<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 16, 1994
REGISTRATION NO. 33-51845
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
USG CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 3275 36-3329400
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification No.)
incorporation or
organization)
</TABLE>
125 SOUTH FRANKLIN STREET
CHICAGO, ILLINOIS 60606-4678
(312) 606-4000
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
------------------------
ARTHUR G. LEISTEN, ESQ.
SENIOR VICE PRESIDENT AND GENERAL COUNSEL
125 SOUTH FRANKLIN STREET
CHICAGO, ILLINOIS 60606-4678
(312) 606-4000
(Name, address and telephone number of agent for service)
------------------------
COPIES TO:
<TABLE>
<S> <C>
FRANCIS J. GERLITS, P.C. SETH A. KAPLAN
Kirkland & Ellis Wachtell, Lipton, Rosen & Katz
200 East Randolph Drive 51 West 52nd Street
Chicago, Illinois 60601 New York, New York 10019
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
TITLE OF EACH CLASS OF AMOUNT TO PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE BE OFFERING PRICE AGGREGATE REGISTRATION
REGISTERED REGISTERED(1)(2) PER SHARE(3) OFFERING PRICE(3) FEE(4)
<S> <C> <C> <C> <C>
Common Stock, par value
$0.10 per share......... 11,500,000 shares $33.25 $346,940,625 $119,635
<FN>
(1) Of the 11,500,000 shares of Common Stock being registered, 9,775,000 shares
were registered pursuant to the Registration Statement originally filed on
January 7, 1994 and 1,725,000 additional shares are being registered
pursuant to this Amendment No. 1.
(2) Includes 1,500,000 shares that the Underwriters have the option to purchase
to cover over-allotments, if any.
(3) Estimated in accordance with Rule 457 solely for the purpose of calculating
the registration fee. The proposed maximum offering price per share shown in
the table relates to the 1,725,000 shares of Common Stock being registered
pursuant to this Amendment No. 1. A proposed maximum offering price per
share of $29.625 was used for the purpose of calculating the registration
fee with respect to the 9,775,000 shares of Common Stock registered pursuant
to the Registration Statement originally filed on January 7, 1994.
(4) Of the $119,635 registration fee, $99,857 was paid in connection with the
Registration Statement originally filed on January 7, 1994. Accordingly,
$19,778 of the registration fee is being paid in connection with this
Amendment No. 1.
</TABLE>
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K
SHOWING LOCATION IN PROSPECTUS OF INFORMATION REQUIRED BY ITEMS OF PART I OF
FORM S-1.
<TABLE>
<CAPTION>
REGISTRATION STATEMENT
ITEM NUMBER AND CAPTION CAPTION OR LOCATION IN PROSPECTUS
- ------------------------------------------------------------- --------------------------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and Outside
Front Cover Page of Prospectus................... Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of
Prospectus....................................... Inside Front Cover Page of Prospectus; Outside Back
Cover Page of Prospectus; Additional Information
3. Summary Information, Risk Factors and Ratio of
Earnings to Fixed Charges........................ Prospectus Summary; Risk Factors
4. Use of Proceeds................................... Purpose of the Offering and Use of Proceeds;
Management's Discussion and Analysis of Financial
Condition and Results of Operations
5. Determination of Offering Price................... Not applicable
6. Dilution.......................................... Dilution
7. Selling Security Holders.......................... Ownership of Common Stock
8. Plan of Distribution.............................. Outside Front Cover Page of Prospectus; Underwriting
9. Description of Securities to Be Registered........ Prospectus Summary; Dividend Policy; Capitalization;
Description of Capital Stock
10. Interests of Named Experts and Counsel............ Legal Matters
11. Information with Respect to the Registrant........ Outside Front Cover Page of Prospectus; Prospectus
Summary; Risk Factors; Dividend Policy; Purpose of the
Offering and Use of Proceeds; Capitalization; Dilution;
Selected Consolidated Financial Data; Management's
Discussion and Analysis of Financial Condition and
Results of Operations; Business; Management; Certain
Relationships and Related Transactions; Description of
Capital Stock; Legal Matters; Experts; Financial
Statements
12. Disclosure of Commission Position on
Indemnification for Securities Act Liabilities... Not Applicable
</TABLE>
<PAGE>
EXPLANATORY NOTE
This Registration Statement contains two forms of prospectus: one (the "U.S.
Prospectus") to be used in connection with an offering in the United States and
Canada and one (the "International Prospectus") to be used in connection with a
concurrent international offering outside the United States and Canada. The U.S.
Prospectus and the International Prospectus are identical except that they
contain different front and back cover pages and different descriptions of the
plan of distribution (contained under the caption "Underwriting" in both
prospectuses). The form of U.S. Prospectus is included herein and is followed by
those pages to be used in the International Prospectus which differ from or are
in addition to those in the U.S. Prospectus. Each of the pages for the
International Prospectus included herein is labelled "Alternate Page for
International Prospectus."
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THE SECURITIES IN
ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO
REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
<TABLE>
<S> <C> <C>
PROSPECTUS SUBJECT TO COMPLETION [LOGO]
10,000,000 SHARES FEBRUARY 16, 1994
USG CORPORATION
COMMON STOCK
($.10 PAR VALUE)
</TABLE>
Of the 10,000,000 shares of common stock ("Common Stock") of USG Corporation
("USG" or the "Corporation") being offered, 6,000,000 shares are being sold by
the Corporation and 4,000,000 shares are being sold by Water Street Corporate
Recovery Fund I, L.P. (the "Selling Stockholder" or "Water Street"). See
"Ownership of Common Stock -- Selling Stockholder and its Affiliates." The
Corporation will not receive any of the proceeds from the sale of Common Stock
by the Selling Stockholder.
Of the 10,000,000 shares of Common Stock being offered, 8,500,000 shares are
being offered hereby in the United States and Canada (the "U.S. Offering") and
1,500,000 shares are being offered in a concurrent international offering
outside the United States and Canada (the "International Offering" and,
collectively with the U.S. Offering, the "Offering"), subject to transfers
between the U.S. Underwriters (as defined herein) and the International
Underwriters (as defined herein). The offering price and underwriting discounts
for the U.S. Offering and the International Offering will be identical. The
closing of the U.S. Offering is conditioned upon the closing of the
International Offering, and the closing of the International Offering is
conditioned upon the closing of the U.S. Offering. See "Underwriting."
The Common Stock is traded on the New York Stock Exchange (the "NYSE") under the
symbol "USG." On February 11, 1994, the last reported sale price of the Common
Stock as reported on the NYSE Composite Tape was $32.375 per share. See "Price
Range of Common Stock." Potential investors are encouraged to obtain current
trading price information.
PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY THE MATTERS DISCUSSED UNDER THE
CAPTION "RISK FACTORS."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<S> <C> <C> <C> <C>
PROCEEDS TO PROCEEDS TO
PRICE TO UNDERWRITING CORPORATION SELLING
PUBLIC DISCOUNT (1) STOCKHOLDER
Per Share.................. $ $ $ $
Total (2).................. $ $ $ $
<FN>
(1) Before deduction of expenses payable by the Corporation, estimated to be
$1,300,000.
(2) The Corporation and the Selling Stockholder have each granted to the U.S.
Underwriters a 30-day option to purchase up to 637,500 additional shares of
Common Stock at the Price to Public, less the Underwriting Discount, solely
to cover over-allotments, if any. Additionally, the Corporation and the
Selling Stockholder have each granted to the International Underwriters a
30-day option to purchase up to 112,500 additional shares of Common Stock at
the Price to Public, less the Underwriting Discount, solely to cover
over-allotments, if any. If the Underwriters exercise such options in full,
the total Price to Public, Underwriting Discount, Proceeds to Corporation
and Proceeds to Selling Stockholder will be , , ,
and , respectively. See "Underwriting."
</TABLE>
The shares of Common Stock are offered subject to receipt and acceptance by the
U.S. Underwriters, to prior sale and to the U.S. Underwriters' right to reject
any order in whole or in part and to withdraw, cancel or modify the offer
without notice. It is expected that delivery of the shares will be made at the
office of Salomon Brothers Inc, Seven World Trade Center, New York, New York, or
through the facilities of The Depository Trust Company, on or about ,
1994.
SALOMON BROTHERS INC LAZARD FRERES & CO.
SMITH BARNEY SHEARSON INC.
The date of this Prospectus is , 1994.
<PAGE>
[PICTURES]
IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZATION, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS (INCLUDING THE NOTES THERETO) CONTAINED
ELSEWHERE IN THIS PROSPECTUS. UNLESS THE CONTEXT OTHERWISE REQUIRES, REFERENCES
TO "USG" AND THE "CORPORATION" MEAN USG CORPORATION, A DELAWARE CORPORATION, AND
ITS SUBSIDIARIES. UNLESS OTHERWISE SPECIFIED, THE INFORMATION PROVIDED IN THIS
PROSPECTUS ASSUMES NO EXERCISE OF THE UNDERWRITERS' OVER-ALLOTMENT OPTIONS. SEE
"UNDERWRITING."
OVERVIEW
Through its subsidiaries, USG is a leading manufacturer of building
materials in North America which produces a wide range of products for use in
residential and nonresidential construction, repair and remodeling, as well as
products used in certain industrial processes. United States Gypsum Company
("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 1993. USG Interiors, Inc. ("USG Interiors") is a leading supplier of
interior ceiling, wall and floor products used primarily in commercial
applications. In 1993, USG Interiors was the largest producer of ceiling grid
and the second largest producer of ceiling tile in the United States. L&W Supply
Corporation ("L&W Supply") is the largest distributor of wallboard and related
products in the United States and in 1993 distributed approximately 22% of U.S.
Gypsum's wallboard production. In addition to its United States operations, the
Corporation's 76% owned subsidiary, CGC Inc. ("CGC"), is the largest
manufacturer of gypsum products in eastern Canada and the Corporation's USG
International unit ("USG International") supplies interior systems and gypsum
wallboard products in Europe, the Pacific and Latin America. In the year ended
December 31, 1993, the Corporation had net sales of $1,916 million and generated
EBITDA of $218 million.
On May 6, 1993, the Corporation completed a comprehensive restructuring of
its debt through the implementation of a "prepackaged" plan of reorganization
under the federal bankruptcy laws. This restructuring significantly reduced the
Corporation's overall interest and debt repayment obligations and extended the
maturities of a substantial portion of its remaining debt. See "The
Restructuring" and "Risk Factors."
BUSINESS
The Corporation participates in three industry segments: Gypsum Products,
Interior Systems and Building Products Distribution.
GYPSUM PRODUCTS. U.S. Gypsum has vertically integrated operations for
extracting, processing, producing and marketing gypsum and related products,
such as "SHEETROCK" brand wallboard, joint compound and industrial gypsum
cements and fillers. U.S. Gypsum also manufactures cement board, which it sells
under the "DUROCK" brand name. Due to the vertical integration of its key raw
materials (gypsum and paper), its technical expertise and the proximity of its
plants to major metropolitan areas, U.S. Gypsum believes that its delivered cost
for gypsum wallboard is generally lower than its competitors'. As a result of
efficiency improvements and cost reduction efforts, U.S. Gypsum's unit
manufacturing cost for gypsum wallboard in 1993 (measured in nominal dollars)
was lower than its unit manufacturing cost in 1982. In the year ended December
31, 1993, the Gypsum Products segment had net sales of $1,165 million and
generated EBITDA of $179 million before allocation of corporate expenses.
INTERIOR SYSTEMS. The Interior Systems segment manufactures and markets an
integrated line of products used primarily for commercial interiors. Products
include ceiling grid and ceiling tile, access floor systems, wall systems and
mineral wool insulation and soundproofing products. In 1993, USG Interiors
accounted for over one-half and approximately one-third of total domestic sales
of ceiling grid and ceiling tile, respectively. CGC is the largest producer of
ceiling grid and the second largest marketer
3
<PAGE>
of ceiling tile in Canada. USG International's net sales in Europe, the Pacific
and Latin America accounted for approximately 27% of the Interior Systems
segment's net sales in 1993. In the year ended December 31, 1993, the Interior
Systems segment had net sales of $550 million and generated EBITDA of $57
million before allocation of corporate expenses.
BUILDING PRODUCTS DISTRIBUTION. The Building Products Distribution segment
is conducted through L&W Supply, which distributed approximately 9% of all
gypsum wallboard in the United States in 1993. L&W Supply's 131 distribution
centers located in 34 states offer a wide range of building products to
construction contractors, including wallboard, drywall metal, ceiling tile and
ceiling grid. L&W Supply is able to provide less than truckload quantities of
materials directly to job sites and place the materials in areas where work is
in progress, thereby reducing contractors' material handling and inventory
requirements. In the year ended December 31, 1993, the Building Products
Distribution segment had net sales of $528 million and generated EBITDA of $7
million before allocation of corporate expenses.
U.S. INDUSTRY TRENDS. Demand for the Corporation's products in the United
States is largely influenced by the three major components of the construction
industry: new residential construction (single and multi-family homes), new
non-residential construction (offices, schools, stores and other institutions)
and repair and remodel activity. In recent years, structural changes in
residential construction activity combined with growth in the repair and remodel
component have partially mitigated the impact of the cyclical demand in overall
new construction components. New residential construction has shifted toward
more single family housing, which typically requires twice as much wallboard as
a multi-family home, and the average single family home size has increased by
approximately 15% since 1986. In addition, the repair and remodel segment has
become an increasing percentage of the Corporation's business. The Corporation
estimates that the repair and remodel segment comprised approximately 36% of
1993 industry-wide demand for gypsum wallboard and approximately half of
industry-wide demand for interior systems products. Largely as a result of these
factors, United States industry shipments of gypsum wallboard were 21.6 billion
square feet in 1993, as compared to 21.3 billion in 1986, despite an approximate
28% decline in the number of housing starts from 1.8 million units in 1986 to
1.3 million units in 1993.
The Corporation estimates that industry capacity utilization for gypsum
wallboard has increased from an average of approximately 83% during 1992 to
approximately 93% during the fourth quarter of 1993. USG's average gypsum
wallboard price increased to $82.46 per thousand square feet ("MSF") in the
three months ended December 31, 1993, as compared to its 14 year low of $67.77
reached in the three months ended March 31, 1992.
There can be no assurance, however, that recent increases in demand and
pricing in the gypsum wallboard industry will continue or that current levels of
demand and pricing can be sustained in the future. In this regard, the
Corporation's business is cyclical in nature and sensitive to changes in general
economic conditions, including changes in interest rates. See "Risk Factors."
The Corporation's principal executive offices are located at 125 South
Franklin Street, Chicago, Illinois 60606. Its telephone number at that address
is 312-606-4000.
THE RESTRUCTURING
On May 6, 1993, the Corporation completed a a comprehensive restructuring of
its debt (the "Restructuring") through implementation of a "prepackaged" plan of
reorganization under the federal bankruptcy laws (the "Prepackaged Plan"). The
Restructuring significantly reduced the Corporation's overall interest and debt
repayment obligations and extended the maturities of a substantial portion of
its remaining debt. In the Restructuring, the Corporation (i) converted
approximately $1.4 billion of subordinated debt and accrued interest into Common
Stock and warrants to purchase Common Stock at an exercise price of $16.14 per
share (the "Warrants"), (ii) converted approximately $340 million of its bank
obligations into 10 1/4% Senior Notes due 2002 ("Senior 2002 Notes"), and (iii)
extended the maturities of its remaining bank obligations and certain public
debt. Subsequent to the Restructuring, the Corporation
4
<PAGE>
also completed an exchange offer that converted an additional $138 million of
bank debt into Senior 2002 Notes and eliminated all scheduled bank debt
amortization prior to December 31, 1997. See "The Restructuring," "Description
of Credit Agreement" and "Risk Factors."
PURPOSE OF THE OFFERING AND USE OF PROCEEDS
The Offering is part of a refinancing strategy which also includes (i) the
placement (the "Note Placement") of $150 million principal amount of new senior
notes due 2001 (the "Senior 2001 Notes") with certain institutional investors
and (ii) the amendment (the "Credit Agreement Amendments" and, together with the
Offering and the Note Placement, the "Transactions") of USG's bank credit
agreement. The Credit Agreement Amendments will increase the size of the
Corporation's revolving credit facility by $70 million and amend existing
mandatory bank term loan prepayment provisions so as to allow USG, upon the
achievement of certain financial tests, to retain additional free cash flow for
capital expenditures and the purchase of its public debt. The Credit Agreement
Amendments are contingent on the consummation of the Offering.
USG expects to use a portion of the net proceeds from the Offering and the
Note Placement, together with approximately $158 million of existing cash
generated from operations, to pay $140 million of its bank debt and to redeem,
at 100% of principal amount, $75 million of its 8% Senior Notes due 1995 (the
"Senior 1995 Notes") and $35 million of its 9% Senior Notes due 1998 (the
"Senior 1998 Notes"). The Corporation also expects to use a portion of the net
proceeds to purchase up to a total of approximately $150 million aggregate
principal amount of its outstanding 8% Senior Notes due 1996 (the "Senior 1996
Notes") and 8% Senior Notes due 1997 (the "Senior 1997 Notes"), depending upon
market conditions. The remainder of the net proceeds will be available for
general corporate purposes, including capital expenditures for cost reduction,
capacity improvement and future growth opportunities.
Sources and uses of funds in the Transactions are estimated to be as
follows:
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS)
<S> <C>
Sources:
The Offering, net of the estimated underwriting discount and
expenses.............................................................. $ 184
The Note Placement..................................................... 150
Cash on hand........................................................... 158
-----
$ 492
-----
-----
Uses:
Payment of bank debt................................................... $ 140
Redemption of Senior 1995 Notes and Senior 1998 Notes.................. 110
Acquisition of Senior 1996 Notes and Senior 1997 Notes................. 150
General corporate purposes............................................. 92
-----
$ 492
-----
-----
</TABLE>
Collectively, the Transactions are designed, among other things, to (i)
reduce the Corporation's financial leverage through the retirement of up to $250
million principal amount of the Corporation's total debt (net of the issuance of
$150 million principal amount of Senior 2001 Notes in the Note Placement), (ii)
reduce the amount of the Corporation's public debt maturing in 1995 through 1998
by up to $260 million (depending on the principal amount of outstanding Senior
1996 Notes and Senior 1997 Notes purchased) and prepay the $140 million of
scheduled bank debt amortization in those years, (iii) extend the final maturity
of a significant portion of the Corporation's debt through the Note Placement,
(iv) improve the Corporation's financial and operating flexibility under its
bank credit agreement and (v) provide an estimated $92 million in funds for
general corporate purposes, including capital
5
<PAGE>
expenditures for cost reduction, capacity improvement and future growth
opportunities. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Liquidity and Capital Resources" and "Purpose of
the Offering and Use of Proceeds."
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the
Corporation:
U.S. Offering................... 5,100,000 shares
International Offering.......... 900,000 shares
------------------
Total......................... 6,000,000 shares
Common Stock offered by the
Selling Stockholder:
U.S. Offering................... 3,400,000 shares
International Offering.......... 600,000 shares
------------------
Total......................... 4,000,000 shares
Common Stock outstanding (a):
Prior to the Offering........... 37,158,085 shares
After the Offering.............. 43,158,085 shares
Use of Proceeds................... Payment of indebtedness and general corporate purposes,
including capital expenditures for cost reduction,
capacity improvement and future growth opportunities.
See "Purpose of the Offering and Use of Proceeds."
NYSE Symbol....................... USG
<FN>
- ------------------------
(a) Does not include (i) warrants to purchase up to an aggregate of 2,601,619
shares of Common Stock which are immediately exercisable at a price of
$16.14 per share and (ii) options held by management to purchase up to an
aggregate of 1,673,000 shares of Common Stock which will become exercisable
at a price of $10.3125 per share in the years 1994 through 1996. See
"Management -- Executive Compensation and Benefits."
</TABLE>
6
<PAGE>
SUMMARY FINANCIAL INFORMATION
(Dollars in millions, except per share data and gypsum wallboard prices)
The following tables present summary historical financial data, summary pro
forma financial data and certain other information. Due to the Restructuring and
implementation of fresh start accounting, financial statements effective May 7,
1993 are not comparable to financial statements for periods prior to that date.
Accordingly, a vertical line has been added to separate such information. The
information in the tables should be read in conjunction with "Selected
Consolidated Financial Data," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Pro Forma Condensed Consolidated
Financial Statements" and the Corporation's Consolidated Financial Statements
and notes thereto, all of which are included elsewhere in this Prospectus. See
"Index to Financial Statements."
The unaudited pro forma earnings statement data for the year ended December
31, 1993 and the unaudited pro forma balance sheet data as of December 31, 1993
were prepared as if the Transactions had occurred on January 1, 1993 and
December 31, 1993, respectively. The unaudited pro forma income statement data
reflects the implementation of the Restructuring, including the adoption of
fresh start accounting prescribed by AICPA Statement of Position 90-7, and the
issuance of $138 million in aggregate principal amount of Senior 2002 Notes in
exchange for bank debt as if those transactions had also occurred on January 1,
1993. The unaudited pro forma financial data shown below does not purport to be
indicative of the results of operations that would actually have been reported
had such transactions actually been consummated on such dates or of the results
of operations that may be reported by the Corporation in the future. For
additional detail, see "Pro Forma Condensed Consolidated Financial Statements."
HISTORICAL INFORMATION
<TABLE>
<CAPTION>
MAY 7 THROUGH JANUARY 1 YEARS ENDED DECEMBER 31,
DECEMBER 31, THROUGH MAY ------------------------------
1993 6, 1993(A) 1992 1991 1990
--------------- ----------- -------- -------- --------
EARNINGS STATEMENT DATA:
<S> <C> <C> <C> <C> <C>
Net sales....................................... $1,325 $ 591 $1,777 $1,712 $1,915
Gross profit.................................... 263 109 317 327 416
Amortization of Excess Reorganization Value..... 113 -- -- -- --
Operating profit................................ 1 38 99 133 195
Interest expense................................ 92 86 334 333 292
Interest income................................. (4) (2) (12) (11) (8)
Other (income)/expense, net..................... (8) 6 1 5 5
Reorganization items............................ -- (709)(b) -- -- --
Extraordinary gain/(loss), net of taxes......... (21) 944 -- -- --
Net earnings/(loss) (c)......................... (129) 1,434 (191) (161) (90)
Average number of common shares (d)............. 37,157,672
Loss before extraordinary loss per common
share.......................................... (2.90)
Net loss per common share (c)(d)................ (3.46)
Dividends paid per common share (d)............. --
BALANCE SHEET DATA (as of the end of the period):
Total assets.................................... 2,163 2,194 1,659 1,626 1,675
Total debt...................................... 1,531(e) 1,556(e) 2,711 2,660 2,600
Total stockholders' equity/(deficit)............ (134) 4 (1,880) (1,680) (1,518)
OTHER INFORMATION:
EBITDA (f)...................................... 155 63 159 194 280
Capital expenditures............................ 29 12 49 49 64
Gross margin (g)................................ 19.8% 18.4% 17.8% 19.1% 21.7%
EBITDA margin (h)............................... 11.7% 10.7% 8.9% 11.3% 14.6%
Gypsum wallboard shipments: (i)
Total U.S. Industry........................... 14.9 6.7 20.3 18.4 20.7
U.S. Gypsum................................... 5.0 2.3 7.2 6.6 7.2
Average U.S. Gypsum wallboard price (j)......... $80.58 $75.81 $71.58 $72.53 $79.08
</TABLE>
7
<PAGE>
PRO FORMA INFORMATION (K)
<TABLE>
<CAPTION>
YEAR
ENDED
DECEMBER
31,
1993
-------
<S> <C>
EARNINGS STATEMENT DATA:
Operating loss.......................................................................... $ (18)
Interest expense........................................................................ 122
Interest income......................................................................... (6)
Other income, net....................................................................... (3)
Loss before extraordinary gain and changes in accounting principles (l)(m).............. (166)
Loss before extraordinary gain and changes in accounting principles per common share
(l)(m)................................................................................. (3.85)
BALANCE SHEET DATA (as of the end of the period):
Total assets............................................................................ 2,097
Total debt.............................................................................. 1,281(n)
Total stockholders' equity.............................................................. 49
OTHER INFORMATION:
EBITDA (f).............................................................................. 218
Amortization of Excess Reorganization Value............................................. 170
<FN>
- ------------------------------
(a) Fresh start accounting adjustments were recorded on May 6, 1993.
(b) Reflects one-time gain from reorganization items, including an $851 million
gain from recording Excess Reorganization Value, partially offset by other
fresh start adjustments, fees and expenses associated with the Restructuring
and a write-off of deferred financing costs associated with the 1988
Recapitalization.
(c) For the period of May 7 through December 31, 1993, amortization of Excess
Reorganization Value ($113 million) and reorganization debt discount ($8
million) reduced reported net earnings by $121 million, or $3.26 per share.
Reorganization debt discount is a component of interest expense.
(d) Common shares and per share data for periods prior to May 7, 1993 have been
omitted because, due to the Restructuring and implementation of fresh start
accounting, they are not meaningful.
(e) Total debt as of December 31 and May 6, 1993 are shown at principal amounts.
The carrying amounts (net of unamortized reorganization debt discount) as
reflected on the Corporation's balance sheets as of those dates are $1,476
million and $1,461 million, respectively.
(f) EBITDA represents earnings before interest, taxes, depreciation, depletion,
amortization, non-cash postretirement charges, reorganization items,
extraordinary gain, discontinued operations 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.
(g) Gross profit as a percentage of net sales.
(h) EBITDA as a percentage of net sales.
(i) In billions of square feet.
(j) Represents average price per thousand square feet realized by U.S. Gypsum
during the periods shown.
(k) For additional pro forma information, see "Pro Forma Condensed Consolidated
Financial Statements."
(l) Pro forma earnings statement data reflects the impact of the Transactions,
implementation of the Restructuring, including the adoption of fresh start
accounting prescribed by AICPA Statement of Position 90-7, and the issuance
of $138 million in aggregate principal amount of Senior 2002 Notes in
exchange for bank debt as if all of these transactions had occurred on
January 1, 1993. The Transactions alone had the impact of reducing the pro
forma loss before extraordinary gain and changes in accounting principles by
$11 million, or $0.25 per share.
(m) Amortization of Excess Reorganization Value ($170 million) and
reorganization debt discount ($10 million) reduced pro forma earnings before
extraordinary gain and changes in accounting principles by $180 million, or
$4.17 per share. Reorganization debt discount is a component of interest
expense.
(n) Total pro forma debt as of December 31, 1993 is shown at the principal
amount. The carrying amount (net of unamortized reorganization debt
discount) as reflected on the Pro Forma Condensed Consolidated Balance Sheet
as of December 31, 1993 is $1,227 million.
</TABLE>
8
<PAGE>
RISK FACTORS
PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY SHOULD CONSIDER
CAREFULLY THE FACTORS SET FORTH BELOW, AS WELL AS THE OTHER INFORMATION SET
FORTH IN THIS PROSPECTUS.
HIGH LEVERAGE
The Corporation will remain highly leveraged upon completion of the
Transactions. As of December 31, 1993, the Corporation had $1,531 million
principal amount of total debt (which had a carrying amount of $1,476 million on
the Corporation's balance sheet after deducting unamortized reorganization debt
discount of $55 million) and a deficit in stockholders' equity of $134 million.
As adjusted to reflect the Offering and the debt repayments to be made in
connection with the Transactions, the Corporation's total principal amount of
debt and stockholders' equity as of December 31, 1993 would have been $1,281
million and $49 million, respectively. The Corporation is expected to have a
deficit in stockholders' equity at least during the period from 1993 through
1998 when reorganization value in excess of identifiable assets ("Excess
Reorganization Value") will be amortized. See "Risk Factors -- Recent Losses,"
"Selected Consolidated Financial Data," "Purpose of the Offering and Use of
Proceeds" and "Capitalization."
The degree to which the Corporation is leveraged will pose risks to holders
of the Common Stock, including, but not limited to, the following: (i) a
significant portion of the Corporation's cash flow from operations will be
dedicated to the payment of principal and interest on its indebtedness, thereby
reducing the funds available to the Corporation for its operations; (ii) the
Corporation's ability to obtain additional financing in the future for working
capital, capital expenditures, acquisitions, general corporate purposes or other
purposes will be restricted; (iii) certain of the Corporation's borrowings are
and will continue to carry variable rates of interest, which could result in
higher interest expense in the event of an increase in interest rates; and (iv)
certain indebtedness contains financial and restrictive covenants, the failure
to comply with which may result in an event of default which, if not cured or
waived, could have a material adverse effect on the Corporation. These and other
factors could have material adverse effects on the marketability, price and
future value of the Common Stock.
LIQUIDITY; RELIANCE ON RECOVERY IN CONSTRUCTION-BASED MARKETS
The Corporation believes that cash generated by operations and the estimated
levels of liquidity available to the Corporation will be sufficient to permit
the Corporation to satisfy its debt service requirements and other capital
requirements for the foreseeable future. However, the Corporation is subject to
significant business, economic and competitive uncertainties that are beyond its
control. Therefore, there can be no assurance that the Corporation's financial
resources will be sufficient for the Corporation to satisfy its debt service
obligations and other capital requirements. See "Risk Factors -- Cyclical
Business" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
RECENT LOSSES
During the period from May 7 through December 31, 1993, the Corporation
reported a net loss of $129 million after the amortization of $113 million of
Excess Reorganization Value. The Corporation expects to report net losses at
least until its Excess Reorganization Value is fully amortized in 1998. Such
amortization will be $170 million per year in 1994 through 1997 and $57 million
in 1998. Although a significant portion of the Corporation's recent net losses
are the result of non-cash items, there can be no assurance that the Corporation
will have net income in the future.
CYCLICAL BUSINESS
The Corporation's business is cyclical in nature and sensitive to changes in
general economic conditions, including, in particular, conditions in the housing
and construction-based markets. These markets are in turn influenced by a
variety of factors beyond the Corporation's control, including interest rates.
As a result of this cyclicality, the Corporation has experienced and in the
future could experience reduced revenues and margins, which may affect the
Corporation's ability to satisfy its debt service obligations on a timely basis.
See "Business" and "Management's Discussion and Analysis of Financial
9
<PAGE>
Condition and Results of Operations." During 1992, a modest recovery in the
Corporation's markets was evidenced by increases in housing starts and wallboard
pricing and shipments, in addition to improvement in sales of other construction
products over 1991. This recovery continued in 1993. However, there can be no
assurance that the modest recovery which began in 1992 will continue.
NONCOMPARABILITY OF HISTORICAL FINANCIAL INFORMATION
As a result of the adoption of fresh start accounting upon emergence from
bankruptcy, the Corporation's assets and liabilities were adjusted to fair
values and retained earnings were restated to zero. The historical financial
information presented herein should not, therefore, be viewed as indicative of
the Corporation's future financial performance. For a discussion of the
Corporation's results of operations since emergence from Chapter 11 proceedings,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
ASBESTOS LITIGATION
One of the Corporation's subsidiaries, U.S. Gypsum, is a defendant in
asbestos lawsuits alleging property damage (the "Property Damage Cases") and
personal injury (the "Personal Injury Cases") and seeking compensatory and, in
many cases, punitive damages. This litigation has not had a material effect on
the Corporation's liquidity or earnings. To date, virtually all costs of the
Personal Injury Cases have been paid by insurance. U.S. Gypsum estimates that it
is probable that the Personal Injury Cases pending at December 31, 1993 can be
disposed of for an amount between $100 million and $120 million, virtually all
of which is expected to be paid by insurance. U.S. Gypsum is unable to make a
reasonable estimate of the cost of disposing of its pending Property Damage
Cases, some of which are class actions or involve multiple buildings. 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 in U.S. Gypsum's insurance coverage action (the "Coverage Action")
against its carriers has so ruled (such ruling has been 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 its
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's independent public
accountants have also noted this uncertainty in their report with respect to the
financial statements of the Corporation. See "Business -- General Information --
Asbestos Litigation" and "Consolidated Financial Statements -- Report of
Independent Public Accountants."
CREDIT AGREEMENT AND OTHER RESTRICTIONS
The Credit Agreement contains certain restrictions on the Corporation's
operations including, among other things, limitations on the ability of the
Corporation and certain of its subsidiaries ("Restricted Subsidiaries") to (i)
incur additional indebtedness, subject to certain exceptions, including an
exception allowing an aggregate of $50 million of capitalized lease obligations
and an aggregate of $75 million of indebtedness to be incurred by foreign
subsidiaries that are not Restricted Subsidiaries, (ii) make any investments in
excess of $5 million in the aggregate, subject to certain exceptions, including
an exception allowing the Corporation (subject to certain terms and conditions)
to repurchase its public senior debt with certain proceeds of permitted asset
sales, certain proceeds from the issuance of public equity or debt securities
and certain excess cash flow otherwise payable to the Banks under the Credit
Agreement, (iii) make capital expenditures, subject to various exceptions and
limitations, or sell assets outside the ordinary course of business, subject to
certain exceptions, including an exception allowing for sales of up to $20
million in any fiscal year and $5 million in any single transaction or series of
related transactions, (iv) make certain payments with respect to outstanding
stock and debt, (v) give guarantees, and (vi) effect certain fundamental
changes, such as the sale of all or substantially all of the
10
<PAGE>
Corporation's or any Restricted Subsidiary's assets, or enter into mergers,
recapitalizations or other similar transactions. Although the Credit Agreement
Amendments are designed to increase the Corporation's financial and operating
flexibility in certain regards, the foregoing restrictions will nonetheless
limit the Corporation's ability to respond to opportunities or changes in its
business. See "Description of Credit Agreement."
In addition, after January 1, 1995, the Credit Agreement will require the
Corporation to achieve and maintain certain financial ratios and tests. There
can be no assurance that the Corporation will be able to achieve and maintain
compliance with the prescribed financial ratios and tests or other requirements
under the Credit Agreement. Failure to achieve or maintain compliance with such
financial ratios and tests or other requirements under the Credit Agreement
would result in a default that could lead to the acceleration of the
Corporation's obligations under the Credit Agreement. An acceleration under the
Credit Agreement would in turn permit the acceleration of other indebtedness of
the Corporation. The acceleration of any such indebtedness would result in its
becoming immediately due and payable and could result in the Corporation
becoming subject to a proceeding under the federal bankruptcy laws. See
"Description Of Credit Agreement."
In addition to the restrictions and covenants contained in the Credit
Agreement, the Senior 2002 Notes contain restrictions on the ability of the
Corporation and the Subsidiaries to incur additional indebtedness, to pay
dividends on the Common Stock, to effect certain fundamental changes and to
enter into certain types of transactions. See "Description of Credit Agreement"
and "Description of Other Debt Obligations."
RESTRICTIONS ON COMMON STOCK DIVIDENDS
The Corporation anticipates that no cash dividends will be paid on the
Common Stock for the foreseeable future. Further, the Corporation's ability to
pay cash dividends on the Common Stock is restricted under a number of the
Corporation's existing agreements. For example, the Senior 2002 Notes prohibit
the payment of cash dividends on the Common Stock subject to certain limited
exceptions and the Credit Agreement prohibits the payment of any cash dividends
on the Common Stock. See "Dividend Policy," "Description of Capital Stock,"
"Description of Credit Agreement" and "Description of Other Debt Obligations."
ANTITAKEOVER PROVISIONS
The Corporation's Certificate of Incorporation, the Corporation's
Shareholder Rights Plan and the Delaware General Corporation Law contain
provisions that could have the effect of delaying or preventing transactions
that result in a change of control of the Corporation, including transactions in
which stockholders might otherwise receive a substantial premium for their
shares over then current market prices, and may limit the ability of
stockholders to approve transactions that they may deem to be in their best
interests. See "Description of Capital Stock."
FUTURE DISTRIBUTIONS OR SALES OF COMMON STOCK
Water Street Corporate Recovery Fund I, L.P. ("Water Street"), together with
its affiliates Goldman, Sachs & Co. and The Goldman Sachs Group, L.P.
(collectively the "Water Street Entities"), beneficially own 16,105,840 shares
of Common Stock (including 116,070 Warrants), or approximately 43% of the Common
Stock outstanding as of December 31, 1993. Water Street proposes to sell
4,000,000 shares of Common Stock in the Offering. Upon consummation of the
Offering, the Water Street Entities will beneficially own 12,105,840 shares of
Common Stock (including 116,070 warrants), or approximately 28% of the Common
Stock to be outstanding after the Offering. Goldman, Sachs & Co. is the general
partner of Water Street. Messrs. Zubrow and Fetzer, who are directors of the
Corporation, are general partners of Goldman, Sachs & Co.
On February 25, 1993, the Corporation entered into a letter agreement with
the Water Street Entities (the "Water Street Agreement"). The Water Street
Agreement, among other things, (i) restricts purchases of Common Stock by the
Water Street Entities; (ii) governs voting by the Water Street Entities of
shares of Common Stock beneficially owned by them; (iii) restricts transfers by
the Water Street
11
<PAGE>
Entities of shares of Common Stock to any person, except for (a) sales
consistent with Rule 144 of the Securities Act of 1933, (b) underwritten public
offerings, (c) persons not known to be 5% holders, (d) pledgees who agree to be
bound by certain provisions of the Water Street Agreement, (e) in the case of
Water Street, distributions to Water Street's partners in accordance with the
governing partnership agreement, (f) pursuant to certain tender or exchange
offers for shares of Common Stock and (g) pursuant to transactions approved by
the Board; (iv) requires that the Corporation's Shareholder Rights Plan provide
temporary exemptions for ownership of Common Stock by the Water Street Entities;
and (v) provides Water Street with four demand registrations and unlimited
piggyback registrations, subject to certain limitations. During the 120-day
period after the effective date of the Offering, Water Street (and, if it
distributes Common Stock to the partners of Water Street, those partners) shall
not request a demand registration of Common Stock. In addition, during such
120-day period, Water Street and Goldman, Sachs & Co. shall not sell or
otherwise dispose of any shares of Common Stock or Warrants, except that, at any
time after 90 days after the effective date of the Offering, Water Street may
distribute all or any portion of its shares of Common Stock and Warrants to the
partners in Water Street in accordance with its governing partnership agreement.
In the event of any such distribution by Water Street, the partners (other than
Goldman, Sachs & Co.) would not be subject to the restriction on selling shares
of Common Stock or Warrants during the remainder of the 120-day period. Except
in the case of the Offering, the Corporation and Water Street have mutual
piggyback rights on registrations initiated by either, generally on a 50-50
basis.
There can be no assurance as to what effect future distributions of Common
Stock by Water Street to its partners or future sales by Water Street or its
partners would have on the trading markets for the Common Stock. See "Ownership
of Common Stock" and "Certain Relationships and Related Transactions."
THE RESTRUCTURING
In July 1988, the Corporation consummated a plan of recapitalization (the
"1988 Recapitalization") in part in response to an unsolicited takeover attempt.
Approximately $2.5 billion in new debt was incurred by the Corporation to
finance the 1988 Recapitalization, pay related costs and repay certain debt
existing at that time. The 1988 Recapitalization immediately changed the
Corporation's capital structure to one that was highly leveraged. At the time of
the 1988 Recapitalization, the Corporation projected that it would have
sufficient cash flows to meet its debt service obligations in a timely manner.
However, 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.
On May 6, 1993 (the "Effective Date"), the Corporation completed the
Restructuring through the implementation of a "prepackaged" plan of
reorganization (the "Prepackaged Plan") which was confirmed under Chapter 11 of
Title 11 of the United States Code (the "Bankruptcy Code") by the United States
Bankruptcy Court for the District of Delaware. The principal components of the
Restructuring were:
- Conversion of approximately $1.4 billion of subordinated debt
and accrued interest into approximately 36.1 million shares of
Common Stock and Warrants to purchase approximately 2.6 million
additional shares of Common Stock.
- Extension of the maturity of the Corporation's bank obligations
through the issuance of approximately $340 million of Senior 2002
Notes, approximately $56 million aggregate principal amount of
capitalized interest notes and approximately $540 million of term
loans with mandatory amortizations from 1994 to 2000; the
implementation of mandatory prepayment provisions and a cash
sweep mechanism; the extension of the Corporation's then existing
revolving credit facility through July 13, 1998; and the making
available of an interest rate on the bank term loans and
revolving credit loans of LIBOR plus 1 7/8% (or, at USG's option,
a base rate maintained by the administrative agent plus 7/8%.)
12
<PAGE>
- Extension of the maturity of $100 million of senior notes due in
1991 and $10 million of Senior 1996 Notes through the issuance of
$75 million of Senior 1995 Notes and $35 million of Senior 1998
Notes.
Substantially all other obligations of the Corporation and its subsidiaries,
including obligations arising out of asbestos litigation and certain other legal
proceedings against the Corporation or its subsidiaries, were not affected by
the Restructuring and remained outstanding. At December 31, 1993, the
Corporation's bank terms loans were subject to an interest rate of approximately
5.4%. The Corporation's bank obligations, as well as the Senior 2002 Notes, are
entitled to the benefit of guarantees made by certain of the Corporation's
subsidiaries. See "Risk Factors -- Asbestos Litigation," "Business -- General
Information -- Asbestos Litigation" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Projected Liquidity."
Subsequent to the Restructuring, on August 10, 1993 the Corporation issued
$138 million of additional Senior 2002 Notes in exchange for $92 million of bank
term loans and $46 million of capitalized interest notes. In connection with the
issuance of the additional Senior 2002 Notes, USG's bank credit agreement was
modified as follows: (i) scheduled bank term loan amortization payments totaling
$95 million due in 1994, 1995 and 1996 were eliminated ($3 million was added to
the final maturity of the bank term loan due in 2000); (ii) $9 million of
capitalized interest notes originally due in 1998 were paid; and (iii) the cash
sweep mechanism was modified to permit the application of up to $165 million of
cash otherwise subject to the cash sweep mechanism in 1994, 1995 and 1996 to
repayment or purchase of senior debt due prior to January 1, 1999 or bank term
loans, at the discretion of the Corporation.
PURPOSE OF THE OFFERING AND USE OF PROCEEDS
The net proceeds to the Corporation from the Offering are estimated to be
approximately $184 million (or $207 million if the Underwriters' over-allotment
options are exercised in full), based on an assumed offering price of $32 3/8
per share (the last reported sale price of the Common Stock on the NYSE
Composite Tape on February 11, 1994), and after deducting the estimated
underwriting discount and offering expenses.
The Offering is part of a refinancing strategy which also includes (i) the
placement of $150 million principal amount of Senior 2001 Notes with certain
institutional investors in the Note Placement and (ii) the amendment of USG's
bank credit agreement (the "Credit Agreement"). The Credit Agreement Amendments
will increase the size of the Corporation's revolving credit facility by $70
million and amend existing bank term loan mandatory prepayment provisions so as
to allow USG, upon the achievement of certain financial tests, to retain
additional free cash flow for capital expenditures and the purchase of its
public debt. The Credit Agreement Amendments are contingent on the consummation
of the Offering.
USG expects to use a portion of the net proceeds from the Offering and the
Note Placement, together with approximately $158 million of existing cash
generated from operations, to pay $140 million of its bank debt and to redeem,
at 100% of principal amount, $75 million of its Senior 1995 Notes and $35
million of its Senior 1998 Notes. The Corporation also expects to use a portion
of the net proceeds to purchase up to a total of approximately $150 million
aggregate principal amount of its outstanding Senior 1996 Notes and Senior 1997
Notes, depending upon market conditions. The remainder of the net proceeds will
be available for general corporate purposes, including capital expenditures for
cost reduction, capacity improvement and future growth opportunities.
13
<PAGE>
Sources and uses of funds in the Transactions are estimated to be as
follows:
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS)
<S> <C>
Sources:
The Offering, net of the estimated underwriting discount and expenses.......... $ 184
The Note Placement............................................................. 150
Cash on hand................................................................... 158
-----
$ 492
-----
-----
Uses:
Payment of bank debt........................................................... $ 140
Redemption of Senior 1995 Notes and Senior 1998 Notes.......................... 110
Acquisition of Senior 1996 Notes and Senior 1997 Notes......................... 150
General corporate purposes..................................................... 92
-----
$ 492
-----
-----
</TABLE>
Collectively, the Transactions are designed, among other things, to (i)
reduce the Corporation's financial leverage through the retirement of up to $250
million principal amount of the Corporation's total debt (net of the issuance of
$150 million principal amount of Senior 2001 Notes in the Note Placement), (ii)
reduce the amount of the Corporation's public debt maturing in 1995 through 1998
by up to $260 million (depending on the principal amount of outstanding Senior
1996 Notes and Senior 1997 Notes purchased) and prepay the $140 million of
scheduled bank debt amortization in those years, (iii) extend the final maturity
of a significant portion of the Corporation's debt through the Note Placement,
(iv) improve the Corporation's financial and operating flexibility under the
Credit Agreement and (v) provide an estimated $92 million in funds for general
corporate purposes, including capital expenditures for cost reduction, capacity
improvement and future growth opportunities. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources."
14
<PAGE>
CAPITALIZATION
The following table sets forth the unaudited consolidated capitalization of
the Corporation and its subsidiaries as of December 31, 1993 and as adjusted to
give effect to the Transactions, including the issuance and sale of 6,000,000
shares of Common Stock by the Corporation in the Offering, based on an assumed
offering price of $32 3/8 per share (the last reported sale price of the Common
Stock on the NYSE Composite Tape on February 11, 1994). This table should be
read in conjunction with the Pro Forma Condensed Consolidated Financial
Statements contained elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1993
--------------------------
HISTORICAL PRO FORMA(A)
----------- -------------
<S> <C> <C>
(UNAUDITED)
(DOLLARS IN MILLIONS)
Total Debt:
Bank debt.................................................................. $ 448 $ 308
Senior notes and debentures:
8% Senior Notes due 1995................................................. 75 --
8% Senior Notes due 1996................................................. 90 15
8% Senior Notes due 1997................................................. 100 25
9% Senior Notes due 1998................................................. 35 --
Senior Notes due 2001.................................................... -- 150
10 1/4% Senior Notes due 2002............................................ 478 478
7 7/8% Sinking Fund Debentures due 2004.................................. 36 36
8 3/4% Sinking Fund Debentures due 2017.................................. 200 200
Industrial revenue bonds and other secured debt............................ 69 69
----------- -------------
Total principal amount of debt............................................. 1,531 1,281
Less unamortized reorganization discount................................... (55) (54)
----------- -------------
Total carrying amount of debt.............................................. 1,476 1,227
----------- -------------
Stockholders' Equity/(Deficit):
Preferred Stock, $1 par value, 36,000,000 shares authorized, no shares
outstanding............................................................. -- --
Common Stock, $0.10 par value, 200,000,000 shares authorized, 37,158,085
shares outstanding prior to the Offering, 43,158,085 shares outstanding
upon consummation of the Offering (b)................................... 4 5
Capital received in excess of par value.................................. -- 183
Deferred currency translation............................................ (9) (9)
Reinvested earnings/(deficit)............................................ (129) (130)
----------- -------------
Total stockholders' equity/(deficit)................................... (134) 49
----------- -------------
Total capitalization................................................. $ 1,342 $ 1,276
----------- -------------
----------- -------------
<FN>
- ------------------------
(a) Assumes purchases by the Corporation of $75 million additional
principal amount of Senior 1996 Notes and $75 million additional principal
amount of Senior 1997 Notes. Such purchases are assumed to be made at 100%
of principal amount. However, the Senior 1996 Notes and Senior 1997 Notes
are not callable and there can be no assurance that the Corporation will be
able to purchase the Senior 1996 Notes or Senior 1997 Notes as shown. Funds
not used to purchase Senior 1996 Notes and Senior 1997 Notes within 12
months after the consummation of the Offering may become subject to the cash
sweep mechanism under the Credit Agreement. See "Description of Credit
Agreement."
</TABLE>
15
<PAGE>
<TABLE>
<S> <C>
(b) Does not include (i) warrants to purchase up to an aggregate of
2,601,619 shares of Common Stock which are immediately exercisable at a
price of $16.14 per share and (ii) options held by management to purchase up
to an aggregate of 1,673,000 shares of Common Stock which will become
exercisable at a price of $10.3125 per share in the years 1994 through 1996.
See "Management -- Executive Compensation and Benefits."
</TABLE>
PRICE RANGE OF COMMON STOCK
The Common Stock is traded on the NYSE under the symbol "USG." In connection
with the issuance of shares of Common Stock pursuant to the Prepackaged Plan,
trading of the Common Stock commenced on the NYSE on a when-issued basis on May
7, 1993 and a regular-way basis on May 21, 1993. During the period from May 6,
1993, the date the Corporation emerged from Chapter 11 bankruptcy proceedings,
through December 31, 1993, the high and low sales prices of Common Stock, as
reported on the NYSE Composite Tape, were $30 1/2 per share and $9 5/8 per
share, respectively. The last reported sale price of the Common Stock as
reported on the NYSE Composite Tape on February 11, 1994 was $32 3/8 per share.
The high and the low sales prices of the Common Stock by quarter during 1993, as
reported on the NYSE Composite Tape, were:
<TABLE>
<CAPTION>
MAY 7 JULY 1 OCTOBER 1
THROUGH THROUGH THROUGH
JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- --------------- ---------------
<S> <C> <C> <C>
High.................................................................... $ 14 $ 22 5/8 $ 30 1/2
Low..................................................................... 9 5/8 13 20 1/4
</TABLE>
Although common stock of the Corporation was publicly traded prior to May 7,
1993, the historical sales prices are not comparable with the sales prices set
forth above due to the Restructuring. Potential investors are encouraged to
obtain current trading price information. As of December 31, 1993, there were
approximately 13,898 stockholders of record of Common Stock.
DIVIDEND POLICY
Since July 1988, the Corporation has not declared or paid any cash dividends
on its Common Stock. The Corporation does not presently intend to pay any
dividends in the foreseeable future. In addition, the Corporation's Credit
Agreement and certain other debt instruments currently restrict the
Corporation's ability to pay dividends to common stockholders. Moreover, the
Corporation is prohibited from paying any dividends without surplus earnings or
capital earmarked for this purpose under Delaware corporate law. See "Risk
Factors -- Restrictions on Common Stock Dividends," "Description of Capital
Stock," "Description of Credit Agreement" and "Description of Other Debt
Obligations."
16
<PAGE>
DILUTION
The following table presents certain information concerning the net tangible
book value per share of the Common Stock as of December 31, 1993, and as
adjusted to reflect the sale of 6,000,000 shares of Common Stock by the
Corporation in the Offering, at an assumed public offering price of $32 3/8 per
share (the last reported sale price of the Common Stock on the NYSE Composite
Tape on February 11, 1994) and after deducting the estimated offering expenses
and underwriting discounts:
<TABLE>
<S> <C> <C>
Assumed public offering price per share.................. $ 32.38
Net tangible book value (deficit) per share before the
Offering (1) $ (23.37)
Increase per share attributable to payments by new
investors............................................... 7.50
---------
Pro forma net tangible book value (deficit) per share
after the Offering...................................... (15.87)
---------
Dilution per share to new investors (2).................. $ 48.25
---------
---------
<FN>
- ------------------------
(1) Net tangible book value per share of Common Stock is determined by
dividing the Corporation's tangible net worth at December 31, 1993
by the aggregate number of shares of Common Stock outstanding.
(2) Dilution is determined by subtracting net tangible book value per
share after the Offering from the public offering price per share.
</TABLE>
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The unaudited Pro Forma Condensed Consolidated Statement of Earnings for the
year ended December 31, 1993 and the unaudited Pro Forma Condensed Consolidated
Balance Sheet as of December 31, 1993 illustrate the effect of the Transactions.
The unaudited pro forma condensed consolidated financial statements should be
read in conjunction with "Selected Consolidated Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Corporation's Consolidated Financial Statements and related notes thereto
contained elsewhere in this Prospectus. See "Index to Financial Statements."
The unaudited Pro Forma Condensed Consolidated Statement of Earnings for the
year ended December 31, 1993 was prepared as if the Transactions had occurred on
January 1, 1993. Due to the Restructuring and implementation of fresh start
accounting, financial statements effective May 7, 1993 are not comparable to
financial statements prior to that date. However, for presentation of the Pro
Forma Condensed Consolidated Statement of Earnings, total results for 1993 are
shown under the caption "Total Before Adjustments." The adjustments set forth
under the caption "Restructuring" reflect the implementation of the Prepackaged
Plan on May 6, 1993, including the adoption of fresh start accounting prescribed
by AICPA Statement of Position 90-7, and the issuance of $138 million in
aggregate principal amount of Senior 2002 Notes on August 10, 1993 in exchange
for bank debt as if those transactions had also occurred on January 1, 1993.
The unaudited Pro Forma Condensed Consolidated Balance Sheet as of December
31, 1993 was prepared as if the consummation of the Transactions had occurred on
December 31, 1993.
17
<PAGE>
USG CORPORATION
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
YEAR ENDED DECEMBER 31, 1993
(UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
PRO FORMA ADJUSTMENTS
TOTAL BEFORE --------------------------------
ADJUSTMENTS (A) RESTRUCTURING (B) TRANSACTIONS PRO FORMA
--------------- ----------------- ------------- -----------
<S> <C> <C> <C> <C>
Net sales.......................................... $ 1,916 $ $ $ 1,916
Cost of products sold.............................. 1,544 1,544
------- ------- ------------- -----------
Gross profit....................................... 372 372
Selling and administrative expenses................ 220 220
Amortization of Excess Reorganization Value........ 113 57(c) 170
------- ------- ------------- -----------
Operating profit/(loss)............................ 39 (57) (18)
Interest expense................................... 178 (39)(d) (17)(e) 122
Interest income.................................... (6) (6)
Other income, net.................................. (2) (1) (3)
Reorganization items............................... (709) 709(f) --
------- ------- ------------- -----------
Earnings/(loss) before taxes on income,
extraordinary gain and changes in accounting
principles........................................ 578 (726) 17 (131)
Taxes on income.................................... 46 (17) 6 35
------- ------- ------------- -----------
Earnings/(loss) before extraordinary gain and
changes in accounting principles.................. 532 (709) 11 (166)
------- ------- ------------- -----------
------- ------- ------------- -----------
Earnings/(loss) before extraordinary gain and
changes in accounting principles per common
share............................................. --(g) (3.85)(h)
------- -----------
------- -----------
</TABLE>
SEE ACCOMPANYING NOTES TO THE PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF
EARNINGS.
18
<PAGE>
USG CORPORATION
NOTES TO THE PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
YEAR ENDED DECEMBER 31, 1993
(UNAUDITED)
(DOLLARS IN MILLIONS)
The following notes set forth the explanations and assumptions used in
preparing the unaudited Pro Forma Condensed Consolidated Statement of Earnings.
The pro forma adjustments are based on estimates by the Corporation's management
using information currently available.
(a) Due to the Restructuring and implementation of fresh start accounting,
financial statements for periods after May 6, 1993 are not comparable to
financial statements prior to that date. However, for presentation of
the Pro Forma Condensed Consolidated Statement of Earnings, results for
1993 are shown under the caption "Total Before Adjustments."
(b) The adjustments set forth under the caption "Restructuring" reflect the
implementation of the Prepackaged Plan on May 6, 1993, including the
adoption of fresh start accounting prescribed by AICPA Statement of
Position 90-7, and the issuance of Senior 2002 Notes on August 10, 1993
in exchange for bank debt, as if those transactions had occurred on
January 1, 1993.
(c) Reflects amortization of Excess Reorganization Value which would have
been recorded during the period of January 1 through May 6, 1993 had the
Restructuring been consummated on January 1, 1993.
(d) Reflects net reduction of interest expense for the period of January 1
through May 6, 1993 as a result of the assumed implementation of the
Prepackaged Plan and issuance of Senior 2002 Notes on January 1, 1993.
The net reduction has been estimated as follows:
<TABLE>
<S> <C> <C>
Decrease in interest expense:
Bank debt................................................... $ (21)
7 3/8% senior notes due 1991................................ (3)
13 1/4% senior subordinated debentures...................... (22)
16% junior subordinated debentures.......................... (18)
---------
$ (64)
Increase in interest expense:
Senior 1995 Notes........................................... 2
Senior 1998 Notes........................................... 1
Senior 2002 Notes........................................... 18
---------
21
Amortization of reorganization debt discount.................. 4
---------
Net reduction of interest expense............................. (39)
---------
---------
</TABLE>
19
<PAGE>
USG CORPORATION
NOTES TO THE PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF EARNINGS (CONTINUED)
(e) Reflects net reduction of interest expense as a result of the
Transactions. The net reduction has been estimated as follows:
<TABLE>
<S> <C> <C>
Decrease in interest expense:
Bank debt.................................................... $ (8)
Senior 1995 Notes............................................ (6)
Senior 1996 Notes............................................ (6)
Senior 1997 Notes............................................ (6)
Senior 1998 Notes............................................ (3)
---
$ (29)
Increase in interest expense:
Senior 2001 Notes (assumed to bear interest at 9 1/4% per
annum)...................................................... 14
Amortization of reorganization debt discount................... (2)
---------
Net reduction of interest expense.............................. (17)
---------
---------
</TABLE>
Assumes purchases by the Corporation of $75 million additional
principal amount of Senior 1996 Notes and $75 million additional principal
amount of Senior 1997 Notes. Such purchases are assumed to be made at 100%
of principal amount. However, the Senior 1996 Notes and Senior 1997 Notes
are not callable and there can be no assurance that the Corporation will
be able to purchase the Senior 1996 Notes or Senior 1997 Notes as shown.
Funds not used to purchase Senior 1996 Notes and Senior 1997 Notes within
12 months after the consummation of the Offering may become subject to the
cash sweep mechanism under the Credit Agreement. If the Corporation is
unable to purchase the Senior 1996 Notes and Senior 1997 Notes as shown,
pro forma pre-tax interest expense could increase by up to $4 million and
pro forma earnings before extraordinary gain and changes in accounting
principles could decrease by up to $2 million, or $0.05 per share. See
"Description of Credit Agreement."
(f) Reflects the elimination of the net gain from reorganization items
associated with the implementation of the Prepackaged Plan and the
adoption of fresh start accounting, since this gain would have been
recorded in the period prior to January 1, 1993.
(g) Due to the Restructuring and implementation of fresh start accounting,
earnings/(loss) before extraordinary gain and changes in accounting
principles per common share for 1993 shown under the caption "Total
Before Adjustments" is not meaningful and therefore has been omitted.
(h) Pro forma earnings/(loss) before extraordinary gain and changes in
accounting principles per common share is computed based upon an average
of 43,157,590 shares of Common Stock assumed to be outstanding during
the year ended December 31, 1993. Amortization of Excess Reorganization
Value ($170 million) and reorganization debt discount ($10 million)
reduced pro forma earnings/(loss) before extraordinary gain and changes
in accounting principles per common share by $4.17 (or $180 million in
total). Reorganization debt discount is a component of interest expense.
20
<PAGE>
USG CORPORATION
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1993
(UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
HISTORICAL ADJUSTMENTS PRO FORMA
----------- ------------ ----------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents............................................... $ 211 $ (66)(a) $ 145
Receivables............................................................. 264 264
Inventories............................................................. 145 145
----------- ------------ ----------
Total current assets.................................................. 620 (66) 554
Property, plant and equipment, net........................................ 754 754
Excess Reorganization Value, net.......................................... 735 735
Other assets.............................................................. 54 54
----------- ------------ ----------
Total assets.......................................................... 2,163 (66) 2,097
----------- ------------ ----------
----------- ------------ ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................ $ 104 $ $ 104
Accrued expenses........................................................ 208 208
Notes payable........................................................... 2 2
Long-term debt maturing within one year................................. 165 (158)(b) 7
Taxes on income......................................................... 20 20
----------- ------------ ----------
Total current liabilities............................................. 499 (158) 341
----------- ------------ ----------
Long-term debt............................................................ 1,309 (91)(b) 1,218
Deferred income taxes..................................................... 180 180
Other liabilities......................................................... 309 309
Stockholders' equity/(deficit):
Preferred stock......................................................... -- --
Common stock............................................................ 4 1(c) 5
Capital received in excess of par value................................. -- 183(c) 183
Deferred currency translation........................................... (9 ) (9 )
Reinvested earnings/(deficit)........................................... (129 ) (1)(d) (130 )
----------- ------------ ----------
Total stockholders' equity/(deficit).................................. (134 ) 183 49
----------- ------------ ----------
Total liabilities and stockholders' equity............................ 2,163 (66) 2,097
----------- ------------ ----------
----------- ------------ ----------
Book value/(deficit) per common share..................................... (3.61 ) 4.75 1.14
----------- ------------ ----------
----------- ------------ ----------
</TABLE>
SEE ACCOMPANYING NOTES TO THE PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET.
21
<PAGE>
USG CORPORATION
NOTES TO THE PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1993
(UNAUDITED)
(DOLLARS IN MILLIONS)
The following notes set forth the explanations and assumptions used in
preparing the unaudited Pro Forma Condensed Consolidated Balance Sheet. The pro
forma adjustments are based on estimates by the Corporation's management using
information currently available.
(a) Reflects the reduction in cash and cash equivalents as follows:
<TABLE>
<S> <C>
Payment of bank debt............................................ $ (140)
Retirement of Senior 1995 Notes................................. (75)
Retirement of Senior 1996 Notes................................. (75)
Retirement of Senior 1997 Notes................................. (75)
Retirement of Senior 1998 Notes................................. (35)
Issuance for cash of Senior 2001 Notes in the Note Placement.... 150
Issuance of Common Stock in the Offering........................ 184
---------
Total........................................................... (66)
---------
---------
</TABLE>
Assumes purchases by the Corporation of $75 million additional
principal amount of Senior 1996 Notes and $75 million additional principal
amount of Senior 1997 Notes. Such purchases are assumed to be made at 100%
of principal amount. However, the Senior 1996 Notes and Senior 1997 Notes
are not callable and there can be no assurance that the Corporation will
be able to purchase the Senior 1996 Notes or Senior 1997 Notes as shown.
Funds not used to purchase Senior 1996 Notes and Senior 1997 Notes within
12 months after the consummation of the Offering may become subject to the
cash sweep mechanism under the Credit Agreement. If the Corporation is
unable to purchase the Senior 1996 Notes and Senior 1997 Notes as shown,
pro forma pre-tax interest expense could increase by up to $4 million and
pro forma earnings before extraordinary gain and changes in accounting
principles could decrease by up to $2 million, or $0.05 per share. See
"Description of Credit Agreement."
(b) Reflects net reduction of short and long-term debt as follows:
<TABLE>
<S> <C>
Payment of bank debt............................................ $ (140)
Retirement of Senior 1995 Notes................................. (75)
Retirement of Senior 1996 Notes................................. (75)
Retirement of Senior 1997 Notes................................. (75)
Retirement of Senior 1998 Notes................................. (35)
Issuance of Senior 2001 Notes in the Note Placement............. 150
---------
(250)
Write-off of related unamortized reorganization discount........ 1
---------
Total........................................................... (249)
---------
---------
</TABLE>
(c) Reflects the issuance of 6,000,000 shares of Common Stock, par value
$0.10 per share, in the Offering, yielding net proceeds of $184 million.
(d) Reflects the write-off of an additional $1 million of unamortized
reorganization debt discount which would have been recorded on December
31, 1993 if the Transactions had occurred on that date.
22
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA AND GYPSUM WALLBOARD PRICES)
The following table presents selected historical consolidated financial
information of the Corporation for the post-Restructuring period of May 7
through December 31, 1993 and for the pre-Restructuring periods of January 1
through May 6, 1993 and the five years ended December 31, 1992. Due to the
Restructuring and implementation of fresh start accounting, financial statements
effective May 7, 1993 are not comparable to financial statements for periods
prior to that date. Accordingly, a vertical line has been added to separate such
information. The information provided below has not been audited. However, the
selected annual historical consolidated financial information presented below
has been derived from the Consolidated Financial Statements of the Corporation
and its subsidiaries which were examined by Arthur Andersen & Co., whose report
with respect to certain of such financial statements appears elsewhere in this
Prospectus. The following financial information should be read in conjunction
with "Pro Forma Condensed Consolidated Financial Statements," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Corporation's Consolidated Financial Statements and notes thereto, all of
which are included elsewhere in this Prospectus. See "Index To Financial
Statements."
<TABLE>
<CAPTION>
MAY 7 THROUGH JANUARY 1 YEARS ENDED DECEMBER 31,
DECEMBER 31, THROUGH MAY ------------------------------------------------
1993 6, 1993(A) 1992 1991 1990 1989 1988
--------------- ----------- -------- -------- -------- -------- --------
EARNINGS STATEMENT DATA:
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales.................................. $1,325 $591 $1,777 $1,712 $1,915 $2,007 $2,070
Cost of products sold...................... 1,062 482 1,460 1,385 1,499 1,506 1,536
--------------- ----------- -------- -------- -------- -------- --------
Gross profit............................... 263 109 317 327 416 501 534
Selling and administrative expenses........ 149 71 218 194 203 209 223
Amortization of Excess Reorganization
Value..................................... 113 -- -- -- -- -- --
Restructuring expenses..................... -- -- -- -- 18 -- 20
--------------- ----------- -------- -------- -------- -------- --------
Operating profit........................... 1 38 99 133 195 292 291
Interest expense........................... 92 86 334 333 292 297 178
Interest income............................ (4) (2) (12) (11) (8) (10) (13)
Other (income)/expense, net................ (8) 6 1 5 5 15 16
Reorganization items....................... -- (709)(b) -- -- -- -- --
Nonrecurring gain.......................... -- -- -- -- (34) (33) --
Taxes on income/(income tax benefit)....... 29 17 (33) (53) (6) 3 43
Extraordinary gain/(loss), net of taxes.... (21) 944 -- -- -- -- --
Changes in accounting principles, net...... -- (150) -- -- -- -- --
Earnings/(loss) from discontinued
operations, net........................... -- -- -- (20) (36) 8 58
--------------- ----------- -------- -------- -------- -------- --------
Net earnings/(loss) (c).................... (129) 1,434 (191) (161) (90) 28 125
--------------- ----------- -------- -------- -------- -------- --------
--------------- ----------- -------- -------- -------- -------- --------
Average number of common shares (d)........ 37,157,672
Loss before extraordinary loss per common
share..................................... (2.90)
Net loss per common share (c)(d)........... (3.46)
Dividends paid per common share (d)........ --
BALANCE SHEET DATA (as of the end of the
period):
Total assets............................... 2,163 2,194 1,659 1,626 1,675 1,585 1,806
Total debt................................. 1,531(e) 1,556(e) 2,711 2,660 2,600 2,428 2,643
Total stockholders' equity/(deficit)....... (134) 4 (1,880) (1,680) (1,518) (1,438) (1,471)
OTHER INFORMATION:
EBITDA (f)................................. 155 63 159 194 280 361 383
Depreciation, depletion and amortization
(g)....................................... 44 22 66 68 76 79 79
Capital expenditures....................... 29 12 49 49 64 76 81
Gross margin (h)........................... 19.8% 18.4% 17.8% 19.1% 21.7% 25.0% 25.8%
EBITDA margin (i).......................... 11.7% 10.7% 8.9% 11.3% 14.6% 18.0% 18.5%
Gypsum wallboard shipments: (j)
Total U.S. Industry...................... 14.9 6.7 20.3 18.4 20.7 21.3 21.3
U.S. Gypsum.............................. 5.0 2.3 7.2 6.6 7.2 7.2 7.3
Average U.S. Gypsum wallboard price (k).... $80.58 $75.81 $71.58 $72.53 $79.08 $85.68 $90.65
</TABLE>
23
<PAGE>
NOTES TO SELECTED CONSOLIDATED FINANCIAL DATA
(a) Fresh start accounting adjustments were recorded on May 6, 1993.
(b) Reflects one-time gain from reorganization items, including an $851 million
gain from recording Excess Reorganization Value, partially offset by other
fresh start adjustments, fees and expenses associated with the Restructuring
and a write-off of deferred financing costs associated with the 1988
Recapitalization.
(c) For the period of May 7 through December 31, 1993, amortization of Excess
Reorganization Value ($113 million) and reorganization debt discount ($8
million) reduced reported net earnings by $121 million, or $3.26 per share.
Reorganization debt discount is a component of interest expense.
(d) Common shares and per share data for periods prior to May 7, 1993 have been
omitted because, due to the Restructuring and implementation of fresh start
accounting, they are not meaningful.
(e) Total debt as of December 31 and May 6, 1993 are shown at principal amounts.
The carrying amounts (net of unamortized reorganization debt discount) as
reflected on the Corporation's balance sheets as of those dates are $1,476
million and $1,461 million, respectively.
(f) EBITDA represents earnings before interest, taxes, depreciation, depletion,
amortization, non-cash postretirement charges, reorganization items,
extraordinary gain, discontinued operations 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.
(g) Excludes amortization of Excess Reorganization Value, which is shown
separately under "Earnings Statement Data."
(h) Gross profit as a percentage of net sales.
(i) EBITDA as a percentage of net sales.
(j) In billions of square feet.
(k) Represents average price per thousand square feet realized by U.S. Gypsum
during the periods shown.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
On May 6, 1993, the Corporation completed the Restructuring. Due to the
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 "The Restructuring" and "Index to
Financial Statements -- Predecessor Company -- Notes to Financial Statements --
Financial Restructuring and Fresh Start Accounting" notes for information on the
Restructuring and implementation of fresh start accounting.
To facilitate a meaningful comparison of the Corporation's operating
performance, the following discussion and analysis is presented on an annual
basis. Consequently, 1993 information presented below does not comply with
post-bankruptcy accounting rules which require separate reporting for the
restructured company and the predecessor company. Included in the following
discussion are comparisons of earnings before interest, taxes, depreciation,
depletion, amortization, and additionally for 1993, non-cash postretirement
charges, reorganization items, extraordinary gain/(loss) and changes in
accounting principles ("EBITDA"). 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.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
CONSOLIDATED RESULTS OF OPERATIONS 1993 1992 1991
- ----------------------------------------------------------------------------------- --------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
NET SALES.......................................................................... $ 1,916 $ 1,777 $ 1,712
GROSS PROFIT....................................................................... 372 317 327
% OF NET SALES................................................................... 19.4% 17.8% 19.1%
Selling and administrative expenses................................................ 220 218 194
% OF NET SALES................................................................... 11.5% 12.3% 11.3%
Amortization of Excess Reorganization Value........................................ 113 -- --
--------- --------- ---------
OPERATING PROFIT................................................................... 39 99 133
--------- --------- ---------
--------- --------- ---------
CALCULATION OF EBITDA:
Operating profit................................................................. $ 39 $ 99 $ 133
Amortization of Excess Reorganization Value...................................... 113 -- --
Depreciation and depletion....................................................... 54 58 57
Other............................................................................ 12 2 4
--------- --------- ---------
EBITDA........................................................................... 218 159 194
% OF NET SALES................................................................. 11.4% 8.9% 11.3%
--------- --------- ---------
--------- --------- ---------
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
NET SALES EBITDA
------------------------------- -------------------------------
RESULTS OF OPERATIONS BY GEOGRAPHIC AREA 1993 1992 1991 1993 1992 1991
- --------------------------------------------------------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
United States:
Gypsum Products........................................ $ 986 $ 889 $ 835 $ 148 $ 99 $ 93
Interior Systems....................................... 376 368 386 45 47 59
Building Products Distribution......................... 528 464 424 7 5 4
Corporate.............................................. -- -- -- (25) (28) (19)
Intrasegment eliminations.............................. (236) (216) (212) -- -- --
--------- --------- --------- --------- --------- ---------
Total United States...................................... 1,654 1,505 1,433 175 123 137
Total Canada............................................. 143 149 169 17 14 29
Total Other Foreign...................................... 208 208 193 26 22 28
Transfers between geographic areas....................... (89) (85) (83) -- -- --
--------- --------- --------- --------- --------- ---------
Total USG Corporation.................................... 1,916 1,777 1,712 218 159 194
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
CONSOLIDATED RESULTS
Net sales increased for the second consecutive year in 1993, up $139
million, or 7.8%, over the prior year. Net sales in 1992 increased $65 million,
or 3.8%, over the 1991 level. The primary factor for the improved levels of
sales has been increased demand for domestic gypsum wallboard which led to all-
time record shipments in 1993 and seven consecutive quarters of improving
prices. These trends reflect the continuing recovery in domestic residential
construction as evidenced by an approximate 7% increase in U.S. housing starts
in 1993 compared with the 1992 level, which was 18% higher than 1991 U.S.
housing starts.
As a percentage of net sales, gross profit in 1993 improved to 19.4% from
17.8% in 1992, reflecting increased gypsum wallboard pricing. In 1992, gross
profit as a percentage of net sales decreased from the 1991 level of 19.1%,
primarily due to lower margins for gypsum wallboard in Canada and interior
systems products.
Selling and administrative expenses increased slightly in 1993 versus 1992.
However, these expenses as a percentage of net sales improved to 11.5% from
12.3% in 1992 as a result of the increase in 1993 net sales. In 1992, selling
and administrative expenses increased $24 million, or 12.4%, over the 1991 level
due to increased compensation and benefits, rent associated with the new
corporate headquarters building, expansion of certain international operations
and a nonrecurring charge associated with organizational streamlining
activities.
Effective May 7, 1993, the Corporation began amortizing its Excess
Reorganization Value which was established in accordance with fresh start
accounting rules. This non-cash amortization, which will continue through April
1998, amounted to $113 million in 1993 with no counterpart in prior years.
Consequently, 1993 operating profit is not comparable to the prior years.
EBITDA in 1993 increased $59 million, or 37.1%, over 1992, after decreasing
$35 million, or 18.0%, in 1992 compared with 1991. These results reflect the
aforementioned gross profit performance and the higher 1992 versus 1991 selling
and administrative expenses.
UNITED STATES
Net sales and EBITDA for domestic Gypsum Products (primarily U.S. Gypsum)
have increased for two consecutive years. In 1993, net sales increased $97
million, or 10.9%, over 1992, following a $54 million, or 6.5%, increase in 1992
compared with 1991. EBITDA in 1993 improved $49 million, or 49.5%, over 1992,
which was $6 million, or 6.5%, higher than the 1991 level. These improvements
primarily reflect improving gypsum wallboard selling prices and increased
volume. Higher sales of joint compound, DUROCK cement board and other products
contributed to the more favorable domestic Gypsum Products results.
26
<PAGE>
As a result of increased demand, 1993 shipments of gypsum wallboard exceeded
7.3 billion square feet, the highest level in the Corporation's history, and
were up 2% over 1992. Shipments in 1992 were up 8% over 1991. As gypsum
wallboard demand and industry capacity utilization increased, prices improved.
After reaching a 14-year low in the first quarter of 1992, gypsum wallboard
prices rebounded in the following quarter and rose in each of the next seven
consecutive quarters. For 1993 as a whole, gypsum wallboard prices increased
10.5% over the prior year average after falling 1.3% in 1992 from 1991. U.S.
Gypsum's average gypsum wallboard prices per thousand square feet for the three
years were as follows:
<TABLE>
<CAPTION>
1993 1992 1991
--------- --------- ---------
<S> <C> <C> <C>
First Quarter............................................................ $ 74.97 $ 67.77 $ 77.05
Second Quarter........................................................... 77.71 72.20 71.93
Third Quarter............................................................ 80.70 73.03 71.32
Fourth Quarter........................................................... 82.46 73.35 70.19
Total Year............................................................... 79.07 71.58 72.53
</TABLE>
Partially offsetting the favorable price and volume trends in 1993 was a 3%
increase in unit manufacturing cost for gypsum wallboard. This increase was
primarily attributable to higher levels of maintenance expenditures and energy
cost. In 1992, unit manufacturing cost declined 2% compared with 1991. However,
EBITDA in 1992 was unfavorably impacted by a nonrecurring pre-tax charge of $4
million associated with organizational streamlining activities.
Net sales in 1993 for domestic Interior Systems (primarily USG Interiors)
increased $8 million, or 2.2%, over the 1992 level, while EBITDA decreased $2
million, or 4.3%. Net sales and EBITDA in 1992 decreased $18 million, or 4.7%,
and $12 million, or 20.3%, from the respective 1991 levels. These results
primarily reflect low levels of non-residential construction in 1992 and 1993,
partially offset in 1993 by increased sales to retail markets. The 1993 net
sales and EBITDA trends primarily reflect increased sales of lower margin
products and higher raw material costs.
Building Products Distribution (L&W Supply) has experienced two consecutive
years of increased net sales and EBITDA. Net sales in 1993 increased $64
million, or 13.8%, and EBITDA rose $2 million, or 40.0%, over the respective
1992 amounts. Comparing 1992 to 1991, net sales were up $40 million, or 9.4%,
and EBITDA increased $1 million, or 25.0%. These improvements reflect higher
gypsum wallboard selling prices and increased volume, as well as improved
results for its other building product lines.
CANADA
Net sales for the Corporation's Canadian operations (primarily CGC) declined
$6 million, or 4.0%, in 1993 versus 1992, due to the strengthened U.S. dollar
compared with the Canadian dollar. However, EBITDA was up $3 million, or 21.4%,
in 1993 versus 1992 due to higher selling prices for gypsum wallboard. Canadian
gypsum wallboard prices were impacted in 1993 by the Canadian government's
ruling that dumping of U.S.-made gypsum 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. For 1992, net sales and EBITDA decreased $20 million, or 11.8%,
and $15 million, or 51.7%, respectively, from the corresponding 1991 levels.
These declines resulted from lower selling prices and volume for gypsum
wallboard due to the weak Canadian economy. Results for both 1993 and 1992 were
also unfavorably impacted by lower sales of CGC's interior systems products due
to the low level of commercial construction.
OTHER FOREIGN
Despite the continuing recession in Europe and the impact of the
strengthened U.S. dollar compared with European currencies, net sales in 1993
for the Corporation's Other Foreign businesses (primarily operations in Europe,
the Pacific and Mexico managed by USG International) were unchanged from 1992
due to increased sales of ceiling tile in Europe. However, EBITDA in 1993
increased $4 million, or 18.2%, over 1992 due to reduced overhead costs.
Comparing 1992 to 1991, net sales increased $15 million, or 7.8%, while EBITDA
decreased $6 million, or 21.4%. The improvement in net sales reflects
27
<PAGE>
increased sales of interior systems products in certain markets as well as the
impact of a weakened U.S. dollar in 1992. The decline in EBITDA resulted from
recessionary market conditions in Europe, costs associated with the Aubange,
Belgium ceiling tile plant and increased overhead costs.
OTHER EARNINGS INFORMATION
Interest expense, which was significantly reduced as a result of the
Restructuring, amounted to $92 million in the period of May 7 through December
31, 1993, of which $8 million represented non-cash amortization of
reorganization debt discount. For the period of January 1 through May 6, 1993,
interest expense was $86 million. For the years ended December 31, 1992 and
1991, interest expense was $334 million and $333 million, respectively.
In connection with the Restructuring, the Corporation recorded in the period
of January 1 through May 6, 1993 a one-time reorganization items gain of $709
million, which primarily consisted of an $851 million gain from recording the
Excess Reorganization Value pursuant to fresh start accounting principles. See
"Index to Financial Statements -- Predecessor Company -- Notes to Financial
Statements -- Reorganization Items" note for additional information on the
reorganization items gain.
Income tax expense amounted to $29 million in the period of May 7 through
December 31, 1993 due to the inability to benefit the amortization of Excess
Reorganization Value. Income tax expense was $17 million for the period of
January 1 through May 6, 1993 while income tax benefits of $33 million and $53
million were recorded in 1992 and 1991, respectively. The income tax expense in
the period of January 1 through May 6, 1993 and the lower 1992 benefit compared
to 1991 were primarily due to the inability to fully benefit a net operating
loss carryforward ("NOL Carryforward") as an offset to deferred taxes. See
"Index to Financial Statements -- 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.
Also in connection with the Restructuring, the Corporation recorded in the
period of January 1 through May 6, 1993 a one-time after-tax extraordinary gain
of $944 million. See "Index to Financial Statements -- Predecessor Company --
Notes to Financial Statements -- Extraordinary Gain" note for additional
information on the extraordinary gain. 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 expected to be prepaid, redeemed or purchased in 1994 with a portion of
the proceeds from the Offering and the Note Placement. See "Purpose of the
Offering and Use of Proceeds" for additional information on the 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 SFAS No.
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions,"
and SFAS No. 109, "Accounting for Income Taxes." See "Index to Financial
Statements -- 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 $129 million was recorded in the period of May 7 through
December 31, 1993 after the aforementioned amortization of Excess Reorganization
Value of $113 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. Net losses of $191 million and
$161 million were recorded in 1992 and 1991, respectively, primarily due to high
levels of interest expense. The net loss in 1991 included a $20 million
after-tax provision relating to the sale of DAP Inc. ("DAP"). Results for DAP
are reported separately as discontinued operations up to September 1991, when
the sale of DAP was completed.
LIQUIDITY AND CAPITAL RESOURCES
On May 6, 1993, the Corporation completed the Restructuring through
implementation of the Prepackaged Plan. The provisions of the Prepackaged Plan
were agreed upon in principle with all committees and certain institutions
representing debt subject to the Restructuring in January 1993. The
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<PAGE>
Corporation's Registration Statement (Registration No. 33-40136), which included
a Disclosure Statement and Proxy Statement -- Prospectus, was declared effective
by the Securities and Exchange Commission (the "SEC") in February 1993. The
solicitation process for approvals of the Prepackaged Plan was completed on
March 15, 1993. The Corporation commenced a prepackaged Chapter 11 bankruptcy
case in Delaware (IN RE: USG CORPORATION, Case No. 93-300) on March 17, 1993 and
received the U.S. Bankruptcy Court's confirmation of the Prepackaged Plan on
April 23, 1993. None of the subsidiaries of the Corporation were part of this
proceeding and there was no impact on trade creditors of the Corporation's
subsidiaries. Under the Prepackaged Plan, all previously existing defaults were
waived or cured.
In the Restructuring, the Corporation (i) converted approximately $1.4
billion of subordinated debt and accrued interest into Common Stock and
Warrants, (ii) converted approximately $300 million principal amount of bank
term loan (the "Bank Term Loan") and $40 million of other obligations under the
Credit Agreement with a syndicate of commercial banks (the "Banks" or the "Bank
Group") into Senior 2002 Notes and (iii) extended the maturities of its
remaining Bank Debt and certain public debt. Further, modifications were made to
the Credit Agreement which resulted in, among other things, (i) the issuance of
$56 million of notes (the "Capitalized Interest Notes" and, together with the
Bank Term Loan, the "Bank Debt") in exchange for an equal amount of accrued but
unpaid interest and other obligations and (ii) modifications to a revolving
credit facility (the "Revolving Credit Facility"). See "The Restructuring" and
"Index to Financial Statements -- Predecessor Company -- Notes to Financial
Statements -- Financial Restructuring" for additional information on the
Restructuring.
Subsequent to the Restructuring, on August 10, 1993, the Corporation issued
an additional $138 million of Senior 2002 Notes in exchange for Bank Debt. This
transaction improved the Corporation's financial flexibility and responded to
strong market demand for the Senior 2002 Notes by replacing near-term maturities
of the Bank Debt with the longer term notes. Although issuance of these notes
caused a modest increase in interest expense from the level experienced since
the Restructuring was consummated, it eliminated all Bank Term Loan scheduled
principal payments due through 1996. Furthermore, in connection with this
exchange, the cash sweep mechanism of the Credit Agreement was modified,
allowing the Corporation to apply cash otherwise subject to the cash sweep
through 1996 to repayment or purchase of senior debt. For the holders of the
Bank Debt participating in the exchange, the Senior 2002 Notes provide greater
yield and liquidity than the Bank Debt. See "The Restructuring" and "Index to
Financial Statements -- Restructured Company -- Notes to Financial Statements --
Indebtedness" note for additional information on this transaction.
On January 7, 1994, the Corporation filed a Registration Statement
(Registration No. 33-51845), as amended on February 16, 1994, pertaining to its
planned public offering of 6,000,000 new shares of common stock to be sold by
the Corporation and 4,000,000 shares of common stock to be sold by Water Street
Corporate Recovery Fund I, L.P. The Offering is part of a refinancing strategy
which also includes (i) the placement of $150 million principal amount of Senior
2001 Notes with certain institutional investors and (ii) certain amendments to
the Corporation's Credit Agreement. The amendments to the Credit Agreement will,
among other things, increase the size of the Corporation's revolving credit
facility by $70 million and amend existing mandatory Bank Term Loan prepayment
provisions to allow the Corporation, upon the achievement of certain financial
tests, to retain additional free cash flow for capital expenditures and the
purchase of its public debt. These amendments are contingent on the consummation
of the Offering.
The Corporation expects to use a portion of the net proceeds from the
Offering and the Note Placement, together with approximately $158 million of
existing cash generated from operations to pay $140 million of Bank Term Loans
and to redeem or purchase approximately $260 million aggregate principal amount
of certain other senior debt issues. The remainder of the net proceeds,
approximately $92 million, will be available for general corporate purposes,
including capital expenditures for cost reduction, capacity improvement and
future growth opportunities. See "Purpose of the Offering and Use of Proceeds"
for more information on the Offering and Note Placement.
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<PAGE>
The Corporation believes that, as a result of the Restructuring, as well as
the subsequent exchange of Senior 2002 Notes for Bank Debt, the Corporation's
cash generated by operations and the estimated levels of liquidity available to
the Corporation will be sufficient to permit the Corporation to satisfy its debt
service requirements and other capital requirements for the foreseeable future.
Upon completion of the Transactions, the Corporation's liquidity and capital
resources will be further significantly strengthened. However, the Corporation
is subject to significant business, economic and competitive uncertainties that
are beyond its control. There can be no assurance that the Corporation's
financial resources will be sufficient for the Corporation to satisfy its debt
service obligations and other capital requirements under all circumstances.
WORKING CAPITAL
As of December 31, 1993, working capital (current assets less current
liabilities) amounted to $121 million and the ratio of current assets to current
liabilities was 1.24 to 1, versus December 31, 1992 when current liabilities
exceeded current assets by $2.6 billion and the ratio of current assets to
current liabilities was .21 to 1. From December 31, 1990 through May 6, 1993,
the Corporation had a deficit working capital position, primarily resulting from
the inclusion of most long-term debt issues in current liabilities due to
various defaults upon certain of the debt issues. Upon consummation of the
Restructuring, all previously existing defaults were waived or cured and
long-term debt included in current liabilities was either exchanged for Common
Stock and Warrants, reclassified to long-term debt or, in the case of $140
million of the Revolving Credit Facility, repaid. See "The Restructuring" and
"Index to Financial Statements -- Predecessor Company -- Notes to Financial
Statements -- Financial Restructuring" note for additional information related
to the Restructuring.
For the period of May 7 through December 31, 1993, cash and cash equivalents
increased $162 million as cash flows from operating activities of $183 million
were partially offset by a net repayment of debt of $21 million. As of December
31, 1993, $158 million of long-term debt was reclassified to currently maturing
long-term debt due to the cash sweep mechanism of the Credit Agreement. This
cash sweep mechanism requires prepayment of long-term debt in 1994. For the
period of January 1 through May 6, 1993, cash and cash equivalents decreased by
$131 million, primarily due to debt repayments in connection with the
Restructuring.
Comparing December 31, 1993 balances with December 31, 1992, accrued
expenses of $208 million were down $345 million, or 62.4%, primarily due to the
cancellation and discharge of $375 million of accrued interest in connection
with the Restructuring. Inventories of $145 million increased $32 million, or
28.3%, primarily due to their revaluation as a result of fresh start accounting.
Accounts receivable (net) of $264 million declined $35 million, or 11.7%,
reflecting a decline in miscellaneous corporate receivables, partially offset by
an increase of $26 million in customer receivables due to the higher level of
net sales. Accounts payable of $104 million rose $13 million, or 14.3%, due to
the increased level of business and improved trade credit.
CAPITAL EXPENDITURES
Capital expenditures amounted to $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
for a total of $41 million in the year ended December 31, 1993. In 1992, capital
expenditures were $49 million. Capital expenditure commitments for the
replacement, modernization and expansion of operations amounted to $11 million
as of December 31, 1993, compared with $24 million as of December 31, 1992. The
Credit Agreement restricts, among other things, capital expenditures above
certain levels. The Corporation believes that these permitted levels are
adequate. In connection with the planned Offering and Note Placement, the Credit
Agreement will be amended, allowing the Corporation to retain additional cash
flow for capital expenditures and other uses. Upon completion of the
Transactions, the Corporation intends to augment its capital spending program on
a basis consistent with such new amendment. See "Purpose of the Offering and Use
of Proceeds" for more information on the Offering and Note Placement.
30
<PAGE>
LITIGATION
One of the Corporation's subsidiaries, U.S. Gypsum, is a defendant in
asbestos lawsuits alleging both property damage and personal injury. This
litigation has not had a material effect on the Corporation's liquidity or
earnings. 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 in U.S. Gypsum's Coverage Action
has so ruled (such ruling has been 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 "Business -- General Information -- Asbestos Litigation" for more
information on legal proceedings.
BUSINESS
INTRODUCTION
Through its subsidiaries, USG is a leading manufacturer of building
materials in North America which produces a wide range of products for use in
residential and nonresidential construction, repair and remodeling, as well as
products used in certain industrial processes. 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 1993. USG
Interiors is a leading supplier of interior ceiling, wall and floor products
used primarily in commercial applications. In 1993, 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. L&W Supply is the
largest distributor of wallboard and related products in the United States and
in 1993 distributed approximately 22% of U.S. Gypsum's wallboard production. In
addition to its United States operations, the Corporation's 76% owned
subsidiary, CGC, is the largest manufacturer of gypsum products in eastern
Canada and the Corporation's USG International unit supplies interior systems
and gypsum wallboard products in the Pacific, Europe and Latin America. In the
year ended December 31, 1993, the Corporation had net sales of $1,916 million
and generated EBITDA of $218 million.
The Corporation believes that its leading industry positions and low cost
structure position it to take advantage of the long-term potential in its three
industry segments: Gypsum Products, Interior Systems and Building Products
Distribution.
U.S. INDUSTRY OVERVIEW
USG's consolidated financial performance is largely influenced by changes in
the three major components of the construction industry in the United States:
new residential construction, new nonresidential construction, and repair and
remodel activity. In recent years, structural changes in residential
construction activity combined with growth in the repair and remodel component
have partially mitigated the impact of the cyclical demand of the overall new
construction components.
NEW RESIDENTIAL AND NONRESIDENTIAL CONSTRUCTION
Demand for the Corporation's products has historically been influenced
primarily by new residential (single and multi-family homes) and nonresidential
(offices, schools, stores, and other institutions)
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construction. Construction activity is directly influenced by a variety of
economic variables. In the short term, the new residential segment is
characterized by fluctuating activity levels as builders and buyers respond to
changes in funding costs, new home prices, and the availability of new
construction financing. Over the medium to long term, new residential
construction activity reflects the demand generated by household formations, the
home ownership rate, removals of housing stock, and the growth of personal
income.
Although new residential construction remains the largest single source of
demand for gypsum wallboard in the United States, it has declined significantly
as a percentage of gypsum wallboard demand since 1986 (a year in which total
gypsum wallboard shipments were comparable to 1993 levels). Residential
construction has a nominal impact on demand for Interiors Systems products. The
following table sets forth demand for gypsum wallboard in the United States by
end-use segment as estimated by U.S. Gypsum based on publicly available data,
internal surveys and data from the Gypsum Association, an industry trade group.
Management estimates that the distribution of U.S. Gypsum's sales volume to
these four end-use segments is generally proportional to industry demand.
<TABLE>
<CAPTION>
1993 1986
--------- ---------
<S> <C> <C>
Residential construction....................................................... 48% 54%
Nonresidential construction.................................................... 9 10
Repair and remodel............................................................. 36 30
Export/other................................................................... 7 6
</TABLE>
Over recent economic cycles, demand for gypsum wallboard has been favorably
impacted by a shift toward more single family housing within the new residential
construction segment and an increase in the average single family home size. New
single family homes, which typically require twice as much wallboard as
multi-family homes, accounted for 87% of total housing starts in 1993, as
compared to 65% in 1986. Additionally, the size of the average single family
home in the United States increased approximately 15% to 2,095 square feet in
1992 from 1,825 square feet in 1986. Largely as a result of these factors,
United States industry shipments of gypsum wallboard were 21.6 billion square
feet in 1993, as compared to 21.3 billion in 1986, despite an approximate 28%
decline in the number of housing starts from 1.8 million units in 1986 to 1.3
million units in 1993, as depicted in the following chart.
GYPSUM WALLBOARD INDUSTRY SHIPMENTS
AND TOTAL HOUSING STARTS
[GRAPHIC]
<TABLE>
<CAPTION>
1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993
----- ----- ----- ----- ----- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Gypsum Wallboard Industry
Shipments, in billions of
square feet 13.3 17.1 19.2 20.2 21.3 21.4 21.3 21.3 20.7 18.4 20.3 21.6
Housing Starts, in thousands
of units 1,062 1,703 1,750 1,742 1,805 1,621 1,488 1,376 1,193 1,014 1,200 1,285
<FN>
SOURCES: HOUSING STARTS ARE BASED ON DATA PUBLISHED BY THE U.S. BUREAU OF
THE CENSUS. GYPSUM WALLBOARD INDUSTRY SHIPMENTS ARE BASED ON DATA
PUBLISHED BY THE GYPSUM ASSOCIATION.
</TABLE>
Nonresidential construction responds less quickly to changes in interest
rates than residential construction because long-term financing is normally
arranged in advance of the commencement of
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<PAGE>
major building projects. In the longer term, nonresidential construction
activity levels are also affected by the general rate of economic growth, the
rate of new job formation and population shifts. Continued weakness in the
nonresidential construction segment has negatively impacted demand for the
products manufactured by both U.S. Gypsum and USG Interiors. Demand for USG
Interiors' products is particularly dependent on new nonresidential construction
activity. Management estimates that approximately one-half of USG Interiors'
1993 sales were in the new nonresidential construction segment as compared to
approximately two-thirds in 1986. In recent years, nonresidential construction
demand has accounted for approximately 10% of gypsum wallboard industry demand
in the United States.
REPAIR AND REMODEL
Based on data published by the U.S. Bureau of The Census, the size of the
total residential repair and remodel market grew to $104 billion in 1992 from
$91 billion in 1986 and $46 billion in 1980. Although data on nonresidential
repair and remodel activity is not readily available, management believes that
this segment grew significantly during the 1980s. The growth of the repair and
remodel market is primarily due to the aging of housing stock, remodeling of
existing buildings and tenant turnover in commercial space. The median age of
housing stock was 27 years in 1990, and the National Association of Homebuilders
forecasts that the median age will increase to 32 years by 2000. Management
believes that the continued aging of housing stock will contribute to further
growth in the repair and remodel segment. In addition, management believes that
the increase in the number of commercial buildings over the last decade will
provide a greater base for nonresidential repair and remodel activity in the
future, as building owners or tenants replace ceiling, wall and floor systems as
part of the tenant turnover process. Demand in the repair and remodel component
tends to be more stable than in new construction, although it does fluctuate
somewhat in response to general economic conditions.
Management estimates that repair and remodel demand for gypsum wallboard has
increased more than 22% since 1986 and, in 1993, accounted for 36% of total
demand for gypsum wallboard in the United States. Management estimates that
approximately one-half of USG Interiors' 1993 sales were to the nonresidential
repair and remodel segment.
GYPSUM PRODUCTS
BUSINESS
The Gypsum Products segment consists primarily of the gypsum operations of
U.S. Gypsum in the United States, CGC in Canada and USG International in Mexico.
CGC is the largest manufacturer of gypsum wallboard in eastern Canada.
Management estimates that industry sales in eastern Canada, including the
Toronto and Montreal metropolitan areas, represent approximately two-thirds of
total Canadian sales volume. In 1993, CGC accounted for approximately 45% of
industry sales in eastern Canada.
PRODUCTS
The Gypsum Products segment 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 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 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.
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<PAGE>
FINANCIAL PERFORMANCE
Summary financial results of the Gypsum Products segment are outlined in the
table below. Such results are not adjusted for intersegment sales eliminations
and corporate expenses. Operating profit in 1993 for the Gypsum Products segment
is not comparable to prior years due to $51 million of non-cash amortization of
Excess Reorganization Value.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------
1993 1992 1991 1990 1989 1988
--------- --------- --------- --------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Net sales..................... $1,165 $1,068 $1,011 $1,134 $1,263 $1,367
Operating profit.............. 90 85 93 148 227 266
EBITDA........................ 179 123 131 194 266 307
EBITDA margin................. 15.4% 11.5% 13.0% 17.1% 21.1% 22.5%
Capital expenditures.......... 30 31 25 25 41 60
</TABLE>
See "Selected Consolidated Financial Data." For additional information on
the Corporation's results by industry segment, including intersegment sales
eliminations and corporate expenses, see "Index to Financial Statements -- Notes
to Financial Statements -- Geographic and Industry Segments."
MANUFACTURING
Gypsum and related products are produced by the Corporation at 42 plants
located throughout the United States, Eastern Canada and in central Mexico. The
Corporation believes several factors contribute to its low delivered cost,
including (i) the vertical integration of its key raw materials (gypsum and
paper); (ii) the technical expertise provided by its extensive research and
development efforts and its experienced employees and (iii) the proximity of its
plants to major metropolitan areas.
USG's vertically integrated gypsum and paper operations provide several cost
and quality advantages. Since the Corporation obtains substantially all of its
gypsum requirements from its own quarries and mines, it controls the cost,
quality and continuity of its supply. These factors are vital to producing
wallboard of a consistently high quality at a low cost. 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
243 million tons, of which approximately 69% are located in the United States
and 31% 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 9.4 million tons.
USG owns and operates seven modern paper mills located across the United
States for efficient distribution of paper to virtually all of its wallboard
plants. These mills have sufficient capacity to satisfy virtually all of the
Corporation's expected paper needs for the foreseeable future. All these mills
presently are designed to produce paper utilizing 100% recycled waste paper
fiber as opposed to more costly virgin pulp. 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.
As the leading producer of gypsum products for over 90 years, USG has
developed extensive knowledge of gypsum and the processes used in making its
products. Combined with USG's experienced work force, USG's technical expertise
provides significant cost efficiencies in the production of existing products
and development of new ones. USG maintains the largest research and development
facility in the gypsum industry in Libertyville, Illinois which conducts fire
and structural 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 and cement board, 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.
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<PAGE>
The number and location of the Corporation's gypsum plants enhance its cost
position by minimizing the distance and the transportation costs to major
metropolitan areas. Transportation costs can be a significant part of total
delivered cost of gypsum products.
MARKETING AND DISTRIBUTION
Distribution is carried out through L&W Supply's 131 distribution centers
located in 34 states, as well as mass merchandisers 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.
COMPETITION
The Corporation competes in North America as the largest of 18 producers of
gypsum wallboard products and, in 1993, accounted for approximately one-third of
total gypsum wallboard sales in the United States. In 1993, U.S. Gypsum's
shipments of gypsum wallboard totaled 7.3 billion square feet, the highest in
the Corporation's history, compared with total domestic industry shipments of
21.6 billion square feet which is also a record level. Principal competitors in
the United States are: National Gypsum Company, which emerged from Chapter 11
bankruptcy in July 1993, The Celotex Corporation, which has operated under
Chapter 11 of the Bankruptcy Code since 1990, Domtar, Inc., Georgia-Pacific
Corporation and several smaller, regional competitors. Major competitors of CGC
in Eastern Canada include Domtar, Inc. and Westroc Industries Ltd.
INTERIOR SYSTEMS
BUSINESS
The Interior Systems segment consists of USG Interiors in the United States,
USG International in Europe, the Pacific and Latin America and CGC in Canada.
The Corporation has increased its emphasis on the interior systems business
since 1986 when Donn Inc. ("Donn"), a manufacturer of ceiling grid and other
interior products, was acquired. Already second behind Armstrong World
Industries, Inc. in the ceiling tile market, the acquisition of Donn positioned
the Corporation as the worldwide leader in ceiling suspension systems and the
only company to offer complete pre-designed, pre-engineered and fully integrated
ceiling systems. With the acquisition of Donn, USG Interiors was established as
a separate subsidiary to combine the operations of Donn and USG Acoustical
Products Company, formerly part of U.S. Gypsum and a leading producer of mineral
fiber ceiling products.
USG's international position was enhanced in late 1987 when it began to
export ceiling tile to Europe to complement Donn's established grid business and
to capitalize on the strength of its existing distribution channels. By
combining ceiling tile and grid as a system for distributors and contractors,
USG has used its leading position in grid to advance sales of ceiling tile. As a
result, management estimates that USG's share of the European ceiling tile
market has grown to approximately 8%. International sales are managed through
USG International on a regional basis consisting of Europe, the Pacific and
Latin America.
CGC manufactures and markets ceiling products and wall and floor systems and
accounted for over one-half of Canadian grid sales in 1993. CGC is the second
largest marketer of ceiling tile in Canada, behind Armstrong World Industries,
Inc., and accounted for approximately 30% of Canadian sales of such products in
1993. CGC markets ceiling tile produced by USG Interiors.
PRODUCTS
The Interior Systems segment manufactures and markets ceiling suspension
systems ("grid") and ceiling tile, access floor systems, wall systems and
mineral wool insulation and soundproofing products. 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. The Corporation believes
its ability to provide custom-designed and specially fabricated ceiling
solutions to meet specific job design installation conditions is increasingly
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<PAGE>
attractive to architects, designers and building owners. 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 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.
FINANCIAL PERFORMANCE
Summary financial results for the Interior Systems segment are outlined in
the table below. Such results are not adjusted for intersegment sales
eliminations and corporate expenses. Operating profit/ (loss) in 1993 for the
Interior Systems segment is not comparable to prior years due to $60 million of
non-cash amortization of Excess Reorganization Value.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------
1993 1992 1991 1990 1989 1988
--------- --------- --------- --------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Net sales..................... $550 $548 $576 $624 $610 $599
Operating profit/(loss)....... (17) 41 62 78 89 83
EBITDA........................ 57 59 78 98 105 98
EBITDA margin................. 10.4% 10.8% 13.5% 15.7% 17.2% 16.4%
Capital expenditures.......... 9 14 22 37 33 17
</TABLE>
See "Selected Consolidated Financial Data." For additional information on
the Corporation's results by industry segment, including intersegment sales
eliminations and corporate expenses, see "Index to Financial Statements -- Notes
to Financial Statements -- Geographic and Industry Segments."
MANUFACTURING
Interior Systems products are manufactured at 16 plants throughout North
America, including 5 ceiling tile plants and 4 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 Interior
Systems 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.
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
Interiors Systems 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 and is oriented toward providing
integrated interior systems at competitive price levels. The Corporation
emphasizes educational and promotional materials designed to influence decision
makers who play a significant role in choosing material suppliers, such as
interior designers, contractors and facility managers. To this end, USG
Interiors maintains the "Solutions Center"-SM- located adjacent to Chicago's
Merchandise Mart which is used for product displays, educational seminars on
products and new product design and development. In recent years, the
Corporation has increased its emphasis on the retail market and as a result now
sells its products to seven of the ten largest building products retailers in
the United States.
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<PAGE>
COMPETITION
The Corporation estimates that it is the world's largest manufacturer of
ceiling suspension systems with approximately 40% of worldwide sales of such
products. 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 National Rolling Mills). 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), Odenwald of West Germany and the Celotex Corporation.
BUILDING PRODUCTS DISTRIBUTION
BUSINESS
The Building Products Distribution segment consists of the operations of the
Corporation's L&W Supply subsidiary. L&W Supply is the largest distributor of
gypsum wallboard and related building products for residential and
nonresidential construction in the United States. L&W Supply distributes
approximately 9% of all gypsum wallboard in the United States (including
approximately 22% of U.S. Gypsum's wallboard production). Wallboard accounts for
approximately 47% of L&W Supply's total net sales.
Although L&W Supply specializes in distribution of gypsum wallboard, joint
compound and other products manufactured primarily by U.S. Gypsum, it also
distributes USG Interiors' products such as acoustical ceiling tile and ceiling
grid and products of other manufacturers, including drywall metal, insulation,
roofing products and accessories.
L&W Supply was founded in 1971 by U.S. Gypsum to address what management
perceived as a growing demand in the construction industry for a specialized
delivery service for construction materials, especially gypsum wallboard. U.S.
Gypsum management believed the construction industry could benefit from a
service-oriented organization that would deliver less than truckload quantities
of construction materials to a job site and place them in the areas where the
work was being done, thereby reducing or eliminating the need for handling by
contractors. To perform this service, U.S. Gypsum established a number of
distribution centers that could stock construction materials and be able to
deliver relatively large quantities with short lead times.
L&W Supply has grown significantly over the past 23 years and now has 131
distribution centers located in 34 states.
FINANCIAL PERFORMANCE
Summary financial results for the Building Products Distribution segment are
outlined in the table below. Such results are not adjusted for intersegment
sales eliminations and corporate expenses. Operating profit in 1993 for the
Building Products Distribution segment is not comparable to prior years due to
$2 million of non-cash amortization of Excess Reorganization Value.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------------
1993 1992 1991 1990 1989 1988
--------- --------- --------- --------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Net sales..................... $528 $464 $424 $478 $485 $483
Operating profit.............. 3 3 -- 4 7 12
EBITDA........................ 7 5 4 12 16 23
EBITDA margin................. 1.3% 1.1% 0.9% 2.5% 3.3% 4.8%
Capital expenditures.......... 2 3 1 1 1 3
</TABLE>
See "Selected Consolidated Financial Data." For additional information on
the Corporation's results by industry segment, including intersegment sales
eliminations and corporate expenses, see "Index to Financial Statements -- Notes
to Financial Statements -- Geographic and Industry Segments."
37
<PAGE>
DISTRIBUTION CENTERS
L&W Supply leases approximately 80% of its facilities from third parties,
which management believes provides it with the flexibility to enter and exit
fluctuating market areas. Usually, initial leases are from three to five years
with a five-year renewal option. Facilities are located in virtually every major
metropolitan area in the United States.
A typical L&W Supply facility has approximately 12,000 square feet of
warehouse space, 1,500 square feet of office space and is located on 1.5 paved
acres of land in prime industrial areas with good interstate highway access.
Each center is equipped with at least one flatbed truck, a boom truck and, in
some cases, a towable forklift. Boom trucks are standard flatbed trucks with
telescoping hydraulic booms installed on the front of the truckbed. By using
either the telescoping boom or the towable forklift, L&W Supply employees are
able to place wallboard, joint compound and other materials in various locations
on a job site.
COMPETITION
L&W Supply's closest 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, mass merchandisers, home improvement centers,
acoustical tile distributors and manufacturers.
Sales are seasonal to the extent that sales are generally greater from the
middle of spring through the middle of autumn than during the remaining part of
the year.
38
<PAGE>
PROPERTIES OF THE CORPORATION
The Corporation's plants, mines, transport ships, quarries and other
facilities are located in North America, Europe, Australia, 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):
GYPSUM PRODUCTS
Gypsum Board and Other Gypsum Products
<TABLE>
<CAPTION>
UNITED STATES
---------------------------
<C> <S>
(*)(**) Baltimore, Maryland
* Boston (Charlestown),
Massachusetts
* Detroit (River Rouge),
Michigan
** East Chicago, Indiana
Empire, Nevada
Fort Dodge, Iowa
* Fremont, California
(*)(**) Galena Park, Texas
* Gypsum, Ohio
* Jacksonville, Florida
(*)(**) New Orleans, Louisiana
* Norfolk, Virginia
Oakfield, New York
Plaster City, California
Plasterco (Saltville),
Virginia
* Santa Fe Springs,
California
Shoals, Indiana
Sigurd, Utah
Southard, Oklahoma
Sperry, Iowa
* Stony Point, New York
Sweetwater, Texas
CANADA
---------------------------
Hagersville, Ontario
* Montreal, Quebec
* St. Jerome, Quebec
MEXICO
---------------------------
*** Puebla, Puebla
</TABLE>
Gypsum plants utilize locally mined or quarried gypsum rock unless noted as
follows:
* These plants use rock from quarry operations at Alabaster, Michigan;
Empire, Nevada; Plaster City, California; Little Narrows and/or Windsor,
Nova Scotia; or Harbour Head, Jamaica, an outside source.
** These plants purchase synthetic gypsum from outside sources.
*** This plant purchases all rock from outside sources.
Joint Compound
Surface preparation and joint treatment products are produced in plants
located at Chamblee, Georgia; Dallas, Texas; East Chicago, Indiana; Fort Dodge,
Iowa; Gypsum, Ohio; Jacksonville, Florida; Port Reading, New Jersey (leased);
Sigurd, Utah; Tacoma, Washington (leased); Torrance, California; Hagersville,
Ontario, Canada; Montreal, Quebec, Canada; Puebla, Mexico; and Selangor,
Malaysia (leased).
Paper
Paper for gypsum board is manufactured at Clark, New Jersey; Galena Park,
Texas; Gypsum, Ohio; Jacksonville, Florida; North Kansas City, Missouri;
Oakfield, New York; and South Gate, California.
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.
39
<PAGE>
Miscellaneous
A mica-processing plant is located at Spruce Pine, North Carolina; perlite
ore is produced at Grants, New Mexico. Metal lath, plaster and drywall
accessories and light gauge steel framing products are manufactured at Puebla,
Mexico. Metal safety grating products are manufactured at Burlington, Ontario,
Canada (leased); and Delta, British Columbia, Canada (leased). Various other
building products are manufactured at La Mirada, California (adhesives) and New
Orleans, Louisiana (lime products).
INTERIOR SYSTEMS
Ceiling Tile
Acoustical ceiling tile and panels are manufactured at Cloquet, Minnesota;
Greenville, Mississippi; Gypsum, Ohio; Walworth, Wisconsin; San Juan Ixhautepec,
Mexico; and Aubange, Belgium.
Ceiling Grid
Ceiling grid products are manufactured at Cartersville, Georgia; Stockton,
California; Westlake, Ohio; Auckland, New Zealand (leased); Dreux, France;
Oakville, Ontario, Canada; Peterlee, England (leased); Selangor, Malaysia
(leased); and Viersen, Germany. A coil coater and slitter plant used in the
production of ceiling grid is also located in Westlake, Ohio.
Access Floor Systems
Access floor systems products are manufactured at Red Lion, Pennsylvania;
Dreux, France; Peterlee, England (leased); and Selangor, Malaysia (leased).
Mineral Wool
Mineral wool products are manufactured at Birmingham, Alabama; Red Wing,
Minnesota; Tacoma, Washington; Wabash, Indiana; Walworth, Wisconsin; and Weston,
Ontario, Canada.
Wall Systems
Wall system products are manufactured at Medina, Ohio (leased).
GENERAL INFORMATION
ASBESTOS 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 seek to recover
compensatory and in many cases punitive damages for personal injury allegedly
resulting from exposure to asbestos and asbestos-containing products (the
"Personal Injury Cases"). 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 $625 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
40
<PAGE>
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 expenditures for all asbestos-related matters,
including property damage, personal injury, insurance coverage litigation and
related expenses, exceeded aggregate insurance payments by $10.9 million in
1991, $25.8 million in 1992, and $8.2 million in 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. U.S. Gypsum is one of
many defendants in four cases that have been certified as class actions and
others that request 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., Circuit Court 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., 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.). 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 claims
and defendants, including USG 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, have been decided. 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 December 31, 1993, 61 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. In addition, approximately 42 property damage
claims have been threatened against U.S. Gypsum.
In total, U.S. Gypsum has settled property damage claims of approximately
191 plaintiffs involved in approximately 75 cases. Twenty-five cases have been
tried to verdict, 16 of which were won by U.S. Gypsum and 6 lost; two other
cases, one won at the trial level and one lost, were settled during appeals.
Another case that was lost at the trial court level has been reversed on appeal
and a new trial ordered. Appeals are pending in 5 of the tried cases. In the
cases lost, compensatory damage awards against
41
<PAGE>
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; a third
was settled after the verdict was reversed on appeal. The remaining punitive
damage award is 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. During 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 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 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 59,000 claimants pending as of
December 31, 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, of which approximately $262 million
remains unexhausted.
42
<PAGE>
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 of Pennsylvania (GEORGINE ET AL. v. AMCHEM PRODUCTS INC., ET
AL., Case No. 93-CV-0215) (hereinafter "Georgine," formerly known as
"Carlough"). 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, if
approved by the court, 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 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. 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 $7 million is expected to be paid by
U.S. Gypsum's insurance carriers.
During 1991, approximately 13,100 Personal Injury Cases were filed against
U.S. Gypsum and approximately 6,300 were settled or dismissed. U.S. Gypsum
incurred expenses of $15.1 million in 1991 with respect to Personal Injury Cases
of which $15.0 million was paid by insurance. 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. As of December 31,
1993, 1992, and 1991, approximately 59,000, 54,000, and 43,000 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 is likely to
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 has reached settlements on approximately 26,700
43
<PAGE>
pending Personal Injury Cases for an amount estimated at approximately $32
million. These settlements will be consummated and the cases closed over a three
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, 1993, can be disposed of for a total amount, including both
indemnity costs and legal fees and expenses, estimated to be between $100
million and $120 million (of which all but $2 million or $5 million,
respectively, is expected to be paid by insurance). 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;
(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 $262 million, of which approximately $250 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 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 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 has appealed the court's ruling with respect to the
policy years available to cover particular claims, and the carriers have
appealed most other aspects of the court's ruling. The appeal process is likely
to take up to a year or more from the date of this Prospectus.
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 is 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, 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 have
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, have agreed to provide
coverage for the Property
44
<PAGE>
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, 1993, carriers providing a total of approximately $90 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 $250 million of coverage that was unexhausted
as of December 31, 1993 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 will continue 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. The number of
Personal Injury Cases 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, 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 ("FASB") Interpretation No. 39. In
accordance with Interpretation No. 39, U.S. Gypsum will record an accrual for
its liabilities for asbestos-related matters which are deemed probable and can
be reasonably estimated, and will separately record 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, it is presently anticipated that the
liabilities and assets to be recorded in 1994 will relate only to pending
Personal Injury Cases. This implementation of Interpretation No. 39 is not
expected to have a material impact on reported earnings 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
45
<PAGE>
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.
OTHER
The Corporation's plants are substantial users of thermal energy. Five major
fuel types are used in a mix consisting of 81% natural gas, 10% electricity, 3%
coke, 3% coal and 3% oil. 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.
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.
None of the industry segments has any special working capital requirements.
None of the industry segments 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 1993 or 1992 consolidated net
sales.
Because orders are filled upon receipt, none of the industry segments has
any significant backlog.
No material part of any industry segment'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.
The average number of persons employed by the Corporation during 1993 and
1992 was 11,900 and 11,850, respectively.
MANAGEMENT
DIRECTORS OF THE CORPORATION
In connection with the consummation of the Prepackaged Plan, the number of
persons comprising the Board was increased by five effective May 6, 1993 which,
after the May 1993 retirement of one director, brought the total Board
membership to 15. Of the five new directors (the "New Directors"), two, Messrs.
Crutcher and Lesser, were nominated by a committee representing holders of the
Corporation's senior subordinated debentures which were converted into Common
Stock under the Prepackaged Plan (each a "Senior Subordinated Director"); two,
Messrs. Fetzer and Zubrow, were nominated by Water Street (each a "Water Street
Director"); and one, Mr. Brown, was nominated by a committee representing
holders of the Corporation's junior subordinated debentures which were converted
into Common Stock and Warrants under the Prepackaged Plan (a "Junior
Subordinated Director").
As the respective terms of office of the New Directors expire, the
Prepackaged Plan provides that each such New Director will be renominated. If a
New Director declines or is unable to accept such nomination, or in the event a
New Director resigns during his term or otherwise becomes unable to continue his
duties as a director, such New Director or, in the case of a Water Street
Director, Water
46
<PAGE>
Street, shall recommend his successor to the Committee on Directors of the
Board. In the event of the death or incapacity of a New Director, his successor
shall be recommended, in the case of a Water Street Director, by Water Street,
in the case of a Senior Subordinated Director, by the remaining Senior
Subordinated Director, and in the case of a Junior Subordinated Director, by the
remaining New Directors. Any such nominee shall be subject to approval by the
Board's Committee on Directors and the Board, which approval shall not be
unreasonably withheld.
Until June 22, 1997, the time at which the director nomination and selection
procedures established by the Prepackaged Plan terminate, no more than two
employee directors may serve simultaneously on the Board. An "employee director"
is defined for this purpose as any officer or employee of the Corporation or any
direct or indirect subsidiary, or any director of any such subsidiary who is not
also a director of the Corporation.
<TABLE>
<CAPTION>
YEAR FIRST
PRINCIPAL OCCUPATION, BECAME
FIVE YEAR EMPLOYMENT HISTORY DIRECTOR
NAME AND AGE AND OTHER DIRECTORSHIPS AND CLASS
- ------------------------------ ------------------------------------------------------------------- -------------
<S> <C> <C>
Eugene B. Connolly, 61 Chairman and Chief Executive Officer, since April 1993; Chairman of 1988
the Board and Chief Executive Officer (June 1990-March 1993); Class 1994
President and Chief Executive Officer (January 1990-May 1990);
Executive Vice President of the Corporation (1987-1989); and
President and Chief Executive Officer of USG Interiors, Inc. (March
1987-March 1989). He also was President and Chief Executive Officer
of DAP Inc. (July 1988-March 1989). Prior to that, he served as
President and Chief Operating Officer of United States Gypsum
Company. He joined the Corporation in 1958, was appointed General
Manager of the Southern Construction Products Division in 1980, and
was elected a Group Vice President, Subsidiaries in 1983 and Group
Vice President, International and Industrial in 1984. Mr. Connolly
is a director of BPB Industries plc, London, England and a director
of U.S. Can Corporation. He is a member of the Advisory Board of
the Kellogg Graduate School of Management, Northwestern University,
the Dean's Advisory Council, School of Business, Indiana University
and the Governing Council, Good Shepherd Hospital (Barrington,
Illinois). Mr. Connolly has been a director of the Corporation
since May 1988 and is Chairman of the Board's Executive Committee.
Keith A. Brown, 42 President (since 1987) of Chimera Corporation, a private management 1993
holding company. Mr. Brown is a director (since 1988) of Adelphia Class 1994
Incorporated, a director (since 1988) of Global Film & Packaging
Corporation, a director (since 1989) of Mansfield Foundry
Corporation, and a director (since 1993) of Ashland Castings
Corporation. Mr. Brown has been a director of the Corporation since
May 1993 and is a member of the Board's Audit Committee and Public
Affairs Committee.
James C. Cotting, 60 Chairman and Chief Executive Officer (since April 1987) of Navistar 1987
International Corporation. Mr. Cotting is a director of Asarco Class 1994
Incorporated and The Interlake Corporation. He is a director of the
National Association of Manufacturers and is a member of the
Conference Board. Mr. Cotting has been a director of the
Corporation since October 1987, is a member of the Board's
Executive Committee and is Chairman of its Finance Committee.
</TABLE>
47
<PAGE>
<TABLE>
<CAPTION>
YEAR FIRST
PRINCIPAL OCCUPATION, BECAME
FIVE YEAR EMPLOYMENT HISTORY DIRECTOR
NAME AND AGE AND OTHER DIRECTORSHIPS AND CLASS
- ------------------------------ ------------------------------------------------------------------- -------------
Philip C. Jackson, Jr., 65 Formerly Vice Chairman and a director of Central Bank of the South, 1979
Birmingham, Alabama, and of its parent company, Central Bancshares Class 1994
of the South (1980-1989); presently Adjunct Professor,
Birmingham-Southern College, Birmingham, Alabama (since January
1989). Mr. Jackson was a member (April 1990-April 1993) of the
Thrift Depositors Protection Oversight Board, Washington, D.C. He
is Director, Saul Centers, Inc., Washington D.C. His past
affiliations include: member of the Board of Governors of the
Federal Reserve System, Washington, D.C., (July 1975-November 1978)
and Vice President and a director of the Jackson Company (mortgage
banking operations) of Birmingham, Alabama (October 1949-June
1975). Mr. Jackson is Trustee, Birmingham-Southern College,
Birmingham, Alabama. He has been a director of the Corporation
since May 1979, is a member of the Board's Executive Committee and
is Chairman of its Public Affairs Committee.
<S> <C> <C>
John B. Schwemm, 59 Retired Chairman (1983-1989) and Chief Executive Officer 1988
(1983-1988) of R.R. Donnelley & Sons Company. He joined that Class 1994
Company in 1965, prior to which he was with the law firm of Sidley
& Austin. Mr. Schwemm was appointed General Counsel in 1969 and
elected Group Vice President, Book Group in 1976. He serves as a
director of Walgreen Company and William Blair Mutual Funds; he
also serves as a Trustee of Northwestern University. Mr. Schwemm
has been a director of the Corporation since May 1988 and is a
member of the Board's Audit Committee and Compensation and Or-
ganization Committee.
W.H. Clark, 61 Chairman of the Board (since 1984), Chief Executive Officer (since 1985 Class
1982) and President (1984-1990) of Nalco Chemical Company of 1995
Naperville, Illinois. He joined the company in 1960 and served in
various capacities until his appointment as a General Manager in
1978. Mr. Clark was elected Group Vice President and President,
Industrial Division (both in 1978); director in 1980; and Executive
Vice President, Domestic Operations, in 1982. He is a director of
Northern Trust Corporation and The Northern Trust Bank, Nicor
Corporation, Bethlehem Steel Corporation, James River Corporation
and Northern Illinois Gas Company. Mr. Clark has been a director of
the Corporation since August 1985, is a member of the Board's
Executive Committee and Compensation and Organization Committee and
is Chairman of its Committee on Directors and Audit Committee.
Lawrence M. Crutcher, 51 Managing Director (since 1990) of Veronis, Suhler & Associates,
investment bankers. From 1967 to 1989, Mr. Crutcher was with Time
Inc. He was President of Book-of-the-Month Club (1985-1989), Vice
President for Financial Planning (1984), Vice President, Magazines
(1981-1983), and Vice President, Circulation (1976-1980). Mr.
Crutcher has been
</TABLE>
48
<PAGE>
<TABLE>
<CAPTION>
YEAR FIRST
PRINCIPAL OCCUPATION, BECAME
FIVE YEAR EMPLOYMENT HISTORY DIRECTOR
NAME AND AGE AND OTHER DIRECTORSHIPS AND CLASS
- ------------------------------ ------------------------------------------------------------------- -------------
director of the Corporation since May 1993 and is a member of the 1993
Board's Committee on Directors and Public Affairs Committee. Class 1995
<S> <C> <C>
Anthony J. Falvo, Jr., 63 Vice Chairman, since April 1993; President (June 1990-March 1993) 1988
and Chief Operating Officer (January 1990-March 1993); Executive Class 1995
Vice President of the Corporation (1988-1989). He previously served
as President and Chief Executive Officer of United States Gypsum
Company (June 1988-March 1989), President and Chief Executive Of-
ficer of Masonite Corporation (April 1986-June 1988), and President
and Chief Operating Officer of Masonite Corporation (March
1985-April 1986). He joined the Corporation in 1955 and was elected
Vice President, Marketing (1982), and Group Vice President,
Consumer Products (1984). He previously served as President, L&W
Supply Corporation (1976) and Director, Group Staff Services
(1980). He serves as a director of Urban Gateways and is on the
Development Council of Good Shepherd Hospital (Barrington,
Illinois). Mr. Falvo has been a director of the Corporation since
May 1988 and is a member of the Board's Executive Committee.
Wade Fetzer III, 56 Partner (since 1986) of Goldman, Sachs & Co., investment bankers. 1993
Mr. Fetzer is a member of the Board of Trustees and the Executive Class 1995
Committee of Rush-Presbyterian St. Luke's Medical Center, a Trustee
of Northwestern University and the University of Wisconsin
Foundation, and a member of the Board of United Charities of
Chicago. Mr. Fetzer has been a director of the Corporation since
May 1993 and is a member of the Board's Compensation and
Organization Committee, Public Affairs Committee and Committee on
Directors.
Judith A. Sprieser, 40 President and Chief Executive Officer (June 1993-present) of Sara 1994
Lee Bakery, North America, a division of Sara Lee Corporation. Ms. Class 1995
Sprieser has been with Sara Lee Corporation since 1987 and served
as Assistant Treasurer, Corporate Finance (1987-1990) and Corporate
Financial Officer (1990-1993) of North American Bakery, Sara Lee
Bakery. She was also Vice President, Sara Lee Food Group (January
1993-June 1993). She has been a director of the Corporation since
February 1994 and is a member of the Board's Audit Committee and
Committee on Directors.
Robert L. Barnett, 53 Formerly Vice Chairman of Ameritech (1991-1992) and President of
the Ameritech Bell Group (1989-1992), which includes eight
wholly-owned subsidiaries of American Information Technologies
Corporation (Ameritech) and the Bell Group staff. Mr. Barnett also
served as President of Ameritech Enterprise Group (1987-1989),
President and Chief Executive Officer of Wisconsin Bell Company
(1985-1987), Vice President of Operations for Wisconsin Bell
Company (1984-1985), President of Ameritech Mobile Communications
Company (1983-1984), and in various other capacities
</TABLE>
49
<PAGE>
<TABLE>
<CAPTION>
YEAR FIRST
PRINCIPAL OCCUPATION, BECAME
FIVE YEAR EMPLOYMENT HISTORY DIRECTOR
NAME AND AGE AND OTHER DIRECTORSHIPS AND CLASS
- ------------------------------ ------------------------------------------------------------------- -------------
with the Bell System, which he joined in 1964. He is a director of 1990
Johnson Controls, Inc. and is a member of the Advisory Council of Class 1996
the Robert R. McCormick School of Engineering and Applied Science
at Northwestern University and of the University's Electrical
Engineering and Computer Science Industrial Advisory Board. He is
affiliated with the Institute of Electrical and Electronics
Engineers. Mr. Barnett has been a director of the Corporation since
May 1990 and is a member of the Board's Compensation and
Organization Committee, Audit Committee and Committee on Directors.
<S> <C> <C>
David W. Fox, 62 Chairman and Chief Executive Officer (since 1990) of Northern Trust 1987
Corporation and The Northern Trust Company. He has been with The Class 1996
Northern Trust Company since 1955 and served as Senior Vice
President (1974-1978), Executive Vice President (1978-1981), Vice
Chairman (1981-1987) and President (1987-1993). Mr. Fox is a
director of The Federal Reserve Bank of Chicago, Northern Trust of
Florida Corp., Banque Rivaud (Paris, France), INROADS/Chicago and
the Chicago Central Area Committee. He is a Governor of the Chicago
Stock Exchange and a trustee of Northwestern Memorial Hospital, the
Adler Planetarium, The Orchestral Association, and DePaul
University. Mr. Fox has been a director of the Corporation since
May 1987, is a member of the Board's Executive Committee, Finance
Committee and Committee on Directors and is Chairman of its
Compensation and Organization Committee.
Marvin E. Lesser, 52 Managing Partner (since 1989) of Cilluffo Associates, L.P., a 1993
private investment partnership. Managing Partner (since 1993) of Class 1996
Sigma Partners, L.P., a private investment partnership. Mr. Lesser
has also been a private consultant since 1992. He was Senior Vice
President (1986-1988) of Bessemer Securities Corporation, a private
investment company and a director (1989-1991) of Amdura
Corporation. Mr. Lesser is Chairman of the Seacoast Area Chapter
(New Hampshire) of the American Red Cross. He has been a director
of the Corporation since May 1993 and is a member of the Board's
Finance Committee, Committee on Directors and Public Affairs
Committee.
Alan G. Turner, 60 Chairman and Chief Executive of BPB Industries plc, London,
England, a manufacturer of gypsum products and other building
materials and paper and packaging products. Prior to September
1993, Mr. Turner was Chairman (November 1992-August 1993), Chairman
and Chief Executive (1985-1992), Chief Executive (1978-1985),
Deputy Chief Executive (1974-1978), and served in various other
capacities since his association with BPB Industries plc in 1962.
He has been a director of that company since 1972. Mr. Turner is
also a director and Vice President of the National Council of
Building Material Producers Limited, United Kingdom; director of
The Manufacturers Life Insurance Company, Toronto;
</TABLE>
50
<PAGE>
<TABLE>
<CAPTION>
YEAR FIRST
PRINCIPAL OCCUPATION, BECAME
FIVE YEAR EMPLOYMENT HISTORY DIRECTOR
NAME AND AGE AND OTHER DIRECTORSHIPS AND CLASS
- ------------------------------ ------------------------------------------------------------------- -------------
director of Jaguar Limited, United Kingdom; director of Adelphi 1984
Enterprises Ltd.; and a member of the European Advisory Board of Class 1996
Boral Limited, Australia. He is an honorary president of
Eurogypsum; a member of the Council and Treasurer of the Royal
Society for the Encouragement of Arts, Manufactures & Commerce,
United Kingdom and a member of the Institution of Chemical
Engineers. Mr. Turner has been a director of the Corporation since
May 1984 and is a member of the Board's Audit Committee and
Committee on Directors. (BPB Industries plc, London, England,
beneficially owns 1,000 shares of common stock of the Corporation).
<S> <C> <C>
Barry L. Zubrow, 40 Partner (since 1988) of Goldman, Sachs & Co., investment bankers. 1993
Mr. Zubrow is a member of the Board of Managers of Haverford Class 1996
College. He has been a director of the Corporation since May 1993
and is a member of the Board's Finance Committee and Committee on
Directors.
</TABLE>
On February 9, 1994, William C. Foote was elected a director of the
Corporation (in the class with a term expiring in 1995) to become effective
March 1, 1994 following the retirement of Mr. Falvo. See "Executive Officers of
the Corporation" below for Mr. Foote's age, present position and employment
within the past five years. He will be a member of the Executive Committee.
EXECUTIVE OFFICERS OF THE CORPORATION (WHO ARE NOT DIRECTORS)
<TABLE>
<CAPTION>
HAS HELD
NAME, AGE PRESENT
AND PRESENT POSITION PRIOR BUSINESS EXPERIENCE IN PAST FIVE YEARS POSITION SINCE
- ----------------------------------------- -------------------------------------------------- -------------------
<S> <C> <C>
William C. Foote, 42 Senior Vice President, USG Interiors, Inc. to January 1994
President and Chief Operating Officer March 1989; Senior Vice President and General
Manager, 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 through December
1993; President and Chief Executive Officer, USG
Interiors, Inc. from January 1993 through December
1993.
Arthur G. Leisten, 52 Vice President and General Counsel to January February 1994
Senior Vice President and General Counsel 1990; Senior Vice President and General Counsel to
March 1993; Senior Vice President, General Counsel
and Secretary to February 1994.
P. Jack O'Bryan, 58 Senior Vice President and General Manager, Central January 1993
Senior Vice President and Chief Construction Products Region, United States Gypsum
Technology Officer Company to March 1989; President and Chief
Executive Officer, United States Gypsum Company to
January 1993.
</TABLE>
51
<PAGE>
<TABLE>
<CAPTION>
HAS HELD
NAME, AGE PRESENT
AND PRESENT POSITION PRIOR BUSINESS EXPERIENCE IN PAST FIVE YEARS POSITION SINCE
- ----------------------------------------- -------------------------------------------------- -------------------
Harold E. Pendexter, Jr., 59 Vice President, Human Resources and Ad- January 1991
Senior Vice President and Chief ministration to January 1990; Senior Vice
Administrative Officer President, Human Resources and Administration to
January 1991.
<S> <C> <C>
Raymond T. Belz, 53 Vice President Finance, United States Gypsum January 1994
Vice President and Controller; Vice Company to December 1990; Vice President Financial
President Financial Services, United Services, United States Gypsum Company since
States Gypsum Company January 1991.
Brian W. Burrows, 54 Same position. March 1987
Vice President, Research and Development
Richard H. Fleming, 46 Vice President Finance and Chief Financial January 1994
Vice President and Chief Financial Officer, Masonite Corporation to February 1989;
Officer Director, Corporate Finance, USG Corporation to
January 1991; Vice President and Treasurer to
December 1993.
Matthew P. Gonring, 38 Director, Public Relations to January 1991; March 1993
Vice President, Corporate Communications Director, Corporate Communications to March 1993.
J. Bradford James, 47 Vice President, Finance & Administration, USG January 1994
Vice President; President and Chief Interiors, Inc. to March 1989; Director, Corporate
Executive Officer, USG Interiors, Inc. Strategic Planning, USG Corporation and Vice
President, Finance & Administration, USG
Interiors, Inc. to January 1990; Vice President,
Financial and Strategic Planning, USG Corporation
to January 1991; Vice President and Chief
Financial Officer, USG Corporation to March 1993;
Senior Vice President and Chief Financial Officer
to December 1993.
John E. Malone, 50 Vice President and Controller, USG Corporation to January 1994
Vice President and Treasurer; Vice December 1993; Vice President -- Finance, USG
President -- Finance, USG International, International, Ltd. since March 1993.
Ltd.
James S. Phillips, 64 Vice President, National Accounts, United States December 1990
Vice President, Corporate Accounts Gypsum Company to March 1989; Vice President
National Accounts, USG Corporation to December
1990.
Donald E. Roller, 56 Executive Vice President and Chief Operating January 1994
Vice President; President and Chief Officer, USG Interiors, Inc. to March 1989;
Executive Officer, United States Gypsum President and Chief Executive Officer, USG
Company Interiors, Inc. to January 1993; President and
Chief Executive Officer, United States Gypsum
Company since January 1993.
Stanley R. Sak, 53 Group Vice President, Ceiling Group, USG January 1994
Vice President; President and Chief Interiors, Inc. to March 1989; Executive Vice
Executive Officer, USG International, President, USG Interiors, Inc. to October 1990;
Ltd. President and Chief Executive Officer, USG
International, Ltd. since October 1990.
</TABLE>
52
<PAGE>
<TABLE>
<CAPTION>
HAS HELD
NAME, AGE PRESENT
AND PRESENT POSITION PRIOR BUSINESS EXPERIENCE IN PAST FIVE YEARS POSITION SINCE
- ----------------------------------------- -------------------------------------------------- -------------------
S. Gary Snodgrass, 42 Vice President Human Resources, USG Interiors, January 1994
Vice President, Human Inc. to December 1989; Director, Corporate Human
Resources -- Operations Resources Planning, USG Corporation and Vice
President, Human Resources, USG Interiors, Inc. to
November 1990; Director, Human Resources, USG
Corporation to September 1992; Vice President,
Management Resources and Employee Relations to
December 1993.
<S> <C> <C>
Dean H. Goossen, 46 General Counsel and Secretary, Arthur J. Gal- February 1994
Corporate Secretary lagher & Co. to 1989; Vice President, General
Counsel and Secretary, Xerox Financial Services
Life Insurance Company to February 1993; Assistant
Secretary, USG Corporation to February 1994.
William R.C. Macdonald, 47 Executive Vice President, Operations, CGC Inc. to March 1989
President and Chief Executive Officer, March 1989.
CGC, Inc.
Frank R. Wall, 61 Senior Vice President and General Manager, Western January 1994
President and Chief Executive Officer, Construction Products Region, United States Gypsum
L&W Supply Corporation Company 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
December 1993.
</TABLE>
EXECUTIVE COMPENSATION AND BENEFITS
The discussion that follows has been prepared based on the actual
compensation paid and benefits provided by the Corporation to the five most
highly compensated executive officers of the Corporation (collectively, the
"Named Executives"), for services performed during 1993 and the other periods
indicated. This historical data is not necessarily indicative of the
compensation and benefits that may be provided to such persons in the future.
In general, the Prepackaged Plan provided for the continuation by the
Corporation of the existing employment, compensation and benefit arrangements.
The Prepackaged Plan resulted in a substantial reduction on May 6, 1993 in the
amounts otherwise potentially payable to the Named Executives in 1994 under the
Corporation's three-year Incentive Recovery Program (the "IRP") and the
concurrent cash settlement of such reduced awards. Although no further awards
will be made to the Named Executives under the IRP, the Named Executives were
eligible for incentive awards under the Corporation's 1993 Annual Management
Incentive Program.
53
<PAGE>
SUMMARY COMPENSATION TABLE
The following table summarizes for the years indicated the compensation
awarded to, earned by or paid to the Named Executives for services rendered in
all capacities to the Corporation and its subsidiaries.
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
ANNUAL COMPENSATION ---------------------------------------
---------------------------------
OTHER AWARDS PAYOUTS
ANNUAL --------------------------- ---------- ALL OTHER
COMPEN- RESTRICTED OPTIONS/ LTIP COMPEN-
NAME AND PRINCIPAL POSITION SALARY BONUS SATION STOCK AWARDS SARS PAYOUTS SATION
(AS OF JANUARY 1, 1994) YEAR ($) ($)(A) ($)(B) ($)(C) (#)(D) ($)(E) ($)(F)
- ---------------------------- --------- --------- --------- ----------- -------------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Eugene B. Connolly 1993 $ 612,500 $ 717,624 $ 52,952 -- 250,000 $1,164,005 $ 42,426
Chairman of the Board and 1992 555,000 -- -- -- -- -- 530
CEO 1991 475,000 -- -- $ 213,750 -- -- 530
Anthony J. Falvo, Jr. 1993 473,750 543,120 -- -- 50,000 800,168 32,869
Vice Chairman 1992 432,500 -- -- -- -- -- 530
1991 376,667 -- -- 142,500 -- -- 530
P. Jack O'Bryan Senior Vice 1993 280,000 255,096 -- -- 100,000 470,448 17,739
President and Chief 1992 256,000 -- -- -- -- -- 530
Technology Officer 1991 236,750 -- -- 83,125 -- -- 530
Donald E. Roller Vice 1993 280,000 255,096 -- -- 100,000 446,614 17,574
President; President and 1992 250,000 -- -- -- -- -- 530
CEO, United States Gypsum 1991 233,333 -- -- 83,125 -- -- 530
Company
Harold E. Pendexter, Jr. 1993 269,583 250,614 -- -- 100,000 408,524 17,739
Senior Vice President and 1992 242,500 -- -- -- -- -- 530
Chief Administrative 1991 210,000 -- -- 83,125 -- -- 530
Officer
</TABLE>
- ------------------------------
(a) Reflects payments arising from cash award opportunities under the
Corporation's 1993 Annual Management Incentive Program which were afforded
to the Named Executives upon termination of the IRP referred to in footnote
(e). The amounts shown are taken into account for purposes of computing
benefits under the Corporation's retirement plans. None of the Named
Executives received an annual cash bonus for 1992 or 1991.
(b) Mr. Connolly's Other Annual Compensation for 1993 included $14,100 in
automobile allowance and $16,724 as the estimated cost of equivalent life
insurance provided by the Corporation's executive death benefit plan; no
other Named Executive had perquisites and other personal benefits
aggregating the lesser of either $50,000 or 10 percent of salary and bonus
for 1993, and none of the Named Executives had such perquisites or other
personal benefits for 1992 or 1991.
(c) The amounts shown reflect the value (determined by the closing price of the
Corporation's common stock on the New York Stock Exchange on the date of
grant) of grants of restricted stock awards made in 1991 under the
Management Performance Plan. The shares subject to some such awards were
originally scheduled to vest no later than the tenth anniversary of the
applicable date of grant, subject to acceleration upon the attainment of
specified performance objectives, and the awards included the right to
receive dividends paid to stockholders. None of the restricted stock awards
were originally scheduled to vest in less than three years from the date of
grant. No dividends were paid by the Corporation in 1991, 1992, or 1993. The
shares subject to such awards were reduced proportionally as a result of the
one for 50 reverse stock split effected by the Prepackaged Plan. Although
none of such shares had vested as of December 31, 1993, the Compensation and
Organization Committees of the Board of Directors determined in November
1993 to accelerate the vesting of all outstanding restricted stock awards,
including the awards held by the Named Executives in the amounts indicated
in the next sentence, to February 14, 1994. As of December 31, 1993, the
aggregate number of restricted shares held by each of the Named Executives
and the aggregate value thereof, determined with reference to closing prices
on such date, were as follows: Mr. Connolly, 3,852 shares, $112,671; Mr.
Falvo, 2,628 shares, $76,869; Mr. O'Bryan, 1,528 shares, $44,694; Mr.
Roller, 1,480 shares, $43,290; and Mr. Pendexter, 1,329 shares, $38,873.
(d) Option awards in 1993 were granted effective June 1, 1993. No option awards
were granted to the Named Executives in 1992 or 1991 and option awards
outstanding as of May 6, 1993 were cancelled without consideration by the
terms of the Prepackaged Plan.
(e) Reflects cash settlements of reduced awards, otherwise potentially payable
in 1994, in connection with termination of the IRP pursuant to and
concurrently with the effectiveness of the Prepackaged Plan. The amounts
shown are taken into account for purposes of computing benefits under the
Corporation's retirement plans. None of the Named Executives received
long-term incentive plan payouts in 1992 or 1991.
54
<PAGE>
(f) All Other Compensation for the Named Executives for each year consisted
solely of matching contributions from the Corporation to defined
contribution plans.
OPTION/SAR GRANTS IN LAST FISCAL YEAR (A)
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE VALUE
---------------------------------------------------------- AT ASSUMED ANNUAL RATES OF
SECURITIES STOCK PRICE APPRECIATION FOR
UNDERLYING % OF TOTAL OPTION TERM(C)
OPTIONS/SARS OPTIONS/SARS EXERCISE ----------------------------
GRANTED GRANTED TO PRICE EXPIRATION 5% 10%
NAME (#)(B) EMPLOYEES IN 1993 ($/SH) DATE ($) ($)
- ----------------------------- -------------- ----------------- ----------- ---------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Eugene B. Connolly........... 250,000 14.9 $ 10.3125 6/1/03 $ 1,618,375 $ 4,109,375
Anthony J. Falvo, Jr......... 50,000 3.0 10.3125 6/1/03 323,675 821,875
P. Jack O'Bryan.............. 100,000 6.0 10.3125 6/1/03 647,350 1,643,750
Donald E. Roller............. 100,000 6.0 10.3125 6/1/03 647,350 1,643,750
Harold E. Pendexter, Jr...... 100,000 6.0 10.3125 6/1/03 647,350 1,643,750
<FN>
- ------------------------
(a) No SARs were granted in 1993.
(b) Pursuant to the Prepackaged Plan, all option awards outstanding as of May 6,
1993, were cancelled without consideration. As permitted by the Prepackaged
Plan, 2,788,350 shares of Common Stock were reserved for future issuance in
conjunction with stock options. Options for 1,673,000 shares of Common Stock
were granted on June 1, 1993 to 45 individuals, including the Named
Executives, at an exercise price of $10.3125 per share, which was the
average of the high and low sales prices for a share of Common Stock as
reported on the NYSE Composite Tape for such date. These options become
exercisable at the rate of one-third of the aggregate grant on each of the
first three anniversaries of the date of the grant (except for the option
grant with respect to 50,000 shares to Mr. Falvo, which is expected to
become exercisable in 1994 in conjunction with his anticipated retirement)
and expire on the tenth anniversary of the date of grant except in the case
of retirement, death or disability in which case they expire on the earlier
of the fifth anniversary of such event or the expiration of the original
option term.
(c) Assumes appreciation in value from the date of grant to the end of the
option term, at the indicated rate.
</TABLE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUE OF UNEXERCISED IN-
OPTIONS/SARS AT FISCAL THE-MONEY OPTIONS/SARS AT
NUMBER OF SHARES YEAR-END (A) FISCAL YEAR-END (A)
UNDERLYING OPTIONS VALUE --------------------------- ---------------------------
EXERCISED REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
NAME (#) ($) (#) (#) ($) ($)
- ------------------------- ------------------ --------- ------------ -------------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Eugene B. Connolly....... 0 $ 0 0 250,000 $ 0 $ 4,718,750
Anthony J. Falvo, Jr..... 0 0 0 50,000 0 943,750
P. Jack O'Bryan.......... 0 0 0 100,000 0 1,887,500
Donald E. Roller......... 0 0 0 100,000 0 1,887,500
Harold E. Pendexter,
Jr...................... 0 0 0 100,000 0 1,887,500
<FN>
- ------------------------
(a) No SARs were outstanding as of December 31, 1993.
</TABLE>
55
<PAGE>
EMPLOYMENT AGREEMENTS
In order to assure continued availability of services of the Named
Executives, the Corporation (or, in the case of Mr. Roller, U.S. Gypsum) entered
into employment agreements (the "Employment Agreements") with the Named
Executives in 1993 which superseded substantially identical agreements entered
into on various dates prior to 1993. The Employment Agreements, which do not by
their terms provide for renewal or extension, terminate on December 31, 1996.
The Employment Agreements provide for minimum annual salaries at the then
current rate to be paid at normal pay periods and at normal intervals to Messrs.
Connolly ($585,000), Falvo ($455,000), O'Bryan ($280,000), Roller ($280,000),
and Pendexter ($255,000), with the minimum annual salaries deemed increased
concurrently with salary increases authorized by the Compensation and
Organization Committee of the Board of Directors. The Employment Agreements
require that each Named Executive devote his full attention and best efforts
during the term of such agreement to the performance of assigned duties. If a
Named Executive is discharged without cause by the Corporation during the term
of his Employment Agreement, he may elect to be treated as a continuing employee
under such agreement, with salary continuing at the minimum rate specified in
such agreement or at the rate in effect at the time of discharge, if greater,
for the balance of the term of the Employment Agreement or for a period of two
years, whichever is greater. In the event of any such salary continuation,
certain benefits will be continued at corresponding levels and for the same
period of time. If a Named Executive becomes disabled during the term of his
Employment Agreement, his compensation continues for the unexpired term of the
Employment Agreement at the rate in effect at the inception of the disability.
In the event of a Named Executive's death during the term of his Employment
Agreement, one-half of the full rate of compensation in effect at the time of
his death will be paid to his beneficiary for the remainder of the unexpired
term of the Employment Agreement.
Each of the Named Executives has undertaken, during the term of his
Employment Agreement and for a period of three years thereafter, not to
participate, directly or indirectly, in any enterprise which competes with the
Corporation or any of its subsidiaries in any line of products in any region of
the United States. Each Named Executive has also agreed not to, at any time, use
for his benefit or the benefit of others or disclose to others any of the
Corporation's confidential information except as required by the performance of
his duties under his Employment Agreement.
TERMINATION COMPENSATION AGREEMENTS
The Corporation is a party to termination compensation agreements with the
Named Executives, each of which will terminate at the earlier of the close of
business on December 31, 1995, or upon the Named Executive attaining age 65.
The agreements provide certain benefits in the event of a "change in
control" and termination of employment within three years thereafter or prior to
the Named Executive attaining age 65, whichever is earlier, but only if such
termination occurs under one of several sets of identified circumstances. Such
circumstances include termination by the Corporation other than for "cause" and
termination by the Named Executive for "good reason." Each "change in control"
will begin a new three-year period for the foregoing purposes. For purposes of
the agreements: (i) a "change in control" is deemed to have occurred, in
general, if any person or group of persons acquires beneficial ownership of 20%
or more of the combined voting power of the Corporation's then outstanding
voting securities, if there is a change in a majority of the members of the
Board within a two year period and in certain other events; (ii) the term
"cause" is defined as, in general, the willful and continued failure by the
Named Executive substantially to perform his duties after a demand for
substantial performance has been delivered or the willful engaging of the Named
Executive in misconduct which is materially injurious to the Corporation; and
(iii) "good reason" for termination by a Named Executive means, in general,
termination subsequent to a change in control based on specified changes in the
Named Executive's duties, responsibilities, titles, offices or office location,
compensation levels and benefit levels or participation.
The benefits include payment of full base salary through the date of
termination at the rate in effect at the time of notice of termination, payment
of any unpaid bonus for a past fiscal year and pro rata
56
<PAGE>
payment of bonus for the then current fiscal year, and continuation through the
date of termination of all stock ownership, purchase and option plans and
insurance and other benefit plans. In the event of a termination giving rise to
benefits under the agreements, the applicable Named Executive will be entitled
to payment of a lump sum amount equal to 2.99 times the sum of (i) his then
annual base salary, computed at 12 times his then current monthly pay and (ii)
his full year position par bonus for the then current fiscal year, subject to
all applicable federal and state income taxes, together with payment of a
gross-up amount to provide for applicable federal excise taxes in the event such
lump sum and all other benefits payable to the Named Executive constitute an
"excess parachute payment" under the Internal Revenue Code. The Corporation is
required to maintain in full force and effect until the earlier of (i) two years
after the date of any termination which gives rise to benefits under any of the
agreements and (ii) commencement by the Named Executive of full-time employment
with a new employer, all insurance plans and arrangements in which the Named
Executive was entitled to participate immediately prior to his termination in a
manner which would give rise to benefits under his agreement, provided that if
such participation is barred, the Corporation will be obligated to provide
substantially similar benefits. In the event of any termination giving rise to
benefits under the agreements, the Corporation is required to credit the
applicable Named Executive with three years of benefit and credited service in
addition to the total number of years of benefit and credited service the Named
Executive accrued under the USG Corporation Retirement Plan. See "Retirement
Plans" below. If the Named Executive has a total of less than five years of
credited service following such crediting, he nonetheless will be treated as if
he were fully vested under that Plan, but with benefits calculated solely on the
basis of such total benefit service.
The Corporation is obligated to pay to each Named Executive all legal fees
and expenses incurred by him as a result of a termination which gives rise to
benefits under his agreement, including all fees and expenses incurred in
contesting or disputing any such termination or in seeking to obtain or enforce
any right or benefit provided under such agreement. No amounts are payable under
such agreements if the Named Executive's employment is terminated by the
Corporation for "cause" or if the Named Executive terminates his employment and
"good reason" does not exist.
Although Water Street's ownership of more than 20% of the Corporation's
voting securities as a result of the Restructuring constituted a "change in
control" under the agreements, each of the Named Executives agreed to waive this
occurrence. Such waivers do not constitute a waiver of any other occurrence of a
change in control.
The Corporation has established a so-called "rabbi trust" to provide a
source of payment for benefits payable under such agreements. Immediately upon
any change in control, the Corporation may deposit with the trustee under such
trust an amount reasonably estimated to be potentially payable under all such
agreements, taking into account any previous deposits. The Corporation did not
make any such deposit to the trust as a result of Water Street's ownership. In
the event that the assets of such trust in fact prove insufficient to provide
for benefits payable under all such agreements, the shortfall would be paid
directly by the Corporation from its general assets.
RETIREMENT PLANS
The following table shows the annual pension benefits on a straight-life
annuity basis for retirement at normal retirement age under the terms of the
Corporation's contributory retirement plan (the "Retirement Plan"), before the
applicable offset of one-half of the primary social security benefits at time of
retirement. The table has been prepared for various compensation classifications
and representative years of credited service under the Plan. Each participating
employee contributes towards the cost of his or her retirement benefit.
Retirement benefits are based on the average rate of annual covered compensation
during the three consecutive years of highest annual compensation in the ten
years of employment immediately preceding retirement. Participants become fully
vested after five years of continuous credited service.
57
<PAGE>
RETIREMENT PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF CREDITED SERVICE
---------------------------------------------------------------
COVERED COMPENSATION 20 25 30 35 40
- ------------------------------------------------ ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
$200,000........................................ $ 64,000 $ 80,000 $ 96,000 $ 112,000 $ 128,000
400,000......................................... 128,000 160,000 192,000 224,000 256,000
600,000......................................... 192,000 240,000 288,000 336,000 384,000
800,000......................................... 256,000 320,000 384,000 448,000 512,000
1,000,000....................................... 320,000 400,000 480,000 560,000 640,000
1,200,000....................................... 384,000 480,000 576,000 672,000 768,000
</TABLE>
The Named Executives participate in the Retirement Plan. The Named
Executives' full years of continuous credited service at December 31, 1993 were
as follows: Mr. Connolly, 35; Mr. Falvo, 38; Mr. O'Bryan, 35; Mr. Roller, 33;
and Mr. Pendexter, 36. Compensation under the Retirement Plan includes salary
and incentive compensation (bonus and IRP payments) for the year in which
payments are made.
Pursuant to a supplemental retirement plan, the Corporation has undertaken
to pay any retirement benefits otherwise payable to certain individuals,
including the Named Executives, under the terms of the Corporation's
contributory Retirement Plan but for provisions of the Internal Revenue Code
limiting amounts payable under tax-qualified retirement plans in certain
circumstances. The Corporation has established a so-called "rabbi trust" to
provide a source of payment for benefits under this supplemental plan. Amounts
are deposited in this trust from time to time to provide a source of payments to
participants as they retire as well as for periodic payments to certain other
retirees. In addition, the Corporation has authorized establishment by certain
individuals, including the Named Executives, of special retirement accounts with
independent financial institutions as an additional means of funding the
Corporation's obligations to make such supplemental payments.
DIRECTOR COMPENSATION
Directors who are not employees of the Corporation are currently entitled to
receive a retainer of $6,000 per quarter plus a fee of $900 for each Board or
Board committee meeting attended, together with reimbursement for out-of-pocket
expenses incurred in connection with attendance at meetings. A non-employee
director serving as chairman of a committee is entitled to receive an additional
retainer of $1,000 per quarter for each such chairmanship. Additional fees for
pre-meeting consultations may be paid as applicable to non-employee directors,
the amount of such fees to bear a reasonable relationship to the regular meeting
fee of $900 and the customary length of a meeting of the Board committee
involved. No director of the Corporation has received any compensation of any
kind for serving as a director while also serving as an officer or other
employee of the Corporation or any of its subsidiaries.
In the past, the Corporation has entered into consulting agreements with
retiring non-employee directors who had specified minimum periods of service on
the Board. Those agreements continued the annualized retainer which was in
effect in each instance at the time of retirement from the Board in return for
an undertaking to serve in an advisory capacity and to refrain from any activity
in conflict or in competition with the Corporation. The Board has determined to
continue to offer such agreements on a case-by-case basis but also has
determined to limit any such agreement to a term not to exceed five years.
58
<PAGE>
OWNERSHIP OF COMMON STOCK
SELLING STOCKHOLDER AND ITS AFFILIATES
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock of the Selling Stockholder and its affiliates as
of December 31, 1993 and as adjusted to reflect the Selling Stockholder's sale
of shares in the Offering. See "Certain Relationships and Related Transactions
- -- Agreement with Water Street Entities."
<TABLE>
<CAPTION>
SHARES OWNED BEFORE SHARES OWNED
THE OFFERING SHARES AFTER THE OFFERING
------------------------------ BEING ------------------------------
NAME AND ADDRESS NUMBER(A) PERCENT(B) OFFERED NUMBER(A) PERCENT(B)
- ---------------------------------- ------------- --------------- ----------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Water Street Corporate Recovery
Fund I, L.P. and its affiliates... 16,105,840 43% 4,000,000 12,105,840 28%
85 Broad Street
New York, New York 10004
<FN>
- ------------------------
(a) Water Street owns directly 15,893,231 shares of Common Stock and 116,070
Warrants that are currently exercisable. Goldman, Sachs & Co. owns
directly 96,539 shares of Common Stock and, as the general partner of
Water Street, may be deemed to be the beneficial owner of the 15,893,231
shares of Common Stock and 116,070 Warrants owned directly by Water
Street. Such shares and Warrants may also be deemed to be beneficially
owned by The Goldman Sachs Group, L.P., one of the general partners of
Goldman, Sachs & Co. Goldman, Sachs & Co. and The Goldman Sachs Group,
L.P. disclaim beneficial ownership of shares and Warrants held by Water
Street to the extent partnership interests in Water Street are held by
persons other than Goldman, Sachs & Co., The Goldman Sachs Group, L.P. and
their affiliates.
(b) Based on 37,158,085 shares outstanding prior to the Offering and
43,158,085 shares outstanding after the Offering.
</TABLE>
OTHER 5% STOCKHOLDERS
In addition to the Selling Stockholder and its affiliates, the Corporation
believes certain funds or accounts managed or advised by Fidelity Managment &
Research Company and Fidelity Management Trust Company may beneficially own in
excess of 5% of the outstanding Common Stock.
59
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information as of January 1, 1994 regarding
the beneficial ownership of Common Stock by each current director and Named
Executive and by all current directors and executive officers of the Corporation
as a group (32 persons). Such information is derived from the filings made with
the SEC by such persons under Section 16(a) of the Exchange Act. The totals
include any shares allocated to the accounts of those individuals through
December 31, 1993 under the USG Corporation Investment Plan.
<TABLE>
<CAPTION>
SHARES
BENEFICIALLY PERCENT
NAME OWNED OF CLASS(A)
- ------------------------------------------------------- ------------ -------------
<S> <C> <C>
Robert L. Barnett...................................... 20
Keith A. Brown......................................... 119,256
W. H. Clark............................................ 2,248
Eugene B. Connolly..................................... 7,789
James C. Cotting....................................... 20
Lawrence M. Crutcher................................... 1,800
Anthony J. Falvo, Jr................................... 6,852
Wade Fetzer III........................................ (b)
David W. Fox........................................... 112
Philip C. Jackson, Jr.................................. 1,963
Marvin E. Lesser....................................... 500
P. Jack O'Bryan........................................ 5,029
Harold E. Pendexter, Jr................................ 5,085
Donald E. Roller....................................... 4,970
John B. Schwemm........................................ 154
Judith A. Sprieser..................................... 0
Alan G. Turner......................................... 0
Barry L. Zubrow........................................ (b)
All current directors and present executive officers as
a group (32 persons), including those current
directors and Named Executives named above............ 172,094
<FN>
- ------------------------
(a) Total beneficial ownership of 172,094 shares of Common Stock by members of
the group identified above represents approximately 0.5% of the total
outstanding shares of Common Stock, excluding the shares that Messrs.
Fetzer and Zubrow may be deemed to beneficially own as described in the
following note. No director had a right to acquire beneficial ownership of
any shares of Common Stock within 60 days after January 1, 1994 except as
described as follows and in note (b) below: Warrants that are currently
exercisable are as follows: Mr. Brown, 16,458 Warrants; Mr. Connolly,
1,003 Warrants; Mr. Falvo, 1,003 Warrants; Mr. Fox, 19 Warrants; Mr.
Jackson, 879 Warrants; Mr. O'Bryan, 831 Warrants; Mr. Pendexter, 619
Warrants; Mr. Roller, 975 Warrants; Mr. Schwemm, 25 Warrants. Warrants
held by directors and executive officers as a group totaled 139,140. The
above table also excludes options to purchase an aggregate of 1,353,000
shares of Common Stock which are not exercisable within 60 days after
January 1, 1994, except for the option grant with respect to 50,000 shares
to Mr. Falvo, which is expected to fully vest in 1994 in conjunction with
his retirement.
(b) Messrs. Fetzer and Zubrow are general partners of Goldman, Sachs & Co. As
general partners, Messrs. Fetzer and Zubrow may be deemed to be the
beneficial owners of shares beneficially owned or held by Goldman, Sachs &
Co. and its affiliates, including Water Street and The Goldman Sachs
Group, L.P. As described above, Goldman, Sachs & Co. owns directly 96,539
shares of Common Stock and, as the general partner of Water Street, may be
deemed to be the beneficial owner of the 15,893,231 shares of Common Stock
and 116,070 Warrants owned directly by Water
</TABLE>
60
<PAGE>
<TABLE>
<S> <C>
Street. Messrs. Fetzer and Zubrow disclaim beneficial ownership of such
shares and Warrants other than to the extent such ownership corresponds to
their respective percentage interests in Goldman, Sachs & Co., The Goldman
Sachs Group, L.P. and Water Street.
</TABLE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
AGREEMENT WITH WATER STREET ENTITIES
On February 25, 1993, the Corporation entered into the Water Street
Agreement. The Water Street Agreement, among other things, (i) restricts the
Water Street Entities from purchasing, or offering or agreeing to purchase, any
shares of Common Stock or other voting securities of the Corporation, except for
Permitted Acquisitions (as defined in the Water Street Agreement) and
acquisitions by any Water Street Entity other than Water Street of up to an
aggregate of 10% of the then outstanding shares of Common Stock in the ordinary
course of its business; (ii) requires (a) Water Street to vote all shares of
Common Stock and other voting securities of the Corporation beneficially owned
by it and (b) the other Water Street Entities to vote all shares of Common Stock
beneficially owned by them in excess of 10% of the then outstanding shares of
Common Stock, in each case, in the same proportion as the votes cast by all
other holders of Common Stock and other voting securities of the Corporation,
subject to certain exceptions described below; (iii) places restrictions on the
ability of the Water Street Entities to transfer shares of Common Stock to any
person, except for (a) sales consistent with Rule 144 of the Securities Act of
1933, (b) underwritten public offerings, (c) persons not known to be 5% holders,
(d) pledgees who agree to be bound by certain provisions of the Water Street
Agreement, (e) in the case of Water Street, distributions to Water Street's
partners in accordance with the governing partnership agreement, (f) pursuant to
certain tender or exchange offers for shares of Common Stock and (g) pursuant to
transactions approved by the Board; (iv) provides Water Street with certain
rights to nominate directors to the Board and Finance Committee (as described
below); (v) requires the maintenance of directors' and officers' liability
insurance and indemnification rights; (vi) requires that the Corporation's
shareholder rights plan provide temporary exemptions for ownership of Common
Stock by the Water Street Entities; (vii) provides Water Street with four demand
registrations and unlimited piggyback registrations, subject to certain
limitations described below; and (viii) provides for indemnification by the
Corporation of Water Street, its underwriters and related parties for securities
law claims related to any demand or piggyback registration contemplated in
clause (vii) above.
In connection with the Restructuring, Water Street nominated two New
Directors to the Board, Wade Fetzer III and Barry L. Zubrow. See "Management --
Directors of the Corporation." In the event that the Water Street Directors are
removed from office without the consent of Water Street, then the restrictions
on the Water Street Entities relating to (i) the purchases of voting securities
of the Corporation other than Permitted Acquisitions, (ii) the voting of
securities of the Corporation and (iii) the transfer of shares of Common Stock,
as described above, shall terminate. These restrictions shall also terminate
upon the earliest to occur of: (i) the consummation of a merger, consolidation
or other business combination to which the Corporation is a constituent
corporation, if the stockholders of the Corporation immediately before such
merger, consolidation or combination do not own more than 50% of the combined
voting power of the then outstanding voting securities of the surviving
corporation, (ii) the Board consisting of a majority of directors not approved
by a vote of the directors serving at the time the Water Street Agreement was
executed, and (iii) the tenth anniversary of the Water Street Agreement. In
addition, the restrictions on purchases of voting securities and transfers of
Common Stock shall also terminate upon the Water Street Entities owning less
than 5% of the then outstanding shares of Common Stock.
Furthermore, the Water Street Entities will not be subject to the voting
restrictions contained in the Water Street Agreement if, among other things: (i)
the Corporation defaults on the payment of principal or interest required to be
paid pursuant to any indebtedness if the aggregate amount of such indebtedness
is $25 million or more; (ii) the principal of any of the Corporation's
indebtedness is declared due and payable prior to the date on which it would
otherwise become due and payable if the aggregate amount of such indebtedness is
$25 million or more; (iii) any person other than Water Street becomes the
beneficial owner of more than 10% of the then outstanding shares of Common
Stock; or (iv) the
61
<PAGE>
Corporation fails to comply with (x) the following financial covenants: a
minimum senior interest coverage ratio, a minimum total interest coverage ratio,
a minimum fixed charge coverage ratio, a minimum adjusted cumulative net worth,
and a maximum leverage ratio or (y) a minimum total interest coverage ratio of
0.63 for a specified coverage period in 1993 and for the first quarter of 1994,
0.84 for the second quarter of 1994, 0.97 for the third quarter of 1994 and 1.14
for the fourth quarter of 1994, provided that (a) such financial covenants shall
be calculated based only on domestic revenues unless the Corporation's
non-domestic consolidated revenues exceed 35% of its total consolidated
revenues, and (b) the Corporation shall not be deemed out of compliance in the
event of a breach, after 1994 and prior to 1998, of the senior interest coverage
ratio or the total interest coverage ratio unless there shall also exist at such
time a breach of the fixed charge coverage ratio or in the event of a breach,
after 1994 and prior to 1998, of the fixed charge coverage ratio unless there
shall also exist at such time a breach of either the senior interest coverage
ratio or the total interest coverage ratio. See "Description of Credit
Agreement." If the Corporation complies with the financial covenants within the
two fiscal quarters following the first failure to comply, the voting
restrictions shall apply again. However, if the Corporation thereafter fails to
comply with any of the financial covenants, the voting restrictions shall
terminate.
The provision of registration rights to Water Street is subject to certain
limitations, including but not limited to the following: (i) of Water Street's
four demand registrations, the Corporation shall pay the registration expenses
(other than commissions and discounts of underwriters) for two registrations,
and the Corporation and Water Street shall each pay one-half of the registration
expenses (other than commissions and discounts of underwriters) for two
registrations; and (ii) other than in connection with the Offering, Water Street
(and any Water Street Entity that receives a distribution of Common Stock from
Water Street and owns 5% or more of the then outstanding shares of Common Stock)
shall not request a demand registration of Common Stock during any period in
which the Corporation is actively engaged in a registered distribution of Common
Stock until 90 days after the effective date of the registration statement
relating to such distribution. With respect to the Offering, Water Street (and,
if it distributes Common Stock to its partners, those partners) shall not
request a demand registration of Common Stock during the 120-day period after
the effective date of the Offering. In addition, during such 120-day period,
Water Street and Goldman, Sachs & Co. shall not sell or otherwise dispose of any
shares of Common Stock or Warrants, except that, at any time after 90 days after
the effective date of the Offering, Water Street may distribute all or any
portion of its shares of Common Stock or Warrants to its partners in accordance
with its governing partnership agreement. In the event of any such distribution
by Water Street, the partners (other than Goldman, Sachs & Co.) would not be
subject to the restriction on selling shares of Common Stock or Warrants during
the remainder of the 120-day period referred to above. Except in the case of the
Offering, the Corporation and Water Street have mutual piggyback rights on
registrations initiated by either, generally on a 50-50 basis.
The Water Street Agreement originally provided, subject to certain
exceptions, that, in connection with the first underwritten public offering of
Common Stock after the Restructuring, the Corporation would have the right to
sell, without participation of Water Street, up to such number of shares of
Common Stock as would yield an aggregate price to the public of $100,000,000 and
that, if a greater number of shares were to be sold in that offering, Water
Street and the Corporation would each have the right to sell 50% of such greater
number of shares. In addition, in connection with such offering, subject to
certain exceptions, the Water Street Agreement originally provided that Water
Street (and, if it distributes Common Stock to its partners, those partners)
would not request or demand registration of Common Stock during the 180-day
period after the effective date of such offering, rather than the 120-day period
that applies to the Offering. In connection with the Offering, the Corporation
and Water Street have mutually determined that they would sell in the Offering
the number of shares of Common Stock reflected on the cover page of this
Prospectus, without regard to such $100,000,000 limitation, and that such
120-day period would apply in lieu of such 180-day period.
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<PAGE>
DESCRIPTION OF CREDIT AGREEMENT
INTRODUCTION
Pursuant to the Prepackaged Plan, the Credit Agreement was entered into by
the Corporation, USG Interiors and the Bank Group. The Credit Agreement amended
and restated a previous credit agreement which was entered into in connection
with the 1988 Recapitalization. In connection with the Prepackaged Plan and the
implementation of the Credit Agreement, the following transactions occurred: (i)
the exchange of $324 million of principal and accrued but unpaid interest on
outstanding term loans for Senior 2002 Notes; (ii) the extension of final
maturity of the remaining principal of the term loans from 1996 to 2000 and the
deferral of all scheduled principal payments until December 1994; (iii) the
capitalization of $51 million in accrued interest originally due on or after
December 31, 1991 and the issuance of capitalized interest notes ("Capitalized
Interest Notes") to represent the capitalized amounts; (iv) the making available
(at the Corporation's option but subject to certain limitations on the
availability of LIBOR pricing) an annual interest rate applicable to the term
loans and the Revolving Credit Facility of LIBOR plus 1 7/8% or Citibank's
Alternate Base Rate III ("Base Rate") plus 7/8%, with the option to capitalize
the amount of such interest in excess of LIBOR plus 1% per annum (such
capitalized interest to bear interest at an annual rate of LIBOR plus 2 1/4% or
Citibank's Base Rate plus 1 1/4% and mature in the years 1998 and 2000); (v) the
implementation of mandatory prepayment provisions, including an excess cash flow
sweep, that takes into account certain liquidity thresholds; (vi) the suspension
of all financial covenants through January 1, 1995 and providing for new
covenants thereafter; (vii) the extension to 1998 of the maturity date of, and
the establishment of a maximum borrowing capacity of $175 million under the then
existing revolving credit facility, including a $110 million letter of credit
subfacility (the "Revolving Credit Facility"); and (viii) the exchange of $16
million owed in connection with certain interest rate swap contracts for an
equal principal amount of Senior 2002 Notes and, in addition, the exchange of
approximately $5 million owed in connection with such interest rate swap
contracts for an equal principal amount of Capitalized Interest Notes. In
connection with the Restructuring, all existing defaults under the previous
credit agreement were waived or cured. Whenever defined terms under the Credit
Agreement, as amended, are referred to but not defined herein, such defined
terms are incorporated herein by reference.
On August 10, 1993, the parties to the Credit Agreement entered into an
amendment to the Credit Agreement (the "1993 Amendments"), pursuant to which (i)
scheduled bank term loan amortization payments totaling $95 million due in 1994,
1995 and 1996 were eliminated ($3 million was added to the final maturity of the
bank term loan due in 2000); (ii) $9 million of Capitalized Interest Notes
originally due in 1998 were paid; and (iii) the cash sweep mechanism was
modified to apply up to $165 million of cash otherwise subject to the cash sweep
mechanism in 1994, 1995 and 1996 to repayment or purchase of senior debt due
prior to January 1, 1999 or Bank Term Loans, at the discretion of the
Corporation. In addition, $46 million of Capitalized Interest Notes and $92
million of Bank Term Loans were exchanged for Senior 2002 Notes. Following such
transactions, approximately $1 million principal amount of Capitalized Interest
Notes remained outstanding. Such remaining amount was repaid in December 1993
and accordingly, no Capitalized Interest Notes are outstanding.
In connection with the Transactions, the parties to the Credit Agreement are
entering into the Credit Agreement Amendments, pursuant to which, among other
things, the size of the Revolving Credit Facility will be increased by $70
million and the mandatory prepayment provisions and cash sweep mechanism will be
modified as described below. The Credit Agreement Amendments require that (i)
$75 million of the proceeds of the Note Placement be used to prepay Bank Term
Loans in the order of maturity (thus fully prepaying the scheduled amortization
payment due December 31, 1997 and partially prepaying the scheduled amortization
payment due December 31, 1998) and (ii) up to $65 million of the proceeds of the
Offering be used to prepay Bank Term Loans in the order of maturity (thus, in
such event, fully prepaying the remaining portion of the scheduled amortization
payment due December 31, 1998). Giving effect to such prepayments, the remaining
scheduled amortization of the Bank Term Loans will consist of $125 million in
1999 and $183 million in 2000.
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<PAGE>
CREDIT AGREEMENT OVERVIEW
ELIMINATION OF ABILITY TO CAPITALIZE INTEREST
The Credit Agreement Amendments provide that USG's ability to defer the
payment of interest in excess of LIBOR plus 1% by issuing Capitalized Interest
Notes will be terminated.
REVOLVING CREDIT FACILITY
The maximum borrowing capacity under the Revolving Credit Facility, as
currently in effect, is $175 million. As part of the Credit Agreement
Amendments, the size of the Revolving Credit Facility will be increased by $68
million. The increased amount of the Revolving Credit Facility is intended to
provide the Corporation with additional funds for the purchase or payment of the
Senior 1996 Notes and Senior 1997 Notes remaining after the Transactions are
consummated. Accordingly, the Credit Agreement Amendment limits borrowing of the
additional commitment (the "Note Purchase Facility") for the purpose of
purchasing or paying Senior 1996 Notes and Senior 1997 Notes. The Revolving
Credit Facility's maturity date is July 13, 1998. Material conditions precedent
to borrowing under the Revolving Credit Facility are limited to the accuracy of
certain representations and warranties, the absence of injunctions and of
certain events of default, such as payment defaults, bankruptcy and certain
cross-defaults to other indebtedness of the Corporation exceeding $25 million in
principal amount, unstayed judgments and intentional breaches of negative
covenants, but prior to January 1, 1995 do not include the satisfaction of
financial covenants or a material adverse change condition precedent.
LETTER OF CREDIT SUBFACILITY
The Revolving Credit Facility also includes a letter of credit subfacility
(the "Letter of Credit Subfacility"). The Issuing Bank or Banks will issue
letters of credit under the Letter of Credit Subfacility ("Facility Letters of
Credit") in amounts not to exceed $110 million in the aggregate.
CASH SWEEP MECHANISM
Under the Credit Agreement as currently in effect, within 30 days after
January 15th of each year (a "Test Date"), commencing on January 15, 1994, the
amount of "Cash Available for Sweep" is calculated in accordance with a
pre-determined formula and paid to holders of the Bank Term Loans on or before
February 15th of each year; provided that, in the case of Test Dates occurring
on January 15, 1994, 1995 and 1996 payments shall instead be made: (i) first, up
to $165 million to either the Corporation's public debt having maturities prior
to January 1, 1999 or Bank Term Loans in order of maturity, as the Corporation
shall elect in its discretion (PROVIDED, that after the payment or repurchase in
full of such public debt (which may occur as a result of an equity or debt
offering), such $165 million of Cash Available for Sweep (or remaining portion
thereof) shall be applied 90% to the Bank Term Loans in order of maturity and
10% to the Corporation as Retained Amounts); and (ii) second, two-thirds to the
Bank Term Loans in order of maturity and one-third to the Corporation as
Retained Amounts (until such Retained Amounts, when added to the Retained
Amounts described in clause (i), equal $50 million, at which time 100% of Cash
Available for Sweep would be applied to the Bank Term Loans in order of
maturity). "Cash Available for Sweep" means, with respect to each Test Date, an
amount equal to the product of (i) the "Sweep Percentage" applicable to such
Test Date and (ii) the excess, if any, of the "Available Liquidity" for such
Test Date over the "Minimum Liquidity" for such Test Date. The "Sweep
Percentage" is 100% for the 1994 through 1996 Test Dates, inclusive, 90% for the
1997 and 1998 Test Dates, and 85% for the 1999 and subsequent Test Dates.
"Available Liquidity" for any Test Date means (i) the daily average of all
domestic cash and cash balances during the applicable Test Period, excluding net
proceeds of certain debt and equity issuances (which are separately required to
be applied to repay the Bank Term Loans and/or senior debt securities); PLUS
(ii) the daily average of all cash of the Corporation's non-domestic
Subsidiaries in excess of certain minimum cash balances during the applicable
Test Period, subject to certain limitations and adjustments for repatriation
taxes and exchange rates; PLUS (iii) the average daily amount available for
borrowing under the Revolving Credit Facility (not including any availability
under the Note Purchase Facility) during the applicable Test Period; SUBJECT TO
(iv) certain adjustments for changes in working capital. "Minimum Liquidity" for
any Test Date means (i) the sum of the Retained Amount for all prior Test Dates,
net of the amount thereof utilized to fund
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<PAGE>
additional Capital Expenditures and repurchases of senior debt securities
(through the maturity dates thereof); plus (ii) the amount set forth below
opposite such Test Date; minus (iii) the Senior Note Prepayment Amount for such
Test Date:
<TABLE>
<CAPTION>
TEST DATE MINIMUM LIQUIDITY
- ------------------------------------------ ----------------------------------------------------
<S> <C>
1/15/94................................... $100,000,000 (PLUS the Asbestos Adjustment)
1/15/95................................... 100,000,000
1/15/96................................... 100,000,000
1/15/97................................... 200,000,000
1/15/98................................... 135,000,000
Thereafter................................ 100,000,000
</TABLE>
The "Asbestos Adjustment" will equal $40 million minus the actual aggregate
amount of payments made by U.S. Gypsum to settle property damage asbestos cases
in 1992 and 1993. The amount of such settlement payments for 1992 was $21.7
million. "Retained Amount" means, for any Test Date, an amount equal to the
product of (i) 100% minus the Sweep Percentage for such Test Date and (ii) the
excess, if any, of the Available Liquidity for such Test Date over the Minimum
Liquidity for such Test Date. "Senior Note Prepayment Amount" means, for any
Test Date on or after January 15, 1997, the principal amount of the
Corporation's public debt originally due during the same calendar year which has
been prepaid as of such Test Date out of funds other than any Retained Amounts.
The Credit Agreement Amendments will provide that the Sweep Percentage for
the January 15, 1997 Test Date and for each Test Date thereafter shall be 50% if
(i) the aggregate outstanding amount of Bank Term Loans at such time does not
exceed $148 million and (ii) USG's public senior debt is then rated at least BB
by Standard & Poor's Corporation and Ba2 by Moody's Investors Service, Inc.
EVENTS OF DEFAULT
The Credit Agreement provides that if an event of default occurs, then, in
the case of an event of default involving certain bankruptcy or insolvency
events, the maturity of loans made under the Credit Agreement will automatically
be accelerated and the obligation of the Senior Lenders to make future revolving
loans or issue letters of credit will terminate or, in the case of any other
event of default, so long as such event of default exists, the Requisite Senior
Lenders will be entitled to accelerate the maturity of loans made under the
Credit Agreement and terminate their obligation to make future revolving loans
or issue letters of credit.
Events of default include: failure to pay any principal, interest or other
amount due to the Senior Lenders; failure to pay other indebtedness, including
subordinated debt, if the aggregate amount of such other indebtedness is $25
million or more or any breach or default under any instrument, agreement or
indenture relating to such indebtedness if the effect thereof is to accelerate
or permit the holders of such indebtedness to accelerate the maturity of such
indebtedness; any single stockholder or group acquiring 50% or more of the
Corporation's stock (directly or indirectly); failure to discharge a judgment or
writ of attachment involving an amount exceeding $5 million, net of insurance;
certain events involving the bankruptcy or insolvency of the Corporation or
certain significant Restricted Subsidiaries; the invalidation or ineffectiveness
of any security agreement governing, or any lien upon, collateral securing the
obligations under the Credit Agreement; the incurrence of certain termination
liabilities under the Employee Retirement Income Security Act of 1974, as
amended ("ERISA"); and failure of the Corporation to meet covenants (subject to
certain grace periods), including various financial covenants described below.
The events of default are applicable only to the Corporation and its Restricted
Subsidiaries.
AFFIRMATIVE COVENANTS
Affirmative covenants under the Credit Agreement require the Corporation to,
among other things, submit periodic financial, labor, environmental and
litigation reports; maintain its corporate existence and franchises; remain
qualified to do business in all appropriate jurisdictions; comply with all
requirements of law; pay all taxes and material claims unless contested in good
faith and covered by reserves in
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<PAGE>
accordance with GAAP; permit members of the Bank Group to inspect its
properties, books and records; maintain its properties in good repair and
maintain proper insurance policies; and maintain licenses, permits, governmental
approvals and authorizations.
NEGATIVE COVENANTS
The Credit Agreement contains negative covenants that cover: restrictions on
the incurrence of additional indebtedness, subject to certain exceptions; sales
of assets outside the ordinary course of business, subject to certain exceptions
including a blanket exception for up to $20 million in any fiscal year and $5
million in any single transaction or group of related transactions; the
incurrence of liens and encumbrances on the property of the Corporation and its
Restricted Subsidiaries; investments; guarantees; dividends and distributions,
and payments upon securities junior in right to the Bank Debt Obligations;
operating leases; mergers, consolidations or sales, leases or transfers of all
or any substantial part of the business, property or assets of the Corporation
or any of its Restricted Subsidiaries; acquisitions of the business, property or
assets of any person, except for acquisitions not exceeding certain permitted
capital expenditure limits; ERISA prohibited transactions; amendments to
corporate charter and by-laws; sale of subsidiaries; amendments of material debt
documents; sale and leaseback transactions; prepayment (including acquisitions
for value) of long-term debt; and certain other transactions and activities.
The negative covenants in the Credit Agreement permit the prepayment or
purchase with Cash Available for Sweep of the Corporation's senior debt
securities having maturities prior to January 1, 1999; PROVIDED, that to the
extent such prepayment or purchase involves the payment of a premium in excess
of 100% of the face amount of any such security, such excess will reduce the
Corporation's existing or future Retained Amounts.
FINANCIAL COVENANTS
From and after January 1, 1995, the Corporation will be required to satisfy
the Financial Covenants set forth below:
MINIMUM SENIOR INTEREST COVERAGE RATIO. The Senior Interest Coverage Ratio
for the Coverage Period ending with each fiscal quarter of each Fiscal Year set
forth below (commencing with the first fiscal quarter of 1995), shall not be
less than the minimum ratio set forth below opposite such fiscal quarter:
<TABLE>
<CAPTION>
MINIMUM MINIMUM
1995 RATIO 1996 RATIO
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Quarter 1 1.00 1 2.20
2 1.25 2 2.30
3 1.75 3 2.40
4 2.00 4 2.50
</TABLE>
<TABLE>
<CAPTION>
MINIMUM MINIMUM
1997 RATIO 1998 RATIO
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Quarter 1 2.50 1 2.80
2 2.60 2 2.80
3 2.70 3 2.80
4 2.80 4 2.80
</TABLE>
<TABLE>
<CAPTION>
MINIMUM MINIMUM
1999 RATIO 2000 RATIO
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Quarter 1 2.80 1 2.80
2 2.80 2 2.80
3 2.80 3 2.80
4 2.80 4 2.80
</TABLE>
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<PAGE>
MINIMUM TOTAL INTEREST COVERAGE RATIO. The Total Interest Coverage Ratio
for the Coverage Period ending with each fiscal quarter of each Fiscal Year set
forth below (commencing with the first fiscal quarter of 1995), shall not be
less than the minimum ratio set forth below opposite such fiscal quarter:
<TABLE>
<CAPTION>
MINIMUM MINIMUM
1995 RATIO 1996 RATIO
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Quarter 1 1.00 1 2.05
2 1.25 2 2.10
3 1.75 3 2.15
4 2.00 4 2.20
</TABLE>
<TABLE>
<CAPTION>
MINIMUM MINIMUM
1997 RATIO 1998 RATIO
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Quarter 1 2.25 1 2.40
2 2.30 2 2.40
3 2.35 3 2.40
4 2.40 4 2.40
</TABLE>
<TABLE>
<CAPTION>
MINIMUM MINIMUM
1999 RATIO 2000 RATIO
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Quarter 1 2.40 1 2.40
2 2.40 2 2.40
3 2.40 3 2.40
4 2.40 4 2.40
</TABLE>
MINIMUM FIXED CHARGE COVERAGE RATIO. The Fixed Charge Coverage Ratio for
the Coverage Period ending with each fiscal quarter of each Fiscal Year set
forth below (commencing with the first fiscal quarter of 1995), shall not be
less than the minimum ratio set forth below opposite such fiscal quarter:
<TABLE>
<CAPTION>
MINIMUM MINIMUM
1995 RATIO 1996 RATIO
--------- ------------- --------- -------------
<S> <C> <C> <C> <C>
Quarter 1 1.0 1 1.3
2 1.1 2 1.4
3 1.1 3 1.4
4 1.2 4 1.5
</TABLE>
<TABLE>
<CAPTION>
MINIMUM
1997 RATIO
--------- -------------
<S> <C> <C>
Quarter 1 1.5
2 1.5
3 1.5
4 1.5
</TABLE>
MINIMUM ADJUSTED CUMULATIVE NET WORTH. The Adjusted Cumulative Net Worth as
of the end of each Fiscal Year set forth below and the end of the three
immediately succeeding fiscal quarters shall not be less than the minimum amount
set forth below opposite such year:
<TABLE>
<CAPTION>
END OF FISCAL YEAR MINIMUM AMOUNT
- ----------------------------------------------------------------------------- -----------------
<S> <C>
1995......................................................................... $ 51,000,000
1996......................................................................... 102,000,000
1997......................................................................... 179,000,000
1998......................................................................... 244,000,000
1999......................................................................... 296,000,000
2000......................................................................... 345,000,000
</TABLE>
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<PAGE>
LEVERAGE RATIO. The Leverage Ratio as of the end of each Fiscal Year set
forth below and the end of the three immediately succeeding fiscal quarters
shall not be greater than the maximum amount set forth below opposite such year:
<TABLE>
<CAPTION>
END OF FISCAL YEAR MAXIMUM RATIO
- ------------------------------------------------------------------------------- -----------------
<S> <C>
1995........................................................................... 0.97
1996........................................................................... 0.93
1997........................................................................... 0.87
1998........................................................................... 0.81
1999........................................................................... 0.76
2000........................................................................... 0.70
</TABLE>
MINIMUM CURRENT RATIO. The ratio of Consolidated Current Assets to
Consolidated Current Liabilities as of the end of each calendar quarter shall
not be less than the minimum ratio set forth below opposite such Fiscal Year in
which such quarter occurs:
<TABLE>
<CAPTION>
FISCAL YEAR MINIMUM RATIO
- ------------------------------------------------------------------------------- -----------------
<S> <C>
1995........................................................................... 1.05
1996........................................................................... 1.10
1997........................................................................... 1.15
1998........................................................................... 1.20
1999........................................................................... 1.20
2000........................................................................... 1.20
</TABLE>
MAXIMUM CAPITAL EXPENDITURES. Domestic Capital Expenditures made by the
Corporation and its U.S. Subsidiaries on a consolidated basis shall not exceed,
for any Fiscal Year, the sum of the following items:
(i) The Base Capital Expenditure Allowance for such year LESS the amount,
if any, of such Base Capital Expenditure Allowance which was used during the
immediately preceding Fiscal Year under clause (ii) below;
(ii) (a) the excess of (1) the sum of (x) the actual cumulative principal
payments (for the period beginning on May 6, 1993) of the Term Loans as a result
of mandatory amortization payments through such date and (y) the actual
cumulative prepayments of Public Debt (including Investments therein), Term
Loans and Capitalized Interest Loans, in each case under this clause (y), as a
result of Cash Available for Sweep over (2) the Projected Cumulative Principal
Payments (such excess being the "Excess Principal Payments") LESS (b) the
cumulative amount of such Excess Principal Payments used for Capital
Expenditures in all prior years, PROVIDED, that in no event shall the amount
included under this clause (ii) for any Fiscal Year exceed 50% of the Base
Capital Expenditure Allowance for the immediately succeeding Fiscal Year;
(iii) (a) the excess of the actual cumulative net cash proceeds arising from
the sale of assets occurring after January 1, 1992 over the Projected Cumulative
Asset Sale Proceeds (the "Excess Sale Proceeds") LESS (b) the cumulative amount
of such Excess Sale Proceeds used for Capital Expenditures and Investments in
all prior years, PROVIDED, that in no event shall any amount be included under
this clause (iii) for any Fiscal Year if the sum of (x) the actual cumulative
principal payments of the Term Loans as a result of mandatory amortization
payments as of the end of the immediately preceding Fiscal Year and (y) the
actual cumulative prepayments of Public Debt (including Investments therein),
Term Loans and Capitalized Interest Loans, in each case under this clause (y),
as a result of Cash Available for Sweep as of the end of the immediately
preceding Fiscal Year (but including any prepayments of Cash Available for Sweep
made on or prior to February 15th of the current Fiscal Year) does not exceed
the Projected Cumulative Principal Payments as of the end of the immediately
preceding Fiscal Year;
(iv) all amounts used for Capital Expenditures the source of which
constitutes Project Financing;
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<PAGE>
(v) the cumulative amount of the portion of the Cash Available for Sweep
which has been retained by the Company in all prior Fiscal Years (the "Cash
Sweep Retention Amount") LESS the cumulative amount of such Cash Sweep Retention
Amount used for Capital Expenditures and other permitted purposes in all prior
years;
(vi) the amount of Capital Expenditures used for creating additional plant
capacity, PROVIDED, that (a) the aggregate amount of such Capital Expenditures
under this clause (vi) for all Fiscal Years shall not exceed $30,000,000 and (b)
at least thirty days prior to making or becoming committed to make any such
Capital Expenditures, the Corporation has notified the Agents thereof in a
writing which describes the additional plant capacity and the business purpose
therefor;
(vii) Capital Expenditures for assets the purchase price of which is paid
with the Common Stock of the Company; and
(viii) the aggregate amount of the Base Capital Expenditures Allowances for
all prior Fiscal Years which have not been used for Capital Expenditures.
The Credit Agreement Amendments will permit the Corporation to make
additional Strategic Capital Expenditures in an aggregate amount equal to the
net proceeds of the Offering in excess of $100,000,000 PLUS the Cash Available
for Sweep with respect to the January 15, 1994 Test Date in excess of
$100,000,000.
DEFINED TERMS USED IN FINANCIAL COVENANTS. Capitalized terms used in the
financial covenants in the Credit Agreement shall have the meanings set forth
below or, if not defined below, the meanings set forth in the Old Credit
Agreement:
"Adjusted Cumulative Net Worth" of the Corporation, at the end of any
quarter, shall mean the cumulative after tax net income (adjusted to exclude
fresh start accounting) from January 1, 1995 through the end of such quarter
PLUS the aggregate net cash proceeds received by the Corporation from the
issuance of equity securities after May 6, 1993.
"Base Capital Expenditure Allowance" for each Fiscal Year, shall mean
the amount set forth below opposite such Fiscal Year:
<TABLE>
<S> <C>
1993.............................................. $33,900,000
1994.............................................. 34,200,000
1995.............................................. 39,300,000
1996.............................................. 39,800,000
1997.............................................. 51,900,000
1998.............................................. 52,200,000
1999.............................................. 52,200,000
</TABLE>
"Consolidated Current Assets" on any date, shall mean the total
consolidated assets of the Corporation and its Subsidiaries (with
inventories being stated on a FIFO basis) which may properly be classified
as current assets in conformity with GAAP.
"Consolidated Current Liabilities" on any date, shall mean the total
consolidated liabilities of the Corporation and its Subsidiaries which may
properly be classified as current liabilities in conformity with GAAP, not
including current maturities of long-term debt, but including any Revolving
Loans which may, in accordance with GAAP, be considered long-term.
"Coverage Period" means (i) with respect to the first fiscal quarter of
1995, the three-month period ending on March 31, 1995, (ii) with respect to
the second fiscal quarter of 1995, the six-month period ending on June 30,
1995, (iii) with respect to the third fiscal quarter of 1995, the nine-month
period ending on September 30, 1995, and (iv) with respect to any succeeding
fiscal quarter, the twelve-month period ending on the last day of such
fiscal quarter.
"Debt" at any time, shall mean, with respect to the Corporation and its
Subsidiaries on a consolidated basis, the sum of (i) the outstanding
principal balance of the Revolving Loans at such
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<PAGE>
time or any indebtedness at such time arising from a permitted revolving
credit facility replacement thereof (less the aggregate amount of cash held
by the Corporation and its consolidated Subsidiaries located in the United
States at such time), (ii) the aggregate amount of long-term indebtedness at
such time (including the current portions thereof), (iii) the outstanding
amount of capital leases (classified as such according to GAAP) shown as a
liability on the Corporation's consolidated balance sheet at such time and
(iv) the aggregate amount of all Accommodation Obligations with respect to
third-party indebtedness of the type described in clauses (ii) and (iii)
above at such time.
"EBITDA" for any period, means the consolidated operating earnings from
continuing operations of the Corporation and its subsidiaries before
interest, taxes, depreciation, amortization, other income and expense,
minority interests, the impact of fresh start accounting and other non-cash
adjustments to income for such period.
"Fixed Charge Coverage Ratio" of the Corporation as of the end of any
fiscal quarter shall mean the ratio of (a) EBITDA for the 12-month period
ending on the last day of such fiscal quarter, excluding the impact of
non-cash fresh start accounting adjustments for such 12-month period, MINUS
actual Capital Expenditures during such 12-month period (excluding Capital
Expenditures under clauses (iv) and (vi) of the Capital Expenditures
covenant described above) to (b) the total net consolidated interest expense
of the Corporation and its Subsidiaries during such 12-month period,
excluding the impact of non-cash amortizations resulting from fresh start
accounting during such period plus the aggregate scheduled principal
payments due (and not previously prepaid) on senior indebtedness of the
Corporation and its Subsidiaries during the 12-month period immediately
succeeding the end of such fiscal quarter.
"Leverage Ratio" of the Corporation on any date, shall mean the ratio of
Debt to Total Capital on such date.
"Projected Cumulative Principal Payments" means the following amounts as
of February 15 of each Fiscal Year below of projected cumulative principal
payments of (i) the Capitalized Interest Notes and the Bank Term Loans as a
result of mandatory amortization payments and cash sweep prepayments and
(ii) any prepayments on or purchases of the Corporation's public debt
securities having maturities prior to January 1, 1999 through such date:
<TABLE>
<CAPTION>
FEBRUARY 15 OF FISCAL YEAR CUMULATIVE PAYMENTS
- ------------------------------------------------------- ---------------------
<S> <C>
1994................................................... $ 0
1995................................................... 57,000,000
1996................................................... 133,000,000
1997................................................... 220,000,000
1998................................................... 332,000,000
1999................................................... 456,000,000
2000................................................... 579,000,000
</TABLE>
"Projected Cumulative Asset Sale Proceeds" means the following amounts
as of the end of each Fiscal Year below of projected cumulative cash
proceeds arising from the sale of assets PLUS for the Fiscal Year in which
the Libertyville facility is sold and each Fiscal Year thereafter, an amount
equal to the net cash proceeds received from the sale of the Libertyville
facility:
<TABLE>
<CAPTION>
END OF FISCAL YEAR CUMULATIVE PROCEEDS
- ------------------------------------------------------- ---------------------
<S> <C>
1992................................................... $ 7,000,000
1993................................................... 16,000,000
1994................................................... 21,000,000
1995................................................... 26,000,000
1996................................................... 31,000,000
1997................................................... 36,000,000
1998................................................... 41,000,000
1999................................................... 46,000,000
</TABLE>
70
<PAGE>
"Senior Interest Coverage Ratio" of the Corporation for any Coverage
Period shall mean the ratio of (i) EBITDA for such period, excluding the
impact of non-cash fresh start accounting adjustments for such period to
(ii) the total net consolidated interest expense (excluding interest on
Subordinated Debt) of the Corporation and its Subsidiaries during such
period, excluding the impact of non-cash amortizations resulting from fresh
start accounting during such period.
"Total Capital" on any date, shall mean the sum of (i) Debt on such date
and (ii) Adjusted Cumulative Net Worth on such date.
"Total Interest Coverage Ratio" of the Corporation for any Coverage
Period shall mean the ratio of (i) EBITDA for such period, excluding the
impact of non-cash fresh start accounting adjustments for such period to
(ii) the total net consolidated interest expense of the Corporation and its
Subsidiaries during such period, excluding the impact of non-cash
amortizations resulting from fresh start accounting during such period.
DOMESTIC NATURE OF COVENANTS. Each of the financial covenants will be
calculated on a domestic basis only, PROVIDED, that, if at anytime the
Corporation's non-domestic consolidated revenues for a Fiscal Year constitute
35% or more of the Corporation's total consolidated revenues for such year,
then, effective as of the first test date in the immediately succeeding Fiscal
Year, such financial covenants shall be calculated to include the financial
performance of the Corporation and all of its consolidated Subsidiaries,
PROVIDED further, that, if such event occurs and the Corporation so requests,
the Corporation, the Bank Group, the Agents and the Administrative Agent shall
in good faith recast the foregoing financial covenants to account for the
inclusion of the financial performance of the non-domestic Subsidiaries.
CERTAIN LIMITS ON COMPLIANCE WITH FINANCIAL COVENANTS. No Event of Default
or Potential Event of Default would be deemed to exist or be continuing with
respect to a breach of the Senior Interest Coverage Ratio and/or the Total
Interest Coverage Ratio for any quarter during Fiscal Years 1995, 1996 and 1997
unless there would also exist a breach of the Fixed Charge Coverage Ratio for
such quarter. Conversely, no Event of Default or Potential Event of Default
would be deemed to exist or be continuing with respect to a breach of the Fixed
Charge Coverage Ratio for any quarter during fiscal years 1995, 1996 and 1997
unless there would also exist a breach of either the Senior Interest Coverage
Ratio or the Total Interest Coverage Ratio for such quarter. No Event of Default
or Potential Event of Default would be deemed to exist or be continuing with
respect to the financial covenants described above unless either (i) such Event
of Default shall be disclosed in or determinable on the basis of the financial
statements, compliance statements or officer's certificates delivered to the
Bank Group pursuant to the Credit Agreement or (ii) the Administrative Agent, at
the direction of the Requisite Senior Lenders, shall have given written notice
of such Event of Default to the Corporation. All calculations of the foregoing
financial covenants shall be rounded to the nearest 1/100. For purposes of
calculating the foregoing covenants, GAAP shall be constant from and after the
date of the Credit Agreement, unless the Corporation and the Requisite Senior
Lenders agree to modify such covenants to account for any subsequent changes to
GAAP.
COLLATERAL
Borrowings under the Credit Agreement are all secured by first priority
security interests in the capital stock of certain Subsidiaries. Such security
interests were granted pursuant to the Collateral Trust Agreement and related
Pledge Agreements which provide that the collateral will also equally and
ratably secure certain other debt of the Corporation and one of the
Subsidiaries, including the Senior 2002 Notes. See "Description of Other Debt
Obligations" and "Description of Collateral Trust Agreement."
AMENDED GUARANTEES
The Corporation has guaranteed all obligations of USG Interiors under the
Credit Agreement. Each of United States Gypsum Company, USG Industries, Inc.,
USG Interiors, Inc., USG Foreign Investments, Ltd., L&W Supply Corporation,
Westbank Planting Company, USG Interiors International, Inc., American Metals
Corporation and La Mirada Products Co., Inc. (together, the "Subsidiary
Guarantors") in turn has guaranteed pursuant to the Amended Subsidiary
Guarantees both the obligations of the Corporation
71
<PAGE>
under the Credit Agreement and the Senior 2002 Notes and the obligations of USG
Interiors under the Credit Agreement. In connection with the 1993 Amendments,
the Subsidiary Guarantors executed the Amended Subsidiary Guarantees, which
entitle the Senior 2002 Notes issued at such time to participate on a PARI PASSU
basis in the benefits of the Amended Subsidiary Guarantees. The Amended
Subsidiary Guarantees are full and unconditional guarantees of prompt payment
and performance, when due, of all (i) the Obligations (as defined in the Credit
Agreement) of the Borrowers (as defined therein) and (ii) all obligations of the
Corporation under the Senior 2002 Notes. The Bank Group has the right to enforce
the Amended Subsidiary Guarantees and seek collection thereunder (for the
ratable benefit of the Bank Group and holders of the Senior 2002 Notes) at any
time when one or more Events of Default have occurred and are continuing under
the Credit Agreement (which Events of Default will include the occurrence and
continuation of any event of default under the Senior 2002 Notes Indenture). The
Bank Group will have the right to (i) determine whether, when and to what extent
the Amended Subsidiary Guarantees will be enforced (provided that each Amended
Subsidiary Guarantee payment will be applied to the Bank Term Loans, Revolving
Credit Facility, Capitalized Interest Notes and Senior 2002 Notes pro rata based
on the respective principal amounts owed thereon) and (ii) amend or eliminate
the Amended Subsidiary Guarantees; provided that the pro rata sharing
requirement contemplated in (i) above is not waivable (in the absence of a
complete release of the Amended Subsidiary Guarantees) without the approval of
the holders of a majority in principal amount of each of the two series of
Senior 2002 Notes, voting separately. The Amended Subsidiary Guarantees will
terminate when the Bank Term Loans, the Revolving Credit Facility and the
Capitalized Interest Notes are retired, regardless of whether any portion of the
Senior 2002 Notes then remains outstanding. The liability of each Subsidiary
Guarantor on its Amended Subsidiary Guarantee is limited to the greater of (i)
95% of the lowest amount, calculated as of the date of delivery of the original
Amended Subsidiary Guarantee, 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.
See "Index To Financial Statements Significant Accounting Policies and
Practices" for condensed consolidating financial statements of the Subsidiary
Guarantors and non-guarantors.
INTEREST
The Corporation may elect, subject to the availability of LIBOR pricing, to
have interest on the Bank Term Loans and Revolving Loans calculated either at
reserve adjusted LIBOR plus 1 7/8% or at Citibank's Base Rate plus 7/8% per
annum. An increase of 2% on all of the above interest rates would automatically
take place five business days after notice of the occurrence of an Event of
Default, and will remain at such increased level for so long as the default
continues. Interest is calculated on the basis of the actual number of days
elapsed in the period during which interest accrues and a year of 360 days.
Interest is payable as follows: (i) for loans bearing interest calculated by
reference to LIBOR, interest is payable on the last day of each interest period,
consisting of one, two, three or, when available, six month periods (interest is
also payable after three months in the latter case); (ii) for the Bank Term
Loans bearing interest calculated by reference to Citibank's Base Rate, interest
is payable on the last day of each calendar quarter; and (iii) for Revolving
Loans bearing interest calculated by reference to Citibank's Base Rate, interest
is payable on the last day of each calendar month. The Corporation may purchase
interest rate caps, swaps, collars or similar devices on terms mutually
acceptable to the Corporation and the Agents.
VOLUNTARY PREPAYMENTS
Voluntary prepayments of the Bank Term Loans, Revolving Loans and
Capitalized Interest Loans may be made upon two business days' prior notice,
PROVIDED THAT the Bank Group shall be indemnified for any breakage costs
resulting from such voluntary prepayment.
72
<PAGE>
MANDATORY PREPAYMENTS
In addition to the excess cash sweep described above, the Corporation is
required to make mandatory prepayments on the Bank Term Loans as a result of the
issuance for cash of new debt and equity securities. Prior to the payment in
full of all outstanding senior debt securities having maturity dates before
January 1, 1999 (other than the Bank Term Loans), 100% of the net proceeds
resulting from the issuance for cash of new debt and equity securities (the
"Refinancing Proceeds") would be applied to the outstanding principal balance of
the Corporation's Bank Term Loans and senior debt securities in order of
maturity; PROVIDED that to the extent such Refinancing Proceeds are insufficient
to repay all of such Bank Term Loans and other senior debt securities due in any
given calendar year, the amount of such Refinancing Proceeds available for such
year will be applied pro rata to the mandatory amortization of the Bank Term
Loans and senior debt securities due during such year based on the principal
amount of Bank Term Loans and senior debt securities due during such year.
Subject to the following sentence, following the payment in full of all existing
senior debt securities having maturity dates before January 1, 1999, 100% of the
Refinancing Proceeds would be applied as follows: (i) first, to the outstanding
principal balance of the Bank Term Loans in the order of maturity, but only to
the extent that the principal balance of the Bank Term Loans has not been
reduced by at least $300 million, and (ii) second, to any of the Corporation's
senior debt securities having a final maturity prior to December 31, 2002,
including the Bank Term Loans (to scheduled installments in the order of
maturity), as determined by the Corporation in its discretion; provided that the
minimum amount of such Refinancing Proceeds applied to the Bank Term Loans under
this clause (ii) shall be a percentage of such Refinancing Proceeds obtained by
dividing the outstanding principal balance of the Bank Term Loans at such time
by the sum of such outstanding principal balance of the Bank Term Loans and the
outstanding principal balance of the Senior 2002 Notes at such time. In the
event that all existing senior debt securities having maturity dates before
January 1, 1999 have been paid in full, the outstanding principal balance of the
Bank Term Loans has been reduced by at least $300 million and the Corporation's
senior debt securities are rated at least BB+ by Standard & Poor's Corporation
or Ba1 by Moody's Investors Service, Inc., the amount of Refinancing Proceeds
subject to the immediately preceding sentence shall be reduced from 100% to
66 2/3%, with the remaining 33 1/3% of such Refinancing Proceeds not being
subject to the mandatory prepayment provisions.
The Credit Agreement Amendments (i) permit, prior to the repayment in full
of all existing senior public debt due before 1999, the use by USG of any
Refinancing Proceeds for the prepayment, at USG's option, of any such public
debt and/or Bank Term Loans in any order of maturity; (ii) require the
application of any such Refinancing Proceeds within one year of issuance; and
(iii) provide that USG may retain 33 1/3% of future Refinancing Proceeds if all
existing senior public debt due before 1999 has been paid in full, the aggregate
outstanding Bank Term Loans at such time does not exceed $148,000,000 and USG's
public senior debt is then rated at least BB by Standard & Poor's Corporation
and Ba2 by Moody's Investors Service, Inc.
FEES
Commitment fees on the unused portion of the Extended Revolving Credit
Facility accrue at a per annum rate of 3/8% and are payable quarterly in
arrears. Commitment fees on the undrawn face amount of all Facility Letters of
Credit accrue at a per annum rate of 1 1/2% and are payable quarterly in
advance.
DESCRIPTION OF OTHER DEBT OBLIGATIONS
THE 1986 INDENTURE SECURITIES
The Senior 1996 Notes, the Senior 1997 Notes and the Senior 2017 Debentures
were issued under an indenture and certain related instruments delivered
thereunder (collectively, the "1986 Indenture"), dated as of October 1, 1986,
between the Corporation and the Harris Trust and Savings Bank, as trustee (the
"1986 Indenture Trustee"). As part of the Restructuring, the 1986 Indenture was
supplemented by resolutions adopted by the Board (the "Bond Board Resolutions")
and an officer's certificate delivered in accordance therewith to provide for
the Senior 1995 Notes and the Senior 1998 Notes. In connection with the Note
Placement, the 1986 Indenture is being supplemented by further resolutions
adopted by
73
<PAGE>
the Board (the "1994 Bond Board Resolutions") and an officer's certificate
delivered in accordance therewith to provide for the Senior 2001 Notes. The
Senior 1995 Notes, the Senior 1996 Notes, the Senior 1997 Notes, the Senior 1998
Notes, the Senior 2001 Notes and the Senior 2017 Debentures are collectively
referred to herein as the "1986 Indenture Securities." Conformed copies of the
1986 Indenture, the Bond Board Resolutions and the 1994 Bond Board Resolution
have been filed as exhibits to the Registration Statement and are available as
described under "Available Information." Whenever particular provisions or
defined terms of the 1986 Indenture Securities or the 1986 Indenture, as
supplemented by the Bond Board Resolutions and the 1994 Bond Board Resolutions,
are referred to, such provisions or defined terms are deemed incorporated herein
by reference and such statements are qualified in their entirety by such
reference. Initial capitalized terms which are defined in the 1986 Indenture are
used herein as so defined.
GENERAL
The Senior 1995 Notes are a series of securities which are limited to $75
million aggregate principal amount. The Senior 1995 Notes bear interest at the
rate of 8% per annum and will mature on December 15, 1995. Interest is payable
semiannually on June 15 and December 15 of each year, to the persons in whose
names the Senior 1995 Notes are registered at the close of business on the next
preceding June 1 or December 1, as the case may be.
The Senior 1996 Notes bear interest at 8% per annum and will mature on
December 15, 1996. Interest is payable semiannually on June 15 and December 15
of each year to the persons in whose names the Senior 1996 Notes are registered
at the close of business on the next preceding June 1 or December 1, as the case
may be.
The Senior 1997 Notes bear interest at 8% per annum and will mature on March
15, 1997. Interest is payable semiannually on September 15 and March 15 of each
year to the persons in whose names the Senior 1997 Notes are registered at the
close of business on the next preceding September 1 or March 1, as the case may
be.
The Senior 1998 Notes are a series of securities which are limited to $35
million aggregate principal amount. The Senior 1998 Notes bear interest at the
rate of 9% per annum and will mature on December 15, 1998. Interest is payable
semi-annually on June 15 and December 15 of each year to the persons in whose
names the Senior 1998 Notes are registered at the close of business on the next
preceding June 1 or December 1, as the case may be.
The Senior 2001 Notes are a series of securities which are limited to $150
million aggregate principal amount. The Senior 2001 Notes bear interest at
9 1/4% per annum and will mature on December 15, 2001. Interest is payable
semi-annually on June 15 and December 15 of each year, beginning June 15, 1994,
to the persons in whose names the Senior 2001 Notes are registered at the close
of business on the next preceding June 1 or December 1, as the case may be.
The Senior 2017 Debentures bear interest at 8.75% per annum and will mature
on March 1, 2017. Interest is payable semiannually on September 1 and March 1 of
each year to the persons in whose names the Senior 2017 Debentures are
registered at the close of business on the next preceding August 15 or February
15, as the case may be.
Principal (and premium, if any) and interest is payable, and the transfer of
the 1986 Indenture Securities is registrable, at the office or agency of the
Corporation maintained for such purpose in the City of Chicago, State of
Illinois, currently the Corporate Trust Office of the 1986 Indenture Trustee,
Harris Trust and Savings Bank, 311 West Monroe Street, Chicago, Illinois 60690;
provided, however, that payment of interest may be made at the option of the
Corporation by check or draft mailed to the person entitled thereto as such
person's address appears in the security register maintained for such purpose
pursuant to the 1986 Indenture. No service charge will be made for any transfer
or exchange except the Corporation may require payment of a sum sufficient to
cover any tax or other governmental charge payable in connection therewith.
74
<PAGE>
The Senior 1995 Notes and the Senior 1998 Notes are issued in fully
registered form without coupons and in denominations of $250 and integral
multiples thereof. The Senior 1996 Notes, the Senior 1997 Notes, Senior 2001
Notes and the Senior 2017 Debentures are issued in fully registered form without
coupons and in denominations of $1,000 and integral multiples thereof.
The 1986 Indenture Securities rank PARI PASSU with all senior secured
indebtedness of the Corporation.
SECURITY
The 1986 Indenture Securities are secured by first priority security
interests in capital stock of certain Subsidiaries which were granted pursuant
to the Collateral Trust Agreement and related pledge and security agreements.
The Collateral Trust Agreement provides that the collateral thereunder equally
and ratably secures certain other debt of the Corporation and one of the
Subsidiaries, including the Senior 2002 Notes and the Bank Debt Obligations.
Holders of the Bank Debt Obligations primarily control the operation of the
Collateral Trust. See "Description of Collateral Trust."
REDEMPTION
The Senior 1995 Notes and the Senior 1998 Notes may be redeemed by the
Corporation in whole or in part at any time without penalty or premium.
The Senior 1996 Notes, the Senior 1997 Notes and the Senior 2001 Notes may
not be redeemed at the option of the Corporation prior to maturity.
The Senior 2017 Debentures may be redeemed at the option of the Corporation
in whole or in part from time to time on at least 30 and not more than 90 days'
notice by mail to registered holders thereof at the following redemption prices
(expressed in percentages of principal amount):
If redeemed during the 12-month period commencing March 1 of each of the
years indicated:
<TABLE>
<CAPTION>
YEAR PERCENTAGE YEAR PERCENTAGE
- ------------------------------ ------------ ------------------------------ ------------
<S> <C> <C> <C>
1993.......................... 105.974% 2000.......................... 102.987%
1994.......................... 105.547 2001.......................... 102.560
1995.......................... 105.120 2002.......................... 102.134
1995.......................... 104.694 2003.......................... 101.707
1997.......................... 104.267 2004.......................... 101.280
1998.......................... 103.840 2005.......................... 100.853
1999.......................... 103.414 2006.......................... 100.427
</TABLE>
and thereafter at 100% of the principal amount thereof, in each case together
with accrued and unpaid interest to the date fixed for redemption.
Notwithstanding the foregoing provisions, the Corporation may not redeem any
of the Senior 2017 Debentures prior to March 1, 1997, directly or indirectly,
from or in anticipation of moneys borrowed by or for the account of the
Corporation or any of its Subsidiaries at an interest cost of less than 8.77%
per annum, except for Senior 2017 Debentures redeemed pursuant to the provisions
described below under "Sinking Fund."
SINKING FUND
As a mandatory sinking fund for the Senior 2017 Debentures, the Corporation
will pay to the 1986 Indenture Trustee before March 1, in each of the years 1998
to 2016, inclusive, an amount in cash sufficient to redeem, at the Sinking Fund
Redemption Price, $10,000,000 aggregate principal amount of the Senior 2017
Debentures. At its option, the Corporation may pay to the 1986 Indenture Trustee
before each mandatory sinking fund payment date an additional amount in cash
sufficient to redeem at the Sinking Fund Redemption Price up to an additional
$15,000,000 aggregate principal amount of the Senior 2017 Debentures. The right
to make such optional sinking fund payments is not cumulative, but any optional
sinking fund payment may be used to reduce the amount of any subsequent
mandatory sinking fund payment. The Corporation may, at its option, credit
against mandatory sinking fund
75
<PAGE>
payments the principal amount of Senior 2017 Debentures acquired or redeemed
other than through the operation of the mandatory sinking fund, provided that
such Senior 2017 Debentures have not theretofore been used for any such credit
or delivered to the 1986 Indenture Trustee for cancellation in connection with
certain sale and leaseback transactions as described below under "Limitation
Upon Sale and Leaseback Transactions."
RESTRICTED AND UNRESTRICTED SUBSIDIARIES
The various restrictive provisions of the 1986 Indenture, as supplemented by
the Bond Board Resolutions and the 1994 Bond Board Resolutions, summarized
below, while applicable to the Corporation and its Restricted Subsidiaries, do
not apply to Unrestricted Subsidiaries. A "Subsidiary" is any corporation, a
majority of the Voting Stock of which is at the time owned directly or
indirectly by the Corporation and its other Subsidiaries. "Voting Stock," as
applied to the stock of any corporation, is stock of any class or classes having
ordinary voting power for the election of a majority of the directors of such
corporation, other than stock having such power only by reason of the happening
of a contingency. A "Restricted Subsidiary" is any Subsidiary which owns any
Principal Operating Property. "Principal Operating Property" is any principal
manufacturing plant, or distribution or research facility, and related
facilities located in the United States and owned and operated by the
Corporation or any Subsidiary for more than 90 days, other than (i) any facility
acquired for the control or abatement of atmospheric pollutants or contaminants,
water pollution, noise, odor or other pollution or (ii) any plant or other
facility which, in the opinion of the Board, is not of material importance to
the business of the Corporation and its Restricted Subsidiaries taken as a
whole. An "Unrestricted Subsidiary" is any Subsidiary other than a Restricted
Subsidiary.
RESTRICTIONS ON MERGER
So long as any 1986 Indenture Securities are outstanding, the Corporation
may not consolidate with or merge into any other corporation or sell or transfer
all or substantially all of its properties and assets to another Person unless
(i) the successor is a corporation organized and existing under the laws of the
United States of America or a state thereof and expressly assumes the due and
punctual payment of the principal of (and premium, if any), interest, if any,
and Additional Amounts, if any, on all the 1986 Indenture Securities and any
coupons and the due and punctual performance and observance of all covenants and
conditions of the Corporation in the 1986 Indenture, as supplemented by the Bond
Board Resolutions, and (ii) such successor corporation shall not, immediately
after such merger or consolidation, or such sale or conveyance, be in default in
the performance of any covenant or condition of the 1986 Indenture, as
supplemented by the Bond Board Resolutions.
LIMITATION UPON SECURED DEBT OF THE CORPORATION AND ITS RESTRICTED
SUBSIDIARIES
So long as any 1986 Indenture Securities are outstanding, the Corporation
will not itself, and will not permit any Restricted Subsidiary to, incur, issue,
assume, guarantee or suffer to exist any indebtedness for money borrowed
("Debt") secured by a mortgage, pledge, lien or security interest ("Mortgage")
on any Principal Operating Property or on any shares of stock or Debt of any
Restricted Subsidiary, without effectively providing that such 1986 Indenture
Securities (together with, if the Corporation so determines, any other Debt of
the Corporation or such Restricted Subsidiary then existing or thereafter
created which is not subordinated Debt) shall be secured equally and ratably
with (or, at the Corporation's option, prior to) such secured Debt so long as
such secured Debt shall be so secured, unless the aggregate amount of all such
secured Debt, together with all Attributable Debt of the Corporation and its
Restricted Subsidiaries in respect of sale and leaseback transactions involving
Principal Operating Properties (other than those exempt under clauses (ii)
through (iv) under "Limitation Upon Sale and Leaseback Transactions" below),
would not exceed 5% of Consolidated Net Tangible Assets. "Consolidated Net
Tangible Assets" means the Corporation's aggregate amount of assets minus (a)
all liabilities except (i) indebtedness for money borrowed maturing on, or
extendable at the option of the obligor to, a date more than one year from the
date of determination thereof, (ii) deferred income taxes and (iii)
stockholders' equity and (b) all goodwill, trade names, trademarks, patents,
unamortized debt discount and expense and other like intangibles. This
restriction does not apply to, and there will be excluded from secured Debt in
any computation under such restriction, Debt secured by (i) Mortgages
76
<PAGE>
on property of, or on any shares of stock or Debt of, any corporation existing
at the time such corporation becomes a Restricted Subsidiary; (ii) Mortgages in
favor of the Corporation or a Restricted Subsidiary; (iii) Mortgages in favor of
governmental bodies to secure progress, advance or other payments pursuant to
any contract or provision of any statute; (iv) certain Mortgages created (A) in
the ordinary course of business, (B) in connection with taxes, assessments or
other governmental charges or (C) in connection with legal proceedings; (v)
Mortgages on property (including leasehold estates), shares of stock or Debt
existing at the time of acquisition thereof (including acquisition through
merger or consolidation); (vi) purchase money and construction Mortgages which
are entered into within specified time limits; and (vii) any extension, renewal,
replacement or refunding of any Mortgage referred to in the foregoing clauses
(i) through (vi), inclusive. "Attributable Debt" is defined in general to mean
the total net amount of rent required to be paid during the remaining term of
any lease, discounted at a rate per annum equal to one-fourth of one percent
over the rate per annum borne by the applicable 1986 Indenture Securities
(except that for 1998 Senior Notes such rate shall be 8 1/4%) compounded
semi-annually.
LIMITATION UPON SALE AND LEASEBACK TRANSACTIONS
So long as any of the following 1986 Indenture Securities are outstanding,
the Corporation will not itself, and will not permit any Restricted Subsidiary
to, sell or transfer any Principal Operating Property owned as of the following
dates with the intention of taking back a lease thereof (a "sale and leaseback
transaction"):
<TABLE>
<S> <C>
Senior 1995 Notes...................... December 15, 1986
Senior 1996 Notes...................... December 15, 1986
Senior 1997 Notes...................... March 15, 1987
Senior 1998 Notes...................... December 15, 1986
Senior 2017 Debentures................. March 1, 1987
Senior 2001 Notes......................
</TABLE>
This restriction does not apply to any sale and leaseback transaction if: (i)
the Corporation or such Restricted Subsidiary could mortgage such Principal
Operating Property under the restrictions set forth under "Limitation Upon
Secured Debt of the Corporation and its Restricted Subsidiaries" above in an
amount equal to the Attributable Debt with respect to such sale and leaseback
transaction without equally and ratably securing the 1986 Indenture Securities;
(ii) within 120 days after the sale or transfer is completed, the Corporation or
a Restricted Subsidiary applies to the retirement of Senior Funded Debt of the
Corporation or Funded Debt of a Restricted Subsidiary an amount equal to the
greater of (A) the net proceeds of the sale of the Principal Operating Property
leased or (B) the fair market value of the Principal Operating Property leased;
(iii) the lease in such sale and leaseback transaction is for a period,
including renewals, of no more than three years; or (iv) such arrangement is
between the Corporation and a Restricted Subsidiary or between Restricted
Subsidiaries.
EVENTS OF DEFAULT
The following will be Events of Default under the 1986 Indenture, as
supplemented by the Bond Board Resolutions: (i) default in the payment of any
principal or premium, if any, on the 1986 Indenture Securities; (ii) default for
30 days in the payment of any interest or Additional Amounts on the 1986
Indenture Securities; (iii) default for 90 days after written notice thereof in
the performance of any other covenant applicable to such Notes; (iv)
acceleration of the maturity of any indebtedness of the Corporation or any
Subsidiary in excess of $50 million principal amount in the aggregate if such
acceleration results from a default under the instruments giving rise to such
indebtedness and is not annulled within 10 days after written notice of such
default; or (v) certain events of bankruptcy, insolvency or reorganization. No
Event of Default with respect to a particular series of securities issued under
the 1986 Indenture, as supplemented by the Bond Board Resolutions, necessarily
constitutes an Event of Default with respect to any other series of securities
issued thereunder. In case an Event of Default (other than an Event of Default
under clause (v)) shall occur and be continuing with respect to any series, the
1986 Indenture Trustee or the holders of not less than 25% in aggregate
principal amount of all series of securities affected thereby then outstanding
under the 1986 Indenture, as supplemented by the Bond
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<PAGE>
Board Resolutions, (voting as one class) by notice to the Corporation may
declare the principal (or, in the case of discounted securities, the amount
specified in the terms thereof) of such series to be due and payable
immediately. In case an Event of Default under clause (v) shall occur and be
continuing, the 1986 Indenture Trustee or the holders of not less than 25% in
aggregate principal amount of all securities then outstanding under the 1986
Indenture, as supplemented by the Bond Board Resolutions, (voting as one class)
by notice may declare the principal (or, in the case of discounted securities,
the amount specified in the terms thereof) of all such outstanding securities to
be due and payable immediately. Any Event of Default with respect to a
particular series of securities issued under the 1986 Indenture, as supplemented
by the Bond Board Resolutions, may be waived, and a declaration of acceleration
rescinded, by the holders of a majority in aggregate principal amount of the
outstanding securities of such series (or if all such outstanding securities, as
the case may be), except in a case of failure to pay principal or premium, if
any, or interest or Additional Amounts in respect of such security for which
payment had not been subsequently made. The 1986 Indenture, as supplemented by
the Bond Board Resolutions, provides that the 1986 Indenture Trustee may
withhold notice to the securityholders of any default (except in payment of
principal, premium, if any, or interest or Additional Amounts) if it determines
in good faith that it is in the interest of the securityholders to do so.
Subject to the provisions of the 1986 Indenture, as supplemented by the Bond
Board Resolutions, relating to the duties of the 1986 Indenture Trustee in case
an Event of Default occurs and is continuing, the 1986 Indenture Trustee will be
under no obligation to exercise any of its rights or powers under the 1986
Indenture, as supplemented by the Bond Board Resolutions, at the request, order
or direction of any of the securityholders, unless such securityholders have
offered to the 1986 Indenture Trustee reasonable indemnity. Subject to such
provisions for the indemnification of the 1986 Indenture Trustee and to certain
other limitations, the holders of a majority in aggregate principal amount of
the securities of all series affected (voting as one class) at the time
outstanding have the right to direct the time, method and place of conducting
any proceeding for any remedy available to the 1986 Indenture Trustee, or
exercising any trust or power conferred on the 1986 Indenture Trustee.
The Corporation is required to file with the 1986 Indenture Trustee annually
an officers' certificate as to the absence of certain defaults under the terms
of the 1986 Indenture, as supplemented by the Bond Board Resolutions.
DEFEASANCE
The Corporation, at its option, (i) will be discharged from any and all
obligations in respect of any series of the 1986 Indenture Securities (except
for certain obligations to register the transfer or exchange of such 1986
Indenture Securities, replace such stolen, lost, destroyed or mutilated 1986
Indenture Securities, maintain paying agencies and hold moneys for payment in
trust) or (ii) will not be under any obligation to comply with certain covenants
and provisions applicable to such 1986 Indenture Securities, including those
described above under "Limitation Upon Secured Debt of the Corporation and
Restricted Subsidiaries" and "Limitation Upon Sale and Leaseback Transactions,"
if the Corporation (i) irrevocably deposits with the 1986 Indenture Trustee, in
trust for the holders of such 1986 Indenture Securities, (A) money or (B)
noncallable obligations issued or fully guaranteed by the United States of
America which through the payment of interest and income thereon and principal
thereof will provide money, in each case in an amount sufficient to pay all the
principal of (and premium, if any) and interest on such 1986 Indenture
Securities on the dates such payments are due in accordance with the terms of
such 1986 Indenture Securities and (ii) shall have paid or caused to be paid all
other sums payable with respect to such 1986 Indenture Securities. To exercise
either of the options described above, the Corporation is required, among other
things, to deliver to the 1986 Indenture Trustee an opinion of nationally
recognized tax counsel to the effect that holders of such 1986 Indenture
Securities will not recognize income, gain or loss for federal income tax
purposes as a result of such deposit and discharge and will be subject to
federal income tax in the same amount and in the same manner and at the same
times as would have been the case if such deposit and discharge had not
occurred, and an officer's certificate and opinion of counsel to the effect that
all conditions precedent relating to such deposit and discharge under the 1986
Indenture, as supplemented by the Bond Board Resolutions, have been
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complied with, and that such deposit and discharge will not cause any violation
of the Investment Company Act of 1940, as amended, on the part of the
Corporation, the trust, the trust funds representing such deposit or the 1986
Indenture Trustee.
MODIFICATION OF THE INDENTURE
The 1986 Indenture, as supplemented by the Bond Board Resolutions, contains
provisions permitting the Corporation and the 1986 Indenture Trustee to modify
or otherwise amend the 1986 Indenture, as supplemented by the Bond Board
Resolutions, or any supplemental indenture thereto or the rights of the holders
of the securities issued thereunder, with the consent of the holders of not less
than a majority in principal amount of the securities of all series at the time
outstanding under such 1986 Indenture, as supplemented by the Bond Board
Resolutions, which are affected by such modification or amendment (voting as one
class); provided that no such modification or amendment shall (i) change the
fixed maturity of any securities, or reduce the principal amount thereof, or
premium, if any, or reduce the rate or extend the time of payment of interest or
Additional Amounts thereon, or reduce the amount due and payable upon the
acceleration of the maturity thereof or the amount provable in bankruptcy, or
make the principal of, or interest, premium or Additional Amounts on, any
security payable in any coin or currency other than that provided in such
security; (ii) impair the right to institute suit for the enforcement of any
such payment on or after the stated maturity thereof; or (iii) reduce the
aforesaid percentage in principal amount of securities, the consent of the
holders of which is required for any such modification or amendment, or the
percentage required for the consent of the holders to waive defaults, without
the consent of the holder of each security so affected.
THE SENIOR 2002 NOTES
The Senior 2002 Notes are issued under two indentures (the "Senior 2002 Note
Indentures") among the Corporation, the Subsidiary Guarantors and State Street
Bank and Trust Company (the "Senior 2002 Note Trustee"), as trustee. The forms
of the Senior 2002 Note Indentures have been filed as exhibits to the
Registration Statement and are available as described under "Available
Information." Whenever particular provisions or defined terms of the Senior 2002
Note Indentures are referred to, such provisions or defined terms are deemed
incorporated herein by reference. Capitalized terms used but not otherwise
defined in this summary have the meanings given to such terms in the Senior 2002
Note Indentures.
GENERAL
The Senior 2002 Notes are limited to $478 million aggregate principal
amount. The Senior 2002 Notes bear interest at a rate of 10 1/4% per annum
(computed on the basis of a 360-day year consisting of twelve 30-day months) and
will mature on December 15, 2002. Interest is payable semiannually on June 15
and December 15, to the persons in whose names the Senior 2002 Notes are
registered at the close of business on the next preceding June 1 or December 1,
as the case may be.
The Senior 2002 Notes rank PARI PASSU with all senior secured indebtedness
of the Corporation.
Principal and interest are payable, and the transfer of Senior 2002 Notes is
registrable, at the office or agency of the Corporation maintained for such
purpose in the City of Chicago, State of Illinois; provided, however, that
payment of interest may be made at the option of the Corporation by check or
draft mailed to the person entitled thereto as it appears in the security
register maintained for such purpose pursuant to the Senior 2002 Note
Indentures.
The Senior 2002 Notes are issued in fully registered form without coupons
and in denominations of $1,000 and integral multiples thereof. No service charge
will be made for any transfer or exchange except the Corporation may require
payment of a sum sufficient to cover any tax or other governmental charge
payable in connection therewith.
SECURITY
The Senior 2002 Notes are secured by first priority security interests in
the capital stock of certain Subsidiaries pursuant to the Collateral Trust
Agreement and related pledge and security agreements
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which provide that the security interests equally and ratably secure certain
other debt of the Corporation and certain of the Subsidiaries, including the
1986 Indenture Securities and the Bank Debt Obligations. The Bank Group will
primarily control the operation of the Collateral Trust Agreement. See
"Description of Collateral Trust."
SUBSIDIARY GUARANTEES
Pursuant to contingent payment guarantees (the "Contingent Payment
Guarantees"), holders of the Senior 2002 Notes are entitled to participate on a
PARI PASSU basis in any collections made by the Bank Group from the Subsidiary
Guarantors pursuant to the Subsidiary Guarantees of the Bank Term Loans, the
Extended Revolving Credit Facility, the Capitalized Interest Notes and the
Senior 2002 Notes. The provisions in the Senior 2002 Note Indentures which
provide for the Contingent Payment Guarantees confirm (but do not expand upon or
add to) the obligation of the Subsidiary Guarantors under the Subsidiary
Guarantees and the right of the holders of the Senior 2002 Notes to participate
in any payments thereunder. However, the Bank Group has the exclusive right to
(i) determine whether, when and to what extent the Subsidiary Guarantees will be
enforced (provided that each guarantee payment will be applied to the Bank Term
Loans, Revolving Credit Facility, Capitalized Interest Notes and Senior 2002
Notes pro rata based on the respective amounts owed thereon) and (ii) amend or
eliminate the Subsidiary Guarantees; provided that the pro rata sharing
requirement contemplated in (i) above is not waivable (in the absence of a
complete release of the Subsidiary Guarantees) without the approval of the
holders of a majority in principal amount of each series of the Senior 2002
Notes then outstanding. In addition, each Subsidiary Guarantor's liability under
its guarantee is limited to the greater of (i) 95% of the lowest amount,
calculated as of the date of delivery of the original Subsidiary Guarantee,
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 is made, in each case plus
collection costs. Holders of the Senior 2002 Notes are entitled to enforce the
pro rata sharing requirement described above in the event that the Bank Group
fails to share proceeds collected under the Subsidiary Guarantees in accordance
with the terms thereof. The Subsidiary Guarantees will terminate when the Bank
Term Loan, the Extended Revolving Credit Facility and the Capitalized Interest
Notes are retired, regardless of whether any portion of the Senior 2002 Notes
then remains outstanding. See "Description of Credit Agreement -- Guarantees."
REDEMPTION
Subject to certain limitations contained in the Credit Agreement, the
Corporation may, at its option, redeem the Senior 2002 Notes in whole at any
time or in part (in integral multiples of $1,000) from time to time, at the
following redemption prices (expressed as a percentage of principal amount) plus
accrued interest to the redemption date:
<TABLE>
<CAPTION>
REDEMPTION DATE REDEMPTION PRICE
- ------------------------------------------------------------------------------------ ---------------------
<S> <C>
At any time through and including May 6, 1994....................................... 103%
At any time between May 6, 1994 and May 6, 1995..................................... 102%
At any time between May 6, 1995 and May 6, 1996..................................... 101%
On the day next following May 6, 1996............................................... 100%
</TABLE>
In addition, the Senior 2002 Notes are subject to mandatory redemption, to
the extent of any and all payments (together with earnings thereon, if any)
received by the Senior 2002 Note Trustee pursuant to the Contingent Payment
Guarantees referred to above or by the Collateral Trustee under the Collateral
Trust Agreement, at a redemption price equal to 100% of the principal amount of
the Senior 2002 Notes redeemed plus accrued interest thereon to the date of
redemption.
CERTAIN COVENANTS OF THE CORPORATION AND ITS RESTRICTED SUBSIDIARIES
Each of the Senior 2002 Note Indentures contains certain covenants binding
upon the Corporation and its Restricted Subsidiaries which include, among
others, the negative covenants described below.
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These covenants do not apply to Unrestricted Subsidiaries. See "The 1986
Indenture Securities -- Restricted and Unrestricted Subsidiaries" above for the
definitions of Restricted and Unrestricted Securities.
Limitation Upon Debt of the Corporation and its Restricted Subsidiaries
So long as any Senior 2002 Notes are outstanding, neither the Corporation
nor any Restricted Subsidiary shall issue, assume, guarantee, incur or otherwise
become liable for (collectively "issue"), directly or indirectly, any Debt,
unless the Interest Coverage Ratio for the four consecutive fiscal quarters
(treated as one accounting period) immediately preceding, and ending at least 30
days prior to, the issuance of such Debt (as shown by a pro forma consolidated
income statement of the Corporation and its Domestic Subsidiaries for such
period after giving effect to (i) the issuance of such Debt and, if applicable,
the application of the net proceeds thereof to refinance other Debt, as if such
Debt was issued and proceeds applied at the beginning of the period; (ii) the
issuance and retirement of any other Debt since the last day of the most recent
fiscal quarter covered by such income statement as if such Debt was issued or
retired at the beginning of the period; and (iii) within certain limits, the
acquisition of any company or business acquired by the Corporation since the
first day of the period, including any acquisition which will be consummated
contemporaneously with the issuance of such Debt, as if such acquisition
occurred at the beginning of the period and without giving effect to any
adjustments to the historical book value of acquired assets or liabilities
required or permitted by generally accepted accounting principles) exceeds the
following ratios for Debt issued in the respective periods indicated: (a) the
period through December 31, 1996, 1.50; (b) the period from January 1, 1997
through December 31, 1998, 1.75; and (c) from January 1, 1999 and thereafter,
2.00. The preceding restrictions will not prohibit the Corporation or any
Restricted Subsidiary from issuing the following Debt: (i) Debt issued pursuant
to the Credit Agreement; provided that (A) amounts outstanding (including
outstanding Facility Letters of Credit) under the Extended Revolving Credit
Facility shall not exceed $175 million at any time, and (B) the Bank Term Loans,
once repaid or prepaid, in whole or in part, shall not again be incurred under
this restriction, except for extensions, renewals, substitutions, refinancings
and replacements as permitted under clause (xi) below; (ii) Debt outstanding on
the Effective Date; provided that any such Debt, once repaid or prepaid, in
whole or in part, shall not again be incurred under this restriction, except for
extensions, renewals, substitutions, refinancings and replacements as permitted
under clause (xi) below; (iii) Debt under the Senior 2002 Notes; (iv) so long as
any Debt remains outstanding under the Credit Agreement, Debt of the Corporation
to any Restricted Subsidiary; provided that (a) the maker of any loan resulting
in the incurrence of such Debt shall not be insolvent at the time such loan was
made or rendered insolvent as a result of the making of such loan, (b) such loan
was in compliance with applicable law and (c) such loan shall be subordinate in
right of payment to the repayment in full of the Senior 2002 Notes following the
acceleration of the Senior 2002 Notes; (v) Debt of any Restricted Subsidiary to
the Corporation or any other Restricted Subsidiary; (vi) Debt relating to
letters of credit (other than Debt permitted by clauses (i) and (ii) above)
issued for the account of the Corporation or any Restricted Subsidiary in an
aggregate amount not to exceed $2.5 million; (vii) Debt incurred in connection
with deferred compensation arrangements for employees and former employees of
the Corporation and its Subsidiaries entered into in the ordinary course of
business; (viii) Debt of the Corporation or any of its Restricted Subsidiaries
which constitutes Project Financing; (ix) Capital Lease Obligations (other than
Debt permitted by clause (ii) above) having an aggregate amount not exceeding
$70 million; (x) Debt (other than Debt permitted by clauses (i) through (ix)
above) in an aggregate principal amount at any one time outstanding not to
exceed (a) $100 million, during the period when any Debt remains outstanding
under the Credit Agreement or any extension or renewal thereof or any successive
extension or renewal thereof, and (b) $50 million, at any time thereafter; and
(xi) Debt issued in connection with any extension, renewal, substitution,
refinancing or replacement of Debt permitted under clauses (i) through (x)
above, or any successive extension, renewal, substitution, refinancing or
replacement thereof; provided, that (a) the reincurrence of any such Debt after
repayment or prepayment of such Debt shall remain subject to the provisos in
clauses (i) or (ii) above, as applicable, (b) the principal amount of such newly
issued Debt shall not be greater than the aggregate principal amount of the Debt
being extended, renewed, substituted, refinanced or replaced thereby and (c) no
such Debt shall be
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issued containing any recourse to the Corporation or its Subsidiaries additional
to the recourse of the Debt being extended, renewed, substituted, refinanced or
replaced thereby. For purposes of the foregoing covenant, the term "Debt" means,
as applied to any Person, without duplication, (i) all indebtedness of such
Person for borrowed money, (ii) all indebtedness of such Person evidenced by
notes, debentures, bonds or other similar instruments, (iii) all reimbursement
obligations of such Person with respect to letters of credit issued for such
Person's account (other than obligations with respect to letters of credit
securing obligations entered into in the ordinary course of business of such
Person to the extent not drawn on or, if and to the extent drawn on, such
drawing is reimbursed promptly following receipt by such Person of a demand for
reimbursement following payment on the letter of credit), (iv) all obligations
of such Person to pay the deferred purchase price of property or services (but
excluding trade accounts payable in the ordinary course of business), (v) all
Capital Lease Obligations of such Person, (vi) all obligations of the type
referred to in clauses (i) through (v) of other Persons for the payment of which
such Person is responsible or liable as obligor, guarantor or otherwise, and
(vii) all obligations of the type referred to in clauses (i) through (v) of
other Persons secured by any Lien on any property or asset of such Person
(whether or not such obligation is assumed by such Person); and the term
"Interest Coverage Ratio" means, with respect to any period, the ratio of (a)
the Corporation's Consolidated Domestic EBITDA (which is defined to exclude the
impact of fresh start accounting principles) for such period, minus Domestic
Capital Expenditures during such period, to (b) the Total Domestic Consolidated
Interest Expense during such period.
Limitation on Restricted Payments
So long as any Senior 2002 Notes are outstanding, the Corporation will not
(i) declare or pay any dividend or make any distribution on any capital stock of
the Corporation (other than dividends or distributions payable solely in capital
stock of the Corporation (excluding preferred stock redeemable at the option of
the holder prior to the first anniversary of the stated maturity of the Senior
2002 Notes ("Redeemable Preferred")) or rights to acquire capital stock (other
than Redeemable Preferred) of the Corporation or, as part of a shareholder
rights plan, rights to acquire capital stock (other than Redeemable Preferred)
of another Person) or (ii) purchase, redeem, retire or otherwise acquire, or
permit any Subsidiary to purchase, redeem, retire or otherwise acquire, for
value, any capital stock of the Corporation or any option, warrant or other
right to acquire capital stock of the Corporation (any such dividend,
distribution, purchase, redemption, retirement or other acquisition being
hereinafter referred to as a "Restricted Payment"), if at the time the
Corporation or such Subsidiary makes such Restricted Payment (a) an Event of
Default shall have occurred and be continuing (or would result therefrom); (b)
the Corporation could not or, after giving effect thereto, would not be able to
incur an additional $1.00 of Debt under the restrictions set forth under the
heading "Limitation Upon Debt of the Corporation and its Restricted
Subsidiaries"; or (c) the aggregate amount of such Restricted Payment and all
other Restricted Payments made since the Effective Date, would exceed the sum
of: (1) $10 million; plus (2) 25% of the Corporation's Domestic Consolidated Net
Income (which is defined to exclude the impact of fresh start accounting
adjustments) accrued during the period (treated as one accounting period) from
January 1, 1995 to December 31, 1996 (or, in case such Domestic Consolidated Net
Income shall be a deficit, minus 100% of such deficit); plus (3) 50% of the
Corporation's Domestic Consolidated Net Income accrued during the period
(treated as one accounting period) on or after January 1, 1997 (or, in case such
Domestic Consolidated Net Income shall be a deficit, minus 100% of such
deficit); plus (4) the aggregate net cash proceeds received by the Corporation
from the issuance, sale or other disposition (other than to a Subsidiary)
subsequent to the Effective Date of capital stock (or any option, warrant or
other right to acquire capital stock), including a sale or issuance of capital
stock (or options, warrants or other rights to acquire capital stock) upon the
conversion of Debt (convertible in accordance with its terms) issued or sold for
cash subsequent to the Effective Date (in which case such capital stock shall be
deemed to have been issued for the dollar amount of such Debt so converted). The
restrictions described above do not prohibit (i) the payment of any dividend
within 60 days after the date of declaration thereof, if at said date of
declaration such payment complied with the restrictions described above; (ii)
the acquisition of any shares of capital stock of the Corporation in exchange
for, or upon conversion of, or out of the proceeds of the substantially
concurrent sale for cash (other than to a
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Subsidiary) of, shares of capital stock (other than Redeemable Preferred) of the
Corporation (in which event neither the receipt nor the application of such
proceeds shall be included in any computation under this paragraph); (iii) the
acquisition of capital stock of the Corporation for the purpose of eliminating
fractional shares; (iv) the distribution of, or redemption by, the Corporation
of any rights to purchase capital stock of the Corporation or any other Person
which rights were issued as part of a shareholder rights plan (in which event
such distribution or redemption shall not be included in any computation under
this paragraph); (v) the issuance, acquisition, reclassification or redemption
by the Corporation of its capital stock pursuant to the 1988 Recapitalization
(such issuance, acquisition, reclassification or redemption shall not be
included in any computation under this paragraph); (vi) the making of any
payment to dissenting stockholders of the Corporation pursuant to any appraisal
right arising under law or court order; (vii) the exercise and payment of stock
appreciation rights pursuant to the Corporation's Management Performance Plan or
any successor equity compensation plan or the repurchase at any time after the
Effective Date of Common Stock from the participants in the Management
Performance Plan or any successor equity compensation plan in order to satisfy
withholding tax obligations (such payment or repurchase shall not be included in
any computation under this paragraph); (viii) the cash settlement of certain
restricted shares of Common Stock pursuant to the Management Performance Plan
(in addition to the repurchases permitted under clause (vii) above) in an
aggregate amount of consideration not to exceed $750,000 (such cash settlement
shall not be included in any computation under this paragraph); and (ix) any
payments or distributions made pursuant to and as described in the Prepackaged
Plan (such payments or distributions shall not be included in any computation
under this paragraph).
Limitation on Transactions with Affiliates
So long as any Senior 2002 Notes are outstanding, the Corporation shall not,
and shall not permit any Subsidiary to, directly or indirectly, enter into any
transaction or series of related transactions involving the purchase, sale,
lease or exchange of property or the rendering of any service by or to the
Corporation or any Subsidiary having a fair market value in excess of $5 million
(as reasonably determined by the Board) with any Affiliate (including financing,
acquisitions and divestitures), unless the Board by resolution (excluding any
members of the Board having a financial interest in such transaction) concludes,
in its reasonable good faith judgment, that (i) such transaction is upon terms
no less favorable to the Corporation or such Subsidiary than could be obtained
in a comparable arm's-length transaction with a Person not an Affiliate and (ii)
such transaction is reasonably necessary or desirable for the Corporation or
such Subsidiary in the conduct of its business (including financings,
acquisitions and divestitures). Notwithstanding the requirements of the
foregoing sentence, transactions with any Affiliate that constitute transactions
in the ordinary course of business of such Affiliate and the Corporation or such
Subsidiary need not be approved by, or disclosed in advance to, the Board;
provided such transactions are periodically reported to the Board on at least a
quarterly basis and otherwise meet the requirements of subclauses (i) and (ii)
of the preceding sentence. "Affiliate" means any Person other than the
Corporation or any Subsidiary which (i) directly or indirectly through one or
more intermediaries, controls the Corporation; (ii) directly or indirectly
through one or more intermediaries, beneficially owns 5% or more of any class of
voting stock of the Corporation, CGC or any domestic Subsidiary; or (iii) is
controlled by any Person referred to in clauses (i) or (ii) above.
Limitation on Guaranteed Debt
So long as any Senior 2002 Notes are outstanding, and at any time when no
Debt remains outstanding under the Credit Agreement, the Corporation shall not
issue or incur any Debt the repayment of principal or interest or both of which
is guaranteed by any Subsidiary, unless each such Subsidiary which guarantees
such other Debt also guarantees the Senior 2002 Notes on a direct and
unconditional basis.
Restrictions on Merger
So long as any Senior 2002 Notes are outstanding, the Corporation shall not
consolidate with or merge into, or sell or transfer all or substantially all of
its property and assets to, any Person unless (i) the
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resulting, surviving or transferee Person (if not the Corporation) shall be
organized and existing under the laws of the United States of America or any
State thereof or the District of Columbia, and such entity shall expressly
assume, by a supplemental indenture, executed and delivered to the Senior 2002
Note Trustee,in form satisfactory to the Senior 2002 Note Trustee, all the
obligations of the Corporation under the Senior 2002 Notes and each of the
Senior 2002 Note Indentures; (ii) immediately prior to and after giving effect
to such transaction, no Event of Default shall have occurred and be continuing;
(iii) immediately after giving effect to such transaction, the resulting,
surviving or transferee Person could issue an additional $1.00 of Debt pursuant
to the restrictions set forth under the heading "Limitation Upon Debt of the
Corporation and its Restricted Subsidiaries" above; and (iv) immediately after
giving effect to such transaction, the resulting, surviving or transferee Person
shall have Consolidated Net Worth in an amount which is not less than the
Consolidated Net Worth (which may be negative) of the Corporation prior to such
transaction.
Limitation on Sale and Leaseback Transactions
So long as any Senior 2002 Notes are outstanding, except as set forth below,
the Corporation will not itself, and it will not permit any Restricted
Subsidiary to, enter into any transaction with any bank, insurance company or
other lender or investor, or to which any such bank, insurance company, lender
or investor is a party, providing for the leasing by the Corporation or a
Restricted Subsidiary of any Principal Operating Property owned at the Effective
Date which has been or is to be sold or transferred by the Corporation or a
Restricted Subsidiary to such bank, company, lender or investor, or to any
Person to whom funds have been or are to be advanced by such bank, insurance
company, lender or investor on the security of such Principal Operating Property
(a "sale and leaseback transaction"). The restriction described above does not
apply to any sale and leaseback transaction if (i) the Corporation or such
Restricted Subsidiary could create Debt secured by a Mortgage (under the
restrictions set forth under "Limitation of Secured Debt of the Corporation and
its Restricted Subsidiaries" below, without regard to clauses (i) through (viii)
thereof), on the Principal Operating Property to be leased in an amount equal to
the Attributable Debt with respect to such sale and leaseback transaction
without equally and ratably securing the Securities; or (ii) within 120 calendar
days after the sale or transfer has been made by the Corporation or by a
Restricted Subsidiary, the Corporation or a Restricted Subsidiary applies an
amount equal to the greater of (A) the net proceeds from the sale of the
Principal Operating Property leased pursuant to such arrangement or (B) the fair
market value of the Principal Operating Property so leased at the time of
entering into such arrangement (as determined in any manner approved by the
Board) to the retirement of Senior Funded Debt of the Corporation or Funded Debt
of a Restricted Subsidiary; provided, that the amount to be applied to the
retirement of Senior Funded Debt of the Corporation or Funded Debt of a
Restricted Subsidiary will be reduced by (x) the principal amount of any Senior
2002 Notes (or other debentures or notes constituting Senior Funded Debt of the
Corporation or Funded Debt of a Restricted Subsidiary) delivered within 75
calendar days after such sale or transfer to the Senior 2002 Note Trustee or
other applicable trustee for retirement and cancellation and (y) the principal
amount of Senior Funded Debt of the Corporation or Funded Debt of a Restricted
Subsidiary, other than Funded Debt included under clause (x), voluntarily
retired by the Corporation or a Restricted Subsidiary within 75 calendar days
after such sale; provided further that, notwithstanding the foregoing, no
retirement referred to in this clause (ii) may be effected by payment at
maturity or pursuant to any mandatory sinking fund payment or any mandatory
prepayment provision; (iii) the lease in such sale and leaseback transaction is
for a period, including renewals, of no more than three years; or (iv) such
arrangement is between the Corporation and a Restricted Subsidiary or between
Restricted Subsidiaries.
Limitation of Secured Debt of the Corporation and its Restricted
Subsidiaries
So long as any Senior 2002 Notes are outstanding, the Corporation will not
itself, and will not permit any Restricted Subsidiary to, incur, issue, assume,
guarantee or suffer to exist any indebtedness for borrowed money (for purposes
hereof, "Secured Debt") secured by a Mortgage on any Principal Operating
Property of the Corporation or any Restricted Subsidiary, or any shares of stock
of or Debt of any Restricted Subsidiary, without effectively providing that the
Senior 2002 Notes (together with, if the Corporation so determines, any other
Debt of the Corporation or such Restricted Subsidiary then
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existing or thereafter created which is not subordinated Debt) will be secured
equally and ratably with (or, at the option of the Corporation, prior to) such
Secured Debt so long as such Secured Debt will be so secured, unless, after
giving effect thereto, the aggregate amount of all such Secured Debt plus all
Attributable Debt of the Corporation and its Restricted Subsidiaries in respect
of sale and leaseback transactions (other than those exempt described under
clauses (ii) through (iv), inclusive, under "Limitation Upon Sale and Leaseback
Transactions" above) would not exceed 5% of Consolidated Net Tangible Assets (as
defined under "the 1986 Indenture Securities -- Limitation Upon Secured Debt of
the Corporation and its Restricted Subsidiaries" above). This restriction will
not apply to, and there will be excluded from Secured Debt in any computation
under such restriction, Debt secured by (i) Mortgages on, and limited to,
property of, or on any shares of stock of or Debt of, any corporation existing
at the time such corporation becomes a Restricted Subsidiary; (ii) Mortgages in
favor of the Corporation or any Restricted Subsidiary; (iii) Mortgages in favor
of any governmental body to secure progress, advance or other payments pursuant
to any contract or provision of any statute; (iv) (A) if made and continuing in
the ordinary course of business, any Mortgage as security for the performance of
any contract or undertaking not directly or indirectly in connection with the
borrowing of money or the securing of Debt, or (B) any Mortgage with any
governmental agency required or permitted to qualify the Corporation or any
Restricted Subsidiary to conduct business, to maintain self-insurance or to
obtain the benefits of any law pertaining to workmen's compensation,
unemployment insurance, old age pensions, social security or similar matters;
(v) Mortgages for taxes, assessments or governmental charges or levies if such
taxes, assessments, governmental charges or levies will not at the time be due
and payable, or if the same thereafter can be paid without penalty, or if the
same are being contested in good faith by appropriate proceedings; (vi)
Mortgages created by or resulting from any litigation or legal proceeding which
at the time is currently being contested in good faith by appropriate
proceedings; or Mortgages arising out of judgments or awards as to which the
time for prosecuting an appeal or proceeding for review has not expired; (vii)
Mortgages on, and limited to, property (including leasehold estates), shares of
stock or Debt existing at the time of acquisition thereof (including acquisition
through merger or consolidation) or to secure the payment of all or any part of
the purchase price thereof or construction thereon or to secure any Debt
incurred prior to, at the time of, or within 120 calendar days after the later
of the acquisition, the completion of construction or the commencement of full
operation of such property or within 120 calendar days after the acquisition of
such shares or Debt for the purpose of financing all or any part of the purchase
price thereof or construction thereon; or (viii) any extension, renewal or
replacement (or successive extension, renewals or replacements), as a whole or
in part, of any Mortgage referred to in the foregoing clauses (i) through (vii),
inclusive, provided that (A) such extension, renewal or replacement Mortgage
will be limited to all or a part of the same property, shares of stock or Debt
that secured the Mortgage so extended, renewed or replaced (plus improvements on
such property) and (B) the Debt secured by such Mortgage at such time is not
increased. "Attributable Debt" is defined in general to mean the total net
amount of rent required to be paid during the remaining term of any lease,
discounted at a rate equal to 10 1/2%.
EVENTS OF DEFAULT
Each of the Senior 2002 Note Indentures contain certain events of default
("Events of Default"), remedies upon such Events of Default and provisions
regarding notices of default, waivers of default and certificates of compliance
comparable to those contained in the 1986 Indenture, as supplemented by the Bond
Board Resolutions. In addition, an Event of Default shall be deemed to have
occurred if the Corporation or USG Interiors shall fail to repay either the
Extended Revolving Credit Facility or the Bank Term Loans when due upon the
respective final scheduled maturity date thereof and, as a result thereof, the
Bank Group files a Notice of Actionable Default under the Collateral Trust
Agreement or a written demand for payment under any of the Subsidiary
Guarantees. See "The 1986 Indenture Securities -- Events of Default."
DEFEASANCE
The Senior 2002 Note Indentures contain provisions regarding defeasance
comparable to those contained in the 1986 Indenture, as supplemented by the Bond
Board Resolutions. Upon defeasance of
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the Senior 2002 Notes in accordance with such provisions, the Corporation will
no longer be obligated to comply with any of the negative covenants described
under "Certain Covenants of the Corporation and its Restricted Subsidiaries"
above. See "The 1986 Indenture Securities -- Defeasance."
MODIFICATION
Each of the Senior 2002 Note Indentures contain provisions regarding
modifications and amendments comparable to those contained in the 1986
Indenture, as supplemented by the Bond Board Resolutions. See "The 1986
Indenture Securities -- Modification of the Indenture."
DESCRIPTION OF COLLATERAL TRUST
In connection with the 1988 Recapitalization, the Corporation established a
collateral trust pursuant to the Collateral Trust Agreement, dated as of July
13, 1988 (the "Old Collateral Trust Agreement"), among the Corporation and
certain of the Subsidiaries (collectively, the "Grantors") and Wilmington Trust
Company and William J. Wade (collectively, the "Collateral Trustee"). Under the
Old Collateral Trust Agreement, the Grantors granted a first priority security
interest in (i) all of the capital stock of the Corporation's principal domestic
Subsidiaries, including U.S. Gypsum, USG Interiors, L&W Supply and USG Foreign
Investments, Ltd.; and (ii) 65% of the capital stock of CGC and certain other of
the Corporation's foreign Subsidiaries (collectively, the "Collateral"). The
Collateral is held in trust for the equal and ratable benefit of the holders of
(i) the Bank Debt Obligations; and (ii) the senior debt securities, including
the 1986 Indenture Securities. In connection with the Restructuring, the Old
Collateral Trust Agreement was amended to provide that the Senior 1995 Notes,
the Senior 1998 Notes and Senior 2002 Notes (together with the Bank Debt
Obligations and the previously existing senior debt securities, the "Senior
Secured Obligations") be equally and ratably secured with the other Senior
Secured Obligations (the "Collateral Trust Agreement"). In connection with the
Note Placement, the Collateral Trust Agreement is being further amended to
provide that the Senior 2001 Notes will be equally and ratably secured with the
other Senior Secured Obligations.
Under the Collateral Trust Agreement, an "Actionable Default" occurs upon
the acceleration of any of the Senior Secured Obligations. A "Notice of
Actionable Default" may be given (i) in the case of an acceleration of the Bank
Debt Obligations, by the Administrative Agent under the Credit Agreement or the
holders of a majority of the Bank Debt Obligations (the "Requisite Senior
Lenders"); or (ii) in the case of an acceleration of any series of securities,
by the trustee under the indenture governing such series or, if provided under
the terms of such series, by the requisite holders of such series. A Notice of
Actionable Default may be withdrawn by the party which gave it (i) at any time
when the Collateral Trustee has not exercised any remedies with respect to the
Collateral as a result thereof or (ii) after the Collateral Trustee has
exercised remedies if the Requisite Senior Lenders consent to such withdrawal.
In addition, a Notice of Actionable Default is deemed withdrawn when the party
giving such Notice has acknowledged payment in full of the Senior Secured
Obligations owing to it. Until such time as any Notice of Actionable Default is
given (and after the time when any such Notice has been withdrawn), the pledgor
thereof may vote any securities comprising the Collateral. At any time when a
Notice of Actionable Default has been given and not withdrawn, the Collateral
Trustee may, upon written notice to the Corporation, vote any securities
comprising the Collateral.
All of the Collateral will be released (i) upon the consent and direction of
the Bank Group or (ii) at such time as the Bank Debt Obligations have been
repaid in full. In addition, the Requisite Senior Lenders may instruct the
Collateral Trustee to release specified portions of the Collateral (e.g., in the
case of asset sales approved by the holders of the Bank Debt Obligations under
the Credit Agreement) provided that no Actionable Default has occurred. The
holders of the Corporation's Securities do not have any similar rights to
authorize release of the Collateral. Under the terms of the Collateral Trust
Agreement, the Collateral and proceeds so released revert to the Grantors and
are not required to be distributed into the Collateral Account (defined below).
For a description of the rights of the holders of the Bank Debt Obligations
under the Credit Agreement, see "Description of Credit Agreement."
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Following receipt of a Notice of Actionable Default, the Requisite Senior
Lenders have the right to direct the Collateral Trustee to exercise, or refrain
from exercising, any rights or remedies with respect to the Collateral. The
holders of the Securities do not have any similar right to direct the actions of
the Collateral Trustee. See "Risk Factors -- Control of Collateral Trust
Agreement by Bank Group." In the absence of relevant directions, the Collateral
Trustee has the power to act on its own initiative. At any time when a Notice of
Actionable Default has been given and not withdrawn, the Collateral Trustee may,
and at the direction of the Requisite Senior Lenders shall, sell the Collateral
for the benefit of the holders of the Senior Secured Obligations. Funds derived
from any sale of Collateral and (at all times after a Notice of Actionable
Default has been given and not withdrawn) dividends and distributions received
on the Collateral are to be deposited to the collateral account established
under the Collateral Trust Agreement (the "Collateral Account"). The Collateral
Trustee shall distribute all moneys in the Collateral Account as follows: (i)
first, to the Collateral Trustee for unpaid fees; (ii) second, to the holders of
the Senior Secured Obligations ratably (on the basis of unpaid amounts) to (a)
pay the portion of the Senior Secured Obligations which is then due and payable
and (b) provide cash collateral (on a dollar-for-dollar basis) for the portion
of the Senior Secured Obligations which is not then due and payable; and (iii)
third, to the Grantors.
DESCRIPTION OF CAPITAL STOCK
GENERAL MATTERS
The total number of shares of capital stock that the Corporation has
authority to issue is 236,000,000, consisting of 200,000,000 shares of Common
Stock, par value $0.10 per share, and 36,000,000 shares of Preferred Stock, par
value $1.00 per share. Upon completion of this Offering, 43,158,085 shares of
Common Stock will be issued and outstanding, assuming no exercise of the
Underwriters' over-allotment option, and no shares of Preferred Stock will be
issued or outstanding. The following summary of certain provisions of the
Corporation's capital stock describes all material provisions of, but does not
purport to be complete and is subject to, and qualified in its entirety by, the
Certificate of Incorporation and the By-laws of the Corporation, each of which
is included as an exhibit to the Registration Statement of which this Prospectus
forms a part.
COMMON STOCK
The issued and outstanding shares of Common Stock are, and the shares of
Common Stock being offered will be upon payment therefor, validly issued, fully
paid and nonassessable. Subject to the prior rights of the holders of any
Preferred Stock, if any, the holders of outstanding shares of Common Stock are
entitled to receive dividends out of assets legally available therefor at such
times and in such amounts as the Board of Directors may from time to time
determine. The Corporation is currently a party to various credit agreements
which prohibit the payment of dividends. See "Risk Factors -- Restrictions on
Common Stock Dividends." Upon liquidation, dissolution or winding up of the
Corporation, the holders of Common Stock are entitled to receive pro rata the
assets of the Corporation which are legally available for distribution, after
payment of all debts and other liabilities and subject to the prior rights of
any holders of Preferred Stock then outstanding, if any. Each outstanding share
of Common Stock is entitled to one vote on all matters submitted to a vote of
stockholders. There is no cumulative voting.
The Common Stock of the Corporation is traded on the New York Stock Exchange
under the symbol "USG." On February 11, 1994, the last reported sales price of
the Common Stock, as reported on the New York Stock Exchange Composite Tape, was
$32 3/8 per share.
CERTAIN PROVISIONS OF THE CERTIFICATE OF INCORPORATION AND BY-LAWS
The Certificate of Incorporation and By-laws of the Corporation contain
certain provisions that are intended to enhance the likelihood of continuity and
stability in the composition of the Board and which may have the effect of
delaying, deferring or preventing a future takeover or change in control of the
Corporation unless such takeover or change in control is approved by the Board.
Such provisions may also render the removal of the current Board and of
management more difficult.
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The Corporation's Certificate of Incorporation provides for three classes of
directors, each of which is to be elected on a staggered basis for a term of
three years. At present, the Board is composed of 15 directors. Each class of
directors is composed of five members. In connection with the Prepackaged Plan,
representatives of certain creditors of the Corporation nominated a total of 5
directors. See "Management -- Directors of the Corporation." If the Water Street
Directors are removed from office without the consent of Water Street, certain
restrictions on the Water Street Entities relating to the purchase, voting and
transfer of shares of Common Stock will terminate. See "Certain Relationships
and Related Transactions -- Agreement with Water Street Entities."
The affirmative vote or consent of at least 80% of the voting power of all
of the stock of the Corporation entitled to vote in the election of directors is
required to approve certain types of transactions with another corporation,
person or entity which, directly or indirectly, owns 5% or more of the
outstanding shares of any class of the Corporation's stock which is entitled to
vote in the election of directors. Such transactions include a merger or
consolidation of the Corporation or any of its Subsidiaries, sale of all or
substantially all of the assets of the Corporation or any of its Subsidiaries or
the sale or lease of any assets (except assets having an aggregate fair market
value of less than $10 million) in exchange for certain types of securities. The
Board may render such super-majority voting requirements inapplicable by (i)
approving a memorandum of understanding with such other corporation, person or
entity with respect to such a transaction prior to the time that such
corporation, person or entity becomes the beneficial owner of 5% or more of any
class of voting stock or (ii) approving such a transaction after the time that
such other corporation, person or entity becomes the beneficial owner of 5% or
more of any class of voting stock if a majority of the members of the Board
approving such transaction were duly elected and acting members of the Board
prior to the time that such other corporation, person or entity became the
beneficial owner of 5% or more of any class of voting stock. This super-majority
voting requirement applies to Water Street.
Any action to be taken at any annual or special meeting of stockholders of
the Corporation may only be taken without a meeting if a consent in writing is
signed by the holders of at least 80% of the voting power of the Corporation
entitled to vote with respect to such subject matter.
The provisions in the Certificate of Incorporation described above may only
be amended by 80% of the voting power of the Corporation entitled to vote in the
election of directors.
PREFERRED STOCK
Upon consummation of the Offering, there will be no shares of Preferred
Stock issued or outstanding. The Corporation has no present intention to issue
any shares of Preferred Stock. However, the Corporation's Board of Directors
may, without further action by the Corporation's stockholders, from time to
time, direct the issuance of shares of Preferred Stock in series and may, at the
time of issuance, determine the rights, preferences and limitations of each
series. Satisfaction of any dividend preferences of outstanding shares of
Preferred Stock would reduce the amount of funds available for the payment of
dividends on shares of Common Stock. Holders of shares of Preferred Stock may be
entitled to receive a preference payment in the event of any liquidation,
dissolution or winding-up of the Corporation before any payment is made to the
holders of shares of Common Stock. Under certain circumstances, the issuance of
shares of Preferred Stock may render more difficult or tend to discourage a
merger, tender offer or proxy contest, the assumption of control by a holder of
a large block of the Corporation's securities or the removal of incumbent
management. The Board of Directors of the Corporation, without stockholder
approval, may issue shares of Preferred Stock with voting and conversion rights
which could adversely affect the holders of shares of Common Stock.
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CERTAIN PROVISIONS OF DELAWARE LAW
The Corporation is governed by the provisions of Section 203 of the Delaware
General Corporation Law. In general, the law prohibits a public Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner. "Business combination" includes
mergers, asset sales and other transactions resulting in a financial benefit to
the stockholder. An "interested stockholder" is a person who, together with
affiliates and associates, owns (or within three years, did own) 15% or more of
the corporation's voting stock.
SHAREHOLDER RIGHTS PLAN
The Corporation's rights agreement (the "Rights Agreement") between the
Corporation and Harris Trust (the "Rights Agent") entitles the registered
stockholder to purchase from the Corporation one-hundredth share of Junior
Series C Preferred Stock at a price of $35 per one-hundredth share (the "Rights
Purchase Price"), subject to adjustment.
Until the earlier to occur of (i) 10 days following the date of a public
announcement that a person or group of affiliated or associated persons (an
"Acquiring Person"), other than the Corporation, any employee benefit plan of
the Corporation, any entity holding Common Stock for or pursuant to the terms of
any such plan or, except as described below, Water Street or its affiliated or
associated persons, has beneficial ownership (as defined in the Rights
Agreement) of 20% or more of the then outstanding Common Stock, (ii) 10 days
following the date of a public announcement that a person or group of affiliated
or associated persons (an "Adverse Person") has beneficial ownership of 10% or
more of the then outstanding Common Stock, the acquisition of which has been
determined by the Board to present an actual threat of an acquisition of the
Corporation that would not be in the best interest of the Corporation's
stockholders or (iii) 10 days following the date of commencement of, or public
announcement of, a tender offer or exchange offer for 30% or more of the Common
Stock (the earliest of such dates being called the "Distribution Date"), the
Rights will be evidenced, with respect to the Common Stock, by the certificates
which will represent such Common Stock. The Rights Agreement provides that,
until the Distribution Date, the Rights will be transferred with and only with
the Common Stock certificates. Until the Distribution Date (or earlier
redemption or expiration of the Rights), Common Stock certificates issued after
May 6, 1993 upon transfer or new issuance of shares of Common Stock (including
any shares of Common Stock issued pursuant to the Restructuring) will contain a
notation incorporating the Rights Agreement by reference.
The Rights Agreement provides that, until December 31, 1997, Water Street's
beneficial ownership of any shares of common Stock (or warrants to purchase
Common Stock or securities exchangeable for or convertible into Common Stock or
warrants to purchase any such exchangeable or convertible securities)
(collectively, "Specified Securities") acquired pursuant to any Permitted
Acquisition (as defined in the Water Street Agreement) will not cause any of the
following to occur: (a) any Water Street Entity to become an Acquiring Person or
an Adverse Person, (b) the Distribution Date, (c) the transfer of Common Stock
of the Corporation (or its successor by operation of law or under the terms of
the Rights Agreement) no longer constituting the transfer of associated Rights
or the distribution of Rights Certificates, (d) the Rights becoming exercisable,
non-redeemable or non-amendable, (e) a condition the result of which Rights may
be exchanged for Common Stock in the manner described in the Rights Agreement,
or (f) the Rights Purchase Price or the amount of securities acquirable upon
payment thereof to be adjusted (collectively, the "Specified Events"). The
Rights Agreement further provides that, until the tenth anniversary of the Water
Street Agreement, (i) from and after any distribution of shares of Common Stock
by Water Street to its partners and until the Water Street Entities beneficially
own a percentage of the outstanding shares of Common Stock which is less than
10% of the outstanding Common Stock (the "Flip-In Threshold"), the beneficial
ownership by the Water Street Entities (other than Water Street) of any
Specified Securities acquired pursuant to any Permitted Acquisition or Permitted
Acquisitions shall not cause any of the Specified Events to occur, so long as
the Water Street Entities shall have voted the shares of Common Stock owned by
them in accordance with the terms of the Water
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Street Agreement; (ii) until the Water Street Entities beneficially own a
percentage of the outstanding shares of Common Stock which is less than the
Flip-In Threshold, the acquisition (other than pursuant to any Permitted
Acquisition or Permitted Acquisitions) by the Water Street Entities (which
acquisition, in the case of persons other than natural persons, is made in the
ordinary course of business), including but not limited to acquisitions on
behalf of proprietary accounts and accounts with respect to which any of the
Water Street Entities has investment discretion, of up to an aggregate of 10% of
the outstanding shares of Common Stock at the time of acquisition shall not
cause any of the Specified Events to occur; (iii) the acquisition (other than
pursuant to any Permitted Acquisition or Permitted Acquisitions) by the Water
Street Entities (which acquisition, in the case of persons other than natural
persons, is made in the ordinary course of business) of an aggregate of more
than 10% of the outstanding shares of Common Stock at the time of acquisition
shall not cause any of the Specified Events to occur, provided that, within ten
business days after the Corporation notifies Water Street of such ownership, the
Water Street Entities sell or otherwise transfer or dispose of Common Stock, so
that, after giving effect to those transactions, the number of shares of Common
Stock beneficially owned by the Water Street Entities that were acquired other
than pursuant to any Permitted Acquisition or Permitted Acquisitions is not
greater than an aggregate of 10% of the then outstanding shares of Common Stock;
and (iv) any percentage increase in any Water Street Entity's beneficial
ownership of outstanding shares of Common Stock that results from the
acquisition of shares of Common Stock by the Corporation or its Subsidiaries
shall not cause any Specified Event to occur.
Until the Distribution Date (or earlier redemption or expiration of the
Rights), the surrender for transfer of any Common Stock certificate also will
constitute the transfer of the Rights associated with the Common Stock
represented by such certificate. As soon as practicable following the
Distribution Date, separate certificates evidencing the Rights (the "Rights
Certificates") will be mailed to holders of record of the Common Stock as of the
close of business on the Distribution Date and such separate Rights Certificates
alone will evidence the Rights. The Rights are not exercisable until the
Distribution Date. The Rights will expire on May 6, 2003 (the "Final Expiration
Date"), unless earlier redeemed by the Corporation as described below. Until a
Right is exercised, the holder thereof, as such, will have no rights as a
stockholder of the Corporation, including, without limitation, the right to vote
or to receive dividends.
In the event that, at any time after the first public announcement that an
Acquiring Person or an Adverse Person has become such, the Corporation is
involved in a merger or other business combination where the Corporation is not
the surviving corporation or where Common Stock is changed or exchanged or in a
transaction where 50% or more of its consolidated assets or earning power are
sold, proper provision will be made so that each holder of a Right (other than
such Acquiring Person or Adverse Person) will thereafter have the right to
receive, upon the exercise thereof at the then-current exercise price of the
Right, that number of shares of common stock of the acquiring company which at
the time of such transaction would have a market value of two times the exercise
price of the Right.
In the event that the Corporation is the surviving corporation in a merger
or other business combination involving an Acquiring Person or an Adverse Person
and the Common Stock remains outstanding and unchanged or in the event that an
Acquiring Person or an Adverse Person engages in one of a number of self-dealing
transactions specified in the Rights Agreement, proper provision will be made so
that each holder of a Right, other than Rights that are or were beneficially
owned (as defined in the Rights Agreement) by the Acquiring Person or the
Adverse Person, as the case may be, on the earliest of the Distribution Date,
the date the Acquiring Person acquires 20% or more of the outstanding Common
Stock or the date the Adverse Person becomes such (which will thereafter be
void), 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. In addition, under
certain circumstances the Board has the option of exchanging all or part of the
Rights (excluding void Rights) for Common Stock in the manner described in the
Rights Agreement. The Rights Agreement also contains a so-called "flip-in"
feature which provides that if any person or group of affiliated or associated
persons becomes an Adverse Person, then the provisions of the preceding two
sentences shall apply.
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The Rights Agreement also provides that, at any time prior to the public
announcement that an Acquiring Person or an Adverse Person has become such, the
Board may (i) redeem the Rights in whole, but not in part, at a price of $.01
per Right (the "Redemption Price") or (ii) amend the New Rights Agreement in any
respect other than any amendment which would reduce the Redemption Price,
shorten the Final Expiration Date or increase the Rights Purchase Price. At any
time after the public announcement that an Acquiring Person or Adverse Person
has become such, the Corporation may amend the Rights Agreement only in a manner
which would not adversely affect the holders of the Rights. Immediately upon the
action of the Board electing to redeem the Rights, the right to exercise the
Rights will terminate and the only right of the holders of Rights will be to
receive the Redemption Price.
The Purchase Price payable, and the number of shares of Series C Preferred
Stock or other securities or property issuable, upon exercise of the Rights are
subject to adjustment from time to time to prevent dilution as described in the
Rights Agreement. With certain exceptions, no adjustment in the Rights Purchase
Price will be required until cumulative adjustments require an adjustment of at
least 1% in such Rights Purchase Price. No fractional shares will be issued
(other than fractions which are integral multiples of one hundredth of a share,
which may, at the election of the Corporation, be evidenced by depositary
receipts), and in lieu thereof, an adjustment in cash will be made based on the
market price of the Series C Preferred Stock on the last trading date prior to
the date of exercise.
The Series C Preferred Stock purchasable upon exercise of the Rights will be
nonredeemable and junior to any outstanding shares of preferred stock of the
Corporation. Each share of Series C Preferred Stock will have a minimum
preferential quarterly dividend rate of $25 per share, but will be entitled to
receive, in the aggregate, a dividend of 100 times the dividend declared on the
shares of Common Stock. In the event of liquidation, the holders of the Series C
Preferred Stock will receive a minimum preferential liquidation payment of $100
per share, but will be entitled to receive an aggregate liquidation payment
equal to 100 times the payment made per share of Common Stock. Each share of
Series C Preferred Stock will have 100 votes, voting together with the Common
Stock. In the event of any merger, consolidation, or other transaction in which
shares of Common Stock are exchanged, each share of Series C Preferred Stock
will be entitled to receive 100 times the amount and the same type of
consideration received per share of Common Stock. The rights of the Series C
Preferred Stock as to dividends, liquidation and voting, and in the event of
mergers and consolidations, are protected by customary anti-dilution provisions.
Because of the nature of the Series C Preferred Stock's dividend, liquidation
and voting rights, the value of the interest in a share of Series C Preferred
Stock should approximate the value of one share of Common Stock.
The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire the
Corporation on terms not approved by the Board, except pursuant to an offer
conditioned on a substantial number of Rights being acquired. The Rights should
not interfere with any merger or other business combination approved by the
Board since the Rights may be redeemed by the Corporation at $.01 per Right
prior to the public announcement that a person has become an Acquiring Person or
an Adverse Person.
In connection with the settlement of certain litigation at the time of the
1988 Recapitalization, the Corporation agreed, subject to certain conditions, to
submit the question of whether to redeem the Rights to a stockholder vote three
years after consummation of the 1988 Recapitalization. At the stockholder
meeting held on May 8, 1991, the Corporation submitted such question to the
stockholders. There were 4,797,682 votes cast in favor of redemption, 30,443,533
votes cast against redemption and 1,863,275 abstentions. The proposal to redeem
the Rights accordingly was not adopted.
LIMITATIONS ON LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Certificate of Incorporation limits the liability of directors to the
fullest extent permitted by the Delaware General Corporation Law. In addition,
the Certificate of Incorporation provides that the Corporation shall indemnify
directors and officers of the Corporation to the fullest extent permitted by
such law.
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TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is Harris Trust and
Savings Bank.
CERTAIN UNITED STATES FEDERAL TAX
CONSEQUENCES FOR NON-U.S. STOCKHOLDERS
THE FOLLOWING DISCUSSION IS PROVIDED FOR GENERAL INFORMATION ONLY; IT DOES
NOT CONSIDER ALL U.S. FEDERAL TAX CONSEQUENCES THAT MAY BE RELEVANT TO A
PARTICULAR NON-U.S. STOCKHOLDER IN LIGHT OF SUCH STOCKHOLDER'S PARTICULAR TAX
POSITION AND DOES NOT DEAL WITH STATE, LOCAL OR FOREIGN TAX CONSEQUENCES. THIS
DISCUSSION IS BASED ON THE INTERNAL REVENUE CODE, EXISTING AND PROPOSED TREASURY
REGULATIONS, AND JUDICIAL AND ADMINISTRATIVE INTERPRETATIONS AS OF THE DATE
HEREOF, ALL OF WHICH ARE SUBJECT TO CHANGE. PROSPECTIVE INVESTORS ARE URGED TO
CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE U.S. FEDERAL, STATE AND LOCAL
TAX CONSEQUENCES OF OWNING AND DISPOSING OF SHARES OF COMMON STOCK, AS WELL AS
ANY TAX CONSEQUENCES RESULTING FROM THE LAWS OF ANY OTHER TAXING JURISDICTION.
GENERAL
This is a general discussion of certain U.S. federal income and estate tax
consequences of the ownership and disposition of shares of Common Stock by a
person that is a Non-U.S. Stockholder. For purposes of this discussion, a
"Non-U.S. Stockholder" means any person other than (i) an individual who is a
citizen or resident of the United States, (ii) a corporation, partnership, or
other entity created or organized in or under the laws of the United States or
any political subdivision thereof, or (iii) an estate or trust the income of
which is subject to U.S. federal income taxation regardless of its source.
DIVIDENDS
In the event that dividends are paid on the Common Stock, any such dividends
paid to a Non-U.S. Stockholder will be subject to U.S. federal income tax
withholding at a rate of 30% of the amount of the dividend (or such lower rate
as may be prescribed by an applicable income tax treaty). However, if the
dividend is effectively connected with the conduct of a U.S. trade or business
by the Non-U.S. Stockholder and the Non-U.S. Stockholder properly files Internal
Revenue Service ("IRS") Form 4224 (or other applicable form required by the IRS)
with the Corporation or its dividend-paying agent, then the dividend (i) will
not be subject to income tax withholding, and (ii) except to the extent that an
applicable income tax treaty provides otherwise, will be subject to U.S. federal
income tax at the regular graduated rates. In the case of a Non-U.S. Stockholder
that is a corporation, such effectively connected dividend income may also be
subject to the branch profits tax (which generally is imposed on a foreign
corporation on the repatriation from the United States of effectively connected
earnings and profits) at a 30% rate (or such lower rate as may be prescribed by
an applicable income tax treaty).
To determine the applicability of an income tax treaty providing for a lower
rate of income tax withholding, dividends paid to an address in a foreign
country are presumed under current Treasury regulations to be paid to a resident
of that country. The Corporation or its dividend-paying agent may generally rely
on the Non-U.S. Stockholder's foreign address of record as the basis for
allowing the benefit of a reduced treaty rate with respect to the dividends
being paid. However, proposed Treasury regulations which have not been finally
adopted would require Non-U.S. Stockholders to satisfy certain certification and
other requirements to obtain the benefit of any applicable income tax treaty
providing for a lower rate of withholding tax on dividends.
A Non-U.S. Stockholder that is eligible for a reduced rate of U.S.
withholding tax pursuant to an income tax treaty may obtain a refund of any
excess amounts currently withheld by filing an appropriate claim for refund with
the IRS.
The Corporation is required to report annually to the IRS and to each
Non-U.S. Stockholder the amount of dividends paid to, and the income tax
withheld with respect to, such stockholder. Such information may also be made
available by the IRS to the tax authorities of the country in which the Non-U.S.
Stockholder resides.
92
<PAGE>
DISPOSITION OF COMMON STOCK
Generally, a Non-U.S. Stockholder will not be subject to U.S. federal income
tax on any gain recognized upon the disposition of such stockholder's shares of
Common Stock unless (i) the Corporation is or has been a "U.S. real property
holding corporation" for federal income tax purposes (which the Corporation does
not believe that it is or is likely to become) and, since the Common Stock is
regularly traded on an established securities market, the Non-U.S. Stockholder
held, directly or indirectly, at any time during the five-year period ending on
the date of disposition, more than 5% of the Common Stock, (ii) the gain is
effectively connected with a U.S. trade or business carried on by the Non-U.S.
Stockholder or, if an income tax treaty applies, is attributable to a U.S.
permanent establishment maintained by the Non-U.S. Stockholder, (iii) the
Non-U.S. Stockholder is an individual who holds the Common Stock as a capital
asset, such stockholder is present in the United States for 183 days or more in
the taxable year of the disposition and either the Non-U.S. Stockholder has a
"tax home" in the United States for U.S. federal income tax purposes or the sale
is attributable to an office or other fixed place of business maintained by the
Non-U.S. Stockholder in the United States, or (iv) the Non-U.S. Stockholder is
subject to tax pursuant to the provisions of U.S. tax law applicable to certain
U.S. expatriates.
ESTATE TAX
Shares of Common Stock owned or treated as owned by an individual who is not
a citizen or resident (as specifically defined for U.S. federal estate tax
purposes) of the United States at the time of his or her death will be
includible in the individual's gross estate for U.S. federal estate tax
purposes, unless an applicable estate tax treaty provides otherwise. Such
individual's estate may be subject to U.S. federal estate tax on property
includible in the estate for U.S. federal tax purposes.
U.S. INFORMATION REPORTING REQUIREMENTS AND BACKUP WITHHOLDING
United States backup withholding (which generally is imposed at the rate of
31% on certain payments to persons that fail to furnish the information required
under the United States information reporting requirements) will generally not
apply to dividends paid on Common Stock to a non-U.S. holder at an address
outside the United States.
The payment of the proceeds from the disposition of Common Stock to or
through the United States office of a broker will be subject to information
reporting and backup withholding unless the holder, under penalties of perjury,
certifies, among other things, its status as a Non-U.S. Stockholder or otherwise
establishes an exemption. The payment of the proceeds from the disposition of
Common Stock to or through a non-U.S. office of a broker will generally, except
as noted below, not be subject to backup withholding and information reporting.
In the case of proceeds from a disposition of Common Stock paid to or through a
non-U.S. office of a broker that is (i) a U.S. person, (ii) a "controlled
foreign corporation" for United States federal income tax purposes or (iii) a
foreign person 50% or more of whose gross income from all sources for certain
periods was effectively connected with a United States trade or business,
information reporting (but not backup withholding) will apply unless the broker
has documentary evidence in its files that the owner is a Non-U.S. Stockholder
(unless the broker has actual knowledge to the contrary).
Any amounts withheld under the backup withholding rules from a payment to a
Non-U.S. Stockholder will be refunded (or credited against the Non-U.S.
Stockholder's United States federal income tax liability, if any), provided that
the required information is furnished to the IRS.
The backup withholding and information reporting rules are currently under
review by the Treasury Department and their application to the Common Stock is
subject to change.
93
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in an agreement among the
Corporation, the Selling Stockholder and the U.S. Underwriters (the "U.S.
Underwriting Agreement"), the Corporation and the Selling Stockholder have
agreed to sell to each of the U.S. Underwriters named below (the "U.S.
Underwriters"), and each of the U.S. Underwriters, for whom Salomon Brothers
Inc, Lazard Freres & Co. and Smith Barney Shearson Inc. are acting as
representatives (the "U.S. Representatives"), has severally agreed to purchase
from the Corporation and the Selling Stockholder the number of shares of Common
Stock set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
U.S. UNDERWRITER SHARES
- ------------------------------------------------------------------------------- -------------
<S> <C>
Salomon Brothers Inc...........................................................
Lazard Freres & Co.............................................................
Smith Barney Shearson Inc......................................................
-------------
Total........................................................................
-------------
-------------
</TABLE>
In the U.S. Underwriting Agreement, the several U.S. Underwriters have
agreed, subject to the terms and conditions set forth therein, to purchase all
8,500,000 shares of Common Stock offered hereby in the U.S. Offering (other than
the shares of Common Stock covered by the over-allotment options described
below) if any such shares are purchased. In the event of a default by any U.S.
Underwriter, the U.S. Underwriting Agreement provides that, in certain
circumstances, purchase commitments of the nondefaulting U.S. Underwriters may
be increased or the U.S. Underwriting Agreement may be terminated. The
Corporation has been advised by the U.S. Representatives that the several U.S.
Underwriters propose initially to offer such shares at the public offering price
set forth on the cover page of this Prospectus, and to certain dealers at such
price, less a concession not in excess of $ per share. The U.S. Underwriters
may allow, and such dealers may reallow, a concession not in excess of $ per
share to other dealers. After this public offering, the public offering price
and such concessions may be changed.
The Corporation and the Selling Stockholder have entered into an
International Underwriting Agreement with the International Underwriters named
therein (the "International Underwriters," and together with the U.S.
Underwriters, the "Underwriters"), for whom Salomon Brothers International
Limited, Lazard Brothers & Co., Limited and Smith Barney Shearson Inc., are
acting as representatives (the "International Representatives"), providing for
the concurrent offer and sale of 1,500,000 shares of Common Stock outside of the
United States and Canada. Both the U.S. Underwriting Agreement and the
International Underwriting Agreement provide that the obligations of the U.S.
Underwriters and the International Underwriters are such that if any of the
shares of Common Stock are purchased by the U.S. Underwriters pursuant to the
U.S. Underwriting Agreement or by the International Underwriters pursuant to the
International Underwriting Agreement, all the shares of Common Stock agreed to
be purchased by either the U.S. Underwriters or the International Underwriters,
as the case may be, pursuant to their respective agreements must be so
purchased. The initial offering price and underwriting discounts for the U.S.
Offering and the International Offering will be identical. The closing of the
U.S. Offering is conditioned upon the closing of the International Offering, and
the closing of the International Offering is conditioned upon the closing of the
U.S. Offering.
Each U.S. Underwriter has severally agreed that, as part of the distribution
of the 8,500,000 shares of Common Stock offered by the U.S. Underwriters, (i) it
is not purchasing any shares of Common Stock for the account of anyone other
than a United States or Canadian Person and (ii) it has not offered or sold, and
will not offer or sell, directly or indirectly, any shares of Common Stock or
distribute this Prospectus to any person outside the United States or Canada or
to anyone other than a United States or Canadian Person. Each International
Underwriter has severally agreed that, as part of the distribution of the
1,500,000 shares of Common Stock by the International Underwriters, (i) it is
not purchasing any shares of Common Stock for the account of any United States
or Canadian Person and (ii) it has not offered or sold, and will not offer or
sell, directly or indirectly, any shares of Common Stock or distribute
94
<PAGE>
any Prospectus relating to the International Offering to any person within the
United States or Canada or to any United States or Canadian Person. The
foregoing limitations do not apply to stabilization transactions or to certain
other transactions specified in the Agreement between U.S. Underwriters and
International Underwriters. "United States or Canadian Person" means any person
who is a national or resident of the United States or Canada, any corporation,
partnership or other entity created or organized in or under the laws of the
United States or Canada, or any political subdivision thereof, any estate or
trust the income of which is subject to United States or Canadian federal income
taxation, regardless of the source of its income (other than a foreign branch of
any United States or Canadian Person), and includes any United States or
Canadian branch of a person other than a United States or Canadian Person.
Any offer of the Common Stock in Canada will be made only pursuant to an
exemption from the registration and qualification requirements in any
jurisdiction in Canada in which such offer is made.
The Corporation and the Selling Stockholder have each granted to the U.S.
Underwriters and the International Underwriters options, exercisable during the
30-day period after the date of this Prospectus, to purchase up to 637,500 and
112,500 additional shares of Common Stock, respectively, at the same price per
share, less underwriting discount as the initial 8,500,000 shares of Common
Stock to be purchased by the U.S. Underwriters. The Underwriters may exercise
such options only to cover over-allotments, if any, made in connection with the
Offering. Either or both options may be exercised at any time up to 30 days
after the date of this Prospectus. To the extent that the Underwriters exercise
such options, each Underwriter will have a firm commitment, subject to certain
conditions, to purchase a number of option shares proportionate to such
Underwriter's initial commitment.
Pursuant to the Agreement between U.S. Underwriters and International
Underwriters, sales may be made between the U.S. Underwriters and the
International Underwriters of such number of shares of Common Stock as may be
mutually agreed. The price of any shares of Common Stock so sold shall be the
initial public offering price, less an amount not greater than the concession to
securities dealers. To the extent that there are sales between the U.S.
Underwriters and the International Underwriters pursuant to the Agreement
between U.S. Underwriters and International Underwriters, the number of shares
initially available for sale by the U.S. Underwriters or by the International
Underwriters may be more or less than the amount appearing on the cover page of
this Prospectus.
The U.S. and International Underwriting Agreements provide that the
Corporation and the Selling Stockholder will indemnify the several U.S.
Underwriters and International Underwriters against certain liabilities,
including liabilities under the Securities Act, or contribute to payments the
U.S. Underwriters and the International Underwriters may be required to make in
respect thereof.
The Corporation has agreed not to sell, or otherwise dispose of, or announce
the offering of, any shares of Common Stock, or any securities convertible into,
or exchangeable for, or exercisable into, shares of Common Stock, except the
shares of Common Stock offered in the Offering, for a period of 120 days from
the date hereof without the prior written consent of the U.S. Representatives
and the International Representatives; provided, however, the Corporation may
issue and sell Common Stock (or options exercisable for Common Stock) pursuant
to any employee or non-employee director stock option plan or stock ownership
plan of the Corporation in effect on the date hereof and the Corporation may
issue Common Stock or any securities convertible into, or exchangeable for, or
exercisable into shares of Common Stock pursuant to the terms of any securities
outstanding on the date hereof or other obligations binding upon the Corporation
and in effect on the date hereof.
The Selling Stockholder has agreed not to sell, or otherwise dispose of, or
announce the offering of, any shares of Common Stock, or any securities
convertible into, or exchangeable for, or exercisable into, shares of Common
Stock, for a period of 120 days from the date hereof, without the prior written
consent of the U.S. Representatives and the International Representatives,
except for the shares of Common Stock offered in the Offering and except that at
any time after 90 days after the date hereof, Water Street may distribute any
such shares and securities to the partners in Water Street. In the event of any
such distribution by Water Street, the partners (other than Goldman, Sachs &
Co.) would not be subject to the restriction on selling shares of Common Stock
during the remainder of the 120-day period. The partners
95
<PAGE>
in Water Street shall not request a demand registration of such shares or
securities for a period of 120 days from the date hereof without the prior
written consent of the U.S. Representatives and the International
Representatives. See "Certain Relationships and Related Transactions --
Agreement with Water Street Entities."
From April 1991 to May 1993, Salomon Brothers Inc ("Salomon") and Lazard
Freres & Co.
("Lazard") advised the Corporation in connection with the development and
implementation of the Restructuring for which they received customary fees and
reimbursement of expenses. Salomon has also provided other financial advisory
and investment banking services to the Corporation from time to time including,
during the past two years, with respect to the divestiture of DAP and certain
business strategy issues for which it received customary fees and reimbursement
of expenses. In addition, Smith Barney Shearson Inc. acted as financial advisor
to certain holders of the Company's subordinated debt in connection with the
Restructuring and received customary fees and reimbursement of expenses.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Corporation by Kirkland & Ellis, Chicago, Illinois. Certain legal
matters will be passed upon for the Underwriters by Wachtell, Lipton, Rosen &
Katz, New York, New York.
96
<PAGE>
EXPERTS
The financial statements and schedules included in this Prospectus and
elsewhere in the registration statement have been audited by Arthur Andersen &
Co., independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports. Reference is made to said reports, which (1) for
the Restructured Company, includes an explanatory paragraph with respect to the
asbestos litigation as discussed in Notes to the Financial Statements
- --"Litigation" note; and (2) for the Predecessor Company, includes an
explanatory paragraph with respect to the asbestos litigation as discussed in
Notes to the Financial Statements -- "Litigation" note and an explanatory
paragraph with respect to the changes in the methods of accounting for post
retirement benefits other than pensions and accounting for income taxes as
discussed in Notes to Financial Statements -- "Cumulative Effect of Changes in
Accounting Principles" note.
ADDITIONAL INFORMATION
The Corporation has filed with the Securities and Exchange Commission (the
"Commission" or the "SEC") a Registration Statement on Form S-1 (the
"Registration Statement") (which term shall encompass all amendments, exhibits
and schedules thereto) under the Securities Act of 1933, as amended (the
"Securities Act"), with respect to the Common Stock being offered hereby. This
Prospectus does not contain all the information set forth in the Registration
Statement, certain parts of which are omitted in accordance with the rules and
regulations of the Commission, and to which reference is hereby made. Such
additional information can be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the following regional offices of
the Commission: 500 W. Madison Street, Suite 1400, Chicago, Illinois 60661; and
Seven World Trade Center, New York, New York 10048. Copies of such material can
be obtained by mail from the public reference section of the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates. Statements made in this Prospectus as to the contents of any contract,
agreement or other document referred to are not necessarily complete. With
respect to each such contract, agreement or other document filed as an exhibit
to the Registration Statement, reference is made to the exhibit for a more
complete description of the matter involved, and each such statement shall be
deemed qualified in its entirety by such reference.
The Corporation is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith, files periodic reports and other information with the
Commission. Such reports and other information filed with the Commission, as
well as the Registration Statement, can be inspected and copied at the public
reference facilities of the Commission at 450 Fifth Street, N.W., Washington,
D.C. 20549, and at the Commission's regional offices located at Northwestern
Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661-2511, and Seven World Trade Center, New York, New York 10048. Copies of
such material can also be obtained by mail from the Public Reference Section of
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. Such reports and other information with respect to the Corporation are
available for inspection at the offices of the New York Stock Exchange, Inc., 20
Broad Street, New York, New York 10005 and the Chicago Stock Exchange, Inc., One
Financial Place, 440 South LaSalle Street, Chicago, Illinois 60605.
97
<PAGE>
USG CORPORATION
------------------------
INDEX TO FINANCIAL STATEMENTS
On May 6, 1993, the Corporation completed the Restructuring through
implementation of the Prepackaged Plan as described elsewhere in this
Prospectus. See "Prospectus Summary" and "The Restructuring." The consolidated
financial statements, notes to financial statements and supplementary financial
data for the period of May 7 through December 31, 1993, presented on pages F-1
through F-36, report the financial results for the restructured USG Corporation.
As a result of the Restructuring and implementation of fresh start accounting,
these restructured company financial results are not comparable to results
reported in the periods prior to May 7, 1993 for the predecessor USG Corporation
which are presented separately on pages F-37 through F-80. Because the
Restructuring was implemented on May 6, 1993, the Restructuring transaction and
accounting adjustments associated with the implementation of fresh start
accounting are reflected in the results of the predecessor company. All
historical financial information presented on pages F-1 through F-82 should be
read in conjunction with the information included in this Prospectus under
"Capitalization," "Pro Forma Condensed Consolidated Financial Statements," and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
RESTRUCTURED COMPANY:
Consolidated Statement of Earnings -- May 7 through December 31, 1993.......................... F-1
Consolidated Balance Sheet -- as of December 31, 1993.......................................... F-2
Consolidated Statement of Cash Flows -- May 7 through December 31, 1993........................ F-3
Notes to Financial Statements.................................................................. F-4
Report of Independent Public Accountants....................................................... F-28
Schedule V -- Property, Plant and Equipment.................................................... F-29
Schedule VI -- Accumulated Depreciation and Depletion of Property, Plant and Equipment......... F-30
Schedule VIII -- Valuation and Qualifying Accounts............................................. F-31
Schedule IX -- Short-Term Borrowings........................................................... F-32
Schedule X -- Supplemental Statement of Earnings Information................................... F-33
Supplemental Note on Financial Information for United States Gypsum Company.................... F-34
Report of Independent Public Accountants with Respect to Supplemental Note and Financial
Statement Schedules........................................................................... F-35
PREDECESSOR COMPANY:
Consolidated Statement of Earnings -- January 1 through May 6, 1993 and the years ended
December 31, 1992 and 1991.................................................................... F-36
Consolidated Balance Sheet -- as of May 6, 1993 and December 31, 1992.......................... F-37
Consolidated Statement of Cash Flows -- January 1 through May 6, 1993 and the years ended
December 31, 1992 and 1991.................................................................... F-38
Notes to Financial Statements.................................................................. F-39
Report of Independent Public Accountants....................................................... F-71
Schedule V -- Property, Plant and Equipment.................................................... F-72
Schedule VI -- Accumulated Depreciation and Depletion of Property, Plant and Equipment......... F-73
Schedule VIII -- Valuation and Qualifying Accounts............................................. F-74
Schedule IX -- Short-Term Borrowings........................................................... F-75
Schedule X -- Supplemental Statement of Earnings Information................................... F-76
Supplemental Note on Financial Information for United States Gypsum Company F-77
Report of Independent Public Accountants with Respect to Supplemental Note and Financial
Statement Schedules........................................................................... F-78
SELECTED QUARTERLY FINANCIAL DATA................................................................ F-79
COMPARATIVE FIVE-YEAR SUMMARY.................................................................... F-80
</TABLE>
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.
98
<PAGE>
USG CORPORATION
(RESTRUCTURED COMPANY)
CONSOLIDATED STATEMENT OF EARNINGS
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MAY 7
THROUGH
DECEMBER 31,
1993
--------------
<S> <C>
Net Sales......................................................................................... $ 1,325
Cost of products sold............................................................................. 1,062
-------
Gross Profit...................................................................................... 263
Selling and administrative expenses............................................................... 149
Amortization of Excess Reorganization Value....................................................... 113
-------
Operating Profit.................................................................................. 1
Interest expense.................................................................................. 92
Interest income................................................................................... (4)
Other income, net................................................................................. (8)
-------
Loss Before Taxes on Income and Extraordinary Loss................................................ (79)
Taxes on income................................................................................... 29
-------
Loss Before Extraordinary Loss.................................................................... (108)
Extraordinary loss, net of taxes.................................................................. (21)
-------
Net Loss.......................................................................................... (129)
-------
-------
Loss Per Common Share:
Before extraordinary loss....................................................................... $ (2.90 )
Extraordinary loss.............................................................................. (0.56 )
-------
Net Loss Per Common Share......................................................................... (3.46 )
-------
-------
</TABLE>
THE NOTES TO FINANCIAL STATEMENTS ON PAGES F-4 THROUGH F-27 ARE AN INTEGRAL PART
OF THIS STATEMENT.
F-1
<PAGE>
USG CORPORATION
(RESTRUCTURED COMPANY)
CONSOLIDATED BALANCE SHEET
(DOLLARS IN MILLIONS)
ASSETS
<TABLE>
<CAPTION>
AS OF
DECEMBER 31,
1993
--------------
<S> <C>
Current Assets:
Cash and cash equivalents (primarily time deposits)............................................... $ 211
Receivables (net of reserves of $13).............................................................. 264
Inventories....................................................................................... 145
-------
Total current assets.......................................................................... 620
-------
Property, Plant and Equipment, Net................................................................ 754
Excess Reorganization Value (net of accumulated amortization of $113)............................. 735
Other Assets...................................................................................... 54
-------
Total assets.................................................................................. 2,163
-------
-------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.................................................................................. $ 104
Accrued expenses.................................................................................. 208
Notes payable..................................................................................... 2
Long-term debt maturing within one year........................................................... 165
Taxes on income................................................................................... 20
-------
Total current liabilities..................................................................... 499
-------
Long-Term Debt.................................................................................... 1,309
Deferred Income Taxes............................................................................. 180
Other Liabilities................................................................................. 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 37,158,085 (after deducting
27,876 shares held in treasury).................................................. 4
Capital received in excess of par value........................................................... --
Deferred currency translation..................................................................... (9)
Reinvested earnings/(deficit)..................................................................... (129)
-------
Total stockholders' equity/(deficit).......................................................... (134)
-------
Total liabilities and stockholders' equity.................................................... 2,163
-------
-------
</TABLE>
THE NOTES TO FINANCIAL STATEMENTS ON PAGES F-4 THROUGH F-27 ARE AN INTEGRAL PART
OF THIS STATEMENT.
F-2
<PAGE>
USG CORPORATION
(RESTRUCTURED COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
MAY 7
THROUGH
DECEMBER 31,
1993
---------------
<S> <C>
Cash Flows from Operating Activities:
Net loss.......................................................................................... $ (129)
Adjustments to reconcile net loss to net cash:
Amortization of Excess Reorganization Value..................................................... 113
Extraordinary loss.............................................................................. 21
Depreciation, depletion and amortization........................................................ 44
Postretirement expense.......................................................................... 7
Deferred income taxes........................................................................... 22
Net gain on asset dispositions.................................................................. (9)
Decrease in working capital:
Receivables..................................................................................... 51
Inventories..................................................................................... 4
Payables........................................................................................ 14
Accrued expenses................................................................................ 37
Decrease in other assets.......................................................................... 7
Increase in other liabilities..................................................................... 5
Other, net........................................................................................ (4)
------
Net cash flows from operating activities...................................................... 183
------
Cash Flows from Investing Activities:
Capital expenditures.............................................................................. (29)
Net proceeds from asset dispositions.............................................................. 29
------
Net cash flows from investing activities........................................................ --
------
Cash Flows from Financing Activities:
Issuance of debt.................................................................................. 36
Repayment of debt................................................................................. (57)
------
Net cash flows to financing activities........................................................ (21)
------
Net Increase in Cash and Cash Equivalents......................................................... 162
------
Cash and cash equivalents as of beginning of period............................................... 49
------
Cash and cash equivalents as of end of period..................................................... 211
------
------
Supplemental Cash Flow Disclosures:
Interest paid $ 73
Income taxes paid................................................................................. 5
------
------
</TABLE>
THE NOTES TO FINANCIAL STATEMENTS ON PAGES F-4 THROUGH F-27 ARE AN INTEGRAL PART
OF THIS STATEMENT.
F-3
<PAGE>
USG CORPORATION
(RESTRUCTURED COMPANY)
NOTES TO FINANCIAL STATEMENTS
(TERMS IN INITIAL CAPITAL LETTERS ARE DEFINED ELSEWHERE IN THIS PROSPECTUS)
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 federal bankruptcy laws (the "Prepackaged Plan") which was
confirmed on April 23, 1993 by the Bankruptcy Court. In the Restructuring, the
Corporation (i) converted approximately $1.4 billion of subordinated debt and
accrued interest into Common Stock and warrants to purchase Common Stock, (ii)
converted approximately $340 million of its bank obligations into 10 1/4% Senior
Notes due 2002 ("Senior 2002 Notes") and (iii) extended the maturities of its
remaining Bank Debt and certain public debt. Upon consummation of the
Restructuring, all previously existing defaults upon senior securities were
waived or cured. None of the subsidiaries of the Corporation were part of this
proceeding and there was no impact on trade creditors of the Corporation's
subsidiaries. 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. See
"Predecessor Company -- Notes to Financial Statements -- Financial Restructuring
and Fresh Start Accounting" notes for information on the terms and
implementation of the Prepackaged Plan and fresh start accounting.
PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS
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.
F-4
<PAGE>
USG CORPORATION
(RESTRUCTURED COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
USG CORPORATION
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF EARNINGS
YEAR ENDED DECEMBER 31, 1993
(UNAUDITED)
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
TOTAL
BEFORE PRO FORMA
ADJUSTMENTS ADJUSTMENTS PRO FORMA
------------- ------------- -----------
<S> <C> <C> <C>
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)
------------- ------ -----------
------------- ------ -----------
<FN>
- ------------------------
(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.
</TABLE>
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 expected to
be prepaid, redeemed or purchased in 1994 in connection with the Corporation's
planned public offering of common stock and issuance of new senior notes. See
"Subsequent Event" note for more information on the planned public offering of
stock and issuance of new senior notes.
RESEARCH AND DEVELOPMENT
Research and development expenditures are charged to earnings as incurred
and amounted to $10 million in the period of May 7 through December 31, 1993.
F-5
<PAGE>
USG CORPORATION
(RESTRUCTURED COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
TAXES ON INCOME AND DEFERRED INCOME TAXES
Loss before taxes on income and extraordinary loss consisted of the
following (dollars in millions):
<TABLE>
<CAPTION>
May 7
through
December 31,
1993
---------------
<S> <C>
U.S..................................................................................... $ (72)
Foreign................................................................................. (7)
-----
Total................................................................................... (79)
-----
-----
</TABLE>
Taxes on income consisted of the following (dollars in millions):
<TABLE>
<CAPTION>
May 7
through
December 31,
1993
-----------------
<S> <C>
Current:
U.S. Federal.......................................................................... $ 12
Foreign............................................................................... 5
State................................................................................. 1
---
18
---
Deferred:
U.S. Federal.......................................................................... 11
Foreign............................................................................... --
State................................................................................. --
---
11
---
Total................................................................................... 29
---
---
</TABLE>
The difference between the statutory U.S. Federal income tax/(benefit) rate
and the Corporation's effective income tax rate is summarized as follows:
<TABLE>
<CAPTION>
MAY 7
THROUGH
DECEMBER 31,
1993
---------------
<S> <C>
Statutory U.S. Federal income tax/(benefit) rate........................................ (35.0)%
Excess Reorganization Value amortization................................................ 49.6
Foreign tax rate differential........................................................... 11.4
Statutory rate adjustment to historical deferred taxes.................................. 4.0
Valuation allowance adjustment.......................................................... 3.3
Other, net.............................................................................. 3.4
-----
Effective income tax rate............................................................... 36.7
-----
-----
</TABLE>
F-6
<PAGE>
USG CORPORATION
(RESTRUCTURED COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Temporary differences and carryforwards which give rise to current and
long-term deferred tax (assets)/liabilities as of December 31, 1993 were as
follows (dollars in millions):
<TABLE>
<CAPTION>
As of
December 31,
1993
---------------
<S> <C>
Property, plant and equipment........................................................... $ 164
Debt discount........................................................................... 19
------
Deferred tax liabilities................................................................ 183
------
Pension and retiree medical benefits.................................................... (90)
Reserves not deductible until paid...................................................... (61)
Other................................................................................... (8)
------
Deferred tax assets before valuation allowance.......................................... (159)
Valuation allowance..................................................................... 90
------
Deferred tax assets..................................................................... (69)
------
Net deferred tax liabilities............................................................ 114
------
------
</TABLE>
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 (the "Code") to the Corporation's 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 $90 million remaining from 1992
after using approximately $23 million to offset U.S. taxable income in 1993 and
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 $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 $79 million as of December 31, 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 inventories are valued under the last-in, first-out ("LIFO") method. As
of December 31, 1993, the LIFO values of these inventories were $103 million and
would have been the same if they were valued under the first-in, first-out
("FIFO") and
F-7
<PAGE>
USG CORPORATION
(RESTRUCTURED COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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):
<TABLE>
<CAPTION>
As of
December 31,
1993
---------------
<S> <C>
Finished goods and work-in-process...................................................... $ 84
Raw materials........................................................................... 53
Supplies................................................................................ 8
-----
Total................................................................................... 145
-----
-----
</TABLE>
The LIFO value of U.S. domestic inventories under fresh start accounting
exceeded that computed for U.S. Federal income tax purposes by $25 million as of
December 31, 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):
<TABLE>
<CAPTION>
As of
December 31,
1993
---------------
<S> <C>
Land and mineral deposits............................................................... $ 61
Buildings and realty improvements....................................................... 233
Machinery and equipment................................................................. 496
-----
790
Reserves for depreciation and depletion................................................. (36)
-----
Total................................................................................... 754
-----
-----
</TABLE>
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 $22 million in the
period of May 7 through December 31, 1993. 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, 1993 were as
follows (dollars in millions):
<TABLE>
<CAPTION>
Minimum
Lease
Payments
-----------
<S> <C>
1994........................................................................................ $ 24
1995........................................................................................ 21
1996........................................................................................ 16
1997........................................................................................ 12
1998........................................................................................ 11
Thereafter.................................................................................. 35
-----
Aggregate minimum payments.................................................................. 119
-----
-----
</TABLE>
F-8
<PAGE>
USG CORPORATION
(RESTRUCTURED COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
INDEBTEDNESS
Total debt, including currently maturing debt, consisted of the following
(dollars in millions):
<TABLE>
<CAPTION>
As of
December 31,
1993
--------------
<S> <C>
SECURED DEBT:
Bank Term Loan, installments due 1997 through 2000...................................... $ 448
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......................................................... 478
7 7/8% Sinking Fund Debentures due 2004............................................... 36
8 3/4% Sinking Fund Debentures due 2017............................................... 200
Other secured debt, average interest rate 8.0%, varying payments through 1999........... 31
UNSECURED DEBT:
Industrial revenue bonds, 5.9% ranging to 8.0%, due through 2014........................ 38
-------
Total principal amount of debt.......................................................... 1,531
Less unamortized reorganization discount................................................ (55)
-------
Total carrying amount of debt........................................................... 1,476
-------
-------
</TABLE>
As of December 31, 1993, the Corporation and its subsidiaries had $1,531
million total principal amount of debt (before unamortized reorganization
discount) on a consolidated basis. Of such total debt, $105 million represented
direct borrowings by the subsidiaries, including $38 million of industrial
revenue bonds, $36 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, $27 million of debt (primarily project financing)
incurred by the Corporation's foreign subsidiaries other than CGC, $2 million of
working capital borrowings by CGC, and $2 million of other long-term borrowings
by CGC.
The Credit Agreement includes a cash sweep mechanism under which excess cash
as of the end of any year, calculated in accordance with the Credit Agreement,
must be used to pay debt within the following year. As of December 31, 1993,
such excess cash amounted to $158 million. Accordingly, $158 million of
long-term debt was reclassified to currently maturing long-term debt.
On August 10, 1993, the Corporation issued $138 million of Senior 2002 Notes
in exchange for $92 million of Bank Term Loans due 1994 through 1996 and $46
million of Capitalized Interest Notes due 2000. The Corporation did not receive
any cash proceeds from the issuance of these securities. In connection with this
transaction, the Credit Agreement was modified, providing for the following
changes: (i) scheduled Bank Term Loan amortization payments of $95 million due
in 1994, 1995 and 1996 were eliminated ($3 million was added to the final
maturity of the Bank Term Loan due in 2000); (ii) USG Interiors paid $9 million
of Capitalized Interest Notes due in 1998; and (iii) the cash sweep mechanism
was modified to permit the use of up to $165 million of cash, otherwise subject
to mandatory Bank Term Loan prepayments in 1994, 1995 and 1996, for payment or
purchase of senior debt with maturities prior to January 1, 1999, or for the
prepayment of Bank Term Loans, at the discretion of the Corporation.
F-9
<PAGE>
USG CORPORATION
(RESTRUCTURED COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Bank Term Loan 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
Loan. 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 Loan was 5.3% in the
period of May 7 through December 31, 1993.
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 Credit Agreement, as amended in
accordance with the Prepackaged Plan, also requires the Corporation, beginning
January 1, 1995, to satisfy certain financial covenants.
The fair market value of debt as of December 31, 1993 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.
Aggregate, presently scheduled maturities of long-term debt, after the
assumed effect of prepayments pursuant to the aforementioned cash sweep
mechanism and excluding other amounts classified as current liabilities, are $9
million, $20 million, $148 million and $153 million in the years 1995 through
1998, respectively.
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 May 7 through December 31, 1993. Net pension expense included the
following components (dollars in millions):
<TABLE>
<CAPTION>
May 7
through
December 31,
1993
-----------------
<S> <C>
Service cost-benefits earned during the period.......................................... $ 7
Interest cost on projected benefit obligation........................................... 21
Actual return on plan assets............................................................ (37)
Net amortization/(deferral)............................................................. 16
---
Net pension expense..................................................................... 7
---
---
</TABLE>
F-10
<PAGE>
USG CORPORATION
(RESTRUCTURED COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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, 1993. The following
table presents a reconciliation of the total assets of the pension plans to the
projected benefit obligation (dollars in millions):
<TABLE>
<CAPTION>
As of
December 31,
1993
---------------
<S> <C>
Amount of assets available for benefits:
Funded assets of the plans at fair market value....................................... $ 400
Accrued pension expense............................................................... 25
-----
Total assets of the plans............................................................... 425
-----
Present value of estimated pension obligation:
Vested benefits....................................................................... 329
Nonvested benefits.................................................................... 27
-----
Accumulated benefit obligation.......................................................... 356
Additional benefits based on projected future salary increases.......................... 85
-----
Projected benefit obligation............................................................ 441
-----
Projected benefit obligation in excess of assets........................................ (16)
-----
-----
</TABLE>
The projected benefit obligation in excess of assets consisted of an
unrecognized net loss 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 period
of May 7 through December 31, 1993. The assumed weighted average discount rate
used in determining the accumulated benefit obligation was 7% and the rate of
increases in projected future compensation levels was 5%.
F-11
<PAGE>
USG CORPORATION
(RESTRUCTURED COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 period of May 7 through December 31, 1993 (dollars in
millions):
<TABLE>
<CAPTION>
May 7
through
December 31,
1993
---------------
<S> <C>
Service cost of benefits earned............................................................. $ 4
Interest on accumulated postretirement benefit obligation................................... 9
------
Net periodic postretirement benefit cost.................................................... 13
------
------
</TABLE>
The status of the Corporation's accrued postretirement benefit cost as of
December 31, 1993 was as follows (dollars in millions):
<TABLE>
<CAPTION>
As of
December 31,
1993
---------------
<S> <C>
Accumulated postretirement benefit obligation:
Retirees.................................................................................. $ 123
Fully eligible active participants........................................................ 14
Other active participants................................................................. 66
------
203
Unrecognized net loss....................................................................... (2)
------
Accrued postretirement benefit cost liability recognized on the Consolidated Balance
Sheet...................................................................................... 201
------
------
</TABLE>
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 11% as of December 31, 1993 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 as of December 31, 1993 by $22 million and increase the net periodic
postretirement benefit cost for the period of May 7 through December 31, 1993 by
$2 million. The assumed discount rate used in determining the accumulated
postretirement benefit obligation was 7%.
COMMITMENTS AND CONTINGENCIES
The Corporation employs a variety of off-balance sheet financial instruments
to reduce its exposure to fluctuations in interest rates, foreign currency
exchange rates and energy costs. These instruments consists primarily of
interest rate caps and swaps, foreign currency forward exchange contracts and
energy price swaps and option agreements. The Corporation designates interest
rate swaps as hedges of LIBOR-based bank debt, and accrues as interest expense
the differential to be paid or received under the agreements as rates change
over the life of the contracts. Gains and losses arising from foreign currency
forward contracts offset gains and losses resulting from the underlying hedged
transactions. Upon settlement of energy price contracts, the resulting gain or
loss is included in related manufacturing
F-12
<PAGE>
USG CORPORATION
(RESTRUCTURED COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
cost. The Corporation continually monitors its positions with, and the credit
quality of, the financial institutions which are counterparties to its
off-balance sheet financial instruments and does not anticipate non-performance
by the counterparties.
As of December 31, 1993, the Corporation had approximately $500 million
(notional amount) of interest rate contracts outstanding, extending up to three
years, and approximately $50 million (combined notional amount) of foreign
currency and energy price contracts outstanding, 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.
MANAGEMENT PERFORMANCE PLAN
On May 6, 1993, all outstanding stock options were cancelled without
consideration and certain shares of restricted and deferred stock were
cashed-out pursuant to "change in control" provisions contained in the
Management Performance Plan (the "Performance Plan"). As of December 31, 1993,
restricted stock and awards for deferred stock yet to be issued (totaling 25,259
shares) remained outstanding as a consequence of certain waivers of the change
in control event by senior members of management.
As permitted by the Prepackaged Plan, 2,788,350 common shares were reserved
for future issuance in conjunction with stock options, all of which remained in
reserve as of December 31,1993. Options for 1,673,000 common shares were granted
on June 1, 1993, leaving an additional 1,115,350 common shares available for
future grants. The options granted on June 1, 1993 become exercisable in the
years 1994 through 1996 at an exercise price of $10.3125 per share.
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, a distribution of one right (the "Rights") 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 were
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.
Under the terms of the Rights Agreement and subject to certain exceptions
for Water Street and its affiliates, generally the Rights become exercisable (i)
10 days following the date of a public announcement that a person or group of
affiliated or associated persons (an "Acquiring Person"), other than the
Corporation, any employee benefit plan of the Corporation, any entity holding
Common Stock for or pursuant to the terms of any such plan, has beneficial
ownership (as defined in the Rights Agreement) of 20% or more of the then
outstanding Common Stock, (ii) 10 days following the date of a public
announcement that a person or group of affiliated or associated persons (an
"Adverse Person") has beneficial ownership of 10% or more of the then
outstanding Common Stock, the acquisition of which has been determined by the
Board to present an actual threat of an acquisition of the Corporation that
would not be in the best interest of the Corporation's stockholders or (iii) 10
days following the date of commencement of, or public announcement of, a tender
offer or exchange offer for 30% or more of the
F-13
<PAGE>
USG CORPORATION
(RESTRUCTURED COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Common Stock. 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 in a merger
or other business combination involving an Acquiring Person or an Adverse Person
and the Common Stock remains outstanding and unchanged or in the event that an
Acquiring Person or an Adverse Person engages in one of a number of self-dealing
transactions specified in the Rights Agreement, proper provision will be made so
that each holder of a Right, other than Rights that are or were beneficially
owned (as defined in the Rights Agreement) by the Acquiring Person or the
Adverse Person, as the case may be, on the earliest of the Distribution Date,
the date the Acquiring Person acquires 20% or more of the outstanding Common
Stock or the date the Adverse Person becomes such (which will thereafter be
void), 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. In addition, under
certain circumstances the Board has the option of exchanging all or part of the
Rights (excluding void Rights) for Common Stock in the manner described in the
Rights Agreement. The Rights Agreement also contains a so-called "flip-in"
feature which provides that if any person or group of affiliated or associated
persons becomes an Adverse Person, then the provisions of the preceding two
sentences shall apply.
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"), were
issued to holders of the Old Junior Subordinated Debentures in addition to the
shares of common stock issued to such holders, all as provided by the
Prepackaged Plan. 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, 1993, 2,601,619
Warrants were outstanding.
F-14
<PAGE>
USG CORPORATION
(RESTRUCTURED COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
STOCKHOLDERS' EQUITY
Changes in stockholders' equity are summarized as follows (dollars in
millions):
<TABLE>
<CAPTION>
May 7
through
December 31,
1993
---------------
<S> <C>
COMMON STOCK:
Beginning Balance........................................................................... $ 4
------
Ending Balance.............................................................................. 4
------
CAPITAL RECEIVED IN EXCESS OF PAR VALUE:
Beginning Balance........................................................................... --
------
Ending Balance.............................................................................. --
------
DEFERRED CURRENCY TRANSLATION:
Beginning Balance........................................................................... --
Change during the period.................................................................... (9)
------
Ending Balance.............................................................................. (9)
------
REINVESTED EARNINGS/(DEFICIT):
Beginning Balance........................................................................... --
Net earnings/(loss)......................................................................... (129)
------
Ending Balance.............................................................................. (129)
------
Total stockholders' equity/(deficit)........................................................ (134)
------
------
</TABLE>
As of December 31, 1993, there were 27,876 shares of $0.10 par value common
stock held in treasury, which were acquired through the forfeiture of restricted
stock.
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 $625 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
F-15
<PAGE>
USG CORPORATION
(RESTRUCTURED COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 expenditures for all asbestos-related matters,
including property damage, personal injury, insurance coverage litigation and
related expenses, exceeded aggregate insurance payments by $10.9 million in
1991, $25.8 million in 1992, and $8.2 million in 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. U.S. Gypsum is one of
many defendants in four cases that have been certified as class actions and
others that request 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., Circuit Court 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., 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.). 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 claims
and defendants, including USG 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, have been decided. 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.
F-16
<PAGE>
USG CORPORATION
(RESTRUCTURED COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
As of December 31, 1993, 61 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. In addition, approximately 42 property damage
claims have been threatened against U.S. Gypsum.
In total, U.S. Gypsum has settled property damage claims of approximately
191 plaintiffs involved in approximately 75 cases. Twenty-five cases have been
tried to verdict, 16 of which were won by U.S. Gypsum and 6 lost; two other
cases, one won at the trial level and one lost, were settled during appeals.
Another case that was lost at the trial court level has been reversed on appeal
and a new trial ordered. Appeals are pending in 5 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; a third was settled after the
verdict was reversed on appeal. The remaining punitive damage award is 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. During 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 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 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 59,000 claimants pending as of
December 31, 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
F-17
<PAGE>
USG CORPORATION
(RESTRUCTURED COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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
$262 million remains unexhausted.
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 of Pennsylvania (GEORGINE ET AL. V. AMCHEM PRODUCTS INC., ET
AL., Case No. 93-CV-0215) (hereinafter "Georgine," formerly known as
"Carlough"). 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, if
approved by the court, 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 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. 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 $7 million is expected to be paid by
U.S. Gypsum's insurance carriers.
During 1991, approximately 13,100 Personal Injury Cases were filed against
U.S. Gypsum and approximately 6,300 were settled or dismissed. U.S. Gypsum
incurred expenses of $15.1 million in 1991 with respect to Personal Injury Cases
of which $15.0 million was paid by insurance. During 1992,
F-18
<PAGE>
USG CORPORATION
(RESTRUCTURED COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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. As of
December 31, 1993, 1992, and 1991, approximately 59,000, 54,000, and 43,000
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 is likely to
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 has reached settlements on approximately 26,700 pending
Personal Injury Cases for an amount estimated at approximately $32 million.
These settlements will be consummated and the cases closed over a three 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, 1993, can be
disposed of for a total amount, including both indemnity costs and legal fees
and expenses, estimated to be between $100 million and $120 million (of which
all but $2 million or $5 million, respectively, is expected to be paid by
insurance). 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; (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 $262 million, of which approximately $250 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 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 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
F-19
<PAGE>
USG CORPORATION
(RESTRUCTURED COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
million spent by U.S. Gypsum to resolve the eight cases. U.S. Gypsum has
appealed the court's ruling with respect to the policy years available to cover
particular claims, and the carriers have appealed most other aspects of the
court's ruling. The appeal process is likely to take up to a year or more from
the date of this report.
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 is 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, 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 have
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, 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. 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, 1993, carriers providing a total of
approximately $90 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 $250 million of
coverage that was unexhausted as of December 31, 1993 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 will continue 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. The number of
Personal Injury Cases pending against U.S. Gypsum has increased in each of the
last several years. In addition, many Property Damage Cases are still at an
F-20
<PAGE>
USG CORPORATION
(RESTRUCTURED COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 will adopt the requirements of
Financial Accounting Standards Board Interpretation No. 39. In accordance with
Interpretation No. 39, U.S. Gypsum will record an accrual for its liabilities
for asbestos-related matters which are deemed probable and can be reasonably
estimated, and will separately record 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, it is presently anticipated that the
liabilities and assets to be recorded in 1994 will relate only to pending
Personal Injury Cases. This implementation of Interpretation No. 39 is not
expected to have a material impact on reported earnings 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.
SUBSEQUENT EVENT
On January 7, 1994, the Corporation filed a Registration Statement
(Registration No. 33-51845), as amended on February 16, 1994, pertaining to its
planned public offering (the "Offering") of 6,000,000 new shares of common stock
to be sold by the Corporation and 4,000,000 shares of common stock to be sold by
Water Street Corporate Recovery Fund I, L.P. The Offering is part of a
refinancing strategy which also includes (i) the placement (the "Note
Placement") of $150 million principal amount of Senior 2001 Notes with certain
institutional investors and (ii) certain amendments to the Corporation's Credit
Agreement (the "Credit Agreement Amendments" and, together with the Offering and
the Note Placement, the "Transactions"). The Credit Agreement Amendments will,
among other things, increase the size of the Corporation's revolving credit
facilty by $70 million and amend existing mandatory Bank Term Loan prepayment
provisions to allow the Corporation, upon the achievement of certain financial
tests, to retain additional free cash flow for capital expenditures and the
purchase of its public debt. The Credit Agreement Amendments are contingent on
the consummation of the Offering.
F-21
<PAGE>
USG CORPORATION
(RESTRUCTURED COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The Corporation expects to use a portion of the net proceeds from the
Offering and the Note Placement, together with approximately $158 million of
existing cash generated from operations to pay $140 million of Bank Term Loans
and to redeem or purchase approximately $260 million aggregate principal amount
of certain other senior debt issues. The remainder of the net proceeds,
approximately $92 million, will be available for general corporate purposes,
including capital expenditures for cost reduction, capacity improvement and
future growth opportunities. The following is an unaudited Pro Forma Condensed
Consolidated Balance Sheet as of December 31, 1993 illustrating the effect of
the Transactions as if they had occurred on that date:
<TABLE>
<CAPTION>
USG CORPORATION
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 1993
(UNAUDITED)
(DOLLARS IN MILLIONS)
Historical Pro Forma
----------- -------------
<S> <C> <C>
Cash and cash equivalents........................................................... $ 211 $ 145
Other current assets................................................................ 409 409
Other assets........................................................................ 1,543 1,543
----------- -------------
Total assets.................................................................... 2,163 2,097
----------- -------------
----------- -------------
Long-term debt maturing within one year............................................. $ 165 $ 7
Other current liabilities........................................................... 334 334
Long-term debt...................................................................... 1,309 1,218
Other liabilities................................................................... 489 489
Total stockholders' equity.......................................................... (134) 49
----------- -------------
Total liabilities and stockholders' equity...................................... 2,163 2,097
----------- -------------
----------- -------------
</TABLE>
GEOGRAPHIC AND INDUSTRY 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 from U.S. Gypsum to L&W Supply. 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. Operating profit/
(loss) in the period of May 7 through December 31, 1993 reflects the non-cash
amortization of Excess Reorganization Value which had the impact of reducing the
operating profit of domestic Gypsum Products by $51 million, domestic Interior
Systems by $60 million and Building Products Distribution by $2 million.
To assist the reader in evaluating the profitability of each geographic and
industry segment, EBITDA is shown separately in the following tables. EBITDA
represents earnings before interest, taxes, depreciation, depletion and
amortization. For the period of May 7 through December 31, 1993, the Corporation
also added back non-cash postretirement charges and an extraordinary loss. 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
F-22
<PAGE>
USG CORPORATION
(RESTRUCTURED COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
<TABLE>
<CAPTION>
Operating Depreciation
May 7 through December 31, 1993 Profit/ Depletion and Capital Identifiable
Geographic Segments Net Sales (Loss) EBITDA Amortization Expenditures Assets
- ------------------------------- --------- ----------- ----------- --------------- --------------- -------------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
United States:
Gypsum Products.............. $ 683 $ 47 $ 108 $ 61 $ 17 $ 904
Interior Systems............. 255 (22) 30 52 2 510
Building Products
Distribution................ 372 4 7 3 1 121
Intrasegment eliminations.... (163) -- -- -- -- --
Corporate.................... -- (26 ) (18 ) 10 -- 254
--------- ----------- ----------- ------- ------- -------
Total........................ 1,147 3 127 126 20 1,789
Canada......................... 95 (6 ) 10 17 6 178
Other Foreign.................. 143 4 18 14 3 197
Transfers between geographic
areas......................... (60) -- -- -- -- (1 )
--------- ----------- ----------- ------- ------- -------
Total.......................... 1,325 1 155 157 29 2,163
--------- ----------- ----------- ------- ------- -------
--------- ----------- ----------- ------- ------- -------
INDUSTRY SEGMENTS
- -------------------------------
Gypsum Products................ $ 806 $ 53 $ 129 $ 76 $ 23 $ 1,093
Interior Systems............... 373 (30 ) 37 68 5 695
Building Products
Distribution.................. 372 4 7 3 1 121
Intersegment eliminations...... (226) -- -- -- -- --
Corporate...................... -- (26 ) (18 ) 10 -- 254
--------- ----------- ----------- ------- ------- -------
Total.......................... 1,325 1 155 157 29 2,163
--------- ----------- ----------- ------- ------- -------
--------- ----------- ----------- ------- ------- -------
<CAPTION>
May 7
through
December 31,
1993
-------------------
<S> <C> <C> <C> <C> <C> <C>
TRANSFERS BETWEEN GEOGRAPHIC AREAS (DOLLARS IN MILLIONS)
- ------------------------------------------
United States......................................................................................... $ 25
Canada................................................................................................ 16
Other Foreign......................................................................................... 19
-------
Total................................................................................................. 60
-------
-------
</TABLE>
F-23
<PAGE>
USG CORPORATION
(RESTRUCTURED COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SUBSIDIARY DEBT GUARANTEES
The Corporation issued $340 million aggregate principal amount of Senior
2002 Notes in May 1993 and an additional $138 million aggregate principal amount
of similar notes in August 1993. 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 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
Term Loan, Revolving Credit Facility, Capitalized Interest Notes 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 Term Loan,
the Revolving Credit Facility and the Capitalized Interest Notes are 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.
There are 43 Non-Guarantors (the "Combined Non-Guarantors"), substantially
all of which are subsidiaries of Guarantors. The Combined Non-Guarantors
primarily include 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 $24 million as of December 31, 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 December 31, 1993 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.
F-24
<PAGE>
USG CORPORATION
(RESTRUCTURED COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
USG CORPORATION
(RESTRUCTURED COMPANY)
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS
MAY 7 THROUGH DECEMBER 31, 1993
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
COMBINED
PARENT COMBINED NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
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)
----------- ----------- ------ ------ -------------
----------- ----------- ------ ------ -------------
</TABLE>
F-25
<PAGE>
USG CORPORATION
(RESTRUCTURED COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
USG CORPORATION
(RESTRUCTURED COMPANY)
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 1993
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
COMBINED
PARENT COMBINED NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
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
----------- ----------- ------ ------ -------------
----------- ----------- ------ ------ -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
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
Stockholders' Equity/(Deficit):
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
----------- ----------- ------ ------ -------------
----------- ----------- ------ ------ -------------
</TABLE>
F-26
<PAGE>
USG CORPORATION
(RESTRUCTURED COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
USG CORPORATION
(RESTRUCTURED COMPANY)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
MAY 7 THROUGH DECEMBER 31, 1993
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
COMBINED
PARENT COMBINED NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------- ----------- ------------- --------------- -------------
<S> <C> <C> <C> <C> <C>
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 AND CASH
EQUIVALENTS................................. 163 (1) -- -- 162
----------- ----------- ------ --- -------------
Cash and cash equivalents at beginning of
period...................................... 24 (7) 32 -- 49
----------- ----------- ------ --- -------------
Cash and cash equivalents at end of period... 187 (8) 32 -- 211
----------- ----------- ------ --- -------------
----------- ----------- ------ --- -------------
</TABLE>
F-27
<PAGE>
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.
F-28
<PAGE>
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 (Restructured Company), a Delaware corporation, and subsidiaries as
of December 31, 1993 and the related consolidated statements of earnings and
cash flows for 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 audit.
We conducted our audit 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 audit provides 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, 1993, and the results of their operations and
their cash flows for 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.
ARTHUR ANDERSEN & CO.
Chicago, Illinois
January 31, 1994
F-29
<PAGE>
USG CORPORATION
(RESTRUCTURED COMPANY)
SCHEDULE V
PROPERTY, PLANT AND EQUIPMENT
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
BEGINNING ENDING
CLASSIFICATION BALANCE BALANCE
- ------------------------------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
MAY 7 THROUGH DECEMBER 31, 1993
- -------------------------------------------------------------------------------------------
Land and mineral deposits................................................................ $ 61 $ 61
Buildings and realty improvements........................................................ 228 233
Machinery and equipment.................................................................. 478 496
----------- -----------
Total................................................................................ 767 790
----------- -----------
----------- -----------
</TABLE>
In accordance with fresh start accounting, the Corporation adjusted its
property, plant and equipment accounts as of May 6, 1993 to fair market value.
Detailed information regarding additions and deductions is omitted as
neither total additions nor total deductions during the period shown above
exceeded 10% of the balance at the end of the period. Total additions were $29
million, total deductions were $8 million and other adjustments increased
property, plant and equipment by $2 million in the period of May 7 through
December 31, 1993.
Total deductions include the effect of foreign currency translation which
increased total deductions by $5 million in the period of May 7 through December
31, 1993.
Upon retirement or other disposition of property, the applicable cost and
accumulated depreciation and depletion are removed from the accounts. Any gains
and losses are included in earnings.
F-30
<PAGE>
USG CORPORATION
(RESTRUCTURED COMPANY)
SCHEDULE VI
ACCUMULATED DEPRECIATION AND DEPLETION OF
PROPERTY, PLANT AND EQUIPMENT
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
Beginning Ending
Classification Balance Balance
- ---------------------------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
MAY 7 THROUGH DECEMBER 31, 1993
- ----------------------------------------------------------------------------------------
Land and mineral deposits............................................................. $ -- $ --
Buildings and realty improvements..................................................... -- 8
Machinery and equipment............................................................... -- 28
----------- -----------
Total............................................................................. -- 36
----------- -----------
----------- -----------
</TABLE>
In accordance with fresh start accounting, the Corporation adjusted its
property, plant and equipment accounts as of May 6, 1993 to fair market value.
Consequently, there were no reserves for depreciation and depletion as of May 7,
1993.
Detailed information regarding additions and deductions is omitted as
neither total additions nor total deductions of property, plant and equipment
(see Schedule V) during the period shown above exceeded 10% of the balance of
property, plant and equipment at the end of the period. Total provisions for
depreciation and depletion were $34 million, total deductions were $1 million
and other adjustments increased reserves by $3 million in the period of May 7
through December 31, 1993.
Upon retirement or other disposition of property, the applicable cost and
accumulated depreciation and depletion are removed from the accounts. Any gains
and losses are included in earnings.
F-31
<PAGE>
USG CORPORATION
(RESTRUCTURED COMPANY)
SCHEDULE VIII
VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
Provision
Charged to Receivables
Beginning Costs and Written Off and Ending
Account Balance Expenses Discounts Allowed Balance
- ------------------------------------------------------------ ------------- ------------- ----------------- -----------
<S> <C> <C> <C> <C>
MAY 7 THROUGH DECEMBER 31, 1993
- ------------------------------------------------------------
Doubtful accounts......................................... $ 11 $ 4 $ (4) $ 11
Cash discounts............................................ 2 15 (15) 2
</TABLE>
F-32
<PAGE>
USG CORPORATION
(RESTRUCTURED COMPANY)
SCHEDULE IX
SHORT-TERM BORROWINGS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
Maximum Average Weighted
Amount Amount Average
Weighted Outstanding Outstanding Interest Rate
Category of Aggregate Ending Average During the During the During the
Short-Term Borrowings Balance Interest Rate Period Period (a) Period (b)
- ------------------------------------------- ----------- ------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C>
MAY 7 THROUGH DECEMBER 31, 1993
- -------------------------------------------
Notes payable (c).................... $ 2 6.6% $ 9 $ 7 6.6%
Revolving Credit Facility (d)........ -- -- -- -- --
</TABLE>
(a) The average of month-end principal balances.
(b) Computed by dividing average monthly interest expense for the period by the
average amount of short-term borrowings outstanding.
(c) Represents borrowings from several foreign banks by USG International and
CGC which are generally not subject to the provisions of the Credit
Agreement.
(d) The Credit Agreement includes a $175 million Revolving Credit Facility, of
which $110 million was established as a letter of credit subfacility.
F-33
<PAGE>
USG CORPORATION
(RESTRUCTURED COMPANY)
SCHEDULE X
SUPPLEMENTAL STATEMENT OF EARNINGS INFORMATION
(DOLLARS IN MILLIONS)
The following amounts were charged to costs and expenses:
<TABLE>
<CAPTION>
May 7 through
December 31,
1993
--------------
<S> <C>
Maintenance and repairs......................................................... $ 84
--------------
--------------
Depreciation, depletion and amortization........................................ $ 44
Amortization of Excess Reorganization Value..................................... 113
--------------
Total depreciation, depletion and amortization.............................. 157
--------------
--------------
</TABLE>
Maintenance and repairs are recorded as costs or expenses when incurred.
Taxes (excluding payroll and income taxes), rents, royalties and advertising
costs are not shown above, as individually they do not exceed one percent of net
sales in the period shown.
F-34
<PAGE>
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. As of December 31, 1993, debentures totaling
$36 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
<TABLE>
<CAPTION>
May 7 through
December 31,
1993
--------------
<S> <C>
Net sales......................................................................................... $ 673
Cost and expenses................................................................................. 584
Amortization of Excess Reorganization Value....................................................... 41
--------------
Operating profit.................................................................................. 48
Interest income, net.............................................................................. (2)
Other income, net................................................................................. (1)
Corporate charges................................................................................. 60
--------------
Loss before taxes on income....................................................................... (9)
Taxes on income................................................................................... 15
--------------
Net loss.......................................................................................... (24)
--------------
--------------
</TABLE>
SUMMARY BALANCE SHEET
<TABLE>
<CAPTION>
As of December
31, 1993
--------------
<S> <C>
Current assets.................................................................................... $ 190
Property, plant and equipment, net................................................................ 483
Excess Reorganization Value, net.................................................................. 265
Other assets...................................................................................... 3
--------------
Total assets.................................................................................. 941
--------------
--------------
Current liabilities............................................................................... $ 124
Other liabilities and obligations................................................................. 149
Stockholder's equity.............................................................................. 668
--------------
Total liabilities and stockholder's equity.................................................... 941
--------------
--------------
</TABLE>
F-35
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
WITH RESPECT TO SUPPLEMENTAL NOTE AND FINANCIAL STATEMENT SCHEDULES
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of USG Corporation (Restructured Company)
included in this Form S-1, and have issued our report thereon dated January 31,
1994. Our report on the consolidated financial statements includes an
explanatory paragraph with respect to the asbestos litigation as discussed in
Notes to Financial Statements -- "Litigation" note. Our audit was made for the
purpose of forming an opinion on the basic financial statements taken as a
whole. The supplemental note and financial statement schedules on pages F-30
through F-35 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 basic financial statements. The
supplemental note and financial statement schedules have been subjected to the
auditing procedures applied in the audit of the basic 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 basic financial statements
taken as a whole.
ARTHUR ANDERSEN & CO.
Chicago, Illinois
January 31, 1994
F-36
<PAGE>
USG CORPORATION
(PREDECESSOR COMPANY)
CONSOLIDATED STATEMENT OF EARNINGS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
JANUARY 1 YEARS ENDED DECEMBER
THROUGH 31,
MAY 6, --------------------
1993 1992 1991
----------- --------- ---------
<S> <C> <C> <C>
Net Sales...................................................................... $ 591 $ 1,777 $ 1,712
Cost of products sold.......................................................... 482 1,460 1,385
----------- --------- ---------
Gross Profit................................................................... 109 317 327
Selling and administrative expenses............................................ 71 218 194
----------- --------- ---------
Operating Profit............................................................... 38 99 133
Interest expense............................................................... 86 334 333
Interest income................................................................ (2) (12) (11)
Other expense, net............................................................. 6 1 5
Reorganization items........................................................... (709) -- --
----------- --------- ---------
Earnings/(Loss) from Continuing Operations Before Taxes on Income,
Extraordinary Gain and Changes in Accounting Principles....................... 657 (224) (194)
Taxes on income/(income tax benefit)........................................... 17 (33) (53)
----------- --------- ---------
Earnings/(Loss) from Continuing Operations Before Extraordinary Gain and
Changes in Accounting Principles.............................................. 640 (191) (141)
Extraordinary gain, net of taxes............................................... 944 -- --
Cumulative effect of changes in accounting principles, net..................... (150) -- --
----------- --------- ---------
Earnings/(Loss) from Continuing Operations..................................... 1,434 (191) (141)
Reserve for DAP divestiture, net of taxes...................................... -- -- (20)
----------- --------- ---------
Net Earnings/(Loss)............................................................ 1,434 (191) (161)
----------- --------- ---------
----------- --------- ---------
</TABLE>
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 PAGES F-40 THROUGH F-71 ARE AN INTEGRAL
PART OF THIS STATEMENT.
F-37
<PAGE>
USG CORPORATION
(PREDECESSOR COMPANY)
CONSOLIDATED BALANCE SHEET
(DOLLARS IN MILLIONS)
ASSETS
<TABLE>
<CAPTION>
AS OF AS OF
MAY 6, DECEMBER 31,
1993 1992
--------- --------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents (primarily time deposits)..................................... $ 49 $ 180
Receivables (net of reserves of $13 and $11)............................................ 315 299
Inventories............................................................................. 148 113
Restricted cash......................................................................... -- 88
--------- -------
Total current assets.................................................................. 512 680
--------- -------
Property, Plant and Equipment, Net...................................................... 767 800
Purchased Goodwill, Net................................................................. -- 69
Excess Reorganization Value............................................................. 851 --
Other Assets............................................................................ 64 110
--------- -------
Total assets.......................................................................... 2,194 1,659
--------- -------
--------- -------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable........................................................................ $ 96 $ 91
Accrued interest expense................................................................ 9 386
Other accrued expenses.................................................................. 162 167
Notes payable........................................................................... 6 2
Revolving Credit Facility............................................................... -- 140
Long-term debt maturing within one year................................................. 9 576
Long-term debt classified as current.................................................... -- 1,926
Taxes on income......................................................................... 13 --
--------- -------
Total current liabilities............................................................. 295 3,288
--------- -------
Long-Term Debt.......................................................................... 1,446 67
Deferred Income Taxes................................................................... 170 175
Other Liabilities....................................................................... 279 9
Stockholders' Equity/(Deficit):
Preferred stock-- $1 par value; $1.80 convertible preferred stock
(initial series); outstanding -- none.................................. -- --
Common stock-- $0.10 par value; outstanding 37,157,458 and 55,757,394 shares (after
deducting 27,556 and 368,409 shares held in treasury).................... 4 5
Capital received in excess of par value................................................. -- 23
Deferred currency translation........................................................... -- (8)
Reinvested earnings/(deficit)........................................................... -- (1,900)
--------- -------
Total stockholders' equity/(deficit).................................................. 4 (1,880)
--------- -------
Total liabilities and stockholders' equity............................................ 2,194 1,659
--------- -------
--------- -------
</TABLE>
THE NOTES TO FINANCIAL STATEMENTS ON PAGES F-40 THROUGH F-71 ARE AN INTEGRAL
PART OF THIS STATEMENT.
F-38
<PAGE>
USG CORPORATION
(PREDECESSOR COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
JANUARY 1 YEARS ENDED DECEMBER
THROUGH 31,
MAY 6, --------------------
1993 1992 1991
----------- --------- ---------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Earnings/(loss) from continuing operations......................................... $ 1,434 $ (191) $ (141)
Reserve for DAP divestiture, net of taxes.......................................... -- -- (20)
Adjustments to reconcile earnings/(loss) from continuing operations to net cash:
Cumulative effect of accounting changes.......................................... 150 -- --
Depreciation, depletion and amortization......................................... 22 66 68
Postretirement expense........................................................... 4 -- --
Interest expense on pay-in-kind debentures....................................... 17 74 63
Deferred income taxes............................................................ (13) (25) (13)
Net (gain)/loss on asset dispositions............................................ 4 (5) (3)
(Increase)/decrease in working capital:
Receivables...................................................................... 18 (1) (16)
Inventories...................................................................... (8) (3) (7)
Payables......................................................................... 3 (4) (14)
Accrued expenses................................................................. 15 213 132
Increase in other assets........................................................... (12) (23) (9)
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) -- --
Decrease in other liabilities...................................................... -- (2) (2)
Other, net......................................................................... (3) (9) (9)
----------- --------- ---------
Net cash flows (to)/from operating activities.................................... (14) 90 29
----------- --------- ---------
Cash Flows from Investing Activities:
Capital expenditures............................................................... (12) (49) (49)
Net proceeds from asset dispositions............................................... -- 6 5
Net proceeds from divestiture of discontinued operations........................... -- -- 80
----------- --------- ---------
Net cash flows (to)/from investing activities.................................... (12) (43) 36
----------- --------- ---------
Cash Flows from Financing Activities:
Issuance of debt................................................................... 5 57 65
Repayment of debt.................................................................. (142) (75) (68)
(Increase)/decrease in restricted assets........................................... 32 (4) (84)
----------- --------- ---------
Net cash flows to financing activities........................................... (105) (22) (87)
----------- --------- ---------
Net Cash Flows From Discontinued Operations........................................ -- -- 2
----------- --------- ---------
Net Increase/(Decrease) in Cash and Cash Equivalents............................... (131) 25 (20)
----------- --------- ---------
Cash and cash equivalents as of beginning of period................................ 180 155 175
----------- --------- ---------
Cash and cash equivalents as of end of period...................................... 49 180 155
----------- --------- ---------
----------- --------- ---------
Supplemental Cash Flow Disclosures:
Interest paid...................................................................... $ 58 $ 52 $ 154
Income taxes paid.................................................................. 3 13 15
----------- --------- ---------
----------- --------- ---------
</TABLE>
THE NOTES TO FINANCIAL STATEMENTS ON PAGES F-40 THROUGH F-71 ARE AN INTEGRAL
PART OF THIS STATEMENT.
F-39
<PAGE>
USG CORPORATION
(PREDECESSOR COMPANY)
NOTES TO FINANCIAL STATEMENTS
(TERMS IN INITIAL CAPITAL LETTERS ARE DEFINED ELSEWHERE IN THIS PROSPECTUS)
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, except for the years
ended December 31, 1992 and 1991, for which 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. See "Fresh Start Accounting" 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 (the "Prepackaged Plan"). The provisions of the Prepackaged Plan
were agreed upon in principle with all committees and certain institutions
representing debt subject to the Restructuring in January 1993. The
Corporation's Registration Statement (Registration No. 33-40136), which included
a Disclosure Statement and Proxy Statement -- Prospectus, was declared effective
by the SEC in February 1993. The solicitation process for approvals of the
Prepackaged Plan was completed on March 15, 1993. The Corporation commenced a
prepackaged Chapter 11 bankruptcy case in Delaware (IN RE: USG CORPORATION, Case
No. 93-300) on March 17, 1993, and received the U.S. Bankruptcy Court's
confirmation of the Prepackaged Plan on April 23, 1993. None of the subsidiaries
of the Corporation were part of this proceeding and there was no impact on trade
creditors of the Corporation's subsidiaries. Under the Prepackaged Plan, all
previously existing defaults were waived or cured.
The following summary of the major provisions of the Prepackaged Plan is
qualified in its entirety by reference to the more detailed information
appearing in the Disclosure Statement.
(a) The Prepackaged Plan provided for a one-for-50 reverse stock split (the
"Reverse Stock Split") which was effected immediately prior to the distribution
of new common stock (the "New Common Stock") pursuant to the Prepackaged Plan.
On May 6, 1993, after giving effect to the Reverse Stock Split, the following
distributions were made to holders of the following securities of the
Corporation:
(i) For each $1,000 principal amount of 13 1/4% senior subordinated
debentures due 2000 (the "Old Senior Subordinated Debentures") (excluding
accrued interest thereon, which was cancelled), the holder received 50.81
shares of New Common Stock. As of May 6, 1993, the total principal amount of
the Old Senior Subordinated Debentures was $600 million.
(ii) For each $1,000 principal amount of 16% junior subordinated
debentures due 2008 (the "Old Junior Subordinated Debentures") (excluding
accrued interest thereon, which was cancelled), the holder received 11.61
shares of New Common Stock and 5.42 Warrants. As of May 6, 1993, the total
principal amount of Old Junior Subordinated Debentures was $533 million, of
which $480 million was subject to the distribution.
Stockholders existing prior to the distribution of New Common Stock retained
their shares of common stock, subject to the Reverse Stock Split. After giving
effect to the Reverse Stock Split and distribution of New Common Stock, there
were 37,157,458 shares of common stock outstanding on
F-40
<PAGE>
USG CORPORATION
(PREDECESSOR COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
May 6, 1993, of which the shares held by stockholders existing prior to such
distribution represented 3% of the total number of outstanding shares. If all
Warrants were exercised, the aggregate holdings of Old Senior Subordinated
Debenture holders, Old Junior Subordinated Debenture holders and previously
existing stockholders would represent 76.7%, 20.6% and 2.7%, respectively, of
the total number of outstanding shares.
(b) For each $1,000 principal amount of 7 3/8% senior notes due 1991 (the
"Old Senior 1991 Notes"), the holder received $750 principal amount of 8% senior
notes due 1995 (the "Senior 1995 Notes") and $250 principal amount of 9% senior
notes due 1998 (the "Senior 1998 Notes"). As of May 6, 1993, the total principal
amount of the Old Senior 1991 Notes was $100 million. In addition, the
Corporation issued $10 million principal amount of Senior 1998 Notes to two
institutional holders of existing 8% senior notes due 1996 (the "Senior 1996
Notes") in exchange for an equal principal amount thereof. The Senior 1995 and
1998 Notes are secured, with certain other indebtedness of the Corporation and
subject to a collateral trust arrangement controlled primarily by holders of the
Banks' claims, by first priority security interests in the capital stock of
certain subsidiaries of the Corporation.
(c) Pursuant to the Prepackaged Plan, modifications were made to a credit
agreement dated as of July 1, 1988 (the "Old Credit Agreement") with the Bank
Group. The modifications, reflected in the Credit Agreement, are summarized as
follows: (i) issuance of $340 million of Senior 2002 Notes in exchange for $300
million principal amount of Bank Term Loans, $24 million of accrued but unpaid
interest on the Bank Term Loan and $16 million owed in connection with certain
interest rate swap contracts; (ii) extension of the final maturity of the
remaining principal outstanding on the Bank Term Loan ($540 million) from 1996
to 2000 and deferral of any scheduled principal payments until December 1994;
(iii) issuance of $56 million of Capitalized Interest Notes bearing annual
interest at LIBOR plus 2 1/4% (or Citibank's base rate plus 1 1/4%) in exchange
for $51 million of accrued but unpaid interest on the Bank Debt and $5 million
in additional amounts owed in connection with interest rate swap contracts; (iv)
making available (at the Corporation's option but subject to certain limitations
on the availability of LIBOR) an annual interest rate applicable to the Bank
Term Loan and an extended revolving credit facility of LIBOR plus 1 7/8% (or
Citibank's base rate plus 7/8%), with the option to issue additional Capitalized
Interest Notes for the amount of such interest in excess of LIBOR plus 1% per
annum; (v) provision for an excess cash flow sweep that will take into account
certain liquidity thresholds; (vi) suspension of all financial covenants through
January 1, 1995 and providing for new covenants thereafter; and (vii) extension
to 1998 of the maturity date of and establishment of a maximum borrowing
capacity of $175 million under the Revolving Credit Facility, including a $110
million letter of credit subfacility. Capitalized Interest Notes of $47 million
were allocated as term capitalized interest notes maturing in 2000, being direct
obligations of the Corporation, and $9 million of the Capitalized Interest Notes
were allocated as revolver capitalized interest notes maturing in 1998, being
direct obligations of USG Interiors.
The Corporation deferred certain principal and interest payments in order to
maintain adequate liquidity during the Restructuring process. These payment
deferrals constituted defaults under the applicable loan agreements and
indentures, which were waived or cured on May 6, 1993.
FRESH START ACCOUNTING
The Corporation accounted for the Restructuring using the principles of
fresh start accounting as required by SOP 90-7. Pursuant to such principles, in
general, the Corporation's assets and liabilities were revalued. Total assets
were stated at the reorganization value of the Corporation following the
Restructuring. The Corporation primarily used "net present value" and
"comparable companies" approaches to determine reorganization value (the
"Reorganization Value"). In the net present value approach, projected,
unleveraged after-tax cash flows of the Subsidiaries and corporate operations
F-41
<PAGE>
USG CORPORATION
(PREDECESSOR COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
through 1995 were discounted at rates approximating the Corporation's adjusted
weighted average cost of capital. Terminal value was determined by capitalizing
the 1995 projected results. Liabilities were stated at fair market value. The
difference between the Reorganization Value of the assets and the fair market
value of the liabilities was recorded as stockholders' equity with retained
earnings restated to zero.
In accordance with SOP 90-7, individual assets and liabilities were adjusted
to fair market value as of May 6, 1993. The portion of the Reorganization Value
not attributable to specific assets ("Excess Reorganization Value") will be
amortized over a five year period. Adjustments were made to the historical
balances of inventory, property, plant and equipment, purchased goodwill,
long-term debt, various accrued liabilities and other long-term liabilities.
F-42
<PAGE>
USG CORPORATION
(PREDECESSOR COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
____The following balance sheet details the adjustments that were made as of May
6, 1993 to record the Restructuring and implement fresh start accounting:
CONSOLIDATED BALANCE SHEET
AS OF MAY 6, 1993
(DOLLARS IN MILLIONS)
ASSETS
<TABLE>
<CAPTION>
PRE- POST-
RESTRUCTURING (A) (B) RESTRUCTURING
AND FRESH RESTRUCTURING FRESH START AND FRESH
START ADJUSTMENTS ADJUSTMENTS START
------------- ------------- ------------ -------------
<S> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents................................. $ 153 $ (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
------------- ------------- ------------ -------------
------------- ------------- ------------ -------------
</TABLE>
- ------------------------
(a) To record the consummation of the Prepackaged Plan. See "Financial
Restructuring" note above for a summary of the terms 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.
F-43
<PAGE>
USG CORPORATION
(PREDECESSOR COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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):
<TABLE>
<CAPTION>
JANUARY 1
THROUGH
MAY 6,
1993
-----------
<S> <C>
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)
-----------
-----------
</TABLE>
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):
<TABLE>
<CAPTION>
JANUARY 1
THROUGH
MAY 6,
1993
-----------
<S> <C>
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
-----------
-----------
</TABLE>
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.
DISCONTINUED OPERATIONS
Results for DAP are set forth separately as discontinued operations in the
accompanying consolidated financial statements and supplementary data schedules
up to September 20, 1991, the completion date of the sale of the business and
substantially all of the assets. Operating results for DAP in 1991 included net
sales of $128 million, taxes on income of $1 million and breakeven net earnings.
In the second quarter of 1991, the Corporation absorbed an expense provision
of $20 million related to the disposition of DAP, net of related income tax
expense of $8 million. An expense provision of $41 million, net of a related
income tax benefit of $2 million, was previously recorded in the fourth quarter
of
F-44
<PAGE>
USG CORPORATION
(PREDECESSOR COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1990. Net proceeds from the transaction amounted to approximately $84 million.
In connection with the execution of the DAP sale agreement, the Banks consented
to the sale as required under the Old Credit Agreement subject to an agreement
by the Corporation and DAP to deposit the proceeds in a bank account to be held
exclusively for use in the Restructuring. As a result, these funds, and interest
earned on these funds, were maintained on an interim basis in a restricted bank
account and were classified as restricted cash in the Consolidated Balance Sheet
until their release in connection with the Restructuring.
RESEARCH AND DEVELOPMENT
Research and development expenditures are charged to earnings as incurred
and amounted to $4 million, $14 million and $12 million in the period of January
1 through May 6, 1993 and in the years ended December 31, 1992 and 1991,
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) from continuing operations before taxes on income,
extraordinary gain and changes in accounting principles consisted of the
following (dollars in millions):
<TABLE>
<CAPTION>
JANUARY 1 YEARS ENDED DECEMBER
THROUGH 31,
MAY 6, --------------------
1993 1992 1991
----------- --------- ---------
<S> <C> <C> <C>
U.S............................................................ $ 483 $ (246) $ (217)
Foreign........................................................ 174 22 23
----------- --------- ---------
Total.......................................................... 657 (224) (194)
----------- --------- ---------
----------- --------- ---------
</TABLE>
Taxes on income/(income tax benefit) consisted of the following (dollars in
millions):
<TABLE>
<CAPTION>
JANUARY 1 YEARS ENDED DECEMBER
THROUGH 31,
MAY 6, --------------------
1993 1992 1991
----------- --------- ---------
<S> <C> <C> <C>
Current:
U.S. Federal................................................. $ 13 $ (12) $ (53)
Foreign...................................................... 2 6 12
----------- --------- ---------
15 (6) (41)
----------- --------- ---------
Deferred:
U.S. Federal................................................. -- (27) (11)
Foreign...................................................... 2 -- (1)
----------- --------- ---------
2 (27) (12)
----------- --------- ---------
Total.......................................................... 17 (33) (53)
----------- --------- ---------
----------- --------- ---------
</TABLE>
F-45
<PAGE>
USG CORPORATION
(PREDECESSOR COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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:
<TABLE>
<CAPTION>
JANUARY 1 YEARS ENDED DECEMBER 31,
THROUGH
MAY 6, ------------------------
1993 1992 1991
------------- ----------- -----------
<S> <C> <C> <C>
Statutory U.S. Federal income tax/(benefit) rate........... 34.0% (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 8.3
Valuation allowance adjustment............................. 2.3 -- --
Unbenefited NOL Carryforward............................... 2.3 12.6 --
Other, net................................................. 2.1 (1.3 ) (1.8 )
----- ----- -----
Effective income tax/(benefit) rate........................ 2.6 (15.0 ) (27.5 )
----- ----- -----
----- ----- -----
</TABLE>
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):
<TABLE>
<CAPTION>
AS OF
MAY 6,
1993
-----------
<S> <C>
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
-----------
-----------
</TABLE>
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.
F-46
<PAGE>
USG CORPORATION
(PREDECESSOR COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
During 1991 and 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):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
--------------------
1992 1991
--------- ---------
<S> <C> <C>
Tax benefit carryforwards..................................................... $ (19) $ (9)
Accelerated tax depreciation.................................................. (5) --
Other, net.................................................................... (3) (3)
--- ---
Total deferred provision...................................................... (27) (12)
Classification adjustment of prior years' deferrals........................... 2 (1)
--- ---
Increase/(decrease) in deferred taxes......................................... (25) (13)
--- ---
--- ---
</TABLE>
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 valued under the LIFO method totaled $72 million as of December 31,
1992 and would have been $25 million higher if they were valued under the FIFO
and average production cost methods. The remaining inventories as of December
31, 1992 were 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):
<TABLE>
<CAPTION>
AS OF
AS OF DECEMBER 31,
MAY 6, 1993 1992
----------- ---------------
<S> <C> <C>
Finished goods and work-in-process................................... $ 87 $ 66
Raw materials........................................................ 54 40
Supplies............................................................. 7 7
----- -----
Total................................................................ 148 113
----- -----
----- -----
</TABLE>
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. As of December 31, 1992, the LIFO value of USG Interiors'
inventories acquired under the purchase method exceeded that computed for U.S.
Federal income tax purposes by $6 million.
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 and at cost as of December 31,
1992. 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
F-47
<PAGE>
USG CORPORATION
(PREDECESSOR COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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):
<TABLE>
<CAPTION>
AS OF AS OF
MAY 6, DECEMBER 31,
1993 1992
----------- --------------
<S> <C> <C>
Land and mineral deposits............................................ $ 61 $ 41
Buildings and realty improvements.................................... 228 401
Machinery and equipment.............................................. 478 1,012
----- -------
767 1,454
Reserves for depreciation and depletion.............................. -- (654)
----- -------
Total................................................................ 767 800
----- -------
----- -------
</TABLE>
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, $31
million and $26 million in the period of January 1 through May 6, 1993 and in
the years ended December 31, 1992 and 1991, respectively.
F-48
<PAGE>
USG CORPORATION
(PREDECESSOR COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
INDEBTEDNESS
Total debt, including currently maturing debt, consisted of the following
(dollars in millions):
<TABLE>
<CAPTION>
AS OF AS OF
MAY 6, DECEMBER 31,
1993 1992
--------- --------------
<S> <C> <C>
SECURED DEBT:
Bank Debt:
Bank Term Loan, installments due through 2000..................... $ 540 $ 840
Revolving Credit Facility......................................... -- 140
Capitalized Interest Notes, due through 2000...................... 56 --
Senior notes and debentures:
7 3/8% Senior Notes due 1991...................................... -- 100
8% Senior Notes due 1995.......................................... 75 --
8% Senior Notes due 1996.......................................... 90 100
8% Senior Notes due 1997.......................................... 100 100
9% Senior Notes due 1998.......................................... 35 --
10 1/4% Senior Notes due 2002..................................... 340 --
7 7/8% Sinking Fund Debentures due 2004........................... 41 41
8 3/4% Sinking Fund Debentures due 2017........................... 200 200
Other secured debt, average interest rates, 10.5% and 10.9%, varying
payments through 1999.............................................. 40 37
UNSECURED DEBT:
Industrial revenue bonds, 5.9% ranging to 10.25%, due through
2014............................................................... 39 38
Old Subordinated Debentures:
13 1/4% Senior Subordinated Debentures due 2000, sinking fund of
$300 million due 1999............................................ -- 600
16% Junior Subordinated Debentures due 2008, sinking fund
commencing 2004.................................................. -- 515
--------- -------
Total principal amount of debt...................................... 1,556 2,711
Less unamortized reorganization discount............................ (95) --
--------- -------
Total carrying amount of debt....................................... 1,461 2,711
--------- -------
--------- -------
</TABLE>
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.
Throughout the Restructuring process (from December 31, 1990 through May 6,
1993), most long-term debt issues were included in current liabilities due to
various defaults upon certain of the debt issues which allowed for the possible
triggering of acceleration and cross-acceleration provisions. Upon consummation
of the Prepackaged Plan, all previously existing defaults were waived or cured
and long-term debt included in current liabilities was treated in accordance
with the Prepackaged Plan as described in "Financial Restructuring" note above.
F-49
<PAGE>
USG CORPORATION
(PREDECESSOR COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 Debt.
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 Loan, 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 the Capitalized
Interest Notes issued 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. As of December 31, 1992,
the fair market value of debt amounted to $679 million, based on indicative bond
prices as of that date excluding the following items which were not practicable
to estimate: (i) the bank debt for which there was no active market; (ii) the
7 7/8% senior debentures due 2004 virtually all of which were owned by a single
investment group; and (iii) the other secured debt which primarily represented
financing for construction of the Aubange plant as described above.
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 years ended December 31,
1992 and 1991. Net pension expense/(benefit) included the following components
(dollars in millions):
<TABLE>
<CAPTION>
JANUARY 1
THROUGH YEARS ENDED DECEMBER 31,
MAY 6, --------------------------------
1993 1992 1991
----------- --------------- ---------------
<S> <C> <C> <C>
Service cost-benefits earned during the period..... $ 3 $ 9 $ 5
Interest cost on projected benefit obligation...... 11 29 29
Actual return on plan assets....................... (15) (14) (79)
Unrecognized prior service cost.................... 1 2 2
Net amortization/(deferral)........................ 2 (25) 41
----- ----- -----
Net pension expense/(benefit)...................... 2 1 (2)
----- ----- -----
----- ----- -----
</TABLE>
F-50
<PAGE>
USG CORPORATION
(PREDECESSOR COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 and exceeded the projected
benefit obligation as of December 31, 1992. The following table presents a
reconciliation of the total assets of the pension plans to the projected benefit
obligation (dollars in millions):
<TABLE>
<CAPTION>
As of As of
May 6, December 31,
1993 1992
------------- ---------------
<S> <C> <C>
Amount of assets available for benefits:
Funded assets of the plans at fair market value................ $ 379 $ 383
Accrued pension expense........................................ 25 15
----- -----
Total assets of the plans........................................ 404 398
----- -----
Present value of estimated pension obligation:
Vested benefits................................................ 298 252
Nonvested benefits............................................. 24 18
----- -----
Accumulated benefit obligation................................... 322 270
Additional benefits based on projected future salary increases... 82 66
----- -----
Projected benefit obligation..................................... 404 336
----- -----
Assets in excess of projected benefit obligation................. -- 62
----- -----
----- -----
</TABLE>
Assets in excess of projected benefit obligation consisted of the following
(dollars in millions):
<TABLE>
<CAPTION>
As of As of
May 6, December 31,
1993 1992
------------- ---------------
<S> <C> <C>
Net assets existing at the date of adoption of SFAS No. 87 not
yet recognized.................................................. $ -- $ 32
Unrecognized net gain due to changes in assumptions and
differences between actual and estimated experience............. -- 43
Unrecognized cost of retroactive benefits granted by plan
amendments...................................................... -- (13)
----- -----
Assets in excess of projected benefit obligation................. -- 62
----- -----
----- -----
</TABLE>
The expected long-term rate of return on plan assets was 9% for both the
period of January 1 through May 6, 1993 and the year ended December 31, 1992.
The assumed weighted average discount rate used in determining the accumulated
benefit obligation was 8% and 9% as of May 6, 1993 and December 31, 1992,
respectively. The rate of increases in projected future compensation levels was
5.5% for the period of January 1 through May 6, 1993 and the year ended December
31, 1992. The unrecognized cost of retroactive benefits granted by plan
amendments was being amortized over 13 years as of December 31, 1992.
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.
F-51
<PAGE>
USG CORPORATION
(PREDECESSOR COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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
principles 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 and $7 million in the years
ended December 31, 1992 and 1991, respectively.
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):
<TABLE>
<CAPTION>
JANUARY 1
THROUGH
MAY 6,
1993
---------------
<S> <C>
Service cost of benefits earned................................................. $ 1
Interest on accumulated postretirement benefit obligation....................... 5
---
Net periodic postretirement benefit cost........................................ 6
---
---
</TABLE>
The status of the Corporation's accrued postretirement benefit cost as of
May 6, 1993 was as follows (dollars in millions):
<TABLE>
<CAPTION>
As of
May 6,
1993
-----------
<S> <C>
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
-----------
-----------
</TABLE>
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 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 Performance Plan, and 25,580 shares (after
F-52
<PAGE>
USG CORPORATION
(PREDECESSOR COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
giving effect to the Reverse Stock Split) 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.
Limitations on the Performance Plan in accordance with the Prepackaged Plan
provide that: (i) options to purchase a number of shares not to exceed 7.5% of
the number of shares of New Common Stock outstanding immediately after giving
effect to the Reverse Stock Split and all distributions of New Common Stock
under the Prepackaged Plan will be reserved for management incentives (2,788,350
shares); (ii) a portion of such options (not to exceed 4.5% of such number of
outstanding shares) may be granted immediately upon consummation of the
Prepackaged Plan; (iii) prior to June 22, 1997, the Corporation will not issue,
award or grant, for compensatory purposes, any stock (including restricted and
deferred stock grants and awards), stock options, stock appreciation rights or
other stock-based awards, except for the options described above or as may
otherwise be approved by the Corporation's stockholders; and (iv) reference to
the year "1988" is deleted from the name of the Performance 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.
Under the terms of the Rights Agreement and subject to certain exceptions
for Water Street and its affiliates, generally the Rights become exercisable (i)
10 days following the date of a public announcement that a person or group of
affiliated or associated persons (an "Acquiring Person"), other than the
Corporation, any employee benefit plan of the Corporation, any entity holding
Common Stock for or pursuant to the terms of any such plan has beneficial
ownership (as defined in the Rights Agreement) of 20% or more of the then
outstanding Common Stock, (ii) 10 days following the date of a public
announcement that a person or group of affiliated or associated persons (an
"Adverse Person") has beneficial ownership of 10% or more of the then
outstanding Common Stock, the acquisition of which has been determined by the
Board to present an actual threat of an acquisition of the Corporation that
would not be in the best interest of the Corporation's stockholders or (iii) 10
days following the date of commencement of, or public announcement of, a tender
offer or exchange offer for 30% or more of the Common Stock. 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 in a merger
or other business combination involving an Acquiring Person or an Adverse Person
and the Common Stock remains outstanding and unchanged or in the event that an
Acquiring Person or an Adverse Person engages in one of a number of self-dealing
transactions specified in the Rights Agreement, proper provision will be made so
that each holder of a Right, other than Rights that are or were beneficially
owned (as defined in the Rights
F-53
<PAGE>
USG CORPORATION
(PREDECESSOR COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Agreement) by the Acquiring Person or the Adverse Person, as the case may be, on
the earliest of the Distribution Date, the date the Acquiring Person acquires
20% or more of the outstanding Common Stock or the date the Adverse Person
becomes such (which will thereafter be void), 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. In addition, under certain circumstances the Board has the option of
exchanging all or part of the Rights (excluding void Rights) for Common Stock in
the manner described in the Rights Agreement. The Rights Agreement also contains
a so-called "flip-in" feature which provides that if any person or group of
affiliated or associated persons becomes an Adverse Person, then the provisions
of the preceding two sentences shall apply.
WARRANTS
On May 6, 1993, a total of 2,602,566 Warrants were issued to holders of the
Old Junior Subordinated Debentures in addition to the shares of common stock
issued to such holders, all as provided by the Prepackaged Plan. 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.
F-54
<PAGE>
USG CORPORATION
(PREDECESSOR COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
STOCKHOLDERS' EQUITY
Changes in stockholders' equity are summarized as follows (dollars in
millions):
<TABLE>
<CAPTION>
January 1 Years ended December 31,
through
May 6, ------------------------
1993 1992 1991
----------- ----------- -----------
<S> <C> <C> <C>
COMMON STOCK:
Beginning Balance.................................................... $ 5 $ 5 $ 5
Reverse Stock Split.................................................. (4) -- --
Issuance of New Common Stock......................................... 3 -- --
----------- ----------- -----------
Ending Balance....................................................... 4 5 5
----------- ----------- -----------
CAPITAL RECEIVED IN EXCESS OF PAR VALUE:
Beginning Balance.................................................... 23 24 23
Restructuring adjustments............................................ 444 -- --
Fresh start accounting adjustment.................................... (467) -- --
Other, net........................................................... -- (1) 1
----------- ----------- -----------
Ending Balance....................................................... -- 23 24
----------- ----------- -----------
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) (1,546)
Net earnings/(loss).................................................. 1,434 (191) (161)
Fresh start accounting adjustment.................................... 467 -- --
Other, net........................................................... (1) -- (2)
----------- ----------- -----------
Ending Balance....................................................... -- (1,900) (1,709)
----------- ----------- -----------
Total stockholders' equity/(deficit)................................. 4 (1,880) (1,680)
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
The Corporation is authorized to issue 36,000,000 shares of $1 par value
preferred stock, however, none were outstanding as of May 6, 1993 or December
31, 1992.
As of May 6, 1993, the number of authorized shares of common stock, $0.10
par value, was 200,000,000 shares, reduced from 300,000,000 shares in accordance
with the Prepackaged Plan. After giving effect to the Reverse Stock Split and
distribution of New Common Stock pursuant to the Prepackaged Plan, there were
37,157,458 shares of common stock outstanding, excluding 27,556 shares held in
treasury, as of May 6, 1993. As of December 31, 1992, there were 55,757,394
shares of common stock outstanding, after deducting 368,409 shares held in
treasury. The treasury shares were acquired through the forfeiture of restricted
stock.
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
F-55
<PAGE>
USG CORPORATION
(PREDECESSOR COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 $100 million of these policies
are presently 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 $10.9 million and
$25.8 million in the years ended December 31, 1991 and 1992, respectively, 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. U.S. Gypsum is one of
many defendants in four cases that have been certified as class actions and
others that request 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
F-56
<PAGE>
USG CORPORATION
(PREDECESSOR COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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, have been
decided. 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 have
been threatened against U.S. Gypsum.
In total, U.S. Gypsum has settled property damage claims of approximately
187 plaintiffs involved in approximately 71 cases. Twenty-two cases have 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 are pending in 4 of the tried cases. In the cases lost, compensatory
damage awards against U.S. Gypsum have 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. The
remaining punitive award is 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.
F-57
<PAGE>
USG CORPORATION
(PREDECESSOR COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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," formerly known as "Carlough"). 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, if approved by the court, 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.
F-58
<PAGE>
USG CORPORATION
(PREDECESSOR COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 1991, approximately 13,100 Personal Injury Cases were filed against
U.S. Gypsum and approximately 6,300 were settled or dismissed. U.S. Gypsum
incurred expenses of $15.1 million in 1991 with respect to Personal Injury
Cases, of which $15.0 million was paid by insurance. 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.
U.S. Gypsum's average settlement cost for Personal Injury Cases over the
past three years has been approximately $1,350 per claim, exclusive of defense
costs. Management anticipates that its average settlement cost is likely to
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. 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 asbestos-related Personal Injury Cases
pending against U.S. Gypsum as of December 31, 1992, can be 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 has
been 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 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, 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 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 of
such claims that are filed, which cannot presently be determined.
F-59
<PAGE>
USG CORPORATION
(PREDECESSOR COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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 has appealed the court's ruling with respect to the
policy years available to cover particular claims, and the carriers have
appealed most other aspects of the court's ruling. These appeals are likely to
take a year or more.
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, 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 have
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, 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. 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 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 $276 million of
coverage that was unexhausted as of December 31, 1992 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 will continue 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
F-60
<PAGE>
USG CORPORATION
(PREDECESSOR COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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, 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.
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.
GEOGRAPHIC AND INDUSTRY 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 from U.S. Gypsum to L&W Supply. 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. Geographic and
industry segment data for 1991 exclude discontinued operations.
To assist the reader in evaluating the profitability of each geographic and
industry segment, EBITDA is shown separately in the following tables. EBITDA
represents earnings before interest, taxes, depreciation, depletion and
amortization. For the period of January 1 through May 6, 1993, the Corporation
also added back non-cash postretirement charges, reorganization items, an
extraordinary gain and the cumulative impact of 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
F-61
<PAGE>
USG CORPORATION
(PREDECESSOR COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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. Certain amounts for 1992 and 1991 have been
reclassified to conform to the current period presentation.
Variations in the levels of corporate identifiable assets primarily reflect
fluctuations in the levels of cash and cash equivalents. Restricted cash of $88
million and $84 million, which represents the proceeds from the sale of DAP, are
included in corporate identifiable assets for 1992 and 1991, respectively.
<TABLE>
<CAPTION>
OPERATING DEPLETION
JANUARY 1 THROUGH MAY 6, 1993 PROFIT/ DEPRECIATION AND CAPITAL IDENTIFIABLE
GEOGRAPHIC SEGMENTS NET SALES (LOSS) EBITDA AMORTIZATION EXPENDITURES ASSETS
- ----------------------------------- ----------- ------------- ----------- ------------------- ----------------- -----------
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN MILLIONS)
United States:
Gypsum Products.................. $ 303 $ 30 $ 40 $ 10 $ 6 $ 956
Interior Systems................. 121 10 15 5 2 562
Building Products Distribution... 156 (1) -- 1 1 116
Intrasegment eliminations........ (73) -- -- -- -- --
Corporate........................ -- (11) (7) 2 -- 142
----------- ------ --- ------ --- -----------
Total............................ 507 28 48 18 9 1,776
Canada............................. 48 4 7 2 1 198
Other Foreign...................... 65 6 8 2 2 221
Transfers between geographic
areas............................. (29) -- -- -- -- (1)
----------- ------ --- ------ --- -----------
Total.............................. 591 38 63 22 12 2,194
----------- ------ --- ------ --- -----------
----------- ------ --- ------ --- -----------
<CAPTION>
INDUSTRY SEGMENTS
- -----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Gypsum Products.................... $ 359 $ 37 $ 50 $ 13 $ 7 $ 1,175
Interior Systems................... 177 13 20 6 4 761
Building Products Distribution..... 156 (1) -- 1 1 116
Intersegment eliminations.......... (101) -- -- -- -- --
Corporate.......................... -- (11) (7) 2 -- 142
----------- ------ --- ------ --- -----------
Total.............................. 591 38 63 22 12 2,194
----------- ------ --- ------ --- -----------
----------- ------ --- ------ --- -----------
</TABLE>
F-62
<PAGE>
USG CORPORATION
(PREDECESSOR COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
DEPLETION
YEAR ENDED DECEMBER 31, 1992 OPERATING DEPRECIATION AND CAPITAL IDENTIFIABLE
GEOGRAPHIC SEGMENTS NET SALES PROFIT EBITDA AMORTIZATION EXPENDITURES ASSETS
- ---------------------------------- --------- ------------- ----------- --------------------- ----------------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
United States:
Gypsum Products................. $ 889 $ 69 $ 99 $ 30 $ 25 $ 645
Interior Systems................ 368 34 47 13 11 260
Building Products
Distribution................... 464 3 5 2 3 95
Intrasegment eliminations....... (216) -- -- -- -- --
Corporate....................... -- (30) (28) 8 1 423
--------- ----- ----- --- --- -------------
Total........................... 1,505 76 123 53 40 1,423
Canada............................ 149 7 14 7 6 96
Other Foreign..................... 208 16 22 6 3 140
Transfers between geographic
areas............................ (85) -- -- -- -- --
--------- ----- ----- --- --- -------------
Total............................. 1,777 99 159 66 49 1,659
--------- ----- ----- --- --- -------------
--------- ----- ----- --- --- -------------
<CAPTION>
INDUSTRY SEGMENTS
- ----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Gypsum Products................... $ 1,068 $ 85 $ 123 $ 38 $ 31 $ 764
Interior Systems.................. 548 41 59 18 14 377
Building Products Distribution.... 464 3 5 2 3 95
Intersegment eliminations......... (303) -- -- -- -- --
Corporate......................... -- (30) (28) 8 1 423
--------- ----- ----- --- --- -------------
Total............................. 1,777 99 159 66 49 1,659
--------- ----- ----- --- --- -------------
--------- ----- ----- --- --- -------------
<CAPTION>
DEPLETION
YEAR ENDED DECEMBER 31, 1991 OPERATING DEPRECIATION AND CAPITAL IDENTIFIABLE
GEOGRAPHIC SEGMENTS NET SALES PROFIT EBITDA AMORTIZATION EXPENDITURES ASSETS
- ---------------------------------- --------- ------------- ----------- --------------------- ----------------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
United States:
Gypsum Products................. $ 835 $ 64 $ 93 $ 29 $ 23 $ 627
Interior Systems................ 386 47 59 12 9 263
Building Products
Distribution................... 424 -- 4 4 1 85
Intrasegment eliminations....... (212) -- -- -- -- --
Corporate....................... -- (22) (19) 10 1 383
--------- ----- ----- --- --- -------------
Total........................... 1,433 89 137 55 34 1,358
Canada............................ 169 22 29 7 3 111
Other Foreign..................... 193 22 28 6 12 157
Transfers between geographic
areas............................ (83) -- -- -- -- --
--------- ----- ----- --- --- -------------
Total............................. 1,712 133 194 68 49 1,626
--------- ----- ----- --- --- -------------
--------- ----- ----- --- --- -------------
<CAPTION>
INDUSTRY SEGMENTS
- ----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Gypsum Products................... $ 1,011 $ 93 $ 131 $ 37 $ 25 $ 754
Interior Systems.................. 576 62 78 17 22 404
Building Products Distribution.... 424 -- 4 4 1 85
Intersegment eliminations......... (299) -- -- -- -- --
Corporate......................... -- (22) (19) 10 1 383
--------- ----- ----- --- --- -------------
Total............................. 1,712 133 194 68 49 1,626
--------- ----- ----- --- --- -------------
--------- ----- ----- --- --- -------------
</TABLE>
F-63
<PAGE>
USG CORPORATION
(PREDECESSOR COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
JANUARY 1 YEARS ENDED DECEMBER 31,
THROUGH
MAY 6, ------------------------
TRANSFERS BETWEEN GEOGRAPHIC AREAS 1993 1992 1991
- ------------------------------------------------------------------------------------ --------------- ----------- -----------
<S> <C> <C> <C>
(DOLLARS IN MILLIONS)
United States....................................................................... $ 13 $ 35 $ 34
Canada.............................................................................. 8 23 22
Other Foreign....................................................................... 8 27 27
--- --- ---
Total............................................................................... 29 85 83
--- --- ---
--- --- ---
</TABLE>
SUBSIDIARY DEBT GUARANTEES
In May 1993, the Corporation issued $340 million aggregate principal amount
of Senior 2002 Notes. 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 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
Term Loan, Revolving Credit Facility, Capitalized Interest Notes 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 Term Loan,
the Revolving Credit Facility and the Capitalized Interest Notes are 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.
There are 43 Non-Guarantors (the "Combined Non-Guarantors"), substantially
all of which are subsidiaries of Guarantors. The Combined Non-Guarantors
primarily include 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 December 31, 1992 and
for the period of January 1 through May 6, 1993, and the years ended
December 31, 1992 and 1991 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.
F-64
<PAGE>
USG CORPORATION
(PREDECESSOR COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
USG CORPORATION
(PREDECESSOR COMPANY)
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS
JANUARY 1 THROUGH MAY 6, 1993
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
COMBINED
PARENT COMBINED NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
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
----------- ----------- ------ ------ -------------
----------- ----------- ------ ------ -------------
</TABLE>
F-65
<PAGE>
USG CORPORATION
(PREDECESSOR COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
USG CORPORATION
(PREDECESSOR COMPANY)
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS
YEAR ENDED DECEMBER 31, 1992
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
COMBINED
PARENT COMBINED NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
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)
----------- ----------- ----- ------ -------------
----------- ----------- ----- ------ -------------
</TABLE>
USG CORPORATION
(PREDECESSOR COMPANY)
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS
YEAR ENDED DECEMBER 31, 1991
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
COMBINED
PARENT COMBINED NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Net sales.................................... $ -- $ 1,452 $ 366 $ (106) $ 1,712
----------- ----------- ----- ------ -------------
Gross profit................................. 1 241 85 -- 327
----------- ----------- ----- ------ -------------
Operating profit/(loss)...................... (22) 110 45 -- 133
Equity in net (earnings)/loss of the
Subsidiaries................................ 185 (30) -- (155) --
Interest expense, net........................ 305 15 2 -- 322
Corporate service charge (331) 331 -- -- --
Other expense/(income)....................... 6 (2) 1 -- 5
----------- ----------- ----- ------ -------------
Earnings/(loss) from continuing operations
before taxes on income...................... (187) (204) 42 155 (194)
Taxes on income/(income tax benefit)......... 15 (80) 12 -- (53)
----------- ----------- ----- ------ -------------
Earnings/(loss) from continuing operations... (202) (124) 30 155 (141)
Discontinued operations...................... 41 (61) -- -- (20)
----------- ----------- ----- ------ -------------
Net earnings/(loss).......................... (161) (185) 30 155 (161)
----------- ----------- ----- ------ -------------
----------- ----------- ----- ------ -------------
</TABLE>
F-66
<PAGE>
USG CORPORATION
(PREDECESSOR COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
USG CORPORATION
(PREDECESSOR COMPANY)
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF MAY 6, 1993
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
COMBINED
PARENT COMBINED NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
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
----------- ----------- ----- ------------ -------------
----------- ----------- ----- ------------ -------------
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current Liabilities:
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
Stockholders' Equity:
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
----------- ----------- ----- ------------ -------------
----------- ----------- ----- ------------ -------------
</TABLE>
F-67
<PAGE>
USG CORPORATION
(PREDECESSOR COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
USG CORPORATION
(PREDECESSOR COMPANY)
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 1992
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
COMBINED
PARENT COMBINED NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents.................. $ 59 $ 87 $ 34 $ -- $ 180
Receivables (net of reserves).............. 65 219 40 (25) 299
Inventories................................ -- 82 34 (3) 113
Restricted cash............................ -- 88 -- -- 88
----------- ----------- ----- ------------ -------------
Total current assets..................... 124 476 108 (28) 680
Property, plant and equipment, net........... 19 664 117 -- 800
Investment in Subsidiaries................... 1,073 133 -- (1,206) --
Purchased goodwill, net...................... -- 61 8 -- 69
Other assets................................. (89) 214 (11) (4) 110
----------- ----------- ----- ------------ -------------
Total assets............................. 1,127 1,548 222 (1,238) 1,659
----------- ----------- ----- ------------ -------------
----------- ----------- ----- ------------ -------------
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current Liabilities:
Accounts payable and accrued expenses...... $ 538 $ 91 $ 39 $ (24) $ 644
Notes payable and long-term debt maturing
within one year........................... 570 141 7 -- 718
Long-term debt classified as current....... 1,926 -- -- -- 1,926
----------- ----------- ----- ------------ -------------
Total current liabilities................ 3,034 232 46 (24) 3,288
Long-term debt............................... 1 38 28 -- 67
Deferred income taxes........................ (36) 196 15 -- 175
Other liabilities............................ -- 9 -- -- 9
Stockholders' Equity/(Deficit):
Common stock............................... 5 2 5 (7) 5
Capital received in excess of par value.... 23 1,002 34 (1,036) 23
Deferred currency translation.............. -- (2) (6) -- (8)
Reinvested earnings/(deficit).............. (1,900) 71 100 (171) (1,900)
----------- ----------- ----- ------------ -------------
Total stockholders' equity/(deficit)..... (1,872) 1,073 133 (1,214) (1,880)
----------- ----------- ----- ------------ -------------
Total liabilities and stockholders'
equity.................................. 1,127 1,548 222 (1,238) 1,659
----------- ----------- ----- ------------ -------------
----------- ----------- ----- ------------ -------------
</TABLE>
F-68
<PAGE>
USG CORPORATION
(PREDECESSOR COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
USG CORPORATION
(PREDECESSOR COMPANY)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
JANUARY 1 THROUGH MAY 6, 1993
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
COMBINED
PARENT COMBINED NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------- ------------- ------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
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 AND CASH EQUIVALENTS.... (35) (94) (2) -- (131)
----- ------ --- ----- ------
Cash and cash equivalents at beginning of
period...................................... 59 87 34 -- 180
----- ------ --- ----- ------
Cash and cash equivalents at end of period... 24 (7) 32 -- 49
----- ------ --- ----- ------
----- ------ --- ----- ------
</TABLE>
F-69
<PAGE>
USG CORPORATION
(PREDECESSOR COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
USG CORPORATION
(PREDECESSOR COMPANY)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1992
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
COMBINED
PARENT COMBINED NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------- ------------- ------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
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 AND CASH
EQUIVALENTS................................. 23 9 (7) -- 25
----- ------ --- ----- ------
Cash and cash equivalents at beginning of
period...................................... 36 78 41 -- 155
----- ------ --- ----- ------
Cash and cash equivalents at end of period... 59 87 34 -- 180
----- ------ --- ----- ------
----- ------ --- ----- ------
</TABLE>
F-70
<PAGE>
USG CORPORATION
(PREDECESSOR COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
USG CORPORATION
(PREDECESSOR COMPANY)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1991
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
COMBINED
PARENT COMBINED NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------- ------------- ------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
NET CASH FLOWS (TO)/FROM OPERATING
ACTIVITIES.................................. $ (216) $ 211 $ 34 $ -- $ 29
----------- ------ --- ----- -----
Capital expenditures....................... (1) (33) (15) -- (49)
Net proceeds from asset dispositions....... -- 4 1 -- 5
Net proceeds from divestiture of
Discontinued Operations................... 80 -- -- -- 80
----------- ------ --- ----- -----
NET CASH FLOWS (TO)/FROM INVESTING
ACTIVITIES.................................. 79 (29) (14) -- 36
----------- ------ --- ----- -----
Issuance of debt........................... -- -- 65 -- 65
Repayment of debt.......................... (4) (1) (63) -- (68)
Cash dividends (paid)/received............. 10 9 (19) -- --
Increase in restricted assets.............. -- (84) -- -- (84)
Net cash transfers (to)/from Corporate..... 34 (34) -- -- --
----------- ------ --- ----- -----
NET CASH FLOWS (TO)/FROM FINANCING
ACTIVITIES.................................. 40 (110) (17) -- (87)
----------- ------ --- ----- -----
Net cash flows from discontinued
operations.................................. -- 2 -- -- 2
----------- ------ --- ----- -----
NET INCREASE/(DECREASE) IN CASH AND CASH
EQUIVALENTS................................. (97) 74 3 -- (20)
----------- ------ --- ----- -----
Cash and cash equivalents at beginning of
period...................................... 133 4 38 -- 175
----------- ------ --- ----- -----
Cash and cash equivalents at end of period... 36 78 41 -- 155
----------- ------ --- ----- -----
----------- ------ --- ----- -----
</TABLE>
F-71
<PAGE>
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.
F-72
<PAGE>
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 December 31, 1992 and the related consolidated statements of earnings and
cash flows for the period of January 1 through May 6, 1993 and for the years
ended December 31, 1992 and 1991. 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" and
"Fresh Start Accounting" notes, 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 for 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 December 31, 1992, and the results of their
operations and their cash flows for the period of January 1 through May 6, 1993
and for the years ended December 31, 1992 and 1991, 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
methods of accounting for postretirement benefits other than pensions and
accounting for income taxes.
ARTHUR ANDERSEN & CO.
Chicago, Illinois
January 31, 1994
F-73
<PAGE>
USG CORPORATION
(PREDECESSOR COMPANY)
SCHEDULE V
PROPERTY, PLANT AND EQUIPMENT
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
BEGINNING ENDING
CLASSIFICATION BALANCE BALANCE
- ------------------------------------------------------------------------------------------- ----------- -----------
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1991
- -------------------------------------------------------------------------------------------
Land and mineral deposits.................................................................. $ 43 $ 41
Buildings and realty improvements.......................................................... 385 402
Machinery and equipment.................................................................... 972 1,000
----------- -----------
Total.................................................................................... 1,400 1,443
----------- -----------
----------- -----------
YEAR ENDED DECEMBER 31, 1992
- -------------------------------------------------------------------------------------------
Land and mineral deposits.................................................................. 41 41
Buildings and realty improvements.......................................................... 402 401
Machinery and equipment.................................................................... 1,000 1,012
----------- -----------
Total.................................................................................... 1,443 1,454
----------- -----------
----------- -----------
JANUARY 1 THROUGH MAY 6, 1993
- -------------------------------------------------------------------------------------------
Land and mineral deposits.................................................................. 41 61
Buildings and realty improvements.......................................................... 401 228
Machinery and equipment.................................................................... 1,012 478
----------- -----------
Total.................................................................................... 1,454 767
----------- -----------
----------- -----------
</TABLE>
In accordance with fresh start accounting, the Corporation adjusted its
property, plant and equipment accounts as of May 6, 1993 to fair market value.
Detailed information regarding additions and deductions other than those
associated with fresh start accounting is omitted as neither total additions nor
total deductions during each of the periods shown above exceeded 10% of the
balance at the end of the period. Excluding fresh start adjustments, total
additions were $12 million in the period of January 1 through May 6, 1993 and
$49 million in each of the years ended December 31, 1992 and 1991. Total
deductions excluding fresh start adjustments were $12 million in the period of
January 1 through May 6, 1993 and $38 million and $6 million in the years ended
December 31, 1992 and 1991, respectively.
Total deductions include the effect of foreign currency translation which
increased total deductions by $1 million in the period of January 1 through May
6, 1993 and by $18 million in the year ended December 31, 1992. In 1991, foreign
currency translation adjustments decreased total deductions by $1 million.
Upon retirement of other disposition of property, the applicable cost and
accumulated depreciation and depletion are removed from the accounts. Any gains
and losses are included in earnings.
F-74
<PAGE>
USG CORPORATION
(PREDECESSOR COMPANY)
SCHEDULE VI
ACCUMULATED DEPRECIATION AND DEPLETION OF
PROPERTY, PLANT AND EQUIPMENT
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
BEGINNING ENDING
CLASSIFICATION BALANCE BALANCE
- ------------------------------------------------------------------------------------------- ------------- -----------
<S> <C> <C>
YEAR ENDED DECEMBER 31, 1991
- -------------------------------------------------------------------------------------------
Land and mineral deposits.................................................................. $ 7 $ 7
Buildings and realty improvements.......................................................... 141 147
Machinery and equipment.................................................................... 427 470
----- -----
Total.................................................................................... 575 624
----- -----
----- -----
YEAR ENDED DECEMBER 31, 1992
- -------------------------------------------------------------------------------------------
Land and mineral deposits.................................................................. 7 7
Buildings and realty improvements.......................................................... 147 155
Machinery and equipment.................................................................... 470 492
----- -----
Total.................................................................................... 624 654
----- -----
----- -----
JANUARY 1 THROUGH MAY 6, 1993
- -------------------------------------------------------------------------------------------
Land and mineral deposits.................................................................. 7 --
Buildings and realty improvements.......................................................... 155 --
Machinery and equipment.................................................................... 492 --
----- -----
Total.................................................................................... 654 --
----- -----
----- -----
</TABLE>
In accordance with fresh start accounting, the Corporation adjusted its
property, plant and equipment accounts as of May 6, 1993 to fair market value.
Consequently, there were no reserves for depreciation and depletion as of that
date.
Detailed information regarding additions and deductions other than those
associated with fresh start accounting is omitted as neither total additions nor
total deductions of property, plant and equipment (see Schedule V) during each
of the periods shown above exceeded 10% of the balance of property, plant and
equipment at the end of the related period. Total provisions for depreciation
and depletion were $20 million in the period of January 1 through May 6, 1993
and $58 million and $57 million in the years ended December 31, 1992 and 1991,
respectively. Total deductions, excluding fresh start adjustments, were $12
million in the period of January 1 through May 6, 1993 and $28 million and $8
million in the years ended December 31, 1992 and 1991, respectively.
Total deductions include the effect of foreign currency translation which
increased total deductions by $2 million in the period of January 1 through May
6, 1993 and by $10 million in the year ended December 31, 1992 and decreased
total deductions by $1 million in the year ended December 31, 1991.
Upon retirement or other disposition of property, the applicable cost and
accumulated depreciation and depletion are removed from the accounts. Any gains
and losses are included in earnings.
F-75
<PAGE>
USG CORPORATION
(PREDECESSOR COMPANY)
SCHEDULE VIII
VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
PROVISION RECEIVABLES
CHARGED TO WRITTEN OFF
BEGINNING COSTS AND AND DISCOUNTS ENDING
ACCOUNT BALANCE EXPENSES ALLOWED BALANCE
- ------------------------------------------------------------- --------------- --------------- --------------- -----------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1991
- -------------------------------------------------------------
Doubtful accounts............................................ $ 6 $ 7 $ (6) $ 7
Cash discounts............................................... 2 23 (23) 2
YEAR ENDED DECEMBER 31, 1992
- -------------------------------------------------------------
Doubtful accounts............................................ 7 7 (5) 9
Cash discounts............................................... 2 24 (24) 2
JANUARY 1 THROUGH MAY 6, 1993
- -------------------------------------------------------------
Doubtful accounts............................................ 9 3 (1) 11
Cash discounts............................................... 2 8 (8) 2
</TABLE>
F-76
<PAGE>
USG CORPORATION
(PREDECESSOR COMPANY)
SCHEDULE IX
SHORT-TERM BORROWINGS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
MAXIMUM AMOUNT AVERAGE AMOUNT WEIGHTED AVERAGE
WEIGHTED OUTSTANDING OUTSTANDING INTEREST RATE
CATEGORY OF AGGREGATE AVERAGE DURING THE DURING THE DURING THE PERIOD
SHORT-TERM BORROWINGS ENDING BALANCE INTEREST RATE PERIOD PERIOD (A) (B)
- ------------------------------------ ----------------- --------------- --------------- --------------- -----------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1991
- -------------------------------------------------------
Notes payable (c)................. $ 8 8.5% $ 19 $ 15 10.5%
Revolving Credit Facility (d)..... 140 12.8 140 140 13.3
YEAR ENDED DECEMBER 31, 1992
- -------------------------------------------------------
Notes payable (c)................. 2 10.6 12 7 8.0
Revolving Credit Facility (d)..... 140 10.0 140 140 11.2
JANUARY 1 THROUGH MAY 6, 1993
- -------------------------------------------------------
Notes payable (c)................. 6 7.3 6 3 8.8
Revolving Credit Facility (d)..... -- 7.3 140 140 8.7
<FN>
- ------------------------
(a) The average of month-end principal balances.
(b) Computed by dividing average monthly interest expense for the period by the
average amount of short-term borrowings outstanding.
(c) Represents borrowings from several foreign banks by USG International and
CGC which are generally not subject to the provisions of the Credit
Agreement.
(d) The Old Credit Agreement, effective up to May 6, 1993, included a $200
million Revolving Credit Facility, of which $70 million was established as a
letter of credit subfacility. Effective May 6, 1993, these amounts were $175
million and $110 million, respectively.
</TABLE>
F-77
<PAGE>
USG CORPORATION
(PREDECESSOR COMPANY)
SCHEDULE X
SUPPLEMENTAL STATEMENT OF EARNINGS INFORMATION
(DOLLARS IN MILLIONS)
The following amounts were charged to costs and expenses:
<TABLE>
<CAPTION>
JANUARY 1 YEARS ENDED DECEMBER
THROUGH 31,
MAY 6, ----------------------
1993 1992 1991
------------- --------- -----
<S> <C> <C> <C>
Maintenance and repairs.......................................... $ 34 $ 105 $ 99
Depreciation, depletion and amortization......................... 22 66 68
</TABLE>
Maintenance and repairs are recorded as costs or expenses when incurred.
Taxes (excluding payroll and income taxes), rents, royalties and advertising
costs are not shown above, as individually they do not exceed one percent of net
sales in any of the periods shown.
F-78
<PAGE>
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 equal to the
amount recorded as of December 31, 1992. Financial results for U.S. Gypsum are
presented below in accordance with disclosure requirements of the SEC (dollars
in millions):
SUMMARY STATEMENT OF EARNINGS
<TABLE>
<CAPTION>
JANUARY 1 YEARS ENDED DECEMBER 31,
THROUGH MAY ------------------------------------
6, 1993 1992 1991
------------- ------------- ---------------------
<S> <C> <C> <C>
Net sales....................................................... $ 297 $ 871 $ 822
Cost and expenses............................................... 268 801 759
------ ------ ------
Operating profit................................................ 29 70 63
Interest expense, net........................................... -- 2 4
Other income, net............................................... -- (2) (1)
Corporate charges............................................... 52 188 173
Reorganization items............................................ (295) -- --
------ ------ ------
Earnings/(loss) before taxes on income and change in accounting
principle...................................................... 272 (118) (113)
Income tax benefit.............................................. (11) (44) (43)
------ ------ ------
Earnings/(loss) before change in accounting principle........... 283 (74) (70)
Cumulative effect of change in accounting principle............. 28 -- --
------ ------ ------
Net earnings/(loss)............................................. 311 (74) (70)
------ ------ ------
------ ------ ------
</TABLE>
SUMMARY BALANCE SHEET
<TABLE>
<CAPTION>
AS OF AS OF
MAY 6, 1993 DECEMBER 31, 1992
------------- ---------------------
<S> <C> <C>
Current assets................................................................ $ 183 $ 192
Property, plant and equipment, net............................................ 486 511
Excess Reorganization Value................................................... 306 --
Other assets.................................................................. 9 7
------ ------
Total assets................................................................ 984 710
------ ------
------ ------
Current liabilities........................................................... $ 33 $ 32
Other liabilities and obligations............................................. 154 193
Stockholder's equity.......................................................... 797 485
------ ------
Total liabilities and stockholder's equity.................................. 984 710
------ ------
------ ------
</TABLE>
F-79
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
WITH RESPECT TO SUPPLEMENTAL NOTE AND FINANCIAL STATEMENT SCHEDULES
We have audited in accordance with generally accepted auditing standards,
the consolidated financial statements of USG Corporation (Predecessor Company)
included in this Form S-1, and have issued our report thereon dated January 31,
1994. Our report on the consolidated financial statements includes an
explanatory paragraph with respect to the asbestos litigation as discussed in
Notes to 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 on Changes on Accounting Principles"
note. Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The supplemental note and financial
statement schedules on pages F-74 through F-79 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 basic
financial statements. The supplemental note and financial statement schedules
have been subjected to the auditing procedures applied in the audits of the
basic 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
basic financial statements taken as a whole.
ARTHUR ANDERSEN & CO.
Chicago, Illinois
January 31, 1994
F-80
<PAGE>
USG CORPORATION
SELECTED QUARTERLY FINANCIAL DATA (A) (UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
APRIL 1 MAY 7
FIRST THROUGH THROUGH THIRD FOURTH
QUARTER MAY 6 JUNE 30 QUARTER QUARTER
-------- --------- -------- -------- ---------
1993
<S> <C> <C> <C> <C> <C>
Net sales............................... $ 436 $ 155 $ 315 $ 514 $ 496
Gross profit............................ 79 30 63 105 95
Operating profit/(loss) (b)............. 27 11 (1) 6 (4)
Net earnings/(loss)(b) (c).............. (279) 1,713 (21) (25) (83)
Per common share (d):
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
<CAPTION>
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
<CAPTION>
FIRST SECOND THIRD FOURTH TOTAL
QUARTER QUARTER QUARTER QUARTER YEAR
-------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
1992 (D)
Net sales............................... $ 426 $ 441 $ 474 $ 436 $ 1,777
Gross profit............................ 71 81 94 71 317
Operating profit........................ 20 28 39 12 99
Net loss................................ (50) (48) (33) (60) (191)
EBITDA.................................. 35 43 54 27 159
</TABLE>
- ------------------------
(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) Effective May 7, 1993, the Corporation began amortizing its Excess
Reorganization Value. This non-cash amortization reduced operating profit
and net earnings by $28 million, $43 million and $42 million in the period
of May 7 through June 30, the third quarter and the fourth quarter of 1993,
respectively.
(c) Net loss in the first quarter of 1993 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 earnings in the fourth quarter of 1993 include an
after-tax extraordinary loss of $21 million related to the Corporation's
proposed 1994 financing plan.
(d) 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.
(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 December 31, 1993: Common -- 13,898; Preferred
-- none.
F-81
<PAGE>
USG CORPORATION
COMPARATIVE FIVE-YEAR SUMMARY (A) (UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
MAY 7 JANUARY 1
THROUGH THROUGH YEARS ENDED DECEMBER 31,
DEC. 31, MAY 6, ------------------------------------------
1993(B) 1993 1992 1991 1990 1989
----------- ----------- --------- --------- --------- ---------
EARNINGS STATEMENT DATA:
<S> <C> <C> <C> <C> <C> <C>
Net sales.................................................. $ 1,325 $ 591 $ 1,777 $ 1,712 $ 1,915 $ 2,007
Gross profit............................................... 263 109 317 327 416 501
Selling and administrative expenses........................ 149 71 218 194 203 209
Amortization of Excess Reorganization Value................ 113 -- -- -- -- --
Operating profit........................................... 1 38 99 133 195 292
Interest expense........................................... 92 86 334 333 292 297
Interest income............................................ (4) (2) (12) (11) (8) (10)
Other (income)/expense, net................................ (8) 6 1 5 5 15
Reorganization items....................................... -- (709) -- -- -- --
Earnings/(loss) from continuing operations before
extraordinary gain/(loss) and changes in accounting
principles................................................ (108) 640 (191) (141) (54) 20
Extraordinary gain/(loss), net of taxes.................... (21) 944 -- -- -- --
Cumulative effect of accounting changes.................... -- (150) -- -- -- --
Net earnings/(loss)........................................ (129) 1,434 (191) (161) (90) 28
Net earnings/(loss) per common share (c)................... (3.46)
BALANCE SHEET DATA (AS OF THE END OF THE PERIOD):
Working capital/(deficit).................................. 121 217 (2,608) (2,372) (2,198) 51
Current ratio.............................................. 1.24 1.74 .21 .21 .24 1.09
Property, plant and equipment, net......................... 754 767 800 819 825 837
Total assets............................................. 2,163 2,194 1,659 1,626 1,675 1,585
Total debt (d)........................................... 1,531 1,556 2,711 2,660 2,600 2,428
Total stockholders' equity/(deficit)....................... (134) 4 (1,880) (1,680) (1,518) (1,438)
OTHER INFORMATION:
EBITDA..................................................... 155 63 159 194 280 361
Capital expenditures....................................... 29 12 49 49 64 76
Gross margin %............................................. 19.8 % 18.4 % 17.8% 19.1% 21.7% 25.0%
EBITDA margin %............................................ 11.7 % 10.7 % 8.9% 11.3% 14.6% 18.0%
Market value per common share (c).......................... 29 1/4
Average number of employees................................ 11,900 11,750 11,850 11,800 12,700 13,400
</TABLE>
- ------------------------------
(a)_Results reflect DAP (sold in 1991), the Marlite Division of USG Interiors
(sold in 1989) and Wiss, Janney, Elstner Associates, Inc. (sold in 1989) 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 Predecessor
Company -- Notes to Financial Statements -- "Financial Restructuring" and
"Fresh Start Accounting" notes 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 of $29 1/4 was the closing
stock price on December 31, 1993.
(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, 1993 and
May 6, 1993 are $1,476 million and $1,461 million, respectively.
F-82
<PAGE>
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE
BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE CORPORATION, THE
SELLING STOCKHOLDER OR BY ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER
OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE CORPORATION SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................. 3
Summary Financial Information.................. 7
Risk Factors................................... 9
The Restructuring.............................. 12
Purpose of the Offering and Use of Proceeds.... 13
Capitalization................................. 15
Price Range of Common Stock.................... 16
Dividend Policy................................ 16
Dilution....................................... 17
Pro Forma Condensed Consolidated Financial
Statements.................................... 17
Selected Consolidated Financial Data........... 23
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 25
Business....................................... 31
Management..................................... 46
Ownership of Common Stock...................... 59
Certain Relationships and Related
Transactions.................................. 61
Description of Credit Agreement................ 63
Description of Other Debt Obligations.......... 73
Description of Collateral Trust................ 86
Description of Capital Stock................... 87
Certain United States Federal Tax Consequences
for Non-U.S. Stockholders..................... 92
Underwriting................................... 94
Legal Matters.................................. 96
Experts........................................ 97
Additional Information......................... 97
Index to Financial Statements.................. 98
</TABLE>
10,000,000 SHARES
USG CORPORATION
COMMON STOCK
($.10 PAR VALUE)
[LOGO]
SALOMON BROTHERS INC
LAZARD FRERES & CO.
SMITH BARNEY SHEARSON INC.
PROSPECTUS
DATED , 1994
<PAGE>
Certain photographs used with permission of Herr, -C- Hedrich-Blessing
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THE SECURITIES IN
ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO
REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
[ALTERNATIVE PAGE FOR INTERNATIONAL PROSPECTUS]
<TABLE>
<S> <C> <C>
PROSPECTUS SUBJECT TO COMPLETION [LOGO]
10,000,000 SHARES FEBRUARY 16, 1994
USG CORPORATION
COMMON STOCK
($.10 PAR VALUE)
</TABLE>
Of the 10,000,000 shares of common stock ("Common Stock") of USG Corporation
("USG" or the "Corporation") being offered, 6,000,000 shares are being sold by
the Corporation and 4,000,000 shares are being sold by Water Street Corporate
Recovery Fund I, L.P. (the "Selling Stockholder" or "Water Street"). See
"Ownership of Common Stock -- Selling Stockholder and its Affiliates." The
Corporation will not receive any of the proceeds from the sale of Common Stock
by the Selling Stockholder.
Of the 10,000,000 shares of Common Stock being offered, 1,500,000 shares are
being offered hereby outside the United States and Canada (the "International
Offering") and 8,500,000 shares are being offered in a concurrent offering in
the United States and Canada (the "U.S. Offering" and, collectively with the
International Offering, the "Offering"), subject to transfers between the U.S.
Underwriters (as defined herein) and the International Underwriters (as defined
herein). The offering price and underwriting discounts for the U.S. Offering and
the International Offering will be identical. The closing of the U.S. Offering
is conditioned upon the closing of the International Offering, and the closing
of the International Offering is conditioned upon the closing of the U.S.
Offering. See "Underwriting."
The Common Stock is traded on the New York Stock Exchange (the "NYSE") under the
symbol "USG." On February 11, 1994, the last reported sale price of the Common
Stock as reported on the NYSE Composite Tape was $32.375 per share. See "Price
Range of Common Stock." Potential investors are encouraged to obtain current
trading price information.
PROSPECTIVE INVESTORS SHOULD CONSIDER CAREFULLY THE MATTERS DISCUSSED UNDER THE
CAPTION "RISK FACTORS."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<S> <C> <C> <C> <C>
PROCEEDS TO PROCEEDS TO
PRICE TO UNDERWRITING CORPORATION SELLING
PUBLIC DISCOUNT (1) STOCKHOLDER
Per Share.................. $ $ $ $
Total (2).................. $ $ $ $
<FN>
(1) Before deduction of expenses payable by the Corporation, estimated to be
$1,300,000.
(2) The Corporation and the Selling Stockholder have each granted to the
International Underwriters a 30-day option to purchase up to 112,500
additional shares of Common Stock at the Price to Public, less the
Underwriting Discount, solely to cover over-allotments, if any.
Additionally, the Corporation and the Selling Stockholder have each granted
to the U.S. Underwriters a 30-day option to purchase up to 637,500
additional shares of Common Stock at the Price to Public, less the
Underwriting Discount, solely to cover over-allotments, if any. If the
Underwriters exercise such options in full, the total Price to Public,
Underwriting Discount, Proceeds to Corporation and Proceeds to Selling
Stockholder will be , , , and , respectively. See "Underwriting."
</TABLE>
The shares of Common Stock are offered subject to receipt and acceptance by the
International Underwriters, to prior sale and to the International Underwriters'
right to reject any order in whole or in part and to withdraw, cancel or modify
the offer without notice. It is expected that delivery of the shares will be
made at the office of Salomon Brothers Inc, Seven World Trade Center, New York,
New York, or through the facilities of The Depository Trust Company, on or about
__________, 1994.
SALOMON BROTHERS INTERNATIONAL LIMITED____________LAZARD BROTHERS & CO., LIMITED
SMITH BARNEY SHEARSON INC.
The date of this Prospectus is __________, 1994.
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
UNDERWRITING
Subject to the terms and the conditions set forth in an agreement among the
Corporation, the Selling Stockholder and the International Underwriters ("the
International Underwriting Agreement"), the Corporation and the Selling
Stockholder have agreed to sell to each of the International Underwriters named
below (the "International Underwriters"), and each of the International
Underwriters, for whom Salomon Brothers International Limited, Lazard Brothers &
Co., Limited and Smith Barney Shearson Inc. are acting as representatives (the
"International Representatives"), has severally agreed to purchase from the
Corporation and the Selling Stockholder the respective number of shares of
Common Stock set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES
INTERNATIONAL UNDERWRITER TO BE PURCHASED
- ---------------------------------------------------------------------------- ----------------
<S> <C>
Salomon Brothers International Limited......................................
Lazard Brothers & Co., Limited..............................................
Smith Barney Shearson Inc...................................................
----------------
Total.....................................................................
----------------
----------------
</TABLE>
In the International Underwriting Agreement, the several International
Underwriters have agreed, subject to the terms and conditions set forth therein,
to purchase all 1,500,000 shares of Common Stock offered hereby (other than the
shares of Common Stock covered by the over-allotment options described below) if
any such shares are purchased. In the event of a default by any International
Underwriter, the International Underwriting Agreement provides that, in certain
circumstances, purchase commitments of the non-defaulting International
Underwriters may be increased or the International Underwriting Agreement may be
terminated. The Corporation and the Selling Stockholder have been advised by the
International Representatives that the several International Underwriters
propose initially to offer such shares of Common Stock to the public at the
price to public set forth on the cover page of this Prospectus, and to certain
dealers at such price less a concession not in excess of $____ per share. The
International Underwriters may allow and such dealers may reallow a concession
not in excess of $____ per share to other dealers. After the initial public
offering, the public offering price and such concessions may be changed.
The Corporation and the Selling Stockholder have entered into a U.S.
Underwriting Agreement with the U.S. Underwriters named therein (the "U.S.
Underwriters," and together with the International Underwriters, the
"Underwriters"), for whom Salomon Brothers Inc, Lazard Freres & Co., and Smith
Barney Shearson Inc., are acting as the representatives (the "U.S.
Representatives"), providing for the concurrent offer and sale of 8,500,000
shares of Common Stock in the United States and Canada. Both the International
Underwriting Agreement and the U.S. Underwriting Agreement provide that the
obligations of the International Underwriters and the U.S. Underwriters are such
that if any of the shares of Common Stock are purchased by the International
Underwriters pursuant to the International Underwriting Agreement or by the U.S.
Underwriters pursuant to the U.S. Underwriting Agreement, all the shares of
Common Stock agreed to be purchased by either the International Underwriters or
the U.S. Underwriters, as the case may be, pursuant to their respective
agreements must be so purchased. The initial public offering price and
underwriting discount per share for the International Offering and the U.S.
Offering will be identical. The closing of the U.S. Offering is a condition to
the closing of the International Offering, and the closing of the International
Offering is conditioned upon the closing of the U.S. Offering.
Each International Underwriter has severally agreed that, as part of the
distribution of the 1,500,000 shares of Common Stock offered by the
International Underwriters, (i) it is not purchasing any shares of Common Stock
for the account of any United States or Canadian Person and (ii) it has not
offered or sold, and will not offer or sell, directly or indirectly, any shares
of Common Stock or distribute this Prospectus to any person within the United
States or Canada or to any United States or Canadian
94
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
Person. Each U.S. Underwriter has severally agreed that, as part of the
distribution of the 8,500,000 shares of Common Stock by the U.S. Underwriters,
(i) it is not purchasing any shares of Common Stock for the account of anyone
other than a United States or Canadian Person, and (ii) it has not offered or
sold, and will not offer or sell, directly or indirectly, any shares of Common
Stock or distribute any Prospectus relating to the U.S. Offering to any person
outside the United States or Canada or to anyone other than a United States or
Canadian Person. The foregoing limitations do not apply to stabilization
transactions or to certain other transactions specified in the Agreement Between
U.S. Underwriters and International Underwriters. "United States or Canadian
Person" means any person who is a national or resident of the United States or
Canada, any corporation, partnership or other entity created or organized in or
under the laws of the United States or Canada or any political subdivision
thereof and any estate or trust which is subject to United States or Canadian
federal income taxation, regardless of the source of its income (other than a
foreign branch of any United States or Canadian Person), and includes any United
States or Canadian branch of a person other than a United States or Canadian
Person.
The Corporation and the Selling Stockholder have each granted to the
International Underwriters and the U.S. Underwriters options to purchase up to
an additional 112,500 and 637,500 additional shares of Common Stock,
respectively, at the price to public set forth on the cover page of this
Prospectus, less underwriting discount. The Underwriters may exercise such
options solely to cover over-allotments, if any, made in connection with the
Offering. Either or both options may be exercised at any time up to 30 days
after the date of this Prospectus. To the extent that the Underwriters exercise
such options, each of the Underwriters will have a firm commitment, subject to
certain conditions, to purchase a number of option shares proportionate to such
Underwriter's initial commitment.
Pursuant to the Agreement Between U.S. Underwriters and International
Underwriters, sales may be made between the International Underwriters and the
U.S. Underwriters of such number of shares of Common Stock as may be mutually
agreed. The price of any shares of Common Stock so sold shall be the initial
public offering price, less an amount not greater than the concession to
securities dealers. To the extent that there are sales between the International
Underwriters and the U.S. Underwriters pursuant to the Agreement Between U.S.
Underwriters and International Underwriters, the number of shares of Common
Stock initially available for sale by the International Underwriters or by the
U.S. Underwriters may be more or less than the amount specified on the cover
page of this Prospectus.
Each International Underwriter has severally represented and agreed that:
(i) it has not offered or sold and will not offer or sell any shares of Common
Stock in the United Kingdom by means of any document other than to persons whose
ordinary business it is to buy and sell shares or debentures (whether as
principal or agent) in circumstances which do not constitute an offer to the
public within the meaning of the Companies Act 1985; (ii) it has complied and
will comply with all applicable provisions of the Financial Services Act 1986
with respect to anything done by it in relation to the shares of Common Stock
in, from or otherwise involving the United Kingdom; and (iii) it has only issued
or passed on and will only issue or pass on in the United Kingdom any document
received by it in connection with the issue of the shares of Common Stock to any
person who is of a kind described in Article 9(3) of the Financial Services Act
1986 (Investment Advertisements) (Exemptions) Order 1988 or is a person to whom
the document may otherwise lawfully be issued or passed on.
Purchasers of the shares of Common Stock offered hereby may be required to
pay stamp taxes and other charges in accordance with the laws and practices of
the country of purchase in addition to the offering price set forth on the cover
page hereof.
The U.S. and International Underwriting Agreements provide that the
Corporation and the Selling Stockholder will indemnify the several U.S.
Underwriters and International Underwriters against certain liabilities,
including liabilities under the Securities Act, or contribute to payments the
U.S. Underwriters and the International Underwriters may be required to make in
respect thereof.
95
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
The Corporation has agreed not to sell, or otherwise dispose of, or announce
the offering of, any shares of Common Stock, or any securities convertible into,
or exchangeable for, or exercisable into, shares of Common Stock, except the
shares of Common Stock offered in the Offering, for a period of 120 days from
the date hereof without the prior written consent of the U.S. Representatives
and the International Representatives; provided, however, the Corporation may
issue and sell Common Stock (or options exercisable for Common Stock) pursuant
to any employee or non-employee director stock option plan or stock ownership
plan of the Corporation in effect on the date hereof and the Corporation may
issue Common Stock or any securities convertible into, or exchangeable for, or
exercisable into shares of Common Stock pursuant to the terms of any securities
outstanding on the date hereof or other obligations binding upon the Corporation
and in effect on the date hereof.
The Selling Stockholder has agreed not to sell, or otherwise dispose of, or
announce the offering of, any shares of Common Stock, or any securities
convertible into, or exchangeable for, or exercisable into, shares of Common
Stock, for a period of 120 days from the date hereof, without the prior written
consent of the U.S. Representatives and the International Representatives,
except for the shares of Common Stock offered in the Offering and except that at
any time after 90 days after the date hereof, Water Street may distribute any
such shares and securities to the partners in Water Street. In the event of any
such distribution by Water Street, the partners (other than Goldman, Sachs &
Co.) would not be subject to the restriction on selling shares of Common Stock
during the remainder of the 120-day period. The partners in Water Street shall
not request a demand registration of such shares or securities for a period of
120 days from the date hereof without the prior written consent of the U.S.
Representatives and the International Representatives. See "Certain
Relationships and Related Transactions -- Agreement with Water Street Entities."
From April 1991 to May 1993, Salomon Brothers Inc ("Salomon") and Lazard
Freres & Co. ("Lazard") advised the Corporation in connection with the
development and implementation of the Restructuring for which they received
customary fees and reimbursement of expenses. Salomon has also provided other
financial advisory and investment banking services to the Corporation from time
to time including, during the past two years, with respect to the divestiture of
DAP and certain business strategy issues for which it received customary fees
and reimbursement of expenses. In addition, Smith Barney Shearson Inc. acted as
financial advisor to certain holders of the Company's subordinated debt in
connection with the Restructuring and received customary fees and reimbursement
of expenses.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Corporation by Kirkland & Ellis, Chicago, Illinois. Certain legal
matters will be passed upon for the Underwriters by Wachtell, Lipton, Rosen &
Katz, New York, New York.
96
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE
BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE CORPORATION, THE
SELLING STOCKHOLDER OR BY ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER
OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR
ANY SALE MADE HEREUNDER SHALL CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE CORPORATION SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
--------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................. 3
Summary Financial Information.................. 7
Risk Factors................................... 9
The Restructuring.............................. 12
Purpose of the Offering and Use of Proceeds.... 13
Capitalization................................. 15
Price Range of Common Stock.................... 16
Dividend Policy................................ 16
Dilution....................................... 17
Pro Forma Condensed Consolidated Financial
Statements.................................... 17
Selected Consolidated Financial Data........... 23
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 25
Business....................................... 31
Management..................................... 46
Ownership of Common Stock...................... 59
Certain Relationships and Related
Transactions.................................. 61
Description of Credit Agreement................ 63
Description of Other Debt Obligations.......... 73
Description of Collateral Trust................ 86
Description of Capital Stock................... 87
Certain United States Federal Tax Consequences
for Non-U.S. Stockholders..................... 92
Underwriting................................... 94
Legal Matters.................................. 96
Experts........................................ 97
Additional Information......................... 97
Index to Financial Statements.................. 98
</TABLE>
10,000,000 SHARES
USG CORPORATION
COMMON STOCK
($.10 PAR VALUE)
[LOGO]
SALOMON BROTHERS
INTERNATIONAL LIMITED
LAZARD BROTHERS & CO., LIMITED
SMITH BARNEY SHEARSON INC.
PROSPECTUS
DATED __________, 1994
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following are the estimated expenses of the issuance and distribution of
the Common Stock being registered, including fees and expenses previously
incurred by the Corporation, other than any underwriting compensation.
<TABLE>
<CAPTION>
AMOUNT
ITEM (DOLLARS IN THOUSANDS)
- ---------------------------------------------------------------------- ----------------------
<S> <C>
Securities and Exchange Commission Registration Fees.................. $ 120
Stock Exchange Filing Fees............................................ 30
NASD Filing Fee....................................................... 30
Blue Sky Fees and Expenses (including attorneys' fees and expenses)... 30
Printing and Engraving Expenses....................................... 400
Transfer Agent's Fees and Expenses.................................... 30
Accounting Fees and Expenses.......................................... 100
Legal Fees and Expenses............................................... 400
Miscellaneous Expenses................................................ 160
-------
Total............................................................. $ 1,300
-------
-------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law ("SECTION 145") (a)
gives Delaware corporations broad powers to indemnify their present and former
directors and officers and those of affiliated corporations against expenses
incurred in the defense of any lawsuit to which they are made parties by reason
of being or having been such directors or officers, subject to specified
conditions and exclusions, (b) gives a director or officer who successfully
defends an action the right to be so indemnified and (c) authorizes the
corporation to buy directors' and officers' liability insurance. Such
indemnification is not exclusive of any other right to which those indemnified
may be entitled under any bylaw, agreement, vote of stockholders or otherwise.
A bylaw provides that the Corporation (a) shall indemnify every person who
is or was a director or officer of the Corporation or is or was serving at the
Corporation's request as a director or officer of another corporation,
partnership, joint venture, trust or other enterprise and (b) shall, if the
board of directors so directs, indemnify any person who is or was an employee or
agent of the Corporation or is or was serving at the Corporation's request as an
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, to the extent, in the manner, and subject to compliance with
the applicable standards of conduct, provided by Section 145 as the same (or any
substitute provision therefor) may be in effect from time to time.
Any such indemnification shall continue as to a person who has ceased to be
a director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person.
The Corporation has procured insurance for the purpose of substantially
covering its future potential liability for indemnification under Section 145 as
discussed above and certain future potential liability of individual officers or
directors incurred in their capacity as such which is not subject to
indemnification.
The Corporation has entered into Indemnification Agreements with each of its
officers and directors. The Indemnification Agreements provide that the
Corporation shall indemnify and keep indemnified the indemnitee to the fullest
extent authorized by Section 145 as it may be in effect from time to time from
and against any expenses (including expenses of investigation and preparation
and reasonable fees and disbursements of legal counsel, accountants and other
experts), judgments, fines and amounts paid in settlement by the indemnitee in
connection with any threatened, pending or completed action,
II-1
<PAGE>
suit or proceeding, whether civil, criminal, administrative or investigative,
and whether or not the cause of action, suit or proceeding incurred before or
after the date of the Indemnification Agreement. The Indemnification Agreements
further provide for advancement of amounts to cover expenses incurred by the
indemnitee in defending any such action, suit or proceeding subject to an
undertaking by the indemnitee to repay any expenses advanced which it is later
determined he or she was not entitled to receive.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, the Corporation has not sold any unregistered
securities.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following is a complete list of Exhibits filed as a part of this
Registration Statement:
See Exhibit Index
(b) The following is a complete list of financial statement Schedules filed
as a part of this Registration Statement and included with the financial
statements filed as a part of this Registration Statement:
<TABLE>
<S> <C> <C> <C>
1. Schedule V -- Property, Plant and Equipment
2. Schedule VI -- Accumulation Depreciation and Depletion of Property, Plant and
Equipment
3. Schedule -- Valuation and Qualifying Accounts
VIII
4. Schedule IX -- Short-Term Borrowings
5. Schedule X -- Supplemental Statement of Earnings Information
</TABLE>
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
ITEM 17. UNDERTAKINGS
The Registrant hereby undertakes:
(1) To provide to the Underwriters at the closing specified in the
underwriting agreement certificates in such denominations and registered in such
names as required by the Underwriters to permit prompt delivery to each
purchaser.
(2) For purposes of determining any liability under the Act, the information
omitted from the form of prospectus filed as part of this registration statement
in reliance upon Rule 430A and contained in a form of prospectus filed by the
registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Act shall be
deemed to be part of this registration statement as of the time it was declared
effective.
(3) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement, relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof; and
(4) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrants pursuant to provisions described in this Registration Statement or
otherwise, the Registrants have been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrants of expenses incurred or paid by a director, officer or
controlling person of the Registrants in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrants will, unless
in the opinion of their respective counsel the matter has been settled by
controlling precedent, submit to a court of appropriate jurisdiction the
question of whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
II-2
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Chicago, State of Illinois on February 1994.
USG CORPORATION
By: /s/ Richard H. Fleming
--------------------------------------
Richard H. Fleming
VICE PRESIDENT AND CHIEF FINANCIAL
OFFICER
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement Amendment No. 1 has been signed on February 1994, by
the following persons in the capacities indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------------------------ ---------------------------------------------------------
<C> <S>
*
-------------------------------------- Chairman of the Board, Chief Executive Officer, and
Eugene B. Connolly Director (Principal Executive Officer)
*
-------------------------------------- Vice Chairman and Director
Anthony J. Falvo, Jr.
/s/ Richard H. Fleming
-------------------------------------- Vice President and Chief Financial Officer (Principal
Richard H. Fleming Financial Officer)
/s/ Raymond T. Belz
-------------------------------------- Vice President and Controller
Raymond T. Belz (Principal Accounting Officer)
*
-------------------------------------- Director
Robert L. Barnett
*
-------------------------------------- Director
Keith A. Brown
*
-------------------------------------- Director
W.H. Clark
*
-------------------------------------- Director
James C. Cotting
*
-------------------------------------- Director
Lawrence M. Crutcher
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------------------------ ---------------------------------------------------------
<C> <S>
*
-------------------------------------- Director
Wade Fetzer III
*
-------------------------------------- Director
David W. Fox
*
-------------------------------------- Director
Philip C. Jackson, Jr.
*
-------------------------------------- Director
Marvin E. Lesser
*
-------------------------------------- Director
John B. Schwemm
-------------------------------------- Director
Judith A. Sprieser
*
-------------------------------------- Director
Alan G. Turner
*
-------------------------------------- Director
Barry L. Zubrow
</TABLE>
*By: /s/ Richard H. Fleming
----------------------------
Richard H. Fleming
Attorney-in-fact
II-4
<PAGE>
EXHIBIT INDEX
The following documents are the exhibits to this Registration Statement on
Form S-1. For convenient reference, each exhibit is listed according to the
Exhibit Table of Regulation S-K. The page number, if any, listed opposite an
exhibit indicates the page number in the sequential numbering system in the
manually signed original of this Registration Statement on Form S-1 where such
exhibit can be found. Exhibits followed by an (*) constitute management
contracts or compensatory plans or arrangements. Exhibits followed by an (**)
will be filed by amendment. Exhibits followed by an (***) have been filed
previously.
<TABLE>
<CAPTION>
EXHIBIT
NO. PAGE
- --------- ---------
<C> <S> <C> <C>
1. Underwriting Agreements
(a) U.S. Underwriting Agreement. **
(b) International Underwriting Agreement. **
(c) Agreement between U.S. and International Underwriting Syndicates. **
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. **
(c) Resolutions dated March 5, 1987 of a Special Committee created by the Board of Directors
of USG Corporation. **
(d) Resolutions dated March 6, 1987 of a Special Committee created by the Board of Directors
of USG Corporation. **
(e) Resolutions dated April 26, 1993 of a Special Committee created by the Board of
Directors of USG Corporation relating to USG Corporation's 8% Senior Notes due 1995 and
9% Senior Notes due 1998 (incorporated by reference to Exhibit 4.1 of USG Corporation's
Form 8-K, dated May 7, 1993).
(f) 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.
(g) 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).
(h) 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.
(i) 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).
(j) 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).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. PAGE
- --------- ---------
<C> <S> <C> <C>
(k) 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).
(l) 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.
5. Opinions of counsel as to the legality of the securities being registered. **
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) 1991-1993 Management Incentive Compensation Program -- USG Corporation, as amended
(incorporated by reference to Exhibit 10(b) of USG Corporation's 1991 Annual Report on
Form 10-K, dated March 5, 1992).*
(c) Amendment and Restatement of USG Corporation Supplemental Retirement Plan, effective as
of July 1, 1993 and dated November 30, 1993.* ***
(d) First Amendment of USG Corporation Supplemental Retirement Plan, effective as of
November 15, 1993 and dated December 2, 1993.* ***
(e) Termination Compensation Agreements (incorporated by reference to Exhibit 10(h) of USG
Corporation's 1991 Annual Report on Form 10-K, dated March 5, 1992).*
(f) 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).*
(g) Indemnification Agreements *.
(h) 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).*
(i) 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).*
(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 Form 8-K filed by
USG Corporation on May 7, 1993).
(k) 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 Form 8-K filed by USG Corporation on May 7, 1993).
(l) 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).
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(m) First Amendment to Amended and Restated Credit Agreement between 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 4M of USG Corporation's Registration Statement No. 35-65804 on Form S-1, dated
July 9, 1993).
(n) Second Amendment to Amended and Restated Credit Agreement between 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.
(o) 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).
(p) 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).
(q) 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).
(r) 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).
(s) 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).
(t) 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).
(u) 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).
(v) 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).
(w) 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).
(x) 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).
(y) 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).
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(z) 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).
(aa) 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).
(ab) 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).
(ac) Agreement 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).
(ad) Letter Agreement dated February 25, 1993 among USG Corporation, Water Street Corporate
Recovery Fund I 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).
(ae) First Amendment to Letter Agreement dated February , 1994 among USG Corporation, Water
Street Corporate Recovery Fund I, L.P., The Goldman Sachs Group, L.P., and Goldman,
Sachs & Co. **
(af) 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).
(ag) 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).
(ah) Consulting Agreement dated May 6, 1993 between USG Corporation and Jack D. Sparks. ***
(ai) Consulting Agreement dated August 11, 1993 between USG Corporation and James W. Cozad. ***
(aj) 1993 Annual Management Incentive Program -- USG Corporation (incorporated by reference
to Exhibit 10(b) of Amendment No. 1 to USG Corporation's Registration Statement No.
33-61152 on Form S-1).
(ak) 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).
(al) 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).
(am) Form of Nonqualified Stock Option Agreement effective June 1, 1993 (incorporated by
reference to Exhibit 10(l) of Amendment No. 1 on USG Corporation's Registration
Statement No. 33-61152 on Form S-1).
(an) Form of Nonqualified Stock Option Agreement with Anthony J. Falvo, Jr. effective June 1,
1993 (incorporated by reference to Exhibit 10(m) of Amendment No. 1 to USG Corporation's
Registration Statement No. 33-61152 on Form S-1).
(ao) 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).
(ap) 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).
(aq) First Amendment to Management Performance Plan, effective November 15, 1993, and dated
February 1, 1994.
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(ar) Modification letter dated February 1, 1994 to Nonqualified Stock Option Agreement dated
June 1, 1993 between USG Corporation and Eugene B. Connolly.
(as) Form of Nonqualified Stock Option Agreement effective February 9, 1994.
(at) Executive Consulting Agreement effective March 1, 1994 between USG Corporation and
Anthony J. Falvo, Jr.
24. Consents of Experts and Counsel
(a) Consent of Arthur Andersen & Co.
(b) Consents of counsel (included in Exhibit 5).
25. Power of Attorney
</TABLE>
<PAGE>
APPENDIX TO FORM S-1
The following graphics have been omitted from the EDGAR submission of
Amendment No. 1 to Form S-1:
Inside front cover page of Prospectus:
An assortment of four photographs of the Corporation's
products and applications of those products.
Page 32:
A line graph depicting United States gypsum wallboard
industry shipments and United States total housing starts
for the years 1982 through 1993 was replaced with a table
providing such data.
Inside back cover page of Prospectus:
An assortment of four photographs of the Corporation's
products and applications of those products.
<PAGE>
Consent in Lieu of Special Meeting
of a Special Offering Committee
Created by the Board of Directors of
USG Corporation
-----------------------------------
The undersigned, being all of the members of a special offering
committee (the "Special Committee") designated and authorized by the Board of
Directors of USG Corporation, a Delaware corporation (the "Corporation"), in
lieu of holding a special meeting of the Special Committee, hereby take the
following actions and adopt the following resolutions by unanimous written
consent pursuant to the General Corporation Law of the State of Delaware and the
By-laws of the Corporation.
WHEREAS, USG Corporation, a Delaware corporation (the "Corporation")
has entered into an Indenture, dated as of October 1, 1986 (the "Indenture"),
with Harris Trust and Savings Bank (the "Trustee"), providing for the issuance
from time to time of debt securities (the "Securities") in one or more series
under the Indenture; and
WHEREAS, the Corporation desires to create a series of Securities
under the Indenture and to make provision for the form and terms thereof, and to
make provision for and authorize certain other matters and agreements in
connection with the issuance and sale of the Securities; and
WHEREAS, the Board of Directors of the Corporation has established the
Special Committee and has authorized, empowered and directed the Special
Committee to take all actions relating to the issuance of up to $150 million in
principal amount of a separate series of Securities, determine and specify the
form and terms of such series and authorize the terms of sale or exchange of
such series; and
WHEREAS, the Special Committee has reviewed a Securities Purchase
Agreement to be entered into among the Corporation and several financial
institutions (collectively, the "Note Purchasers") relating to the purchase and
sale of the series of Securities to be authorized pursuant to these resolutions
(the "Purchase Agreement"); and
WHEREAS, the capitalized terms used in these resolutions and not
otherwise defined herein shall have the same meaning herein as the meanings
given to such terms in the Indenture;
NOW, THEREFORE, BE IT RESOLVED: That the following resolutions are
adopted by the Special Committee effective as of February 1, 1994.
BE IT RESOLVED: That there is hereby approved and established a
series of Securities under the Indenture, whose terms shall be as follows:
(1) The series of Securities established hereby to be issued pursuant
to the Indenture shall be known and designated as the "9.25% Senior Notes Due
2001" (the "2001 Notes").
(2) The aggregate principal amount of the 2001 Notes shall be limited
to $150,000,000 (except as provided in Section 2.01(2) of the Indenture).
(3) The stated maturity of the principal of the 2001 Notes shall be
September 15, 2001. The 2001 Notes shall not be callable at the option of the
Corporation.
<PAGE>
(4) The 2001 Notes shall bear interest at the rate of 9.25% per annum
from the Closing Date (as defined in the Purchase Agreement) or from the most
recent Interest Payment Date (defined below) to which interest has been paid or
duly provided for, as the case may be, payable on each March 15 and September
15, commencing September 15, 1994, until the principal amount thereof is paid or
made available for payment. Each March 15 and September 15 shall be an
"Interest Payment Date" for the 2001 Notes. The March 1 or September 1 (whether
or not a Business Day) next preceding an Interest Payment Date shall be the
"Regular Record Date" for the interest payable on such Interest Payment Date.
(5) The principal of and interest on the 2001 Notes shall be payable,
and the 2001 Notes shall be transferable and exchangeable, at the office or
agency of the Corporation maintained for that purpose in the City of Chicago,
State of Illinois; PROVIDED, HOWEVER, that at the option of the Corporation,
payment of interest may be made by check mailed to the address of the Holder
entitled thereto as such address shall appear in the Security Register.
(6) The 2001 Notes shall be issued only in denominations of $1,000
and integral multiples thereof.
(7) The 2001 Notes shall be issued as Registered Securities only, in
fully registered form.
(8) The following additional covenants of the Corporation shall be
added for the benefit of the 2001 Notes and the holders thereof:
(i) DEFINITIONS APPLICABLE TO COVENANTS. The following definitions
shall be applicable to the covenants specified below:
(A) Attributable Debt" means, as to any particular lease under
which any Person is at the time liable and at any date as of which the
amount thereof is to be determined, the total net amount of rent
required to be paid by such Person under such lease during the
remaining term thereof (including any period for which such lease has
been extended or may, at the option of the lessor, be extended),
discounted from the respective due dates thereof to such date at a
rate per annum equal to one-fourth of one percent above the rate per
annum borne by the 2001 Notes compounded semi-annually. The net
amount of rent required to be paid under any such lease for any such
period shall be the aggregate amount of the rent payable by the lessee
with respect to such period after excluding amounts required to be
paid on account of maintenance and repairs, insurance, taxes,
assessments, water rates and similar charges. In the case of any
lease which is terminable by the lessee upon the payment of a penalty,
such net amount shall also include the amount of such penalty, but no
rent shall be considered as required to be paid under such lease
subsequent to the first date upon which it may be so terminated.
(B) "Consolidated Net Tangible Assets" means the aggregate
amount of assets (including investments in Unrestricted Subsidiaries,
but less applicable reserves and other properly deductible items)
after deducting therefrom (x) all liabilities and liability items
except Funded Debt, deferred income taxes and stockholders' equity,
and (y) all goodwill, trade names, trademarks, patents, unamortized
debt discount and expense and other like intangibles, in each case
computed in accordance with generally accepted accounting principles,
which under generally accepted accounting principles would appear on a
consolidated balance sheet of the Corporation and its Restricted
Subsidiaries.
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<PAGE>
(C) "Funded Debt" means any indebtedness for borrowed money
maturing on, or extendible at the option of the obligor to, a date
more than one year from the date of the determination thereof.
(D) "Mortgage" means and includes any mortgage, pledge, lien,
security interest, conditional sale or other title retention agreement
or other similar encumbrance.
(E) "Principal Operating Property" means any principal
manufacturing plant, or distribution or research facility, and related
raw material and other facilities (other than facilities acquired
subsequent to December 15, 1986 for the control or abatement of
atmospheric pollutants or contaminants, water pollution, noise, odor
or other pollution) which on the effective date of these resolutions
or at any time subsequent thereto is located in the United States and
has been owned and operated by the Corporation or any Subsidiary for
more than 90 days; provided, however, that any principal manufacturing
plant, or distribution or research facility, and related raw material
and other facilities (not theretofore owned by the Corporation or a
Subsidiary) owned and operated by a corporation which becomes a
Subsidiary after the effective date of these resolutions shall not
constitute a Principal Operating Property unless and until owned and
operated by such corporation for more than 90 days after it becomes a
Subsidiary; and provided, further, that the Board of Directors may by
Board Resolution declare that any plant is not of material importance
to the business of the Corporation and its Restricted Subsidiaries as
a whole, in which case such plant shall not be deemed to be a
Principal Operating Property.
(F) "Restricted Subsidiary" means as of the date of
determination any Subsidiary which owns any Principal Operating
Property.
(G) "Senior Funded Debt" means all Funded Debt, and all
renewals, extensions and refunding of Funded Debt, except Subordinated
Funded Debt.
(H) "Subordinated Funded Debt" means any unsecured Funded Debt
of the Corporation which is expressly made subordinate and junior in
rank and right of payment to the 2001 Notes in the event of any
insolvency or bankruptcy proceedings, or any receivership,
liquidation, reorganization or other similar proceedings in connection
therewith, relative to the Corporation or to its creditors, as such,
or to its property, or in the event of any proceedings for voluntary
liquidation, dissolution or other winding up of the Corporation,
whether or not involving insolvency or bankruptcy.
(I) "Subsidiary" of the Corporation means any corporation at
least a majority of the shares of the Voting Stock (or the equivalent
thereof, in the case of corporations organized outside the United
States of America) of which shall at the time be owned, directly or
indirectly, by the Corporation or by one or more Subsidiaries or by
the Corporation and one or more Subsidiaries.
(J) "Unrestricted Subsidiary" means any Subsidiary other than a
Restricted Subsidiary.
(K) "Voting Stock," as applied to the stock of any corporation,
means stock of any class or classes (however designated) having
ordinary voting power for the election of a
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majority of the directors of such corporation, other than stock having
such power only by reason of the happening of a contingency.
(ii) LIMITATION ON LIENS. So long as 2001 Notes shall be Outstanding,
the Corporation will not itself, and will not permit any Restricted
Subsidiary to, incur, issue, assume, guarantee or suffer to exist any
indebtedness for money borrowed (indebtedness for money borrowed being
hereinafter in this paragraph called "Debt") secured by a Mortgage on any
Principal Operating Property of the Corporation or any Restricted
Subsidiary, or any shares of stock of or Debt of any Restricted Subsidiary
(such secured Debt being referred to as "Secured Debt"), without
effectively providing that the 2001 Notes (together with, if the
Corporation shall so determine, any other Debt of the Corporation or such
Restricted Subsidiary then existing or thereafter created which is not
subordinated Debt) shall be secured equally and ratably with (or, at the
option of the Corporation, prior to) such Secured Debt so long as such
Secured Debt shall be so secured, unless, after giving effect thereto, the
aggregate amount of all such Secured Debt plus all Attributable Debt of the
Corporation and its Restricted Subsidiaries in respect of sale and
leaseback transactions (as defined in the following paragraph, but
excluding leases exempt from the prohibition of the following paragraph by
clauses (B) through (D), inclusive, thereof) would not exceed 5% of
Consolidated Net Tangible Assets; provided, however, that this paragraph
shall not apply to, and there shall be excluded from Secured Debt in any
computation under this paragraph, Debt secured by:
(A) Mortgages on, and limited to, property of, or on any shares
of stock of or Debt of, any corporation existing at the time such
corporation becomes a Restricted Subsidiary;
(B) Mortgages in favor of the Corporation or any Restricted
Subsidiary;
(C) Mortgages in favor of any governmental body to secure
progress, advance or other payments pursuant to any contract or
provision of any statute;
(D) if made and continuing in the ordinary course of business,
any Mortgage as security for the performance of any contract or
undertaking not directly or indirectly in connection with the
borrowing of money or the securing of Debt, or (ii) any Mortgage with
any governmental agency required or permitted to qualify the
Corporation or any Restricted Subsidiary to conduct business, to
maintain self-insurance or to obtain the benefits of any law
pertaining to workmen's compensation, unemployment insurance, old age
pensions, social security or similar matters;
(E) Mortgages for taxes, assessments or governmental charges or
levies if such taxes, assessments, governmental charges or levies
shall not at the time be due and payable, or if the same thereafter
can be paid without penalty, or if the same are being contested in
good faith by appropriate proceedings;
(F) Mortgages created by or resulting from any litigation or
legal proceeding which at the time is currently being contested in
good faith by appropriate proceedings; or Mortgages arising out of
judgments or awards as to which the time for prosecuting an appeal or
proceeding for review has not expired;
(G) Mortgages on, and limited to, property (including leasehold
estates), shares of stock or Debt existing at the time of acquisition
thereof (including acquisition through merger or consolidation) or to
secure the payment of all or any part of the
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<PAGE>
purchase price thereof or construction thereon or to secure any Debt
incurred prior to, at the time of, or within 120 days after the later
of the acquisition, the completion of construction or the commencement
of full operation of such property or within 120 days after the
acquisition of such shares or Debt for the purpose of financing all or
any part of the purchase price thereof or construction thereon; or
(H) any extension, renewal or replacement (or successive
extensions, renewals or replacements), as a whole or in part, of any
Mortgage referred to in the foregoing clauses (A) through (G),
inclusive, provided that (x) such extension, renewal or replacement
Mortgage shall be limited to all or a part of the same property,
shares of stock or Debt that secured the Mortgage so extended, renewed
or replaced (plus improvements on such property) and (y) the Debt
secured by such Mortgage at such time is not increased.
(iii) LIMITATION ON SALE AND LEASEBACK. So long as any 2001 Notes
shall be Outstanding, except as hereinafter provided, the Corporation will
not itself, and it will not permit any Restricted Subsidiary to, enter into
any transaction with any bank, insurance company or other lender or
investor, or to which any such bank, company, lender or investor is a
party, providing for the leasing by the Corporation or a Restricted
Subsidiary of any Principal Operating Property owned at December 15, 1986
which has been or is to be sold or transferred by the Corporation or a
Restricted Subsidiary to such bank, company, lender or investor, or to any
Person to whom funds have been or are to be advanced by such bank, company,
lender or investor on the security of such Principal Operating Property
(herein referred to as a "sale and leaseback transaction"). This covenant
shall not apply to any sale and leaseback transaction if:
(A) the Corporation or such Restricted Subsidiary could create
Debt secured by a Mortgage pursuant to the preceding paragraph,
without regard to clauses (A) through (H) thereof, on the Principal
Operating Property to be leased in an amount equal to the Attributable
Debt with respect to such sale and leaseback transaction without
equally and ratably securing the 2001 Notes, or
(B) the Corporation or a Restricted Subsidiary, within 120 days
after the sale or transfer shall have been made by the Corporation or
by a Restricted Subsidiary, applies an amount equal to the greater of
the net proceeds from the sale of the Principal Operating Property
leased pursuant to such arrangement or the fair market value of the
Principal Operating Property so leased at the time of entering into
such arrangement (as determined in any manner approved by the Board of
Directors) to the retirement of Senior Funded Debt of the Corporation
or Funded Debt of a Restricted Subsidiary; provided, that the amount
to be applied to the retirement of Senior Funded Debt of the
Corporation or Funded Debt of a Restricted Subsidiary shall be reduced
by (x) the principal amount of any 2001 Notes (or other debentures or
notes constituting Senior Funded Debt of the Corporation or Funded
Debt of a Restricted Subsidiary) delivered within 75 days after such
sale or transfer to the Trustee or other applicable trustee for
retirement and cancellation and (y) the principal amount of Senior
Funded Debt of the Corporation or Funded Debt of a Restricted
Subsidiary, other than Funded Debt included under clause (x),
voluntarily retired by the Corporation or a Restricted Subsidiary
within 75 days after such sale. Notwithstanding the foregoing, no
retirement referred to in this clause (B) may be effected by payment
at maturity or pursuant to any mandatory sinking fund payment or any
mandatory prepayment provision, or
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<PAGE>
(C) the lease in such sale and leaseback transaction is for a
period, including renewals, of no more than three years, or
(D) such arrangement is between the Corporation and a Restricted
Subsidiary or between Restricted Subsidiaries.
(9) The following additional Event of Default shall be added to those
Events of Default in the Indenture for the benefit of the 2001 Notes and the
holders thereof:
Any event of default or events of default as defined in any mortgages,
indentures or instruments, under which there may be issued, or by which
there may be secured or evidenced, any indebtedness for borrowed money of
the Corporation or any Subsidiary in excess of $50,000,000 principal amount
in the aggregate, whether such indebtedness now exists or shall hereafter
be created, which shall happen and shall result in such indebtedness
becoming or being declared due and payable prior to the date on which it
would otherwise become due and payable, and such acceleration or
accelerations shall not be rescinded or annulled for a period of ten days
after there has been given, by registered or certified mail, to the
Corporation by the Trustee or to the Corporation and the Trustee by the
Holders of at least 25% in principal amount of the 2001 Notes Outstanding,
a written notice specifying such event of default or events of default and
requiring the Corporation to cause such acceleration or accelerations to be
rescinded or annulled and stating that such notice is a "Notice of Default"
hereunder.
For all purposes of the Indenture as it relates to the 2001 Notes, the foregoing
Event of Default shall be deemed to be an Event of Default described in (a), (b)
or (c) of Section 6.01 of the Indenture.
(10) The provisions of Article Twelve of the Indenture relating to
defeasance of Securities shall be applicable to the 2001 Notes, except that
Section 12.02 of the Indenture as it relates to the 2001 Notes shall be replaced
by the following provision:
SATISFACTION, DISCHARGE AND DEFEASANCE OF 2001 NOTES. At the
Corporation's option, either (a) the Corporation shall be deemed to have
paid and discharged the entire indebtedness on all the Outstanding 2001
Notes and the Trustee, at the expense of the Corporation, shall execute
proper instruments acknowledging satisfaction and discharge of such
indebtedness, or (b) the Corporation shall cease to be under any obligation
to comply with any term, provision, condition or covenant applicable to the
2001 Notes set forth in Section 11.01 of the Indenture and in item 8 of the
Board Resolution authorizing the series of 2001 Notes and the issuance
thereof (I.E., the covenants regarding "Limitation on Liens" and
"Limitation on Sale and Leaseback"), when:
(i) with respect to all Outstanding 2001 Notes,
(A) the Corporation shall have deposited or caused to be
deposited with the Trustee as trust funds in trust for such
purpose an amount sufficient to pay and discharge the entire
indebtedness of all Outstanding 2001 Notes for principal and
interest to the stated maturity; or
(B) the Corporation shall have deposited or caused to be
deposited with the Trustee as obligations in trust for such
purpose such amount of direct noncallable obligations of, or
noncallable obligations the payment of principal of and interest
on which is fully guaranteed by, the United States of America, or
to the payment of which obligations or guarantees the full faith
and credit of the United States of America is
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<PAGE>
pledged, maturing as to principal and interest in such amounts
and at such times as will, together with the income to accrue
thereon (but without reinvesting any proceeds thereof), be
sufficient to pay and discharge the entire indebtedness on all
Outstanding 2001 Notes for principal and interest to the stated
maturity;
(ii) the Corporation shall have paid or caused to be paid all
other sums payable with respect to the Outstanding 2001 Notes;
(ii) if the 2001 Notes are then listed on any national securities
exchange, the Corporation shall have delivered to the Trustee an
Opinion of Counsel to the effect that the Corporation's exercise of
its option under this provision would not cause such 2001 Notes to be
delisted;
(iv) no Event of Default or event (including such deposit), which
with notice or lapse of time would become an Event of Default, with
respect to the 2001 Notes shall have occurred and be continuing on the
date of such deposit;
(v) the Corporation shall have delivered to the Trustee an
Opinion of Counsel of nationally recognized tax counsel to the effect
that Holders of the 2001 Notes will not recognize income, gain or loss
for Federal income tax purposes as a result of the Corporation's
exercise of its option under this provision and will be subject to
Federal income tax in the same amount and in the same manner and at
the same times as would have been the case if such option had not been
exercised;
(vi) the Corporation shall have delivered to the Trustee an
Opinion of Counsel to the effect that the Corporation's exercise of
its option under this provision will not cause any violation of the
Investment Company Act of 1940, as amended, on the part of the
Corporation, the trust, the trust funds representing the Corporation's
deposit or the Trustee; and
(vii) the Corporation shall have delivered to the Trustee an
Officers' Certificate and an Opinion of Counsel, each stating that all
conditions precedent relating to the Corporation's exercise of its
option under this provision have been complied with.
Any deposits with the Trustee referred to above shall be irrevocable
and shall be made under the terms of an escrow trust agreement in form and
substance satisfactory to the Trustee.
For purposes of this provision, "discharged" means that the
Corporation shall be deemed to have paid and discharged the entire
indebtedness represented by, and obligations under, the 2001 Notes and to
have satisfied all the obligations under this Indenture relating to the
2001 Notes (and the Trustee, at the expense of the Corporation, shall
execute proper instruments acknowledging the same), except (x) the rights
of Holders of 2001 Notes to receive, from the trust fund described above,
payment of the principal of and interest on such 2001 Notes when such
payments are due, (y) the Corporation's obligations with respect to the
2001 Notes under Sections 2.05, 2.07, 4.02 and 12.03 of the Indenture and
(z) the rights, powers, trusts, duties and immunities of the Trustee
hereunder.
BE IT FURTHER RESOLVED: That the form of the 2001 Note attached
hereto as Exhibit A is in all respects approved, and that the execution and
delivery of the 2001 Notes as provided in the Indenture is hereby authorized,
- 7 -
<PAGE>
approved and directed, with such changes therein as the officer executing the
same shall approve, such execution to be conclusive evidence of such approval.
BE IT FURTHER RESOLVED: that the form, terms and provisions of the
Purchase Agreement by and among the several Purchasers and the Corporation, and
the Corporation's performance of its obligations under the Purchase Agreement
be, and they hereby are, in all respects, approved; and further resolved, that
the Chief Executive Officer, Chief Financial Officer, President, any Vice
President, Secretary, any Assistant Secretary (the "Proper Officers") are hereby
authorized and empowered, acting alone or with one or more other Proper
Officers, to execute and deliver the Purchase Agreement in the name and on
behalf of the Corporation and under its corporate seal or otherwise,
substantially in the form approved, with such changes therein and modifications
thereto as the executing officer may in his discretion approve, which approval
shall be conclusively evidenced by the execution thereof.
BE IT FURTHER RESOLVED: that the 2001 Notes be issued in accordance
with the Purchase Agreement at the times, in the various denominations and for
the various consideration to the Corporation called for therein.
BE IT FURTHER RESOLVED: that the form, terms and provisions of the
Registration Rights Agreement contemplated by the Purchase Agreement (the
"Registration Agreement") by and among the Corporation and the several
Purchasers, and the Corporation's performance of its obligations under the
Registration Agreement be, and they hereby are, in all respects, approved; and
further resolved, that the Proper Officers of the Corporation are hereby
authorized and empowered to execute and deliver the Registration Agreement in
the name and on behalf of the Corporation and under its corporate seal or
otherwise, substantially in the form approved, with such changes therein and
modifications thereto as the executing officer may in his discretion approve,
which approval shall be conclusively evidenced by the execution thereof.
WHEREAS, certain of the Purchasers are or may be Affiliates (as such
term is defined in the Indenture dated as of April 26, 1993 and the Indenture
dated as of August 10, 1993, among the Corporation, State Street Bank and Trust
Company and the other parties thereto (the "10-1/4% Note Indentures")) of the
Corporation; and
WHEREAS, in reviewing the Note Transactions as required under Section
4.09 of the 10-1/4% Note Indentures, the Special Committee has reviewed (and
received the advice of the Corporation's legal and financial advisors
concerning) the issuance of the 2001 Notes and the other transactions
contemplated by the Purchase Agreement and the Registration Agreement
(collectively, the "Note Transactions").
NOW THEREFORE, BE IT RESOLVED: that the Note Transactions (i) are
reasonably necessary or desirable for the Corporation in the conduct of its
business and (ii) are upon terms no less favorable to the Corporation than those
which could be obtained in a comparable arm's length transaction with a party
that is not an Affiliate of the Corporation.
BE IT FURTHER RESOLVED: That the proper officers of the Corporation
be, and they hereby are, authorized and directed to take such actions and to
execute and deliver such instruments and documents and to do such other things
as they or any of them shall deem necessary or advisable to effectuate the
purposes and intent of the foregoing Resolutions.
- 8 -
<PAGE>
This consent may be executed in two or more counterparts, each of
which shall be deemed an original and all of which taken together shall
constitute one and the same consent.
IN WITNESS WHEREOF, the undersigned have executed this instrument as
of the 1st day of February, 1994.
/s/ Eugene B. Connolly
-------------------------------------
Eugene B. Connolly
/s/ Anthony J. Falvo, Jr.
-------------------------------------
Anthony J. Falvo, Jr.
/s/ James C. Cotting
-------------------------------------
James C. Cotting
<PAGE>
INDEMNIFICATION AGREEMENT
AGREEMENT, made and entered into as of the _____ day of ______________,
19___, between USG Corporation, a Delaware corporation (the "Corporation") and
________________________________ (the "Indemnitee").
WHEREAS, the Corporation is a Delaware corporation engaged through its
subsidiaries in producing and selling products in the building materials
industry; and
WHEREAS, Indemnitee currently serves as a director or an officer of the
Corporation, or both, or as a director of another enterprise at the request of
the Corporation, and, as such, may be subjected personally to claims, suits or
proceedings arising as a result of such service; and
WHEREAS, as an inducement to Indemnitee to continue to serve as such
director or officer, the Corporation has agreed to indemnify Indemnitee against
expenses and costs incurred by Indemnitee in connection with any such claims,
suits or proceedings, in accordance with, and to the fullest extent authorized
by the General Corporation Law of the State of Delaware as it may be in effect
from time to time; and
WHEREAS, the parties by this Agreement desire to set forth the terms and
conditions of such indemnification;
NOW, THEREFORE, the parties agree as follows:
1. The Corporation hereby agrees to indemnify, and keep indemnified,
Indemnitee to the fullest extent authorized by the General Corporation Law of
the State of Delaware, including, without limitation, Section 145(f) thereof,
and other applicable law as it may be in effect from time to time, from and
against any expenses (including expenses of investigation and preparation and
reasonable fees and disbursements of Indemnitee's counsel, accountants and other
experts), judgments, fines and amounts paid in settlement, actually and
reasonably incurred by Indemnitee in connection with any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that Indemnitee is or was a director or
officer of the Corporation, or is or was serving at the request of the
Corporation as a director of another corporation, partnership, joint venture,
trust or other enterprise, and whether or not the cause of such action, suit or
proceeding occurred before or after the date of this Agreement. Notwithstanding
the foregoing, but except as provided in Paragraph 8 hereof, the Corporation
shall indemnify the Indemnitee in connection with a proceeding (or part thereof)
initiated by the Indemnitee only if
Page 1 of 4
<PAGE>
such proceeding (or part thereof) was authorized by the Board of Directors of
the Corporation. For purposes of this Agreement, the terms "Corporation",
"other enterprise", "fines", and "serving at the request of the Corporation"
shall have the meanings provided in Section 145 of the General Corporation Law
of the State of Delaware.
2. In the event that, under applicable law, the entitlement of Indemnitee
to be indemnified hereunder shall depend upon whether Indemnitee shall have
acted in accordance with a defined standard of conduct, the burden of proof
establishing that Indemnitee has not acted in accordance with such standard
shall rest with the Corporation and Indemnitee shall be presumed to have acted
in accordance with such standard and entitled to indemnification unless, based
upon clear and convincing evidence, it shall be determined that Indemnitee has
not met such standard. Such determination shall be made by any of the
following, the final identification of which shall be at the sole discretion of
Indemnitee, to be made after request by the the Corporation: (i) the Board of
Directors of the Corporation, by a majority vote of a quorum consisting of
directors who are not parties to the action, suit, or proceeding, (ii)
independent legal counsel in a written opinion, which counsel shall be
acceptable to the Indemnitee and such quorum of the Board of Directors, or which
at the option of Indemnitee shall be selected by the Chief Judge of the U.S.
District Court for the Northern District of Illinois, (iii) the stockholders of
the Corporation, or (iv) a court of competent jurisdiction.
3. Indemnitee shall notify the Corporation in writing of any matter with
respect to which Indemnitee intends to seek indemnification hereunder as soon as
reasonably practicable following the receipt by Indemnitee of written notice
thereof, provided that delay in so notifying the Corporation shall not
constitute a waiver by Indemnitee of his rights hereunder.
4. Indemnitee shall control the defense (including the selection of
qualified counsel) of any action, suit or proceeding against him which may give
rise to a right of indemnification hereunder, subject to the following: (a) if
the insurance carrier which shall have supplied any D&O Coverage (as defined in
Section 6) shall be willing to conduct such defense without any reservation as
to coverage, then unless on written application by Indemnitee concurred in by
the Board of Directors of the Corporation, Indemnitee and the Board of Directors
deem it undesirable, such insurance carrier shall select counsel to conduct such
defense; and (b) in any case involving two or more defendants who are entitled
to indemnification by the Corporation, separate counsel may be used by
Indemnitee only to the extent necessary to avoid conflicts of interest.
Page 2 of 4
<PAGE>
5. In the event of any action, suit or proceeding against Indemnitee which
may give rise to a right of indemnification from the Corporation pursuant to
this Agreement, following written request to the Corporation by Indemnitee, the
Corporation shall advance to Indemnitee amounts to cover reasonable expenses
incurred by Indemnitee in defending such action, suit or proceeding in advance
of the final disposition thereof upon receipt of (i) an undertaking by or on
behalf of Indemnitee to repay such amount if it shall ultimately be determined
by final judgment of a court of competent jurisdiction that he is not entitled
to be indemnified by the Corporation hereunder, and (ii) satisfactory
documentation as to the amount of such expenses. Indemnitee's written
certification together with a copy of the statement paid or to be paid by
Indemnitee shall constitute satisfactory documentation absent manifest error.
6. The Corporation shall use all reasonable efforts to provide Indemnitee
with Directors and Officers insurance coverage ("D&O Coverage") providing to
Indemnitee coverage no less advantageous than that currently in effect for
directors and officers of the Corporation generally or, if such coverage is not
available, the best coverage then available in the insurance industry.
Indemnitee shall not settle any matter for which he intends to seek
indemnification hereunder without first attempting to obtain any approval
required with respect to such settlement by the insurance carrier of any
applicable D&O Coverage. If Indemnitee seeks such approval but such approval is
not granted by the insurance carrier of any applicable D&O Coverage, Indemnitee
shall be entitled to indemnification from the Corporation to the fullest extent
provided by such D&O Coverage or to the fullest extent otherwise provided by
this Agreement, whichever shall be greater. The provision of D&O Coverage by an
insurer at the expense of the Corporation or the failure to so provide D&O
Coverage shall in no way limit or diminish the obligation of the Corporation to
indemnify Indemnitee as provided elsewhere in this Agreement, which obligation
shall be absolute, provided that any amounts actually recovered by Indemnitee
from the insurer providing D&O Coverage shall be applied in reduction of amounts
otherwise owing by the Corporation by reason of its indemnification under this
Agreement.
7. Neither the Corporation nor Indemnitee shall settle or compromise any
action, suit, or proceeding covered by this Agreement without first obtaining
written consent to such settlement or compromise from the other, which consent
in no event shall be unreasonably withheld.
8. In the event Indemnitee is required to bring any action to enforce
rights or to collect amounts due under this Agreement and is successful in such
action, the Corporation shall reimburse Indemnitee for all of Indemnitee's
reasonable fees and expenses in bringing and pursuing such action.
Page 3 of 4
<PAGE>
9. All agreements and obligations of the Corporation contained herein
shall continue during the period Indemnitee is
a director or officer of the Corporation or is or was serving at the request of
the Corporation as a director of another corporation, partnership, joint
venture, trust or other enterprise and shall continue thereafter so long as
Indemnitee shall be subject to any possible claim or threatened, pending or
completed action, suit or proceeding, whether civil, criminal, or investigative,
by reason of the fact that Indemnitee was a director or officer of the
Corporation or serving in any other capacity referred to herein.
10. The indemnification rights granted to Indemnitee under this Agreement
shall not be deemed exclusive of, or in limitation of, any rights to which
Indemnitee may be entitled under Delaware law, the Corporation's Certificate of
Incorporation or By-laws, a vote of stockholders or otherwise.
11. The rights granted to Indemnitee hereunder shall inure to the benefit
of Indemnitee, his personal representative, heirs, executors, administrators and
beneficiaries, and this Agreement shall be binding upon the Corporation, its
successors and assigns.
12. This Agreement shall be governed by the laws of the State of Delaware.
To the extent permitted by applicable law, the parties hereby waive any
provision of law which renders any provision in this Agreement unenforceable in
any respect. Whenever possible, each provision of this Agreement shall be
interpreted in such manner as to be effective and valid under applicable law,
but if any provision shall be held to be prohibited by or invalid under
applicable law, such provision shall be deemed amended to accomplish the
objectives of the provision as originally written to the fullest extent
permitted by law and all other provisions shall remain in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above stated.
USG Corporation
By____________________________________
Chairman of the Board and
Chief Executive Officer
____________________________________
Indemnitee
<PAGE>
SECOND AMENDMENT
Dated as of January 31, 1994
to
AMENDED AND RESTATED CREDIT AGREEMENT
Dated as of May 6, 1993
This SECOND AMENDMENT (this "Second Amendment") dated as of January
31, 1994 is entered into among USG CORPORATION (the "Company"), USG INTERIORS,
INC. ("Interiors") (the Company and Interiors being sometimes collectively
referred to herein as the "Borrowers"), the FINANCIAL INSTITUTIONS LISTED ON THE
SIGNATURE PAGES HEREOF (collectively referred to herein, together with their
respective successors and assigns, as the "Senior Lenders" and individually as a
"Senior Lender"), BANKERS TRUST COMPANY, CHEMICAL BANK and CITIBANK, N.A.
("Citibank"), in their capacities as agents for the Senior Lenders hereunder (in
such capacities, the "Agents"), and CITIBANK, in its separate capacity as
administrative agent for the Senior Lenders hereunder (in such capacity, the
"Administrative Agent").
PRELIMINARY STATEMENTS. (1) The Borrowers, the Senior Lenders, the
Agents and the Administrative Agent have entered into the Amended and Restated
Credit Agreement dated as of May 6, 1993 (as amended pursuant to that certain
First Amendment dated as of August 1, 1993, the "Credit Agreement") and have
agreed to further amend the Credit Agreement as hereinafter set forth.
(2) Capitalized terms used herein and not otherwise defined herein
shall have the meanings ascribed to such terms in the Credit Agreement. Unless
referring to a section of this Second Amendment, all section references
contained herein are references to section numbers as they appear in the Credit
Agreement.
SECTION 1. EFFECTIVE DATES. (a) On the "Senior Note Effective Date"
(as defined in SECTION 4 below), the Company shall issue $150,000,000 aggregate
principal amount of 9.25% Senior Notes due September 15, 2001 (the "2001 Notes")
to certain institutional investors. In return, the Company shall receive cash
and/or a portion of the Public Debt due in 1996 or 1997, PROVIDED, that at least
$85,000,000 of such consideration shall be in cash. The provisions of this
Second Amendment set forth in SECTION 2 hereof shall become effective on the
Senior Note Effective Date.
(b) On the "Equity Effective Date" (as defined in SECTION 4 below),
the Company shall issue common stock to the public (the "Equity Issuance")
pursuant to that certain S-1 Registration Statement filed with the Commission on
January 7, 1994 (the "Registration Statement"). The provisions of this Second
Amendment set forth in SECTION 3 hereof shall become effective on the Equity
Effective Date.
SECTION 2. AMENDMENTS IN CONNECTION WITH ISSUANCE OF THE 2001 NOTES.
2.1. PREPAYMENT OF THE TERM LOANS. On the Senior Note Effective
Date, out of the Excess Proceeds of Issuance of Stock or Debt arising from the
issuance of the 2001 Notes, the Company shall make a prepayment of the Term
Loans (the "Debt Proceeds Prepayment") in the aggregate amount of $75,000,000,
payable to the Administrative Agent for the account of the Term Senior Lenders.
The Debt Proceeds Prepayment shall be applied to pay in full the installment on
the Term Loans due on December 31, 1997 and to pay in part the installment on
the Term Loans due on December 31, 1998.
2.2. TERMINATION OF THE CAPITALIZED INTEREST FACILITIES. No
Capitalized Interest Loans shall be outstanding as of the Senior Note Effective
Date. In addition, the parties hereto hereby agree to terminate the ability of
the Borrowers to defer the payment of interest in cash pursuant to Section
<PAGE>
2.04(b) of the Credit Agreement. Accordingly, as of the Senior Note Effective
Date:
(a) The following defined terms in the Credit Agreement shall be
deleted in their entirety:
"Capitalized Interest Loan"
"Capitalized Interest Note"
"Deferred Interest"
"Imputed Eurodollar Rate"
"Notice of Deferral"
"Revolver Capitalized Interest Loans"
"Revolver Capitalized Interest Notes"
"Term Capitalized Interest Loans"
"Term Capitalized Interest Notes"
"Total Term Pro Rata Share"
(b) Each reference in the Credit Agreement to the Term Capitalized
Interest Loans, the Term Capitalized Interest Notes, the Revolver Capitalized
Interest Loans, the Revolver Capitalized Interest Notes, the Capitalized
Interest Loans and the Capitalized Interest Notes shall be deleted in their
entirety, and each provision of the Credit Agreement specifically applicable
solely to any such defined term shall be deleted in its entirety, and from and
after the Senior Note Effective Date shall be of no further force or effect.
(c) Each reference in the Credit Agreement to "Total Term Pro Rata
Share" is hereby deleted and a reference to "Term Loan Pro Rata Share" is
substituted therefor.
(d) Sections 2.03 and 2.08(e) of the Credit Agreement are deleted in
their entirety (it being understood that subsequent sections and subsections
shall not be renumbered or relettered on account of such deletions).
(e) Section 2.04(b) of the Credit Agreement is deleted in its
entirety and the following is substituted therefor:
"(b) INTEREST PAYMENTS. Subject to SECTION 2.04(D), interest
accrued on each Base Rate Loan and each Eurodollar Rate Loan shall be
payable by the Borrower borrowing such Base Rate Loan or Eurodollar Rate
Loan in arrears (i) on each Interest Payment Date applicable to such Loan,
(ii) upon the prepayment thereof in full, (iii) with respect to each Base
Rate Loan, upon conversion thereof to a Eurodollar Rate Loan (but only if
no other Base Rate Loan of the same Type of Loan remains outstanding after
such conversion) and (iv) at maturity."
(f) Exhibit 6-C and Exhibit 6-D to the Credit Agreement are deleted
in their entirety.
2.3. ADDITIONAL AMENDMENTS TO THE CREDIT AGREEMENT. Upon the
occurrence of the Senior Note Effective Date, the Credit Agreement is hereby
further amended as follows:
(a) Section 1.01 of the Credit Agreement is hereby amended to delete
the definition of "Senior Term Debt" therein and to substitute therefor the
following:
"SENIOR TERM DEBT" shall mean, at any time, the Term Loans and
the Public Debt outstanding at such time.
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<PAGE>
(b) Section 2.01(b)(i) of the Credit Agreement is hereby amended to
delete the amount of the principal installment set forth opposite the date
12/31/97 and to substitute the amount of "$0" opposite such date.
(c) Section 2.01(b)(i) of the Credit Agreement is hereby further
amended to delete the amount of the principal installment set forth opposite the
date 12/31/98 and to substitute the amount of "$65,000,000" opposite such date.
(d) Section 2.06(b)(ii)(A) of the Credit Agreement is hereby deleted
in its entirety and the following is substituted therefor:
"(A) prior to the payment in full of all Public Debt having
maturity dates prior to January 1, 1999, 100% of the Excess Proceeds of
Issuance of Stock or Debt shall be applied to the repayment of Public Debt
having maturity dates prior to January 1, 1999 and/or the outstanding Term
Loans, as the Company may in its discretion elect; PROVIDED, that to the
extent that any portion of such Excess Proceeds of Issuance of Stock or
Debt are not so applied within the time period set forth in SECTION
8.03(VIII)(A), then such portion shall cease to be deemed Excess Proceeds
of Issuance of Stock or Debt for all purposes hereunder;"
(e) Section 8.01 of the Credit Agreement is amended to delete clause
(iv) thereof and to substitute therefor the following:
"(iv) Indebtedness arising under or in connection with the
Public Debt (including, without limitation, the New Senior Note
Obligations);"
(f) Section 8.03(viii) of the Credit Agreement is amended to (i)
delete the reference to "January 1, 2002" therein and to substitute therefor
"January 1, 2003" and (ii) delete the reference to "nine months" in clause (A)
thereof and substitute therefor "one year".
(g) Exhibit 1 to the Credit Agreement (Form of Assignment and
Acceptance) is deleted in its entirety, and a new Exhibit 1, in the form
attached hereto as ANNEX I, is substituted therefor.
2.4. CONSENT TO AMENDMENT TO AMENDED AND RESTATED COLLATERAL TRUST
AGREEMENT. By their execution hereof, the Requisite Senior Lenders hereby
consent to the terms of, and authorize the Administrative Agent to cause to be
executed the Second Amendment to the Amended and Restated Collateral Trust
Agreement, substantially in the form of ANNEX II hereto (the "Collateral Trust
Amendment").
SECTION 3. AMENDMENTS IN CONNECTION WITH EQUITY ISSUANCE.
3.1. PREPAYMENT OF THE TERM LOANS. On the Equity Effective Date, out
of the Excess Proceeds of Issuance of Stock or Debt arising from the Equity
Issuance, the Company shall make a prepayment of the Term Loans (the "Equity
Proceeds Prepayment") in the aggregate amount equal to the sum of (i)
$50,000,000 and (ii) the lesser of (A) $15,000,000 and (B) the amount by which
the Excess Proceeds of Issuance of Stock or Debt arising from the Equity
Issuance exceeds $150,000,000, which Equity Proceeds Prepayment shall be payable
to the Administrative Agent for the account of the Term Senior Lenders (each
Term Senior Lender's Term Loan Pro Rata Share of such payment, plus such Term
Senior Lender's Term Loan Pro Rata Share of the payment under SECTION 2.1 above,
being such Term Senior Lender's "Paydown Amount"). The Equity Proceeds
Prepayment shall be applied to the installment on the Term Loans due on December
31, 1998.
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<PAGE>
3.2. CHANGES TO THE REVOLVING LOAN COMMITMENTS.
(a) Each Senior Lender may, in its sole discretion, elect to increase
its existing Revolving Loan Commitment (if such Senior Lender is an existing
Revolver Senior Lender) or become obligated with respect to a new Revolving Loan
Commitment (if such Senior Lender is not an existing Revolver Senior Lender) in
an amount up to the amount set forth by such Senior Lender on a Notice of
Election substantially in the form of ANNEX III hereto (each being a "Notice of
Election", and the amount set forth thereon being such Senior Lender's "Elected
Amount") delivered to the Administrative Agent no later than a date to be
determined by the Company and the Agents, which date shall be on or after
February 7, 1994 and shall be notified to the Senior Lenders at least five
Business Days prior to such date.
(b) The aggregate new and additional Revolving Loan Commitments of
all Senior Lenders (the "Aggregate Additional Revolving Loan Commitments") shall
equal the lesser of (i) the aggregate Elected Amounts and (ii) $90,000,000.
(c) Each Senior Lender's new or additional Revolving Loan Commitment
("Additional Revolving Loan Commitment") shall be calculated as follows:
(i) if the aggregate Elected Amounts for all Senior Lenders is less
than $90,000,000, the Additional Revolving Loan Commitment for each Senior
Lender shall be such Senior Lender's Elected Amount; and
(ii) if the aggregate Elected Amounts for all Senior Lenders is
greater than $90,000,000:
(A) the Elected Amount of each Senior Lender shall consist of
(x) a "Converted Portion" which shall be an amount equal to the lesser
of such Senior Lender's Elected Amount and such Senior Lender's
Paydown Amount and (y) if applicable, an "Excess Portion" which shall
be in an amount equal to the excess, if any, of such Senior Lender's
Elected Amount over such Senior Lender's Paydown Amount;
(B) if the aggregate amount of the Converted Portions for all of
the Senior Lenders is less than $90,000,000, each Senior Lender's
Additional Revolving Loan Commitment shall be equal to such Senior
Lender's Converted Portion, PLUS, if such Senior Lender's Elected
Amount exceeds such Senior Lender's Converted Portion, an amount equal
to the product of (x) the excess of $90,000,000 over the aggregate
Converted Portions of all Senior Lenders and (y) a fraction having a
numerator equal to such Senior Lender's Excess Portion and a
denominator equal to the aggregate amount of the Excess Portions for
all Senior Lenders; and
(C) if the aggregate amount of the Converted Portions for all
Senior Lenders is greater than $90,000,000, each Senior Lender's
Additional Revolving Loan Commitment shall be equal to the product of
(x) $90,000,000 and (y) a fraction having a numerator equal to such
Senior Lender's Converted Portion and a denominator equal to the
aggregate amount of the Converted Portions for all Senior Lenders.
(d) On the Equity Effective Date, Interiors shall pay to the
Administrative Agent, for the account of each Senior Lender delivering a Notice
of Election pursuant to this SECTION 3.2, an additional fee (the "Additional
Revolver Closing Fee") equal to one-fifth of one percent (0.20%) of the
Additional Revolving Commitment of each such Senior Lender.
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<PAGE>
3.3. AMENDMENTS TO THE CREDIT AGREEMENT. Upon the occurrence of the
Equity Effective Date, the Credit Agreement is hereby amended as follows:
(a) Section 1.01 of the Credit Agreement is hereby amended to add the
following defined terms thereto:
"PUBLIC DEBT REVOLVING LOANS" shall mean Revolving Loans the
proceeds of which are used to repay (including payment at maturity) or
repurchase Public Debt due in 1996 or 1997.
"WORKING CAPITAL REVOLVING LOANS" shall mean Revolving Loans that
do not constitute Public Debt Revolving Loans.
(b) Section 1.01 of the Credit Agreement is hereby further amended to
delete the definition of "Revolving Loan Commitment" therein and to substitute
therefor the following:
"REVOLVING LOAN COMMITMENT" shall mean the obligation of a
Revolver Senior Lender to make Revolving Loans and to participate in
Facility Letters of Credit pursuant to the terms and conditions of
this Agreement, and "REVOLVING LOAN COMMITMENTS" shall mean the
aggregate principal amount of the Revolving Loan Commitments of all
the Senior Lenders."
(c) Section 2.01(b)(i) of the Credit Agreement is hereby further
amended to delete the amount of the principal installment set forth opposite the
date 12/31/98 and to substitute opposite such date an amount equal to
$65,000,000 MINUS the amount of the Equity Proceeds Prepayment.
(d) Section 2.02(a) of the Credit Agreement is amended to delete the
parenthetical contained in clause (i)(A) thereof.
(e) Section 2.02(a) of the Credit Agreement is further amended to
delete clause (x) contained in clause (iv) thereof and to substitute the
following therefor:
"(x) in the case of Base Rate Loans, shall be in the aggregate minimum
of $5,000,000 and integral multiples of $1,000,000 in excess of that
amount (except that Revolving Loans which constitute Public Debt
Revolving Loans may be borrowed as Base Rate Loans without being
subject to such minimum amount or integral multiple) and".
(f) Section 2.02(a) of the Credit Agreement is further amended to add
the following clause (v) thereto:
"(v) Each Notice of Borrowing shall specify the portion of the
Revolving Loans requested therein which constitute Working Capital
Revolving Loans and Public Debt Revolving Loans; PROVIDED, that any
Notice of Borrowing that does not make the foregoing specification
(including, without limitation, all Notices of Borrowing delivered on
or before January 31, 1994) shall be deemed to be a request for
Working Capital Revolving Loans. At no time shall the sum of (A) the
aggregate outstanding principal balance of the Working Capital
Revolving Loans and (B) the Facility Letter of Credit Obligations
exceed $174,841,297. In no event shall the sum of the principal
amount of the Public Debt Revolving Loans made by the Revolver Senior
Lenders hereunder exceed $90,000,000. Each repayment of Revolving
Loans shall be accompanied be a written notice indicating whether such
payment shall reduce outstanding Working Capital Revolving Loans or
Public Debt Revolving Loans; PROVIDED, that, if such written notice
does not accompany any such
-5-
<PAGE>
payment, such payment shall be deemed to reduce outstanding Working
Capital Revolving Loans. Public Debt Revolving Loans, once repaid,
cannot be reborrowed (it being understood that such Public Debt
Revolving Loans may be continued and/or converted in accordance with
the terms of SECTION 2.04(C)). Notwithstanding the minimum amount and
notice requirements set forth in SECTION 2.02(F) for reductions to the
Revolving Loan Commitments, as of the close of business on the last
day of each calendar quarter, the Revolving Loan Commitments shall be
automatically reduced by an amount equal to the aggregate amount of
repayments of principal of Public Debt Revolving Loans which occurred
during such quarter. Each such automatic reduction of the Revolving
Loan Commitments shall reduce the Revolving Loan Commitment of each
Revolver Senior Lender proportionately in accordance with its Revolver
Pro Rata Share."
(g) Section 2.06(b)(i) of the Credit Agreement is amended to delete
clause (iii) of the first sentence of the definition of "Available Liquidity"
and to substitute the following therefor:
"(iii) the average daily amount by which $174,841,297 exceeds the sum
of (A) the outstanding principal balance of the Revolving Loans which
constitute Working Capital Revolving Loans and (B) the Facility Letter
of Credit Obligations."
(h) Section 2.06(b)(i) of the Credit Agreement is amended to add the
following definition following the definition of "Cash Available for Sweep"
therein:
"CAPITAL EXPENDITURE ADJUSTMENT" means the amount notified by the
Company to the Agents (with such supporting details as are requested by the
Agents) on January 15, 1995 (or, if not a Business Day, on the next
preceding Business Day) equal to the difference between the amount of
Capital Expenditures permitted under SECTION 9.08(IX) hereof and the
aggregate Capital Expenditures actually incurred prior to such Business Day
under such SECTION 9.08(IX).
(i) Section 2.06(b)(i) of the Credit Agreement is further amended to
add, after the figure "$100,000,000"(1) opposite the 01/15/95 Test Date in the
definition of "Minimum Liquidity", the following: "PLUS the Capital Expenditure
Adjustment".
(j) Section 2.06(b)(i) of the Credit Agreement is further amended to
add the following proviso at the end of the definition of "Sweep Percentage"
therein:
"; PROVIDED, that for the 1/15/97 Test Date and for each Test Date
thereafter, the Sweep Percentage shall be equal to 50% if, on such Test
Date, (1) the outstanding principal balance of the Term Loans does not
exceed $148,000,000 and (2) the long-term public senior debt of the Company
is then rated at least BB by Standard & Poor's Corporation and Ba2 by
Moody's Investors Service, Inc. (or, with respect to either such rating
agency, an equivalent rating from another nationally recognized rating
agency acceptable to the Agents)".
(k) Section 2.06(b)(ii)(C) of the Credit Agreement is amended to:
- ----------------------
(1) This amount was reduced from $175,000,000 to $100,000,000 pursuant to
the First Amendment to the Credit Agreement.
-6-
<PAGE>
(i) delete clause (2) thereof in its entirety and to substitute
therefor the following: "(2) the outstanding principal balance of the Term
Loans does not exceed $148,000,000"; and
(ii) delete clause (3) thereof in its entirety (through and
including the parenthetical clause therein) and to substitute therefor the
following: "(3) the long-term public senior debt of the Company is then
rated at least BB by Standard & Poor's Corporation and Ba2 by Moody's
Investors Service, Inc. (or, with respect to either such rating agency, an
equivalent rating from another nationally recognized rating agency
acceptable to the Agents)".
(l) Section 8.03 of the Credit Agreement is amended to delete clause
(x) thereof in its entirety and to substitute the following therefor:
"(x) any other Investments not otherwise described in clauses
(i) through (ix) above, not exceeding in the aggregate at any one time
outstanding the sum of (A) $5,000,000 and (B) the lesser of (1)
$20,000,000 and (2) the excess of the net cash proceeds received by
the Company from the issuance of common stock of the Company issued
pursuant to that certain S-1 Registration Statement filed with the
Commission on January 7, 1994 OVER $150,000,000; PROVIDED, that
Investments in Public Debt under this clause (x) shall not at any one
time exceed an aggregate amount of $5,000,000."
(m) Section 8.04 of the Credit Agreement is amended to add the
following additional clause at the end thereof:
"(viii) reasonable and customary indemnities made in connection
with Capital Expenditures permitted by the terms hereof."
(n) Section 8.09(a) of the Credit Agreement is amended to (i) insert,
immediately after the words "Consolidated Rental Payments" therein, the
following: "(except Consolidated Rental Payments arising in connection with the
Libertyville Facility)"; and (ii) to delete the table therein and to substitute
therefor the following:
<TABLE>
<CAPTION>
Consolidated
"Year Rental Payments
---- ---------------
<S> <C>
1994 $48,000,000
1995 $51,000,000
1996 $54,000,000
1997 $57,000,000
1998 $60,000,000
1999 $63,000,000
2000 $66,000,000"
</TABLE>
(o) Section 9.08 of the Credit Agreement is amended to add the
following additional clause at the end thereof:
"(ix) strategic Capital Expenditures in an aggregate amount not
to exceed the sum of (x) the excess of the net cash proceeds received by
the Company from the issuance of common stock of the Company issued
pursuant to that certain S-1 Registration Statement filed with the
Commission on January 7, 1994 OVER $100,000,000, PLUS (y) the excess of the
Cash Available for Sweep with respect to the 1/15/94 Test Date Series due
OVER $100,000,000."
SECTION 4. CONDITIONS PRECEDENT TO EFFECTIVENESS.
-7-
<PAGE>
4.1. SENIOR NOTE EFFECTIVE DATE. SECTION 2 of this Second Amendment,
and all provisions of this Second Amendment applicable thereto, shall become
effective as of the date (the "Senior Note Effective Date") on which each of the
following conditions precedent shall have occurred:
(a) DOCUMENTATION. The Agents shall have received all of the
following:
(i) Counterparts of this Second Amendment executed by both of the
Borrowers, the Agents, the Administrative Agent and Senior Lenders whose Term
Loans and Revolving Loan Commitments aggregate 66-2/3% or more of the sum of the
then aggregate unpaid principal balance of the Term Loans and the then aggregate
principal amount of the Revolving Loan Commitments;
(ii) Written notice from the Administrative Agent to the parties to
the Collateral Trust Amendment that the Requisite Senior Lenders have consented
to the execution of the Collateral Trust Amendment;
(iii) The Collateral Trust Amendment, executed by the Company,
Interiors, USG Foreign Investments, Ltd. and Wilmington Trust Company and
William J. Wade, as Trustee;
(iv) Reaffirmations of Guaranties executed by the Company and each
Subsidiary party to a Subsidiary Guaranty, in form and substance reasonably
satisfactory to the Agents and counsel for the Agents;
(v) The opinion of Kirkland & Ellis, counsel to the Company and
Interiors, and the opinion of the General Counsel of the Company, in each case
relating to such matters as the Agents deem appropriate and in form and
substance reasonably satisfactory to the Agents and counsel for the Agents;
(vi) A certificate of the Secretary or Assistant Secretary of the
Company certifying (A) the names and true signatures of the incumbent officers
of the Company authorized to sign this Second Amendment, the Collateral Trust
Amendment and all other Loan Documents executed by the Company in connection
herewith, (B) the resolutions of the Company's Board of Directors approving and
authorizing the execution, delivery and performance of this Second Amendment,
the Collateral Trust Amendment and all other Loan Documents executed by the
Company in connection herewith, and (C) the resolutions of the Company's Board
of Directors authorizing and approving the issuance of, and setting forth
certain terms with respect to, the 2001 Notes;
(vii) A certificate of the Secretary or Assistant Secretary of
Interiors certifying (A) the names and true signatures of the incumbent officers
of Interiors authorized to sign this Second Amendment, the Collateral Trust
Amendment and all other Loan Documents executed by Interiors in connection
herewith and (B) the resolutions of Interiors' Board of Directors approving and
authorizing the execution, delivery and performance of this Second Amendment,
the Collateral Trust Amendment and all other Loan Documents executed by
Interiors in connection herewith; and
(viii) A certificate of the Secretary or Assistant Secretary of USG
Foreign Investments, Ltd. ("Foreign Investments") certifying (A) the names and
true signatures of the incumbent officers of Foreign Investments authorized to
sign the Collateral Trust Amendment and (B) the resolutions of Foreign
Investments' Board of Directors approving and authorizing the execution,
delivery and performance of the Collateral Trust Amendment.
(b) ISSUANCE OF 2001 NOTES. The Company shall have issued at least
$150,000,000 in aggregate principal amount of its 2001 Notes and received in
return cash (at least $85,000,000) and/or its existing Public Debt due in 1996
or 1997.
-8-
<PAGE>
(c) PAYDOWN OF TERM LOANS. The Company shall have made the Debt
Proceeds Prepayment.
(d) NO EVENTS OF DEFAULT. No Event of Default or Potential Event of
Default shall have occurred and be continuing.
4.2. EQUITY EFFECTIVE DATE. SECTION 3 of this Second Amendment, and
all provisions of this Second Amendment applicable thereto, shall become
effective as of the date (the "Equity Effective Date") following the Senior Note
Effective Date on which each of the following conditions precedent shall have
occurred:
(a) DOCUMENTATION. The Agents shall have received all of the
following:
(i) Counterparts of this Second Amendment executed by both of the
Borrowers, the Agents, the Administrative Agent, each Revolver Senior Lender and
Senior Lenders whose Term Loans and Revolving Loan Commitments aggregate 66-2/3%
or more of the sum of the then aggregate unpaid principal balance of the Term
Loans and the then aggregate principal amount of the Revolving Loan Commitments;
(ii) A certificate of the Secretary or Assistant Secretary of the
Company certifying the resolutions of the Company's Board of Directors approving
and authorizing the execution, delivery and performance of the Registration
Statement and the issuance of the new common stock thereunder;
(iii) The opinion of Kirkland & Ellis, counsel to the Company and
Interiors, and the opinion of the General Counsel of the Company, in each case
relating to such matters as the Agents deem appropriate and in form and
substance reasonably satisfactory to the Agents and counsel for the Agents; and
(iv) A copy of the final Registration Statement, certified to be in
the form in which the Commission declared such Registration Statement to be
effective.
(b) ISSUANCE OF COMMON STOCK. The Company shall have issued common
stock pursuant to the Registration Statement resulting in net cash proceeds
received by the Company of not less than $100,000,000.
(c) PAYDOWN OF TERM LOANS. The Company shall have made the Equity
Proceeds Prepayment.
(d) PAYMENT OF THE ADDITIONAL REVOLVER CLOSING FEE. Interiors shall
have paid the Additional Revolver Closing Fee in cash to the Administrative
Agent for the account of the applicable Senior Lenders.
(e) NO EVENTS OF DEFAULT. No Event of Default or Potential Event of
Default shall have occurred and be continuing.
SECTION 5. EXCESS PROCEEDS OF ISSUANCE OF STOCK OR DEBT. Except to
the extent of the Debt Proceeds Prepayment and the Equity Proceeds Prepayment,
the net cash proceeds arising from the issuance of the 2001 Notes and the Equity
Issuance shall not constitute Excess Proceeds of Issuance of Stock or Debt for
purposes of Section 2.06(b)(ii) of the Credit Agreement.
SECTION 6. CONFIRMATION OF CREDIT AGREEMENT. Except as herein
expressly amended, the Credit Agreement is ratified and confirmed in all
respects and shall remain in full force and effect in accordance with its terms.
Each reference in the Credit Agreement to "this Agreement" shall mean the Credit
Agreement as amended by that certain First Amendment dated as of
-9-
<PAGE>
August 1, 1993 among the parties hereto, as further amended by this Second
Amendment, and as hereinafter amended or restated.
SECTION 7. COSTS AND EXPENSES. Each Borrower agrees to pay on demand
all costs and expenses of the Administrative Agent and the Agents in connection
with the preparation, reproduction, execution and delivery of this Second
Amendment, including the reasonable fees and out-of-pocket expenses of Sidley &
Austin, counsel for the Agents, and Ernst & Young, financial advisor to the
Agents.
SECTION 8. SUCCESSORS AND ASSIGNS. This Second Amendment and the
other Loan Documents executed in connection herewith shall be binding upon the
parties hereto and thereto and their respective successors and assigns
(including, without limitation, a receiver, trustee or debtor-in-possession of
any of the Borrowers) and shall inure to the benefit of the parties hereto and
thereto and the successors and permitted assigns of the Senior Lenders and the
Issuing Banks.
SECTION 9. EXECUTION IN COUNTERPARTS. This Second Amendment may be
executed and delivered in any number of counterparts and by different parties
hereto in separate counterparts, each of which when so executed and delivered
shall be deemed to be an original and all of which taken together shall
constitute one and the same original agreement.
SECTION 10. GOVERNING LAW. This Second Amendment shall be governed
by and construed in accordance with the laws of the State of New York.
SECTION 11. HEADINGS. Section headings in this Second Amendment are
included herein for convenience of reference only and shall not constitute a
part of this Second Amendment for any other purpose.
-10-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Second
Amendment to be executed by their respective officers thereunto duly authorized
as of the date first above written.
USG CORPORATION
By____________________________
Title:
USG INTERIORS, INC.
By____________________________
Title:
CITIBANK, N.A.,
as Administrative Agent, as an
Agent and as a Senior Lender
By____________________________
Title:
BANKERS TRUST COMPANY, as an
Agent and as a Senior Lender
By____________________________
Title:
CHEMICAL BANK, as an Agent
and as a Senior Lender
By____________________________
Title:
-11-
<PAGE>
BANQUE PARIBAS CHICAGO BRANCH
By: _______________________________
Title: ___________________________
By: _______________________________
Title: ___________________________
CONTINENTAL BANK N.A.
By: _______________________________
Title: ___________________________
TCW SPECIAL CREDITS TRUST
By: _______________________________
Title: ___________________________
By: _______________________________
Title: ___________________________
TCW SPECIAL CREDITS FUND III
By: _______________________________
Title: ___________________________
By: _______________________________
Title: ___________________________
TCW SPECIAL CREDITS FUND IIIB
By: _______________________________
Title: ___________________________
By: _______________________________
Title: ___________________________
TCW SPECIAL CREDITS TRUST IIIB
By: _______________________________
Title: ___________________________
By: _______________________________
Title: ___________________________
THE COMMON FUND FOR BOND INVESTMENTS
By: _______________________________
Title: ___________________________
DELAWARE STATE EMPLOYEES PENSION PLAN
By: _______________________________
Title: ___________________________
-12-
<PAGE>
MELLON BANK, N.A
By: _______________________________
Title: ___________________________
BANK OF AMERICA, N.T. & S.A.
By: _______________________________
Title: ___________________________
THE DAI-ICHI KANGYO BANK, LIMITED
By: _______________________________
Title: ___________________________
INTERNATIONALE NEDERLANDEN (U.S.)
CAPITAL CORPORATION
By: _______________________________
Title: ___________________________
THE NORTHERN TRUST COMPANY
By: _______________________________
Title: ___________________________
THE SUMITOMO BANK, LTD. CHICAGO BRANCH
By: _______________________________
Title: ___________________________
TORONTO-DOMINION BANK, CAYMAN BRANCH
By: _______________________________
Title: ___________________________
THE FUJI BANK, LIMITED
By: _______________________________
Title: ___________________________
THE MITSUBISHI BANK, LTD. CHICAGO BRANCH
By: _______________________________
Title: ___________________________
THE NIPPON CREDIT BANK, LTD.
By: _______________________________
Title: ___________________________
-13-
<PAGE>
THE SANWA BANK, LIMITED CHICAGO BRANCH
By: _______________________________
Title: ___________________________
SOCIETE GENERALE
By: _______________________________
Title: ___________________________
THE ASAHI BANK, LTD., CHICAGO BRANCH
By: _______________________________
Title: ___________________________
THE YASUDA TRUST AND BANKING COMPANY, LIMITED
By: _______________________________
Title: ___________________________
NATIONAL WESTMINSTER BANK PLC
By: _______________________________
Title: ___________________________
THE TOKAI BANK, LTD.
By: _______________________________
Title: ___________________________
THE INDUSTRIAL BANK OF JAPAN, LIMITED
CHICAGO BRANCH
By: _______________________________
Title: ___________________________
AUSTRALIA AND NEW ZEALAND BANKING GROUP LTD.,
CHICAGO BRANCH
By: _______________________________
Title: ___________________________
PILGRIM PRIME RATE TRUST
By: _______________________________
Title: ___________________________
BANK OF IRELAND
By: _______________________________
Title: ___________________________
-14-
<PAGE>
THE TOYO TRUST & BANKING CO., LTD.
By: _______________________________
Title: ___________________________
THE MITSUI TRUST & BANKING CO. LTD.
By: _______________________________
Title: ___________________________
WILMINGTON SAVINGS FUND SOCIETY, FSB
By: _______________________________
Title: ___________________________
FIRST HAWAIIAN BANK
By: _______________________________
Title: ___________________________
MORGAN GUARANTY TRUST COMPANY OF NEW YORK
By: _______________________________
Title: ___________________________
CREDIT NATIONAL
By: _______________________________
Title: ___________________________
THE ROYAL BANK OF SCOTLAND PLC
By: _______________________________
Title: ___________________________
BANQUE WORMS GRAND CAYMAN BRANCH
By: _______________________________
Title: ___________________________
STATE BANK OF NEW SOUTH WALES, LIMITED
By: _______________________________
Title: ___________________________
CAISSE CENTRALE DES BANQUES POPULAIRES
By: _______________________________
Title: ___________________________
-15-
<PAGE>
BEAR, STEARNS & CO. INC.
By: _______________________________
Title: ___________________________
CROWN LEASING USA INC.
By: _______________________________
Title: ___________________________
SHOWA LEASING (U.S.A.) INC.
By: _______________________________
Title: ___________________________
RYOSHIN LEASING (USA) INC.
By: _______________________________
Title: ___________________________
LASALLE NATIONAL BANK
By: _______________________________
Title: ___________________________
MERRILL LYNCH, PIERCE, FENNER &
SMITH, INC.
By: _______________________________
Title: ___________________________
LEHMAN COMMERCIAL PAPER
By: _______________________________
Title: ____________________________
-i-
<PAGE>
ANNEX I
to
SECOND AMENDMENT
EXHIBIT 1
FORM OF ASSIGNMENT AND ACCEPTANCE AGREEMENT
This ASSIGNMENT AND ACCEPTANCE dated as of ________ ___, 199_ between
____________ (the "Assignor") and _____________ (the "Assignee").
PRELIMINARY STATEMENTS
A. Reference is made to that certain Amended and Restated Credit
Agreement dated as of May 6, 1993 (as the same has been and may hereafter be
amended, restated, supplemented or otherwise modified from time to time, the
"Restated Credit Agreement") among USG Corporation and USG Interiors, Inc., each
a Delaware corporation, the financial institutions from time to time party
thereto (the "Senior Lenders"), Bankers Trust Company, Chemical Bank and
Citibank, N.A., as agents for the Senior Lenders (the "Agents"), and Citibank,
N.A., as administrative agent for the Senior Lenders (the "Administrative
Agent"). Capitalized terms used herein and not otherwise defined herein shall
have the meanings ascribed thereto in the Restated Credit Agreement.
B. The Assignor is a Senior Lender and, as such, presently holds a
percentage of the rights and obligations of the Senior Lenders under the
Restated Credit Agreement. On the terms and subject to the conditions set forth
below, the Assignor desires to sell and assign to the Assignee, and the Assignee
desires to purchase and assume from the Assignor, a portion of the Assignor's
rights and obligations under the Restated Credit Agreement as of the "Assignment
Date" (as defined below).
NOW, THEREFORE, the Assignor and the Assignee hereby agree as follows:
1. The Assignor hereby sells and assigns to the Assignee, and the
Assignee hereby purchases and assumes from the Assignor:(2)
(i) __% of each of the Term Loans owing to the Assignor on the
Assignment Date, constituting $________,
(ii) __% of each of (a) the Assignor's Revolving Loan Commitment
as in effect on the Assignment Date, constituting $___________, and (b) the
Revolving Loans owing to the Assignor on the Assignment Date, constituting
$_________, and
(iii) all other rights and obligations relating to the foregoing
(including, without limitation, the applicable Notes and any participation
in Facility Letters of Credit) under the Restated Credit Agreement as of
the Assignment Date.
2. The Assignor:
(i) represents and warrants that as of the date hereof (a) the
Term Loan owing to the Assignor is $__________, and (b) the Assignor's
Revolving Loan Commitment is $__________, of which $___________ is
outstanding;
- ----------------------------
(2)Complete the following, as applicable.
ii
<PAGE>
(ii) represents and warrants that it is the legal and beneficial
owner of the interests being assigned by it hereunder and that such
interest is free and clear of any adverse claim;
(iii) makes no representation or warranty and assumes no
responsibility with respect to any statements, warranties or
representations made in or in connection with the Restated Credit Agreement
or the execution, legality, validity, enforceability, genuineness,
sufficiency or value of the Restated Credit Agreement;
(iv) makes no representation or warranty and assumes no
responsibility with respect to the financial condition of any Borrower or
guarantor or the performance or observance by any Borrower or guarantor of
any of their obligations under the Restated Credit Agreement;
(v) attaches hereto:(3)
[a Term Note dated ______ ___, 199_ in the original principal amount
of $________ in favor of the Assignor; [and]]
[a Revolving Loan Note dated ________ ___, 199_ in the original
principal amount of up to $__________ in favor of the Assignor; and]
(vi) requests that the Administrative Agent exchange the Notes
referred to in clause (v) above for the following new Notes:(4)
[a Term Note in the original principal amount of $________, dated the
Assignment Date and made in favor of the Assignee; [and]]
[a Revolving Loan Note in the original principal amount of up to
$__________, dated the Assignment Date and made in favor of the
Assignee; [and]]
[a Term Note in the original principal amount of $________, dated the
Assignment Date and made in favor of the Assignor; [and]](5)
[a Revolving Loan Note in the original principal amount of up to
$__________, dated the Assignment Date and made in favor of the
Assignor].
3. The Assignee (i) confirms that it has received a copy of the
Restated Credit Agreement, together with copies of such other documents and
information as it has deemed appropriate to make its own credit analysis and
decision to enter into this Assignment and Acceptance; (ii) agrees that it will,
independently and without reliance upon any Agent, the Assignor or any other
Senior Lender and based on such documents and information as it shall deem
appropriate at the time, continue to make its own credit decisions in taking or
not taking action under the Restated Credit Agreement; (iii) appoints and
authorizes the Agents and the Administrative Agent to take such action as
- ----------------------
(3)Insert one or both of the following alternatives, as applicable. If the
applicable Note or Notes are lost, attach an indemnification agreement,
substantially in the form of Exhibit 7 to the Restated Credit Agreement, in lieu
of such Note or Notes.
(4)Insert one or more of the following, as applicable.
(5)Use this clause and the one following it only if the Assignor is
retaining an interest in the Loans or the Revolving Credit Facility, as
applicable.
iii
<PAGE>
agents on its behalf and to exercise such powers under the Restated Credit
Agreement as are delegated to the Agents and the Administrative Agent by the
terms thereof, together with such powers as are reasonably incidental thereto;
(iv) agrees that it will perform in accordance with their terms all of the
obligations which by the terms of the Restated Credit Agreement are required to
be performed by it as a Senior Lender; [and] (v) specifies as its Domestic
Lending Office (and address for notices) and Eurodollar Lending Office the
offices set forth beneath its name on the signature page hereof[; and (vi)
confirms that it is rated at least BBB by Standard & Poor's Corporation (or has
otherwise been approved by the Company and the Issuing Banks)](6).
4. Subject to the acceptance hereof by the Administrative Agent, the
effective date for this Assignment and Acceptance shall be _____________ (the
"Assignment Date"). Following the execution of this Assignment and Acceptance,
it will be delivered to the Administrative Agent for acceptance and recording by
the Administrative Agent.
5. Upon such acceptance and recording, as of the Assignment Date, (i)
the Assignee shall be a Senior Lender under the Restated Credit Agreement and,
to the extent provided in this Assignment and Acceptance, have the rights and
obligations of a Senior Lender thereunder, and (ii) the Assignor shall, to the
extent provided in this Assignment and Acceptance, relinquish its rights and be
released from its obligations under the Restated Credit Agreement.
6. Upon such acceptance and recording, from and after the Assignment
Date, the Administrative Agent shall make all payments under the Restated Credit
Agreement and the Notes in respect of the interest assigned hereby (including,
without limitation, all payments of principal, interest and commitment fees with
respect thereto) to the Assignee. The Assignor and Assignee shall make all
appropriate adjustments in payments under the Restated Credit Agreement and the
Notes for periods prior to the Assignment Date directly between themselves.
7. This Assignment and Acceptance shall be governed by, and construed
in accordance with, the laws of the State of New York.
[Any other arrangements between the Assignor and the Assignee which do
not conflict with the terms set forth above and the terms of the Restated Credit
Agreement may be set forth herein or in a separate agreement.]
- ----------------------
(6)Include the bracketed language only if the Assignor is assigning all or
a portion of its Revolving Loan Commitment to the Assignee.
iv
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Assignment and
Acceptance to be executed by their respective officers thereunto duly authorized
as of the date first above written.
[NAME OF ASSIGNOR]
By_______________________
Title:
[NAME OF ASSIGNEE]
By_______________________
Title:
Domestic Lending Office:
[Address]
Eurodollar Lending Office:
[Address]
Accepted this _____ day of
__________, 199_.
CITIBANK, N.A., as
Administrative Agent
By____________________________
Title:
v
<PAGE>
ANNEX II
to
SECOND AMENDMENT
FORM OF SECOND AMENDMENT TO COLLATERAL TRUST AGREEMENT
SECOND AMENDMENT
Dated as of January 31, 1994
to
AMENDED AND RESTATED COLLATERAL TRUST AGREEMENT
Dated as of May 6, 1993
THIS SECOND AMENDMENT (this "Second Amendment") dated as of January
31, 1994 is entered into among USG CORPORATION (the "Company"), USG INTERIORS,
INC. ("Interiors"), USG FOREIGN INVESTMENTS, LTD. ("Foreign Investments") (the
Company, Interiors and Foreign Investments being sometimes collectively referred
to herein as the "Grantors"), and WILMINGTON TRUST COMPANY and WILLIAM J. WADE
acting not in their individual capacities but solely as trustee (in such
capacities, collectively, the "Trustee") under this Second Amendment for the
"Holders" of the "Secured Debt" (as each such term is defined in the Collateral
Trust Agreement described below).
PRELIMINARY STATEMENTS. (1) The Grantors and the Trustee have
entered into the Amended and Restated Collateral Trust Agreement dated as of May
6, 1993 (as previously amended pursuant to that certain First Amendment dated
August 1, 1993, the "Collateral Trust Agreement") and have agreed to further
amend the Collateral Trust Agreement as hereinafter set forth in order to add as
"Secured Debt" thereunder the 9.25% Senior Notes due September 15, 2001 issued
by the Company pursuant to that certain Indenture dated as of October 1, 1986
between the Company and Harris Trust and Savings Bank, as trustee.
(2) Capitalized terms used herein and not otherwise defined herein
shall have the meanings ascribed to such terms in the Collateral Trust
Agreement.
SECTION 1. AMENDMENTS TO COLLATERAL TRUST AGREEMENT. Upon the
occurrence of the "Senior Note Effective Date" (as defined in SECTION 2 below),
the Collateral Trust Agreement is amended to delete item 1 to Schedule 2
thereof, and to substitute the following therefor:
"1. Indenture dated as of October 1, 1986 between the Company and
Harris Trust and Savings Bank, as trustee, under which the Company has
issued those certain 8% Senior Notes due 1995, those certain 8% Senior
Notes due 1996, those certain 8% Senior Notes due 1997, those certain 9%
Senior Notes due 1998, those certain 9.25% Senior Notes due 2001 and those
certain 8-3/4% Debentures due 2017.
Public Trustee Notice Address:
Corporate Trust Department
311 West Monroe Street
Chicago, Illinois 60690"
SECTION 2. CONDITION PRECEDENT TO EFFECTIVENESS. This Second
Amendment shall become effective upon the occurrence of the "Senior Note
Effective Date" under the Second Amendment to Amended and Restated Credit
Agreement of even date herewith among the Company, Interiors, the financial
institutions parties thereto, Bankers Trust Company, Chemical Bank and Citibank,
N.A., as Agents, and Citibank, N.A., as Administrative Agent.
vi
<PAGE>
SECTION 3. CONFIRMATION OF COLLATERAL TRUST AGREEMENT. Except as
herein expressly amended, the Collateral Trust Agreement is ratified and
confirmed in all respects and shall remain in full force and effect in
accordance with its terms. Each reference in the Collateral Trust Agreement to
"this Agreement" shall mean the Collateral Trust Agreement as amended by this
Second Amendment, and as hereinafter amended or restated.
SECTION 4. COSTS AND EXPENSES. Each Grantor agrees to pay on demand
all costs and expenses of the Trustee reasonably incurred in connection with the
preparation, reproduction, execution and delivery of this Second Amendment.
SECTION 5. SUCCESSORS AND ASSIGNS. This Second Amendment shall be
binding upon the parties hereto and their respective successors and permitted
assigns (including, without limitation, a receiver, trustee or debtor-in-
possession of any of the Grantors) and shall inure to the benefit of the parties
hereto and the successors and permitted assigns of the Trustee.
SECTION 6. EXECUTION IN COUNTERPARTS. This Second Amendment may be
executed and delivered in any number of counterparts and by different parties
hereto in separate counterparts, each of which when so executed and delivered
shall be deemed to be an original and all of which taken together shall
constitute one and the same original agreement.
SECTION 7. GOVERNING LAW. This Second Amendment shall be governed by
and construed in accordance with the laws of the State of New York.
SECTION 8. HEADINGS. Section headings in this Second Amendment are
included herein for convenience of reference only and shall not constitute a
part of this Second Amendment for any other purpose.
vii
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Second
Amendment to be executed by their respective officers thereunto duly authorized
as of the date first above written.
USG CORPORATION
By____________________________
Title:
USG INTERIORS, INC.
By____________________________
Title:
USG FOREIGN INVESTMENTS, LTD.
By____________________________
Title:
WILMINGTON TRUST COMPANY, not in its
individual capacity but solely as
Trustee
By____________________________
Title:
______________________________
William J. Wade, not in his
individual capacity but solely as
Trustee
viii
<PAGE>
ANNEX III
to
SECOND AMENDMENT
FORM OF NOTICE OF ELECTION
USG CORPORATION
ADDITIONAL REVOLVING LOAN COMMITMENT ELECTION FORM
FOR SENIOR LENDERS
Reference is hereby made to (i) that certain Amended and Restated
Credit Agreement dated as of May 6, 1993 (as amended, the "Credit Agreement")
among USG Corporation ("USG") and USG Interiors, Inc., each a Delaware
corporation (collectively, the "Companies"), the financial institutions from
time to time party thereto (the "Senior Lenders"), Bankers Trust Company,
Chemical Bank and Citibank, N.A., as agents for the Senior Lenders (the
"Agents"), and Citibank, N.A., as administrative agent for the Senior Lenders
(the "Administrative Agent"), and (ii) that certain Second Amendment to Amended
and Restated Credit Agreement dated as of January 31, 1994 (the "Second
Amendment") among the Companies, the Senior Lenders, the Agents and the
Administrative Agent. Capitalized terms used herein and not otherwise defined
herein shall have the meanings ascribed thereto in the Credit Agreement or the
Second Amendment, as applicable.
PART I -- TO BE COMPLETED BY SENIOR LENDERS
The undersigned hereby certifies that it is a Senior Lender under the
Credit Agreement. Accordingly:
1. Under the terms and subject to the conditions contained in the
Credit Agreement and the Second Amendment, the undersigned hereby confirms its
commitment (its "Commitment") to extend an Additional Revolving Loan Commitment
to Interiors under the Credit Agreement of up to the following amount (please
type or print clearly):
$_________________________.
2. The undersigned acknowledges and agrees that, in the event that
the Senior Lenders offer aggregate Additional Revolving Loan Commitments in
excess of $90,000,000, then the Additional Revolving Loan Commitment of the
undersigned shall be equal to the amount set forth in PARAGRAPH 1 above reduced
in accordance with the terms of Section 3.2 of the Second Amendment.
3. The undersigned acknowledges and agrees that its Commitment
hereunder shall become effective and binding on the undersigned immediately upon
submission of this election form to the Administrative Agent, and may not be
revoked until April 30, 1994 (in the event that the Equity Effective Date has
not occurred on or before such date), notwithstanding any reduction thereof in
accordance with PARAGRAPH 2 above and Section 3.2 of the Credit Agreement.
_________________________________
[Print name of institution]
By_______________________________
Name:_______________________
Title:______________________
ix
<PAGE>
PART II -- TO BE COMPLETED BY INTERIORS
The aggregate Additional Revolving Loan Commitments, and the aggregate
Converted Portions and Excess Portions thereof, were as follows:
Aggregate Additional
Revolving Loan Commitments: $___________________
Aggregate Converted Portions: $___________________
Aggregate Excess Portions: $___________________
In accordance with the terms of Section 3.2 of the Second Amendment,
your institution's Additional Revolving Loan Commitment is as follows:
Name of Senior Lender: _____________________________
Additional Revolving
Loan Commitment: $____________________________
USG INTERIORS, INC.
By__________________________
Title:
<PAGE>
FIRST AMENDMENT
TO
MANAGEMENT PERFORMANCE PLAN
OF USG CORPORATION
FIRST AMENDMENT effective as of November 15, 1994 (this "First Amendment"),
to the Management Performance Plan of USG Corporation (formerly known as the
1988 Management Performance Plan of USG Corporation and hereinafter referred to
as the "Plan"), which Plan was adopted and approved by the Compensation and
Organization Committee (the "Committee") of the Board of Directors of USG
Corporation (the "Corporation") on June 2, 1988, ratified by the Board of
Directors of the Corporation on June 6, 1988, and approved by the stockholders
of the Corporation on July 8, 1988.
WHEREAS, the Committee has recommended, and the Board of Directors has approved,
an amendment to the Plan to permit the transfer of Non-Qualified Stock Options
(as defined in the Plan), upon the terms and subject to limitations set forth
below;
NOW, THEREFORE, in consideration of the premises, the Plan is hereby amended as
set forth below:
1. Section 6(e) of the Plan is hereby deleted in its entirety and the
following is hereby substituted therefor:
"(e) TRANSFERABILITY OF OPTIONS. The transferability of Stock Options
awarded pursuant to this Section 6 shall be subject to the following
restrictions and conditions:
"(i) Except as provided in paragraph (ii) of this
Section 6(e), no Stock Option shall be transferable by the optionee
otherwise than by will or by the laws of descent and distribution, and
all Stock Options shall be exercisable, during the optionee's
lifetime, only by the optionee.
"(ii) A Non-Qualified Stock Option may be transferred by the
optionee to members of his or her immediate family (which, for
purposes of the Plan, shall be limited to his or her children,
grandchildren and spouse), or to one or more trusts for the benefit
of such family members or partnerships in which such family members
are the only partners, if (a) the stock option agreement with respect
to such Non-Qualified Stock Option, which must be approved by the
Committee, expressly so provides, either in connection with the
original grant of such Non-Qualified Stock Option or in a subsequent
modification of an outstanding stock option agreement, and (b) the
optionee does not receive
<PAGE>
any consideration for the transfer. A Non-Qualified Stock Option not
subject to such a stock option agreement expressly permitting its
transfer upon such terms will not be transferable and will be subject
to the terms of paragraph (i) of this Section 6(e). Any Non-Qualified
Stock Option transferred as permitted by this paragraph (ii) may
thereafter be exercised by the permitted transferee, and only such
transferee, upon the same terms as the original optionee could have
exercised it prior to such transfer, but will otherwise continue to be
subject to the same terms and conditions that were applicable to such
Non-Qualified Stock Option immediately prior to the transfer. Any
Non-qualified Stock Option so transferred may not thereafter be
subsequently transferred without the express written approval of the
Committee."
2. Except as expressly amended and modified by this First Amendment, the
Plan is hereby ratified and confirmed in all respects.
IN WITNESS WHEREOF, the Corporation has caused this First Amendment to be
executed by its officers thereunto duly authorized as of the 1st day of
February, 1994.
USG CORPORATION
By /s/ Harold E. Pendexter, Jr.
_______________________________
Harold E. Pendexter, Jr.
Sr. Vice President and
Chief Administrative
Officer
Attest:
/s/ Dean H. Goossen
________________________
Dean H. Goossen
Assistant Secretary
<PAGE>
FIRST AMENDMENT
TO
MANAGEMENT PERFORMANCE PLAN
OF USG CORPORATION
FIRST AMENDMENT effective as of November 15, 1994 (this "First Amendment"),
to the Management Performance Plan of USG Corporation (formerly known as the
1988 Management Performance Plan of USG Corporation and hereinafter referred to
as the "Plan"), which Plan was adopted and approved by the Compensation and
Organization Committee (the "Committee") of the Board of Directors of USG
Corporation (the "Corporation") on June 2, 1988, ratified by the Board of
Directors of the Corporation on June 6, 1988, and approved by the stockholders
of the Corporation on July 8, 1988.
WHEREAS, the Committee has recommended, and the Board of Directors has approved,
an amendment to the Plan to permit the transfer of Non-Qualified Stock Options
(as defined in the Plan), upon the terms and subject to limitations set forth
below;
NOW, THEREFORE, in consideration of the premises, the Plan is hereby amended as
set forth below:
1. Section 6(e) of the Plan is hereby deleted in its entirety and the
following is hereby substituted therefor:
"(e) TRANSFERABILITY OF OPTIONS. The transferability of Stock Options
awarded pursuant to this Section 6 shall be subject to the following
restrictions and conditions:
"(i) Except as provided in paragraph (ii) of this
Section 6(e), no Stock Option shall be transferable by the optionee
otherwise than by will or by the laws of descent and distribution, and
all Stock Options shall be exercisable, during the optionee's
lifetime, only by the optionee.
"(ii) A Non-Qualified Stock Option may be transferred by the
optionee to members of his or her immediate family (which, for
purposes of the Plan, shall be limited to his or her children,
grandchildren and spouse), or to one or more trusts for the benefit
of such family members or partnerships in which such family members
are the only partners, if (a) the stock option agreement with respect
to such Non-Qualified Stock Option, which must be approved by the
Committee, expressly so provides, either in connection with the
original grant of such Non-Qualified Stock Option or in a subsequent
modification of an outstanding stock option agreement, and (b) the
optionee does not receive
<PAGE>
any consideration for the transfer. A Non-Qualified Stock Option not
subject to such a stock option agreement expressly permitting its
transfer upon such terms will not be transferable and will be subject
to the terms of paragraph (i) of this Section 6(e). Any Non-Qualified
Stock Option transferred as permitted by this paragraph (ii) may
thereafter be exercised by the permitted transferee, and only such
transferee, upon the same terms as the original optionee could have
exercised it prior to such transfer, but will otherwise continue to be
subject to the same terms and conditions that were applicable to such
Non-Qualified Stock Option immediately prior to the transfer. Any
Non-qualified Stock Option so transferred may not thereafter be
subsequently transferred without the express written approval of the
Committee."
2. Except as expressly amended and modified by this First Amendment, the
Plan is hereby ratified and confirmed in all respects.
IN WITNESS WHEREOF, the Corporation has caused this First Amendment to be
executed by its officers thereunto duly authorized as of the 1st day of
February, 1994.
USG CORPORATION
By /s/ Harold E. Pendexter, Jr.
_______________________________
Harold E. Pendexter, Jr.
Sr. Vice President and
Chief Administrative
Officer
Attest:
/s/ Dean H. Goossen
________________________
Dean H. Goossen
Assistant Secretary
<PAGE>
February 1, 1994
Mr. Eugene B. Connolly
25360 Wagon Wheel Court
Barrington, IL 60010
Dear Mr. Connolly:
Reference is made to that certain Nonqualified Stock Option Agreement dated
as of June 1, 1993 (the "Agreement"), between USG Corporation (the
"Corporation") and you. Terms used in this modification letter and not defined
herein shall have the respective meanings ascribed to them in the Agreement.
On November 10, 1993, the Board of Directors of the Corporation approved an
amendment to the Corporation's Management Performance Plan permitting certain
transfers of nonqualified stock options granted under the Plan to the immediate
family of a holder or to family trusts or partnerships so long as the
Compensation and Organization Committee of the Board of Directors approves the
transfer and the holder's nonqualified stock option agreement expressly provides
for such transfer, either in connection with the original agreement documenting
the applicable grant or in a modification of an outstanding agreement.
You have requested approval of transfers of part of your option grant under
the Agreement to Dorothy E. Connolly, your spouse, and the Connolly Family
Investments, L.P., a limited partnership of which you are the general partner
and all of whose other partners are members of your immediate family. The
Compensation and Organization Committee approved such transfers by you on
November 9, 1993, subject to the aforementioned amendment to the Plan and to
appropriate modification of the Agreement, which is the object of this
modification letter.
Accordingly, the Agreement is hereby modified by the deletion of paragraph
3.2 thereof in its entirety and the substitution therefor of the following:
"3.2 TRANSFER AND EXERCISABILITY. Except as provided in the next sentence
of this paragraph 3.2, the option granted in
<PAGE>
paragraph 2 above shall be exercisable during the lifetime of the Holder
only by the Holder and shall not be transferable other than by will or the
laws of descent and distribution upon the death of the Holder. The option
granted in paragraph 2 above may be transferred, in whole or in part,
pursuant to an assignment of this agreement in whole or in part complying
with the provisions of Section 6(e)(ii) of the Plan, in which case the
permitted assignee may exercise the portion of the option so assigned as if
such permitted assignee were the Holder. In the event of the death of the
Holder, (a) the portion of the option not so assigned shall be exercisable
only by the executor or administrator of the estate of the Holder or the
person or persons to whom such option portion shall pass by will or the
laws of descent and distribution, and (b) the portion of the option so
assigned shall be exercisable only by the permitted assignee, in either
case only (x) in accordance with other provisions contained in this
document, and (y) to the extent to which the Holder was entitled at the
time of death."
If you are in agreement with such modification, please sign in the space
below and return a signed copy of this modification letter to the Corporation,
attention of the Corporate Secretary.
Very truly yours,
USG Corporation
By /s/ Harold E. Pendexter, Jr.
----------------------------
Harold E. Pendexter, Jr.
Sr. Vice President and
Chief Administrative Officer
Agreed this 1st day of February, 1994:
/s/ Eugene B. Connolly
- -----------------------
Eugene B. Connolly
<PAGE>
Exhibit 10 (AR)
MANAGEMENT PERFORMANCE PLAN OF USG CORPORATION
----------------------------------------------
NONQUALIFIED STOCK OPTION
-------------------------
1. DATE OF GRANT. This option is granted effective February 9, 1994 (the
"Date of Grant").
2. GRANT OF OPTION. USG CORPORATION (the "Corporation"), for good and
valuable consideration, the receipt of which is hereby acknowledged, hereby
irrevocably grants to _____________________________ (the "Holder") a
nonqualified option to purchase a total of ____________________ shares of
common stock, $0.10 par value, of the Corporation at the price of $32.5625
per share, upon the terms and conditions hereinafter stated, pursuant to
the Management Performance Plan of the Corporation (the "Plan"), all
determinations by the Committee appointed under the Plan (the "Committee")
necessary or appropriate to the grant of this option having been duly made.
3. SPECIFIC CONDITIONS OF GRANT. The option granted in paragraph 2 above is
subject to the following conditions.
3.1 EXERCISABILITY. Subject to the provisions of paragraphs 3.3 and 3.4,
the option shall be exercisable, in whole or part, as follows:
- 34% of the total grant on a cumulative basis on or after the first
anniversary of the Date of Grant;
- 67% of the total grant on a cumulative basis on or after
second anniversary of the Date of Grant; and
- 100% of the total grant on a cumulative basis on or after the
third anniversary of the Date of Grant.
In no event shall any part of the option be exercisable after the tenth
anniversary of the Date of Grant.
3.2 NONTRANSFERABILITY. The option granted in paragraph 2 above shall be
exercisable during the lifetime of the Holder only by the Holder and shall
not be transferable other than by will or the laws of descent and
distribution upon the death of the Holder. In the event of such death,
the option shall be exercisable only in accordance with other provisions
contained in this document and only (a) by the executor or administrator
of the estate of the Holder or the person or persons to whom the option
shall pass by will or
Page 1 of 6
<PAGE>
the laws of descent and distribution, and (b) to the extent to which the
Holder was entitled at the time of death.
3.3 TERMINATION BY DISABILITY OR DEATH. In the event employment of the
Holder by the Corporation or any Subsidiary terminates by reason of
disability or death, the entire option shall become and be exercisable
thereafter for a period of five (5) years from the date of such disability
or death or until expiration of the term of the option specified in
paragraph 3.1 above, whichever period is shorter; provided, however, that
in the event of such a termination by reason of disability and the Holder
dies within such five (5)-year period, the option shall be exercisable
for a period of six (6) months from the date of such death or until the
end of such five (5)-year period, whichever period expires later, but
in no event beyond expiration of the term of the option specified in
paragraph 3.1 above. For purposes of this document, "disability" shall
mean an inability due to physical or mental impairment to perform the
duties of the Holder's position for the immediately preceding six (6)
months and an inability for the same reasons to be gainfully employed for
the rest of the Holder's life, both of which findings shall be certified
by a physician or physicians satisfactory to the Corporation or the
appropriate Subsidiary.
3.4. TERMINATION BY REASON OF RETIREMENT OR DISCHARGE WITHOUT CAUSE. In
the event employment of the Holder by the Corporation or any Subsidiary
terminates by reason of retirement or discharge by the Corporation or a
Subsidiary without cause (a "Termination Event"), the option shall be
exercisable thereafter as follows:
- 34% of the total grant on a cumulative basis if Termination
Event occurs before the first anniversary of the Date of Grant;
- 67% of the total grant on a cumulative basis if Termination
Event occurs after first but before second anniversary of
the Date of Grant; and
- 100% of the total grant on a cumulative basis if Termination
Event occurs after second anniversary of the Date of Grant;
in any such case for a period of five (5) years from the date of such
Termination Event or until the expiration of the term of the option
specified in paragraph 3.1 above, whichever period is shorter; provided,
however, that in the event the Holder dies within such five (5)-year
period, the option shall be exercisable following such death to the extent
such option was exercisable at the time of death and
Page 2 of 6
<PAGE>
for a period of six (6) months from the date of such death or until the
end of such five (5)-year period, whichever period expires later, but in
no event beyond expiration of the term of the option specified in
paragraph 3.1 above. For purposes of this document, the terms
"retirement" and "cause" shall have the respective meanings specified in
the Plan.
3.5 TERMINATION FOR OTHER REASONS. In the event employment of the Holder
by the Corporation or any Subsidiary terminates for any reason other than
disability, death, retirement, or discharge without cause, the option
thereupon shall terminate, except that such option shall thereafter be
exercisable, to the extent otherwise then exercisable, for the lesser of
three (3) months or the balance of the term of the option specified in
paragraph 3.1 above if such termination is by voluntary resignation by the
Holder; provided, however, that in the event the Holder dies within such
three (3)-month period, the option shall be exercisable following such
death to the extent such option was exercisable at the time of
death and for a period of six (6) months from the date of such death, but
in no event beyond expiration of the term of the option specified in
paragraph 3.1 above.
4. PROCEDURE FOR EXERCISE. The option granted in paragraph 2 above shall be
exercisable only in accordance with the following procedure.
4.1 NOTICE. The Holder shall deliver or cause to be delivered to the
Corporate Secretary of the Corporation at 125 South Franklin Street,
Chicago, Illinois 60606, a written notice of exercise on a form provided
by or acceptable to the Corporate Secretary. Such written notice shall
state the number of shares as to which the option is being exercised.
The notice shall include the name(s) and address(es) the Holder wishes to
use for the registration of certificates, together with the social
security number of one of the persons in whose name the stock is to be
registered. The date of receipt of the notice by the Corporate Secretary
(together with payment and any requested representation as provided in
paragraphs 4.2 and 4.3 below) shall conclusively be deemed the date of
exercise.
4.2 PAYMENT. The Holder shall make payment for the shares as to which the
option is being exercised by submitting to the Corporation, together with
the notice specified in paragraph 4.1 above, either a check payable to the
Corporation or certificates for unrestricted shares of common stock of the
Corporation then owned by the Holder (which certificates shall be properly
endorsed or otherwise properly transferred to the Corporation), or by any
combination of such a check and such certificates. The
Page 3 of 6
<PAGE>
value of any such certificate for purposes of calculating payment of the
aggregate option price for the shares as to which the option is being
exercised shall be based on the closing sales price of such common stock
on the New York Stock Exchange composite tape on the date of exercise,
with the number of shares required for such payment to be rounded up to
the next whole share. Such payment shall be accompanied by a payment
equal to (a) twenty-eight percent (28%) for Federal income tax
withholding of the income realized by the Holder as of the date of
exercise, plus (b) an appropriate percent for state income tax
withholding of such income, plus (c) any amount required to be withheld
under the Federal Insurance Contributions Act (FICA); provided, however,
that, in the discretion of the Corporation, the Holder may elect, by
written notice to the Corporation delivered at the time of exercise, to
have the total of such withholdings satisfied by a reduction in the
number of shares otherwise deliverable on such exercise, such reduction
to be calculated based on the closing price on the New York Stock
Exchange composite tape on the date of such notice and additionally
to entail issuance of no fractional shares by the Corporation (fractional
balances to be eliminated by an increase in such reduction to the next
full share). The income realized by the Holder as of the date of exercise
shall equal the difference between the aggregate option price for the
shares as to which the option is being exercised and the aggregate market
value for such shares (based on the closing price for such shares on the
New York Stock Exchange composite tape on such date). The Corporation
shall retain the right to change the above withholding rates to the
extent required by law. Notwithstanding the foregoing, at the discretion
of the Corporation, payment requirements may be satisfied by a cashless
exercise as permitted by the Federal Reserve Board's Regulation T through
a broker subject thereto and who is a member of the National Association
of Securities Dealers, Inc., subject to applicable securities laws and
state or provincial corporation law requirements.
4.3. REPRESENTATION. The Holder shall deliver to the Corporation if
requested by the Corporation a representation to the effect that the
Holder is not acquiring the shares as to which the option is being
exercised with a view to distribution thereof.
4.4. CONDITIONS TO DELIVERY OF SHARES. The Corporation in no event shall
be obligated to deliver certificates for shares to the Holder until the
notice and payment provisions of paragraphs 4.1 and 4.2 above have been
met and until any requested representation pursuant to paragraph 4.3
above has been delivered. Notices, instruments of payment, and other
documents required by any part of this paragraph 4 shall be satisfactory
in form and substance to the Corporate
Page 4 of 6
<PAGE>
Secretary of the Corporation. The Corporation under no circumstances shall
be obligated to issue fractional shares.
5. CHANGE IN CONTROL. In the event of a Change in Control, as defined in
Section 13(b) of the Plan, after the Date of Grant, the option granted in
paragraph 2 above shall (a) to the extent not previously exercisable, become
fully exercisable, and (b) be valued, with such value to be converted to cash
on the basis of the Change in Control Price, as defined in Section 13(c) of the
Plan, minus the aggregate option price, and such cash, less applicable tax
withholdings, shall be paid to the Holder.
6. CHANGES IN CAPITALIZATION OR ORGANIZATION. Nothing contained in this
document shall alter or diminish in any way the right and authority of the
Corporation to effect changes in its capital or organizational structure;
provided, however, that the following procedures shall be recognized:
6.1. STOCK SPLIT, STOCK DIVIDEND, OR EXTRAORDINARY DISTRIBUTION. In the
event the number of outstanding shares of common stock of the Corporation
is increased prior to the termination of the option granted in paragraph 2
above by a stock split, by declaration by the Board of Directors of the
Corporation of a dividend payable only in shares of such stock, or by any
other extraordinary distribution of shares, the number and the option
price per share shall be proportionately adjusted without any change in
the aggregate option purchase price.
6.2. ORGANIZATIONAL CHANGES. In the event a merger, consolidation,
reorganization, or other change in corporate structure materially changes
the terms or value of the common stock of the Corporation, the number of
shares subject to the option granted in paragraph 2 above and the option
price thereof shall be adjusted in such manner as the Committee in its
sole discretion shall determine to be equitable and consistent with the
purposes of the Plan. Such determination shall be conclusive for all
purposes with respect to the option granted in paragraph 2 above.
7. REGISTRATION, QUALIFICATION, AND LISTING. In the event the Board of
Directors of the Corporation at any time determines in its sole discretion that
the shares covered by the option granted in paragraph 2 above are required to
be registered or qualified pursuant to Federal law or any state law applicable
to such option or should be listed on an exchange, the option shall not be
exercisable in whole or in part unless and until such registration,
qualification, or listing has been effected to the satisfaction of said Board
of Directors.
8. RIGHTS OF THE HOLDER. Nothing contained in this document shall confer on
the Holder any right to continue in the
Page 5 of 6
<PAGE>
employment of the Corporation or any Subsidiary nor affect in any way the right
of the Corporation or any Subsidiary to terminate such employment at any time.
Nothing contained in this document shall affect in any way the right of the
Holder to participate in any retirement, insurance, investment or other
employee benefit plan of the Corporation or any Subsidiary. The Holder shall
have no rights of a stockholder with respect to any of the shares covered by
the option granted in paragraph 2 above until the option has been exercised in
whole or in part and the shares in question have been issued.
9. THE PLAN TO GOVERN. The option granted in paragraph 2 above and all other
provisions contained in this document shall be subject to and interpreted in a
manner consistent with the terms and conditions of the Plan.
USG CORPORATION
By
---------------------------
Corporate Secretary
I hereby accept the option granted in the foregoing document on the terms and
conditions stated therein.
---------------------------
The Holder
Page 6 of 6
<PAGE>
EXECUTIVE CONSULTING AGREEMENT
THIS AGREEMENT, entered into as of this 1st day of March 1994, by and
between USG Corporation, a corporation organized and existing under the laws of
the State of Delaware (hereinafter called "USG") and ANTHONY J. FALVO, JR., an
individual residing in Bluffton, South Carolina.
W I T N E S S E T H :
WHEREAS, FALVO has served in executive positions for USG Corporation
including President and Chief Operating Officer and including Vice Chairman for
a number of years and has had extensive experience in the business and affairs
of USG; and
WHEREAS, FALVO retired as an officer of USG February 28, 1994; and
WHEREAS, USG desires to utilize the business experience and knowledge of
FALVO in handling specific international projects and other special assignments,
as appropriate; and
WHEREAS, FALVO desires to make such services and advice available to USG,
provided that the rendering of such services and advice allows FALVO time for
other interests and does not affect in any way the right of FALVO to receive any
benefits under benefit plans of USG or any contractual entitlement from USG;
NOW, THEREFORE, for and in consideration of the premises and mutual
promises herein contained, the parties hereto agree as follows:
ARTICLE 1. FALVO agrees to make himself available to USG to render services
and advice on the business and affairs of USG. Such services and advice shall
be rendered in the manner hereinafter provided and are anticipated to require 3
to 4 days per month during the term hereof.
ARTICLE 2. FALVO agrees to make himself available to USG at such times as
the parties may mutually agree, beginning with the date of this Agreement. USG
agrees to pay FALVO $75,000 in ten equal installments on or before the fifteenth
day of each month beginning March 1, 1994. In the event of FALVO's death, or if
he becomes mentally or physically unable on a permanent basis to provide
services as specified, the unpaid installments shall be paid out within twenty-
five (25) days to him or to his designated beneficiary, attorney in fact, or
estate.
ARTICLE 3. In addition to the fees set forth in ARTICLE 2, USG agrees to
pay any authorized travel, living expenses, and telephone
Page 1 of 4
<PAGE>
expenses incurred by FALVO in the interests of USG and such other extraordinary
expenses as USG may from time to time authorize. Reimbursement for authorized
expenditures shall be made upon presentation of receipts or other evidence of
such expenditures.
ARTICLE 4. During the term of this Agreement, FALVO shall work closely with
the Chairman and Chief Executive Officer, USG Corporation and persons designated
by him. Said Chairman and Chief Executive Officer, USG Corporation or persons
designated by him shall identify the specific projects to be performed by FALVO,
authorize travel and other expenditures by FALVO, and arrange any necessary
conferences between FALVO, executives of USG and outside parties.
ARTICLE 5. It is understood that nothing in this Agreement shall be
construed to create a partnership or joint venture or the relationship of
employer and employee. FALVO will at all times be deemed an independent
contractor and, accordingly, USG will not make any deductions required by law to
be made from compensation paid by an employer to an employee. As an independent
contractor, FALVO will be required to perform his duties hereunder only
according to the provisions hereof. In fulfilling the terms of this Agreement,
FALVO will be responsible for results only, will have no authority to direct the
employees of USG, and will not be subject to the control of USG or any officers
or employees of USG.
ARTICLE 6. FALVO recognizes that by virtue of this Agreement, he occupies a
position of confidence and trust in his dealings with USG and agrees to use his
best efforts to prevent, either during the term of this Agreement or at any time
thereafter, duplication or disclosure of data, plans, specifications, formulae,
drawings, or any other information, whether business or technical, of a
confidential nature furnished directly or indirectly, in writing or otherwise
and at any time, to FALVO by USG.
ARTICLE 7. This Agreement shall not be assigned by either party without the
prior written consent of the other party hereto, except that it may be assigned
without such consent to the successor of USG or to a person, firm or corporation
acquiring all or substantially all of the business and assets of USG. Nothing
herein contained, however, shall be deemed to prevent USG from assigning this
Agreement to any affiliated company.
ARTICLE 8. FALVO agrees that he will communicate to USG or its nominee any
and all inventions and improvements conceived by him solely or jointly with
others relating to the business and affairs of USG and arising out of his work
as a consultant for USG and that he will assign to USG or its nominee all his
right, title, and interest to any and all such inventions and improvements,
including both the United States and foreign rights. FALVO further agrees to
execute at any and all times, upon request of USG or any of its successors or
assigns or nominees, any and all papers necessary or desirable to apply for or
obtain Letters Patent of the United
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<PAGE>
States or foreign countries and to vest complete title thereto in USG or its
successors or nominees, as the case may be, including, but not by way of
limitation, any and all papers relating to interferences, reissues,
continuations, continuations-in-part, or litigation relating to any of said
improvements or inventions.
ARTICLE 9. FALVO agrees to make all reports and recommendations to USG in
writing upon completion of his work upon any assigned subject if so requested by
USG.
Upon termination of this Agreement for any cause whatsoever, all designs,
reports, and writings prepared for USG not theretofore delivered to USG shall
become the property of USG and be delivered to USG by FALVO.
FALVO agrees that he will not publish or use, except for the benefit of USG's
business, any information arising out of, in connection with, or relating to his
consulting services performed hereunder without prior written permission of USG.
ARTICLE 10. The term of this agreement shall be for ten (10) months from
the date first stated above thereby ending December 31, 1994. In the event USG
desires to utilize FALVO's services beyond expiration of said term, it shall so
advise him by no later than the close of business on November 30, 1994.
ARTICLE 11. During the term of this Agreement and for a period of one (1)
year thereafter, FALVO shall not acquire an interest in, become associated with
or employed by, or engage in consulting work for, any person, firm, or
corporation which competes with USG or any of its subsidiaries or affiliated
companies in any line of business in any section of the United States, (except
in non-competitive fields approved in writing in advance by USG) or which
otherwise has interests adverse to USG.
ARTICLE 12. All notices provided for in this Agreement shall be given in
writing either by personal delivery of such notice or by depositing the same,
postage prepaid, in the United States mail, addressed to the parties
respectively at the following addresses:
USG: USG Corporation
125 South Franklin Street
Chicago, Illinois 60606
Attention: Chairman and Chief Executive Officer
CONSULTANT: Mr. Anthony J. Falvo, Jr.
14 Spring Hill Court
Bluffton, SC 29910
ARTICLE 13. This Agreement shall be construed and the legal relationship of
the parties determined in accordance with the laws of the State of Illinois.
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<PAGE>
ARTICLE 14. This Agreement shall not become effective until executed by USG.
No change in, addition to, or waiver of the terms and conditions hereof shall be
binding upon either party unless approved in writing by such party or by its
authorized officer or officers. No modification shall be effected by the
acknowledgment or acceptance of commercial forms containing different terms or
conditions.
IN WITNESS WHEREOF, the parties hereto have caused this agreement to be
executed in duplicate and their signatures affixed hereto as of the day and year
first above written.
USG CORPORATION
By: /s/ Eugene G. Connolly
--------------------------
Chairman of the Board and
Chief Executive Officer
ATTEST:
/s/ Dean H. Goossen
- -------------------------
Corporate Secretary
CONSULTANT:
/s/ Anthony J. Falvo, Jr.
----------------------------
Anthony J. Falvo, Jr.
WITNESS:
/s/ Lisa A. Healy
- -------------------------
Name
Page 4 of 4
<PAGE>
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use in this
registration statement of our reports dated January 31, 1994 included herein and
to all references to our Firm included in this registration statement.
/s/ Arthur Andersen & Co.
ARTHUR ANDERSEN & CO.
Chicago, Illinois,
February 15, 1994
<PAGE>
POWER OF ATTORNEY
WHEREAS, the Board of Directors of USG Corporation (the "Corporation") has
approved the issuance and sale of shares of the Corporation's Common Stock in a
public offering (the "Equity Offering");
WHEREAS, the Corporation, in connection with the Equity Offering, will file
a Registration Statement on Form S-1 (the "Equity Registration Statement") under
the Securities Act of 1933 (the "Act") with the Securities and Exchange
Commission (the "Commission");
WHEREAS, the Board of Directors of the Corporation has also approved the
issuance and sale of $150 million principal amount of new senior notes due 2001
("New Senior Notes") for cash and/or in exchange for its 8% Senior Notes due
1996 and 8% Senior Notes due 1997; and
WHEREAS, the Corporation, in connection with the issuance and sale of New
Senior Notes, will file with the Commission under the Act a registration
statement (the "Debt Registration Statement") covering the sale (or resales) of
New Senior Notes.
NOW, THEREFORE:
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 true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution, for him and in his name, place
and stead, in any and all capacities, to:
(i) sign the Equity Registration Statement and any or all amendments
thereto, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Commission; and
(ii) sign the Debt Registration Statement and any or all amendments
thereto, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the 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 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.
<PAGE>
This power of attorney has been signed on January 4, 1994 by the following
persons:
Signature Title
--------- ------
/s/ Eugene B. Connolly Chairman of the Board, Chief Executive
- ---------------------------------- Officer, and Director
Eugene B. Connolly
/s/ Anthony J. Falvo, Jr. Vice Chairman and Director
- ----------------------------------
Anthony J. Falvo, Jr.
/s/ Robert L. Barnett Director
- ----------------------------------
Robert L. Barnett
/s/ Keith A. Brown Director
- ----------------------------------
Keith A. Brown
/s/ W.H. Clark Director
- ----------------------------------
W.H. Clark
/s/ James C. Cotting Director
- ----------------------------------
James C. Cotting
/s/ Lawrence M. Crutcher Director
- ----------------------------------
Lawrence M. Crutcher
/s/ Wade Fetzer III Director
- ----------------------------------
Wade Fetzer III
/s/ David W. Fox Director
- ----------------------------------
David W. Fox
<PAGE>
/s/ Philip C. Jackson, Jr. Director
- ----------------------------------
Philip C. Jackson, Jr.
/s/ Marvin E. Lesser Director
- ----------------------------------
Marvin E. Lesser
/s/ John B. Schwemm Director
- ----------------------------------
John B. Schwemm
/s/ Alan G. Turner Director
- ----------------------------------
Alan G. Turner
/s/ Barry L. Zubrow Director
- ----------------------------------
Barry L. Zubrow
