<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 7, 1995
REGISTRATION NO. 33-60563
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 1
TO
S-3 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 of (Primary Standard (I.R.S. Employer
incorporation or organization) Industrial Identification No.)
Classification Code Number)
</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 & 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, ESQ.
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:
FROM TIME TO TIME AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
--------------------------
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. / /
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. / /
--------------------------
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>
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 TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE 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>
SUBJECT TO COMPLETION
DATED JULY 7, 1995
PROSPECTUS
[LOGO]
$150,000,000
USG CORPORATION
% SENIOR NOTES DUE 2005
The % Senior Notes due 2005 (the "Notes") of USG Corporation ("USG" or the
"Corporation") will mature on , 2005. Interest on the Notes will be
payable semi-annually on and of each year, beginning
, 1995. The Notes are redeemable at the option of the Corporation, in
whole or in part at any time on or after , 2000 at the redemption
prices set forth herein plus accrued interest.
Upon issuance, the Notes will be senior obligations of the Corporation and will
rank pari passu with the Corporation's bank debt and other senior obligations.
Such bank debt will be incurred under a new credit agreement (the "New Credit
Agreement") to be entered into by the Corporation and certain banks prior to the
closing of this offering. Borrowings under the New Credit Agreement, and
pursuant to negative pledge clauses, the Notes and certain other senior
obligations of the Corporation, will share in security interests in the capital
stock of certain of the Corporation's domestic subsidiaries to be granted
pursuant to a collateral trust arrangement. Upon repayment of such bank debt and
termination of the commitments of the banks to make advances under the New
Credit Agreement, or upon release of the collateral by the banks (which the
banks are required to do if the Corporation reaches Investment Grade Status),
the Notes and such other senior indebtedness will cease to be secured. The Notes
will be effectively subordinated to current and future indebtedness and
liabilities of the Corporation's subsidiaries.
The Corporation has the obligation, subject to certain conditions, to offer to
repurchase all of the Notes at 101% of the principal amount thereof plus accrued
interest to the date of repurchase (i) upon the occurrence of a Change of
Control or (ii) if the Corporation reaches Investment Grade Status, upon the
occurrence of both a Designated Event and a Rating Decline in connection
therewith. See "Description of the Notes."
Application will be made to list the Notes on the New York Stock Exchange.
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>
<CAPTION>
- -------------------------------------------------------------------------------------
PROCEEDS TO
PRICE TO UNDERWRITING THE
PUBLIC(1) DISCOUNT CORPORATION(1)(2)
<S> <C> <C> <C>
Per Note................................. % % %
Total.................................... $ $ $
- -------------------------------------------------------------------------------------
<FN>
(1) Plus accrued interest, if any, from , 1995 to the date of
delivery.
(2) Before deduction of expenses payable by the Corporation estimated to be
$ . See "Underwriting."
</TABLE>
The Notes are offered subject to receipt and acceptance by the Underwriters, to
prior sale and to the 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 Notes 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 , 1995.
SALOMON BROTHERS INC
BT SECURITIES CORPORATION
CITICORP SECURITIES, INC.
CHEMICAL SECURITIES INC.
The date of this Prospectus is , 1995
<PAGE>
(Art Work / Pictures)
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES AT A
LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
STABILIZING, 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 OR INCORPORATED BY REFERENCE IN THIS PROSPECTUS. THE CLOSING UNDER THE
NEW CREDIT AGREEMENT IS EXPECTED TO OCCUR PRIOR TO THE CLOSING OF THIS OFFERING.
SEE "DESCRIPTION OF NEW CREDIT AGREEMENT." CERTAIN CAPITALIZED TERMS USED IN
THIS SUMMARY ARE DEFINED ELSEWHERE IN THIS PROSPECTUS. UNLESS THE CONTEXT
OTHERWISE REQUIRES, REFERENCES TO "USG" AND THE "CORPORATION" MEAN USG
CORPORATION, A DELAWARE CORPORATION, AND ITS SUBSIDIARIES. PROSPECTIVE INVESTORS
ARE URGED TO READ THIS PROSPECTUS IN ITS ENTIRETY. SEE "RISK FACTORS" FOR A
DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN EVALUATING AN
INVESTMENT IN THE NOTES.
THE CORPORATION
OVERVIEW
Through its subsidiaries, USG is a leading manufacturer of building
materials, producing a wide range of products for use in new residential and new
nonresidential construction, repair and remodel, as well as products used in
certain industrial processes. The Corporation's United States Gypsum Company
subsidiary ("U.S. Gypsum") is the largest producer of gypsum wallboard in the
United States and accounted for approximately one-third of total domestic gypsum
wallboard sales in 1994. USG Interiors Inc. ("USG Interiors") is a leading
supplier of interior ceiling grid and tile systems, interior wall systems and
other products used primarily in commercial applications. USG Interiors was the
largest producer of ceiling grid and the second largest producer of ceiling tile
in the United States in 1994, accounting for over one-half and approximately
one-third of total domestic sales of such products, respectively. L&W Supply
Corporation ("L&W Supply"), the Corporation's wholly-owned distribution
subsidiary, is the largest distributor of wallboard and related products in the
U.S. and distributed approximately 22% of U.S. Gypsum's 1994 wallboard sales. 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 USG International ("USG International") supplies interior systems and
gypsum products in Europe, Asia Pacific and Latin America. For the twelve months
ended December 31, 1994, the Corporation had net sales of $2,290 million and
generated EBITDA of $325 million. For the three months ended March 31, 1994 and
March 31, 1995, the Corporation had net sales of $506 million and $598 million,
respectively, and generated EBITDA of $66 million and $106 million,
respectively.
The Corporation believes that its leading positions in its core businesses,
low cost structure, quality and breadth of its product lines, emphasis on
customer service and the distribution capabilities of L&W Supply provide
significant competitive advantages. USG's business strategy is to maintain and
enhance its leading positions in North America and expand its presence
internationally. USG is currently implementing this strategy by: (i) improving
its financial position and flexibility through approximately equal application
of free cash flow to debt reduction and capital expenditures, with an objective
of achieving investment grade status; (ii) enhancing its cost position through
process improvements such as increasing line speeds in existing manufacturing
facilities and implementing technology which allows the use of lower cost raw
materials; and (iii) growing its core gypsum and ceilings businesses by, among
other things, expanding its repair and remodel presence, increasing
manufacturing capacity in existing plants, continuing to introduce specialty
product applications, extending its penetration of international markets with
existing products and further leveraging L&W Supply's nationwide distribution
network.
USG's operations are organized into two core businesses. The North American
Gypsum business includes U.S. Gypsum and L&W Supply in the United States, the
gypsum business of CGC in Canada and the Corporation's Mexican gypsum operations
("North American Gypsum"). The Worldwide Ceilings business is composed of USG
Interiors, the international interior systems businesses in Europe, Asia Pacific
and Latin America managed as USG International and the interior systems business
of CGC ("Worldwide Ceilings").
3
<PAGE>
NORTH AMERICAN GYPSUM
U.S. Gypsum is a vertically integrated manufacturer of gypsum and related
products, including "SHEETROCK" brand wallboard, joint compound and industrial
gypsum cements and fillers. In 1994, U.S. Gypsum shipped approximately 7.7
billion square feet of wallboard, a record for the company. The Corporation's
gypsum operations include 41 manufacturing facilities, 14 gypsum quarries and
mines and seven paper plants located throughout North America, making the
Corporation virtually self sufficient in its two key raw materials, gypsum rock
and paper. Because of its vertical integration in key raw materials, technical
expertise and the proximity of plants to major metropolitan areas, the
Corporation believes that its wallboard has the lowest delivered cost of any
competitor in North America.
L&W Supply distributed approximately 9% of all gypsum wallboard sold in the
United States and distributed 22% of U.S. Gypsum's wallboard sales in 1994. L&W
Supply's 148 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 (including the interior of homes under
construction), thereby reducing contractors' material handling and inventory
requirements.
For the twelve months ended December 31, 1994, North American Gypsum had net
sales of $1,780 million and generated EBITDA of $304 million before allocation
of corporate expenses. For the three months ended March 31, 1994 and March 31,
1995, North American Gypsum had net sales of $388 million and $470 million,
respectively, and generated EBITDA of $61 million and $98 million, respectively,
before allocation of corporate expenses.
WORLDWIDE CEILINGS
USG Interiors manufactures and markets an integrated line of products used
primarily for commercial interiors. Products include ceiling grid, "ACOUSTONE"
and "AURATONE" brand ceiling tile, wall systems, mineral wool insulation and
soundproofing products. USG Interiors accounted for over one-half and
approximately one-third of 1994 total sales of ceiling grid and ceiling tile,
respectively, in the United States, and CGC is the largest producer of ceiling
grid and the second largest marketer of ceiling tile in Canada. The Corporation
believes its leading positions in ceiling grid and tile are attributable to its
emphasis on providing total product solutions through a broad product line as
well as its emphasis on marketing to key decision makers in the design
specification process, such as architects and interior designers. The
Corporation is focused on growing its interiors business through increased
penetration of retail channels and additional international sales. USG
International's net sales in Europe, the Pacific and Latin America accounted for
approximately 34% of the Worldwide Ceilings segment's net sales in 1994. For the
twelve months ended December 31, 1994, Worldwide Ceilings had net sales of $594
million and generated EBITDA of $62 million before allocation of corporate
expenses. For the three months ended March 31, 1994 and March 31, 1995,
Worldwide Ceilings had net sales of $140 million and $149 million, respectively,
and generated EBITDA of $15 million and $18 million, respectively, before
allocation of corporate expenses.
UNITED STATES INDUSTRY TRENDS
Demand for the Corporation's products in the United States reflects activity
in the three major components of the construction industry: new residential
construction (single and multi-family homes), new nonresidential construction
(offices, schools, stores and other institutions) and repair and remodel
activity. In recent years, changes in residential construction activity combined
with growth in the repair and remodel component have partially mitigated the
impact of cyclical demand for overall new construction. 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 component has become an increasing percentage of the
Corporation's business, accounting for approximately 35% of 1994 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 23.7 billion square feet in 1994, as
compared to 21.3 billion in 1986, despite an approximate 19% decline in the
number of housing starts from 1.806 million units in 1986 to 1.457 million units
in 1994.
4
<PAGE>
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.
USE OF PROCEEDS
This offering is part of a refinancing which also includes the replacement
of the Corporation's existing bank credit facility with a seven year, $500
million bank revolving credit facility under a new credit agreement (the "New
Credit Agreement"). The Corporation intends to use approximately $192 million of
borrowings under the New Credit Agreement to repay all borrowings currently
outstanding under its existing bank facility. See "Description of New Credit
Agreement." The Corporation intends to use the net proceeds of this offering,
together with approximately $125 million of additional borrowings under the New
Credit Agreement, to redeem all of the Corporation's outstanding 10 1/4% Senior
Notes due 2002 (the "10 1/4% Senior Notes") and to pay call premiums, fees and
expenses associated with the refinancings. In June 1995, the Corporation
redeemed approximately $30 million principal amount of the 10 1/4% Senior Notes
using cash on hand. The Corporation believes that the refinancings will provide
significant benefits, including lowering the Corporation's funding costs,
extending approximately $460 million of debt maturities and simplifying its
capital structure through the elimination of subsidiary guarantees of
Corporation indebtedness. The Notes, along with the obligations under the New
Credit Agreement ("Bank Debt") and substantially all other public indebtedness
of the Corporation, will be 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. Holders of the Bank Debt
will primarily control the operation of the Collateral Trust. See "Description
of Collateral Trust."
DESCRIPTION OF NOTES
<TABLE>
<S> <C>
Issuer....................................... USG Corporation
Securities Offered........................... $150 million aggregate principal amount of
% Senior Notes Due , 2005.
Interest Payment Dates....................... and of each year, commencing .
Maturity Date................................ , 2005.
Optional Redemption.......................... The Notes are redeemable at the option of the
Corporation, on or after , 2000 in
whole or in part, at the redemption prices
set forth herein plus accrued interest to the
date of redemption. See "Description of Notes
-- Optional Redemption."
Sinking Fund................................. None.
Change of Control............................ The Corporation has the obligation, subject
to certain conditions, to offer to repurchase
all of the Notes at 101% of the principal
amount thereof plus accrued interest to the
date of repurchase (i) upon the occurrence of
a Change of Control or (ii) if the
Corporation reaches Investment Grade Status,
upon the occurrence of both a Designated
Event and a Rating Decline in connection
therewith. See "Description of the Notes."
There can be no assurance that the
Corporation will be able to fund any such
repurchase of the Notes. See "Description of
the Notes -- Change of Control."
</TABLE>
5
<PAGE>
<TABLE>
<S> <C>
Principal Covenants.......................... The Indenture will contain certain covenants
which restrict the ability of the Corporation
to pay dividends and make certain other
distributions in respect of its capital stock
and the ability of the Corporation and its
Restricted Subsidiaries to, among other
things, incur additional indebtedness, create
secured debt, enter into or permit sale and
leaseback transactions, sell assets, enter
into transactions with affiliates, merge,
consolidate or transfer substantially all of
their assets, or contractually restrict the
ability of a Restricted Subsidiary to pay
dividends or make other distributions. If the
Corporation reaches Investment Grade Status,
the foregoing principal covenants will cease
to be operative, except for those covenants
that restrict the creation of secured debt,
sale and leaseback transactions, and mergers,
consolidations, and sales of all or
substantially all assets. However, all of
these restrictions are subject to a number of
important qualifications. See "Description of
the Notes -- Certain Covenants."
Ranking and Security......................... Upon issuance, the Notes will be senior
obligations of the Corporation and will rank
pari passu with the Corporation's Bank Debt
and other senior obligations. Borrowings
under the New Credit Agreement, and pursuant
to negative pledge clauses, the Notes and
certain other senior obligations of the
Corporation, will share in security interests
in the capital stock of certain of the
Corporation's domestic subsidiaries to be
granted pursuant to the Collateral Trust
Agreement.
Holders of the Bank Debt will primarily
control the operation of the Collateral
Trust. The Collateral Trust will be
terminated, and the Notes will become
unsecured, if the Corporation reaches
Investment Grade Status and will also be
terminated if the Bank Debt is repaid and the
commitments of the banks to make advances
under the New Credit Agreement have
terminated, or the collateral is otherwise
released by the holders of the Bank Debt. See
"Description of Collateral Trust."
The rights of the Corporation and its
creditors, including holders of the Notes, to
realize upon the assets of any subsidiary of
the Corporation 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
itself may be a creditor with enforceable
claims against such subsidiary. Therefore,
the Notes will be effectively subordinated to
existing and future liabilities of the
Corporation's subsidiaries.
</TABLE>
6
<PAGE>
<TABLE>
<S> <C>
On a pro forma basis, as of March 31, 1995,
assuming consummation of the transactions
described under "Use of Proceeds," the
Corporation and its subsidiaries would have
had $1,027 million total principal amount of
debt (before unamortized reorganization
discount) on a consolidated basis and
subsidiaries of the Corporation would have
been directly liable for $151 million
principal amount of such debt. See
"Description of New Credit Agreement."
Use of Proceeds.............................. Proceeds from the sale of the Notes will be
used, along with borrowings under the New
Credit Agreement, to redeem all of the
currently outstanding 10 1/4% Senior Notes
and to pay applicable call premiums, fees and
expenses. See "Use of Proceeds."
Risk Factors................................. An investment in the Notes involves a
significant degree of risk. See "Risk
Factors."
</TABLE>
7
<PAGE>
SUMMARY FINANCIAL INFORMATION
(Dollars in millions, except gypsum wallboard prices)
The following table presents summary historical financial data and certain
other information of the Corporation. Due to the Restructuring, as defined in
"Management's Discussion and Analysis of Results of Operations and Financial
Condition," and implementation of fresh start accounting, financial statements
for periods subsequent to May 6, 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 table should be read in
conjunction with "Selected Consolidated Financial Data" "Management's Discussion
and Analysis of Results of Operations and Financial Condition," 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>
THREE MONTHS
ENDED MAY 7 JANUARY 1 YEAR
MARCH 31, YEAR ENDED THROUGH THROUGH ENDED
---------------------- DECEMBER 31, DECEMBER 31, MAY 6, DECEMBER
1995 1994 1994 1993 1993 (a) 31, 1992
---------- --------- ------------ ------------ --------- --------
<S> <C> <C> <C> <C> <C> <C>
EARNINGS STATEMENT DATA:
Net sales.................................. $ 598 $ 506 $ 2,290 $1,325 $ 591 $1,777
Cost of products sold...................... 446 396 1,773 1,062 482 1,460
---------- --------- ------------ ------------ --------- --------
Gross profit............................... 152 110 517 263 109 317
Selling and administrative expenses........ 60 57 244 149 71 218
Amortization of Excess Reorganization
Value..................................... 42 42 169 113 -- --
---------- --------- ------------ ------------ --------- --------
Operating profit........................... 50 11 104 1 38 99
Interest expense........................... 27 37 149 92 86 334
Interest income............................ (2) (3) (10) (4) (2) (12)
Other (income)/expense, net................ -- 1 3 (8) 6 1
Reorganization items (b)................... -- -- -- -- (709) --
---------- --------- ------------ ------------ --------- --------
Earnings/(loss) from continuing operations
before taxes on income, extraordinary
gain/(loss) and changes in accounting
principles................................ 25 (24) (38) (79) 657 (224)
Taxes on income/(income tax benefit)....... 27 10 54 29 17 (33)
Extraordinary gain/(loss), net of taxes.... -- -- -- (21) 944 --
Cumulative effect of accounting changes.... -- -- -- -- (150) --
---------- --------- ------------ ------------ --------- --------
Net earnings/(loss) (c).................... $ (2) $ (34) $ (92) $ (129) $1,434 $ (191)
---------- --------- ------------ ------------ --------- --------
---------- --------- ------------ ------------ --------- --------
BALANCE SHEET DATA (end of the period):
Property, plant and equipment, net......... $ 770 $ 747 $ 755 $ 754 $ 767 $ 800
Total assets............................... 2,040 2,387 2,124 2,163 2,194 1,659
Total debt (d)............................. 1,050 1,439 1,149 1,531 1,556 2,711
Total stockholders' equity/(deficit)....... (2) 51 (8) (134) 4 (1,880)
OTHER INFORMATION:
EBITDA (e)................................. $ 106 $ 66 $ 325 $ 155 $ 63 $ 159
Depreciation, depletion and
amortization (f).......................... 17 18 84 44 22 66
Capital expenditures....................... 24 7 64 29 12 49
Gross margin % (g)......................... 25.4 21.7 22.6 19.8 18.4 17.8
EBITDA margin % (h)........................ 17.7 13.0 14.2 11.7 10.7 8.9
Pro forma cash interest expense (i)........ 22 -- 86 -- -- --
Ratio of EBITDA to pro forma cash interest
expense (i)............................... 4.8x -- 3.8x -- -- --
Ratio of pro forma total debt to
EBITDA (j)................................ -- -- 3.2 -- -- --
Gypsum wallboard shipments: (k)
Total U.S. Industry...................... 6.0 5.7 23.7 14.9 6.7 20.3
U.S. Gypsum.............................. 1.9 1.9 7.7 5.0 2.3 7.2
Capacity utilization %:
Total U.S. Industry...................... 93 92 94 91 83 83
U.S. Gypsum.............................. 96 98 97 96 91 93
Average U.S. Gypsum wallboard price (l).... $ 112.26 $ 89.53 $100.08 $80.58 $75.81 $71.58
<FN>
- ------------------------------
(a) Fresh start accounting adjustments were recorded on May 6, 1993 in
connection with the Restructuring.
(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
debt incurred in 1988.
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
(c) Amortization of Excess Reorganization Value (as defined herein and shown
separately above) and amortization of non-cash reorganization debt discount
(included in interest expense) reduced reported net earnings by $43 million
and $46 million in the three months ended March 31, 1995 and 1994,
respectively, by $190 million in the year ended December 31, 1994 and by
$121 million in the period of May 7 through December 31, 1993.
(d) Reflects the principal amount of total debt. The carrying amounts (net of
unamortized reorganization debt discount) as reflected on the Corporation's
balance sheets were $1,026 million as of March 31, 1995, $1,388 million as
of March 31, 1994, $1,122 million as of December 31, 1994, $1,476 million
as of December 31, 1993 and $1,461 million as of May 6, 1993. Subsequent to
March 31, 1995, the Corporation redeemed approximately $30 million
principal amount of 10 1/4% Senior Notes using cash on hand.
(e) EBITDA represents earnings before interest, taxes, depreciation, depletion,
amortization, reorganization items, extraordinary items and changes in
accounting principles. The Corporation believes EBITDA is helpful in
understanding cash flow generated from operations that is available for
taxes, debt service and capital expenditures. In addition, EBITDA
facilitates the monitoring of covenants related to certain long-term debt.
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.
(f) Excludes Amortization of Excess Reorganization Value which is shown
separately under "Earnings Statement Data."
(g) Gross profit as a percentage of net sales.
(h) EBITDA as a percentage of net sales.
(i) Pro forma cash interest expense for the three months ended March 31, 1995
and the year ended December 31, 1994 assumes that the transactions
described under "Use of Proceeds" were consummated as of the beginning of
each period. The levels of Bank Debt, the Notes and 10 1/4% Senior Notes
used in the calculation of pro forma cash interest expense were the pro
forma levels of such debt as of March 31, 1995 as shown under
"Capitalization." In addition, pro forma cash interest expense excludes all
non-cash amortization of debt reorganization discount. For these reasons,
pro forma cash interest expense is not comparable to historical interest
expense.
(j) Reflects the principal amount of pro forma total debt of $1,035 million as
of December 31, 1994 as the numerator and EBITDA of $325 million for the
twelve months ended December 31, 1994 as the denominator.
(k) In billions of square feet.
(l) Represents average price per thousand square feet realized by U.S. Gypsum
during the periods shown.
</TABLE>
9
<PAGE>
RISK FACTORS
INVESTORS SHOULD CONSIDER CAREFULLY THE FACTORS SET FORTH BELOW, AS WELL AS
THE OTHER INFORMATION SET FORTH IN THIS PROSPECTUS, PRIOR TO DECIDING WHETHER OR
NOT TO PURCHASE THE NOTES. CAPITALIZED TERMS USED HEREIN AND NOT OTHERWISE
DEFINED HAVE THE MEANINGS ASCRIBED TO THEM ELSEWHERE IN THIS PROSPECTUS.
SUBSTANTIAL LEVERAGE
The Corporation will remain substantially leveraged upon completion of this
offering. As of March 31, 1995, the Corporation had $1,050 million principal
amount of total debt (which had a carrying amount of $1,026 million on the
Corporation's balance sheet after deducting unamortized reorganization discount
of $24 million) and a deficit in stockholders' equity of $2 million. As adjusted
to reflect consummation of the transactions described under "Use of Proceeds,"
the Corporation's total principal amount of debt and deficit in stockholders'
equity as of March 31, 1995 would have been $1,027 million and $5 million,
respectively. The Corporation is expected to have a deficit in stockholders'
equity at least through 1998 when reorganization value in excess of identifiable
assets ("Excess Reorganization Value") will be fully amortized. See "Risk
Factors -- Recent Losses," "Selected Consolidated Financial Data" and
"Capitalization."
The degree to which the Corporation is leveraged will pose risks to holders
of the Notes, including, but not limited to, the following: (i) a 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,
debt service requirements, acquisitions, general corporate 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) the
Corporation may be adversely affected in the event of a downturn in its
business. These and other factors could have an adverse effect on the
marketability, price and future value of the Notes.
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 businesses. These businesses are in turn influenced by a
variety of factors beyond the Corporation's control, including interest rates,
consumer confidence, household formation and general economic conditions. 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.
The Corporation has experienced a recovery in the businesses in which it
competes beginning in 1992, as evidenced by increases in housing starts and
wallboard pricing and shipments and improvement in sales of other construction
products. However, first quarter 1995 seasonally adjusted housing starts were
down 5% from the average reported for the first quarter of 1994. See
"Management's Discussion and Analysis of Results of Operations and Financial
Condition -- First Quarter Ended March 31, 1995 Compared With First Quarter
Ended March 31, 1994."
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"). Virtually all costs of the
Personal Injury Cases are being paid by insurance. However, many of U.S.
Gypsum's insurance carriers are denying coverage for the Property Damage Cases,
although U.S. Gypsum believes that substantial coverage exists and the trial
court and appellate courts in U.S. Gypsum's coverage action (the "Coverage
Action") have so ruled.
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 resolution 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,
10
<PAGE>
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.
RECENT LOSSES
For the year ended December 31, 1994, the Corporation reported a net loss of
$92 million after the amortization of $169 million of Excess Reorganization
Value. Amortization of Excess Reorganization Value is a non-cash item which is
not deductible for federal income tax purposes. For the three months ended March
31, 1995, the Corporation reported a net loss of $2 million after the
amortization of $42 million of Excess Reorganization Value. Amortization of
Excess Reorganization Value will continue at the rate of $169 million per year
through 1997 and will amount to approximately $64 million in 1998. Although 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.
HOLDING COMPANY STRUCTURE; RELATIVE PRIORITY OF DEBT CLAIMS
The Corporation's operations are conducted through its subsidiaries. The
Corporation's ability to service its indebtedness is largely dependent upon the
receipt of funds from its subsidiaries by way of dividends, interest, loans or
otherwise. The rights of the Corporation and its creditors, including holders of
the Notes, to realize upon 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 itself may be
a creditor with enforceable claims against such subsidiary. Therefore, the Notes
will be effectively subordinated to existing and future liabilities of the
Corporation's subsidiaries.
As of March 31, 1995, the Corporation and its subsidiaries had $1,050
million total principal amount of debt (before unamortized reorganization
discount) on a consolidated basis. As of March 31, 1995, subsidiaries of the
Corporation were directly liable for $151 million principal amount of such debt.
On a pro forma basis, as of March 31, 1995, assuming consummation of the
transactions described under "Use of Proceeds," the Corporation and its
subsidiaries would have had $1,027 million total principal amount of debt
(before unamortized reorganization discount) on a consolidated basis and
subsidiaries of the Corporation would have been directly liable for $151 million
principal amount of such debt.
There are no contractual restrictions on the payment of dividends by the
Corporation's domestic subsidiaries and the Indenture contains restrictions on
the ability of the Corporation to create, permit or suffer to exist any dividend
restrictions affecting Restricted Subsidiaries, subject to certain limited
exceptions. See "Description of the Notes -- Certain Covenants -- Limitation on
Dividend and Other Payment Restrictions Affecting Subsidiaries." However,
certain of the Corporation's foreign subsidiaries are subject to loan covenants
or other contractual provisions which could limit their ability to pay dividends
to the Corporation.
NEW CREDIT AGREEMENT AND OTHER RESTRICTIONS
Under the New Credit Agreement, the Corporation will be required to maintain
minimum interest coverage and debt to EBITDA ratios. The New Credit Agreement,
as well as certain other debt instruments to which the Corporation is a party,
also contain certain restrictive covenants and events of default. See
"Description of New Credit Agreement" and "Description of Other Debt
Securities." Among other consequences, such provisions could limit the
Corporation's financial and business flexibility in the future. Furthermore, a
default under such provisions, if not cured or waived, could result in an
acceleration of some or all of the Corporation's indebtedness.
CONTROL OF COLLATERAL TRUST AGREEMENT BY BANK GROUP
The Notes, together with the Bank Debt and approximately $431 million of
public indebtedness of the Corporation, will be secured by a pledge of all of
the shares of the Corporation's major domestic subsidiaries (the "Collateral")
under the Collateral Trust Agreement and certain related pledge and security
agreements. Holders of the Bank Debt will primarily control the operation of the
Collateral Trust. The Collateral Trust will be terminated, and the Notes will
become unsecured, if the Corporation reaches Investment Grade
11
<PAGE>
Status and will also be terminated if the Bank Debt is repaid or the collateral
is otherwise released by the holders of the Bank Debt. In addition, the holders
of a majority of the Bank Debt may instruct the Collateral Trustee to release
specified portions of the Collateral provided that no Actionable Default has
occurred and is continuing. The holders of the Notes will not have any rights to
authorize (or prevent) the release of the Collateral. The Collateral will be
released in any event at such time as the Corporation reaches Investment Grade
Status or at such time as the obligations under the New Credit Agreement have
been paid in full, notwithstanding the fact that there may be outstanding
obligations under the Notes.
The holders of the Bank Debt also will have the exclusive right without
consent of the holders of the Notes to direct the Collateral Trustee to
exercise, or refrain from exercising, any rights or remedies with respect to the
Collateral following receipt of a Notice of Actionable Default. Consequently,
the holders of Notes will have no right to direct the Collateral Trustee to
foreclose upon the Collateral or take or refrain from taking any other actions
with respect thereto even at such times as the value of the Collateral may be
diminishing. See "Description of Collateral Trust Agreement."
CERTAIN TRADING CONSIDERATIONS
There is currently no trading market for the Notes. Although the Corporation
intends to cause the Notes to be authorized for listing on the New York Stock
Exchange, there can be no assurance, even if such authorization is obtained,
that an active market for the Notes will develop or, if any such market
develops, that it will continue to exist or as to the liquidity of such market.
In addition, no assurance can be given that a holder of the Notes will be able
to sell them in the future or that such sale will be at a price equal to or
higher than the initial public offering price. Furthermore, the Notes may trade
at a discount from their initial public offering prices depending upon
prevailing interest rates and other factors.
USE OF PROCEEDS
This offering is part of a refinancing which also includes the replacement
of the Corporation's existing bank credit facility with a seven year, $500
million bank revolving credit facility under the New Credit Agreement. The
Corporation intends to use approximately $192 million of borrowings under the
New Credit Agreement to repay all borrowings currently outstanding under its
existing bank facility. See "Description of New Credit Agreement." The
Corporation intends to use the net proceeds of this offering, together with
approximately $125 million of additional borrowings under the New Credit
Agreement, to redeem all of the Corporation's outstanding 10 1/4% Senior Notes
and to pay call premiums, fees and expenses associated with the refinancings. In
June 1995, the Corporation redeemed approximately $30 million principal amount
of the 10 1/4% Senior Notes using cash on hand. The Corporation believes that
the refinancings will provide significant benefits, including lowering the
Corporation's funding costs, extending approximately $460 million of debt
maturities and simplifying its capital structure through the elimination of
subsidiary guarantees of Corporation indebtedness. The Notes, along with the
Bank Debt and substantially all other indebtedness of the Corporation, will be
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. Holders of the Bank Debt will primarily control the
operation of the Collateral Trust. See "Description of Collateral Trust."
The New Credit Agreement will be a seven year, $500 million revolving credit
facility which will mature in 2002. The New Credit Agreement will bear interest
at the London Interbank Offered Rate as determined from time to time ("LIBOR")
plus an applicable spread based on the Corporation's net debt to EBITDA ratio
(as defined) for the preceding four quarters. Based on the Corporation's pro
forma financial results for the twelve month period ending March 31, 1995, the
applicable spread under the New Credit Agreement would have been 0.875%. See
"Description of New Credit Agreement." Borrowings under the Corporation's
existing credit agreement bear interest at a rate of LIBOR plus 1.875%. See
"Description of New Credit Agreement."
12
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(Dollars in millions, except gypsum wallboard prices)
The following table presents selected historical consolidated financial
information of the Corporation. Due to the Restructuring and implementation of
fresh start accounting, financial statements for periods subsequent to May 6,
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 which were
examined by Arthur Andersen LLP, whose report with respect to certain of such
financial statements is incorporated by reference in this Prospectus. The
following financial information should be read in conjunction with "Management's
Discussion and Analysis of Results of Operations and Financial Condition" and
the Corporation's Consolidated Financial Statements and notes thereto, both of
which are included elsewhere in this Prospectus. See "Index to Financial
Statements."
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MAY 7 JANUARY 1
MARCH 31, YEAR ENDED THROUGH THROUGH
--------------------- DECEMBER 31, DECEMBER 31, MAY 6,
1995 1994 1994 1993 1993 (A)
--------- --------- ------------ ------------ ---------
<S> <C> <C> <C> <C> <C>
EARNINGS STATEMENT DATA:
Net sales............................. $ 598 $ 506 $ 2,290 $1,325 $ 591
Cost of products sold................. 446 396 1,773 1,062 482
--------- --------- ------------ ------------ ---------
Gross profit.......................... 152 110 517 263 109
Selling and administrative expenses... 60 57 244 149 71
Restructuring expenses................ -- -- -- -- --
Amortization of Excess Reorganization
Value................................ 42 42 169 113 --
--------- --------- ------------ ------------ ---------
Operating profit...................... 50 11 104 1 38
Interest expense...................... 27 37 149 92 86
Interest income....................... (2) (3) (10) (4) (2)
Other (income)/expense, net........... -- 1 3 (8) 6
Reorganization items (b).............. -- -- -- -- (709)
Nonrecurring gain..................... -- -- -- -- --
--------- --------- ------------ ------------ ---------
Earnings/(loss) from continuing
operations before taxes on income,
extraordinary gain/(loss) and changes
in accounting principles............. 25 (24) (38) (79) 657
Taxes on income/(income tax
benefit)............................. 27 10 54 29 17
Extraordinary gain/(loss), net of
taxes................................ -- -- -- (21) 944
Cumulative effect of accounting
changes.............................. -- -- -- -- (150)
Earnings/(loss) from discontinued
operations........................... -- -- -- -- --
--------- --------- ------------ ------------ ---------
Net earnings/(loss) (c)............... $ (2) $ (34) $ (92) $ (129) $1,434
--------- --------- ------------ ------------ ---------
--------- --------- ------------ ------------ ---------
BALANCE SHEET DATA (end of the period):
Property, plant and equipment, net.... $ 770 $ 747 $ 755 $ 754 $ 767
Total assets.......................... 2,040 2,387 2,124 2,163 2,194
Total debt (d)........................ 1,050 1,439 1,149 1,531 1,556
Total stockholders'
equity/(deficit)..................... (2) 51 (8) (134) 4
OTHER INFORMATION:
EBITDA (e)............................ $ 106 $ 66 $ 325 $ 155 $ 63
Depreciation, depletion and
amortization (f)..................... 17 18 84 44 22
Capital expenditures.................. 24 7 64 29 12
Gross margin % (g).................... 25.4 21.7 22.6 19.8 18.4
EBITDA margin % (h)................... 17.7 13.0 14.2 11.7 10.7
Pro forma cash interest expense (i)... 22 -- 86 -- --
Ratio of EBITDA to pro forma cash
interest expense (i)................. 4.8x -- 3.8x -- --
Ratio of pro forma total debt to
EBITDA (j)........................... -- -- 3.2 -- --
Ratio of earnings to fixed
charges (k).......................... 1.9 --(l) --(l) --(l) 8.5(m)
Gypsum wallboard shipments: (o)
Total U.S. Industry................. 6.0 5.7 23.7 14.9 6.7
U.S. Gypsum......................... 1.9 1.9 7.7 5.0 2.3
Capacity utilization %:
Total U.S. Industry................. 93 92 94 91 83
U.S. Gypsum......................... 96 98 97 96 91
Average U.S. Gypsum wallboard
price (p)............................ $ 112.26 $89.53 $100.08 $80.58 $75.81
<CAPTION>
YEARS ENDED
DECEMBER 31,
----------------------
1992 1991 1990
------ ------ ------
<S> <C> <C> <C>
EARNINGS STATEMENT DATA:
Net sales............................. $1,777 $1,712 $1,915
Cost of products sold................. 1,460 1,385 1,499
------ ------ ------
Gross profit.......................... 317 327 416
Selling and administrative expenses... 218 194 203
Restructuring expenses................ -- -- 18
Amortization of Excess Reorganization
Value................................ -- -- --
------ ------ ------
Operating profit...................... 99 133 195
Interest expense...................... 334 333 292
Interest income....................... (12) (11) (8)
Other (income)/expense, net........... 1 5 5
Reorganization items (b).............. -- -- --
Nonrecurring gain..................... -- -- (34)
Earnings/(loss) from continuing ------ ------ ------
operations before taxes on income,
extraordinary gain/(loss) and changes
in accounting principles............. (224) (194) (60)
Taxes on income/(income tax
benefit)............................. (33) (53) (6)
Extraordinary gain/(loss), net of
taxes................................ -- -- --
Cumulative effect of accounting
changes.............................. -- -- --
Earnings/(loss) from discontinued
operations........................... -- (20) (36)
------ ------ ------
Net earnings/(loss) (c)............... $ (191) $ (161) $ (90)
------ ------ ------
BALANCE SHEET DATA (end of the period): ------ ------ ------
Property, plant and equipment, net.... $ 800 $ 819 $ 825
Total assets.......................... 1,659 1,626 1,675
Total debt (d)........................ 2,711 2,660 2,600
Total stockholders'
equity/(deficit)..................... (1,880) (1,680) (1,518)
OTHER INFORMATION:
EBITDA (e)............................ $ 159 $ 194 $ 280
Depreciation, depletion and
amortization (f)..................... 66 68 76
Capital expenditures.................. 49 49 64
Gross margin % (g).................... 17.8 19.1 21.7
EBITDA margin % (h)................... 8.9 11.3 14.6
Pro forma cash interest expense (i)... -- -- --
Ratio of EBITDA to pro forma cash
interest expense (i)................. -- -- --
Ratio of pro forma total debt to
EBITDA (j)........................... -- -- --
Ratio of earnings to fixed
charges (k).......................... --(n) -- --(n)
Gypsum wallboard shipments: (o)
Total U.S. Industry................. 20.3 18.4 20.7
U.S. Gypsum......................... 7.2 6.6 7.2
Capacity utilization %:
Total U.S. Industry................. 83 75 86
U.S. Gypsum......................... 93 88 95
Average U.S. Gypsum wallboard
price (p)............................ $71.58 $72.53 $79.08
<FN>
- ------------------------------
(a) Fresh start accounting adjustments were recorded on May 6, 1993 in
connection with the Restructuring.
(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
debt incurred in 1988.
</TABLE>
13
<PAGE>
<TABLE>
<S> <C>
(c) Amortization of Excess Reorganization Value (as defined herein and shown
separately above) and non-cash reorganization debt discount (included in
interest expense) reduced reported net earnings by $43 million and $46
million in the three months ended March 31, 1995 and 1994, respectively, by
$190 million in the year ended December 31, 1994 and by $121 million in the
period of May 7 through December 31, 1993.
(d) Reflects the principal amount of total debt. The carrying amounts (net of
unamortized reorganization debt discount) as reflected on the Corporation's
balance sheets were $1,026 million as of March 31, 1995, $1,388 million as
of March 31, 1994, $1,122 million as of December 31, 1994, $1,476 million
as of December 31, 1993 and $1,461 million as of May 6, 1993. Subsequent to
March 31, 1995, the Corporation redeemed approximately $30 million
principal amount of 10 1/4% Senior Notes using cash on hand.
(e) EBITDA represents earnings before interest, taxes, depreciation, depletion,
amortization, reorganization items, extraordinary items, 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. 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.
(f) Excludes Amortization of Excess Reorganization Value which is shown
separately under "Earnings Statement Data."
(g) Gross profit as a percentage of net sales.
(h) EBITDA as a percentage of net sales.
(i) Pro forma cash interest expense for the three months ended March 31, 1995
and the year ended December 31 1994 assumes that the transactions described
under "Use of Proceeds" were consummated as of the beginning of each
period. The levels of Bank Debt, the Notes and 10 1/4% Senior Notes used in
the calculation of pro forma cash interest expense were the pro forma
levels of such debt as of March 31, 1995 as shown under "Capitalization."
In addition, pro forma cash interest expense excludes all non-cash
amortization of debt reorganization discount. For these reasons, pro forma
cash interest expense is not comparable to historical interest expense.
(j) Reflects the principal amount of pro forma total debt of $1,035 million as
of December 31, 1994 as the numerator and EBITDA of $325 million for the
twelve months ended December 31, 1994 as the denominator.
(k) For purposes of computing the ratio of earnings from continuing operations
to fixed charges, earnings from continuing operations are defined as
earnings/(loss) from continuing operations before taxes on income, plus
interest expense, plus, for the years 1990 through 1993, amortization of
capitalized financing costs. Fixed charges are defined as interest expense
plus amortization of capitalized financing costs. The interest factor in
rental expense had an insignificant effect on the ratios.
(l) For the three months ended March 31, 1994, the year ended December 31, 1994
and the period of May 7 through December 31, 1993, earnings from continuing
operations were inadequate to cover fixed charges. The amounts of the
coverage deficiency were $24 million, $38 million and $79 million,
respectively. Included in earnings from continuing operations before taxes
for these periods were non-cash charges for amortization of Excess
Reorganization Value of $42 million, $169 million and $113 million,
respectively.
(m) Earnings from continuing operations for the period of January 1 through May
6, 1993 include a restructuring gain of $709 million. Without this gain,
earnings from continuing operations would have been inadequate to cover
fixed charges by $52 million.
(n) For the years ended December 31, 1992, 1991, and 1990, earnings from
continuing operations were inadequate to cover fixed charges by $224
million, $194 million, and $60 million, respectively.
(o) In billions of square feet.
(p) Represents average price per thousand square feet realized by U.S. Gypsum
during the periods shown.
</TABLE>
14
<PAGE>
CAPITALIZATION
The following table sets forth the unaudited consolidated capitalization of
the Corporation and its subsidiaries as of March 31, 1995 and as adjusted to
give effect to the consummation of the transactions described under "Use of
Proceeds." This table should be read in conjunction with the Consolidated
Financial Statements contained elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1995
------------------------
HISTORICAL PRO FORMA
----------- -----------
(UNAUDITED)
(DOLLARS IN MILLIONS)
<S> <C> <C>
Total Debt:
Bank borrowings........................................................................ $ 192 $ 317
Accounts Receivable Facility........................................................... 80 80
8% Senior Notes due 1996............................................................... 28 28
8% Senior Notes due 1997............................................................... 41 41
9 1/4% Senior Notes due 2001........................................................... 150 150
10 1/4% Senior Notes due 2002.......................................................... 298 --
7 7/8% Sinking Fund Debentures due 2004................................................ 22 22
% Senior Notes due 2005............................................................. -- 150
8 3/4% Sinking Fund Debentures due 2017................................................ 190 190
Industrial revenue bonds and other debt................................................ 49 49
----------- -----------
Total principal amount of debt......................................................... 1,050 1,027
Less unamortized reorganization discount............................................... (24) (23)
----------- -----------
Total carrying amount of debt.......................................................... 1,026 1,004
Stockholders' Equity/(Deficit):
Preferred stock........................................................................ -- --
Common stock........................................................................... 5 5
Capital received in excess of par value................................................ 221 221
Deferred currency translation.......................................................... (5) (5)
Reinvested earnings/(deficit).......................................................... (223) (226)
----------- -----------
Total stockholders' equity/(deficit)................................................. (2) (5)
----------- -----------
Total capitalization............................................................... $ 1,024 $ 999
----------- -----------
----------- -----------
</TABLE>
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
FIRST QUARTER ENDED MARCH 31, 1995 COMPARED WITH FIRST QUARTER ENDED MARCH 31,
1994
RESULTS OF OPERATIONS
Comparing the first three months of 1995 and 1994, net sales increased $92
million, or 18.2%. Improved sales were reported for both of USG Corporation's
core businesses, North American Gypsum and Worldwide Ceilings, as a result of
strong housing starts in the fourth quarter of 1994, growth in repair and
remodel activity and improving commercial and institutional construction.
Gross profit as a percentage of net sales rose to 25.4% from 21.7% due to
higher selling prices for all major product lines.
Selling and administrative expenses increased $3 million, or 5.3%. However,
as a percentage of net sales, these expenses improved to 10.0% from 11.3%.
Amortization of excess reorganization value, which was established in
connection with the Restructuring and is being amortized over a five-year
period, reduced operating profit by $42 million in each first quarter period.
See "-- Liquidity and Capital Resources."
Because of the continuing amortization of excess reorganization value, USG
reports EBITDA (earnings before interest, taxes, depreciation, depletion and
amortization) to facilitate comparisons of current and historical results.
EBITDA amounted to $106 million in the first three months of 1995, an increase
of $40 million, or 60.6%, versus the corresponding 1994 period. As a percentage
of net sales, EBITDA increased to 17.7% from 13.0%. (Note: EBITDA should not be
considered as an alternative to net earnings as an indicator of operating
performance or to cash flows as a measure of overall liquidity.)
Interest expense in the first three months of 1995 declined $10 million, or
27.0%, compared with the first three months of 1994 primarily reflecting a $389
million net reduction of debt since March 31, 1994.
Income tax expense amounted to $27 million and $10 million for the three
months ended March 31, 1995 and 1994, respectively. The Corporation's income tax
expense is computed based on pre-tax earnings excluding the non-cash
amortization of excess reorganization value, which is not deductible for federal
income tax purposes. Further, under the principles of fresh-start accounting,
the benefits of the domestic net operating loss carryforwards are not reflected
in income tax expense. See "Index to Consolidated Financial Statements --
Restructured Company -- Notes to Financial Statements -- Taxes on Income and
Deferred Income Taxes." For 1995, the Corporation anticipates that its effective
tax rate, excluding amortization of excess reorganization value, will be similar
to its 1994 rate of approximately 41%.
Net losses of $2 million and $34 million were reported in the first three
months of 1995 and 1994, respectively. However, the non-cash amortization of
excess reorganization value and reorganization debt discount (included in
interest expense) reduced net earnings by $43 million, or $0.96 per share, and
$46 million, or $1.17 per share, in the respective quarters.
16
<PAGE>
The following is an analysis of USG's results of operations by core business
(dollars in millions):
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------------------
NET SALES EBITDA
-------------------- --------------------
1995 1994 1995 1994
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
NORTH AMERICAN GYPSUM:
- -----------------------
U.S. Gypsum Company............................................................... $ 332 $ 269 $ 86 $ 53
L&W Supply Corporation............................................................ 174 139 4 1
CGC Inc. (gypsum)................................................................. 25 24 3 2
Other subsidiaries................................................................ 17 19 5 5
Eliminations...................................................................... (78) (63) -- --
--------- --------- --------- ---
Total North American Gypsum....................................................... $ 470 $ 388 $ 98 $ 61
--------- --------- --------- ---
WORLDWIDE CEILINGS:
- ------------------
USG Interiors, Inc................................................................ $ 95 $ 96 $ 15 $ 13
USG International................................................................. 56 45 2 1
CGC Inc. (interiors).............................................................. 8 8 1 1
Eliminations...................................................................... (10) (9) -- --
--------- --------- --------- ---
Total Worldwide Ceilings.......................................................... $ 149 $ 140 $ 18 $ 15
--------- --------- --------- ---
Corporate......................................................................... -- -- (10) (10)
Eliminations...................................................................... (21) (22) -- --
--------- --------- --------- ---
Total USG Corporation............................................................. $ 598 $ 506 $ 106 $ 66
--------- --------- --------- ---
--------- --------- --------- ---
</TABLE>
NORTH AMERICAN GYPSUM
Net sales of $470 million increased $82 million, or 21.1%, and EBITDA of $98
million increased $37 million, or 60.7%, over the first three months of 1994.
For U.S. Gypsum, improved results were driven by the continuing strong
demand for gypsum wallboard and related products. Despite unfavorable weather
conditions in several parts of the United States, wallboard shipments in the
first quarter of 1995 totalled 1.925 billion square feet, a first quarter record
and an increase of 3% over the prior-year period. U.S. Gypsum's wallboard plants
operated at 96% of capacity in the first three months of 1995 compared to an
industry average of 93%. Realized selling prices for wallboard averaged $112.26
per thousand square feet, up 25% and 5% compared to the first and fourth
quarters of 1994, respectively. However, improved wallboard margins resulting
from the higher selling prices were partially offset by continued increases in
unit manufacturing costs as a result of the rising cost of purchased waste
paper. Compared to the fourth quarter of 1994, rising waste paper costs resulted
in an approximate $2.50 per thousand square feet increase in wallboard unit
manufacturing costs or an aggregate increase of $4.8 million in cost of products
sold. Based on data issued by the U.S. Bureau of the Census, first quarter 1995
seasonally adjusted annual housing starts averaged 1.297 million privately owned
units, down 5% from the average reported for the first quarter of 1994. Due to
the lagged effect on demand for wallboard, first quarter 1995 housing starts
will impact second quarter shipments.
L&W Supply Corporation, USG's building products distribution business,
experienced the highest level of first quarter net sales in its history. This
performance resulted from record sales of gypsum products, which account for
approximately 50% of L&W Supply's total sales, and record sales of non-gypsum
products. Improved results for non-gypsum products were led by drywall metal,
ceiling products and insulation.
Results for CGC Inc.'s gypsum business reflect low levels of new residential
construction in eastern Canada, offset by export opportunities and growth in the
repair and remodel market. Consequently, CGC's net sales and EBITDA improved
slightly compared to the first three months of 1994 due to higher wallboard
selling prices and increased shipments of wallboard to the United States, offset
to a large extent by decreased shipments in eastern Canada.
17
<PAGE>
WORLDWIDE CEILINGS
Net sales of $149 million increased $9 million, or 6.4%, and EBITDA of $18
million increased $3 million, or 20.0%, over the first three months of 1994.
Slightly lower net sales for USG Interiors reflect the divestiture of the
floor division in December 1994. EBITDA for USG Interiors increased 15.4%.
Excluding floor division results in 1994, net sales and EBITDA for USG Interiors
increased 7.2% and 15.4%, respectively. These improvements reflect higher
average selling prices for ceiling tile and grid and record first quarter
ceiling tile shipments largely due to strong retail and export sales.
USG International reported increased sales in all three of its principal
geographic markets: Europe, Latin America and Asia Pacific. Results for ceiling
tile in Europe benefited from records in production volume, cost performance and
net sales.
YEAR ENDED DECEMBER 31, 1994 COMPARED WITH YEARS ENDED DECEMBER 31, 1993 AND
1992
RESULTS OF OPERATIONS
Due to the Restructuring, the Corporation's financial statements effective
May 7, 1993 are not comparable to financial statements for periods prior to that
date. The following information presents 1993 on an annual basis to facilitate a
meaningful year-to-year comparison. See "Index to Consolidated Financial
Statements -- Restructured Company -- Notes to Financial Statements -- Financial
Restructuring" for information on the Restructuring and implementation of fresh
start accounting.
CONSOLIDATED RESULTS (DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-------------------------------
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Net sales........................................................................... $ 2,290 $ 1,916 $ 1,777
--------- --------- ---------
Gross profit........................................................................ 517 372 317
% of net sales.................................................................... 22.6% 19.4% 17.8%
Selling and administrative expenses................................................. 244 220 218
% of net sales.................................................................... 10.7% 11.5% 12.3%
Amortization of excess reorganization value......................................... 169 113 --
--------- --------- ---------
Operating profit.................................................................... 104 39 99
--------- --------- ---------
--------- --------- ---------
Calculation of EBITDA:
Operating profit.................................................................. $ 104 $ 39 $ 99
Amortization of excess reorganization value....................................... 169 113 --
Depreciation and depletion........................................................ 53 54 58
Other............................................................................. (1) 12 2
--------- --------- ---------
EBITDA............................................................................ 325 218 159
% of net sales.................................................................. 14.2% 11.4% 8.9%
--------- --------- ---------
--------- --------- ---------
</TABLE>
In 1994, improved results in nearly all of the Corporation's businesses led
to increased net sales for the third consecutive year, up $374 million, or
19.5%, over 1993. In 1993, net sales increased $139 million, or 7.8%, over the
1992 level. EBITDA for 1994 increased $107 million, or 49.1%, over the 1993
level, which was up $59 million, or 37.1%, over 1992. Continued improvement in
gypsum wallboard prices and record shipments of gypsum wallboard, joint
compound, ceiling tile and cement board accounted for these results. These
trends reflect continued strength in building materials markets despite rising
interest rates in 1994. Based on information issued by the Bureau of Census,
housing starts in the United States amounted to 1.457 million units in 1994, up
13% over the 1993 level of 1.288 million units. The 1993 level of housing starts
was 7% above the 1992 amount of 1.200 million units. New nonresidential
construction also improved, the second consecutive year of such growth, and
demand from repair and remodel expenditures continued to grow.
18
<PAGE>
In the fourth quarter of 1994, U.S. Gypsum recorded a $30 million pre-tax
charge to cost of products sold ($17 million after-tax) primarily to cover the
cash portion of two asbestos litigation settlements. Approximately two-thirds of
this amount was paid in 1994 with the remainder payable in 1995 and 1996. See
"Index to Consolidated Financial Statements -- Restructured Company -- Notes to
Financial Statements -- Litigation" for information on these settlements.
Despite this charge, gross profit as a percentage of net sales increased to
22.6% in 1994 from 19.4% in 1993 and 17.8% in 1992 reflecting increased gypsum
wallboard prices.
Selling and administrative expenses in 1994 increased $24 million, or 10.9%,
over the prior year largely due to increased expenses related to compensation
and benefits and product and marketing programs. As a percent of net sales,
however, these expenses improved to 10.7% in 1994 compared to 11.5% in 1993 and
12.3% in 1992.
The Corporation began amortizing its excess reorganization value, which was
established in connection with the Restructuring, on May 7, 1993. This non-cash
amortization, which will continue through April 1998, amounted to $169 million
and $113 million in 1994 and 1993, respectively, with no counterpart in 1992.
Consequently, operating profit is not comparable for any of the three years
shown in the table above.
CORE BUSINESS RESULTS (DOLLAR IN MILLIONS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
----------------------------------------------------------------
NET SALES EBITDA
------------------------------- -------------------------------
1994 1993 1992 1994 1993 1992
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
NORTH AMERICAN GYPSUM:
U.S. Gypsum........................................ $ 1,209 $ 970 $ 871 $ 248 $ 148 $ 101
L&W Supply......................................... 659 528 464 15 7 5
CGC (gypsum)....................................... 110 91 92 15 9 3
Other subsidiaries................................. 90 77 77 28 23 21
Eliminations....................................... (288) (223) (208) (2) -- --
--------- --------- --------- --------- --------- ---------
Total North American Gypsum.......................... 1,780 1,443 1,296 304 187 130
--------- --------- --------- --------- --------- ---------
WORLDWIDE CEILINGS:
USG Interiors...................................... 400 360 354 53 48 47
USG International.................................. 202 185 189 6 4 5
CGC (interiors).................................... 29 30 33 3 4 5
Eliminations....................................... (37) (35) (35) -- -- --
--------- --------- --------- --------- --------- ---------
Total Worldwide Ceilings............................. 594 540 541 62 56 57
--------- --------- --------- --------- --------- ---------
Corporate............................................ -- -- -- (41) (25) (28)
Eliminations......................................... (84) (67) (60) -- -- --
--------- --------- --------- --------- --------- ---------
Total USG Corporation................................ 2,290 1,916 1,777 325 218 159
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
NORTH AMERICAN GYPSUM
Net sales and EBITDA for North American Gypsum continued to increase in
1994. Net sales increased $337 million, or 23.4%, over the 1993 level, which was
up $147 million, or 11.3%, above 1992. EBITDA increased $117 million, or 62.6%,
in 1994 compared with 1993 after increasing $57 million, or 43.8%, from 1992 to
1993. The U.S. Gypsum component of EBITDA for 1994 includes the impact of the
aforementioned $30 million charge associated with asbestos litigation
settlements.
For U.S. Gypsum, continuing improvement in gypsum wallboard prices and
record shipments of gypsum wallboard, joint compound and DUROCK cement board led
to improved sales and profits. In 1994, net sales and EBITDA increased $239
million, or 24.6%, and $100 million, or 67.6%, over the respective 1993 amounts.
Comparing 1993 to 1992, net sales and EBITDA increased $99 million, or 11.4%,
and $47 million, or 46.5%, respectively. Gypsum wallboard prices continued to
rise from the 14-year low experienced in the
19
<PAGE>
first quarter of 1992. For 1994, the average price of wallboard rose 26.6% above
1993, after increasing 10.5% in 1993 from the 1992 average. U.S. Gypsum's
average gypsum wallboard prices per thousand square feet by quarter for 1992
through 1994 were as follows:
<TABLE>
<CAPTION>
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
First Quarter............................................... $ 89.53 $ 74.97 $ 67.77
Second Quarter.............................................. 98.39 77.71 72.20
Third Quarter............................................... 104.65 80.70 73.03
Fourth Quarter.............................................. 106.92 82.46 73.35
--------- --------- ---------
Total Year.............................................. $ 100.08 $ 79.07 $ 71.58
</TABLE>
Shipments of gypsum wallboard in 1994 topped 7.7 billion square feet, the
highest level in the Corporation's history, and increased by 5% over the
previous record of 7.3 billion square feet in 1993. U.S. Gypsum's wallboard
manufacturing plants operated at 97% of capacity in 1994 compared with 94% in
1993.
In 1994, higher costs for purchased waste paper contributed to increased
unit manufacturing cost for gypsum wallboard. U.S. Gypsum's unit manufacturing
cost for wallboard in 1994 increased due to an increase of approximately $4.00
per thousand square feet, or a total increase of $30.8 million in cost of
products sold due to cost increases for purchased waste paper. Unit
manufacturing cost rose 3% in 1993 from the 1992 level primarily due to higher
levels of maintenance expenditures and energy cost.
L&W Supply reported its highest annual sales ever in 1994, up $131 million,
or 24.8%, from 1993. EBITDA for 1994 increased $8 million, or 114.3%, from the
prior year amount. Comparing 1993 to 1992, net sales and EBITDA increased $64
million, or 13.8%, and $2 million, or 40.0%, respectively. These improvements
reflect higher gypsum wallboard selling prices and increased volume, as well as
increased sales of other building materials product lines.
CGC's gypsum division experienced improved volume for gypsum wallboard,
particularly in shipments to the United States, and increased prices for
wallboard, primarily due to increased wallboard demand in North America as a
whole. Net sales in 1994 increased $19 million, or 20.9%, over the prior year,
while EBITDA increased $6 million, or 66.7%, in the same period. As a result of
the strengthened U.S. dollar compared with the Canadian dollar, net sales for
1993 decreased slightly from the 1992 level. EBITDA, however, tripled from 1992
to $9 million in 1993 due to higher selling prices for wallboard. Wallboard
prices in Canada were positively impacted in 1993 by the Canadian government's
ruling that dumping of U.S.-made wallboard had occurred and the resulting
imposition of duties on gypsum wallboard imported into Canada from the United
States at prices below certain levels. This ruling will be in effect until
January 1998.
WORLDWIDE CEILINGS
Net sales and EBITDA for Worldwide Ceilings in 1994 increased $54 million,
or 10.0%, and $6 million, or 10.7%, respectively, over 1993. These improvements
are in contrast to 1992 to 1993 results, when net sales and EBITDA each
decreased $1 million.
USG Interiors experienced record shipments and higher prices for ceiling
tile in 1994, primarily due to recovering nonresidential construction markets,
increased sales to retail markets and increased exports. Sales of ceiling
suspension grid also improved in 1994. Compared to the prior year, 1994 net
sales and EBITDA increased $40 million, or 11.1%, and $5 million, or 10.4%,
respectively. Net sales and EBITDA for 1993 increased $6 million, or 1.7%, and
$1 million, or 2.1%, respectively, above 1992. These results reflect increased
sales to retail markets, which offset a low level of nonresidential construction
in 1993.
USG International's results reflect improved sales in all regions as well as
continued cost improvements in European operations. In 1994, net sales and
EBITDA increased $17 million, or 9.2%, and $2 million, or 50.0%, over the
respective 1993 amounts. Comparing 1993 to 1992, net sales and EBITDA decreased
$4 million, or 2.1%, and $1 million, or 20.0%, respectively. The 1993 results
reflect the combined impact of a European recession and a strengthened U.S.
dollar compared with European currencies.
20
<PAGE>
OTHER EARNINGS INFORMATION
Interest expense continues to decline as a result of the Restructuring and
subsequent debt repayment and refinancing activities. Interest expense amounted
to $149 million in 1994, down $29 million, or 16.3%, from $178 million recorded
in 1993. In 1994, interest expense includes a fourth quarter non-cash pre-tax
charge of $16 million for the write-off of reorganization debt discount
primarily in conjunction with the Corporation's plan to accelerate the payment
of bank term loans issued under the existing credit agreement and $12 million of
amortization of reorganization debt discount. In 1993, interest expense included
$8 million of amortization of reorganization debt discount and $46 million of
interest expense that was forgiven or converted to equity as a result of the
Restructuring. Interest expense decreased $156 million in 1993 from the 1992
amount of $334 million due to the Restructuring.
The Corporation's income tax expense is computed based on pre-tax earnings
excluding the non-cash amortization of excess reorganization value, which is not
deductible for federal income tax purposes. In 1994, income tax expense amounted
to $54 million compared with $46 million in 1993. The Corporation's effective
tax rate for 1994 was negative 142.1%; however, excluding amortization of excess
reorganization value, the Corporation's 1994 effective tax rate was 41.2%. An
income tax benefit of $33 million was recorded in 1992. See "Index to
Consolidated Financial Statements -- Notes to Financial Statements -- Taxes on
Income and Deferred Income Taxes" for both the Restructured and Predecessor
Companies for additional information on income taxes.
A one-time after-tax net charge of $150 million was recorded in the first
quarter of 1993 representing the cumulative impact of the adoption of Statement
of Financial Accounting Standard ("SFAS") No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," and SFAS No. 109, "Accounting for
Income Taxes." See "Financial Statements and Supplementary Data -- Predecessor
Company -- Notes to Financial Statements -- Taxes on Income and Deferred Income
Taxes and Postretirement Benefits" for information related to these accounting
changes.
A net loss of $92 million was recorded in 1994. However, this loss included
the: (i) non-cash amortization of excess reorganization value of $169 million;
(ii) non-cash amortization of reorganization debt discount of $12 million; (iii)
non-cash after-tax write-off of reorganization debt discount amounting to $9
million primarily associated with the Bank Term Loans; and (iv) after-tax charge
of $17 million associated with asbestos litigation settlements. Together, these
items reduced net earnings by $207 million, or $4.81 per common share. A net
loss of $129 million was recorded in the period of May 7 through December 31,
1993 after amortization of excess reorganization value of $113 million,
amortization of reorganization debt discount of $8 million, and the after-tax
extraordinary loss of $21 million. Net earnings of $1,434 million were recorded
in the period of January 1 through May 6, 1993, reflecting the reorganization
items gain of $709 million and the after-tax extraordinary gain of $944 million.
A net loss of $191 million was recorded in 1992 primarily due to high levels of
interest expense.
LIQUIDITY AND CAPITAL RESOURCES
On May 6, 1993, the Corporation completed a comprehensive restructuring of
its debt (the "Restructuring") through implementation of a "prepackaged" plan of
reorganization under the federal bankruptcy laws (the "Prepackaged Plan"). In
accordance with the terms of the Prepackaged Plan, $1.4 billion of debt and
accrued interest was converted into equity, interest expense was significantly
reduced and the maturities of a substantial portion of its remaining debt were
extended. The Corporation accounted for the Restructuring using the principles
of fresh start accounting. See "Index to Consolidated Financial Statements --
Predecessor Company -- Notes to Financial Statements -- Financial Restructuring"
for information on the Restructuring and implementation of fresh start
accounting.
Since May 1993, outstanding debt has been reduced by over $500 million and
all but approximately $100 million of scheduled maturities have been eliminated
until 2001. In addition, upon completion of the refinancing described under "Use
of Proceeds," the Corporation will have approximately $130 million of
21
<PAGE>
undrawn availability under the New Credit Agreement. In the absence of
significant unanticipated cash demands, the Corporation believes that cash
generated by operations and the estimated levels of liquidity available to it
will be sufficient to satisfy its debt service requirements and other capital
requirements.
The Corporation is currently pursuing a strategy of reducing debt and
growing its core gypsum and ceilings businesses through the approximately equal
application of free cash flow between debt reduction and capital expenditures,
with an objective of achieving investment grade status. The Corporation expects
that capital expenditures will exceed $100 million in 1995. Substantial capital
investments underway at North American Gypsum plants include various cost
reduction and capacity expansion projects, including the installation of stock
cleaning equipment to utilize lower grades of recycled paper, continued
implementation of technology which lowers wallboard weight and additional use of
synthetic gypsum at manufacturing facilities at which it is more economical than
natural sources of gypsum rock. Projects to enhance manufacturing efficiency
expected to be completed in 1995 are estimated to increase wallboard capacity by
600 million square feet. In the Worldwide Ceilings business, USG Interiors has
announced a $45 million expansion of its ceiling tile plant in Greenville,
Mississippi, scheduled for completion in 1996. As of March 31, 1995, capital
expenditure commitments for the replacement, modernization and expansion of
operations amounted to $102 million compared with $61 million as of December 31,
1994. The Corporation periodically evaluates possible acquisitions or
combinations involving other businesses related to its current operations but is
not actively pursuing any potential material acquisitions at the present time.
As of March 31, 1995, working capital (current assets less current
liabilities) amounted to $159 million and the ratio of current assets to current
liabilities was 1.38 to 1, versus December 31, 1994 when working capital
amounted to $189 million and the ratio of current assets to current liabilities
was 1.42 to 1. Receivables (net of reserves) increased $22 million, or 8.0%,
versus December 31, 1994, to $296 million, inventories increased $17 million, or
9.8% to $190 million and accounts payable increased $23 million, or 18.9% to
$145 million. These increases primarily reflect normal seasonal fluctuations.
In the fourth quarter of 1994, the Corporation entered into an accounts
receivable facility (the "Receivables Facility") in which USG Funding
Corporation ("USG Funding"), a special purpose subsidiary of the Corporation,
purchases trade receivables (excluding intercompany receivables owed by L&W
Supply) of U.S. Gypsum and USG Interiors as generated. The purchased receivables
are held in a master trust (the "Master Trust") for the benefit of certificate
holders in such trust. Under a supplement to the Master Trust, certificates
representing an ownership interest in the Master Trust of up to $130 million
were issued to Citicorp Securities, Inc. The interest rate on the debt issued
under the Receivables Facility is fixed at approximately 8.9% (including
facility costs) through a long-term interest rate swap. Debt issued under the
facility may be prepaid at any time. Pursuant to the applicable reserve and
eligibility requirements, the maximum amount of debt issuable under the
Receivables Facility as of December 31, 1994 (including $80 million outstanding
at such date) was $103 million. Under the relevant agreements and related
documentation, USG Funding is a separate corporate entity with its own separate
creditors which will be entitled to be satisfied out of USG Funding's assets
prior to distribution of any value to its shareholder. As of March 31, 1995, the
outstanding balance of receivables sold to USG Funding and held under the Master
Trust was $145 million and debt outstanding under the Receivables Facility was
$80 million. Receivables and debt outstanding in connection with the Receivables
Facility remain in receivables and long-term debt, respectively, on the
Corporation's consolidated balance sheet. See "Financial Statements and
Supplementary Data -- Restructured Company -- Notes to Financial Statements --
Accounts Receivable Facility and Indebtedness" notes for more information on
1994 refinancing activities.
In the first three months of 1995, cash and cash equivalents decreased to
$94 million from $197 million primarily due to a net reduction in debt of $99
million. First quarter debt repayments included $91 million of bank term loans,
$41 million of which satisfied the remaining 1994 cash sweep obligation in
accordance with the bank credit agreement as then in effect. The New Credit
Agreement will not contain a cash sweep mechanism. Subsequent to March 31, 1995,
the Corporation called $30 million face amount of 10 1/4% Senior Notes using
cash on hand.
22
<PAGE>
One of the Corporation's subsidiaries, U.S. Gypsum, is a defendant in
asbestos lawsuits alleging both property damage and personal injury. See
"Business -- General Information -- Asbestos Litigation Developments and Index
to Consolidated Financial Statements -- Restructured Company -- Notes to
Financial Statements -- Litigation."
The Corporation and certain of its subsidiaries have been notified by state
and federal environmental protection agencies of possible involvement as one of
numerous "potentially responsible parties" in a number of so-called "Superfund"
sites in the United States. The Corporation believes that neither these matters
nor any other known governmental proceeding regarding environmental matters will
have a material adverse effect upon its earnings or consolidated financial
position.
23
<PAGE>
BUSINESS
INTRODUCTION
OVERVIEW
Through its subsidiaries, USG is a leading manufacturer of building
materials, producing a wide range of products for use in new residential and new
nonresidential construction, repair and remodel, 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 1994. USG Interiors is a leading
supplier of interior ceiling tile and grid systems, interior wall systems and
other products used primarily in commercial applications. USG Interiors was the
largest producer of ceiling grid and the second largest producer of ceiling tile
in the United States in 1994, 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 U.S. and in
1994 distributed approximately 22% of U.S. Gypsum's wallboard sales. 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 USG
International supplies interior systems and gypsum wallboard products in Europe,
Asia Pacific and Latin America. For the twelve months ended December 31, 1994,
the Corporation had net sales of $2,290 million and generated EBITDA of $325
million. For the three months ended March 31, 1994 and March 31, 1995, the
Corporation had net sales of $506 million and $598 million, respectively, and
generated EBITDA of $66 million and $106 million, respectively.
BUSINESS STRATEGY
The Corporation believes that its leading positions in its core businesses,
low cost structure, quality and breadth of its product lines, emphasis on
customer service and the distribution capabilities of L&W Supply provide
significant competitive advantages. USG's business strategy is to maintain and
enhance its leading positions in North America and expand its presence
internationally. USG is currently implementing this strategy by: (i) improving
its financial position and flexibility through approximately equal application
of free cash flow to debt reduction and capital expenditures, with an objective
of achieving investment grade status; (ii) enhancing its cost position through
process improvements such as increasing line speeds in existing manufacturing
facilities and implementing technology that allows the use of lower cost
materials; and (iii) growing its core gypsum and ceiling businesses by, among
other things, expanding its presence in the repair and remodel market,
increasing manufacturing capacity in existing plants, continuing to introduce
specialty product applications, extending its penetration of international
markets with existing products and further leveraging L&W Supply's nationwide
distribution network.
REDUCING DEBT AND IMPROVING FINANCIAL FLEXIBILITY. The Corporation's
present intention is to apply its projected annual free cash flow approximately
equally between debt reduction and capital expenditures with an objective of
reaching investment grade status. In addition, the Corporation has pursued
opportunities to reduce near term principal amortization requirements, either
through debt reduction or refinancings.
ENHANCING ITS COST POSITION. In 1994, the Corporation began an incremental
process improvement and capacity expansion program at strategically located
wallboard plants throughout the United States. This program is expected to lower
its unit manufacturing costs while at the same time increasing the wallboard
manufacturing capacity of U.S. Gypsum's existing plants by approximately 600
million square feet in 1995. Among the cost reduction and capacity expansion
programs being implemented by North American Gypsum are the installment of stock
cleaning equipment to utilize lower grades of recycled paper, continued
implementation of technology which lowers wallboard weight, additional use of
synthetic gypsum at facilities at which it is more economical than natural
sources of gypsum and projects to enhance manufacturing efficiency.
GROWING THE CORE GYPSUM AND CEILINGS BUSINESSES. The Corporation believes
there are substantial opportunities to expand both its North American Gypsum and
Worldwide Ceilings businesses. In North American Gypsum, the Corporation seeks
to expand its presence in the growing repair and remodel business through, among
other things, additional penetration of retail channels and emphasizing
marketing
24
<PAGE>
strategies and product line extensions targeted to the retail customer
(including small contractors and do-it-yourselfers). North American Gypsum is
also leveraging L&W Supply's nationwide distribution network by expanding the
number of third party product offerings. Worldwide Ceilings seeks to increase
its product leadership in specialty ceilings through the introduction of new
products such as COMPASSO brand ceiling grid, which allows designers to create
suspended ceilings with curved edges, as well as increasing sales of its
existing products overseas, especially in the Asia Pacific region, in order to
capitalize on the evolution of international design specifications toward United
States/European standards. The Corporation also plans to lower costs and expand
capacity in its Worldwide Ceilings business, and has announced a $45 million
expansion of its Greenville, Mississippi ceiling tile manufacturing facility.
This expansion is in response to increasing domestic and worldwide demand for
its AURATONE brand ceiling tile product. The Corporation believes the Greenville
facility is among the lowest cost ceiling tile plants in the world, and after
completion of the expansion in 1996, will be the largest ceiling tile plant in
the world.
UNITED STATES INDUSTRY OVERVIEW
USG's consolidated financial performance is influenced by activity in the
three major components of the construction industry in the United States: new
residential construction, new nonresidential construction, and repair and
remodel. In recent years, 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 CONSTRUCTION
Demand for the Corporation's products has historically been influenced
primarily by new residential (single and multi-family homes) and new
nonresidential (offices, schools, stores, and other institutions) construction.
New residential construction remains the largest single source of demand for
gypsum wallboard in the United States, although it has declined significantly as
a percentage of gypsum wallboard demand since 1986 (a year in which total gypsum
wallboard shipments were comparable to 1994 levels). Residential construction
has a nominal impact on demand for interior 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>
1994 1986
----- -----
<S> <C> <C>
Residential construction....................................................... 49% 54%
Nonresidential construction.................................................... 9 10
Repair and remodel............................................................. 35 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 82% of total housing starts in 1994, as
compared to 65% in 1986. Additionally, the size of the average single family
home in the United States increased approximately 15% to 2,100 square feet in
1994 from 1,825 square feet in 1986. Largely as a result of these factors,
United States industry shipments of gypsum wallboard were 23.7 billion square
feet in 1994, as compared to 21.3 billion in 1986, despite an approximate 19%
decline in the number of housing starts from 1.806 million units in 1986 to
1.457 million units in 1994, as depicted in the following chart.
25
<PAGE>
GYPSUM WALLBOARD INDUSTRY SHIPMENTS
AND TOTAL HOUSING STARTS
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
INDUSTRY SHIPMENTS HOUSING STARTS
<S> <C> <C>
1982 13.25 1062
1983 17.11 1703
1984 19.18 1750
1985 20.16 1742
1986 21.31 1805
1987 21.41 1621
1988 21.31 1488
1989 21.25 1376
1990 20.728 1193
1991 18.412 1014
1992 20.309 1200
1993 21.63 1288
1994 23.694 1457
</TABLE>
NEW NONRESIDENTIAL CONSTRUCTION
In recent years, demand for interior systems resulting from new
nonresidential construction, and particularly demand resulting from construction
of new office space, has declined as a percentage of total interior systems
demand. The Corporation believes that new nonresidential construction currently
accounts for approximately one-half of industry interior systems, down from
approximately two-thirds in 1986, and that construction of new office space
currently accounts for less than 15% of total interior systems demand. The
balance of interior systems demand is represented by repair and remodel,
including retail. Declining office vacancy rates have caused demand to shift to
the repair and remodel component in recent years, as existing office space is
finished prior to initial occupancy or as landlords refurbish older space as an
inducement to attract or retain tenants. In addition, non-office demand (which
includes stores, entertainment facilities, restaurant facilities and schools)
for interior systems has also increased as a percentage of total interior
systems demand.
Nonresidential construction demand has accounted for approximately 10% of
gypsum wallboard industry demand in the United States.
REPAIR AND REMODEL
Management estimates that repair and remodel demand for gypsum wallboard has
increased more than 22% since 1986 and, in 1994, accounted for 35% of total
industry demand for gypsum wallboard in the United States. The repair and
remodel business is relatively stable and management believes that the growth
rate is approximately 3% to 5% per year. The growth of repair and remodel 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 business. Demand in the repair and remodel business tends to be more
stable than in new construction, although it does fluctuate somewhat in response
to general economic conditions.
26
<PAGE>
Management believes that the increase in the number of commercial buildings
over the last decade provides a greater base for nonresidential repair and
remodel activity in the future, as building owners or tenants replace ceiling
and wall systems as part of the tenant turnover process. Management estimates
that approximately one-half of USG Interiors' 1994 sales were to the
nonresidential repair and remodel segment.
NORTH AMERICAN GYPSUM
BUSINESS
North American Gypsum includes U.S. Gypsum and L&W Supply in the United
States, the gypsum business of the Corporation's 76%-owned subsidiary, CGC, in
Canada and Yeso Panamericano S.A. de C.V. ("YPSA"), USG's operations 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 1994, CGC accounted for approximately 45% of
industry sales in eastern Canada.
PRODUCTS
North American Gypsum manufactures and markets building and industrial
products used in a variety of applications. Gypsum panel products are used to
finish the interior walls and ceilings in residential, commercial and mobile
home construction. These products provide aesthetic as well as sound dampening
and fire retarding value. The majority of these products are sold under the
"SHEETROCK" brand name. Also sold under the "SHEETROCK" brand name is a line of
joint compounds used for finishing wallboard joints. The "DUROCK" line of cement
board and accessories provides 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, as well as gypsum-based products sold to
agricultural and industrial customers for use in a number of applications,
including soil conditioning, road repair, fireproofing and ceramics.
FINANCIAL PERFORMANCE
Summary financial results of North American Gypsum are outlined in the table
below. Such results are not adjusted for intersegment sales eliminations and
corporate expenses.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1994(a) 1993 1992
--------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Net sales....................................................... $ 1,780 $ 1,443 $ 1,296
EBITDA.......................................................... 304 187 130
EBITDA margin................................................... 17.1% 13.0% 10.0%
Capital expenditures............................................ $ 49 $ 32 $ 34
<FN>
- ------------------------
(a) 1994 includes a $30 million pre-tax charge for asbestos settlements
relating to two major class actions. See "Index to Consolidated
Financial Statements -- Restructured Company -- Notes to Financial
Statements -- Litigation."
</TABLE>
For additional information on the Corporation's results by core business
segment, including intersegment sales eliminations and corporate expenses, see
"Index to Financial Statements -- Notes to Financial Statements -- Industry and
Geographic Segments."
MANUFACTURING
Gypsum and related products are produced by the Corporation at 41 plants
located throughout the United States, eastern Canada and in central Mexico. The
geographic distribution of the Corporation's gypsum plants enhance its cost
position by minimizing transportation costs to major metropolitan areas, a
significant component of total delivered wallboard cost. In 1994, the
Corporation began an incremental
27
<PAGE>
process improvement and wallboard capacity expansion at strategically located
plants throughout the United States. This program is expected to lower U.S.
Gypsum's unit manufacturing costs while at the same time increasing its
wallboard capacity by approximately 600 million square feet.
Gypsum rock is mined or quarried at 14 company-owned locations in the United
States and Canada. In 1994, these facilities provided approximately 95% of the
gypsum used by the Corporation's plants in North America, with most of the
remainder being synthetic gypsum. The Corporation's geologists estimate that
recoverable rock reserves are sufficient for more than 30 years of operation
based on the Corporation's average annual production of crude gypsum during the
past five years. Proven reserves contain approximately 232 million tons, of
which approximately 70% are located in the United States and 30% in Canada.
Additional reserves of approximately 153 million tons exist on three properties
not in operation. The Corporation's total average annual production of crude
gypsum in the United States and Canada during the past five years was 9.7
million tons. Synthetic gypsum, which the Corporation purchases under long-term
contracts from coal-fired power generation plants, is a by-product of the coal
desulferization process.
USG owns and operates seven paper mills located across the United States.
Vertical integration in this key raw material ensures a continuous supply of
high quality paper that is tailored to the specific needs of USG's wallboard
production process.
USG maintains the gypsum industry's largest research and development
facility, located in Libertyville, Illinois. This facility conducts fire,
structural and acoustical testing and product and process development. Research
and development activities involve technology related to gypsum, cellulosic
fiber and cement as the primary raw materials on which panel products and
systems, such as gypsum board, cement board and ceiling tile, are based. Related
technologies are those pertaining to joint compounds and textures for wallboard
finishing, specialty plaster products for both construction and industrial
applications, coatings and latex polymers. Product and process development
research from the Libertyville facility plays a significant role in the
Corporation's ongoing cost reduction efforts, as many potential improvements are
tested at Libertyville before implementation in manufacturing plants.
MARKETING AND DISTRIBUTION
Distribution is carried out through L&W Supply's 148 distribution centers in
34 states, as well as through home improvement centers and other retailers,
building material dealers, contractors and distributors. L&W Supply specializes
in delivering less than truckload quantities of construction materials to a job
site and places them in areas where work is being done (including the interior
of a home under construction), thereby reducing the need for handling by
contractors. Although L&W Supply specializes in distribution of gypsum wallboard
(which accounts for approximately 50% of its total net sales), joint compound
and other products manufactured primarily by U.S. Gypsum, it also distributes
products manufactured by USG Interiors such as acoustical ceiling tile and
ceiling grid and products of other manufacturers, including drywall metal,
insulation, roofing products and accessories.
COMPETITION
The Corporation competes in North America as the largest of 18 producers of
gypsum wallboard products and, in 1994, accounted for approximately one-third of
total gypsum wallboard sales in the United States. No new wallboard
manufacturing plants have been opened since 1990, and the Corporation is not
aware of plans to build any new plants. Total domestic industry shipments of
gypsum wallboard totalled 23.7 billion square feet in 1994, a record for the
industry, and US Gypsum's shipments of gypsum wallboard
28
<PAGE>
totaled 7.7 billion square feet, also a record level. The second largest
competitor in the gypsum wallboard industry, National Gypsum Company, shipped
approximately 5.5 billion square feet of wallboard in 1994 and has 18
manufacturing plants. Principal manufacturers of wallboard in the United States
are set forth below:
<TABLE>
<CAPTION>
WALLBOARD MANUFACTURER
- ---------------------------------------------------------- 1994 SHIPMENTS
--------------------
(BILLION SQ. FT.)
<S> <C>
U.S. Gypsum............................................... 7.7
National Gypsum Company................................... 5.5
Georgia Pacific........................................... 2.8
Domtar, Inc............................................... 1.9
Celotex Corporation....................................... 0.9
<FN>
Source: Public filings and U.S. Gypsum estimates
</TABLE>
Major competitors in eastern Canada include Domtar, Inc. and Westroc
Industries Ltd. In Mexico, the Corporation's major competitor is Panel Rey.
L&W Supply's largest competitor, Gypsum Management Supply, is an independent
distributor with approximately 70 locations in the southern, central and western
United States. There are several regional competitors, such as CSR/GDMA in the
southern United States and Strober Building Supply in the northeastern United
States. L&W Supply's many local competitors include lumber dealers, hardware
stores, home improvement centers, acoustical tile distributors and
manufacturers.
WORLDWIDE CEILINGS
BUSINESS
Worldwide Ceilings includes USG Interiors, the international interior
systems businesses in Europe, Asia Pacific and Latin America managed as USG
International and the interior systems business of CGC.
PRODUCTS
Worldwide Ceilings manufactures and markets ceiling grid and ceiling tile,
wall systems, 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. 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.
FINANCIAL PERFORMANCE
Summary financial results of Worldwide Ceilings are outlined in the table
below.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1994 1993 1992
--------- --------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Net sales............................................................. $ 594 $ 540 $ 541
EBITDA................................................................ 62 56 57
EBITDA margin......................................................... 10.4% 10.4% 10.5%
Capital expenditures.................................................. $ 15 $ 9 $ 14
</TABLE>
The results displayed above are not adjusted for intersegment sales
eliminations and corporate expenses. For additional information on the
Corporation's results by core business segment, including intersegment sales
eliminations and corporate expenses, see "Index to Financial Statements -- Notes
to Financial Statements -- Industry and Geographic Segments."
29
<PAGE>
MANUFACTURING
Worldwide Ceilings products are manufactured at 21 plants located in North
America, Europe, New Zealand and Malaysia, including 5 ceiling tile plants and 9
ceiling grid plants. The remaining plants produce other interior products and
raw materials for ceiling tile and grid. Principal raw materials used in the
production of Worldwide Ceilings products include mineral fiber, steel, aluminum
extrusions and high-pressure laminates. Certain of these raw materials are
produced internally, while others are obtained from various outside suppliers.
Shortages of raw materials used in this segment are not expected.
MARKETING AND DISTRIBUTION
Worldwide Ceilings products are sold primarily in markets related to the new
construction and renovation of commercial buildings as well as the retail market
for small commercial contractors. Marketing and distribution to large commercial
users is conducted through a network of distributors and installation
contractors as well as through L&W Supply. In recent years, Worldwide Ceilings
has increased its emphasis on retail customers, including both small contractors
and do-it-yourselfers, as well as increasing sales of existing products abroad.
In the domestic retail segment, Worldwide Ceilings has increased sales through
marketing strategies tailored to home improvement retailers which emphasize
increased inventory turn through the stocking of a selected product assortment
of USG Interiors' most popular offerings. In the international area, Worldwide
Ceilings is attempting to capitalize on the evolution of international design
specifications toward United States/European standards through selective
expansion of its international sales force, exploration of joint marketing
agreements with foreign-based companies where appropriate and increasing product
availability from its manufacturing base within each region.
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 located near Chicago's
Merchandise Mart.
COMPETITION
The Corporation estimates that it is the world's largest manufacturer of
ceiling grid. USG's most significant competitor is Chicago Metallic Corporation,
which participates worldwide. Other competitors in ceiling grid include W.A.V.E.
(a joint venture of Armstrong World Industries, Inc. and Worthington Industries/
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),
OWA Faserplattenwerk GmbH (Odenwald) and The Celotex Corporation.
GENERAL INFORMATION
ASBESTOS LITIGATION DEVELOPMENTS
A discussion of the Corporation's pending asbestos litigation as of December
31, 1994 is contained in "Index to Financial Statements -- Restructured Company
- -- Notes to Financial Statements -- Litigation". Subsequent to the date of those
financial statements, there have been several important developments with
respect to U.S. Gypsum's declaratory judgment action against its insurance
carriers. First, on April 5, 1995, the Illinois Supreme Court denied the
insurers' petition for leave to appeal the November 4, 1994 ruling of the
Illinois Appellate Court. In May 1995, the Illinois Supreme Court denied the
insurers' motion seeking reconsideration of the denial of leave to appeal. In
addition, during April 1995, one of the defendant carriers, which provided both
primary and excess policies to U.S. Gypsum during the 1960's and 1970's, agreed
to pay U.S. Gypsum a total of $38.4 million representing the aggregate face
amount of the policy, plus certain legal expenses and other costs. $25 million
was paid in April 1995 with the rest to be paid in three annual installments.
30
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(AS OF JUNE 1, 1995 EXCEPT AS SPECIFIED OTHERWISE)
DIRECTORS OF THE CORPORATION
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION AND HAS BEEN A
NAME AND AGE OTHER DIRECTORSHIPS DIRECTOR SINCE
- ------------------------------ ------------------------------------------------------------ ------------------
<S> <C> <C>
Eugene B. Connolly, 62 Chairman and Chief Executive Officer from January 1994; May 1988
President and Chief Executive Officer to May 1990; Chairman
of the Board and Chief Executive Officer to March 1993;
Chairman, President and Chief Executive Officer to January
1994; director, U.S. Can Corporation and The Pepper
Companies, Inc.
Robert L. Barnett, 54 Vice Chairman, Ameritech to 1992; President, Ameritech Bell May 1990
Group to 1992; President, Ameritech Enterprise Group to
1989; President and Chief Executive Officer to 1987, Vice
President of Operation to 1985, Wisconsin Bell Company;
President, Ameritech Mobile Communications Company to 1984;
director, Johnson Controls, Inc.; member, Advisory Council
of the Robert R. McCormick School of Engineering and
Computer Science at Northwestern University; member,
Northwestern University's Electrical Engineering and
Computer Science Industrial Advisory Board; affiliated with
the Institute of Electrical and Electronics Engineers.
Keith A. Brown, 43 President, Chimera Corporation from 1987; director, Adelphia May 1993
Incorporated from 1988; director, Global Film & Packaging
Corporation from 1988; director, Ashland Castings
Corporation from 1993; director, Mansfield Capital
Corporation from 1994; director, Poly Shapes Corporation
from 1994.
W. H. Clark, 62 Chairman of the Board and Chief Executive Officer to 1994 August 1985
and President to 1990, Nalco Chemical Company; director,
Northern Trust Corporation and The Northern Trust Bank;
director, Nicor Corporation; director, Bethlehem Steel
Corporation; director, James River Corporation; director,
Northern Illinois Gas Company; director, Diamond Shamrock
Corporation.
James C. Cotting, 61 Chairman of the Board, Navistar International Corporation October 1987
from 1987; Chief Executive Officer, Navistar International
Corporation to 1995; director, Asarco Incorporated;
director, Interlake Corporation; director, MIM Holdings
Limited; director, National Association of Manufacturers;
governor, Chicago Stock Exchange.
Lawrence M. Crutcher, 52 Managing Director, Veronis, Suhler & Associates from 1990; May 1993
President to 1989, Vice President for Financial Planning to
1984, Vice President -- Magazines to 1983, Vice
President-Circulation to 1980, Book-of-the-Month Club.
</TABLE>
31
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION AND HAS BEEN A
NAME AND AGE OTHER DIRECTORSHIPS DIRECTOR SINCE
- ------------------------------ ------------------------------------------------------------ ------------------
<S> <C> <C>
William C. Foote, 43 President and Chief Operating Officer from January 1994; March 1994
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 to January 1994; President
and Chief Executive Officer, USG Interiors, Inc. from
January 1993 to January 1994; director, GATX Corporation.
David W. Fox, 63 Chairman, Northern Trust Corporation and The Northern Trust May 1987
Company from 1990; Chief Executive Officer to 1995; Senior
Vice President to 1978, Executive Vice President to 1981,
Vice Chairman to 1987, President to 1993, The Northern Trust
Company; director, The Federal Reserve Bank of Chicago;
director, Northern Trust of Florida Corp.; director, Banque
Rivaud (Paris, France); director, Chicago Central Area
Committee; Governor, Chicago Stock Exchange; Chairman,
Northwestern Memorial Hospital; trustee, Adler Planetarium;
trustee, The Orchestral Association; trustee, DePaul
University.
Philip C. Jackson, Jr., 66 Vice Chairman and director, Central Bank of the South and May 1979
its parent company, Central Bancshares of the South to 1989;
Adjunct Professor, Birmingham-Southern College, Birmingham,
Alabama from January 1989; member, Thrift Depositors
Protection Oversight Board to April 1993; Director, Saul
Centers, Inc.; member, Board of Governors of the Federal
Reserve System, Washington, D.C. to November 1978; Vice
President and director, Jackson Company to June 1975;
Trustee, Birmingham-Southern College, Birmingham, Alabama.
Marvin E. Lesser, 53 Managing Partner, Sigma Partners, L.P. from 1993; private May 1993
consultant from 1992; Managing Partner, Cilluffo Associates,
L.P. to 1994; director, Amdura Corporation to 1991; chair,
Seacoast Area Chapter (New Hampshire and Maine) of the
American Red Cross.
John B. Schwemm, 61 Chairman to 1989 and Chief Executive Officer to 1988, R. R. May 1988
Donnelley & Sons Company; former General Counsel and Group
Vice President -- Book Group, R. R. Donnelley & Sons
Company; director, Walgreen Company; director, William Blair
Mutual Funds; Trustee, Northwestern University.
</TABLE>
32
<PAGE>
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION AND HAS BEEN A
NAME AND AGE OTHER DIRECTORSHIPS DIRECTOR SINCE
- ------------------------------ ------------------------------------------------------------ ------------------
<S> <C> <C>
Judith A. Sprieser, 41 Senior Vice President and Chief Financial Officer, Sara Lee February 1994
Corporation from November 1994; President and Chief
Executive Officer to 1994, Chief Financial Officer to 1993,
Assistant Treasurer -- Corporate Finance to 1990, Sara Lee
Bakery, North America.
</TABLE>
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>
J. Bradford James, 48 Director, Corporate Strategic Planning, USG Corporation and January 1995
Group Vice President, Vice President, Finance & Administration, USG Interiors,
Worldwide Ceilings & Inc. to January 1990; Vice President, Financial and
International; President and Strategic Planning, USG Corporation to January 1991; Vice
Chief Executive Officer, USG President and Chief Financial Officer, USG Corporation to
Interiors, Inc. March 1993; Senior Vice President and Chief Financial
Officer, USG Corporation to January 1994; Vice President,
USG Corporation, President and Chief Executive Officer, USG
Interiors, Inc. to January 1995.
Donald E. Roller, 57 President and Chief Executive Officer, USG Interiors, Inc. January 1995
Group Vice President, North to January 1993; Vice President, USG Corporation, President
American Gypsum; President and Chief Executive Officer, United States Gypsum Company to
and Chief Executive Officer, January 1995.
United States Gypsum Company
Richard H. Fleming, 47 Director, Corporate Finance, to January 1991; Vice President January 1995
Senior Vice President and and Treasurer to January 1994; Vice President and Chief
Chief Financial Officer Financial Officer to January 1995.
Arthur G. Leisten, 53 Vice President and General Counsel to January 1990; Senior February 1994
Senior Vice President and Vice President and General Counsel to March 1993; Senior
General Counsel Vice President, General Counsel and Secretary to February
1994.
P. Jack O'Bryan, 59 President and Chief Executive Officer, United States Gypsum August 1994
Senior Vice President, Company to January 1993; Senior Vice President and Chief
Worldwide Manufacturing and Technology Officer, USG Corporation to August 1994.
Technology
Harold E. Pendexter, Jr., 60 Vice President, Human Resources and Administration to January 1991
Senior Vice President and January 1990; Senior Vice President, Human Resources and
Chief Administrative Officer Administration to January 1991.
Raymond T. Belz, 54 Vice President Finance, United States Gypsum Company to January 1995
Vice President and November 1990; Vice President Financial Services and
Controller; Vice President Financial Administration, United States Gypsum Company to
and Chief Financial Officer, January 1994; Vice President and Controller, USG
North American Gypsum Corporation, Vice President Financial Services, United
States Gypsum Company to January 1995.
</TABLE>
33
<PAGE>
<TABLE>
<CAPTION>
HAS HELD
NAME, AGE PRESENT
AND PRESENT POSITION PRIOR BUSINESS EXPERIENCE IN PAST FIVE YEARS POSITION SINCE
- ------------------------------ ------------------------------------------------------------ ------------------
<S> <C> <C>
Brian W. Burrows, 55 Same position. March 1987
Vice President, Research and
Development
Matthew P. Gonring, 39 Director, Public Relations to January 1991; Director, March 1993
Vice President, Corporate Corporate Communications to March 1993.
Communications
John E. Malone, 51 Vice President and Controller, USG Corporation to December January 1994
Vice President and Treasurer 1993; Vice President -- Finance, USG International to April
1995.
James S. Phillips, 65 Vice President, National Accounts to December 1990; Vice January 1995
Vice President President, Corporate Accounts to January 1995.
Robert B. Sirgant, 54 Director, Marketing -- East Region, United States Gypsum January 1995
Vice President, Corporate Company to November 1992; Vice President, National Accounts
Accounts and Marketing -- East, United States Gypsum Company to July
1994; Vice President, National Accounts, United States
Gypsum Company to January 1995.
S. Gary Snodgrass, 43 Director, Corporate Human Resources Planning, USG February 1995
Vice President, Human Corporation and Vice President, Human Resources, USG
Resources -- Operations; Vice Interiors, Inc. to November 1990; Director, Human Resources,
President, Human Resources, USG Corporation to September 1992; Vice President,
Worldwide Ceilings Management Resources and Employee Relations to January 1994;
Vice President, Human Resources -- Operations to February
1995.
Frank R. Wall, 61 Senior Vice President and General Manager, Western March 1995
Vice President; President and Construction Products Region, United States Gypsum Company
Chief Executive Officer, L&W to January 1990; Senior Vice President, Operating Services,
Supply Corporation United States Gypsum Company to April 1993; Executive Vice
President and Chief Operating Officer, L&W Supply
Corporation to January 1994, President and Chief Executive
Officer, L&W Supply to March 1995.
Dean H. Goossen, 47 Vice President, General Counsel and Secretary, Xerox February 1994
Corporate Secretary Financial Services Life Insurance Company to February 1993;
Assistant Secretary, USG Corporation to February 1994.
Paul J. Vanderberg, 35 Director, Planning, United States Gypsum Company to February January 1995
President and Chief Executive 1990; General Manager, Materials Division, United States
Officer, CGC Inc. Gypsum Company to February 1992; General Manager, Durock,
United States Gypsum Company to March 1994; Director,
Marketing Services and Planning, United States Gypsum
Company from November 1992 to March 1994; Executive Vice
President and Chief Operating Officer, CGC Inc. to January
1995.
</TABLE>
34
<PAGE>
DESCRIPTION OF NEW CREDIT AGREEMENT
OVERVIEW
The Corporation has executed a commitment letter (the "Financing
Commitment") with Chemical Securities Inc. ("CSI"), under which CSI has agreed
to use its best efforts to arrange a new seven year $500 million secured
revolving credit facility (the "New Credit Facility") with a syndicate of banks
(the "Banks" or the "Bank Group") selected by the Corporation and CSI. Chemical
Bank ("Chemical") will serve as sole and exclusive administrative agent. The
Corporation expects to enter into the New Credit Agreement prior to the closing
of this offering.
A copy of the form of New Credit Agreement will be filed as an exhibit to
the Registration Statement of which this Prospectus forms a part. The following
summary of the New Credit Agreement does not purport to be complete and is
qualified in its entirety by reference to the New Credit Agreement.
THE NEW CREDIT FACILITY
The New Credit Facility is a seven-year revolving credit facility in an
aggregate maximum amount of $500 million, including a letter of credit
subfacility of up to $125 million . The New Credit Facility will consist of
revolving loans ("Revolving Loans"), including an uncommitted bid option, and
letters of credit ("L/C's"). Except as described below, the New Credit Facility
will expire in 2002 and will not require amortization prior to maturity.
If the "Debt/EBITDA Ratio" (as defined below) exceeds 2.5 to 1.0 for the
fiscal quarter ended June 30, 2000, the New Credit Facility will be permanently
reduced by $100 million, $50 million of such reduction to be effective as of the
date the quarterly financial statements for such fiscal quarter are delivered to
the Agent (or, if not delivered, effective as of the date such financial
statements were due) and $50 million of such reduction to be effective 12 months
thereafter. Any outstanding amounts which would exceed the reduced commitment
must be repaid together with any breakage costs, if applicable.
INTEREST RATE
Interest on the Revolving Loans will be computed based on (i) Alternate Base
Rate or (ii) LIBOR plus the applicable spread (the "LIBOR Spread"), which spread
will initially be 0.875% and adjust as set forth below.
<TABLE>
<CAPTION>
LIBOR SPREAD COMMITMENT FEE
DEBT/EBITDA (IN BASIS POINTS) (IN BASIS POINTS)
----------------- ------------------ ------------------
<S> <C> <C>
greater than 4.00x 175 37.5
3.50x - 4.00x 150 37.5
3.00x - 3.50x 125 31.25
2.50x - 3.00x 87.5 25.0
2.00x - 2.50x 75 25.0
1.50x - 2.00x 62.5 22.5
less than 1.50x 50.0 20.0
</TABLE>
Changes, if any, to the LIBOR Spread and Commitment Fee will occur on the
date of delivery of each quarterly or annual, as applicable, financial
statement.
In addition to the interest rate mechanism described above, a bid option
("Bid Option") will be provided under the New Credit Agreement on an uncommitted
basis through a competitive auction mechanism. The Corporation will not be
obliged to accept any bids submitted. The Corporation will have the option of
inviting the Banks to submit bids (via Chemical) for advances ("Competitive Bid
Loans"). Bidding will be requested either on the basis of: (i) a margin relative
to LIBOR ("Eurodollar Bids") upon four business days' prior notice, or (ii) an
absolute interest rate ("Absolute Rate Bids") upon one business day's prior
notice. Bids may be requested for periods of up to six months. The Bid Option
may result in additional interest expense savings to the Corporation.
"Alternate Base Rate" will be the highest of (i) the rate from time to time
publicly announced by Chemical in New York City as its prime rate, (ii) the
secondary market rate for three-month certificates of deposit from time to time
plus 1.0% and (iii) the federal funds rate from time to time plus 1/2 of 1.0%.
35
<PAGE>
"LIBOR" will be an interest rate per annum determined by the Agent to be the
arithmetic average of the rates designated as "LIBO" on Telerate screen number
3756 USD-LIBOR-BBA (rounded upwards, if necessary, to the nearest 1/16%) for
deposits with a maturity comparable to a 1-, 2-, 3- or 6- month interest period
offered in immediately available funds in the London interbank market. If
applicable, the cost of reserves under Regulation D of the Federal Reserve Board
will be included in the calculation of LIBOR.
FEES
The Corporation will pay a commitment fee of one-quarter of one percent
(0.25%) per annum on the unused amount of the New Credit Facility. The
Corporation will also pay a rate per annum equal to the then applicable LIBOR
spread as set forth above on the average daily undrawn face amount of all
outstanding L/C's.
SECURITY
The New Credit Facility will be secured by a pledge of the outstanding
capital stock of U.S. Gypsum, USG Interiors, L&W Supply and USG Foreign
Investments, Ltd. Such security will be permanently released once the
Corporation's senior public debt is rated "Investment Grade" (a rating of BBB-
or higher by Standard & Poor's Ratings Group and Baa3 or higher by Moody's
Investors Service, Inc.). See "Description of the Collateral Trust."
NEGATIVE COVENANTS
The New Credit Facility will contain material restrictions (with certain
exceptions) on the operation of the Corporation's business, including without
limitation covenants pertaining to:(i) liens and encumbrances; (ii) sale and
leaseback transactions; (iii) investments, loans and advances, PROVIDED, that
this covenant would no longer apply once the Corporation's senior public debt
rating is Investment Grade; (v) mergers, consolidations and sales of assets with
respect to the Corporation and material subsidiaries; (v) acquisitions of
businesses not related to the building materials industry; (vi) dividends,
distributions and repurchases of stock and subordinated debt; PROVIDED that the
Corporation may pay dividends, make distributions and repurchase stock and
subordinated debt in an aggregate amount during the term of the New Credit
Facility not to exceed the sum of (A) an initial amount to be determined, and
(B) an aggregate amount not to exceed a percentage (to be determined) of
consolidated net income (adjusted for fresh start accounting) for the period
beginning at the end of the fiscal quarter in which the Closing Date occurs
through the end of the most recent fiscal quarter for which financial statements
have been delivered; PROVIDED, that such covenant will cease to be applicable
once the Corporation's senior public debt is rated Investment Grade; (vii) use
of proceeds, PROVIDED, that the use of proceeds arising from the issuance of
additional debt and equity will be at the Corporation's discretion; (viii) debt
or guarantees thereof if the incurrence thereof would (A) cause a breach of the
then applicable financial covenants or (B) exceed certain agreed upon levels
with respect to secured debt and debt of subsidiaries; (ix) restrictions in
other agreements on ability of subsidiaries to declare and pay dividends; and
(x) financial covenants or events of default in other debt agreements which are
more restrictive than those contained in the New Credit Agreement.
FINANCIAL COVENANTS
The New Credit Facility will contain the following financial covenants:
- Debt/EBITDA Ratio will not exceed 4.50 to 1.0; and
- Interest Coverage Ratio will not be less than 2.25 to 1.0.
Compliance with these financial covenants must be demonstrated quarterly on a
trailing 12 month basis.
"DEBT" at any time, will 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 (including Competitive Bid Loans) at such time,
(ii) the aggregate amount of long-term indebtedness of the Corporation and its
consolidated subsidiaries at such time (including the current portion thereof),
(iii) the outstanding amount of capital leases shown as a liability on the
Corporation's consolidated balance sheet at such time and (iv) the aggregate
amount of all guarantees with respect to indebtedness of third parties of the
type described in clauses (ii) and (iii) above at such time.
36
<PAGE>
"EBITDA" for any period, will mean 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.
"DEBT/EBITDA RATIO" will mean the ratio, calculated as of the last day of
each fiscal quarter, of (i) Debt less the aggregate amount of cash and cash
equivalents held by the Corporation and its consolidated subsidiaries to (ii)
EBITDA for the four quarter period ending on the last day of such quarter (in
each case as reflected on the Corporation's consolidated financial statements
for such quarter).
"INTEREST COVERAGE RATIO" of the Corporation for any period will mean the
ratio of (a) EBITDA for such period to (b) the total net consolidated interest
expense of the Corporation and its subsidiaries during such period (as shown on
a consolidated income statement of the Corporation for such period prepared in
accordance with GAAP), excluding the impact of non-cash amortization resulting
from fresh start accounting during such period.
EVENTS OF DEFAULT
The New Credit Facility will contain customary events of default including,
without limitation, (i) the failure to make payments when due, (ii) defaults
under other agreements or instruments of indebtedness in excess of specified
amounts, (iii) noncompliance with covenants, (iv) breaches of representations
and warranties, (v) bankruptcy, (vi) judgments in excess of specified amounts,
(vii) impairment of security interests in collateral, and (viii) certain changes
of control.
DESCRIPTION OF NOTES
The Notes will be issued under an indenture dated as of October 1, 1986 (the
"1986 Indenture"), between the Company and Harris Trust and Savings Bank, as
trustee (the "Indenture Trustee"), as supplemented by resolutions adopted by the
Board and an officer's certificate delivered in connection therewith. The 8%
Senior Notes due 1996 (the "Senior 1996 Notes"), the 8% Senior Notes due 1997
(the "Senior 1997 Notes"), the 9 1/4% Senior Notes due 2001 (the "Senior 2001
Notes") and the 8 3/4% Sinking Fund Debentures due 2017 (the "Senior 2017
Debentures," and, together with the Senior 1996 Notes, the Senior 1997 Notes,
the Senior 2001 Notes and the Notes, the "Indenture Securities") were also
issued under the Indenture, as supplemented by resolutions adopted by the Board
and officer's certificates delivered in connection therewith. The 1986
Indenture, as supplemented by such Board resolutions and related instruments, is
referred to herein as the "Indenture." Copies of the Indenture and related
instruments 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 Indenture Securities or the Indenture 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.
GENERAL
The Notes are a series of securities which are limited to $150.0 million
aggregate principal amount. The Notes will bear interest at % per annum and
will mature on , 2005. Interest on the Notes is payable semi-annually
on and of each year, commencing , to the persons in
whose names the Notes are registered at the close of business on the next
preceding or , as the case may be. Interest on the Notes shall
accrue from , 1995.
Principal (and premium, if any) and interest is payable, and the transfer of
the Notes is registrable, at the office or agency of the Company maintained for
such purpose in the City of Chicago, State of Illinois, currently the Corporate
Trust Office of the 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 Company 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 Indenture. No service
charge will be made for any transfer or exchange except the Company may require
payment of a sum sufficient to cover any tax or other governmental charge
payable in connection therewith.
37
<PAGE>
The Notes will be issued in fully registered form without coupons and in
denominations of $1,000 and integral multiples thereof.
RANKING AND SECURITY
Upon issuance, the Notes will be senior obligations of the Corporation and
will rank pari passu with the Bank Debt and other senior obligations. The Bank
Debt will be incurred under the New Credit Agreement to be entered into by the
Corporation and certain banks prior to the closing of this offering. Borrowings
under the New Credit Agreement, and pursuant to negative pledge clauses, the
Notes and certain other senior obligations of the Corporation, will share in
security interests in the capital stock of certain of the Corporation's domestic
subsidiaries as provided in the Collateral Trust Agreement. Upon repayment of
the Bank Debt and termination of the commitments of the banks to make advances
under the New Credit Agreement, or upon release of the collateral by the banks
(which the banks are required to do if the Corporation reaches Investment Grade
Status), the Notes and such other senior indebtedness will cease to be secured.
The Notes will be effectively subordinated to current and future indebtedness
and liabilities of the Corporation's subsidiaries. See "Risk Factors -- Holding
Company Structure; Relative Priority of Debt Claims."
Holders of the Bank Debt primarily control the operation of the Collateral
Trust. See "Description of Collateral Trust."
OPTIONAL REDEMPTION
The Notes are not subject to redemption by the Company prior to ______ _,
2000. Thereafter, the Notes may, from time to time, be redeemed, in whole or in
part, at the option of the Company upon not less than 30 nor more than 60 days'
prior notice to Holders, at the redemption prices set forth below (expressed in
percentages of the principal amount thereof), plus accrued and unpaid interest
thereon, up to the Redemption Date.
<TABLE>
<CAPTION>
REDEMPTION PERIOD PERCENTAGE
- ------------------------------------------- -------------
<S> <C>
2000 to 2001
2001 to 2002
2002 to 2003
After 2003 100%
</TABLE>
If less than all of the Notes are to be redeemed, the selection of the Notes
to be redeemed shall be made as provided in the Indenture.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder shall have the right
to require the Corporation to repurchase such Holder's Notes, in whole or in
part, in integral multiples of $1,000, pursuant to the Change of Control Offer
described in the next succeeding paragraph at the Repurchase Price in cash equal
to 100% of the aggregate principal amount thereof, plus accrued and unpaid
interest thereon, if any, to the Change of Control Payment Date.
Within 30 calendar days subsequent to the date of any Change of Control, the
Corporation will mail a notice to each Holder and to the Trustee stating, among
other things, (i) that a Change of Control has occurred and a Change of Control
Offer is being made as described in this paragraph, and that, although Holders
are not required to tender their Notes, all Notes that are timely tendered will
be accepted for payment; (ii) the Repurchase Price and the Change of Control
Payment Date, which will be a date occurring no earlier than 30 days and no
later than 60 days after the date on which such notice is mailed; (iii) that any
Notes (or any portion thereof) accepted for payment pursuant to the Change of
Control Offer (and duly paid on the Change of Control Payment Date) will cease
to accrue interest after the Change of Control Payment Date; and (iv) a
description of the transaction or transactions constituting the Change of
Control and the procedures that Holders must follow in order to tender their
Notes for payment.
In the event the Corporation reaches Investment Grade Status, the foregoing
Change of Control provisions shall no longer apply, and thereafter if both a
Designated Event with respect to the Corporation and a Rating Decline in
connection therewith shall occur, the Corporation will be obligated to offer to
38
<PAGE>
repurchase any or all of the Notes at a price in cash equal to 100% of the
principal amount thereof, plus accrued and unpaid interest to the date of
repurchase. If the Corporation effects defeasance of the Notes under the
Indenture prior to the date notice of a Rating Decline in connection with a
Designated Event is required, the Corporation will not be obligated to make a
repurchase offer as a result of such Designated Event and Rating Decline.
There can be no assurance that the Corporation will be able to fund any such
repurchase of the Notes. The New Credit Agreement provides that certain change
of control events with respect to the Corporation would constitute a default
thereunder. Any future credit agreements or other agreements relating to
indebtedness to which the Corporation becomes a party may contain similar
restrictions and provisions. In the event a Change of Control occurs at a time
when the Corporation is prohibited from purchasing Notes, the Corporation could
seek the consent of its lenders to the purchase of Notes or could attempt to
refinance the borrowings that contain such prohibition. If the Corporation does
not obtain such a consent or repay such borrowings, the Corporation will remain
prohibited from purchasing Notes. In such case, the Corporation's failure to
purchase tendered Notes would constitute an Event of Default under the
Indenture.
If an offer is made to repurchase Notes, the Corporation will comply with
all tender offer rules, including but not limited to Section 14(e) under the
Exchange Act and Rule 14e-1 thereunder, to the extent applicable to such offer.
Except as described above, the Indenture does not contain provisions that
permit the Holders of the Notes to require that the Corporation repurchase or
redeem the Notes in the event of a takeover, recapitalization or restructuring.
SINKING FUND
There will be no mandatory sinking fund payments for the Notes.
BOOK-ENTRY SYSTEM
The Notes will initially be issued in the form of one or more Global
Securities (as defined in the Indenture) held in book-entry form. Accordingly,
The Depository Trust Corporation ("DTC") or its nominees will be the sole
registered holder of the Notes for all purposes under the Indenture.
Upon the issuance of a Global Security, DTC or its nominee will credit the
accounts of persons holding through it with the respective principal amounts of
the Notes represented by such Global Security purchased by such persons in the
offering. Such accounts shall be designated by the Underwriter with respect to
Notes placed by the Underwriters for the Corporation. Ownership of beneficial
interests in a Global Security will be limited to persons that have accounts
with DTC ("participants") or persons that may hold interests through
participants. Ownership of beneficial interest by participants in a Global
Security will be shown on, and the transfer of that ownership interest will be
effected only through, records maintained by DTC for such Global Security.
Ownership of beneficial interests in such Global Security by persons that hold
through participants will be shown on, and the transfer of that ownership
interest within such participant will be effected only through, records
maintained by such participant. The laws of some jurisdictions require that
certain purchasers of securities take physical delivery of such securities in
definitive form. Such limits and such laws may impair the ability to transfer
beneficial interests in a Global Security.
Payment of principal and interest on Notes represented by any such Global
Security will be made to DTC or its nominee, as the case may be, as the sole
registered owner and the sole holder of the Notes represented thereby for all
purposes under the Indenture. None of the Corporation, the Trustee, any agent of
the Corporation, or the Underwriters will have any responsibility or liability
for any aspect of DTC's records relating to or payments made on account of
beneficial ownership interests in Global Security representing any Notes or for
maintaining, supervising, or reviewing any of DTC's records relating to such
beneficial ownership interests.
The Corporation has been advised by DTC that upon receipt of any payment of
principal of or interest on any Global Security, DTC will immediately credit, on
its book-entry registration and transfer system, the accounts of participants
with payments in amounts proportionate to their respective beneficial interests
in
39
<PAGE>
the principal or face amount of such Global Security as shown on the records of
DTC. Payments by participants to owners of beneficial interests in a Global
Security held through such participants will be governed by standing
instructions and customary practices as is now the case with securities held for
customer accounts registered in "street name" and will be the sole
responsibility of such participants.
A Global Security may not be transferred except as a whole by DTC to a
nominee of DTC. A Global Security is exchangeable for certificated Notes only if
(i) DTC notifies the Corporation that it is unwilling or unable to continue as a
Depository for such Global Security or if at any time DTC ceases to be a
clearing agency registered under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), (ii) the Corporation executes and delivers to the Trustee
a notice that such Global Security shall be so transferable, registrable, and
exchangeable, and such transfers shall be registrable, or (iii) there shall have
occurred and be continuing an Event of Default or an event which, with the
giving of notice or lapse of time or both, would constitute an Event of Default
with respect to the Notes represented by such Global Security. Any Global
Security that is exchangeable for certificated Notes pursuant to the preceding
sentence will be transferred to, and registered and exchanged for, certificated
Notes in authorized denominations and registered in such names as the Depository
holding such Global Security may direct. Subject to the foregoing, a Global
Security is not exchangeable, except for a Global Security of like denomination
to be registered in the name of the Depository or its nominee. In the event that
a Global Security becomes exchangeable for certificated Notes, (i) certificated
Notes will be issued only in fully registered form in denominations of $1,000 or
integral multiples thereof, (ii) payment of principal, any repurchase price, and
interest on the certificated Notes will be payable, and the transfer of the
certificated Notes will be registerable at the office or agency of the
Corporation maintained for such purposes, and (iii) no service charge will be
made for any registration of transfer or exchange of the certificated Notes,
although the Corporation may require payment of a sum sufficient to cover any
tax or governmental charge imposed in connection therewith.
So long as the Depository for a Global Security, or its nominee, is the
registered owner of such Global Security, such Depository or such nominee, as
the case may be, will be considered the sole owner or holder of the Notes
represented by such Global Security for the purposes of receiving payment of the
Notes receiving notices, and for all other purposes under the Indenture and the
Notes. Beneficial interest in Notes will be evidenced only by, and transfers
thereof will be effected only through, records maintained by the Depository and
its participants. Cede & Co. has been appointed as the nominee of the
Depository. Except as provided above, owners of beneficial interest in a Global
Security will not be entitled to and will not be considered the holders thereof
for any purposes under the Indenture. Accordingly, each person owning a
beneficial interest in a Global Security must rely on the procedures of the
Depository, and, if such person is not a participant, on the procedures of the
participant through which such person owns its interest, to exercise any rights
of a holder under the Indenture. The Corporation understands that under existing
industry practice, in the event that the Corporation requests any action of
holders or that an owner of a beneficial interest in a Global Security desires
to give or take any action which a holder is entitled to give or take under the
Indenture, the Depository would authorize the participants holding the relevant
beneficial interest to give or take such action and such participants would
authorize beneficial owners owning through such participants to give or take
such action or would otherwise act upon the instructions of beneficial owners
owning through them.
DTC has advised the Corporation that DTC is a limited-purpose trust company
organized under the Banking Law of the State of New York, a member of the
Federal Reserve System, a "clearing corporation" within the meaning of the New
York Uniform Commercial Code, and a "clearing agency" registered under the
Exchange Act. DTC was created to hold the securities of its participants and to
facilitate the clearance and settlement of securities transactions among its
participants in such securities through electronic book-entry changes in
accounts of the participants, thereby eliminating the need for physical movement
of securities certificates. DTC's participants include securities brokers and
dealers (including the Underwriters), banks, trust companies, clearing
corporations, and certain other organizations some of whom (and/or their
representatives) own DTC. Access to DTC's book-entry system is also available to
others, such as banks, brokers, dealers, and trust companies that clear through
or maintain a custodial relationship with a participant, either directly or
indirectly.
40
<PAGE>
CERTAIN RESTRICTIVE COVENANTS
The Indenture will provide that the following restrictive covenants will be
applicable to the Corporation unless and until the Corporation reaches
Investment Grade Status. After the Corporation has reached Investment Grade
Status and notwithstanding that the Corporation's Debt Rating may later cease to
be rated Investment Grade by either S&P or Moody's or both, the Corporation will
be released from its obligations to comply with each of the restrictive
covenants described below, except for "Limitation on Restricted Subsidiary
Indebtedness and Preferred Stock," "Limitation on Secured Indebtedness of the
Corporation and its Restricted Subsidiaries" and "Limitation on Sale and
Leaseback Transactions." The Corporation will remain obligated to comply with
certain provisions described in "Restrictions on Merger" and certain other
covenants that are not described below upon reaching Investment Grade Status.
The Corporation will also remain obligated to comply with certain provisions
described under "Change of Control" above.
LIMITATIONS ON INDEBTEDNESS. The Corporation will not, directly or
indirectly, Incur any Indebtedness unless, immediately after the date of the
Incurrence of such Indebtedness and after giving effect to the Incurrence of
such Indebtedness and the receipt and application of the proceeds thereof as if
such Indebtedness had been Incurred and the proceeds thereof applied on the
first day of the Determination Period, Consolidated Interest Coverage Ratio of
the Corporation exceeds 2.0 to 1.
Notwithstanding the foregoing, the Corporation may Incur the following
Indebtedness (although any Indebtedness so Incurred shall be included, to the
extent outstanding at the Transaction Date, in any subsequent determination of
the Consolidated Interest Coverage Ratio): (i) Indebtedness under the New Credit
Facility; (ii) Indebtedness outstanding on the Issue Date; (iii) Indebtedness
outstanding under the Notes; (iv) Indebtedness of the Corporation in respect of
Capital Lease Obligations Incurred after the Issue Date if after giving effect
to the Incurrence of such Indebtedness the aggregate amount of Priority
Indebtedness outstanding would not exceed the Priority Indebtedness Basket; (v)
Indebtedness under Interest Rate Protection Agreements, provided that the
obligations under such agreements are related to payment obligations on
Indebtedness otherwise permitted by the terms of this covenant; (vi)
Indebtedness of the Corporation to any wholly owned Restricted Subsidiary of the
Corporation (but only so long as such debt is held by such wholly owned
Restricted Subsidiary); (vii) Permitted Refinancing Indebtedness; (viii)
Indebtedness incurred in connection with a prepayment of the Notes pursuant to a
Change of Control, provided that (A) the principal amount of such Indebtedness
does not exceed the principal amount of the Notes prepaid plus all interest
accrued thereon and all related fees, expenses and redemption or repurchase
premiums related thereto (including any payments made in connection with
procuring any required lender or similar consents); (B) such Indebtedness has an
Average Life equal to or greater than the remaining Average Life of the Notes;
and (C) such Indebtedness does not mature prior to the Stated Maturity of the
Notes; and (ix) Indebtedness not otherwise permitted to be Incurred pursuant to
this paragraph or the preceding paragraph in an aggregate principal amount at
any one time outstanding not to exceed $125 million.
LIMITATION ON RESTRICTED SUBSIDIARY INDEBTEDNESS AND PREFERRED STOCK. The
Corporation will not permit any of its Restricted Subsidiaries to Incur,
directly or indirectly, any Indebtedness or issue any Preferred Stock, except:
(i) Indebtedness or Preferred Stock outstanding on the Issue Date; (ii)
Indebtedness or Preferred Stock issued to and held by the Corporation or any
wholly owned Restricted Subsidiary of the Corporation (but only so long as such
Indebtedness or Preferred Stock is held or owned by the Corporation or any
wholly owned Restricted Subsidiary of the Corporation); (iii) Indebtedness of a
Restricted Subsidiary in respect of Capital Lease Obligations if after giving
effect to the Incurrence of such Indebtedness the aggregate amount of Priority
Indebtedness outstanding would not exceed the Priority Indebtedness Basket; (iv)
Indebtedness under Interest Rate Protection Agreements, provided that the
obligations under such agreements are related to payment obligations on
Indebtedness otherwise permitted by the terms of this covenant; (v) Indebtedness
Incurred as Project Financing by a Foreign Restricted Subsidiary; (vi)
Indebtedness not otherwise permitted to be Incurred or Preferred Stock not
otherwise permitted to be issued pursuant to this paragraph if after giving
effect to the Incurrence of such Indebtedness the aggregate amount of Priority
Indebtedness outstanding would not exceed the Priority Indebtedness Basket;
provided that the aggregate amount of Indebtedness Incurred or Preferred Stock
issued by Domestic Restricted
41
<PAGE>
Subsidiaries pursuant to this clause (vi) shall not exceed $75 million; and
(vii) Indebtedness Incurred or Preferred Stock issued in exchange for, or the
proceeds of which are used to Refinance Indebtedness or Preferred Stock referred
to in clause (i) of this paragraph, to the extent that (A) the principal amount
of such Indebtedness or the liquidation value of such Preferred Stock so
Incurred or issued does not exceed the principal amount or liquidation value of
the Indebtedness or Preferred Stock so exchanged or Refinanced plus all interest
or dividends accrued thereon and all related fees, expenses and redemption and
repurchase premiums (including any payments made in connection with procuring
any required lender or similar consents), (B) the Indebtedness so Incurred or
Preferred Stock so issued has a Stated Maturity or final redemption date later
than the Stated Maturity or final redemption date (if any) of, and an Average
Life that is longer than that of, the Indebtedness or Preferred Stock being
exchanged or Refinanced and (C) the Indebtedness so Incurred or Preferred Stock
so issued has no greater recourse to the Property of the Corporation or its
subsidiaries than that of the Indebtedness or Preferred Stock being exchanged or
refinanced.
Any Indebtedness Incurred or Preferred Stock issued pursuant to the
preceding paragraph will be included, to the extent outstanding at the
Transaction Date in any subsequent determination of the Consolidated Interest
Coverage Ratio.
The Corporation will not, and will not permit any of its Restricted
Subsidiaries to, take any action or enter into any transaction or series of
transactions that would result in a Person becoming a Restricted Subsidiary
(whether through an acquisition, the redesignation of an Unrestricted Subsidiary
or otherwise) unless, after giving effect to such action, transaction or series
of transactions, on a pro forma basis, (i) the Corporation could Incur at least
$1.00 of additional Indebtedness pursuant to the first paragraph under the
"Limitation on Indebtedness" and (ii) such subsidiary could then Incur, pursuant
to clauses (ii) through (vi) of the first paragraph above, all Indebtedness as
to which it is obligated at such time.
LIMITATIONS ON RESTRICTED PAYMENTS. The Corporation will not, and will not
permit any of its Restricted Subsidiaries to, directly or indirectly, make any
Restricted Payment if, at the time of and after giving effect to the proposed
Restricted Payment (i) any Default or Event of Default has occurred and is
continuing, (ii) the Corporation could not incur at least $1.00 of additional
Indebtedness under the first paragraph of "-- Limitation on Indebtedness", or
(iii) the aggregate amount expended or declared for all Restricted Payments from
the Issue Date (the Fair Market Value of the amount so expended or committed, if
other than in cash, to be determined in good faith by the Board of Directors of
the Corporation) exceeds the sum of (A) 50% of the aggregate Consolidated Net
Income of the Corporation (or, if Consolidated Net Income shall be a deficit,
minus 100% of such deficit) commencing on the last day of the fiscal quarter
immediately preceding the Issue Date and ending on the last day of the fiscal
quarter immediately preceding the date of such Restricted Payment, (B) 100% of
the aggregate net proceeds, including cash and the Fair Market Value of Property
other than cash, received by the Corporation subsequent to the Issue Date from
capital contributions from its stockholders or from the issuance or sale (other
than to a Subsidiary) of Qualified Capital Stock of the Corporation or of any
convertible securities or debt obligations issued on or after the date of
issuance of the Notes which have been converted into, exchanged for or satisfied
by the issuance of Qualified Capital Stock and (C) $175.0 million (collectively,
the "Restricted Payment Basket").
The foregoing limitations do not prevent the Corporation from (i) paying a
dividend on its Capital Stock within 60 days after declaration thereof if, on
the declaration date, the Corporation could have paid such dividend in
compliance with the Indenture; (ii) acquiring shares of its Capital Stock (1)
solely in exchange for other shares of its Capital Stock (other than Redeemable
Stock), (2) to eliminate fractional shares for up to an aggregate consideration
in any fiscal year of the Corporation not to exceed $10.0 million, (3) pursuant
to an order of a court of competent jurisdiction, or (4) from an employee or
director of the Corporation in connection with repurchase provisions under
employee or director stock option and stock purchase agreements or plans or
other agreements to compensate employees or directors of the Corporation, but in
no event may such acquisition of its shares by the Corporation be for a price
greater than the higher of Fair Market Value and the price at which such
securities were sold to such employee or director by the Corporation; (iii)
purchasing or redeeming Indebtedness which is contractually subordinated to the
Notes in exchange for, or out of the proceeds of, the substantially concurrent
(1) sale or issuance of Capital Stock
42
<PAGE>
(other than Redeemable Stock) of the Corporation, or (2) incurrence of
Indebtedness of the Corporation that is at least as contractually subordinated
in right of payment to the Notes and has a Stated Maturity later than the Stated
Maturity of the Notes as the Indebtedness so refinanced and an Average Life
greater than the remaining Average Life of the Notes; (iv) the distribution or
redemption by the Corporation of any rights to purchase capital stock of the
Corporation or any other Person which rights are or were issued as part of a
shareholder rights plan; provided that any such redemption will be at a price
not to exceed [$0.01] per right; (v) the making of any payment required pursuant
to the Corporation's 1988 plan of recapitalization or the Corporation's 1993
plan of reorganization; provided that such payments shall not exceed $5 million
in the aggregate; and (vi) purchasing or redeeming up to 25% of the stock of any
Restricted Subsidiary to the extent the Restricted Payment Basket is not
exceeded. Further, in the case of a Qualified Receivables Transaction, the
foregoing limitations do not prevent a Receivables Subsidiary from acquiring
equity interests of a trust or other person established by such Receivables
Subsidiary to effect such Qualified Receivables Transaction.
The payments permitted to be made pursuant to clauses (ii)(1), (iii), (iv)
and (v) of the preceding paragraph shall be excluded for purposes of any future
calculations of the aggregate amount expended or declared for Restricted
Payments. The payments permitted to be made pursuant to clauses (i), (ii)(2),
(ii)(3), (ii)(4), and (vi) shall be included for purposes of any future
calculations of the aggregate amount expended or declared for Restricted
Payments.
LIMITATION UPON SECURED INDEBTEDNESS OF THE CORPORATION AND ITS RESTRICTED
SUBSIDIARIES. So long as any of the Notes are outstanding, the Corporation will
not itself, and will not permit any Restricted Subsidiary to, Incur any
Indebtedness secured by a Lien on any Principal Operating Property or on any
shares of stock or Indebtedness of any Restricted Subsidiary, without
effectively providing that the Notes (together with, if the Corporation so
determines, any other Senior Indebtedness of the Corporation or Indebtedness of
such Restricted Subsidiary then existing or thereafter created) shall be secured
equally and ratably with (or, at the Corporation's option, prior to) such
secured Indebtedness so long as such secured Indebtedness shall be so secured,
unless, after giving effect thereto, Priority Indebtedness would not exceed the
Priority Indebtedness Basket. This restriction does not apply to, and there will
be excluded from secured Indebtedness in any computation under such restriction,
Indebtedness secured by (i) Liens on property of, or on any shares of stock or
Indebtedness of, any Person existing at the time such Person becomes a
Restricted Subsidiary; (ii) Liens in favor of the Corporation or a wholly owned
Restricted Subsidiary; (iii) Liens in favor of governmental bodies to secure
progress, advance or other payments pursuant to any contract or provision of any
statute; (iv) certain Liens 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) Liens on, and limited to, property
(including leasehold estates), shares of stock or Indebtedness existing at the
time of acquisition thereof (including acquisition through merger or
consolidation and not put in place in contemplation of the transaction); (vi)
purchase money and construction Liens which are entered into within specified
time limits; (vii) Liens on the assets of a Receivables Subsidiary in a
Qualified Receivables Transaction; and (viii) any extension, renewal,
replacement or refunding of any Lien referred to in the foregoing clauses (i)
through (vii), inclusive.
LIMITATION UPON SALE AND LEASEBACK TRANSACTIONS. So long as any of the
Notes are outstanding, the Corporation will not itself, and will not permit any
Restricted Subsidiary to, enter into any Sale and Leaseback Transaction with
respect to any Principal Operating Property owned by them while the Notes are
outstanding.
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 Value with respect to such Sale and Leaseback
Transaction without equally and ratably securing the 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 Indebtedness of the
Corporation or Indebtedness of a Restricted Subsidiary an amount equal to the
greater of (A) the net proceeds of the sale
43
<PAGE>
of the Principal Operating Property leased or (B) the fair market value of the
Principal Operating Property leased at the time of entering into such
arrangement; or (iii) such arrangement is between the Corporation and a
wholly-owned Restricted Subsidiary or between Restricted Subsidiaries.
TRANSACTIONS WITH AFFILIATES. Neither the Corporation nor any Restricted
Subsidiary will be permitted to: (i) sell, lease, transfer, or otherwise dispose
of any of its properties, assets, or securities to; (ii) purchase any property,
assets, or securities from; or (iii) enter into any contract or agreement with,
or for the benefit of, an Affiliate, within the meaning of Rule 405 promulgated
by the Commission under the Securities Act, of the Corporation or a subsidiary
of the Corporation (other than the Corporation or a wholly owned subsidiary of
the Corporation) (an "Affiliate Transaction") other than Affiliate Transactions
(A) in the ordinary course of business with Affiliates which are directly or
indirectly controlled by the Corporation and are engaged in a similar or
complementary line of business, which Affiliate Transactions do not exceed: (a)
$25.0 million in any one Affiliate Transaction or series of related Affiliate
Transactions unless a majority of the disinterested members of the Board of
Directors of the Corporation determines that such Affiliate Transaction or
series of Affiliate Transactions is on terms not less favorable to the
Corporation or such Restricted Subsidiary than those that would apply to an
arms-length transaction with an unaffiliated party and (b) $100.0 million in any
one Affiliate Transaction or series of related Affiliate Transactions unless the
test set forth in clause (a) has been satisfied and the Board of Directors of
the Corporation shall have been advised by an independent financial advisor
that, in the opinion of such advisor, such Affiliate Transaction or series of
Affiliate Transactions is fair, from a financial point of view, to the
Corporation or such Restricted Subsidiary; and (B) with Affiliates other than
those described in clause (A) above, which in the aggregate do not exceed: (a)
$5.0 million in any one Affiliate Transaction or series of related Affiliate
Transactions unless an officer of the Corporation certifies in writing that such
Affiliate Transaction or series of Affiliate Transactions is on terms not less
favorable to the Corporation or such Restricted Subsidiary than those that would
apply to an arms-length transaction with an unaffiliated party; (b) $25.0
million in any one Affiliate Transaction or series of related Affiliate
Transactions unless a majority of the disinterested members of the Board of
Directors of the Corporation determines that such Affiliate Transaction or
series of Affiliate Transactions is on terms not less favorable to the
Corporation or such Restricted Subsidiary than those that would apply to an
arms-length transaction with an unaffiliated party and (c) $100.0 million in any
one Affiliate Transaction or series of related Affiliate Transactions unless the
test set forth in clause (b) has been satisfied and the Board of Directors of
the Corporation shall have been advised by an independent financial advisor
that, in the opinion of such advisor, such Affiliate Transaction or series of
Affiliate Transactions is fair, from a financial point of view, to the
Corporation or such Restricted Subsidiary; provided that (x) transactions
between or among the Corporation and/or its wholly owned Restricted Subsidiaries
will not be considered Affiliate Transactions and (y) transactions between a
Receivables Subsidiary and any Person in which the Receivables Subsidiary has an
investment as part of a Qualified Receivables Transaction will not be considered
an Affiliate Transaction, but only to the extent such transactions are solely in
connection with the Qualified Receivables Transaction. In addition, any other
Affiliate Transactions that are not covered by clause (A) or (B) of the
preceding sentence by reason of their size shall be on terms not less favorable
to the Corporation or such Restricted Subsidiary than those that would apply to
an arms-length transaction with an unaffiliated party.
The foregoing limitations do not apply to (i) certain transactions with an
officer or director of the Corporation or any Subsidiary of the Corporation
entered into in the ordinary course of business (including compensation or
employee benefit arrangements with any officer or director of the Corporation or
any Subsidiary of the Corporation) or (ii) transactions between the Corporation
and its wholly owned Restricted Subsidiaries or among its wholly owned
Restricted Subsidiaries or (iii) transactions in the ordinary course of business
consistent with past practice between the Corporation and CGC Inc., so long as
CGC Inc. remains a Restricted Subsidiary.
LIMITATION ON ASSET SALES. The Corporation will not, and will not permit
any Restricted Subsidiary to, consummate any Asset Sale unless: (i) the
Corporation or such Restricted Subsidiary, as the case may be, receives
consideration at least equal to the Fair Market Value of the Property disposed
of and (ii) at least 70% of the consideration received by the Corporation or
such Restricted Subsidiary for such Property is in the form of cash, cash
equivalents and Indebtedness from which the Corporation or such Restricted
Subsidiary (or another Restricted Subsidiary) is released provided that the
Corporation must, within 270 days of such Asset Sale, at the Corporation's
option, (1) reinvest an amount equal to the Net Cash Proceeds (or any portion
thereof) from such disposition in Additional Assets and/or (2) apply an amount
equal to such Net
44
<PAGE>
Cash Proceeds to the repayment of Senior Indebtedness and/or (3) offer to apply
an amount equal to such Net Cash Proceeds to the repayment of the Notes and
repurchase any Notes properly tendered in acceptance of such Prepayment Offer on
a pro rata basis at a purchase price at least equal to 100% of their principal
amount plus interest accrued to the date of such repurchase. In the event the
remaining Net Cash Proceeds resulting from any Asset Sale after giving effect to
the purchase of Additional Assets and/or the repayment of Senior Indebtedness,
are less than $25.0 million, the application of an amount equal to such
remaining Net Cash Proceeds to a pro rata offer to repurchase the Notes may be
deferred until such time as such remaining Net Cash Proceeds, together with
remaining Net Cash Proceeds from any prior or subsequent Asset Sales not
otherwise applied in accordance with this paragraph, are at least equal to $25.0
million. To the extent that any portion of the amount of Net Cash Proceeds
remains after compliance with the foregoing and provided that all Holders have
been given the opportunity to tender their Notes for repurchase as provided in
clause (3) above, the Corporation or such Restricted Subsidiary may use such
remaining amount for general corporate purposes.
Within five Business Days after 270 days from the date of an Asset Sale, the
Corporation shall, if it chooses (or is obligated) to apply an amount equal to
any remaining Net Cash Proceeds (or any portion thereof) to fund an offer to
repurchase the Notes, send a written Prepayment Offer Notice, by first-class
mail, to the Holders of the Notes. The Prepayment Offer Notice will also state
(i) that the Corporation is offering to purchase Notes pursuant to the
provisions of the Indenture described herein under "-- Limitation on Asset
Sales", (ii) that any Notes (or any portion thereof) accepted for payment (and
duly paid on the Purchase Date) pursuant to the Prepayment Offer will cease to
accrue interest after the Purchase Date, (iii) the Expiration Date of the
Prepayment Offer, which will be, subject to any contrary requirements of
applicable law, not less than 30 days nor more than 60 days after the date of
such Prepayment Offer, (iv) a Purchase Date (which shall be the settlement date
for the purchase of Notes and shall be within three business days after the
Expiration Date), (v) the aggregate principal amount of Notes to be purchased
and the purchase price thereof and (vi) a description of the procedure which a
Holder must follow and any other information necessary to tender all or any
portion of such Holder's Notes.
LIMITATION ON DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED
SUBSIDIARIES. The Corporation will not be permitted to, and will not permit any
Restricted Subsidiary to, directly or indirectly, create or otherwise cause or
suffer to exist any encumbrance or restriction (other than pursuant to law or
regulation) on the ability of any Restricted Subsidiary to (i) pay any dividend
on, or make any other distribution on account of, its capital stock or pay any
Indebtedness owed to the Corporation or a Restricted Subsidiary; (ii) make loans
or advances to the Corporation or a Restricted Subsidiary; or (iii) transfer any
of its property or assets to the Corporation or any other Restricted Subsidiary,
except for (a) restrictions in agreements existing as of the date of issuance of
the Notes; (b) restrictions in the Collateral Trust Agreement; (c) restrictions
on Foreign Restricted Subsidiaries relating to Project Financings; (d)
restrictions on Foreign Joint Ventures; (e) restrictions on Domestic Joint
Ventures, but only to the extent that the amounts invested by the Corporation in
the entities subject to such restrictions do not exceed $25.0 million in the
aggregate; (f) Indebtedness or other contractual requirements of a Receivables
Subsidiary solely in connection with a Qualified Receivables Transaction,
provided that such restrictions apply only to such Receivables Subsidiary; (g)
any encumbrance or restriction pursuant to an agreement relating to an
acquisition of Property, so long as the encumbrances or restrictions in any such
agreement relate solely to the Property so acquired and were not created in
connection with or in anticipation of such acquisition; (h) any encumbrance or
restriction relating to any Indebtedness of any Restricted Subsidiary at the
date on which such Restricted Subsidiary was acquired by the Corporation or any
Restricted Subsidiary (other than Indebtedness issued by such Restricted
Subsidiary in connection with or in anticipation of its acquisition); (i) any
encumbrance or restriction pursuant to an agreement effecting a permitted
refinancing of Indebtedness issued pursuant to an agreement referred to in the
foregoing clauses (a), (b), (g) and (h), so long as the encumbrances and
restrictions contained in any such refinancing agreement are no more restrictive
than the encumbrances and restrictions contained in such agreements; (j)
customary provisions restricting subletting or assignment of any lease of the
Corporation or any Restricted Subsidiary or provisions in agreements that
restrict the assignment of such agreement or any rights thereunder; (k) any
restriction on the sale or other disposition of assets or Property securing debt
as a result of a lien of the kind set forth in clauses (i)-(vii) of "--
Limitation
45
<PAGE>
Upon Secured Indebtedness of the Corporation and its Restricted Subsidiaries"
and (l) restrictions in agreements with Foreign Restricted Subsidiaries taking
the form of net worth maintenance tests and similar financial covenants.
RESTRICTED AND UNRESTRICTED SUBSIDIARIES. The Corporation may designate a
subsidiary (including a newly formed or newly acquired subsidiary) of the
Corporation or any of its Restricted Subsidiaries as an Unrestricted Subsidiary
if (i) such subsidiary does not have any obligations which, if in Default, would
result in a cross default on Indebtedness of the Corporation and (a) such
Subsidiary has total assets of $1,000 or less, or (b) such designation is
effective immediately upon such Person becoming a subsidiary of either the
Corporation or any of its Restricted Subsidiaries or (ii) such subsidiary is a
Receivables Subsidiary. Unless so designated as an Unrestricted Subsidiary, any
Person that becomes a subsidiary of the Corporation or any of its Restricted
Subsidiaries shall be classified as a Restricted Subsidiary thereof. Except as
provided in clause (i)(a) of this paragraph, no Restricted Subsidiary may be
redesignated as an Unrestricted Subsidiary. An Unrestricted Subsidiary may be
redesignated as a Restricted Subsidiary. The designation of an Unrestricted
Subsidiary or removal of such designation shall be made by the Board of
Directors of the Corporation or a committee thereof pursuant to a certified
resolution delivered to the Trustee and shall be effective as of the date
specified in the applicable certified resolution, which shall not be prior to
the date such certified resolution is delivered to the Trustee.
RESTRICTIONS ON MERGER
So long as any Notes are outstanding, the Corporation will not, except as
described below, consolidate with or merge into any other Person or sell or
transfer all or substantially all of its properties and assets to another Person
unless (i) the surviving entity is a company organized and existing under the
laws of the United States of America or a state thereof and expressly assumes,
by supplemental indenture satisfactory to the Trustee, the due and punctual
payment of the principal of (and premium, if any) and interest on all the Notes
and the due and punctual performance and observance of all covenants and
conditions of the Corporation in the Indenture; (ii) immediately before and
after giving effect to such transaction or series of related transactions on a
pro forma basis, no default or Event of Default (and no event that, after notice
or lapse of time, or both, would become an Event of Default), shall have
occurred and be continuing; (iii) immediately after giving effect to such
transaction or series of transactions on a pro forma basis (including, without
limitation, any Indebtedness Incurred or anticipated to be Incurred in
connection with such transaction or series of transactions), the Corporation (or
the surviving entity if the Corporation is not continuing) would be able to
Incur at least $1.00 of additional Indebtedness under the first paragraph of
"-- Limitation on Indebtedness"; and (iv) immediately after giving effect to
such transaction or series of transactions on a pro forma basis (including,
without limitation, any Indebtedness Incurred or anticipated to be Incurred in
connection with such transaction or series of transactions) as if such
transaction had occurred on the first day of the Determination Period, the
Corporation (or the surviving entity if the Corporation is not continuing) shall
have a Consolidated Net Worth equal to or greater than the Consolidated Net
Worth of the Corporation immediately prior to the transaction or series of
transactions. The foregoing restriction will not apply to the merger or
consolidation of a Restricted Subsidiary of the Corporation with or into the
Corporation or the merger or consolidation of two or more Restricted
Subsidiaries of the Corporation. In the event the Corporation reaches Investment
Grade Status and notwithstanding that the Corporation's Debt Rating thereafter
ceases to be rated Investment Grade by either S&P or Moody's or both the
restrictions contained in clauses (iii) and (iv) above shall cease to apply.
Because the term "all or substantially all" may not have an established meaning
and may depend on the facts and circumstances of a particular transaction,
including the qualitative as well as the quantitative aspects of such
transaction, there may be an uncertainty in the ability of holders or the
Indenture Trustee to determine when a sale of all or substantially all of the
assets has occurred and thus an uncertainty of holders or the Indenture Trustee
to determine as to whether a breach of this covenant has occurred.
EVENTS OF DEFAULT
The following are Events of Default under the Indenture with respect to the
Notes: (i) default in the payment of any principal or premium, if any, on the
Notes when the same becomes due and payable at maturity, upon redemption or upon
repurchase pursuant to a Prepayment Offer as described in "Limitation on Asset
Sales" above or pursuant to a Change of Control or other Designated Event as
described in "Change of Control" above; (ii) default for 30 days in the payment
of any interest on the Notes; or (iii) default for 60 days after written notice
thereof in the performance of any covenant (other than those covered by
46
<PAGE>
clauses (i) and (ii) of this paragraph) applicable to the Notes; (iv)
acceleration of 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; (v) the entry by a court of competent jurisdiction of one or more
judgments or orders against the Corporation or any of its Restricted
Subsidiaries in an uninsured aggregate amount in excess of $50 million and such
judgment or order is not discharged, waived, stayed or satisfied for a period of
45 consecutive days; or (vi) certain events of bankruptcy, insolvency or
reorganization. No Event of Default with respect to a particular series of
securities issued under the Indenture 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 (vi))
shall occur and be continuing with respect to the Notes, the Indenture Trustee
or the holders of not less than 25% in aggregate principal amount of the Notes
thereby then outstanding under the Indenture (voting as one class) by notice to
the Corporation may declare the principal of the Notes to be due and payable
immediately and if an Event of Default under clause (vi) shall occur and be
continuing, all such Notes shall become due and payable immediately without any
further action or notice. Any Event of Default with respect to the Notes may be
waived, and a declaration of acceleration rescinded, by the holders of a
majority in aggregate principal amount of the Notes except in a case of failure
to pay principal or premium, if any, or interest in respect of the Notes or
failure to honor change of control provisions. The Indenture provides that the
Indenture Trustee may withhold notice to the security holders 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
security holders to do so.
Subject to the provisions of the Indenture relating to the duties of the
Indenture Trustee in case an Event of Default occurs and is continuing, the
Indenture Trustee will be under no obligation to exercise any of its rights or
powers under the Indenture, at the request, order or direction of any of the
security holders, unless such security holders have offered to the Indenture
Trustee reasonable indemnity. Subject to such provisions for the indemnification
of the 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
Indenture Trustee, or exercising any trust or power conferred on the Indenture
Trustee.
The Corporation is required to file with the Indenture Trustee annually an
officers' certificate as to the absence of certain defaults under the terms of
the Indenture.
DEFEASANCE
The Corporation, at its option, (i) will be discharged from any and all
obligations in respect of the Notes (except for certain obligations to register
the transfer or exchange of the Notes, replace such stolen, lost, destroyed or
mutilated certificates for the Notes, 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 the Notes, including those
described above if the Corporation (A) irrevocably deposits with the Indenture
Trustee, in trust for the holders of the Notes, (1) money or (2) 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 of, if any) and interest on the Notes on the dates such payments
are due in accordance with the terms of the Notes and (B) shall have paid or
caused to be paid all other sums payable with respect to the Notes. To exercise
either of the options described above, the Corporation is required, among other
things, to deliver to the Indenture Trustee an opinion of nationally recognized
tax counsel to the effect that holders of the Notes 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 Indenture have been 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 Indenture Trustee.
47
<PAGE>
MODIFICATION OF THE INDENTURE
The Indenture contains provisions permitting the Corporation and the
Indenture Trustee to modify or otherwise amend the Indenture, 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 the Indenture 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
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 or premium 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;
(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; or
(iv) modify or eliminate any of the provisions of the Indenture relating to a
Change of Control or the obligation of the Corporation to offer to purchase
Notes as set forth in " -- Limitation on Asset Sales," without, in the case of
this clause (iv), the consent of holders of not less than two-thirds in
principal amount of securities so affected.
CERTAIN DEFINITIONS
"Additional Assets" means any Property (other than cash or cash equivalents)
used in or substantially related to the businesses engaged in by the Corporation
or its Restricted Subsidiaries as of the Issue Date.
"Affiliate" means, as to any Person, any other Person which directly or
indirectly controls, or is under common control with, or is controlled by, such
Person. As used in this definition, "control" (including, with its correlative
meanings, "controlled by" and "under common control with") shall mean
possession, directly or indirectly, of power to direct or cause the direction of
management or policies (whether through ownership of securities or partnership
or other ownership interests, by contract or otherwise), provided that, in any
event, (a) any Person which owns directly or indirectly 10% or more of the
securities having ordinary voting power for the election of directors or other
governing body of a company or 10% or more of the partnership or other ownership
interests of any other Person (other than as a limited partner of such other
Person) will be deemed to control such company or other Person and (b) each
Unrestricted Subsidiary shall be deemed to be an Affiliate of the Corporation
and of each other Restricted Subsidiary and Unrestricted Subsidiary.
Notwithstanding the foregoing, no Person (other than the Corporation or any
subsidiary of the Corporation) in whom a Receivables Subsidiary makes an
investment solely in connection with a Qualified Receivables Transaction shall
be deemed to be an Affiliate of the Corporation or any of its subsidiaries with
respect to such investment (but may be deemed an Affiliate with respect to other
transactions, if applicable).
"Asset Sale" means, with respect to any Person, any transfer, conveyance,
sale, lease or other disposition (including, without limitation, dispositions
pursuant to any consolidation or merger, but excluding any Sale and Leaseback
Transaction)(an "Assignment") by such Person or any of its Restricted
Subsidiaries (including (x) issuances of capital stock by any Restricted
Subsidiary of such Person except to such Person or a wholly owned Restricted
Subsidiary of such Person and (y) any consolidation, merger or other sale of any
such Restricted Subsidiary with, into or to another person in a transaction in
which such Restricted Subsidiary ceases to be a Restricted Subsidiary, but
excluding a disposition by a Restricted Subsidiary of such Person to such Person
or a wholly owned Restricted Subsidiary of such Person or by such Person to a
wholly owned Restricted Subsidiary of such Person) in any single transaction or
series of transactions of (i) shares of Capital Stock (other than directors'
shares of Qualified Capital Stock) or other ownership interests of a subsidiary
of such Person or (ii) any other Property (other than cash or cash equivalents)
of such Person or any of its Restricted Subsidiaries (other than sales within
the ordinary course of business) where the Fair Market Value of the shares,
ownership interests, or other Property being sold, leased, or otherwise disposed
of, in a single transaction or series of transactions, exceeds $25 million
(except in the case of issuances of capital stock described in clause (x) above,
as to which the $25 million threshhold will not apply); provided that the term
"Asset Sale" shall not include (a) any asset disposition permitted pursuant
48
<PAGE>
to "-- Restrictions on Merger" which constitutes a disposition of all or
substantially all of the Corporation's assets or properties, (b) sales of
accounts receivable and related assets of the type specified in the definition
of "Qualified Receivables Transaction" to a Receivables Subsidiary, (c)
transfers of accounts receivable and related assets of the type specified in the
definition of "Qualified Receivables Transaction" (or a fractional undivided
interest therein) by a Receivables Subsidiary in a Qualified Receivables
Transaction, (d) the surrender or waiver of contract rights or the settlement,
release or surrender of contract, tort or other claims of any kind, (e) the
grant of any license of patents, trademarks, registrations therefor and other
similar intellectual property or (f) any Assignment of Property to any Joint
Venture to the extent all such Assignments do not in the aggregate exceed 7.5%
of the Corporation's consolidated Property, Plant and Equipment as shown or
reflected on the Corporation's consolidated balance sheet most recently filed
under the Exchange Act. In the case of clauses (b) and (c) above, sales or
transfers of accounts receivable and related assets shall not be excluded from
the definition of Asset Sale to the extent that the Corporation records debt on
its consolidated balance sheet in connection therewith in excess of 90% of the
consolidated net book value of the Corporation's accounts receivable as shown or
reflected in the Corporation's consolidated balance sheet most recently filed
under the Exchange Act.
"Attributable Value" means, as to any particular lease under which any
Person is at the time liable, other than a Capital Lease Obligation, and at any
date as of which the amount thereof is to be determined, the greater of (i) the
Fair Market Value of the property subject to such lease, or (ii) the total net
amount of rent required to be paid by such Person under such lease during the
initial term thereof as determined in accordance with GAAP, discounted from the
last date of such initial term to the date of determination at a rate per annum
equal to the interest rate borne by the 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 rent payable by the lessee with respect to such
period after excluding amounts required to be paid on account of insurance,
taxes, assessments, utility, operating and labor costs 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.
"Average Life" means, as of any date, with respect to any debt security or
Redeemable Stock that is Preferred Stock, the quotient obtained by dividing (1)
the sum of the products of (x) the number of years from such date to the date of
each scheduled principal or redemption payment (including any sinking fund or
mandatory redemption payment requirements) of such debt or equity security
multiplied in each case by (y) the amount of such principal or redemption
payment by (ii) the sum of all such principal or redemption payments.
"Capital Lease Obligation" of any Person means the obligation to pay rent or
other payment amounts under a lease of (or other Indebtedness arrangement
conveying the right to use) real or personal property of such Person which is
required to be classified and accounted for as a capital lease or a liability on
the face of a balance sheet of such Person in accordance with GAAP. The amount
of any such Capital Lease Obligation shall be the capitalized amount thereof,
determined in accordance with GAAP and as set forth or reflected in the
Corporation's financial statements most recently filed under the Exchange Act.
"Capital Stock" in any Person means any and all shares, interests,
participations or other equivalents in the equity interest (however designated)
in such Person and any rights (other than debt securities convertible into an
equity interest), warrants or options to subscribe for or to acquire an equity
interest in such Person.
"Change of Control" means an event or series of events by which (i)(A) the
Corporation consolidates with or merges into any other Person or conveys,
transfers or leases all or substantially all of its assets to any Person or
group of Persons or (B) any Person consolidates with or merges into the
Corporation, in the case of either (A) or (B) pursuant to a transaction or
series of transactions (other than a transaction or series of transactions
between the Corporation and a wholly owned Restricted Subsidiary of the
Corporation if permitted under "Restrictions on Merger") as a result of which
the existing shareholders of the Corporation immediately prior thereto would
hold less than 50% of the combined voting power of the Voting Stock of the
49
<PAGE>
surviving Person, or (ii) any "person" or "group" (each as defined in Section
13(d)(3) and 13d-5 of the Exchange Act) becomes the "beneficial owner" (as
defined under Rule 13d-3 of the Exchange Act), directly or indirectly, of more
than 50% of the total voting power of all classes of Voting Stock of the
Corporation, or (iii) during any period of two consecutive years, individuals
who at the beginning of such period constituted the Board of Directors (together
with any new or replacement directors whose election by the Board of Directors
or whose nomination for election by the Corporation's stockholders was approved
by a vote of at least 66 2/3% of the directors then still in office who were
either directors at the beginning of such period or whose election or nomination
for election was previously so approved) cease for any reason to constitute a
majority of the directors then in office; provided that in the event that a
Person or group that is beneficial owner of 50% or less of the Voting Stock of
the Corporation is able to elect a majority of the Board pursuant to an
agreement with another holder or group of holders, a Change of Control will be
deemed to have occurred.
"Company" includes corporations, associations, companies and business
trusts.
"Consolidated Interest Coverage Ratio" means as of the Transaction Date, the
ratio of (i) the aggregate amount of Consolidated EBITDA of such Person, to (ii)
the aggregate Consolidated Interest Expense of such Person, in each case for the
Determination Period assuming for the purposes of this measurement the
continuation of market interest rates prevailing on the Transaction Date and
base interest rates in respect of floating interest rate obligations equal to
the base interest rates on such obligations in effect as of the Transaction
Date; PROVIDED that if such Person or any of its Restricted Subsidiaries is a
party to any Interest Rate Protection Agreements which would have the effect of
changing the interest rate on any Indebtedness of such Person or any of its
subsidiaries for such Determination Period (or a portion thereof), the resulting
rate shall be used for such Determination Period or portion thereof; and
PROVIDED FURTHER that any Consolidated Interest Expense with respect to debt
Incurred or retired by such Person or any of its Restricted Subsidiaries during
theDetermination Period shall be calculated as if such debt was so Incurred or
retired on the first day of the Determination Period; and PROVIDED FURTHER that
if the transaction giving rise to the need to calculate the Consolidated
Interest Coverage Ratio would have the effect of increasing or decreasing
EBITDA, EBITDA shall be calculated on a pro forma basis as if such transaction
had occurred on the first day of the Determination Period and if, during the
same Determination Period (x) such Person or any of its subsidiaries shall have
engaged in any Asset Sale, EBITDA for such period shall be reduced by an amount
equal to the EBITDA (if positive), or increased by an amount equal to the EBITDA
(if negative), directly attributable to the assets which are the subject of such
Asset Sale for such period calculated on a pro forma basis as if such Asset Sale
and any related retirement of Indebtedness had occurred on the first day of such
period or (y) such Person or any of its Restricted Subsidiaries shall have
acquired any material assets or Person outside of the ordinary course of
business (including in a pooling of interests transaction), EBITDA shall be
calculated on a PRO FORMA BASIS as if such acquisition had occurred on the first
day of such period.
"Consolidated Interest Expense" means, with respect to any Person for any
period, without duplication (A) the sum of (1) the aggregate amount of cash and
non-cash interest expense (including capitalized interest and the interest
component of any Capital Lease Obligation) of such Person and its Restricted
Subsidiaries for such period as determined on a consolidated basis In accordance
with GAAP in respect of Indebtedness (including, without limitation, (x) any
amortization of debt discount (but excluding non-cash amortization of debt
discount associated with the implementation of the Restructuring), (y) net costs
associated with Interest Rate Protection Agreements (including any amortization
of discounts) and (z) all accrued interest; (ii) Preferred Stock dividends of
such Person (and of its Restricted Subsidiaries if paid to a Person other than
such Person or its Restricted Subsidiaries) declared and payable in cash
multiplied by a fraction the numerator of which is one and the denominator of
which is one minus the Corporation's effective tax rate for such period; (iii)
the portion of any rental obligation of such Person or its Restricted
Subsidiaries in respect of any Capital Lease Obligation allocable to interest
expense in accordance with GAAP; (iv) the portion of any rental obligation of
such Person or its Restricted Subsidiaries in respect of any Sale and Leaseback
Transaction allocable to interest expense (determined as if such were treated as
a Capital Lease Obligation); and (v) to the extent any Indebtedness of any other
Person is Guaranteed by such Person or any of its Restricted Subsidiaries, the
aggregate amount of interest paid, accrued or scheduled to be paid or
50
<PAGE>
accrued, by such other Person during such period attributable to any such
Indebtedness, minus (B) to the extent included in (A) above, amortization or
write-off of deferred financing costs of such Person and its Restricted
Subsidiaries during such period and any charge related to any premium or penalty
paid in connection with redeeming or retiring any Indebtedness of such Person
and its Restricted Subsidiaries prior to its Stated Maturity; in the case of
both (A) and (B) above, after elimination of intercompany accounts among such
Person and its Restricted Subsidiaries and as determined in accordance with GAAP
and excluding the amortization of capitalized reorganization debt discount costs
associated with the revaluation of assets and liabilities with respect to the
Restructuring as determined in accordance with GAAP and as set forth or
reflected in the Corporation's financial statements most recently filed under
the Exchange Act.
"Consolidated Net Income" of any Person means, for any period, the aggregate
net income (or net loss) of such Person and its Restricted Subsidiaries for such
period on a consolidated basis determined in accordance with GAAP; provided that
there shall be excluded therefrom, without duplication (a) all items classified
as extraordinary, (b) any net loss or net income of any Person other than such
Person and its Restricted Subsidiaries, except to the extent of the amount of
dividends or other distributions actually paid to such Person or its Restricted
Subsidiaries by such other Person during such period, (c) gains or losses in
respect of Asset Sales by such Person or its Restricted Subsidiaries, (d) the
net income of any Restricted Subsidiary of such Person to the extent that the
payment of dividends or other distributions to such Person is restricted by
contract or otherwise, except for any dividends or distributions actually paid
by such Restricted Subsidiary to such Person; provided that the net income of
all such Restricted Subsidiaries shall be excluded from Consolidated Net Income
only to the extent it exceeds $2 million per annum and (e) amortization of
excess reorganization value and capitalized reorganization debt discount costs
associated with the revaluation of assets and liabilities with respect to the
Restructuring, in each case as set forth or reflected in the Corporation's
financial statements most recently filed under the Exchange Act.
"Consolidated Net Tangible Assets" means the aggregate amount of assets
(including investments in Unrestricted Subsidiaries, but less applicable
reserves and other properly deductible items) minus (a) all liabilities and
liability items 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) the asset value as reflected in the balance sheet
of all goodwill, trade names, trademarks, patents, unamortized excess
reorganization value, unamortized debt discount and expense and other like
intangibles, in each case as determined in accordance with GAAP and as set forth
or reflected in the Corporation's consolidated balance sheet most recently filed
under the Exchange Act.
"Consolidated Net Worth" of any Person means the stockholders' equity of
such Person and its Restricted Subsidiaries, as determined on a consolidated
basis in accordance with GAAP, less amounts attributable to Redeemable Stock of
such Person and its Restricted Subsidiaries.
"Consolidated EBITDA" of any Person means, for any period, the Consolidated
Net Income of such Person, increased (to the extent deducted in determining
Consolidated Net Income) by the sum of (i) all income taxes of such Person and
its Restricted Subsidiaries paid or accrued in accordance with GAAP, (ii) the
Consolidated Interest Expense of such Person and its Restricted Subsidiaries for
such period, (iii) depletion, depreciation and amortization expenses of such
Person and its Restricted Subsidiaries for such period, (iv) other non-cash
items of such Person and its Restricted Subsidiaries for such period to the
extent such non-cash items reduced Consolidated Net Income, MINUS non-cash items
to the extent such non-cash items increased the Consolidated Net Income of such
Person and its Restricted Subsidiaries for such period; and (v) items shown as
"Other Expense" on the consolidated statement of earnings of such Person and its
Restricted Subsidiaries for such period, but only to the extent such items
reduced Consolidated Net Income by $3 million or less on an annualized basis
during such period.
"Credit Facility" means the bank credit facility entered into on
, 1995 between the Corporation, on the one hand, and the banks
signatory thereto on the other, and all related notes, collateral
51
<PAGE>
documents, guarantees, instruments and other agreements executed in connection
therewith, as the same may be amended, modified, supplemented, restated or
Refinanced from time to time, under which the Corporation is permitted to borrow
up to $ .
"Debt Rating" means the actual rating assigned to the Notes by Moody's or
S&P, as the case may be. (The Indenture provides that the Corporation will use
its best efforts to cause both Moody's and S&P to make a rating of the Notes
publicly available, but in the event that either Moody's or S&P does not make a
rating of the Notes publicly available, the Indenture provides that the
Corporation shall select any other nationally recognized securities rating
agency to make such a rating. In such event, the terms "Moody's" and "S&P," as
the case may be, mean, for purposes of this definition, such other nationally
recognized securities rating agency.)
"Default" means any event, act or condition the occurrence of which is, or
after notice or the passage of time or both would be, an Event of Default.
"Designated Event" shall be deemed to have occurred at such time as (a) a
Change of Control occurs or (b) a Designated Restricted Payment Event occurs.
"Designated Restricted Payment Event" means a (i) declaration or payment of
any dividend on, or the making of any distribution on account of, the
Corporation's capital stock or (ii) purchase, redemption, or acquisition or
retirement for value of any capital stock (including any option, warrant or
right to purchase capital stock) of the Corporation owned beneficially by a
Person other than a wholly owned Restricted Subsidiary of the Corporation, by
the Corporation or any subsidiary of the Corporation, if the aggregate dividends
and repurchases referred to in clauses (i) and (ii) above for the consecutive
twelve month period ending on the Transaction Date exceeds one half of the
Consolidated Net Income of the Corporation for the eight fiscal quarters
immediately prior to the Transaction Date for which consolidated financial
statements are publicly available.
"Determination Period" means the four consecutive fiscal periods for which
consolidated financial statements in respect thereof are available immediately
prior to the applicable Transaction Date.
"Domestic Joint Ventures" means Joint Ventures having their primary business
operations inside the United States.
"Domestic Restricted Subsidiary" means a Restricted Subsidiary having its
primary business operations inside the United States.
"Exchange Act" means the Securities Exchange Act of 1934, as amended from
time to time, and the rules and regulations promulgated thereunder.
"Fair Market Value" means, with respect to the total consideration received
pursuant to any Asset Sale or any non-cash consideration received by any Person,
the fair market value of such consideration as determined in good faith by the
Board of Directors or a committee thereof.
"Fiscal year" means, with respect to the Corporation, the twelve consecutive
months ending December 31.
"Foreign Joint Ventures" means Joint Ventures having their primary business
operations outside the United States.
"Foreign Restricted Subsidiary" means a Restricted Subsidiary having its
primary business operations outside the United States.
"Full Rating Category" means (i) with respect to S&P, any of the following
categories: BB, B, CCC, CC, and C, and (ii) with respect to Moody's, any of the
following categories: Ba, B, Caa, Ca, and C. In determining whether the rating
of the Notes has decreased by the equivalent of one Full Rating Category,
gradation within Full Rating Categories (+ and - for S&P; 1, 2, and 3 for
Moody's) shall be taken into account (e.g., with respect to S&P, a decline in
rating from BB+ to BB-, or from BB to B+, will constitute a decrease of less
than one Full Rating Category.)
52
<PAGE>
"GAAP" or "generally accepted accounting principles," with respect to any
computation required or permitted hereunder shall, except as otherwise
specifically provided, mean such accounting principles as are generally accepted
in the United States of America at the date of such computation.
"Guarantee" by any Person means any obligation, contingent or otherwise, of
such Person guaranteeing or having the economic effect of guaranteeing any
Indebtedness of any Person (the "primary obligor") in any manner, whether
directly or indirectly, including, without limitation, any obligation of such
Person, (i) to purchase or pay (or advance or supply funds for the purchase of
payment of) such Indebtedness or other obligation of such other Person (whether
arising by virtue of partnership arrangements, or by agreement to keep-well, to
purchase assets, goods, securities or services, to take-or-pay, or to maintain
financial statement conditions or otherwise) or (ii) entered into for purposes
of assuring in any other manner the obligee of such Indebtedness or other
obligation of the payment thereof or to protect such obligee against loss in
respect thereof (in whole or in part); PROVIDED, HOWEVER, that the term
"Guarantee" will not include endorsements for collection or deposit in the
ordinary course of business (and "Guaranteed", "Guaranteeing" and "Guarantor"
shall have meanings correlative to the foregoing).
"Incur" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (by conversion, exchange or otherwise), extend,
assume, Guarantee or otherwise become liable in respect of such Indebtedness or
other obligation or the recording, as required pursuant to GAAP or otherwise, of
any such Indebtedness or obligation on the balance sheet of such Person (and
"Incurrence," "Incurred," and "Incurrable" and "Incurring" shall have meanings
correlative to the foregoing); provided, however, that a change in GAAP that
results in an obligation of such Person that exists at such time becoming
Indebtedness shall not be deemed an Incurrence of such Indebtedness.
"Indebtedness" means at any time (without duplication), with respect to any
Person, whether recourse is to all or a portion of the assets of such Person,
and whether or not contingent, (i) any obligation of such Person for borrowed
money, (ii) any obligation of such Person evidenced by bonds, debentures, notes,
Guarantees or other similar instruments, (iii) any reimbursement obligation of
such Person with respect to letters of credit, bankers' acceptances or similar
facilities issued for the account of such Person (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) any obligation of such Person issued or assumed as the deferred purchase
price of Property or services (but excluding trade accounts payable or accrued
liabilities arising in the ordinary course of business), (v) any Capital Lease
Obligation of such Person, (vi) the maximum fixed redemption or repurchase price
of Redeemable Stock of such Person at the time of determination, (vii) any
payment obligation of such Person under Interest Rate Protection Agreements at
the time of determination, (viii) the Attributable Value of any obligation to
pay rent or other payment amounts of such Person with respect to any Sale and
Leaseback Transaction to which such Person is a party, and (ix) any obligation
of the type referred to in clauses (i) through (viii) of this paragraph of
another Person secured by any Lien on any property or asset of such Person
(whether or not such obligation is assumed by such Person), the amount of such
obligation being deemed to be the lesser of the value of such property or asset
or the amount of the obligations so secured. Notwithstanding the foregoing, the
following shall not constitute Indebtedness: (x) obligations Incurred in
connection with currency hedges and energy hedges entered into in the ordinary
course of business and (y) Indebtedness of any Person existing at the time such
Person becomes a Restricted Subsidiary if such Indebtedness is defeased in
accordance with its terms or, in the event that defeasance is not provided for
in the instruments defining such Indebtedness, the Corporation irrevocably
deposits in trust for the holders of such Indebtedness money or 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 of, if any) and interest on such Indebtedness on the dates such
payments are due in accordance with the terms thereof and shall pay or cause to
be paid all other sums payable with respect thereto. For purposes of the second
preceding sentence, the maximum fixed repurchase price of any Redeemable Stock
that does not have a fixed repurchase price shall be calculated in accordance
with the terms of such
53
<PAGE>
Redeemable Stock as if such Redeemable Stock were repurchased on any date on
which Indebtedness shall be required to be determined pursuant to this
Indenture; provided, however, that if such Redeemable Stock is not then
permitted to be repurchased, the repurchase price shall be the book value of
such Redeemable Stock. The amount of Indebtedness of any Person at any date
shall be the outstanding balance at such date of all unconditional obligations
as described above and the maximum liability of any contingent obligations in
respect thereof at such date.
"Interest Rate Protection Agreement" means, with respect to any Person, any
interest rate swap agreement, interest rate cap agreement, currency swap
agreement or other financial agreement or arrangement designed to protect such
Person or its Restricted Subsidiaries against fluctuations in interest rate or
currency exchange rates, as in effect from time to time.
"Investment Grade" means a rating of at least BBB- (or the equivalent) or
higher by S&P and Baa3 (or the equivalent) or higher by Moody's.
"Investment Grade Status" shall be deemed to have been reached on the date
that the Debt Rating by both Moody's and S&P is Investment Grade.
"Issue Date" means the first day on which the Notes are issued.
"Joint Ventures" means joint ventures or other risk sharing arrangements
(which may include partnerships or corporations) the purpose of which is to
engage in the same or complementary lines of business as the Corporation or a
Restricted Subsidiary or in businesses consistent with the fundamental nature of
the operating business of the Corporation or a Restricted Subsidiary.
"Lien" means, with respect to any Property, any mortgage or deed of trust,
pledge, hypothecation, assignment, deposit arrangement, security interest, lien
(statutory or other), charge, encumbrance, preference, priority or other
security or similar agreement or preferential arrangement of any kind or nature
whatsoever on or with respect to such Property (including without limitation,
any conditional sale or other title retention agreement having substantially the
same economic effect as any of the foregoing).
"Moody's" means Moody's Investors Service or any successor to the rating
agency business thereof.
"Net Cash Proceeds" from any Asset Sale by any Person or its Restricted
Subsidiaries means cash, cash equivalents or readily marketable securities
received, net of (i) all reasonable out-of-pocket expenses of such Person or
such Restricted Subsidiary Incurred in connection with an Asset Sale of such
type, including, without limitation, all legal, title and recording tax
expenses, commissions and other fees and expenses Incurred (but excluding any
finder's fee or broker's fee payable to any Affiliate of such Person) and
all federal, state, provincial, foreign and local taxes arising in connection
with such Asset Sale that are paid or required to be accrued as a liability
under GAAP by such Person or its Restricted Subsidiaries, (ii) all payments made
by such Person or its Restricted Subsidiaries on any Indebtedness which is
secured by such Properties in accordance with the terms of any Lien upon or with
respect to such Properties or which must, by the terms of such Lien, or in order
to obtain a necessary consent to such Asset Sale or by applicable law, be repaid
out of the proceeds from such Asset Sale, and (iii) all distributions and other
payments made to minority interest holders in Restricted Subsidiaries of such
Person as a result of such Asset Sale (except for distributions under this
clause) (iii) made to Affiliates of such Person or Restricted Subsidiaries);
provided that, in the event that any consideration for an Asset Sale (which
would otherwise constitute Net Cash Proceeds) is required to be held in escrow
pending determination of whether a purchase price adjustment will be made, such
consideration (or any portion thereof) shall become Net Cash Proceeds only at
such time as it is released to such Person or its Restricted Subsidiaries from
escrow, and provided that any non-cash consideration received in connection with
an Asset Sale, which is within 90 days converted to cash, shall be deemed to be
Net Cash Proceeds at such time and shall thereafter be applied in accordance
with "-- Limitation on Asset Sales."
"Permitted Refinancing Indebtedness" means Indebtedness of the Corporation,
the proceeds of which are used to Refinance outstanding Indebtedness of the
Corporation or any Restricted Subsidiary, provided that (i) if the Indebtedness
being Refinanced is pari passu with or subordinated in right of payment to the
54
<PAGE>
Notes, then such Indebtedness is pari passu or subordinated in right of payment
to, as the case may be, the Notes at least to the same extent as the
Indebtedness being Refinanced, (ii) such Indebtedness is scheduled to mature no
earlier than the Indebtedness being Refinanced and (iii) such Indebtedness has
an Average Life at the time such Indebtedness is Incurred that is equal to or
greater than the Average Life of the Indebtedness being Refinanced, and (iv)
such Indebtedness is in an aggregate principal amount (or, if such Indebtedness
is issued at a price less than the principal amount thereof, has an aggregate
original issue price) not in excess of the aggregate principal amount then
outstanding of the Indebtedness being Refinanced (or if the Indebtedness being
Refinanced was issued at a price less than the principal amount thereof, then
not in excess of the amount of liability in respect thereof determined in
accordance with GAAP) plus all interest accrued thereon and all related fees,
expenses, and redemption or repurchase premiums (including any payments made in
connection with procuring any required lender or similar consents).
"Preferred Stock," as applied to the Capital Stock of any Person, means
Capital Stock of such Person of any class or classes (however designated) that
ranks prior, as to the payment of dividends or as to the distribution of assets
upon any voluntary or involuntary liquidation, dissolution or winding up of such
Person, to shares of Capital Stock of any other class of such Person.
"Principal Operating Property" is any 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 any facility acquired for the control or abatement of atmospheric
pollutants or contaminants, water pollution, noise, odor or other pollution.
"Priority Indebtedness" means (without duplication) (a) the Capital Lease
Obligations of (x) the Corporation Incurred pursuant to clause (iv) of
"Limitations on Indebtedness" or (y) any Restricted Subsidiary of the
Corporation Incurred pursuant to clause (iii) of "Limitation on Restricted
Subsidiary Indebtedness and Preferred Stock," (b) Indebtedness or Preferred
Stock of any Restricted Subsidiary of the Corporation Incurred pursuant to
clause (vi) of "Limitation on Restricted Subsidiary Indebtedness and Preferred
Stock," (c) Indebtedness of the Corporation Incurred after the Issue Date which
is secured by a Lien of the type described in "Limitation Upon Secured
Indebtedness of the Corporation and its Restricted Subsidiaries," but with
respect to which the Notes are not equally and ratably secured and (d) the
Attributable Value of any Sale and Leaseback Transactions referred to in clause
(i) of the second paragraph of "Limitation Upon Sale and Leaseback Transactions"
to the extent entered into after the Issue Date and not included under clause
(a) above. Following the Corporation achieving Investment Grade Status, clause
(a)(x) above will no longer be applicable.
"Priority Indebtedness Basket" means the greater of (a) 5% of Consolidated
Net Tangible Assets of the Corporation and (b) $225 million.
"Project Financing" means Indebtedness incurred to finance the construction,
development or acquisition of property or assets, with respect to which
Indebtedness recourse is limited to (x) the property or assets constituting all
or a portion of the project being financed with the proceeds of such
Indebtedness and the funds generated from such project upon the completion of
such project, (y) the entity undertaking such project if such entity exists for
the primary purpose of operating such project, and/or (z) a Restricted or
Unrestricted Subsidiary to the extent it Guarantees such Indebtedness; provided
that Indebtedness associated with any Guarantee made by a Restricted Subsidiary
shall be charged against the Priority Indebtedness Basket (unless to do so would
be duplicative).
"Property" means, with respect to any Person, any interest of such Person in
any kind of property or asset, whether real, personal or mixed, or tangible or
intangible, including, without limitation, Capital Stock in any other Person.
"Qualified Capital Stock" means Capital Stock of the Corporation or any of
its Restricted Subsidiaries that does not by its terms require any dividends,
distributions, mandatory repayment or redemption prior to the first anniversary
following the Stated Maturity of the Notes.
"Qualified Receivables Transaction" means any transaction or series of
transactions that may be entered into by the Corporation or any of its
subsidiaries pursuant to which the Corporation or any of its
55
<PAGE>
subsidiaries may sell, convey or otherwise transfer to (a) a Receivables
Subsidiary (in the case of a transfer by the Corporation or any of its
subsidiaries) and (ii) any other person (in the case of a transfer by a
Receivables Subsidiary), or may grant a security interest in, any accounts
receivable (whether now existing or arising in the future) of the Corporation or
any of its subsidiaries, and any assets related thereto including, without
limitation, all collateral securing such accounts receivable, all contacts and
all guarantees or other obligations in respect of such accounts receivable,
proceeds of such accounts receivable and other assets which are customarily
transferred or in respect of which security interests are customarily granted in
connection with asset securitization transactions involving accounts receivable.
"Rating Decline" means the occurrence of the following on or within 90
calendar days after, the date of public disclosure of the occurrence of a
Designated Event (which period will be extended, for a period not to exceed 90
calendar days, so long as the Debt Rating is under publicly announced
consideration for possible downgrading by both Moody's and S&P): (i) in the
event the Notes are rated Investment Grade by Moody's or S&P on the earlier of
the date immediately preceding the date of the public disclosure of (w) the
occurrence of a Designated Event or (x) (if applicable) the intention of the
Corporation to effect a Designated Event, the Debt Rating by both Moody's and
S&P shall be below Investment Grade; or (ii) in the event the Notes are rated
below Investment Grade by both Moody's and S&P on the earlier of the date
immediately preceding the date of the public disclosure of (y) the occurrence of
a Designated Event or (z) (if applicable) the intention of the Corporation to
effect a Designated Event, the Debt Rating by each of Moody's and S&P shall be
decreased by at least one Full Rating Category.
"Receivables Subsidiary" means a wholly owned subsidiary of the Corporation
which engages in no activities other than in connection with the financing of
accounts receivable and which is designated by or pursuant to the authority of
the Board of Directors of the Corporation (as provided below) as a Receivables
Subsidiary (a) no portion of the Indebtedness or any other obligations
(contingent or otherwise) of which (i) is guaranteed by the Corporation or any
subsidiary of the Corporation (excluding guarantees of obligations (other than
the principal of, and interest on, Indebtedness) pursuant to representations,
warranties, covenants and indemnities entered into in the ordinary course of
business in connection with a Qualified Receivables Transaction), (ii) is
recourse to or obligates the Corporation or any subsidiary of the Corporation in
any way other than pursuant to representations, warranties, covenants and
indemnities entered into in connection with a Qualified Receivables Transaction
or (iii) subjects any property or asset of the Corporation or any subsidiary of
the Corporation, directly or indirectly, contingently or otherwise, to the
satisfaction thereof, other than pursuant to representations, warranties,
covenants and indemnities entered into in the ordinary course of business in
connection with a Qualified Receivables Transaction and (b) with which neither
the Corporation nor any subsidiary of the Corporation has any obligation to
maintain or preserve such subsidiary's financial condition (other than
restrictions on dividends and distributions by such subsidiary) or cause such
subsidiary to achieve certain levels of operating results. Any such designation
shall be evidenced to the Trustee by filing with the Trustee a certified copy of
the resolution of the Board of Directors of the Corporation giving effect to or
authorizing such designation and an officer's certificate certifying that such
designation complied with the foregoing conditions.
"Redeemable Stock" of any Person means any equity security of such Person
that by its terms (or by the terms of any security into which it is convertible
or for which it is exchangeable), or otherwise, is required to be redeemed or is
redeemable at the option of the holder thereof, in whole or part, prior to the
Stated Maturity of the Notes, or is exchangeable for debt at any time, in whole
or part, prior to the Stated Maturity of the Notes.
"Redemption Date" means, when used with respect to any Note to be redeemed,
the date fixed for redemption of such Note pursuant to the Indenture.
"Refinance" means, with respect to any Indebtedness, to renew, extend,
refinance, refund, replace or repurchase, or be substituted for, such
Indebtedness and "Refinancing" means the renewal, extension, refinancing,
refunding, replacement or repurchasing of, or substitution for, such
Indebtedness.
"Restricted Payment" means (i) a dividend or other distribution declared or
paid on the Capital Stock of the Corporation or to the Corporation's
stockholders (in their capacity as such), or declared or paid to any
56
<PAGE>
Person other than the Corporation or a Restricted Subsidiary of the Corporation
on the Capital Stock of any Restricted Subsidiary of the Corporation, in each
case, other than dividends, distributions or payments payable or made solely in
Qualified Capital Stock of the Corporation, (ii) a payment made by the
Corporation or any of its Restricted Subsidiaries (other than to the Corporation
or any Restricted Subsidiary of the Corporation) to purchase, redeem, acquire or
retire any Capital Stock of the Corporation or of a Restricted Subsidiary or
(iii) a payment made by the Corporation or any of its Restricted Subsidiaries to
redeem, repurchase, defease (including, but not limited to, insubstance or legal
defeasance) or otherwise acquire or retire for value, prior to any scheduled
maturity, scheduled repayment or scheduled sinking fund or mandatory redemption
payment, Indebtedness of the Corporation which is subordinate (whether pursuant
to its terms or by operation of law) in right of payment to the Notes and which
was scheduled to mature (after giving effect to any and all options to extend
the maturity thereof) on or after the Stated Maturity of the Notes.
"Restricted Subsidiary" means (i) prior to the Corporation achieving
Investment Grade Status, any subsidiary of the Corporation that exists on the
Issue Date other than (a) [list] and (b) any other Subsidiary of the Corporation
not designated as an Unrestricted Subsidiary by the Board in compliance with the
covenants described in "-- Restricted and Unrestricted Subsidiaries" and (ii)
following the Corporation achieving Investment Grade Status, any subsidiary of
the Corporation which owns any Principal Operating Property.
"S&P" means Standard & Poor's Rating Group, a division of McGraw-Hill, Inc.,
or any successor to the rating agency business thereof.
"Sale and Leaseback Transaction" means, with respect to any Person, any
direct or indirect arrangement pursuant to which Property is sold or transferred
by such Person or a Restricted Subsidiary of such Person and is thereafter
leased back from the purchaser or transferee thereof by such Person or one of
its Restricted Subsidiaries.
"Senior Indebtedness" means, at any date, any outstanding Indebtedness of
the Corporation that is pari passu in right of payment with the Notes.
"Stated Maturity" means, when used with respect to any security, the date
specified in such security as the fixed date on which the principal or
redemption price of such security is due and payable and, when used with respect
to any installment of interest on a security, the fixed date on which such
installment of interest is due and payable. The Stated Maturity of a Capital
Lease Obligation shall be the date of the last payment of rent or any other
amount due under such lease prior to the first date upon which such lease may be
terminated by the lessee without payment of a penalty.
"Tangible Assets" of any Person means, at any date, the net book value as
shown by the accounting books and records of such Person of all its Property,
less the net book value of all items that would be classified as intangibles
under GAAP, including, without limitation, (i) licenses, patents, patent
applications, copyrights, trademarks, trade names, goodwill, noncompete
agreements and organizational expenses, (ii) unamortized debt discount and
expense, (iii) all reserves for depreciation, obsolescence, depletion and
amortization of its Properties and (iv) all other proper reserves which in
accordance with GAAP should be provided in connection with the business
conducted by such Person.
"Transaction Date" means the date of any transaction giving rise to the need
to calculate the Consolidated Interest Coverage Ratio or to determine whether
there has been a Designated Event.
"Unrestricted Subsidiary" means (a) [list], and (b) any subsidiary of the
Corporation that the Corporation has classified, pursuant to "Restricted and
Unrestricted Subsidiaries" as an Unrestricted Subsidiary and that has not been
reclassified as a Restricted Subsidiary.
"Voting Stock" of any Person means Capital Stock of such Person which
ordinarily has voting power for the election of directors (or persons performing
similar functions) of such Person, whether at all times or only as long as no
senior class of securities has such voting power by reason of any contingency.
57
<PAGE>
DESCRIPTION OF OTHER DEBT OBLIGATIONS
The Senior 1996 Notes, the Senior 1997 Notes, the Senior 1998 Notes, the
Senior 2001 Notes and the Senior 2017 Debentures were issued under the Indenture
(the "Other Indenture Securities"). The Senior 1996 Notes bear interest at 8%
per annum and will mature on December 15, 1996. The Senior 1997 Notes bear
interest at 8% per annum and will mature on March 15, 1997. The Senior 2017
Debentures bear interest at 8.75% per annum and will mature on March 1, 2017.
The Other Indenture Securities rank pari passu with the Notes and with all other
senior secured indebtedness of the Corporation. The Other Indenture Securities
will be secured by first priority security interests in capital stock of certain
of the Corporation's subsidiaries under the Collateral Trust Agreement. See
"Capitalization" and "Description of Collateral Trust."
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
at face amount plus a premium 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.
Notwithstanding the foregoing provision, 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 sinking
fund provisions described below.
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 Other Indenture Securities are entitled to the benefit of covenants
limiting the ability of the Corporation and certain restricted subsidiaries to
(i) incur certain secured debt without equally and ratably securing the Other
Indenture Securities, (ii) entering into certain sale and leaseback transactions
involving principal operating properties and (iii) enter into merger
transactions unless certain conditions are satisfied. The provisions described
above under "Description of the Notes" concerning defeasance and events of
default also apply to the Other Indenture Securities.
The Corporation and U.S. Gypsum are co-obligors with respect to the 7 7/8%
Sinking Fund Debentures due 2004 (the "Senior 2004 Debentures"). The Senior 2004
Debentures will also be secured by first priority security interests in capital
stock of certain of the Corporation's domestic subsidiaries under the Collateral
Trust Agreement. See "Capitalization" and "Description of Collateral Trust."
DESCRIPTION OF COLLATERAL TRUST
In connection with entering into the New Credit Agreement, the Corporation
will establish a collateral trust pursuant to the Collateral Trust Agreement
(the "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 Collateral
Trust Agreement, the Grantors will grant a first priority security interest in
all of the capital stock of U.S. Gypsum, USG Interiors, L&W Supply and USG
Foreign Investments, Ltd. (collectively, the "Collateral"). The Collateral will
be held in trust for the equal and ratable benefit of the holders of (i) the
Bank Debt, and (ii) the Notes and the other 1986 Indenture Securities (the
"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
58
<PAGE>
acceleration of the Bank Debt, by the Administrative Agent under the Credit
Agreement or the holders of a majority of the Bank Debt (the "Requisite Bank
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) once the Corporation's senior
public debt is rated "Investment Grade" (a rating of BBB- or higher by Standard
& Poor's Ratings Group and Baa3 or higher by Moody's Investors Service, Inc.),
(ii) upon the consent and direction of the Requisite Bank Lenders or (ii) at
such time as the Bank Debt has been repaid in full and the commitments of the
Bank Group to make advances under the New Credit Agreement have terminated. In
addition, the Requisite Bank 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 under the Credit Agreement) provided
that no Actionable Default has occurred. The holders of the Notes 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 under the New Credit Agreement, see "Description of New Credit
Agreement."
Following receipt of a Notice of Actionable Default, the Requisite Bank
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 Notes 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 Bank 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.
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement,
the Corporation has agreed to sell to each of the Underwriters named below, and
each of the Underwriters has severally agreed to purchase, the aggregate
principal amount of Notes set forth opposite the name of such Underwriter:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
UNDERWRITER OF NOTES
- -------------------------------------------------------------------------------- ------------
<S> <C>
Salomon Brothers Inc............................................................ $
BT Securities Corporation....................................................... $
Citicorp Securities, Inc........................................................ $
Chemical Securities Inc......................................................... $
Total....................................................................... $
</TABLE>
59
<PAGE>
In the Underwriting Agreement, the several Underwriters have agreed, subject
to the terms and conditions set forth therein, to purchase the entire amount of
the Notes offered hereby if any Notes are purchased. The Underwriters have
advised the Corporation that they propose initially to offer the Notes to the
public at the public offering price set forth on the cover page of this
Prospectus and to certain dealers at such offering price less a concession not
in excess of % principal amount of the Notes. The Underwriters may allow, and
such dealers may reallow, a concession not in excess of % of the principal
amount of the Notes to certain other dealers. After the offering of the Notes
commences, the public offering price or such concessions may be changed. In the
event of a default by any one or more of the Underwriters, the Underwriting
Agreement provides that, in certain circumstances, the purchase commitment of
the nondefaulting Underwriters may be increased or the Underwriting Agreement
terminated.
The Underwriting Agreement provides that the Corporation will indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933, or contribute to payments the Underwriters may be
required to make in respect thereof.
The Underwriters have advised the Corporation that they currently intend to
make a market in the Notes; however, they are not obligated to do so and any
market making may be discontinued at any time without notice. No assurance can
be given as to the development or liquidity of any trading market in the Notes.
If an active market does not develop, the market price and liquidity of the
Notes may be adversely effected.
The Underwriters and their affiliates from time to time engage in investment
banking and commercial banking transactions with the Corporation in the ordinary
course of business. Chemical Securities Inc. is acting as arranger of the New
Credit Agreement, and its affiliate, Chemical Bank, is agent bank under the New
Credit Agreement. Bankers Trust Company and Citibank, N.A., which are affiliates
of BT Securities Corporation and Citicorp Securities, Inc., respectively, are
acting as managing agents under the New Credit Agreement. Salomon Brothers Inc
("Salomon") has provided financial advisory and investment banking services to
the Corporation from time to time for which it has received customary fees and
reimbursement of expenses including, advising the Corporation from April 1991 to
May 1993 in connection with the development and implementation of the
Restructuring. Salomon also acted as an underwriter in the Corporation's public
offering of its Common Stock in March 1994.
LEGAL MATTERS
The validity of the Notes will be passed upon by Kirkland & Ellis, Chicago,
Illinois. Certain legal matters will be passed upon for the Underwriters by
Wachtell, Lipton, Rosen & Katz, New York, New York.
EXPERTS
The consolidated financial statements and supplemental schedules of the
Corporation and its subsidiaries, included and incorporated in this prospectus
by reference have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their reports with respect thereto, and are
included and incorporated 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 an explanatory paragraph with respect to the change in the
method of accounting for asbestos-related matters also 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.
AVAILABLE INFORMATION
The Corporation has filed with the Securities and Exchange Commission (the
"Commission" or the "SEC") a Registration Statement on Form S-3 (the
"Registration Statement") (which term shall encompass
60
<PAGE>
all amendments, exhibits and schedules thereto) under the Securities Act of
1933, as amended (the "Securities Act"), with respect to the Notes 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: Northwestern Atrium Center, 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 but such statements are complete in all material
respects for the purposes herein made. 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, 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.
INFORMATION INCORPORATED BY REFERENCE
The Corporation's Annual Report on Form 10-K for the year ended December 31,
1994, its Quarterly Report on Form 10-Q for the quarter ended March 31, 1995 and
its Report on Form 8-K dated May 24, 1995 have been filed by the Corporation
with the Commission (File No. 1-8864) and are specifically incorporated herein
by reference.
All documents filed by the Corporation with the Commission pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of
this Prospectus and prior to the termination or completion of this offering
shall be deemed to be incorporated by reference in this Prospectus and to be
part of this Prospectus from the date of the filing of such document. Any
statement contained herein or in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein
or in any other subsequently filed document which also is or is deemed to be
incorporated by reference herein modifies or supersedes such statement. Any such
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
The Corporation hereby undertakes to provide without charge to each person
to whom a copy of this Prospectus has been delivered, upon the written or oral
request of such person, a copy of any or all of the information filed by it that
has been incorporated by reference in this Prospectus (not including exhibits to
the information that is incorporated by reference herein unless such exhibits
are specifically incorporated by reference in such information). Requests for
such information should be directed to USG Corporation, 125 South Franklin
Street, Chicago, Illinois 60606-4678, Attention: Investor Relations (telephone
number: (312) 606-4000).
61
<PAGE>
USG CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
On May 6, 1993, the Corporation completed the Restructuring through
implementation of the Prepackaged Plan as described in the notes to financial
statements. The consolidated financial statements and notes thereto for the
interim periods ended March 31, 1995 and 1994, presented on pages F-2 through
F-12, and the year ended December 31, 1994 and period of May 7 through December
31, 1993, presented on pages F-13 through F-44, report financial data 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 for the
period of January 1 through May 6, 1993 and the year ended December 31, 1992 on
pages F-47 through F-73. 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-2
through F-77 should be read in conjunction with the information included in this
Prospectus under "Capitalization," and "Management's Discussion and Analysis of
"Results of Operations and Financial Condition."
<TABLE>
<CAPTION>
PAGE
---------
<S> <C>
RESTRUCTURED COMPANY:
CONDENSED INTERIM FINANCIAL STATEMENTS (UNAUDITED):
Consolidated Statements of Earnings -- Three months ended March 31, 1995 and 1994...................... F-2
Consolidated Balance Sheet -- As of March 31, 1995 and December 31, 1994............................... F-3
Consolidated Statement of Cash Flows -- Three months ended March 31, 1995 and 1994..................... F-4
Notes to Interim Financial Statements.................................................................. F-5
Consolidated Statement of Earnings -- Year ended December 31, 1994 and May 7 through December 31, 1993... F-13
Consolidated Balance Sheet -- As of December 31, 1994 and December 31, 1993.............................. F-14
Consolidated Statement of Cash Flows -- Year ended December 31, 1994 and May 7 through December 31,
1993.................................................................................................... F-15
Notes to Financial Statements............................................................................ F-16
Report of Independent Public Accountants................................................................. F-46
PREDECESSOR COMPANY:
Consolidated Statement of Earnings -- January 1 through May 6, 1993 and year ended December 31, 1992..... F-47
Consolidated Balance Sheet -- As of May 6, 1993.......................................................... F-48
Consolidated Statement of Cash Flows -- January 1 through May 6, 1993 and year ended December 31, 1992... F-49
Notes to Financial Statements............................................................................ F-50
Report of Independent Public Accountants................................................................. F-75
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED).............................................................. F-76
</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.
F-1
<PAGE>
USG CORPORATION
(RESTRUCTURED COMPANY)
CONSOLIDATED STATEMENT OF EARNINGS
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
------------------------------
1995 1994
-------------- --------------
<S> <C> <C>
Net Sales......................................................................... $ 598 $ 506
Cost of products sold............................................................. 446 396
-------------- --------------
Gross Profit...................................................................... 152 110
Selling and administrative expenses............................................... 60 57
Amortization of excess reorganization value....................................... 42 42
-------------- --------------
Operating Profit.................................................................. 50 11
Interest expense.................................................................. 27 37
Interest income................................................................... (2) (3)
Other expense/(income), net....................................................... -- 1
-------------- --------------
Earnings/(Loss) Before Taxes on Income............................................ 25 (24)
Taxes on income................................................................... 27 10
-------------- --------------
Net Loss.......................................................................... (2) (34)
-------------- --------------
-------------- --------------
Net Loss Per Common Share......................................................... (0.05) (0.87)
-------------- --------------
-------------- --------------
Dividends paid per common share................................................... -- --
Average number of common shares................................................... 45,085,540 39,134,246
</TABLE>
SEE ACCOMPANYING NOTES TO INTERIM FINANCIAL STATEMENTS.
F-2
<PAGE>
USG CORPORATION
(RESTRUCTURED COMPANY)
CONSOLIDATED BALANCE SHEET
(DOLLARS IN MILLIONS)
ASSETS
<TABLE>
<CAPTION>
AS OF AS OF
MARCH 31, DECEMBER 31,
1995 1994
----------------- --------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents...................................................... $ 94 $ 197
Receivables (net of reserves -- $16 and $14)................................... 296 274
Inventories.................................................................... 190 173
------ ------
Total current assets......................................................... 580 644
------ ------
Property, Plant and Equipment (net of reserves for depreciation and depletion
-- $90 and $80)............................................................... 770 755
Excess Reorganization Value (net of accumulated amortization -- $324 and
$282)......................................................................... 519 561
Other Assets................................................................... 171 164
------ ------
Total Assets................................................................. 2,040 2,124
------ ------
------ ------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable............................................................... 145 122
Accrued expenses............................................................... 217 253
Notes payable.................................................................. 5 1
Long-term debt maturing within one year........................................ 3 44
Taxes on income................................................................ 51 35
------ ------
Total current liabilities.................................................... 421 455
------ ------
Long-Term Debt................................................................. 1,018 1,077
Deferred Income Taxes.......................................................... 177 179
Other Liabilities.............................................................. 426 421
Stockholders' Equity/(Deficit):
Preferred stock................................................................ -- --
Common stock................................................................... 5 5
Capital received in excess of par value........................................ 221 221
Deferred currency translation.................................................. (5) (13)
Reinvested earnings/(deficit).................................................. (223) (221)
------ ------
Total stockholders' equity/(deficit)......................................... (2) (8)
------ ------
Total Liabilities and Stockholders' Equity................................... 2,040 2,124
------ ------
------ ------
</TABLE>
SEE ACCOMPANYING NOTES TO INTERIM FINANCIAL STATEMENTS.
F-3
<PAGE>
USG CORPORATION
(RESTRUCTURED COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1995 1994
--------- ---------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss........................................................................................ $ (2) $ (34)
Adjustments to reconcile net loss to net cash:
Amortization of excess reorganization value................................................... 42 42
Depreciation, depletion and other amortization................................................ 17 18
Deferred income taxes......................................................................... (2) 7
Net (gain)/loss on asset dispositions......................................................... (3) --
(Increase)/decrease in working capital:
Receivables................................................................................... (22) (25)
Inventories................................................................................... (17) (21)
Payables...................................................................................... 39 15
Accrued expenses.............................................................................. (36) 2
Increase in other assets........................................................................ (7) (9)
Increase in other liabilities................................................................... 5 4
--------- ---------
Net cash flows (to)/from operating activities................................................. 14 (1)
--------- ---------
Cash Flows from Investing Activities:
Capital expenditures............................................................................ (24) (7)
Net proceeds from asset dispositions............................................................ 6 --
--------- ---------
Net cash flows to investing activities........................................................ (18) (7)
--------- ---------
Cash Flows from Financing Activities:
Issuance of debt................................................................................ 6 114
Repayment of debt............................................................................... (105) (207)
Proceeds from public offering of common stock................................................... -- 224
--------- ---------
Net cash flows (to)/from financing activities................................................. (99) 131
--------- ---------
Net Increase/(Decrease) in Cash & Cash Equivalents.............................................. (103) 123
--------- ---------
Cash & cash equivalents at beginning of period.................................................. 197 211
--------- ---------
Cash & cash equivalents at end of period........................................................ 94 334
--------- ---------
--------- ---------
Supplemental Cash Flow Disclosures:
Interest paid................................................................................... $ 25 $ 22
Income taxes paid............................................................................... 13 4
--------- ---------
--------- ---------
</TABLE>
SEE ACCOMPANYING NOTES TO INTERIM FINANCIAL STATEMENTS.
F-4
<PAGE>
USG CORPORATION
(RESTRUCTURED COMPANY)
NOTES TO INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
(1) The consolidated financial statements of USG Corporation and its
subsidiaries ("USG" or the "Corporation") included herein have been
prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. In the opinion of management, the statements reflect
all adjustments, which are of a normal recurring nature, necessary to
present fairly the Corporation's financial position as of March 31, 1995
and December 31, 1994; and results of operations and cash flows for the
three months ended March 31, 1995 and 1994. While these interim financial
statements and accompanying notes are unaudited, they have been reviewed by
Arthur Andersen LLP, the Corporation's independent public accountants.
These financial statements and notes are to be read in conjunction with the
financial statements and notes included in the Corporation's 1994 Annual
Report on Form 10-K dated March 8, 1995.
(2) In the fourth quarter of 1994, the Corporation established a revolving
accounts receivable facility. Under this new financing program, the trade
receivables of United States Gypsum Company ("U.S. Gypsum") and USG
Interiors, Inc. ("USG Interiors") are being purchased by USG Funding
Corporation ("USG Funding") and transferred to a trust administered by
Chemical Bank as trustee. Certificates representing an ownership interest
of up to $130 million in the trust have been issued to an affiliate of
Citicorp North America, Inc. USG Funding, a special purpose subsidiary of
USG Corporation, is a separate corporate entity with its own separate
creditors which will be entitled to be satisfied out of USG Funding's
assets prior to any value in USG Funding becoming available to its
shareholder. Receivables and debt outstanding in connection with the
receivables facility remain in receivables and long-term debt,
respectively, on the Corporation's consolidated balance sheet.
(3) On May 6, 1993, the Corporation completed a comprehensive restructuring of
its debt through implementation of a "prepackaged" plan of reorganization
under United States bankruptcy law. 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. Excess reorganization value, the portion of the reorganization value
not attributable to specific assets, is being amortized over a five-year
period, effective May 7, 1993.
(4) Income tax expense amounted to $27 million and $10 million for the three
months ended March 31, 1995 and 1994, respectively. The Corporation's
income tax expense is computed based on pre-tax earnings excluding the
non-cash amortization of excess reorganization value, which is not
deductible for federal income tax purposes. Further, under the provisions
of SOP 90-7, the benefits of the domestic net operating loss carryforwards
("NOL Carryforwards") discussed below are not reflected in income tax
expense.
The Corporation has NOL Carryforwards of $49 million remaining from 1992.
These NOL Carryforwards may be used to offset U.S. taxable income through
2007. The Internal Revenue Code limits the Corporation's annual use of its
NOL Carryforwards to the lesser of its taxable income or approximately $30
million plus any unused limit from prior years. Furthermore, due to the
uncertainty regarding the application of the Internal Revenue Code to the
exchange of stock for debt, the Corporation's NOL Carryforwards to 1994 and
later years could be reduced or eliminated. The Corporation has a $4 million
minimum tax credit which may be used to offset U.S. regular tax liability in
future years.
(5) As of March 31, 1995, 2,750,555 common shares were reserved for future
issuance in conjunction with existing stock option grants. An additional
11,105 common shares were reserved for future grants.
(6) One of the Corporation's operating subsidiaries, U.S. Gypsum, is a
defendant in asbestos lawsuits alleging both property damage and personal
injury. Virtually all costs of the Personal Injury Cases are
F-5
<PAGE>
USG CORPORATION
(RESTRUCTURED COMPANY)
NOTES TO INTERIM FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
being paid by insurance. However, many of U.S. Gypsum's insurance carriers
are denying coverage for the Property Damage Cases, although U.S. Gypsum
believes that substantial coverage exists and the trial court and an
appellate court in U.S. Gypsum's Coverage Action have so ruled. The
carriers are seeking reconsideration of the Illinois Supreme Court's
refusal to review the appellate court's ruling. 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.
(7) On January 1, 1985, all of the issued and outstanding shares of stock of
U.S. Gypsum were converted into shares of USG Corporation and the holding
company became a joint and several obligor for certain debentures
originally issued by U.S. Gypsum. Debentures totaling $22 million and $33
million were recorded on the holding company's books of account as of March
31, 1995 and December 31, 1994, respectively. Summary financial results for
U.S. Gypsum are presented below (dollars in millions):
SUMMARY STATEMENT OF EARNINGS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31,
--------------------
1995 1994
--------- ---------
<S> <C> <C>
Net sales........................................................... $ 332 $ 269
Cost and expenses................................................... 255 224
Amortization of excess reorganization value......................... 15 15
--------- ---------
Operating profit.................................................... 62 30
Interest expense, net............................................... -- --
Corporate charges................................................... 22 24
--------- ---------
Earnings before taxes on income..................................... 40 6
Taxes on income..................................................... 21 9
--------- ---------
Net earnings/(loss)................................................. 19 (3)
--------- ---------
--------- ---------
</TABLE>
F-6
<PAGE>
USG CORPORATION
(RESTRUCTURED COMPANY)
NOTES TO INTERIM FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
SUMMARY BALANCE SHEET
<TABLE>
<CAPTION>
AS OF MARCH AS OF
31, DEC. 31,
1995 1994
----------- -----------
<S> <C> <C>
Current assets............................................... $ 381 $ 345
Property, plant and equipment, net........................... 503 491
Excess reorganization value, net............................. 189 204
Other assets................................................. 106 103
----------- -----------
Total assets................................................. 1,179 1,143
----------- -----------
----------- -----------
Current liabilities.......................................... 212 197
Other liabilities and obligations............................ 256 256
Stockholder's equity......................................... 711 690
----------- -----------
Total liabilities and stockholder's equity................... 1,179 1,143
----------- -----------
----------- -----------
</TABLE>
(8) As of March 31, 1995, $298 million aggregate principal amount of 10 1/4%
senior notes due 2002 were outstanding. Each of U.S. Gypsum, USG
Industries, Inc., USG Interiors, 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
"Combined Guarantors") guaranteed, in the manner described below, the
obligations of the Corporation under its bank term loans' credit agreement
and 10 1/4% senior notes. The Combined Guarantors are jointly and severally
liable under the guarantees. Holders of the bank term loans 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 loans and 10 1/4% senior 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 loans are retired regardless
of whether any such 10 1/4% senior notes remain unpaid. The liability of
each of the Combined Guarantors on its guarantee is limited to the greater
of: (i) 95% of the lowest amount, calculated as of July 13, 1988,
sufficient to render the guarantor insolvent, leave the guarantor with
unreasonably small capital or leave the guarantor unable to pay its debts
as they become due (each as defined under applicable law); and (ii) the
same amount, calculated as of the date any demand for payment under such
guarantee is made, in each case plus collection costs. The guarantees are
senior obligations of the applicable guarantor and rank PARI PASSU with all
unsubordinated obligations of the guarantor.
Subsidiaries other than the Combined Guarantors (the "Combined
Non-Guarantors"), substantially all of which are subsidiaries of Guarantors,
primarily include CGC Inc., Gypsum Transportation Limited, USG Canadian
Mining Ltd. and the Corporation's Mexican, European and Pacific
subsidiaries. USG Funding is also a Non-Guarantor. The long-term debt of the
Combined Non-Guarantors of $84 million as of March 31, 1995 and December 31,
1994, has restrictive covenants that restrict, among other things, the
payment of dividends.
The following condensed consolidating information presents:
(i) Condensed financial statements as of March 31, 1995 and December 31,
1994 and for the three months ended March 31, 1995 and 1994 of (a) the
Corporation on a parent company only basis, (b) the Combined Guarantors,
(c) the Combined Non-Guarantors and (d) the Corporation on a
consolidated basis. Except for the following condensed financial
statements, separate financial information with respect to the Combined
Guarantors is not deemed material to investors and is omitted.)
(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-7
<PAGE>
USG CORPORATION
(RESTRUCTURED COMPANY)
NOTES TO INTERIM FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
USG CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS
THREE MONTHS ENDED 3/31/95
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
PARENT COMBINED COMBINED NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------------- ------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Net sales.................................... $ -- $ 530 $ 97 $ (29) $ 598
--- ----- --- --- -----
Gross profit/(loss).......................... -- 132 20 -- 152
--- ----- --- --- -----
Operating profit/(loss)...................... (10) 59 1 -- 50
Equity in net (earnings)/loss of the
subsidiaries................................ 4 -- -- (4) --
Interest expense, net........................ 23 -- 2 -- 25
Corporate service charge..................... (38) 41 (3) -- --
Other expense/(income), net.................. (1) 3 (2) -- --
--- ----- --- --- -----
Earnings/(loss) before taxes on income....... 2 15 4 4 25
Taxes on income.............................. 4 20 3 -- 27
--- ----- --- --- -----
Net earnings/(loss).......................... (2) (5) 1 4 (2)
--- ----- --- --- -----
--- ----- --- --- -----
</TABLE>
F-8
<PAGE>
USG CORPORATION
(RESTRUCTURED COMPANY)
NOTES TO INTERIM FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
USG CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS
THREE MONTHS ENDED 3/31/94
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
PARENT COMBINED COMBINED NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------------- ------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
Net sales.................................... $ -- $ 443 $ 88 $ (25) $ 506
--- ----- --- --- -----
Gross profit/(loss).......................... -- 92 18 -- 110
--- ----- --- --- -----
Operating profit/(loss)...................... (9) 21 (1) -- 11
Equity in net (earnings)/loss of the
subsidiaries................................ 32 4 -- (36) --
Interest expense, net........................ 33 -- 1 -- 34
Corporate service charge..................... (42) 42 -- -- --
Other expense/(income), net.................. 1 -- -- -- 1
Earnings/(loss) before taxes on income....... (33) (25) (2) 36 (24)
Taxes on income.............................. 1 7 2 -- 10
--- ----- --- --- -----
Net earnings/(loss).......................... (34) (32) (4) 36 (34)
--- ----- --- --- -----
--- ----- --- --- -----
</TABLE>
F-9
<PAGE>
USG CORPORATION
(RESTRUCTURED COMPANY)
NOTES TO INTERIM FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
USG CORPORATION
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF MARCH 31, 1995
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
PARENT COMBINED COMBINED NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------- ----------- --------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents.................... $ 79 $ (9) $ 24 $ -- $ 94
Receivables, net............................. 1 138 194 (37) 296
Inventories.................................. -- 144 50 (4) 190
----------- ----------- --- ------------ -------------
Total current assets....................... 80 273 268 (41) 580
Property, plant and equipment, net........... 15 633 122 -- 770
Investment in subsidiaries................... 1,441 268 -- (1,709) --
Excess reorganization value, net............. -- 414 105 -- 519
Other assets................................. (241) 440 (30) 2 171
----------- ----------- --- ------------ -------------
Total assets............................... 1,295 2,028 465 (1,748) 2,040
----------- ----------- --- ------------ -------------
----------- ----------- --- ------------ -------------
Accounts payable and accrued expenses........ 77 307 65 (36) 413
Notes payable and LTD maturing within one
year........................................ -- 2 6 -- 8
----------- ----------- --- ------------ -------------
Total current liabilities.................. 77 309 71 (36) 421
Long-term debt............................... 897 37 84 -- 1,018
Deferred income taxes........................ 6 154 16 1 177
Other liabilities............................ 312 109 4 1 426
Common stock................................. 5 1 6 (7) 5
Capital received in excess of par value...... 221 1,438 364 (1,802) 221
Deferred currency translation................ -- -- (5) -- (5)
Reinvested earnings/(deficit)................ (223) (20) (75) 95 (223)
----------- ----------- --- ------------ -------------
Total stockholders' equity/(deficit)....... 3 1,419 290 (1,714) (2)
----------- ----------- --- ------------ -------------
Total liabilities and stockholders'
equity.................................... 1,295 2,028 465 (1,748) 2,040
----------- ----------- --- ------------ -------------
----------- ----------- --- ------------ -------------
</TABLE>
F-10
<PAGE>
USG CORPORATION
(RESTRUCTURED COMPANY)
NOTES TO INTERIM FINANCIAL STATEMENTS (CONTINUED)
(UNAUDITED)
USG CORPORATION
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 1994
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
PARENT COMBINED COMBINED NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------- ----------- --------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents.................... $ 178 $ (11) $ 30 $ -- $ 197
Receivables, net............................. -- 135 173 (34) 274
Inventories.................................. -- 136 43 (6) 173
----------- ----------- --- ------------ -------------
Total current assets....................... 178 260 246 (40) 644
Property, plant and equipment, net........... 15 623 117 -- 755
Investment in subsidiaries................... 1,436 261 -- (1,697) --
Excess reorganization value, net............. -- 447 114 -- 561
Other assets................................. (227) 426 (28) (7) 164
----------- ----------- --- ------------ -------------
Total assets............................... 1,402 2,017 449 (1,774) 2,124
----------- ----------- --- ------------ -------------
----------- ----------- --- ------------ -------------
Accounts payable and accrued expenses........ 83 298 63 (34) 410
Notes payable and LTD maturing within one
year........................................ 41 2 2 -- 45
----------- ----------- --- ------------ -------------
Total current liabilities.................. 124 300 65 (34) 455
Long-term debt............................... 956 37 84 -- 1,077
Deferred income taxes........................ 9 155 15 -- 179
Other liabilities............................ 308 109 4 -- 421
Common stock................................. 5 1 6 (7) 5
Capital received in excess of par value...... 221 1,438 364 (1,802) 221
Deferred currency translation................ -- -- (13) -- (13)
Reinvested earnings/(deficit)................ (221) (23) (76) 99 (221)
----------- ----------- --- ------------ -------------
Total stockholders' equity/(deficit)....... 5 1,416 281 (1,710) (8)
----------- ----------- --- ------------ -------------
Total liabilities and stockholders'
equity.................................... 1,402 2,017 449 (1,744) 2,124
----------- ----------- --- ------------ -------------
----------- ----------- --- ------------ -------------
</TABLE>
F-11
<PAGE>
USG CORPORATION
(RESTRUCTURED COMPANY)
NOTES TO INTERIM FINANCIAL STATEMENTS (CONCLUDED)
(UNAUDITED)
USG CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1995
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
PARENT COMPANY COMBINED NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------- ------------- ------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
NET CASH FLOWS (TO)/FROM OPERATING
ACTIVITIES.................................. $ (42) $ 67 $ (11) $ -- $ 14
----- --- --- ----- -----
Capital expenditures....................... -- (21) (3) -- (24)
Net proceeds from asset dispositions....... -- -- 6 -- 6
----- --- --- ----- -----
NET CASH FLOWS (TO)/FROM INVESTING
ACTIVITIES.................................. -- (21) 3 -- (18)
----- --- --- ----- -----
Issuance of debt........................... -- -- 6 -- 6
Repayment of debt.......................... (102) -- (3) -- (105)
Cash dividends (paid)/received............. -- 1 (1) -- --
Net cash transfers (to)/from corporate..... 45 (45) -- -- --
----- --- --- ----- -----
NET CASH FLOWS (TO)/FROM FINANCING
ACTIVITIES.................................. (57) (44) 2 -- (99)
----- --- --- ----- -----
NET INCREASE/(DECREASE) IN CASH & CASH
EQUIVALENTS................................. (99) 2 (6) -- (103)
Cash & cash equivalents -- beginning......... 178 (11) 30 -- 197
----- --- --- ----- -----
Cash & cash equivalents -- end............... 79 (9) 24 -- 94
----- --- --- ----- -----
----- --- --- ----- -----
</TABLE>
USG CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1994
(DOLLARS IN MILLIONS)
<TABLE>
<S> <C> <C> <C> <C> <C>
NET CASH FLOWS (TO)/FROM OPERATING
ACTIVITIES......................... $ (23) $ 17 $ 5 $ -- $ (1)
----- --- --- ----- -----
Capital expenditures.............. -- (6) (1) -- (7)
Net proceeds from asset
dispositions..................... -- -- -- -- --
----- --- --- ----- -----
NET CASH FLOWS (TO)/FROM INVESTING
ACTIVITIES......................... -- (6) (1) -- (7)
----- --- --- ----- -----
Issuance of debt.................. 85 -- 29 -- 114
Repayment of debt................. (189) -- (18) -- (207)
Proceeds from stock offering...... 224 -- -- -- 224
Cash dividends (paid)/received.... -- 11 (11) -- --
Net cash transfers (to)/from
corporate........................ 26 (26) -- -- --
----- --- --- ----- -----
NET CASH FLOWS (TO)/FROM FINANCING
ACTIVITIES......................... 146 (15) -- -- 131
----- --- --- ----- -----
NET INCREASE/(DECREASE) IN CASH &
CASH EQUIVALENTS................... 123 (4) 4 -- 123
Cash & cash equivalents --
beginning.......................... 187 (8) 32 -- 211
----- --- --- ----- -----
Cash & cash equivalents -- end...... 310 (12) 36 -- 334
----- --- --- ----- -----
----- --- --- ----- -----
</TABLE>
F-12
<PAGE>
USG CORPORATION
(RESTRUCTURED COMPANY)
CONSOLIDATED STATEMENT OF EARNINGS
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED MAY 7 THROUGH
DECEMBER 31, DECEMBER 31,
1994 1993
-------------- --------------
<S> <C> <C>
Net Sales......................................................................... $ 2,290 $ 1,325
Cost of products sold............................................................. 1,773 1,062
------ ------
Gross Profit...................................................................... 517 263
Selling and administrative expenses............................................... 244 149
Amortization of excess reorganization value....................................... 169 113
------ ------
Operating Profit.................................................................. 104 1
Interest expense.................................................................. 149 92
Interest income................................................................... (10) (4)
Other (income)/expense, net....................................................... 3 (8)
------ ------
Loss Before Taxes on Income and Extraordinary Loss................................ (38) (79)
Taxes on income................................................................... 54 29
------ ------
Loss Before Extraordinary Loss.................................................... (92) (108)
Extraordinary loss, net of taxes.................................................. -- (21)
------ ------
Net Loss.......................................................................... (92) (129)
------ ------
------ ------
Loss Per Common Share:
Before extraordinary loss....................................................... $ (2.14) $ (2.90)
Extraordinary loss.............................................................. -- (0.56)
------ ------
Net Loss Per Common Share......................................................... (2.14) (3.46)
------ ------
------ ------
</TABLE>
THE NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THIS STATEMENT.
F-13
<PAGE>
USG CORPORATION
(RESTRUCTURED COMPANY)
CONSOLIDATED BALANCE SHEET
(DOLLARS IN MILLIONS)
ASSETS
<TABLE>
<CAPTION>
AS OF DECEMBER 31
--------------------
1994 1993
--------- ---------
<S> <C> <C>
Current Assets:
Cash and cash equivalents (primarily time deposits)........................................... $ 197 $ 211
Receivables (net of reserves of $14 and $13).................................................. 274 264
Inventories................................................................................... 173 145
--------- ---------
Total current assets........................................................................ 644 620
Property, Plant and Equipment, Net............................................................ 755 754
Excess Reorganization Value (net of accumulated amortization of $282 and $113)................ 561 735
Other Assets.................................................................................. 164 54
--------- ---------
Total assets................................................................................ 2,124 2,163
--------- ---------
--------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable.............................................................................. $ 122 $ 104
Accrued expenses.............................................................................. 253 208
Notes payable................................................................................. 1 2
Long-term debt maturing within one year....................................................... 44 165
Taxes on income............................................................................... 35 20
--------- ---------
Total current liabilities................................................................... 455 499
--------- ---------
Long-Term Debt................................................................................ 1,077 1,309
Deferred Income Taxes......................................................................... 179 180
Other Liabilities............................................................................. 421 309
Stockholders' Equity/(Deficit):
Preferred stock -- $1 par value; authorized 36,000,000 shares; $1.80 convertible preferred
stock (initial series); outstanding -- none................................ -- --
Common stock -- $0.10 par value; authorized 200,000,000 shares; outstanding 45,083,211 and
37,158,085 shares (after deducting 33,988 and 27,876 shares held in
treasury)..................................................................... 5 4
Capital received in excess of par value....................................................... 221 --
Deferred currency translation................................................................. (13) (9)
Reinvested earnings/(deficit)................................................................. (221) (129)
--------- ---------
Total stockholders' equity/(deficit)........................................................ (8) (134)
--------- ---------
Total liabilities and stockholders' equity.................................................. 2,124 2,163
--------- ---------
--------- ---------
</TABLE>
THE NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THIS STATEMENT.
F-14
<PAGE>
USG CORPORATION
(RESTRUCTURED COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
YEAR ENDED MAY 7 THROUGH
DECEMBER 31, DECEMBER 31,
1994 1993
--------------- ---------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net loss.......................................................................... $ (92) $ (129)
Adjustments to reconcile net loss to net cash:
Amortization of excess reorganization value..................................... 169 113
Extraordinary loss.............................................................. -- 21
Depreciation, depletion and amortization........................................ 84 44
Deferred income taxes........................................................... (1) 22
Net gain on asset dispositions.................................................. (2) (9)
(Increase)/decrease in working capital:
Receivables..................................................................... (10) 51
Inventories..................................................................... (28) 4
Payables........................................................................ 33 14
Accrued expenses................................................................ 45 37
(Increase)/decrease in other assets............................................... (9) 7
Increase in other liabilities..................................................... 12 12
Other, net........................................................................ (3) (4)
----- -----
Net cash flows from operating activities........................................ 198 183
----- -----
Cash Flows from Investing Activities:
Capital expenditures.............................................................. (64) (29)
Net proceeds from asset dispositions.............................................. 16 29
----- -----
Net cash flows to investing activities.......................................... (48) --
----- -----
Cash Flows from Financing Activities:
Issuance of debt.................................................................. 262 36
Repayment of debt................................................................. (650) (57)
Proceeds from public offering of common stock..................................... 224 --
----- -----
Net cash flows to financing activities.......................................... (164) (21)
----- -----
Net Increase/(Decrease) in Cash and Cash Equivalents.............................. (14) 162
Cash and cash equivalents as of beginning of period............................... 211 49
----- -----
Cash and cash equivalents as of end of period..................................... 197 211
----- -----
----- -----
Supplemental Cash Flow Disclosures:
Interest paid..................................................................... $ 115 $ 73
Income taxes paid................................................................. 38 5
----- -----
----- -----
</TABLE>
THE NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THIS STATEMENT.
F-15
<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 United States bankruptcy law (the "Prepackaged Plan"). In
accordance with the terms of the Prepackaged Plan, $1.4 billion of debt and
accrued interest was converted into equity, interest expense was significantly
reduced and the maturities of a substantial portion of its remaining debt were
extended. The Corporation accounted for the Restructuring using the principles
of fresh start accounting as required by AICPA Statement of Position 90-7,
"Financial Reporting by Entities in Reorganization under the Bankruptcy Code"
("SOP 90-7"). Pursuant to such principles, individual assets and liabilities
were adjusted to fair market value as of May 6, 1993. Excess reorganization
value, the portion of the reorganization value not attributable to specific
assets, is being amortized over a five-year period, effective May 7, 1993.
The following unaudited Pro Forma Condensed Consolidated Statement of
Earnings for the year ended December 31, 1993 has been prepared giving effect to
the consummation of the Restructuring, including the implementation of fresh
start accounting, as if the consummation had occurred on January 1, 1993. Due to
the Restructuring and implementation of fresh start accounting, financial
statements effective May 7, 1993 for the Restructured Company are not comparable
to financial statements prior to that date for the Predecessor Company. However,
for presentation of this statement, total results for 1993 are shown under the
caption "Total Before Adjustments." The adjustments set forth under the caption
"Pro Forma Adjustments" reflect the implementation of the Prepackaged Plan and
the adoption of fresh start accounting as if they had occurred on January 1,
1993.
F-16
<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>
ACCOUNTS RECEIVABLE FACILITY
In the fourth quarter of 1994, the Corporation entered into an accounts
receivable facility (the "Receivables Facility") in which USG Funding, a special
purpose subsidiary of the Corporation, formed under Delaware law, entered into
agreements with U.S. Gypsum and USG Interiors. These agreements provide that USG
Funding will purchase trade receivables (excluding intercompany receivables owed
by L&W Supply) of U.S. Gypsum and USG Interiors as generated, in a transaction
designed to be a "true sale" under applicable law. USG Funding is a party to a
Master Trust arrangement (the "Master Trust") under which the purchased
receivables are then transferred to Chemical Bank as Trustee to be held for the
benefit of certificate holders in such trust. A residual interest in the Master
Trust is owned by USG Funding through subordinated certificates. Under a
supplement to the Master Trust, certificates representing an ownership interest
in the Master Trust of up to $100 million were issued to Citicorp Securities,
Inc. The interest rate on the debt issued under the Receivables Facility is
fixed at approximately 8.9% (including facility costs)
F-17
<PAGE>
USG CORPORATION
(RESTRUCTURED COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
through a long-term interest rate swap. Under a pending amendment to the
Receivables Facility, debt issued under such facility will have a final maturity
in 2004 and the Corporation will have the option to expand such facility up to
$130 million. Debt issued under the Receivables Facility may be prepaid at any
time. Pursuant to the applicable reserve and eligibility requirements, the
maximum amount of debt issuable under the Receivables Facility as of December
31, 1994 (including the $80 million outstanding at such date) was $103 million.
Under the foregoing agreements and related documentation, USG Funding is a
separate corporate entity with its own separate creditors which will be entitled
to be satisfied out of USG Funding's assets prior to distribution of any value
to its shareholder.
As of December 31, 1994, the outstanding balance of receivables sold to USG
Funding and held under the Master Trust was $151 million and debt outstanding
under the Receivables Facility was $80 million. Receivables and debt outstanding
in connection with the Receivables Facility remain in receivables and long-term
debt, respectively, on the Corporation's consolidated balance sheet.
EXTRAORDINARY LOSS
In December 1993, the Corporation recorded an extraordinary loss of $21
million, net of related income tax benefit of $11 million, reflecting the
write-off of the reorganization discount associated with debt issues prepaid,
redeemed or purchased in 1994 in connection with the Equity Offering and Note
Placement. See "Indebtedness" and "Stockholders' Equity" notes for more
information on the Equity Offering and Note Placement.
RESEARCH AND DEVELOPMENT
Research and development expenditures are charged to earnings as incurred
and amounted to $17 million in the year ended December 31, 1994 and $10 million
in the period of May 7 through December 31, 1993.
TAXES ON INCOME AND DEFERRED INCOME TAXES
Earnings/(loss) before taxes on income and extraordinary loss consisted of
the following (dollars in millions):
<TABLE>
<CAPTION>
YEAR ENDED MAY 7 THROUGH
DECEMBER 31, 1994 DECEMBER 31, 1993
----------------- -----------------
<S> <C> <C>
U.S..................................................................... $ (42) $ (72)
Foreign................................................................. 4 (7)
--- ---
Total................................................................... (38) (79)
--- ---
--- ---
</TABLE>
F-18
<PAGE>
USG CORPORATION
(RESTRUCTURED COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Taxes on income consisted of the following (dollars in millions):
<TABLE>
<CAPTION>
YEAR ENDED MAY 7 THROUGH
DECEMBER 31, 1994 DECEMBER 31, 1993
----------------- -----------------
<S> <C> <C>
Current:
U.S. Federal.......................................................... $ 39 $ 12
Foreign............................................................... 12 5
State................................................................. 10 1
--- ---
61 18
--- ---
Deferred:
U.S. Federal.......................................................... (7) 11
Foreign............................................................... -- --
State................................................................. -- --
--- ---
(7) 11
--- ---
Total................................................................... 54 29
--- ---
--- ---
</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
YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31,
1994 1993
------------ ------------
<S> <C> <C>
Statutory U.S. Federal income tax/(benefit) rate.................................................... (35.0)% (35.0)%
Excess reorganization value amortization............................................................ 154.8 49.6
Foreign tax rate differential....................................................................... 10.6 11.4
Statutory rate adjustment to historical deferred taxes.............................................. -- 4.0
Valuation allowance adjustment...................................................................... -- 3.3
State income taxes.................................................................................. 16.7 --
Depletion........................................................................................... (7.5) --
Other, net.......................................................................................... 2.5 3.4
----- -----
Effective income tax rate........................................................................... 142.1 36.7
----- -----
----- -----
</TABLE>
F-19
<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, 1994 and 1993
were as follows (dollars in millions):
<TABLE>
<CAPTION>
AS OF DECEMBER 31
--------------------
1994 1993
--------- ---------
<S> <C> <C>
Property, plant and equipment......................................................... $ 164 $ 164
Debt discount......................................................................... 11 19
Deferred tax liabilities.............................................................. 175 183
--------- ---------
Pension and retiree medical benefits.................................................. (94) (90)
Reserves not deductible until paid.................................................... (71) (61)
Other................................................................................. (6) (8)
--------- ---------
Deferred tax assets before valuation allowance........................................ (171) (159)
Valuation allowance................................................................... 90 90
--------- ---------
Deferred tax assets................................................................... (81) (69)
--------- ---------
Net deferred tax liabilities.......................................................... 94 114
--------- ---------
--------- ---------
</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 to the Corporation's net operating loss carryforwards (the
"NOL Carryforwards") as a result of the Prepackaged Plan, no deferred tax asset
is recorded. Under fresh start accounting rules, any benefit realized from
utilizing predecessor company NOL Carryforwards will not impact net earnings.
The Corporation has NOL Carryforwards of $49 million remaining from 1992
after using approximately $50 million to offset U.S. taxable income in 1994.
These NOL Carryforwards may be used to offset U.S. taxable income through 2007.
The Internal Revenue Code limits the Corporation's annual use of its NOL
Carryforwards to the lesser of its taxable income or approximately $30 million
plus any unused limit from prior years. Furthermore, due to the uncertainty
regarding the application of the Code to the exchange of stock for debt, the
Corporation's NOL Carryforwards to 1994 and later years could be reduced or
eliminated. The Corporation has a $4 million minimum tax credit which may be
used to offset U.S. regular tax liability in future years.
The Corporation does not provide for U.S. Federal income taxes on the
portion of undistributed earnings of foreign subsidiaries which are intended to
be permanently reinvested. The cumulative amount of such undistributed earnings
totaled approximately $93 million as of December 31, 1994. Any future
repatriation of undistributed earnings would not, in the opinion of management,
result in significant additional taxes.
INVENTORIES
Most of the Corporation's domestic inventories are valued under the last-in,
first-out ("LIFO") method. In accordance with the implementation of fresh start
accounting, inventories were stated at fair market value as of May 6, 1993. As
of December 31, 1994, the LIFO values of these inventories were $121 million and
would have been $5 million higher if they were valued under the first-in,
first-out ("FIFO") and average production cost methods. As of December 31, 1993,
inventories valued under the LIFO method totaled $103 million and would have
been the same if they were valued under the FIFO and average production cost
F-20
<PAGE>
USG CORPORATION
(RESTRUCTURED COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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
--------------------
1994 1993
--------- ---------
<S> <C> <C>
Finished goods and work-in-process............................................ $ 102 $ 84
Raw materials................................................................. 62 53
Supplies...................................................................... 9 8
--------- ---------
Total......................................................................... 173 145
--------- ---------
--------- ---------
</TABLE>
The LIFO value of U.S. domestic inventories under fresh start accounting
exceeded that computed for U.S. Federal income tax purposes by $30 million and
$25 million as of December 31, 1994 and 1993, respectively.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment were stated at fair market value as of May 6,
1993 in accordance with fresh start accounting. Provisions for depreciation are
determined principally on a straight-line basis over the expected average useful
lives of composite asset groups. Depletion is computed on a basis calculated to
spread the cost of gypsum and other applicable resources over the estimated
quantities of material recoverable. Interest during construction is capitalized
on major property additions. Property, plant and equipment classifications were
as follows (dollars in millions):
<TABLE>
<CAPTION>
AS OF DECEMBER 31
--------------------
1994 1993
--------- ---------
<S> <C> <C>
Land and mineral deposits..................................................... $ 56 $ 61
Buildings and realty improvements............................................. 230 233
Machinery and equipment....................................................... 549 496
--------- ---------
835 790
Reserves for depreciation and depletion....................................... (80) (36)
--------- ---------
Total......................................................................... 755 754
--------- ---------
--------- ---------
</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 $37 million and $22
million in the year ended December 31, 1994 and the period of May 7
F-21
<PAGE>
USG CORPORATION
(Restructured Company)
Notes to Financial Statements (Continued)
through December 31, 1993, respectively. Future minimum lease payments, by year
and in the aggregate, under operating leases with initial or remaining
noncancellable terms in excess of one year as of December 31, 1994 were as
follows (dollars in millions):
<TABLE>
<CAPTION>
MINIMUM
LEASE
PAYMENTS
-----------
<S> <C>
1995.............................................................................. $ 28
1996.............................................................................. 24
1997.............................................................................. 19
1998.............................................................................. 15
1999.............................................................................. 12
Thereafter........................................................................ 30
-----
Aggregate minimum payments........................................................ 128
-----
-----
</TABLE>
INDEBTEDNESS
Total debt, including currently maturing debt, consisted of the following
(dollars in millions):
<TABLE>
<CAPTION>
AS OF DECEMBER 31
--------------------
1994 1993
--------- ---------
<S> <C> <C>
SECURED DEBT:
Bank Term Loans, installments due 1997 through 2000................................. $ 283 $ 448
Receivables Facility, due 2003 and 2004............................................. 80 --
Senior notes and debentures:
8% Senior Notes due 1995.......................................................... -- 75
8% Senior Notes due 1996.......................................................... 28 90
8% Senior Notes due 1997.......................................................... 41 100
9% Senior Notes due 1998.......................................................... -- 35
9 1/4% Senior Notes, due 2001..................................................... 150 --
10 1/4% Senior Notes due 2002..................................................... 298 478
7 7/8% Sinking Fund Debentures due 2004........................................... 33 36
8 3/4% Sinking Fund Debentures due 2017........................................... 190 200
Other secured debt, average interest rate 9.4% and 8.0%, varying payments through
1999............................................................................... 7 31
UNSECURED DEBT:
Industrial revenue bonds, 5.9% ranging to 8.0%, due through 2019.................... 39 38
--------- ---------
Total principal amount of debt...................................................... 1,149 1,531
Less unamortized reorganization discount............................................ (27) (55)
--------- ---------
Total carrying amount of debt....................................................... 1,122 1,476
--------- ---------
--------- ---------
</TABLE>
As of December 31, 1994, the Corporation and its subsidiaries had $1,149
million total principal amount of debt (before unamortized reorganization
discount) on a consolidated basis. Of such total debt, $159 million represented
direct borrowings by the subsidiaries, including $80 million borrowed under the
Receivables Facility, $39 million of industrial revenue bonds, $33 million of
7 7/8% sinking fund debentures issued by U.S. Gypsum in 1974 and subsequently
assumed by the Corporation on a joint and several basis in 1985, and $7 million
of debt incurred by the Corporation's foreign subsidiaries.
The Bank Term Loans and most other senior debt are secured by a pledge of
all of the shares of the Corporation's major domestic subsidiaries and 65% of
the shares of certain of its foreign subsidiaries
F-22
<PAGE>
USG CORPORATION
(RESTRUCTURED COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
including CGC, pursuant to a collateral trust arrangement controlled primarily
by holders of the Bank Term Loans. The rights of the Corporation and its
creditors to the assets of any subsidiary upon the latter's liquidation or
reorganization will be subject to the prior claims of such subsidiary's
creditors, except to the extent that the Corporation may itself be a creditor
with enforceable claims against such subsidiary.
The fair market value of debt outstanding as of December 31, 1994 was $1,109
million, based on indicative bond prices as of that date, excluding other
secured debt, which was not practicable to estimate. As of December 31, 1993,
the fair market value of debt was $1,481 million, based on indicative bond
prices as of that date, excluding other secured debt, primarily representing
financing for construction of the Aubange plant, which was not practicable to
estimate.
The "other secured debt" category shown in the table above primarily
includes short-term and long-term borrowings from several foreign banks. As of
December 31, 1993, this category primarily included borrowings by USG
International used principally to finance construction of the Aubange, Belgium
ceiling tile plant. This debt, which was repaid in 1994, was secured by a lien
on the assets of the Aubange plant and had restrictive covenants that
restricted, among other things, the payment of dividends. Foreign borrowings
made by the Corporation's international operations are generally allowed, within
certain limits, under provisions of the Credit Agreement.
The weighted average interest rate on outstanding short-term borrowings was
9.2% and 6.6% as of December 31, 1994 and 1993, respectively.
As of December 31, 1994, aggregate scheduled maturities of long-term debt,
excluding amounts classified as current liabilities, were $37 million, $45
million, $4 million and $73 million for the years 1996 through 1999,
respectively.
THE CREDIT AGREEMENT
The Bank Term Loans were issued in connection with the Credit Agreement. In
general, the Credit Agreement restricts, among other things, the incurrence of
additional indebtedness, mergers, asset dispositions, investments, prepayment of
other debt, dealings with affiliates, capital expenditures, payment of dividends
and lease commitments and requires the Corporation, beginning January 1, 1995,
to satisfy certain financial covenants. An agreement with Water Street also
requires the Corporation to satisfy certain financial covenants.
The average rate of interest on the Bank Term Loans was 6.2% and 5.3% in the
year ended December 31, 1994 and the period of May 7 through December 31, 1993,
respectively.
The Credit Agreement provides for a revolving credit facility (the
"Revolving Credit Facility"). As of December 31, 1994, the Revolving Credit
Facility amounted to $245 million, including a $115 million letter of credit
subfacility and $70 million available solely for the purchase or repayment of
Senior 1996 Notes and Senior 1997 Notes. As of December 31, 1993, the Revolving
Credit Facility amounted to $175 million, including the aforementioned $115
million letter of credit subfacility. Amounts committed and undrawn under such
letter of credit subfacility were $58 million and $60 million as of December 31,
1994 and 1993, respectively. There were no amounts outstanding under the
Revolving Credit Facility as of December 31, 1994 and 1993.
Under the Cash Sweep provision of the Credit Agreement, a portion of excess
cash as of the end of any year, calculated in accordance with the Credit
Agreement, must be used to pay Bank Term Loans. As of December 31, 1994, the
Cash Sweep amounted to $132 million, of which 50%, or $66 million was required
to be used to pay Bank Term Loans while the remaining 50% was retained by the
Corporation for general corporate purposes. The portion of the Cash Sweep
required to be used to pay Bank Term Loans included $25 million which was
prepaid in the third quarter of 1994 and $41 million which was reclassified to
currently
F-23
<PAGE>
USG CORPORATION
(RESTRUCTURED COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
maturing long-term debt as of December 31, 1994 and paid in January 1995. In
February 1995, the Corporation made a further payment of $50 million to reduce
Bank Term Loans outstanding. This additional payment was applied to the 1999
maturity of the Bank Term Loans thereby reducing the 1999 aggregate scheduled
maturity shown above.
DEBT REFINANCING
In the fourth quarter of 1994, the Corporation entered into the Receivables
Facility. As of December 31, 1994, debt issued in connection with the
Receivables Facility totaled $80 million and accounts receivable held in the
Master Trust totaled $151 million. See "Accounts Receivable Facility" note for
more information on the Receivables Facility.
Also during the fourth quarter of 1994, the Corporation decided to pursue
various refinancing alternatives related to its Bank Term Loans. The Corporation
intends to accelerate the payment of such loans in 1995 through a combination of
excess cash flow and proceeds from a potential refinancing. As a result, the
Corporation recorded a non-cash pre-tax charge of $16 million to interest
expense reflecting the write-off of reorganization debt discount primarily
associated with the Bank Term Loans.
In the third quarter of 1994, the Third Amendment to the Credit Agreement
was consummated. In connection with such amendment, the Corporation made the
aforementioned $25 million prepayment of the Cash Sweep. Major revisions to the
Credit Agreement provided by the Third Amendment included modification of the
Cash Sweep provision, authorization for the Corporation to immediately prepay
certain debt, authorization for the Corporation to enter into a revolving
accounts receivable sale facility and certain other changes to increase the
Corporation's operating flexibility.
In the first quarter of 1994, the Corporation implemented a refinancing plan
which included (i) a public offering of 14,375,000 shares of common stock (the
"Equity Offering"), of which 7,900,000 shares, yielding net proceeds to the
Corporation of $224 million, were newly issued by the Corporation and 6,475,000
were sold by Water Street Corporate Recovery Fund I, L.P. ("Water Street"), a
stockholder; (ii) the issuance of $150 million of Senior 2001 Notes to certain
institutional investors (the "Note Placement") in exchange for $30 million
aggregate principal amount of its outstanding Senior 1996 Notes, $35 million
aggregate principal amount of its outstanding Senior 1997 Notes and $85 million
in cash; and (iii) amendment of the Credit Agreement for the second time since
the Restructuring. This amendment, (together with the Equity Offering and the
Note Placement, the "Transactions") increased the size of the Corporation's
revolving credit facility by $70 million (solely for the purchase or repayment
of Senior 1996 Notes and Senior 1997 Notes) and amended the Cash Sweep provision
to allow the Corporation, upon the achievement of certain financial tests, to
retain additional free cash flow for capital expenditures and repayment of its
public debt.
In August, 1993, the Corporation issued $138 million of Senior 2002 Notes in
exchange for Bank Term Loans and other debt then outstanding under the Credit
Agreement. The Corporation did not receive any cash proceeds from the issuance
of these securities. In connection with this transaction, an amendment to the
Credit Agreement provided for the elimination of scheduled Bank Term Loans
payments through 1996, prepayment of $9 million of other debt outstanding under
the Credit Agreement and modification of the Cash Sweep provision.
PENSION PLANS
The Corporation and most of its subsidiaries have defined benefit retirement
plans for all eligible employees. Benefits of the plans are generally based on
years of service and employees' compensation
F-24
<PAGE>
USG CORPORATION
(RESTRUCTURED COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
during the last years of employment. The Corporation's contributions are made in
accordance with independent actuarial reports which, for most plans, required
minimal funding in the year ended December 31, 1994 and the period of May 7
through December 31, 1993. Net pension expense included the following components
(dollars in millions):
<TABLE>
<CAPTION>
YEAR ENDED MAY 7 THROUGH
DECEMBER 31, 1994 DECEMBER 31, 1993
----------------- -----------------
<S> <C> <C>
Service cost-benefits earned during the period.......................... $ 11 $ 7
Interest cost on projected benefit obligation........................... 31 21
Actual (return)/loss on plan assets..................................... 1 (37)
Net amortization/(deferral)............................................. (35) 16
--- ---
Net pension expense..................................................... 8 7
--- ---
--- ---
</TABLE>
The pension plan assets, which consist primarily of publicly traded common
stocks and debt securities, had an estimated fair market value that was lower
than the projected benefit obligation as of December 31, 1994 and 1993.
The following table presents a reconciliation of the total assets of the
pension plans to the projected benefit obligation (dollars in millions):
<TABLE>
<CAPTION>
AS OF DECEMBER 31
--------------------
1994 1993
--------- ---------
<S> <C> <C>
Amount of assets available for benefits:
Funded assets of the plans at fair market value....................................... $ 370 $ 400
Accrued pension expense............................................................... 29 25
--------- ---------
Total assets of the plans............................................................... 399 425
--------- ---------
Present value of estimated pension obligation:
Vested benefits....................................................................... 300 329
Nonvested benefits.................................................................... 25 27
--------- ---------
Accumulated benefit obligation.......................................................... 325 356
Additional benefits based on projected future salary increases.......................... 79 85
--------- ---------
Projected benefit obligation............................................................ 404 441
--------- ---------
Projected benefit obligation in excess of assets........................................ (5) (16)
--------- ---------
--------- ---------
</TABLE>
The projected benefit obligation in excess of assets consisted of an
unrecognized net loss in each period due to changes in assumptions and
differences between actual and estimated experience.
The expected long-term rate of return on plan assets was 9% for the year
ended December 31, 1994 and the period of May 7 through December 31, 1993. The
assumed weighted average discount rate used in determining the accumulated
benefit obligation was 8.25% and 7% as December 31, 1994 and 1993, respectively.
The rate of increases in projected future compensation levels was 5% for both
periods.
POSTRETIREMENT BENEFITS
The Corporation maintains plans that provide retiree health care and life
insurance benefits for all eligible employees. Employees generally become
eligible for the retiree benefit plans when they meet minimum retirement age and
service requirements. The cost of providing most of these benefits is shared
with retirees.
F-25
<PAGE>
USG CORPORATION
(RESTRUCTURED COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes the components of net periodic postretirement
benefit cost for the year ended December 31, 1994 and the period of May 7
through December 31, 1993 (dollars in millions):
<TABLE>
<CAPTION>
YEAR ENDED MAY 7 THROUGH
DECEMBER 31, 1994 DECEMBER 31, 1993
----------------- -----------------
<S> <C> <C>
Service cost of benefits earned......................................... $ 6 $ 4
Interest on accumulated postretirement benefit obligation............... 12 9
--- ---
Net periodic postretirement benefit cost................................ 18 13
--- ---
--- ---
</TABLE>
The status of the Corporation's accrued postretirement benefit cost as of
December 31, 1994 and 1993 were as follows (dollars in millions):
<TABLE>
<CAPTION>
AS OF DECEMBER 31
--------------------
1994 1993
--------- ---------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees.................................................................................. $ 81 $ 123
Fully eligible active participants........................................................ 11 14
Other active participants................................................................. 59 66
--------- ---------
151 203
Unrecognized net gain/(loss)................................................................ 42 (2)
--------- ---------
Accrued postretirement benefit cost liability recognized on the Consolidated Balance
Sheet...................................................................................... 193 201
--------- ---------
--------- ---------
</TABLE>
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 10% and 11% as of December 31, 1994 and
1993, respectively, with a gradually declining rate to 5% by the year 2000 and
remaining at that level thereafter. A one-percentage-point increase in the
assumed health care cost trend rate for each year would increase the accumulated
postretirement benefit obligation by $20 million and $22 million as of December
31, 1994 and 1993, respectively, and increase the net periodic postretirement
benefit cost by $3 million and $2 million for the year ended December 31, 1994
and the period of May 7 through December 31, 1993, respectively. The assumed
discount rate used in determining the accumulated postretirement benefit
obligation was 8.25% and 7% as of December 31, 1994 and 1993, respectively.
COMMITMENTS AND CONTINGENCIES
The Corporation has limited involvement with derivative financial
instruments and does not use them for trading purposes. They are used primarily
to manage well-defined interest rate and energy cost risks as well as occasional
foreign currency exchange exposure. The following table presents the carrying
amounts and estimated fair value of the Corporation's derivative portfolio as of
December 31, 1994 (dollars in millions):
<TABLE>
<CAPTION>
NOTIONAL CARRYING
AMOUNT AMOUNT FAIR VALUE
----------- ------------- -----------
<S> <C> <C> <C>
Interest rate contracts....................................................... $ 545 $ 5 $ 8
Energy price swaps............................................................ 23 -- (1)
</TABLE>
The amounts reported as fair value represent the market value as obtained
from broker quotations. The negative fair value of the energy price swaps is an
estimate of the amounts the Corporation would need to pay as of December 31,
1994 to cancel the contracts or transfer them to other parties.
F-26
<PAGE>
USG CORPORATION
(RESTRUCTURED COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
As of December 31, 1993, the Corporation had approximately $455 million
notional amount of interest rate contracts outstanding, extending up to three
years, and approximately $42 million notional amount and $11 million notional
amount of energy price and foreign currency exchange contracts outstanding,
respectively, extending one year or less. The difference in the value of all of
the aforementioned contracts and the December 31, 1993 market value was not
material.
The Corporation is exposed to credit losses in the event of nonperformance
by the counterparties on all its derivative contracts but has no off-balance
sheet credit risk of accounting loss. All counterparties have investment grade
credit standing and accordingly, the Corporation anticipates that these
counterparties will be able to fully satisfy their obligation under the
contracts. The Corporation does not obtain collateral or other security to
support financial instruments subject to credit risk but monitors the credit
standing of counterparties.
INTEREST RATE RISK MANAGEMENT
The Corporation purchased prepaid interest rate caps and swap options to
manage the impact of interest rate changes on LIBOR-based bank debt. As of
December 31, 1994, such instruments owned by the Corporation totaled $445
million, which capped the Corporation's expected LIBOR-based bank debt payments
at 5.2% for 1995 ($250 million notional amount), 7% for 1996 ($120 million
notional amount) and 7% for 1997 ($75 million notional amount). In addition, as
of December 31, 1994, the Corporation had entered into $100 million of interest
rate swap and collar agreements to hedge its Receivables Facility, under which
$80 million was outstanding as of December 31, 1994. In January 1995, such
interest rate swap and collar agreements were terminated at par and replaced
with $80 million of new interest rate swap agreements. Under the interest rate
swap agreements, the Corporation pays a fixed rate of approximately 8.9%
(including facility costs) in exchange for the monthly commercial paper-based
payments due on the Receivables Facility until its final maturity.
Premiums paid for purchased interest rate cap agreements are amortized to
interest expense over the term of the caps. Unamortized premiums are included in
other assets on the consolidated balance sheet. Amounts receivable under cap
agreements and receivables or payables under swap agreements are accrued as an
increase or decrease to interest expense as appropriate.
ENERGY COST RISK MANAGEMENT
The Corporation uses energy price swap agreements to hedge anticipated
purchases of fuel to be utilized in the manufacturing process for gypsum
wallboard. Under these swap agreements, the Corporation receives or makes
payments based on the differential between a specified price and the actual
closing price for the current month's energy price contract. As of December 31,
1994, the Corporation had over-the-counter swap agreements to exchange monthly
payments on notional amounts of energy amounting to $23 million, all extending
one year or less.
Upon settlement of energy price contracts, the resulting gain or loss is
included in cost of products sold, along with the actual spot energy cost of the
corresponding underlying hedged transaction, the combination of which amounts to
the predetermined specified contract price.
FOREIGN EXCHANGE RISK MANAGEMENT
The Corporation had no foreign currency exchange contracts as of December
31, 1994.
MANAGEMENT PERFORMANCE PLAN
On May 6, 1993, all outstanding stock options were cancelled without
consideration and all shares of restricted and deferred stock were cashed-out
pursuant to "change in control" provisions contained in the Management
Performance Plan except for 25,580 shares of restricted stock and awards for
deferred stock yet to be issued which remained outstanding as a consequence of
certain waivers of the change in control
F-27
<PAGE>
USG CORPORATION
(RESTRUCTURED COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
event by senior members of management. Those shares which remained outstanding
on May 6, 1993 were freed of restrictions in 1994, an acceleration from the
original terms which freed the restrictions on incremental portions of the
shares through 1998.
As permitted by the Prepackaged Plan, a certain number of common shares were
reserved for future issuance in conjunction with stock options. Options were
granted in 1993 and 1994 at an exercise price equal to the mean of the high and
low sales prices for a share of the Corporation's common stock (the "Common
Stock") as reported on the NYSE composite tape on the grant dates. These options
become exercisable at the rate of one-third of the aggregate grant on each of
the first three anniversaries of the date of the grant and expire on the tenth
anniversary of the date of grant except in the case of retirement, death or
disability in which case they expire on the earlier of the fifth anniversary of
such event or the expiration of the original option term. Stock option activity
for the year ended December 31, 1994 and the period of May 7 through December
31, 1993 was as follows:
<TABLE>
<CAPTION>
YEAR ENDED MAY 7 THROUGH
DECEMBER 31, DECEMBER 31,
1994 1993
-------------- --------------
<S> <C> <C>
Outstanding at beginning of period.......................................... 1,673,000 --
Granted..................................................................... 1,161,500 1,673,000
Exercised (at a price of $10.3125 per share)................................ (23,800) --
Canceled.................................................................... (46,200) --
-------------- --------------
Outstanding at end of period (at prices ranging from $10.3125 to $32.5625
per share)................................................................. 2,764,500 1,673,000
-------------- --------------
-------------- --------------
Exercisable at end of period................................................ 578,020 --
Available for grant at end of period........................................ 50 1,115,350
</TABLE>
PREFERRED SHARE PURCHASE RIGHTS
On May 6, 1993, a rights plan (the "Rights Agreement") was adopted pursuant
to which the Corporation declared a distribution of one right (the "Rights")
upon each share of Common Stock. The Rights, which are intended to protect
stockholders in the event of an unsolicited attempt to acquire the Corporation,
generally become exercisable 10 days following the announcement of the
acquisition of 20% or more of the outstanding Common Stock by someone other than
the Corporation or one of its employee benefit plans (10% in the case of an
acquisition which the Corporation's Board of Directors determines to represent a
threat of acquisition not in the best interests of the Corporation's
stockholders). When exercisable, each of the Rights entitles the registered
holder to purchase one-hundredth of a share of a junior participating preferred
stock, series C, $1.00 par value per share, at a price of $35.00 per
one-hundredth of a preferred share, subject to adjustment. The Rights also
provide for a so-called "flip-in" feature and exchange feature and certain
exemptions permitting certain acquisitions and the continued holding of common
shares by Water Street and its affiliates in excess of the otherwise specified
thresholds.
In the event that the Corporation is the surviving corporation and the
Common Stock remains outstanding and unchanged in a merger or other business
combination with such acquiring party or the acquiring party engages in one of a
number of self-dealing transactions specified in the Rights Agreement, each
holder of a Right other than the acquiring party will thereafter have the right,
subject to the exchange feature, to receive upon exercise thereof that number of
shares of Common Stock having a market value at the time of such transaction of
two times the exercise price of the Right.
WARRANTS
On May 6, 1993, a total of 2,602,566 warrants, each to purchase a share of
Common Stock at an exercise price of $16.14 per share (the "Warrants"), in
addition to Common Stock, were issued to holders of
F-28
<PAGE>
USG CORPORATION
(RESTRUCTURED COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
certain debt which was converted to equity in the Restructuring. Upon issuance,
each of the Warrants entitled the holder to purchase one share of Common Stock
at a purchase price of $16.14 per share, subject to adjustment under certain
events.
The Warrants are exercisable, subject to applicable securities laws, at any
time prior to May 6, 1998. Each share of Common Stock issued upon exercise of a
Warrant prior to the Distribution Date (as defined in the Rights Agreement) and
prior to the redemption or expiration of the Rights will be accompanied by an
attached Right issued under the terms and subject to the conditions of the
Rights Agreement as it may then be in effect. As of December 31, 1994 and 1993,
outstanding Warrants amounted to 2,594,181 and 2,601,619, respectively.
STOCKHOLDERS' EQUITY
Changes in stockholders' equity are summarized as follows (dollars in
millions):
<TABLE>
<CAPTION>
YEAR ENDED MAY 7 THROUGH
DECEMBER 31, DECEMBER 31,
1994 1993
--------------- ---------------
<S> <C> <C>
COMMON STOCK:
Beginning Balance........................................................... $ 4 $ 4
Public offering of common stock............................................. 1 --
----- -----
Ending Balance.............................................................. 5 4
----- -----
CAPITAL RECEIVED IN EXCESS OF PAR VALUE:
Beginning Balance........................................................... -- --
Public offering of common stock............................................. 223 --
Other, net.................................................................. (2) --
----- -----
Ending Balance.............................................................. 221 --
----- -----
DEFERRED CURRENCY TRANSLATION:
Beginning Balance........................................................... (9) --
Change during the period.................................................... (4) (9)
----- -----
Ending Balance.............................................................. (13) (9)
----- -----
REINVESTED EARNINGS/(DEFICIT):
Beginning Balance........................................................... (129) --
Net loss.................................................................... (92) (129)
----- -----
Ending Balance.............................................................. (221) (129)
----- -----
Total stockholders' equity/(deficit)........................................ (8) (134)
----- -----
----- -----
</TABLE>
There were 33,988 and 27,876 shares of $0.10 par value Common Stock held in
treasury as of December 31, 1994 and 1993, respectively. These shares were
acquired through the forfeiture of restricted stock and the surrender of shares
in settlement of tax withholding obligations.
In the first quarter of 1994, the Corporation completed the Equity Offering
under which 14,375,000 shares of Common Stock was sold to the public, consisting
of 7,900,000 shares newly issued by the Corporation and 6,475,000 sold by Water
Street. Net proceeds to the Corporation from the newly issued shares amounted to
$224 million. The Corporation did not receive any proceeds from the sale of
shares by Water Street. See "Indebtedness" note for more information on the
Equity Offering.
F-29
<PAGE>
USG CORPORATION
(RESTRUCTURED COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
LITIGATION
One of the Corporation's subsidiaries, U.S. Gypsum, is among numerous
defendants in lawsuits arising out of the manufacture and sale of
asbestos-containing building materials. U.S. Gypsum sold certain
asbestos-containing products beginning in the 1930's; in most cases the products
were discontinued or asbestos was removed from the product formula by 1972, and
no asbestos-containing products were sold after 1977. Some of these lawsuits
seek to recover compensatory and in many cases punitive damages for costs
associated with maintenance or removal and replacement of products containing
asbestos (the "Property Damage Cases"). Others of these suits (the "Personal
Injury Cases") seek to recover compensatory and in many cases punitive damages
for personal injury allegedly resulting from exposure to asbestos and
asbestos-containing products. It is anticipated that additional personal injury
and property damage cases containing similar allegations will be filed.
As discussed below, U.S. Gypsum has substantial personal injury and property
damage insurance for the years involved in the asbestos litigation. Prior to
1985, when an asbestos exclusion was added to U.S. Gypsum's policies, U.S.
Gypsum purchased comprehensive general liability insurance policies covering
personal injury and property damage in an aggregate face amount of approximately
$850 million. Insurers that issued approximately $106 million of these policies
are presently insolvent. After deducting insolvencies and exhaustion of
policies, approximately $550 million of insurance remains potentially available.
Because U.S. Gypsum's insurance carriers initially responded to its claims for
defense and indemnification with various theories denying or limiting coverage
and the applicability of their policies, U.S. Gypsum filed a declaratory
judgment action against them in the Circuit Court of Cook County, Illinois on
December 29, 1983. (U. S. GYPSUM CO. V. ADMIRAL INSURANCE CO., ET AL.) (the
"Coverage Action"). U.S. Gypsum alleges in the Coverage Action that the carriers
are obligated to provide indemnification for settlements and judgments and, in
some cases, defense costs incurred by U.S. Gypsum in property damage and
personal injury claims in which it is a defendant. The current defendants are
ten insurance carriers that provided comprehensive general liability insurance
coverage to U.S. Gypsum between the 1940's and 1984. As discussed below, several
carriers have settled all or a portion of the claims in the Coverage Action.
U.S. Gypsum's aggregate out-of-pocket cash expenditures for all
asbestos-related matters, including property damage, personal injury, insurance
coverage litigation and related expenses, exceeded aggregate insurance payments
by $25.8 million in 1992, $8.2 million in 1993 and $33.4 million in 1994. For
the same periods, the Corporation has charged $18 million to earnings annually
for all asbestos-related matters, excluding the $30 million charge described in
"Property Damage Cases" below.
PROPERTY DAMAGE CASES
The Property Damage Cases have been brought against U.S. Gypsum by a variety
of plaintiffs, including school districts, state and local governments, colleges
and universities, hospitals and private property owners. As of December 31,
1994, 41 Property Damage Cases were pending against U.S. Gypsum; however, the
number of buildings involved is greater than the number of cases because many of
these cases, including the class actions referred to below, involve multiple
buildings. In addition, approximately 37 property damage claims have been
threatened against U.S. Gypsum. U.S. Gypsum has denied the substantive
allegations of each of the Property Damage Cases and intends to defend them
vigorously except when advantageous settlements are possible.
U.S. Gypsum is one of many defendants in three pending cases that have been
certified as class actions and others that request such certification. On April
10, 1992, a state court in Philadelphia certified a class consisting of all
owners of buildings leased to the federal government. (PRINCE GEORGE CENTER,
INC. V. U.S. GYPSUM CO., ET AL., Court of Common Pleas, Philadelphia, Pa.) On
September 4, 1992, a Federal district
F-30
<PAGE>
USG CORPORATION
(RESTRUCTURED COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
court in South Carolina conditionally certified a class comprised of all
colleges and universities in the United States, which certification is presently
limited to the resolution of certain allegedly "common" liability issues.
(CENTRAL WESLEYAN COLLEGE V. W.R. GRACE & CO., ET AL, U.S.D.C. S.C.).
In October 1994, U.S. Gypsum executed agreements to settle two other class
actions (one of which has now been closed), subject to court approval following
notice to the respective classes. One suit was brought on behalf of owners and
operators of all elementary and secondary schools in the United States that
contain or contained friable asbestos-containing material. (IN RE ASBESTOS
SCHOOL LITIGATION, U.S.D.C, E.D. Pa.) Approximately 1,350 school districts opted
out of the class, some of which have filed or may file separate lawsuits. The
other class action settlement involved approximately 333 school districts in
Michigan that had opted out of the nationwide class action. (BOARD OF EDUCATION
OF THE CITY OF DETROIT, ET AL. V. THE CELOTEX CORP., ET AL., Circuit Court for
Wayne County, MI.) The Corporation took a $30 million pre-tax charge to earnings
in the fourth quarter of 1994 primarily to cover the cash payments,
approximately two-thirds of which was paid in 1994 with the rest payable over
the next two years. In addition, U.S. Gypsum will also issue discount coupons to
the school districts in the nationwide class action for the purchase of plaster
products. The coupons, which will be redeemable over ten years subject to annual
"caps," will have an aggregate face amount of $50 million. No charge against
earnings was recorded for future coupon redemptions. Such redemptions will
reduce margins when redeemed, and although the amount of redemptions cannot be
estimated, the impact on results of operations is expected to be immaterial. The
Michigan settlement was approved by the Court on December 2, 1994, and no appeal
was filed. The settlement of the nationwide class action has not yet been
presented to the Court for approval.
A case pending in state court in South Carolina, which has not been
certified as a class action, purports to be a "voluntary" class action on behalf
of owners of all buildings containing certain types of asbestos-containing
products manufactured by the nine named defendants, including U.S. Gypsum, other
than buildings owned by the federal or state governments, single family
residences, or buildings at issue in the other described class actions.
(ANDERSON COUNTY HOSPITAL V. W.R. GRACE & CO., ET AL., Court of Common Pleas,
Hampton Co., S.C. (the "Anderson Case")). The Anderson Case also names the
Corporation as a defendant, alleging, among other things, that the guarantees
executed by U.S. Gypsum in connection with the 1988 Recapitalization, as well as
subsequent distributions of cash from U.S. Gypsum to the Corporation, rendered
U.S. Gypsum insolvent and constitute a fraudulent conveyance. In July 1994, the
court in the Anderson Case ruled that claims involving building owners outside
South Carolina cannot be included in the suit. A case which has yet to be
certified as a class action was filed in federal court in the Eastern District
of Texas on August 8, 1994. (KIRBYVILLE INDEPENDENT SCHOOL DISTRICT V. U.S.
GYPSUM, ET AL., United States District Court for the Eastern District of Texas,
Beaumont Division). The case purports to be a class action on behalf of all
public building owners and political subdivisions of the State of Texas,
including all cities, counties and municipalities. The damages claimed against
U.S. Gypsum in the class action cases are unspecified.
In total, U.S. Gypsum has settled approximately 93 property damage cases,
involving 209 plaintiffs, in addition to the two school class action settlements
referred to above. Twenty-four cases have been tried to verdict, 15 of which
were won by U.S. Gypsum and 5 lost; three other cases, one won at the trial
level and two lost, were settled during appeals. Another case that was lost at
the trial court level was reversed on appeal and remanded to the trial court,
which has now entered judgment for U.S. Gypsum. Appeals are pending in 3 of the
tried cases. In the cases lost, compensatory damage awards against U.S. Gypsum
have totaled $11.5 million. Punitive damages totalling $5.5 million were entered
against U.S. Gypsum in four trials. Two of the punitive damage awards, totalling
$1.45 million, were paid after appeals were exhausted; and two were settled
during the appellate process.
In 1992, 7 new Property Damage Cases were filed against U.S. Gypsum, 10 were
dismissed before trial, 18 were settled, 3 were closed following trial or
appeal, and 76 were pending at year-end. U.S. Gypsum expended $34.9 million for
the defense and resolution of Property Damage Cases and received insurance
F-31
<PAGE>
USG CORPORATION
(RESTRUCTURED COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
payments of $10.2 million in 1992. During 1993, 5 new Property Damage Cases were
filed against U.S. Gypsum, 7 were dismissed before trial, 11 were settled, 1 was
closed following trial or appeal, 2 were consolidated into 1, and 61 were
pending at year end; U. S Gypsum expended $13.9 million for the defense and
resolution of Property Damage Cases and received insurance payments of $7.6
million in 1993. In 1994, 5 new Property Damage Cases were filed against U.S.
Gypsum, 5 were dismissed before trial, 19 were settled, 1 was closed following
trial or appeal, and 41 were pending at year-end. U.S. Gypsum expended $40.6
million for the defense and resolution of Property Damage Cases (excluding
payments not yet due and future credits for coupon redemption under a 1994 class
action settlement) and received insurance payments of $9 million in 1994.
In the Property Damage Cases litigated to date, a defendant's liability for
compensatory damages, if any, has been limited to damages associated with the
presence and quantity of asbestos-containing products manufactured by that
defendant which are identified in the buildings at issue, although plaintiffs in
some cases have argued that principles of joint and several liability should
apply. Because of the unique factors inherent in each of the Property Damage
Cases, including the lack of reliable information as to product identification
and the amount of damages claimed against U.S. Gypsum in many cases, including
the class actions described above, management is unable to make a reasonable
estimate of the cost of disposing of pending Property Damage Cases.
PERSONAL INJURY CASES
U.S. Gypsum was among numerous defendants in asbestos personal injury suits
and administrative claims involving approximately 54,000 claimants pending as of
December 31, 1994 although, as discussed below, approximately 22,000 of such
claims are settled but not yet closed. All asbestos bodily injury claims pending
in the federal courts, including approximately one-third of the Personal Injury
Cases pending against U.S. Gypsum, have been consolidated in the United States
District Court for the Eastern District of Pennsylvania.
U.S. Gypsum is a member, together with 19 other former producers of
asbestos-containing products, of the Center for Claims Resolution (the
"Center"). The Center has assumed the handling, including the defense and
settlement, of all Personal Injury Cases pending against U.S. Gypsum and the
other members of the Center. Each member of the Center is assessed a portion of
the liability and defense costs of the Center for the Personal Injury Cases
handled by the Center, according to predetermined allocation formulas. Five of
U.S. Gypsum's insurance carriers that in 1985 signed an Agreement Concerning
Asbestos-Related Claims (the "Wellington Agreement") are supporting insurers
(the "Supporting Insurers") of the Center. The Supporting Insurers are obligated
to provide coverage for the defense and indemnity costs of the Center's members
pursuant to the coverage provisions in the Wellington Agreement. Claims for
punitive damages are defended but not paid by the Center; if punitive damages
are recovered, insurance coverage may be available under the Wellington
Agreement depending on the terms of particular policies and applicable state
law. Punitive damages have not been awarded against U.S. Gypsum in any of the
Personal Injury Cases. Virtually all of U.S. Gypsum's personal injury liability
and defense costs are paid by those of its insurance carriers that are
Supporting Insurers. The Supporting Insurers provided approximately $350 million
of the total coverage referred to above, of which approximately $222 million
remains unexhausted.
On January 15, 1993, U.S. Gypsum and the other members of the Center entered
into a class action settlement in the U. S. District Court for the Eastern
District of Pennsylvania. (GEORGINE ET AL. V. AMCHEM PRODUCTS INC., ET AL., Case
No. 93-CV-0215; hereinafter "Georgine.") The class of plaintiffs includes all
persons who have been occupationally exposed to asbestos-containing products
manufactured by the defendants, who had not filed an asbestos personal injury
suit as of the date of the filing of the class action. The settlement has been
approved by the trial court, and if upheld on appeal will implement for all
future Personal Injury Cases, except as noted below, an administrative
compensation system to replace judicial
F-32
<PAGE>
USG CORPORATION
(RESTRUCTURED COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
claims against the defendants, and will provide fair and adequate compensation
to future claimants who can demonstrate exposure to asbestos-containing products
manufactured by the defendants and the presence of an asbestos-related disease.
Approximately 250,000 purported class members "opted out," or elected to be
excluded from the settlement, although a substantial portion of such "opt outs"
had previously filed claims or are in groups considered unlikely to generate
significant numbers of future claims. As of December 31, 1994, approximately
10,000 claims naming U.S. Gypsum as a defendant had been filed by "opt outs." In
addition, in each year a limited number of class members will have certain
rights to prosecute their claims for compensatory (but not punitive) damages in
court in the event they reject the compensation offered by the administrative
processing of their claim.
The Center members, including U.S. Gypsum, have instituted proceedings
against those of their insurance carriers that had not consented to support the
settlement, seeking a declaratory judgment that the settlement is reasonable
and, therefore, that the carriers are obligated to fund their portion of it.
Consummation of the settlement is contingent upon, among other things, court
approval of the settlement and a favorable ruling in the declaratory judgment
proceedings against the non-consenting insurers.
Each of the defendants has committed to fund a defined portion of the
settlement, up to a stated maximum amount, over the initial ten year period of
the agreement (which is automatically extended unless terminated by the
defendants). Taking into account the provisions of the settlement agreement
concerning the maximum number of claims that must be processed in each year and
the total amount to be made available to the claimants, the Center estimates
that U.S. Gypsum will be obligated to fund a maximum of approximately $125
million of the class action settlement, exclusive of expenses, with a maximum
payment of less than $18 million in any single year; of the total amount of U.S.
Gypsum's obligation, all but approximately $7 million is expected to be paid by
U.S. Gypsum's insurance carriers.
During 1992, approximately 20,100 Personal Injury Cases were filed against
U.S. Gypsum and approximately 10,600 were settled or dismissed. U.S. Gypsum
incurred expenses of $21.6 million in 1992 with respect to Personal Injury Cases
of which $21.5 million was paid by insurance. During 1993, approximately 26,900
Personal Injury Cases were filed against U.S. Gypsum and approximately 22,900
were settled or dismissed. U.S. Gypsum incurred expenses of $34.9 million in
1993 with respect to Personal Injury Cases of which $34.0 million was paid by
insurance. During 1994, approximately 14,000 Personal Injury Cases were filed
against U.S. Gypsum, U.S. Gypsum was added as a defendant in approximately 4,000
cases that had been previously filed, and approximately 23,000 were settled or
dismissed. U.S. Gypsum incurred expenses of $38 million in 1994 with respect to
Personal Injury Cases of which $37.3 million was paid by insurance. As of
December 31, 1994, 1993, and 1992, 54,000, 59,000, and 54,000 Personal Injury
Cases were outstanding against U.S. Gypsum, respectively.
U.S. Gypsum's average settlement cost for Personal Injury Cases over the
past three years has been approximately $1,600 per claim, exclusive of defense
costs. Management anticipates that its average settlement cost may increase due
to such factors as the possible insolvency of co-defendants, although this
increase may be offset to some extent by other factors, including the
possibility for block settlements of large numbers of cases and the apparent
increase in the percentage of asbestos personal injury cases that appear to have
been brought by individuals with little or no physical impairment. Through the
Center, U.S. Gypsum had reached settlements on approximately 22,000 Personal
Injury Cases pending on December 31, 1994 for amounts totalling approximately
$32 million, to be expended over a three to five year period. In management's
opinion, based primarily upon U.S. Gypsum's experience in the Personal Injury
Cases disposed of to date and taking into consideration a number of
uncertainties, it is probable that all asbestos-related Personal Injury Cases
pending against U.S. Gypsum as of December 31, 1994, can be disposed of for a
total amount, including both indemnity costs and legal fees and expenses,
estimated to be between $90 million and $100 million (of which all but less than
$5 million is expected to be paid by insurance). The estimated cost of resolving
pending claims takes into account, among other factors, (i) the number of
F-33
<PAGE>
USG CORPORATION
(RESTRUCTURED COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
pending claims; (ii) the settlements of certain large blocks of claims for
higher per-case averages than have historically been paid; (iii) the committed
but unconsummated settlements described above; and (iv) a small increase in U.S.
Gypsum's historical settlement average.
Assuming that the Georgine class action settlement referred to above is
approved substantially in its current form, management estimates, based on
assumptions supplied by the Center, U.S. Gypsum's maximum total exposure in
Personal Injury Cases during the next ten years (the initial term of the
agreement), including liability for pending claims and claims resolved as part
of the class action settlement, as well as defense costs and other expenses, at
approximately $250 million, of which approximately $235 million is expected to
be paid by insurance. U.S. Gypsum's additional exposure for claims filed by
persons who have opted out of Georgine would depend on the number and severity
of such claims that are filed, which cannot presently be determined.
COVERAGE ACTION
As indicated above, all of U.S. Gypsum's carriers initially denied coverage
for the Property Damage Cases and the Personal Injury Cases, and U.S. Gypsum
initiated the Coverage Action to establish its right to such coverage. U.S.
Gypsum has voluntarily dismissed the Supporting Insurers referred to above from
the personal injury portion of the Coverage Action because they committed to
providing personal injury coverage in accordance with the Wellington Agreement.
U.S. Gypsum's claims against the remaining carriers for coverage for the
Personal Injury Cases have been stayed since 1984.
On January 7, 1991, the trial court in the Coverage Action ruled on the
applicability of U.S. Gypsum's insurance policies to settlements and one adverse
judgment in eight Property Damage Cases. The court ruled that the eight cases
were generally covered, and imposed coverage obligations on particular policy
years based upon the dates when the presence of asbestos-containing material was
"first discovered" by the plaintiff in each case. The court awarded
reimbursement of approximately $6.2 million spent by U.S. Gypsum to resolve the
eight cases. U.S. Gypsum appealed the court's ruling with respect to the policy
years available to cover particular claims, and the carriers appealed most other
aspects of the court's ruling.
On November 4, 1994, the Illinois Appellate Court issued a ruling affirming
the trial court's finding that the eight cases were covered, but expanding the
years of coverage available by holding that all insurance policies in effect
from the date of installation to the date of removal of asbestos-containing
products are obligated to provide coverage (known as the "continuous trigger" of
coverage). The defendant carriers' rehearing petition was denied by the
Appellate Court in January 1995. The defendant carriers have indicated their
intention to seek review by the Illinois Supreme Court, which is discretionary
with the Court. If the Supreme Court accepts the appeal, the appeal will
continue for a year or more. Once the appellate process has concluded, further
proceedings will be necessary in the trial court with respect to the application
of the appellate ruling to all Property Damage Cases other than the eight cases
involved in the earlier trial, as well as resolution of certain other issues.
The Appellate Court's ruling, if applied to the Property Damage Cases
generally, will allow U.S. Gypsum to access all of its available insurance
coverage for Property Damage Cases, subject to reduction for amounts that are
spent on Personal Injury Cases. Under the ruling, all Property Damage Cases
would be covered by insurance unless or until such insurance becomes exhausted.
U.S. Gypsum is evaluating the impact of the ruling on past property damage
expenditures and, if the ruling is applied to such expenditures, U.S. Gypsum
should be able to recover a substantial portion, subject to the allocation of
costs to insolvent carriers, excess carriers with no defense cost obligations,
and carriers that have previously settled. The Company is not yet able to
estimate the amount of its past property damage expenditures that it could
recover or when such recoveries would occur.
Eight carriers, including two of the Supporting Insurers, have settled U.S.
Gypsum's claims for both property damage and personal injury coverage and have
been dismissed from the Coverage Action entirely.
F-34
<PAGE>
USG CORPORATION
(RESTRUCTURED COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Four of these carriers agreed to pay all or a substantial portion of their
policy limits to U.S. Gypsum beginning in 1991 and continuing over the following
four years. Three other excess carriers, including the two settling Supporting
Insurers, have agreed to provide coverage for the Property Damage Cases and the
Personal Injury Cases subject to certain limitations and conditions, when and if
underlying primary and excess coverage is exhausted. Taking into account the
above settlements, including participation of certain of the settling carriers
in the Wellington Agreement, and consumption through December 31, 1994, carriers
providing a total of approximately $81 million of unexhausted insurance have
agreed, subject to the terms of the various settlement agreements, to cover both
Personal Injury Cases and Property Damage Cases. Carriers providing an
additional $210 million of coverage that was unexhausted as of December 31, 1994
have agreed to cover Personal Injury Cases under the Wellington Agreement, but
continue to contest coverage for Property Damage Cases and remain defendants in
the Coverage Action. U.S. Gypsum continues to seek negotiated resolutions with
its carriers in order to minimize the expense and delays of litigation.
Insolvency proceedings have been instituted against four of U. S. Gypsum's
insurance carriers. Midland Insurance Company, declared insolvent in 1986,
provided excess insurance ($4 million excess of $1 million excess of $500,000
primary in each policy year) from February 15, 1975 to February 15, 1978;
Transit Casualty Company, declared insolvent in 1985, provided excess insurance
($15 million excess of $1 million primary in each policy year) from August 1,
1980 to December 31, 1985; Integrity Insurance Company, declared insolvent in
1986, provided excess insurance ($10 million quota share of $25 million excess
of $90 million) from August 1, 1983 to July 31, 1984; and American Mutual
Insurance Company, declared insolvent in 1989, provided the primary layer of
insurance ($500,000 per year) from February 1, 1963 to April 15, 1971. It is
possible that U.S. Gypsum will be required to pay a presently indeterminable
portion of the costs that would otherwise have been covered by these policies.
In addition, portions of various policies issued by Lloyd's and other London
market companies between 1966 and 1979 have also become insolvent; under the
Wellington Agreement, U.S. Gypsum must pay these amounts, which total
approximately $12 million.
It is not possible to predict the number of additional lawsuits alleging
asbestos-related claims that may be filed against U.S. Gypsum. Many Property
Damage Cases are still at an early stage and the potential liability therefrom
is consequently uncertain. In view of the limited insurance funding currently
available for the Property Damage Cases resulting from the continued resistance
by a number of U.S. Gypsum's insurers to providing coverage, the effect of the
asbestos litigation on the Corporation will depend upon a variety of factors,
including the damages sought in the Property Damage Cases that reach trial prior
to the completion of the Coverage Action, U.S. Gypsum's ability to successfully
defend or settle such cases, and the resolution of the Coverage Action. As a
result, management is unable to determine whether an adverse outcome in the
asbestos litigation will have a material adverse effect on the results of
operations or the consolidated financial position of the Corporation.
ACCOUNTING CHANGE
Effective January 1, 1994, the Corporation adopted the requirements of
Financial Accounting Standards Board Interpretation No. 39 ("Interpretation
39"). In accordance with Interpretation 39, U.S. Gypsum recorded an accrual for
its liabilities for asbestos-related matters which are deemed probable and can
be reasonably estimated, and separately recorded an asset equal to the amount of
such liabilities that is expected to be paid by uncontested insurance. Due to
management's inability to reasonably estimate U.S. Gypsum's liability for
Property Damage Cases and (until the implementation of Georgine is deemed
probable) future Personal Injury Cases, the liability and asset recorded in 1994
relate only to pending Personal Injury Cases. As of December 31, 1994, the
liability (which is included in other liabilities on the
F-35
<PAGE>
USG CORPORATION
(RESTRUCTURED COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
consolidated balance sheet) and the asset (which is included in other assets on
the consolidated balance sheet) for pending Personal Injury Cases each amounted
to $100 million. This implementation of Interpretation 39 did not impact
earnings, cash flow or net assets.
ENVIRONMENTAL LITIGATION
The Corporation and certain of its subsidiaries have been notified by state
and federal environmental protection agencies of possible involvement as one of
numerous "potentially responsible parties" in a number of so-called "Superfund"
sites in the United States. In substantially all of these sites, the involvement
of the Corporation or its subsidiaries is expected to be minimal. The
Corporation believes that appropriate reserves have been established for its
potential liability in connection with all Superfund sites but is continuing to
review its accruals as additional information becomes available. Such reserves
take into account all known or estimable costs associated with these sites
including site investigations and feasibility costs, site cleanup and
remediation, legal costs, and fines and penalties, if any. In addition,
environmental costs connected with site cleanups on USG-owned property are also
covered by reserves established in accordance with the foregoing. The
Corporation believes that neither these matters nor any other known governmental
proceeding regarding environmental matters will have a material adverse effect
upon its earnings or consolidated financial position.
INDUSTRY AND GEOGRAPHIC SEGMENTS
Transactions between geographic areas are accounted for on an "arm's-length"
basis. No single customer accounted for 4% or more of consolidated net sales.
Export sales to foreign unaffiliated customers represent less than 10% of
consolidated net sales.
Intrasegment and intersegment eliminations largely reflect intercompany
sales. Segment operating profit/(loss) includes all costs and expenses directly
related to the segment involved and an allocation of expenses which benefit more
than one segment. Segment operating profit/(loss) also includes the non-cash
amortization of excess reorganization value which had the impact of reducing
operating profit. Assets for USG Funding, which was established in 1994,
represent the outstanding balance of receivables purchased from U.S. Gypsum and
USG Interiors, net of reserves, and are included in "corporate identifiable
assets" in the table below. As of December 31, 1994, such receivables, net of
reserves, amounted to $123 million, including $84 million purchased from U.S.
Gypsum and $39 million purchased from USG Interiors. Information for the period
of May 7 through December 31, 1993, shown in the following tables has been
restated to conform to the Corporation's current industry segment organization.
F-36
<PAGE>
USG CORPORATION
(RESTRUCTURED COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
AMORTIZATION OF
OPERATING EXCESS DEPRECIATION
YEAR ENDED DECEMBER 31, 1994 PROFIT/ REORGANIZATION DEPLETION AND CAPITAL IDENTIFIABLE
INDUSTRY SEGMENTS NET SALES (LOSS) VALUE AMORTIZATION EXPENDITURES ASSETS
- -------------------------------- --------- ------------- ------------------- ----------------- ----------------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
North American Gypsum:
U.S. Gypsum................... $ 1,209 $ 158 $ 61 $ 29 $ 37 $ 887
CGC (gypsum division)......... 110 (6) 18 3 4 120
Other subsidiaries............ 90 24 -- 4 5 56
Eliminations.................. (84) -- -- -- -- 1
--------- ----- ----- --- ----- ------
Total Gypsum Products......... 1,325 176 79 36 46 1,064
Building Products
Distribution................. 659 10 3 2 3 147
Eliminations.................. (204) (2) -- -- -- (33)
--------- ----- ----- --- ----- ------
Total North American Gypsum... 1,780 184 82 38 49 1,178
--------- ----- ----- --- ----- ------
Worldwide Ceilings:
USG Interiors................. 400 (28) 71 10 12 403
USG International............. 202 (13) 16 3 3 189
CGC (interiors division)...... 29 3 -- -- -- 8
Eliminations.................. (37) -- -- -- -- --
--------- ----- ----- --- ----- ------
Total Worldwide Ceilings...... 594 (38) 87 13 15 600
--------- ----- ----- --- ----- ------
Corporate....................... -- (42) -- 33 -- 352
Eliminations.................... (84) -- -- -- -- (6)
--------- ----- ----- --- ----- ------
Total USG Corporation........... 2,290 104 169 84 64 2,124
--------- ----- ----- --- ----- ------
--------- ----- ----- --- ----- ------
GEOGRAPHIC SEGMENTS
- --------------------------------
United States................... $ 2,008 $ 94 $ 135 $ 74 $ 52 $ 1,770
Canada.......................... 164 2 18 5 9 153
Other Foreign................... 228 8 16 5 3 200
Transfers between geographic
areas.......................... (110) -- -- -- -- 1
--------- ----- ----- --- ----- ------
Total USG Corporation........... 2,290 104 169 84 64 2,124
--------- ----- ----- --- ----- ------
--------- ----- ----- --- ----- ------
</TABLE>
F-37
<PAGE>
USG CORPORATION
(RESTRUCTURED COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
AMORTIZATION OF
OPERATING EXCESS DEPRECIATION
YEAR ENDED DECEMBER 31, 1993 PROFIT/ REORGANIZATION DEPLETION AND CAPITAL IDENTIFIABLE
INDUSTRY SEGMENTS NET SALES (LOSS) VALUE AMORTIZATION EXPENDITURES ASSETS
- -------------------------------- --------- ------------- ------------------- ----------------- ----------------- -------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
North American Gypsum:
U.S. Gypsum................... $ 673 $ 48 $ 41 $ 20 $ 17 $ 912
CGC (gypsum division)......... 61 (8) 12 2 2 145
Other subsidiaries............ 53 13 -- 2 4 61
Eliminations.................. (43) -- -- -- -- --
--------- ----- ----- --- ----- ------
Total Gypsum Products......... 744 53 53 24 23 1,118
Building Products
Distribution................. 372 4 2 1 1 125
Eliminations.................. (111) -- -- -- -- (25)
--------- ----- ----- --- ----- ------
Total North American Gypsum... 1,005 57 55 25 24 1,218
--------- ----- ----- --- ----- ------
Worldwide Ceilings:
USG Interiors................. 245 (20) 47 6 2 507
USG International............. 126 (11) 11 2 3 181
CGC (interiors division)...... 19 1 -- 1 -- 9
Eliminations.................. (23) -- -- -- -- --
--------- ----- ----- --- ----- ------
Total Worldwide Ceilings...... 367 (30) 58 9 5 697
--------- ----- ----- --- ----- ------
Corporate....................... -- (26) -- 10 -- 251
Eliminations.................... (47) -- -- -- -- (3)
--------- ----- ----- --- ----- ------
Total USG Corporation........... 1,325 1 113 44 29 2,163
--------- ----- ----- --- ----- ------
--------- ----- ----- --- ----- ------
GEOGRAPHIC SEGMENTS
- --------------------------------
United States................... $ 1,147 $ 3 $ 90 $ 36 $ 20 $ 1,789
Canada.......................... 95 (6) 12 5 6 178
Other Foreign................... 143 4 11 3 3 197
Transfers between geographic
areas.......................... (60) -- -- -- -- (1)
--------- ----- ----- --- ----- ------
Total USG Corporation........... 1,325 1 113 44 29 2,163
--------- ----- ----- --- ----- ------
--------- ----- ----- --- ----- ------
</TABLE>
<TABLE>
<CAPTION>
MAY 7 THROUGH
YEAR ENDED DECEMBER 31,
DECEMBER 31, 1994 1993
----------------- ---------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
TRANSFERS BETWEEN GEOGRAPHIC AREAS
- ----------------------------------------------------------------------------------
United States .................................................................... $ 44 $ 25
Canada ........................................................................... 36 16
Other Foreign .................................................................... 30 19
----- ------
Total ............................................................................ 110 60
----- ------
----- ------
</TABLE>
F-38
<PAGE>
USG CORPORATION
(RESTRUCTURED COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
SUBSIDIARY DEBT GUARANTEES
The Corporation had $298 million and $478 million aggregate principal amount
of Senior 2002 Notes outstanding as of December 31, 1994 and 1993, respectively.
Each of U.S. Gypsum, USG Industries, Inc., USG Interiors, USG Foreign
Investments, Ltd., L&W Supply, Westbank Planting Company, USG Interiors
International, Inc., American Metals Corporation and La Mirada Products Co.,
Inc. (together, the "Combined Guarantors") guaranteed, in the manner described
below, both the obligations of the Corporation under the Credit Agreement and
the Senior 2002 Notes. The Combined Guarantors are jointly and severally liable
under these guarantees (the "Subsidiary Guarantees"). Holders of the Bank Debt
have the right to (i) determine whether, when and to what extent the guarantees
will be enforced (provided that each guarantee payment will be applied to the
Bank Debt and Senior 2002 Notes pro rata based on the respective amounts owed
thereon) and (ii) amend or eliminate the guarantees. The guarantees will
terminate when the Bank Debt is retired regardless of whether any Senior 2002
Notes remain unpaid. The liability of each of the Combined Guarantors on its
guarantee is limited to the greater of (i) 95% of the lowest amount, calculated
as of July 13, 1988, sufficient to render the guarantor insolvent, leave the
guarantor with unreasonably small capital or leave the guarantor unable to pay
its debts as they become due (each as defined under applicable law) and (ii) the
same amount, calculated as of the date any demand for payment under such
guarantee is made, in each case plus collection costs. The guarantees are senior
obligations of the applicable guarantor and rank PARI PASSU with all
unsubordinated obligations of the guarantor.
Subsidiaries other than the Combined Guarantors (the "Combined
Non-Guarantors"), substantially all of which are subsidiaries of guarantors,
primarily include CGC, Gypsum Transportation Limited, USG Canadian Mining Ltd.,
and the Corporation's Mexican, European and Pacific subsidiaries. USG Funding is
also a Non-Guarantor. The long-term debt of the Combined Non-Guarantors of $84
million and $24 million as of December 31, 1994 and 1993, respectively, has
restrictive covenants that restrict, among other things, the payment of
dividends.
The following condensed consolidating information presents:
(i) Condensed financial statements as of December 31, 1994 and 1993, for the
year ended December 31, 1994 and for the period of May 7 through December
31, 1993 of: (a) the Corporation on a parent company only basis (the "Parent
Company," which was the only entity of the Corporation included in the
bankruptcy proceeding); (b) the Combined Guarantors; (c) the Combined
Non-Guarantors; and (d) the Corporation on a consolidated basis. Due to the
Restructuring and implementation of fresh start accounting, the financial
statements for the restructured company (periods after May 6, 1993) are not
comparable to those of the predecessor company. Except for the following
condensed financial statements, separate financial information with respect
to the Combined Guarantors is omitted as such separate financial information
is not deemed material to investors.
(ii) The Parent Company and Combined Guarantors shown with their investments in
their subsidiaries accounted for on the equity method.
(iii) Elimination entries necessary to consolidate the Parent Company and its
subsidiaries.
F-39
<PAGE>
USG CORPORATION
(RESTRUCTURED COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
USG CORPORATION
(RESTRUCTURED COMPANY)
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS
YEAR ENDED DECEMBER 31, 1994
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
PARENT COMBINED COMBINED NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Net sales.................................... $ -- $ 2,008 $ 391 $ (109) $ 2,290
----------- ----------- ----- ------------ ------
Gross profit................................. (2) 432 87 -- 517
----------- ----------- ----- ------------ ------
Operating profit/(loss)...................... (43) 137 10 -- 104
Equity in net loss of the subsidiaries....... 34 6 -- (40) --
Interest expense, net........................ 134 2 3 -- 139
Corporate service charge..................... (164) 164 -- -- --
Other expense/(income)....................... 45 (41) (1) -- 3
----------- ----------- ----- ------------ ------
Earnings/(loss) before taxes on income....... (92) 6 8 40 (38)
Taxes on income.............................. -- 40 14 -- 54
----------- ----------- ----- ------------ ------
Net loss..................................... (92) (34) (6) 40 (92)
----------- ----------- ----- ------------ ------
----------- ----------- ----- ------------ ------
</TABLE>
USG CORPORATION
(RESTRUCTURED COMPANY)
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS
MAY 7 THROUGH DECEMBER 31, 1993
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
PARENT COMBINED 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-40
<PAGE>
USG CORPORATION
(RESTRUCTURED COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
USG CORPORATION
(RESTRUCTURED COMPANY)
CONDENSED CONSOLIDATING BALANCE SHEET
AS OF DECEMBER 31, 1994
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
PARENT COMBINED COMBINED NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents.................... $ 178 $ (11) $ 30 $ -- $ 197
Receivables, net............................. -- 135 173 (34) 274
Inventories.................................. -- 136 43 (6) 173
----------- ----------- ----- ------------ ------
Total current assets....................... 178 260 246 (40) 644
Property, plant and equipment, net........... 15 623 117 -- 755
Investment in subsidiaries................... 1,436 261 -- (1,697) --
Excess reorganization value, net............. -- 447 114 -- 561
Other assets................................. (227) 426 (28) (7) 164
----------- ----------- ----- ------------ ------
Total assets............................... 1,402 2,017 449 (1,744) 2,124
----------- ----------- ----- ------------ ------
----------- ----------- ----- ------------ ------
Accounts payable and accrued expenses........ $ 83 $ 298 $ 63 $ (34) $ 410
Notes payable and long-term debt maturing
within one year............................. 41 2 2 -- 45
----------- ----------- ----- ------------ ------
Total current liabilities.................. 124 300 65 (34) 455
Long-Term Debt............................... 956 37 84 -- 1,077
Deferred Income Taxes........................ 9 155 15 -- 179
Other Liabilities............................ 308 109 4 -- 421
Common stock................................. 5 1 6 (7) 5
Capital received in excess of par value...... 221 1,438 364 (1,802) 221
Deferred currency translation................ -- -- (13) -- (13)
Reinvested earnings/(deficit)................ (221) (23) (76) 99 (221)
----------- ----------- ----- ------------ ------
Total stockholders' equity/(deficit)....... 5 1,416 281 (1,710) (8)
----------- ----------- ----- ------------ ------
Total liabilities and stockholders'
equity.................................... 1,402 2,017 449 (1,744) 2,124
----------- ----------- ----- ------------ ------
----------- ----------- ----- ------------ ------
</TABLE>
F-41
<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>
PARENT COMBINED COMBINED NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents.................... $ 187 $ (8) $ 32 $ -- $ 211
Receivables, net............................. 8 240 44 (28) 264
Inventories.................................. -- 114 34 (3) 145
----------- ----------- ----- ------------ ------
Total current assets....................... 195 346 110 (31) 620
Property, plant and equipment, net........... 21 620 113 -- 754
Investment in subsidiaries................... 1,511 277 -- (1,788) --
Excess reorganization value, net............. -- 582 153 -- 735
Other assets................................. (35) 91 3 (5) 54
----------- ----------- ----- ------------ ------
Total assets............................... 1,692 1,916 379 (1,824) 2,163
----------- ----------- ----- ------------ ------
----------- ----------- ----- ------------ ------
Accounts payable and accrued expenses........ $ 100 $ 207 $ 52 $ (27) $ 332
Notes payable and long-term debt maturing
within one year............................. 158 3 6 -- 167
----------- ----------- ----- ------------ ------
Total current liabilities.................. 258 210 58 (27) 499
Long-Term Debt............................... 1,249 36 24 -- 1,309
Deferred Income Taxes........................ 14 151 15 -- 180
Other Liabilities............................ 296 8 5 -- 309
Common stock................................. 4 1 6 (7) 4
Capital received in excess of par value...... -- 1,472 310 (1,782) --
Deferred currency translation................ -- -- (9) -- (9)
Reinvested earnings/(deficit)................ (129) 38 (30) (8) (129)
----------- ----------- ----- ------------ ------
Total stockholders' equity/(deficit)....... (125) 1,511 277 (1,797) (134)
----------- ----------- ----- ------------ ------
Total liabilities and stockholders'
equity.................................... 1,692 1,916 379 (1,824) 2,163
----------- ----------- ----- ------------ ------
----------- ----------- ----- ------------ ------
</TABLE>
F-42
<PAGE>
USG CORPORATION
(RESTRUCTURED COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
USG CORPORATION
(RESTRUCTURED COMPANY)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW
YEAR ENDED DECEMBER 31, 1994
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
PARENT COMBINED COMBINED NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Net cash flows (to)/from operating
activities.................................. $ (187) $ 296 $ 89 $ -- $ 198
----------- ----------- ----- ------------ ------
Capital expenditures....................... (1) (51) (12) -- (64)
Net proceeds from asset dispositions....... 4 12 -- -- 16
----------- ----------- ----- ------------ ------
Net cash flows (to)/from investing
activities.................................. 3 (39) (12) -- (48)
----------- ----------- ----- ------------ ------
Issuance of debt........................... 85 4 173 -- 262
Repayment of debt.......................... (524) (3) (123) -- (650)
Public offering of common stock............ 224 -- -- -- 224
Cash dividends (paid)/received............. 21 28 (49) -- --
Net cash transfers (to)/from Corporate..... 369 (289) (80) -- --
----------- ----------- ----- ------------ ------
Net cash flows (to)/from financing
activities.................................. 175 (260) (79) -- (164)
----------- ----------- ----- ------------ ------
Net decrease in cash & equivalents........... (9) (3) (2) -- (14)
----------- ----------- ----- ------------ ------
Cash and cash equivalents -- beginning....... 187 (8) 32 -- 211
----------- ----------- ----- ------------ ------
Cash and cash equivalents -- end............. 178 (11) 30 -- 197
----------- ----------- ----- ------------ ------
----------- ----------- ----- ------------ ------
</TABLE>
F-43
<PAGE>
USG CORPORATION
(RESTRUCTURED COMPANY)
NOTED TO FINANCIAL STATEMENTS (CONCLUDED)
USG CORPORATION
(RESTRUCTURED COMPANY)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW
MAY 7 THROUGH DECEMBER 31, 1993
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
PARENT COMBINED 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 &
equivalents................................. 163 (1) -- -- 162
----------- ----------- ----- ------------ ------
Cash and cash equivalents -- beginning....... 24 (7) 32 -- 49
----------- ----------- ----- ------------ ------
Cash and cash equivalents -- end............. 187 (8) 32 -- 211
----------- ----------- ----- ------------ ------
----------- ----------- ----- ------------ ------
</TABLE>
F-44
<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-45
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board
of Directors of USG Corporation:
We have audited the accompanying consolidated balance sheets of USG Corporation
(Restructured Company), a Delaware corporation, and subsidiaries as of December
31, 1994 and 1993 and the related consolidated statements of earnings and cash
flows for the year ended December 31, 1994 and the period of May 7 through
December 31, 1993. These financial statements are the responsibility of the
Corporation's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Notes to Financial Statements -- "Financial Restructuring" note,
on May 6, 1993, the Corporation completed a comprehensive financial
restructuring through the implementation of a prepackaged plan of reorganization
under Chapter 11 of the United States Bankruptcy Code and applied fresh start
accounting. As such, results of operations through May 6, 1993 (Predecessor
Company) are not comparable with results of operations subsequent to that date.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of USG Corporation and
subsidiaries as of December 31, 1994 and 1993, and the results of their
operations and their cash flows for the year ended December 31, 1994 and the
period of May 7 through December 31, 1993, in conformity with generally accepted
accounting principles.
As discussed in Notes to Financial Statements -- "Litigation" note, in view of
the limited insurance funding currently available for property damage cases
resulting from the continued resistance by a number of U.S. Gypsum's insurers to
providing coverage, the effect of the asbestos litigation on the Corporation
will depend upon a variety of factors, including the damages sought in property
damage cases that reach trial prior to the completion of the coverage action,
U.S. Gypsum's ability to successfully defend or settle such cases, and the
resolution of the coverage action. As a result, management is unable to
determine whether an adverse outcome in the asbestos litigation will have a
material adverse effect on the consolidated results of operations or the
consolidated financial position of the Corporation.
As discussed in Notes to Financial Statements -- "Litigation" note, on January
1, 1994, the Corporation changed its method of accounting for asbestos-related
matters.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Chicago, Illinois
January 26, 1995
F-46
<PAGE>
USG CORPORATION
(PREDECESSOR COMPANY)
CONSOLIDATED STATEMENT OF EARNINGS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
JANUARY 1 YEAR
THROUGH ENDED
MAY 6, DECEMBER 31,
1993 1992
----------- --------------
<S> <C> <C>
Net Sales............................................................................. $ 591 $ 1,777
Cost of products sold................................................................. 482 1,460
----------- ------
Gross Profit.......................................................................... 109 317
Selling and administrative expenses................................................... 71 218
----------- ------
Operating Profit...................................................................... 38 99
Interest expense...................................................................... 86 334
Interest income....................................................................... (2) (12)
Other expense, net.................................................................... 6 1
Reorganization items.................................................................. (709) --
----------- ------
Earnings/(Loss) Before Taxes on Income, Extraordinary Gain and Changes in Accounting
Principles........................................................................... 657 (224)
Taxes on income/(income tax benefit).................................................. 17 (33)
----------- ------
Earnings/(Loss) Before Extraordinary Gain and Changes in Accounting Principles........ 640 (191)
Extraordinary gain, net of taxes...................................................... 944 --
Cumulative effect of changes in accounting principles, net............................ (150) --
----------- ------
Net Earnings/(Loss)................................................................... 1,434 (191)
----------- ------
----------- ------
</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 ARE AN INTEGRAL PART OF THIS STATEMENT.
F-47
<PAGE>
USG CORPORATION
(PREDECESSOR COMPANY)
CONSOLIDATED BALANCE SHEET
(DOLLARS IN MILLIONS)
ASSETS
<TABLE>
<CAPTION>
AS OF
MAY 6,
1993
---------
<S> <C>
Current Assets:
Cash and cash equivalents (primarily time deposits)..................................................... $ 49
Receivables (net of reserves of $13).................................................................... 315
Inventories............................................................................................. 148
---------
Total current assets.................................................................................. 512
---------
Property, Plant and Equipment, Net...................................................................... 767
Excess Reorganization Value............................................................................. 851
Other Assets............................................................................................ 64
---------
Total assets.......................................................................................... 2,194
---------
---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable........................................................................................ $ 96
Accrued expenses........................................................................................ 171
Notes payable........................................................................................... 6
Long-term debt maturing within one year................................................................. 9
Taxes on income......................................................................................... 13
---------
Total current liabilities............................................................................. 295
---------
Long-Term Debt.......................................................................................... 1,446
Deferred Income Taxes................................................................................... 170
Other Liabilities....................................................................................... 279
Stockholders' Equity:
Preferred stock -- $1 par value; authorized 36,000,000 shares; $1.80 convertible preferred stock
(initial series); outstanding -- none................................................ --
Common stock -- $0.10 par value; authorized 200,000,000 shares; outstanding 37,157,458 shares (after
deducting 27,556 shares held in treasury)............................................... 4
Capital received in excess of par value................................................................. --
Deferred currency translation........................................................................... --
Reinvested earnings..................................................................................... --
---------
Total stockholders' equity............................................................................ 4
---------
Total liabilities and stockholders' equity............................................................ 2,194
---------
---------
</TABLE>
THE NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THIS STATEMENT.
F-48
<PAGE>
USG CORPORATION
(PREDECESSOR COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
JANUARY 1 YEAR
THROUGH ENDED
MAY 6, DECEMBER 31,
1993 1992
----------- ---------------
<S> <C> <C>
Cash Flows from Operating Activities:
Net earnings/(loss)................................................................... $ 1,434 $ (191)
Adjustments to reconcile net earnings/(loss) to net cash:
Cumulative effect of accounting changes............................................. 150 --
Depreciation, depletion and amortization............................................ 22 66
Interest expense on pay-in-kind debentures.......................................... 17 74
Deferred income taxes............................................................... (13) (25)
Net (gain)/loss on asset dispositions............................................... 4 (5)
(Increase)/decrease in working capital:
Receivables......................................................................... 18 (1)
Inventories......................................................................... (8) (3)
Payables............................................................................ 3 (4)
Accrued expenses.................................................................... 15 213
Increase in other assets.............................................................. (12) (23)
Changes due to reorganization items:
Increase in reorganization items.................................................... 65 --
Net adjustments to fair market value................................................ (759) --
Gain on discharge of prepetition liabilities........................................ (944) --
Payment of liabilities net of collection of letters of credit....................... (7) --
Increase/(decrease) in other liabilities.............................................. 4 (2)
Other, net............................................................................ (3) (9)
----------- -----
Net cash flows (to)/from operating activities....................................... (14) 90
----------- -----
Cash Flows from Investing Activities:
Capital expenditures.................................................................. (12) (49)
Net proceeds from asset dispositions.................................................. -- 6
----------- -----
Net cash flows to investing activities.............................................. (12) (43)
----------- -----
Cash Flows from Financing Activities:
Issuance of debt...................................................................... 5 57
Repayment of debt..................................................................... (142) (75)
(Increase)/decrease in restricted assets.............................................. 32 (4)
----------- -----
Net cash flows to financing activities.............................................. (105) (22)
----------- -----
Net Increase/(Decrease) in Cash and Cash Equivalents.................................. (131) 25
----------- -----
Cash and cash equivalents as of beginning of period................................... 180 155
----------- -----
Cash and cash equivalents as of end of period......................................... 49 180
----------- -----
----------- -----
Supplemental Cash Flow Disclosures:
Interest paid......................................................................... $ 58 $ 52
Income taxes paid..................................................................... 3 13
----------- -----
----------- -----
</TABLE>
THE NOTES TO FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THIS STATEMENT.
F-49
<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. For the
period of January 1 through May 6, 1993, net currency translation gains or
losses on foreign subsidiaries are included in deferred currency translation, a
component of stockholders' equity. For the year ended December 31, 1992, Mexican
currency translation losses were charged to earnings. Purchased goodwill, which
was written off in accordance with the implementation of fresh start accounting,
was previously being amortized over a period of 40 years.
For purposes of the Consolidated Balance Sheet and Consolidated Statement of
Cash Flows, all highly liquid investments with a maturity of three months or
less at the time of purchase are considered to be cash equivalents.
FINANCIAL RESTRUCTURING
On May 6, 1993, the Corporation completed a comprehensive restructuring of
its debt (the "RESTRUCTURING") through implementation of a "prepackaged" plan of
reorganization under United States bankruptcy law (the "PREPACKAGED PLAN"). In
accordance with the terms of the Prepackaged Plan, $1.4 billion of debt and
accrued interest was converted into equity, interest expense was significantly
reduced and the maturities of a substantial portion of the Corporation's
remaining debt were extended. The Corporation accounted for the Restructuring
using the principles of fresh start accounting as required by AICPA Statement of
Position 90-7, "Financial Reporting by Entities in Reorganization under the
Bankruptcy Code" ("SOP 90-7"). Pursuant to such principles, individual assets
and liabilities were adjusted to fair market value as of May 6, 1993. Excess
reorganization value, the portion of the reorganization value not attributable
to specific assets, is being amortized over a five-year period, effective May 7,
1993.
The following balance sheet details the adjustments that were made as of May
6, 1993 to record the Restructuring and implement fresh start accounting:
F-50
<PAGE>
USG CORPORATION
(PREDECESSOR COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
USG CORPORATION
(PREDECESSOR COMPANY)
CONSOLIDATED BALANCE SHEET
AS OF MAY 6, 1993
(DOLLARS IN MILLIONS)
ASSETS
<TABLE>
<CAPTION>
PRE- POST-
RESTRUCTURING (A) (B) RESTRUCTURING
AND RESTRUCTURING FRESH START AND
FRESH START ADJUSTMENTS ADJUSTMENTS FRESH 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
------------- ------------- ------ ------
------------- ------------- ------ ------
<FN>
- --------------------------
(a) To record the consummation of the Prepackaged Plan.
(b) To record the adjustments to state assets and liabilities at their
estimated fair market value, including establishment of Excess
Reorganization Value.
</TABLE>
F-51
<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.
RESEARCH AND DEVELOPMENT
Research and development expenditures are charged to earnings as incurred
and amounted to $4 million and $14 million in the period of January 1 through
May 6, 1993 and the year ended December 31, 1992, respectively.
F-52
<PAGE>
USG CORPORATION
(PREDECESSOR COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
TAXES ON INCOME AND DEFERRED INCOME TAXES
Effective January 1, 1993, the Corporation adopted SFAS No. 109, "Accounting
for Income Taxes." The cumulative effect as of January 1, 1993 of adopting SFAS
No. 109 was a one-time benefit to first quarter 1993 net earnings of $30
million, primarily due to adjusting deferred taxes from historical to current
tax rates. Financial statements for periods prior to January 1, 1993 have not
been restated to reflect the adoption of this standard.
Earnings/(loss) before taxes on income, extraordinary gain and changes in
accounting principles consisted of the following (dollars in millions):
<TABLE>
<CAPTION>
JANUARY 1 YEAR ENDED
THROUGH MAY DECEMBER 31,
6, 1993 1992
------------- ---------------
<S> <C> <C>
U.S............................................................... $ 483 $ (246)
Foreign........................................................... 174 22
----- -----
Total........................................................... 657 (224)
----- -----
----- -----
</TABLE>
Taxes on income/(income tax benefit) consisted of the following (dollars in
millions):
<TABLE>
<CAPTION>
JANUARY 1
THROUGH MAY YEAR ENDED
6, 1993 DECEMBER 31, 1992
------------- -----------------
<S> <C> <C>
Current:
U.S. Federal................................................... $ 13 $ (12)
Foreign........................................................ 2 6
--- ---
15 (6)
--- ---
Deferred:
U.S. Federal................................................... -- (27)
Foreign........................................................ 2 --
--- ---
2 (27)
--- ---
Total........................................................ 17 (33)
--- ---
--- ---
</TABLE>
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 YEAR ENDED
THROUGH MAY DECEMBER 31,
6, 1993 1992
------------- ---------------
<S> <C> <C>
Statutory U.S. Federal income tax/(benefit) rate................. 34.0% (34.0)%
Nontaxable effects of adopting fresh start accounting............ (41.4) --
Capitalized restructuring fees................................... 2.0 --
Foreign tax rate differential.................................... 1.3 7.7
Valuation allowance adjustment................................... 2.3 --
Unbenefited NOL Carryforward..................................... 2.3 12.6
Other, net....................................................... 2.1 (1.3)
----- -----
Effective income tax/(benefit) rate.............................. 2.6 (15.0)
----- -----
----- -----
</TABLE>
F-53
<PAGE>
USG CORPORATION
(PREDECESSOR COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
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.
During 1992, deferred income taxes resulted from certain items being treated
differently for financial reporting purposes than for income tax purposes. The
tax effect of such differences is summarized as follows (dollars in millions):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1992
-----------------
<S> <C>
Tax benefit carryforwards..................................................... $ (19)
Accelerated tax depreciation.................................................. (5)
Other, net.................................................................... (3)
---
Total deferred provision.................................................... (27)
Classification adjustment of prior years' deferrals........................... 2
---
Decrease in deferred taxes.................................................. (25)
---
---
</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.
F-54
<PAGE>
USG CORPORATION
(PREDECESSOR COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
INVENTORIES
In accordance with the implementation of fresh start accounting, inventories
were stated at fair market value as of May 6, 1993. Most of the Corporation's
domestic and Mexican inventories are valued under the LIFO method. As of May 6,
1993, the LIFO values of these inventories were $103 million and would have been
the same if they were valued under the FIFO and average production cost methods.
Inventories include material, labor and applicable factory overhead costs.
Inventory classifications were as follows (dollars in millions):
<TABLE>
<CAPTION>
AS OF
MAY 6,
1993
-----------
<S> <C>
Finished goods and work-in-process............................................................. $ 87
Raw materials.................................................................................. 54
Supplies....................................................................................... 7
-----
Total........................................................................................ 148
-----
-----
</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.
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
MAY 6,
1993
-----------
<S> <C>
Land and mineral deposits...................................................................... $ 61
Buildings and realty improvements.............................................................. 228
Machinery and equipment........................................................................ 478
-----
767
Reserves for depreciation and depletion........................................................ --
-----
Total........................................................................................ 767
-----
-----
</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 and $31
million in the period of January 1 through May 6, 1993 and the year ended
December 31, 1992, respectively.
F-55
<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
MAY 6,
1993
---------
<S> <C>
SECURED DEBT:
Bank Debt:
Bank Term Loans, installments due through 2000.................................... $ 540
Capitalized Interest Notes, due through 2000...................................... 56
Senior notes and debentures:
8% Senior Notes due 1995.......................................................... 75
8% Senior Notes due 1996.......................................................... 90
8% Senior Notes due 1997.......................................................... 100
9% Senior Notes due 1998.......................................................... 35
10 1/4% Senior Notes due 2002..................................................... 340
7 7/8% Sinking Fund Debentures due 2004........................................... 41
8 3/4% Sinking Fund Debentures due 2017........................................... 200
Other secured debt, average interest rates 10.5%, varying payments through 1999..... 40
UNSECURED DEBT:
Industrial revenue bonds, 5.9% ranging to 10.25%, due through 2014.................. 39
---------
Total principal amount of debt...................................................... 1,556
Less unamortized reorganization discount............................................ (95)
---------
Total carrying amount of debt....................................................... 1,461
---------
---------
</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.
The Bank Debt and most other senior debt are secured by a pledge of all of
the shares of the Corporation's major domestic subsidiaries and 65% of the
shares of certain of its foreign subsidiaries, including CGC, pursuant to a
collateral trust arrangement controlled primarily by holders of the Bank Term
Loans. The rights of the Corporation and its creditors to the assets of any
subsidiary upon the latter's liquidation or reorganization will be subject to
the prior claims of such subsidiary's creditors, except to the extent that the
Corporation may itself be a creditor with enforceable claims against such
subsidiary. The average rate of interest on the Bank Term Loans, excluding
default interest which was cured or waived in accordance with the Prepackaged
Plan, was 6.5% in the period of January 1 through May 6, 1993. The rate of
interest on certain capitalized interest notes issued under the Credit Agreement
on May 6, 1993 in connection with the provisions of the Prepackaged Plan was
5.4% based on LIBOR plus 2 1/4%.
The "other secured debt" category shown in the table above primarily
includes short-term and long-term borrowings from several foreign banks by USG
International used principally to finance construction of the Aubange, Belgium
ceiling tile plant. This debt is secured by a lien on the assets of the Aubange
plant and has restrictive covenants that restrict, among other things, the
payment of dividends. Foreign borrowings made by the Corporation's international
operations are generally allowed, within certain limits, under provisions of the
Credit Agreement.
F-56
<PAGE>
USG CORPORATION
(PREDECESSOR COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
In general, the Credit Agreement restricts, among other things, the
incurrence of additional indebtedness, mergers, asset dispositions, investments,
prepayment of other debt, dealings with affiliates, capital expenditures,
payment of dividends and lease commitments.
The fair market value of debt as of May 6, 1993 was $1,421 million, based on
estimates of fair market value calculated in connection with implementation of
fresh start accounting, excluding other secured debt, primarily representing
financing for construction of the Aubange plant that is secured by a direct lien
on its assets, which was not practicable to estimate.
The weighted average interest rate on outstanding short-term borrowings was
7.3% as of May 6, 1993.
PENSION PLANS
The Corporation and most of its subsidiaries have defined benefit retirement
plans for all eligible employees. Benefits of the plans are generally based on
years of service and employees' compensation during the last years of
employment. The Corporation's contributions are made in accordance with
independent actuarial reports which, for most plans, required minimal funding in
the period of January 1 through May 6, 1993 and the year ended December 31,
1992. Net pension expense included the following components (dollars in
millions):
<TABLE>
<CAPTION>
JANUARY 1 YEAR
THROUGH ENDED
MAY 6, DECEMBER 31,
1993 1992
------------- -----------------
<S> <C> <C>
Service cost-benefits earned during the period.............................. $ 3 $ 9
Interest cost on projected benefit obligation............................... 11 29
Actual return on plan assets................................................ (15) (14)
Unrecognized prior service cost............................................. 1 2
Net amortization/(deferral)................................................. 2 (25)
--- ---
Net pension expense......................................................... 2 1
--- ---
--- ---
</TABLE>
The pension plan assets, which consist primarily of publicly traded common
stocks and debt securities, had an estimated fair market value that equaled the
projected benefit obligation as of May 6, 1993. The following table presents a
reconciliation of the total assets of the pension plans to the projected benefit
obligation (dollars in millions):
<TABLE>
<CAPTION>
AS OF
MAY 6,
1993
-----------
<S> <C>
Amount of assets available for benefits:
Funded assets of the plans at fair market value............................................... $ 379
Accrued pension expense....................................................................... 25
-----
Total assets of the plans....................................................................... 404
-----
Present value of estimated pension obligation:
Vested benefits............................................................................... 298
Nonvested benefits............................................................................ 24
-----
Accumulated benefit obligation.................................................................. 322
Additional benefits based on projected future salary increases.................................. 82
-----
Projected benefit obligation.................................................................... 404
-----
Assets in excess of projected benefit obligation................................................ --
-----
-----
</TABLE>
For the period of January 1 through May 6, 1993, the expected long-term rate
of return on plan assets was 9%, the assumed weighted average discount rate used
in determining the accumulated benefit obligation was 8% and the rate of
increases in projected future compensation levels was 5.5%.
F-57
<PAGE>
USG CORPORATION
(PREDECESSOR 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.
Effective January 1, 1993, the Corporation adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," for its retiree
benefit plans. Under this accounting standard, the Corporation is required to
accrue the estimated cost of retiree benefit payments during employees' active
service period. The Corporation elected to recognize this change in accounting
principle on the immediate recognition basis. The cumulative effect as of
January 1, 1993 of adopting SFAS No. 106 was a one-time after-tax charge to
first quarter 1993 net earnings of $180 million. The Corporation previously
expensed the cost of these benefits, which principally relate to health care, as
claims were incurred. These costs were $8 million in the year ended December 31,
1992.
The following table summarizes the components of net periodic postretirement
benefit cost for the period of January 1 through May 6, 1993 (dollars in
millions):
<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 Management Performance Plan reserved 8,600,000 shares of Common Stock
for issuance in connection with grants of incentive stock options, nonqualified
stock options, stock appreciation rights, restricted stock, deferred stock,
performance shares and performance units.
F-58
<PAGE>
USG CORPORATION
(PREDECESSOR COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
In accordance with the Prepackaged Plan, all outstanding stock options (for
3,786,575 shares) were cancelled without consideration, 1,016,090 shares of
restricted and deferred stock were cashed-out pursuant to "change in control"
provisions contained in the Management Performance Plan, and 25,580 shares of
restricted stock and awards for deferred stock yet to be issued remained
outstanding as a consequence of certain waivers of the change in control event
by senior members of management.
The Prepackaged Plan limited future awards under the Management Performance
Plan without stockholder approval to options to purchase a number of shares not
to exceed 7.5% of the number of shares of Common Stock outstanding immediately
after implementation of the Prepackaged Plan (2,788,350 shares), of which
options for 4.5% of such number of outstanding shares may be granted immediately
upon consummation of the Prepackaged Plan.
PREFERRED SHARE PURCHASE RIGHTS
On June 6, 1988, the Corporation adopted a Preferred Share Purchase Rights
Plan and pursuant to its provisions declared, subject to the consummation of the
1988 Recapitalization, the distribution of one Right upon each new share of
Common Stock issued in the 1988 Recapitalization. The 1988 Recapitalization
became effective July 13, 1988 and the distribution occurred immediately
thereafter. The Rights contain provisions which are intended to protect
stockholders in the event of an unsolicited attempt to acquire the Corporation.
The Preferred Share Purchase Rights Plan was terminated in connection with
implementation of the Prepackaged Plan. On May 6, 1993, the Rights Agreement was
adopted with provisions substantially similar to the old rights except that: (i)
the purchase price of the Rights was reset; (ii) the expiration of the Rights
was extended; (iii) a so-called "flip-in" feature and exchange feature was
added; (iv) certain exemptions were added permitting certain acquisitions and
the continued holding of common shares by Water Street and its affiliates in
excess of the otherwise specified thresholds; (v) the redemption price was
reduced; and (vi) the amendment provision was liberalized.
The Rights generally become exercisable 10 days following the announcement
of the acquisition of 20% or more of the outstanding Common Stock by someone
other than the Corporation or one of its employee benefit plans (10% in the case
of an acquisition which the Corporation's Board of Directors determines to
represent a threat of acquisition not in the best interests of the Corporation's
stockholders). When exercisable, each of the Rights entitles the registered
holder to purchase one-hundredth of a share of a junior participating preferred
stock, series C, $1.00 par value per share, at a price of $35.00 per one-
hundredth of a preferred share, subject to adjustment.
In the event that the Corporation is the surviving corporation and the
Common Stock remains outstanding and unchanged in a merger or other business
combination such acquiring party or the acquiring party engages in one of a
number of self-dealing transactions specified in the Rights Agreement, each
holder of a Right other than the acquiring party will thereafter have the right
to receive upon exercise thereof that number of shares of Common Stock having a
market value at the time of such transaction of two times the exercise price of
the Right.
WARRANTS
On May 6, 1993, a total of 2,602,566 Warrants, in addition to Common Stock,
were issued to holders of certain debt which was converted to equity in the
Restructuring. Upon issuance, each of the Warrants entitled the holder to
purchase one share of Common Stock at a purchase price of $16.14 per share,
subject to adjustment under certain events.
The Warrants are exercisable, subject to applicable securities laws, at any
time prior to May 6, 1998. Each share of Common Stock issued upon exercise of a
Warrant prior to the distribution date as defined in
F-59
<PAGE>
USG CORPORATION
(PREDECESSOR COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
the Rights Agreement and prior to the redemption or expiration of the Rights
will be accompanied by an attached Right issued under the terms and subject to
the conditions of the Rights Agreement as it may then be in effect.
STOCKHOLDERS' EQUITY
Changes in stockholders' equity are summarized as follows (dollars in
millions):
<TABLE>
<CAPTION>
JANUARY 1 YEAR ENDED
THROUGH MAY DECEMBER 31,
6, 1993 1992
----------- --------------
<S> <C> <C>
COMMON STOCK:
Beginning Balance........................................................... $ 5 $ 5
Reverse Stock Split......................................................... (4) --
Issuance of New Common Stock................................................ 3 --
----------- -------
Ending Balance.............................................................. 4 5
----------- -------
----------- -------
CAPITAL RECEIVED IN EXCESS OF PAR VALUE:
Beginning Balance........................................................... 23 24
Restructuring adjustments................................................... 444 --
Fresh start accounting adjustment........................................... (467) --
Other, net.................................................................. -- (1)
----------- -------
Ending Balance.............................................................. -- 23
----------- -------
DEFERRED CURRENCY TRANSLATION:
Beginning Balance........................................................... (8) --
Change during the period.................................................... 1 (8)
Fresh start accounting adjustment........................................... 7 --
----------- -------
Ending Balance.............................................................. -- (8)
----------- -------
REINVESTED EARNINGS/(DEFICIT):
Beginning Balance........................................................... (1,900) (1,709)
Net earnings/(loss)......................................................... 1,434 (191)
Fresh start accounting adjustment........................................... 467 --
Other, net.................................................................. (1) --
----------- -------
Ending Balance.............................................................. -- (1,900)
----------- -------
Total stockholders' equity/(deficit)........................................ 4 (1,880)
----------- -------
----------- -------
</TABLE>
As of May 6, 1993, the Corporation held 27,556 shares of $0.10 par value
common stock in treasury. The treasury shares were acquired through the
forfeiture of restricted stock.
LITIGATION
INFORMATION IN THE FOLLOWING "LITIGATION" NOTE IS AS OF MAY 6, 1993. SEE
"RESTRUCTURED COMPANY -- NOTES TO FINANCIAL STATEMENTS -- LITIGATION" NOTE FOR
CURRENT LITIGATION INFORMATION.
One of the Corporation's subsidiaries, U.S. Gypsum, is among numerous
defendants in lawsuits arising out of the manufacture and sale of
asbestos-containing building materials. U.S. Gypsum sold certain
asbestos-containing products beginning in the 1930's; in most cases the products
were discontinued or asbestos was removed from the product formula by 1972, and
no asbestos-containing products were sold after 1977. Some of these lawsuits
seek to recover compensatory and in many cases punitive damages for costs
associated with maintenance or removal and replacement of products containing
asbestos (the
F-60
<PAGE>
USG CORPORATION
(PREDECESSOR COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
"Property Damage Cases"). Others of these suits (the "Personal Injury Cases")
seek to recover compensatory and in many cases punitive damages for personal
injury allegedly resulting from exposure to asbestos and asbestos-containing
products. It is anticipated that additional personal injury and property damage
cases containing similar allegations will be filed.
As discussed below, U.S. Gypsum has substantial personal injury and property
damage insurance for the years involved in the asbestos litigation. Prior to
1985, when an asbestos exclusion was added to U.S. Gypsum's policies, U.S.
Gypsum purchased comprehensive general liability insurance policies covering
personal injury and property damage in an aggregate face amount of approximately
$850 million. As of May 6, 1993, insurers that issued approximately $100 million
of these policies were insolvent. Because U.S. Gypsum's insurance carriers
initially responded to its claims for defense and indemnification with various
theories denying or limiting coverage and the applicability of their policies,
U.S. Gypsum filed a declaratory judgment action against them in the Circuit
Court of Cook County, Illinois on December 29, 1983. (U.S. GYPSUM CO. V. ADMIRAL
INSURANCE CO., ET AL.) (the "Coverage Action"). U.S. Gypsum alleges in the
Coverage Action that the carriers are obligated to provide indemnification for
settlements and judgments and, in some cases, defense costs incurred by U.S.
Gypsum in personal injury and property damage cases in which it is a defendant.
The current defendants are ten insurance carriers that provided comprehensive
general liability insurance coverage to U.S. Gypsum between the 1940's and 1984.
As discussed below, several carriers have settled all or a portion of the claims
in the Coverage Action.
U.S. Gypsum's aggregate expenditures for all asbestos-related matters,
including property damage, personal injury, insurance coverage litigation and
related expenses, exceeded aggregate insurance payments by $25.8 million in the
year ended December 31, 1992, and by $3.8 million in the period of January 1
through May 6, 1993.
PROPERTY DAMAGE CASES
The Property Damage Cases have been brought against U.S. Gypsum by a variety
of plaintiffs, including school districts, state and local governments, colleges
and universities, hospitals, and private property owners. As of May 6, 1993,
U.S. Gypsum was one of many defendants in four cases that had been certified as
class actions and others that requested such certification. One class action
suit is brought on behalf of owners and operators of all elementary and
secondary schools in the United States that contain or contained friable
asbestos-containing material. (IN RE ASBESTOS SCHOOL LITIGATION, U.S.D.C., E.D.
Pa.) Approximately 1,350 school districts opted out of the class, some of which
have filed or may file separate lawsuits or are participants in a state court
class action involving approximately 333 school districts in Michigan. (BOARD OF
EDUCATION OF THE CITY OF DETROIT, ET AL. V. THE CELOTEX CORP., et al., Cir. Ct.
for Wayne County, Mich.) On April 10, 1992, a state court in Philadelphia
certified a class consisting of all owners of buildings leased to the federal
government. (PRINCE GEORGE CENTER, INC. V. U.S. GYPSUM CO., ET AL., Ct. of
Common Pleas, Philadelphia, Pa.) On September 4, 1992, a Federal district court
in South Carolina conditionally certified a class comprised of all colleges and
universities in the United States, which certification is presently limited to
the resolution of certain allegedly "common" liability issues. (CENTRAL WESLEYAN
COLLEGE, V. W.R. GRACE & CO., ET AL., U.S.D.C., S.C.). On December 23, 1992, a
case was filed in state court in South Carolina purporting to be a "voluntary"
class action on behalf of owners of all buildings containing certain types of
asbestos-containing products manufactured by the nine named defendants,
including U.S. Gypsum, other than buildings owned by the federal or state
governments, single family residences, or buildings at issue in the four above
described class actions (ANDERSON COUNTY HOSPITAL V. W.R. GRACE & CO., ET AL.,
Court of Common Pleas, Hampton Co., S.C. (the "Anderson Case"). On January 14,
1993, the plaintiff filed an amended complaint that added a number of
defendants, including the Corporation. The amended complaint alleges, among
other things, that the guarantees executed by U.S. Gypsum in connection with the
1988 Recapitalization, as well as subsequent distributions of cash from U.S.
Gypsum to the Corporation, rendered U.S. Gypsum insolvent and constitute a
fraudulent conveyance. The suit seeks to set aside the guarantees and
F-61
<PAGE>
USG CORPORATION
(PREDECESSOR COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
recover the value of the cash flow "diverted" from U.S. Gypsum to the
Corporation in an amount to be determined. This case has not been certified as a
class action and no other threshold issues, including whether the South Carolina
Courts have personal jurisdiction over the Corporation, had been decided as of
May 6, 1993. The damages claimed against U.S. Gypsum in the class action cases
are unspecified. U.S. Gypsum has denied the substantive allegations of each of
the Property Damage Cases and intends to defend them vigorously except when
advantageous settlements are possible.
As of May 6, 1993, 67 Property Damage Cases were pending against U.S.
Gypsum; however, the number of buildings involved is greater than the number of
cases because many of these cases, including the class actions referred to
above, involve multiple buildings. Approximately 40 property damage claims were
threatened against U.S. Gypsum.
In total, as of May 6, 1993, U.S. Gypsum had settled property damage claims
of approximately 187 plaintiffs involved in approximately 71 cases. Twenty-two
cases had been tried to verdict, 13 of which were won by U.S. Gypsum and 7 lost;
two other cases, one won at the trial level and one lost, were settled after
appeals. Appeals were pending in 4 of the tried cases. In the cases lost,
compensatory damage awards against U.S. Gypsum totaled $12.5 million. Punitive
damages totaling $5.5 million were entered against U.S. Gypsum in four trials.
Two of the punitive damage awards, totaling $1.45 million, were paid after
appeals were exhausted; a third was settled after the verdict was reversed on
appeal. As of May 6, 1993, the remaining punitive award was on appeal.
In 1991, 13 new Property Damage Cases were filed against U.S. Gypsum, 11
were dismissed before trial, 8 were settled, 2 were closed following trial or
appeal, and 100 were pending at year end; U.S. Gypsum expended $22.2 million for
the defense and resolution of Property Damage Cases and received insurance
payments of $13.8 million in 1991. In 1992, 7 new Property Damage Cases were
filed against U.S. Gypsum, 10 were dismissed before trial, 18 were settled, 3
were closed following trial or appeal, and 76 were pending at year end. U.S.
Gypsum expended $34.9 million for the defense and resolution of Property Damage
Cases and received insurance payments of $10.2 million in 1992. In the period of
January 1 through May 6, 1993, no new Property Damage Cases were filed against
U.S. Gypsum, 2 were dismissed before trial, 7 were settled, and 67 were pending
at the end of the period. U.S. Gypsum expended $7.0 million for the defense and
resolution of Property Damage Cases and received insurance payments of $3.7
million in the period.
In the Property Damage Cases litigated to date, a defendant's liability for
compensatory damages, if any, has been limited to damages associated with the
presence and quantity of asbestos-containing products manufactured by that
defendant which are identified in the buildings at issue, although plaintiffs in
some cases have argued that principles of joint and several liability should
apply. Because of the unique factors inherent in each of the Property Damage
Cases, including the lack of reliable information as to product identification
and the amount of damages claimed against U.S. Gypsum in many cases, including
the class actions described above, management is unable to make a reasonable
estimate of the cost of disposing of pending Property Damage Cases.
PERSONAL INJURY CASES
U.S. Gypsum was among numerous defendants in asbestos personal injury suits
and administrative claims involving 57,645 claimants pending as of May 6, 1993.
All asbestos bodily injury claims pending in the federal courts, including
approximately one-third of the Personal Injury Cases pending against U.S.
Gypsum, have been consolidated in the United States District Court for the
Eastern District of Pennsylvania.
U.S. Gypsum is a member, together with 19 other former producers of
asbestos-containing products, of the Center for Claims Resolution (the
"Center"). The Center has assumed the handling, including the defense and
settlement, of all Personal Injury Cases pending against U.S. Gypsum and the
other members of the Center. Each member of the Center is assessed a portion of
the liability and defense costs of the
F-62
<PAGE>
USG CORPORATION
(PREDECESSOR COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Center for the Personal Injury Cases handled by the Center, according to
predetermined allocation formulas. Five of U.S. Gypsum's insurance carriers that
in 1985 signed an Agreement Concerning Asbestos-Related Claims (the "Wellington
Agreement") are supporting insurers (the "Supporting Insurers") of the Center.
The Supporting Insurers are obligated to provide coverage for the defense and
indemnity costs of the Center's members pursuant to the coverage provisions in
the Wellington Agreement. Claims for punitive damages are defended but not paid
by the Center; if punitive damages are recovered, insurance coverage may be
available under the Wellington Agreement depending on the terms of particular
policies and applicable state law. Punitive damages have not been awarded
against U.S. Gypsum in any of the Personal Injury Cases. Virtually all of U.S.
Gypsum's personal injury liability and defense costs are paid by those of its
insurance carriers that are Supporting Insurers. The Supporting Insurers
provided approximately $350 million of the total coverage referred to above.
On January 15, 1993, U.S. Gypsum and the other members of the Center were
named as defendants in a class action filed in the U.S. District Court for the
Eastern District Pennsylvania (GEORGINE ET AL. V. AMCHEM PRODUCTS INC., ET AL.,
Case No. 93-CV-0215) (hereinafter "Georgine,"). The complaint generally defines
the class of plaintiffs as all persons who have been occupationally exposed to
asbestos-containing products manufactured by the defendants and who had not
filed an asbestos personal injury suit as of the date of the filing of the class
action. Simultaneously with the filing of the class action, the parties filed a
settlement agreement in which the named plaintiffs, proposed class counsel, and
the defendants agreed to settle and compromise the claims of the proposed class.
The settlement, which was awaiting court approval as of May 6, 1993, will
implement for all future Personal Injury Cases, except as noted below, an
administrative compensation system to replace judicial claims against the
defendants, and will provide fair and adequate compensation to future claimants
who can demonstrate exposure to asbestos-containing products manufactured by the
defendants and the presence of an asbestos-related disease. Class members will
be given the opportunity to "opt out," or elect to be excluded from the
settlement, although the defendants reserve the right to withdraw from the
settlement if the number of opt outs is, in their sole judgment, excessive. In
addition, in each year a limited number of claimants will have certain rights to
prosecute their claims for compensatory (but not punitive) damages in court in
the event they reject compensation offered by the administrative processing of
their claim.
The Center members, including U.S. Gypsum, have instituted proceedings
against those of their insurance carriers that had not consented to support the
settlement, seeking a declaratory judgment that the settlement is reasonable
and, therefore, that the carriers are obligated to fund their portion of it.
Consummation of the settlement is contingent upon, among other things, court
approval of the settlement and a favorable ruling in the declaratory judgment
proceedings against the non-consenting insurers. It is anticipated that appeals
will follow the district court's ruling on the fairness and reasonableness of
the settlement.
Each of the defendants has committed to fund a defined portion of the
settlement, up to a stated maximum amount, over the initial ten-year period of
the agreement (which is automatically extended unless terminated by the
defendants). Taking into account the provisions of the settlement agreement
concerning the maximum number of claims that must be processed in each year and
the total amount to be made available to the claimants, the Center estimates
that U.S. Gypsum will be obligated to fund a maximum of approximately $125
million of the class action settlement, exclusive of expenses, with a maximum
payment of less than $18 million in any single year; of the total amount of U.S.
Gypsum's obligation, all but approximately $13 million or less is expected to be
paid by U.S. Gypsum's insurance carriers.
During 1992, approximately 20,100 Personal Injury Cases were filed against
U.S. Gypsum and approximately 10,600 were settled or dismissed. U.S. Gypsum
incurred expenses of $21.6 million in 1992 with respect to Personal Injury Cases
of which $21.5 million was paid by insurance. In the period of January 1 through
May 6, 1993, approximately 8,700 Personal Injury Cases were filed against U.S.
Gypsum and
F-63
<PAGE>
USG CORPORATION
(PREDECESSOR COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
approximately 5,300 were settled or dismissed. U.S. Gypsum incurred expenses of
$10.9 million in the period with respect to Personal Injury Cases of which $10.8
million was paid by insurance. As of May 6, 1993, December 31, 1992 and December
31, 1991, approximately 58,000, 54,000 and 43,000 Personal Injury Cases were
outstanding against U.S. Gypsum, respectively.
As of May 6, 1993, U.S. Gypsum's average settlement cost for Personal Injury
Cases over the past three years was approximately $1,350 per claim, exclusive of
defense costs. Management anticipated that its average settlement cost was
likely to increase due to such factors as the possible insolvency of co-
defendants, although this increase might be offset to some extent by other
factors, including the possibility for block settlements of large numbers of
cases and the apparent increase in the percentage of asbestos personal injury
cases that appear to have been brought by individuals with little or no physical
impairment. In management's opinion, based primarily upon U.S. Gypsum's
experience in the Personal Injury Cases disposed of and taking into
consideration a number of uncertainties, it was probable that asbestos-related
Personal Injury Cases pending against U.S. Gypsum as of December 31, 1992, could
have been disposed of for an amount estimated to be between $80 million and $100
million, including both indemnity costs and legal fees and expenses. The
estimated cost of resolving pending claims takes into account, among other
factors, (i) an increase in the number of pending claims; (ii) the settlements
of certain large blocks of claims for higher per-case averages than have
historically been paid; and (iii) a slight increase in U.S. Gypsum's historical
settlement average. No accrual was recorded for this amount because, pursuant to
the Wellington Agreement, U.S. Gypsum's Supporting Insurers are obligated to pay
these costs.
Assuming that the Georgine class action settlement referred to above is
approved substantially in its current form, management estimated, based on
assumptions supplied by the Center, U.S. Gypsum's maximum total exposure as of
May 6, 1993 in Personal Injury Cases during the next ten years (the initial term
of the agreement), including liability for pending claims, claims resolved as
part of the class action settlement, and opt out claims, as well as defense
costs and other expenses, at approximately $271 million, of which at least $254
million was expected to be paid by insurance. U.S. Gypsum's additional exposure
for claims filed by persons who have opted out of Georgine would depend on the
number of such claims that are filed, which could not be determined.
COVERAGE ACTION
As indicated above, all of U.S. Gypsum's carriers initially denied coverage
for the Property Damage Cases and the Personal Injury Cases, and U.S. Gypsum
initiated the Coverage Action to establish its right to such coverage. U.S.
Gypsum has voluntarily dismissed the Supporting Insurers referred to above from
the personal injury portion of the Coverage Action because they are committed to
providing personal injury coverage in accordance with the Wellington Agreement.
U.S. Gypsum's claims against the remaining carriers for coverage for the
Personal Injury Cases have been stayed since 1984.
On January 7, 1991, the trial court in the Coverage Action ruled on the
applicability of U.S. Gypsum's insurance policies to settlements and one adverse
judgment in eight Property Damage Cases. The court ruled that the eight cases
were generally covered, and imposed coverage obligations on particular policy
years based upon the dates when the presence of asbestos-containing material was
"first discovered" by the plaintiff in each case. The court awarded
reimbursement of approximately $6.2 million spent by U.S. Gypsum to resolve the
eight cases. U.S. Gypsum appealed the court's ruling with respect to the policy
years available to cover particular claims, and the carriers appealed most other
aspects of the court's ruling.
U.S. Gypsum's experience in the Property Damage Cases suggests that "first
discovery" dates in the eight cases referred to above (1978 through 1985) are
likely to be typical of most pending cases. U.S. Gypsum's total insurance
coverage for the years 1978 through 1984 totals approximately $350 million
(after subtracting insolvencies and discounts given to settling carriers).
However, some pending cases, as well as some cases filed in the future, may be
found to have first discovery dates later than August 1, 1984, after
F-64
<PAGE>
USG CORPORATION
(PREDECESSOR COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
which U.S. Gypsum's insurance policies did not provide coverage for
asbestos-related claims. In addition, as described below, the first layer excess
carrier for the years 1980 through 1984 is insolvent and U.S. Gypsum may be
required to pay amounts otherwise covered by those and other insolvent policies.
Accordingly, if the court's ruling is affirmed, U.S. Gypsum will likely be
required to bear a portion of the cost of the property damage litigation.
Eight carriers, including two of the Supporting Insurers, settled U.S.
Gypsum's claims for both property damage and personal injury coverage and were
dismissed from the Coverage Action entirely. Four of these carriers agreed to
pay all or a substantial portion of their policy limits to U.S. Gypsum beginning
in 1991 and continuing over the next four years. Three other excess carriers,
including the two settling Supporting Insurers, agreed to provide coverage for
the Property Damage Cases and the Personal Injury Cases subject to certain
limitations and conditions, when and if underlying primary and excess coverage
is exhausted. It cannot presently be determined when such coverage might be
reached. Taking into account the above settlements, including participation of
certain of the settling carriers in the Wellington Agreement, and consumption
through December 31, 1992, carriers providing a total of approximately $97
million of unexhausted insurance had agreed, subject to the terms of the various
settlement agreements, to cover both Personal Injury Cases and Property Damage
Cases. Carriers providing an additional $276 million of coverage that was
unexhausted as of December 31, 1992 had agreed to cover Personal Injury Cases
under the Wellington Agreement, but continued to contest coverage for Property
Damage Cases and remained defendants in the Coverage Action. U.S. Gypsum will
continue to seek negotiated resolutions with its carriers in order to minimize
the expense and delays of litigation.
As of May 6, 1993, insolvency proceedings had been instituted against four
of U.S. Gypsum's insurance carriers. Midland Insurance Company, declared
insolvent in 1986, provided excess insurance ($4 million excess of $1 million
excess of $500,000 primary in each policy year) from February 15, 1975 to
February 15, 1978; Transit Casualty Company, declared insolvent in 1985,
provided excess insurance ($15 million excess of $1 million primary in each
policy year) from August 1, 1980 to December 31, 1985; Integrity Insurance
Company, declared insolvent in 1986, provided excess insurance ($10 million
quota share of $25 million excess of $90 million) from August 1, 1983 to July
31, 1984; and American Mutual Insurance Company, declared insolvent in 1989,
provided the primary layer of insurance ($500,000 per year) from February 1,
1963 to April 15, 1971. It is possible that U.S. Gypsum will be required to pay
a presently indeterminable portion of the costs that would otherwise have been
covered by these policies.
It is not possible to predict the number of additional lawsuits alleging
asbestos-related claims that may be filed against U.S. Gypsum. The number of
Personal Injury Claims pending against U.S. Gypsum has increased in each of the
last several years. In addition, many Property Damage Cases are still at an
early stage and the potential liability therefrom is consequently uncertain. In
view of the limited insurance funding currently available for the Property
Damage Cases resulting from the continued resistance by a number of U.S.
Gypsum's insurers to providing coverage, the effect of the asbestos litigation
on the Corporation will depend upon a variety of factors, including the damages
sought in the Property Damage Cases that reach trial prior to the completion of
the Coverage Action, U.S. Gypsum's ability to successfully defend or settle such
cases, and the resolution of the Coverage Action. As a result, as of May 6,
1993, management was unable to determine whether an adverse outcome in the
asbestos litigation would have a material adverse effect on the results of
operations or the consolidated financial position of the Corporation.
ENVIRONMENTAL LITIGATION
The Corporation and certain of its subsidiaries had been notified by state
and federal environmental protection agencies of possible involvement as one of
numerous "potentially responsible parties" in a number of so-called "Superfund"
sites in the United States. In substantially all of these sites, the involvement
of the Corporation or its subsidiaries is expected to be minimal. The
Corporation believes that
F-65
<PAGE>
USG CORPORATION
(PREDECESSOR COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
appropriate reserves have been established for its potential liability in
connection with all Superfund sites but is continuing to review its accruals as
additional information becomes available. Such reserves take into account all
known or estimable costs associated with these sites including site
investigations and feasibility costs, site cleanup and remediation, legal costs,
and fines and penalties, if any. In addition, environmental costs connected with
site cleanups on USG-owned property are also covered by reserves established in
accordance with the foregoing. The Corporation believes that neither these
matters nor any other known governmental proceeding regarding environmental
matters will have a material adverse effect upon its earnings or consolidated
financial position.
INDUSTRY AND GEOGRAPHIC SEGMENTS
Transactions between geographic areas are accounted for on an "arm's-length"
basis. No single customer accounted for 4% or more of consolidated net sales.
Export sales to foreign unaffiliated customers represent less than 10% of
consolidated net sales.
Intrasegment and intersegment eliminations largely reflect intercompany
sales. Segment operating profit/(loss) includes all costs and expenses directly
related to the segment involved and an allocation of expenses which benefit more
than one segment.
Variations in the levels of corporate identifiable assets primarily reflect
fluctuations in the levels of cash and cash equivalents. Restricted cash of $88
million, which represents the proceeds from the 1991 sale of DAP Inc., formerly
a wholly owned subsidiary of the Corporation, is included in corporate
identifiable assets for 1992. Information shown in the following tables has been
restated to conform to the Corporation's current industry segment organization.
<TABLE>
<CAPTION>
OPERATING DEPLETION
JANUARY 1 THROUGH MAY 6, 1993 NET PROFIT/ DEPRECIATION AND CAPITAL IDENTIFIABLE
INDUSTRY SEGMENTS SALES (LOSS) AMORTIZATION EXPENDITURES ASSETS
- ------------------------------------------------------------ ------ ---------- ---------------- ------------ ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
North American Gypsum:
U.S. Gypsum............................................... $ 297 $ 29 $10 $ 6 $ 964
CGC (gypsum division)..................................... 30 2 1 1 165
Other subsidiaries........................................ 24 6 2 -- 60
Eliminations.............................................. (20) -- -- -- --
------ --- --- --- ------
Total Gypsum Products..................................... 331 37 13 7 1,189
Building Products Distribution............................ 156 (1) 1 1 118
Eliminations.............................................. (49) -- -- -- (22)
------ --- --- --- ------
Total North American Gypsum............................... 438 36 14 8 1,285
------ --- --- --- ------
Worldwide Ceilings:
USG Interiors............................................. 115 10 5 2 558
USG International......................................... 59 1 1 2 204
CGC (interiors division).................................. 11 2 -- -- 9
Eliminations.............................................. (12) -- -- -- --
------ --- --- --- ------
Total Worldwide Ceilings.................................. 173 13 6 4 771
------ --- --- --- ------
Corporate................................................... -- (11) 2 -- 139
Eliminations................................................ (20) -- -- -- (1)
------ --- --- --- ------
Total USG Corporation....................................... 591 38 22 12 2,194
------ --- --- --- ------
------ --- --- --- ------
</TABLE>
F-66
<PAGE>
USG CORPORATION
(PREDECESSOR COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
OPERATING DEPLETION
NET PROFIT/ DEPRECIATION AND CAPITAL IDENTIFIABLE
GEOGRAPHIC SEGMENTS SALES (LOSS) AMORTIZATION EXPENDITURES ASSETS
- ------------------------------------------------------------ ------ ---------- ---------------- ------------ ------------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
United States............................................... $ 507 $ 28 $18 $ 9 $1,776
Canada...................................................... 48 4 2 1 198
Other Foreign............................................... 65 6 2 2 221
Transfers between geographic areas.......................... (29) -- -- -- (1)
------ --- --- --- ------
Total USG Corporation....................................... 591 38 22 12 2,194
------ --- --- --- ------
------ --- --- --- ------
<CAPTION>
YEAR ENDED DECEMBER 31, 1992
INDUSTRY SEGMENTS
- ------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
North American Gypsum:
U.S. Gypsum............................................... $ 871 $ 70 $31 $25 $ 653
CGC (gypsum division)..................................... 92 -- 3 3 67
Other subsidiaries........................................ 77 17 4 3 57
Eliminations.............................................. (66) -- -- -- --
------ --- --- --- ------
Total Gypsum Products..................................... 974 87 38 31 777
Building Products Distribution............................ 464 3 2 3 98
Eliminations.............................................. (142) -- -- -- (22)
------ --- --- --- ------
Total North American Gypsum............................... 1,296 90 40 34 853
------ --- --- --- ------
Worldwide Ceilings:
USG Interiors............................................. 354 35 12 11 256
USG International......................................... 189 -- 5 3 125
CGC (interiors division).................................. 33 4 1 -- 8
Eliminations.............................................. (35) -- -- -- --
------ --- --- --- ------
Total Worldwide Ceilings.................................. 541 39 18 14 389
------ --- --- --- ------
Corporate................................................... -- (30) 8 1 423
Eliminations................................................ (60) -- -- -- (6)
------ --- --- --- ------
Total USG Corporation....................................... 1,777 99 66 49 1,659
------ --- --- --- ------
------ --- --- --- ------
<CAPTION>
GEOGRAPHIC SEGMENTS
- ------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
United States............................................... $1,505 $ 76 $53 $40 $1,423
Canada...................................................... 149 7 7 6 96
Other Foreign............................................... 208 16 6 3 140
Transfers between geographic areas.......................... (85) -- -- -- --
------ --- --- --- ------
Total USG Corporation....................................... 1,777 99 66 49 1,659
------ --- --- --- ------
------ --- --- --- ------
</TABLE>
<TABLE>
<CAPTION>
JANUARY 1
THROUGH MAY 6 YEAR ENDED DECEMBER
TRANSFERS BETWEEN GEOGRAPHIC AREAS 1993 31, 1992
- -------------------------------------------------------------------------------------- --------------- -------------------
(DOLLARS IN MILLIONS)
<S> <C> <C>
United States......................................................................... $ 13 $ 35
Canada................................................................................ 8 23
Other Foreign......................................................................... 8 27
--- ---
Total................................................................................. 29 85
--- ---
--- ---
</TABLE>
SUBSIDIARY DEBT GUARANTEES
As of May 6, 1993, $340 million aggregate principal amount of Senior 2002
Notes were outstanding. Each of U.S. Gypsum, USG Industries, Inc., USG
Interiors, USG Foreign Investments, Ltd., L&W Supply, Westbank Planting Company,
USG Interiors International, Inc., American Metals Corporation and La Mirada
Products Co., Inc. (together, the "Combined Guarantors") guaranteed, in the
manner described below, both the obligations of the Corporation under the Credit
Agreement and the Senior 2002 Notes. The Combined
F-67
<PAGE>
USG CORPORATION
(PREDECESSOR COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Guarantors are jointly and severally liable under these guarantees (the
"Subsidiary Guarantees"). Holders of the Bank Debt have the right to (i)
determine whether, when and to what extent the guarantees will be enforced
(provided that each guarantee payment will be applied to the Bank Debt and
Senior 2002 Notes pro rata based on the respective amounts owed thereon) and
(ii) amend or eliminate the guarantees. The guarantees will terminate when the
Bank Debt is retired regardless of whether any Senior 2002 Notes remain unpaid.
The liability of each of the Combined Guarantors on its guarantee is limited to
the greater of (i) 95% of the lowest amount, calculated as of July 13, 1988,
sufficient to render the guarantor insolvent, leave the guarantor with
unreasonably small capital or leave the guarantor unable to pay its debts as
they become due (each as defined under applicable law) and (ii) the same amount,
calculated as of the date any demand for payment under such guarantee is made,
in each case plus collection costs. The guarantees are senior obligations of the
applicable guarantor and rank PARI PASSU with all unsubordinated obligations of
the guarantor.
Subsidiaries other than the Combined Guarantors (the "Combined
Non-Guarantors"), substantially all of which are subsidiaries of Guarantors,
primarily included, as of May 6, 1993, CGC, Gypsum Transportation Limited, USG
Canadian Mining Ltd. and the Corporation's Mexican, European and Pacific
subsidiaries. The long-term debt of the Combined Non-Guarantors of $28 million
as of May 6, 1993 has restrictive covenants that restrict, among other things,
the payment of dividends.
The following condensed consolidating information presents:
(i) Condensed financial statements as of May 6, 1993 and for the period of
January 1 through May 6, 1993, and the year ended December 31, 1992: (a) the
Corporation on a parent company only basis (the "Parent Company," which was
the only entity of the Corporation included in the bankruptcy proceeding);
(b) the Combined Guarantors; (c) the Combined Non-Guarantors; and (d) the
Corporation on a consolidated basis. Due to the Restructuring and
implementation of fresh start accounting, the financial statements for the
restructured company (periods after May 6, 1993) are not comparable to those
of the predecessor company. Except for the following condensed financial
statements, separate financial information with respect to the Combined
Guarantors is omitted as such separate financial information is not deemed
material to investors.
(ii) The Parent Company and Combined Guarantors shown with their investments in
their subsidiaries accounted for on the equity method.
(iii) Elimination entries necessary to consolidate the Parent Company and its
subsidiaries.
F-68
<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-69
<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>
F-70
<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>
PARENT COMPANY COMBINED NON-
COMPANY GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
----------- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents.................... $ 24 $ (7) $ 32 $ -- $ 49
Receivables, net............................. 55 236 49 (25) 315
Inventories.................................. -- 111 39 (2) 148
----------- ----------- ----- ------------ ------
Total current assets....................... 79 340 120 (27) 512
Property, plant and equipment, net........... 22 628 117 -- 767
Investment in subsidiaries................... 1,823 312 -- (2,135) --
Excess reorganization value.................. -- 671 180 -- 851
Other assets................................. (103) 159 5 3 64
----------- ----------- ----- ------------ ------
Total assets............................... 1,821 2,110 422 (2,159) 2,194
----------- ----------- ----- ------------ ------
----------- ----------- ----- ------------ ------
Accounts payable and accrued expenses........ $ 176 $ 76 $ 52 $ (24) $ 280
Notes payable and long-term debt maturing
within one year............................. 3 1 11 -- 15
----------- ----------- ----- ------------ ------
Total current liabilities.................. 179 77 63 (24) 295
Long-term debt............................... 1,371 47 28 -- 1,446
Deferred income taxes........................ -- 155 15 -- 170
Other liabilities............................ 267 8 4 -- 279
Common stock................................. 4 1 6 (7) 4
Capital received in excess of par value...... -- 1,678 306 (1,984) --
Deferred currency translation................ -- -- -- -- --
Reinvested earnings.......................... -- 144 -- (144) --
----------- ----------- ----- ------------ ------
Total stockholders' equity................. 4 1,823 312 (2,135) 4
----------- ----------- ----- ------------ ------
Total liabilities and stockholders'
equity.................................... 1,821 2,110 422 (2,159) 2,194
----------- ----------- ----- ------------ ------
----------- ----------- ----- ------------ ------
</TABLE>
F-71
<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>
PARENT COMPANY 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 & EQUIVALENTS........... (35) (94) (2) -- (131)
----- ----- --- ----- -----
Cash and cash equivalents -- beginning....... 59 87 34 -- 180
----- ----- --- ----- -----
Cash and cash equivalents -- end............. 24 (7) 32 -- 49
----- ----- --- ----- -----
----- ----- --- ----- -----
</TABLE>
F-72
<PAGE>
USG CORPORATION
(PREDECESSOR COMPANY)
NOTES TO FINANCIAL STATEMENTS (CONCLUDED)
USG CORPORATION
(PREDECESSOR COMPANY)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1992
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
PARENT COMPANY 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 &
EQUIVALENTS................................. 23 9 (7) -- 25
----- ----- --- ----- -----
Cash and cash equivalents -- beginning....... 36 78 41 -- 155
----- ----- --- ----- -----
Cash and cash equivalents -- end............. 59 87 34 -- 180
----- ----- --- ----- -----
----- ----- --- ----- -----
</TABLE>
F-73
<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-74
<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 the related consolidated statements of earnings and cash flows for the
period of January 1 through May 6, 1993 and for the year ended December 31,
1992. These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
As discussed in Notes to Financial Statements -- "Financial Restructuring" note,
on May 6, 1993, the Corporation completed a comprehensive financial
restructuring through the implementation of a prepackaged plan of reorganization
under Chapter 11 of the United States Bankruptcy Code and applied fresh start
accounting. The restructuring resulted in an extraordinary gain of $944 million,
primarily from the exchange of debt, and fresh start accounting resulted in a
$709 million gain, primarily from revaluing assets and liabilities to reflect
reorganization value. These one-time credits to income were recorded as of May
6, 1993 by the Predecessor Company. As such, results of operations through May
6, 1993 (Predecessor Company) are not comparable with results of operations
subsequent to that date.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of USG Corporation and
subsidiaries as of May 6, 1993 and the results of their operations and their
cash flows for the period of January 1 through May 6, 1993 and for the year
ended December 31, 1992, in conformity with generally accepted accounting
principles.
As discussed in Notes to Financial Statements -- "Litigation" note, in view of
the limited insurance funding currently available for property damage cases
resulting from the continued resistance by a number of U.S. Gypsum's insurers to
providing coverage, the effect of the asbestos litigation on the Corporation
will depend upon a variety of factors, including the damages sought in property
damage cases that reach trial prior to the completion of the coverage action,
U.S. Gypsum's ability to successfully defend or settle such cases, and the
resolution of the coverage action. As a result, management is unable to
determine whether an adverse outcome in the asbestos litigation will have a
material adverse effect on the consolidated results of operations or the
consolidated financial position of the Corporation.
As discussed in Notes to Financial Statements -- "Cumulative Effect of Changes
in Accounting Principles" note, on January 1, 1993 the Corporation changed its
method of accounting for postretirement benefits other than pensions and
accounting for income taxes.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Chicago, Illinois
January 31, 1994
F-75
<PAGE>
USG CORPORATION
SELECTED QUARTERLY FINANCIAL DATA (A) (UNAUDITED)
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH TOTAL
QUARTER QUARTER QUARTER QUARTER YEAR
-------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
1994
Net sales............................... $ 506 $ 562 $ 621 $ 601 $ 2,290
Gross profit (b)........................ 110 133 153 121 517
Operating profit (b) (c)................ 11 32 47 14 104
Net (loss)(b) (c)....................... (34) (17) (6) (35) (92)
Per common share:
Net loss (d).......................... (0.87) (0.38) (0.13) (0.79) (2.14)
Price range (e) -- high............... 36 32 1/4 24 1/2 21 3/4 36
low................ 27 1/2 17 3/4 18 3/8 17 1/4 17 1/4
EBITDA.................................. 66 87 105 67 325
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
APRIL 1 MAY 7
FIRST THROUGH THROUGH THIRD FOURTH
QUARTER MAY 6 JUNE 30 QUARTER QUARTER
-------- --------- ------- ------- -------
1993
Net sales............................... $ 436 $ 155 $ 315 $ 514 $ 496
Gross profit............................ 79 30 63 105 95
Operating profit/(loss)(c).............. 27 11 (1 ) 6 (4 )
Net earnings/(loss)(c) (f).............. (279) 1,713 (21 ) (25 ) (83 )
Per common share (g):
Net loss.............................. -- -- (0.57 ) (0.66 ) (2.23 )
Price range (e) -- high............... -- -- 14 22 5/8 30 1/2
low................ -- -- 9 5/8 13 20 1/4
EBITDA.................................. 46 17 37 65 53
<FN>
- ------------------------
(a) Due to the Restructuring and implementation of fresh start accounting, the
financial statements effective May 7, 1993 for the Restructured Company are
not comparable to financial statements prior to that date for the
Predecessor Company.
(b) Fourth quarter 1994 gross profit, operating profit and net loss reflect a
$30 million pre-tax charge ($17 million after-tax) to cost of sales for
asbestos litigation settlements. Fourth quarter 1994 net loss also reflects
a $16 million pre-tax charge ($9 million after-tax) for the write-off of
reorganization debt discount.
(c) Effective May 7, 1993, the Corporation began amortizing its excess
reorganization value which reduced operating profit and net earnings. This
non-cash amortization amounted to $42 million, $42 million, $43 million and
$42 million in the first through fourth quarters of 1994, respectively. For
the period of May 7 through June 30 and the third and fourth quarters of
1993, amortization of excess reorganization value amounted to $28 million,
$43 million and $42 million, respectively.
(d) As a result of common shares issued in the first quarter of 1994, the sum
of the losses per common share for the four quarters of 1994, which are
based on average shares outstanding during each quarter, does not equal the
loss per common share for the year ended December 31, 1994, which is based
on the average shares outstanding during the year.
(e) Stock price ranges are for transactions on the New York Stock Exchange
(trading symbol USG), which is the principal market for these securities.
Stockholders of record as of January 31, 1995: Common -- 6,072; Preferred
-- none.
</TABLE>
F-76
<PAGE>
<TABLE>
<S> <C>
(f) First quarter 1993 net loss reflects a one-time after-tax net charge of
$150 million for the cumulative effect of changes in accounting principles
and a pre-tax reorganization items expense of $69 million. Net earnings in
the period of April 1 through May 6, 1993 include a one-time pre-tax
reorganization items gain of $778 million and a one-time after-tax
extraordinary gain of $944 million, both of which were associated with the
Restructuring. Net loss in the fourth quarter of 1993 includes an after-tax
extraordinary loss of $21 million related to the Corporation's 1994 Equity
Offering and Note Placement.
(g) Per-share information for periods prior to May 7, 1993 is omitted because,
due to the Restructuring and implementation of fresh start accounting, it
is not meaningful.
</TABLE>
F-77
<PAGE>
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH
THIS OFFERING TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN
THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
CORPORATION OR ANY OF THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, 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 DATE SUBSEQUENT TO THE DATE HEREOF. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE
NOTES OFFERED HEREBY OR BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS UNLAWFUL, OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANYONE TO WHOM IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................. 3
Risk Factors................................... 10
Use of Proceeds................................ 12
Selected Consolidated Financial Data........... 13
Capitalization................................. 15
Management's Discussion and Analysis of Results
of Operations and Financial Condition......... 16
Business....................................... 24
Management..................................... 31
Description of New Credit Agreement............ 35
Description of Notes........................... 37
Description of Other Debt Obligations.......... 57
Description of Collateral Trust................ 58
Underwriting................................... 59
Legal Matters.................................. 60
Experts........................................ 60
Available Information.......................... 60
Information Incorporated by Reference.......... 61
Index to Consolidated Financial Statements..... F-1
</TABLE>
$150,000,000
USG CORPORATION
% SENIOR NOTES DUE 2005
[LOGO]
SALOMON BROTHERS INC
BT SECURITIES CORPORATION
CITICORP SECURITIES, INC.
CHEMICAL SECURITIES INC.
PROSPECTUS
DATED , 1995
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following are the estimated expenses of the issuance and distribution of
the securities being registered, including fees and expenses previously incurred
by the Corporation, other than any underwriting compensation.
<TABLE>
<CAPTION>
ITEM AMOUNT
- -------------------------------------------------------------------------------- ------------
<S> <C>
SEC Registration Fees........................................................... $ 51,724
Printing and Mailing Expenses................................................... 200,000
Legal Fees and Expenses......................................................... 200,000
Accountants' Fees and Expenses.................................................. 100,000
Miscellaneous Expenses.......................................................... 500,000
------------
Total....................................................................... $ 1,051,724
------------
------------
</TABLE>
ITEM 15. 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, 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.
II-1
<PAGE>
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
ITEM 17. UNDERTAKINGS
The Registrant hereby undertakes:
(1) 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.
(2) 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.
(3) That, for purposes of determining any liability under the Securities
Act of 1933, each filing of the registrant's annual report pursuant to
section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (and,
where applicable, each filing of an employee benefit plan's annual report
pursuant to section 15(d) of the Securities Exchange of 1934) that is
incorporated by reference in the registration statement 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 the initial bona
fide offering thereof.
(4) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the Company pursuant to the foregoing provisions, or otherwise,
the Company has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Company of expenses incurred or paid by a director,
officer or controlling person of the Company 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
Company will, unless in the opinion of its 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 Securities 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 Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Chicago, State of
Illinois on July 7, 1995.
USG CORPORATION
By: ________Richard H. Fleming________
Richard H. Fleming
SENIOR VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed on June 26, 1995, 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)
*
------------------------------------------ President, Chief Operating Officer and Director
William C. Foote
Richard H. Fleming
------------------------------------------ Senior Vice President and Chief Financial Officer
Richard H. Fleming (Principal Financial Officer)
Raymond T. Belz
------------------------------------------ Vice President and Controller (Principal Accounting
Raymond T. Belz 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
David W. Fox
------------------------------------------ Director
Philip C. Jackson, Jr.
*
------------------------------------------ Director
Marvin E. Lesser
*
------------------------------------------ Director
John B. Schwemm
*
------------------------------------------ Director
Judith A. Sprieser
*By: Richard H. Fleming
-------------------------------------
Richard H. Fleming
ATTORNEY-IN-FACT
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
The following documents are the exhibits to this Registration Statement on
Form S-3. 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-3 where such
exhibit can be found.
<TABLE>
<CAPTION>
EXHIBIT NO. PAGE
- ----------- -----
<S> <C> <C> <C>
3. Underwriting Agreement.*
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).
(e) Consent Resolution adopted by a Special Committee created by the Board of Directors of USG
Corporation relating to USG Corporation's % Senior Notes due 2005.*
5. Opinions of counsel as to the legality of the securities being registered.*
12. Statement recomputation of ratio of earnings to fixed charges.**
23. Consents of experts and counsel.
(a) Consent of Arthur Andersen LLP.
(b) Consents of counsel (included in Exhibit 5).*
24. Power of attorney.**
25. Statement of eligibility of trustee.**
99. Additional Exhibits.
(a) Form of Credit Agreement dated as of , 1995, among USG Corporation and the Banks
listed on the signature page thereto and Chemical Bank as Administrative Agent.*
<FN>
- ------------------------
* To be filed by amendment.
** Previously filed.
</TABLE>
<PAGE>
EXHIBIT 23 (A)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the inclusion and
incorporation by reference in this registration statement of our reports dated
January 26, 1995, included in USG Corporation's Form 10-K for the year ended
December 31, 1994 and to all references to our Firm included in this
registration statement.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Chicago, Illinois,
July 7, 1995
