FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 1-8864
USG CORPORATION
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(Exact name of registrant as specified in its charter)
Delaware 36-3329400
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
125 South Franklin Street, Chicago, Illinois 60606-4678
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (312) 606-4000
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No
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As of June 30, 1998, 49,669,192 shares of USG common stock were outstanding.
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Table of Contents
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Page
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PART I FINANCIAL STATEMENTS
Item 1. Financial Statements:
Consolidated Statement of Earnings:
Three Months and Six Months Ended
June 30, 1998 and 1997 3
Consolidated Balance Sheet:
As of June 30, 1998 and December 31, 1997 4
Consolidated Statement of Cash Flows:
Six Months Ended June 30, 1998 and 1997 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 12
Report of Independent Public Accountants 21
PART II OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 4. Submission of Matters to a Vote of Security Holders 26
Item 6. Exhibits and Reports on Form 8-K 27
SIGNATURES 28
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
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USG CORPORATION
CONSOLIDATED STATEMENT OF EARNINGS
(dollars in millions except per share data)
(Unaudited)
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Three Months Six Months
ended June 30, ended June 30,
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1998 1997 1998 1997
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Net sales $ 775 $ 723 $ 1,510 $ 1,396
Cost of products sold 554 521 1,093 1,017
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Gross profit 221 202 417 379
Selling and administrative expenses 74 72 146 138
Amortization of excess
reorganization value - 42 - 84
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Operating profit 147 88 271 157
Interest expense 13 16 26 33
Interest income (1) (1) (2) (1)
Other expense, net 1 1 3 1
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Earnings before income taxes 134 72 244 124
Income taxes 52 45 95 82
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Net earnings 82 27 149 42
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Basic earnings per common share 1.68 0.57 3.11 0.91
Diluted earnings per common share 1.63 0.55 2.98 0.87
Dividends paid per common share - - - -
Average common shares 48,604,788 46,092,895 47,932,326 46,009,868
Average diluted common shares 50,294,953 48,258,005 50,038,941 48,232,876
See accompanying Notes to Consolidated Financial Statements.
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USG CORPORATION
CONSOLIDATED BALANCE SHEET
(dollars in millions)
(Unaudited)
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As of As of
June 30, December 31,
1998 1997
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Assets
Current Assets:
Cash and cash equivalents $ 72 $ 72
Receivables (net of reserves - $19 and $17) 364 297
Inventories 235 208
Current and deferred income taxes 56 63
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Total current assets 727 640
Property, plant and equipment (net of reserves
for depreciation and depletion - $260 and $236) 1,072 982
Other assets 364 304
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Total Assets 2,163 1,926
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Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable 170 146
Accrued expenses 214 220
Debt maturing within one year 21 10
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Total current liabilities 405 376
Long-term debt 567 610
Deferred income taxes 163 163
Other liabilities 686 630
Stockholders' Equity:
Preferred stock - -
Common stock 5 5
Capital received in excess of par value 310 258
Deferred currency translation (31) (25)
Reinvested earnings (deficit) 58 (91)
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Total stockholders' equity 342 147
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Total Liabilities and Stockholders' Equity 2,163 1,926
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See accompanying Notes to Consolidated Financial Statements.
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USG CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(dollars in millions)
(Unaudited)
<CAPTION>
Six Months
Ended June 30,
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1998 1997
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Operating Activities:
Net earnings $ 149 $ 42
Adjustments to reconcile net earnings to net cash:
Amortization of excess reorganization value - 84
Depreciation, depletion and other amortization 40 34
Current and deferred income taxes 6 (1)
(Increase) decrease in working capital:
Receivables (67) (48)
Inventories (27) (20)
Payables 24 14
Accrued expenses (6) (2)
(Increase) decrease in other assets (1) (3)
Increase (decrease) in other liabilities (5) (1)
Other, net (1) (2)
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Net cash from operating activities 112 97
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Investing Activities:
Capital expenditures (130) (56)
Net proceeds from asset dispositions 2 1
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Net cash to investing activities (128) (55)
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Financing Activities:
Issuance of debt 58 91
Repayment of debt (107) (141)
Short-term borrowings, net 19 2
Issuances of common stock 46 4
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Net cash from (to) financing activities 16 (44)
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Net increase (decrease) in cash & cash equivalents - (2)
Cash & cash equivalents at beginning of period 72 44
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Cash & cash equivalents at end of period 72 42
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Supplemental Cash Flow Disclosures:
Interest paid 28 33
Income taxes paid 84 85
See accompanying Notes to Consolidated Financial Statements.
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USG CORPORATION
Notes to Consolidated Financial Statements
(Unaudited)
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1. Basis of Presentation
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. The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses. Actual results
could differ from those estimates. In the opinion of management, the
statements reflect all adjustments, which are of a normal recurring
nature, necessary to present fairly the Corporation's financial
position as of June 30, 1998, and December 31, 1997, results of
operations for the three months and six months ended June 30, 1998 and
1997, and cash flows for the six months ended June 30, 1998 and 1997.
Certain amounts in the prior years' financial statements have been
reclassified to conform with the 1998 presentation. 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 1997 Annual Report on Form 10-K dated February 20, 1998.
2. Comprehensive Income
In the first quarter of 1998, the Corporation adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive
Income." Total comprehensive income, consisting of net earnings and
foreign currency translation adjustments, amounted to $79 million and
$143 million in the three months and six months ended June 30, 1998,
respectively. For the respective 1997 periods, total comprehensive
income amounted to $27 million and $33 million. There was no tax impact
on the foreign currency translation adjustments.
3. Earnings Per Share
Basic earnings per share were computed by dividing net earnings by the
weighted average number of common shares outstanding for the period.
The dilutive effect of the potential exercise of outstanding options
and warrants to purchase shares of common stock is calculated using the
treasury stock method. The reconciliation of basic earnings per share
to diluted earnings per share is shown in the following table (dollars
in millions except share data).
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Periods Ended June 30, 1998 1997
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Net Shares Net Shares
Earnings (000) EPS Earnings (000) EPS
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Three Months:
Basic earnings $ 82 48,605 $1.68 $ 27 46,093 $ 0.57
Effect of
Dilutive Securities:
Options 948 774
Warrants 742 1,391
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Diluted Earnings 82 50,295 1.63 27 48,258 0.55
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Six Months:
Basic earnings 149 47,932 3.11 42 46,010 0.91
Effect of
Dilutive Securities:
Options 962 827
Warrants 1,145 1,396
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Diluted Earnings 149 50,039 2.98 42 48,233 0.87
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4. Stock Options
As of June 30, 1998, common shares totaling 2,143,575 were reserved for
future issuance in conjunction with existing stock option grants. In
addition, 1,139,145 common shares were reserved for future grants.
5. Financial Instruments
The Corporation uses derivative instruments to manage well-defined
interest rate, energy cost and foreign currency exposures. The
Corporation does not use derivative instruments for trading purposes.
The criteria used to determine if hedge accounting treatment is
appropriate are: (i) the designation of the hedge to an underlying
exposure (ii) whether or not overall uncertainty is being reduced and
(iii) if there is a correlation between the value of the derivative
instrument and the underlying obligation.
Interest Rate Derivative Instruments:
The Corporation utilizes interest rate swap agreements to manage the
impact of interest rate changes on its underlying floating-rate debt.
These agreements are designated as hedges and qualify for hedge
accounting. Amounts payable or receivable under these swap agreements
are accrued as an increase or decrease to interest expense on a current
basis. To the extent the underlying floating-rate debt is reduced, the
Corporation terminates swap agreements accordingly so as not to be in
an overhedged position. In such cases, the Corporation recognizes gains
and/or losses in the period the agreement is terminated.
Energy Cost Derivative Instruments:
The Corporation uses swap agreements to hedge anticipated purchases of
fuel to be utilized in the manufacturing processes for gypsum wallboard
and ceiling tile. Under these swap agreements, the Corporation receives
or makes payments based on the differential between a specified price
and the actual closing price for the current month's energy price
contract. These contracts are designated as hedges and qualify for
hedge accounting. Amounts payable or receivable under these swap
agreements are accrued as an increase or decrease to cost of products
sold, along with the actual spot energy cost of the corresponding
underlying hedge transaction, the combination of which amounts to the
predetermined specified contract price.
Foreign Currency Derivative Instruments:
The Corporation has operations in a number of countries and has
inter-company transactions among them and, as a result, is exposed to
changes in foreign currency exchange rates. The Corporation manages
most of these exposures on a consolidated basis, which allows netting
of certain exposures to take advantage of any natural offsets. To the
extent the net exposures are hedged, option and forward contracts are
used. The foreign currency options qualify for hedge accounting, under
which the option premium is amortized over the life of the option. The
forward contracts are marked to market on a current basis with gains
and/or losses included in net earnings in the period in which the
exchange rates change.
6. Recently Issued Accounting Standard
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities." Statement 133 is effective for
fiscal years beginning after June 15, 1999 and cannot be applied
retroactively. The Statement establishes accounting and reporting
standards requiring that every derivative instrument be recorded in the
balance sheet as either an asset or liability measured at its fair
value. The Statement requires that changes in the derivative's fair
value be recognized currently in earnings unless specific hedge
accounting criteria are met. The Corporation currently plans to adopt
Statement 133 effective January 1, 2000, and will determine both the
method and impact of adoption prior to that date.
7. Excess Reorganization Value
Excess reorganization value, an intangible asset totaling $851 million,
was recorded in 1993 in connection with a comprehensive restructuring
of the Corporation's debt and the implementation 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").
As of September 30, 1997, the remaining $83 million balance of excess
reorganization value was eliminated. This balance, which would have
been amortized through April 1998, was offset by the elimination of a
valuation allowance in accordance with SOP 90-7. See Note 8 below for
additional information.
8. Income Taxes
Income tax expense amounted to $52 million and $95 million in the three
months and six months ended June 30, 1998, respectively. For the
respective 1997 periods, income tax expense amounted to $45 million and
$82 million. The Corporation's income tax expense in the second quarter
and first six months of 1997 was computed based on pre-tax earnings
excluding the noncash amortization of excess reorganization value,
which was not deductible for income tax purposes.
In the third quarter of 1997, a valuation allowance of $90 million,
which had been provided for deferred tax assets relating to pension and
retiree medical benefits prior to the Corporation's financial
restructuring in 1993, was eliminated. The elimination of this
allowance reflected a change in management's judgment regarding the
realizability of these assets in future years as a result of the
Corporation's pretax earnings levels and improved capital structure
over the past three years. In accordance with SOP 90-7, the benefit
realized from the elimination of this allowance was used to reduce the
balance of excess reorganization value to zero as of September 30,
1997.
9. Litigation
One of the Corporation's subsidiaries, United States Gypsum Company ("U.S.
Gypsum"), is a defendant in asbestos lawsuits alleging both property
damage and personal injury. See Part II, Item 1. "Legal Proceedings" for
information concerning the asbestos litigation.
The Corporation and certain of its subsidiaries have been notified by
state and federal environmental protection agencies of possible
involvement as one of numerous "potentially responsible parties" in a
number of so-called "Superfund" sites in the United States. The
Corporation believes that neither these matters nor any other known
governmental proceeding regarding environmental matters will have a
material adverse effect upon its earnings or consolidated financial
position. See Part II, Item 1. "Legal Proceedings" for additional
information on environmental litigation.
10. Accounts Receivable Facility
Under a revolving accounts receivable facility, the trade receivables
of U.S. Gypsum and USG Interiors, Inc. are being purchased by USG
Funding Corporation ("USG Funding") and transferred to a trust
administered by Chase Manhattan 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 that 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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
RESULTS OF OPERATIONS
USG Corporation Consolidated Results
Net Sales - Record shipments of all major product lines and higher selling
prices for SHEETROCK brand gypsum wallboard resulted in second quarter 1998 net
sales of $775 million, a record level for any quarter in USG's history and a 7%
increase compared with net sales of $723 million in the second quarter of 1997.
For the first six months of 1998, net sales totaled $1,510 million, an 8%
increase compared with net sales of $1,396 million in the comparable 1997
period.
Gross Profit Margin - Gross profit as a percentage of net sales was 28.5% and
27.6% in the second quarter and first six months of 1998, respectively, up from
27.9% and 27.1% in the respective 1997 periods. These increases reflect higher
realized prices for most product lines combined with manufacturing costs that
benefited from favorable raw material and energy prices and cost-reduction
efforts.
Selling and Administrative Expenses - Second quarter and first six months 1998
selling and administrative expenses increased 3% and 6%, respectively over the
prior-year periods. However, as a percentage of net sales, these expenses were
9.5% in the second quarter and 9.7% in the first six months of 1998, down from
10.0% and 9.9% in the comparable 1997 periods. Expense dollars are up in 1998
primarily due to marketing and information technology initiatives and USG's
performance-based restricted stock program.
Amortization of Excess Reorganization Value - The noncash amortization of excess
reorganization value reduced operating profit by $42 million and $84 million in
the second quarter and first six months of 1997. As explained in Notes 7 and 8
of this report, the remaining balance of excess reorganization value was
eliminated as of September 30, 1997.
Interest Expense - As a result of debt reduction during the past year, interest
expense in the second quarter and first six months of 1998 decreased 19% and
21%, respectively, from the corresponding 1997 periods.
Income Tax - Income tax expense amounted to $52 million and $95 million in the
three months and six months ended June 30, 1998, respectively. For the
respective 1997 periods, income tax expense amounted to $45 million and $82
million. The Corporation's income tax expense in the 1997 periods was computed
based on pre-tax earnings excluding the noncash amortization of excess
reorganization value, which was not deductible for income tax purposes.
Net Earnings - Second quarter 1998 net earnings were $82 million, or $1.63 per
diluted share. Second quarter 1997 net earnings, which amounted to $27 million,
or $0.55 per diluted share, were net of the noncash amortization of excess
reorganization value of $42 million, or $0.87 per diluted share.
For the first six months of 1998, net earnings were $149 million, or $2.98 per
diluted share. Comparable 1997 net earnings, which amounted to $42 million, or
$0.87 per diluted share, were net of the noncash amortization of excess
reorganization value of $84 million, or $1.75 per diluted share.
EBITDA - Earnings before interest, taxes, depreciation, depletion, amortization
and certain other income and expense items ("EBITDA") amounted to $165 million
in the second quarter and $307 million in the first six months of 1998. Both
amounts represent increases of 12% versus the same periods last year.
As a result of the amortization of excess reorganization value through September
30, 1997, USG continues to report EBITDA to facilitate comparisons of current
and historical results. EBITDA is also helpful in understanding cash flow
generated from operations that is available for taxes, debt service and capital
expenditures. EBITDA should not be considered by investors as an alternative to
net earnings as an indicator of the Corporation's operating performance or to
cash flows as a measure of its overall liquidity.
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USG Corporation Core Business Results
(dollars in millions)
Net Sales EBITDA
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Three Months Six Months Three Months Six Months
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Periods ended June 30 1998 1997 1998 1997 1998 1997 1998 1997
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North American Gypsum:
U.S. Gypsum Company $ 430 $ 391 $ 838 $ 766 $ 132 $ 116 $ 249 $ 221
L&W Supply Corporation 274 250 518 471 11 10 17 16
CGC Inc. (gypsum) 34 30 71 61 5 4 12 9
Other subsidiaries 23 24 43 44 7 8 13 13
Eliminations (124) (106) (234) (206) - (1) - (1)
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Total 637 589 1,236 1,136 155 137 291 258
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Worldwide Ceilings:
USG Interiors, Inc. 114 106 221 204 18 17 32 30
USG International 56 58 113 113 4 4 7 7
CGC Inc. (ceilings) 9 8 19 16 1 1 2 2
Eliminations (16) (13) (30) (26) - - - -
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Total 163 159 323 307 23 22 41 39
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Corporate - - - - (13) (12) (25) (23)
Eliminations (25) (25) (49) (47) - - - -
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Total USG Corporation 775 723 1,510 1,396 165 147 307 274
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North American Gypsum
Second quarter 1998 net sales of $637 million and EBITDA of $155 million
increased 8% and 13%, respectively, over second quarter 1997 levels.
First six months 1998 net sales of $1,236 million and EBITDA of $291 million
increased 9% and 13%, respectively, versus comparable 1997 levels.
United States Gypsum Company - U.S. Gypsum's net sales and EBITDA in the second
quarter of 1998 were the highest ever for any quarter. Shipments of SHEETROCK
brand gypsum wallboard totaled 2.226 billion square feet, a record for any
quarter and an 8% increase over second quarter 1997 shipments of 2.061 billion
square feet. Selling prices on SHEETROCK wallboard averaged $127.34 per thousand
square feet, a record for any quarter and an increase of 3% versus $123.42 for
the second quarter of 1997. Manufacturing unit costs for SHEETROCK wallboard
were down slightly from the prior-year period. Second quarter 1998 capacity
utilization at U.S. Gypsum's wallboard plants increased to approximately 100%
from 98% a year ago. Second quarter shipments of SHEETROCK brand joint compound
and DUROCK brand cement board also reached record levels.
L&W Supply Corporation - Second quarter 1998 net sales and EBITDA for USG's
building products distribution business were each up 10% from a year ago. In
addition, second quarter net sales were a record for any quarter. This sales and
EBITDA performance reflects new quarterly highs for wallboard shipments and
selling prices and for sales and gross profit of complementary building
products. As of June 30, 1998, L&W Supply operated 180 locations in the United
States after acquiring one location during the second quarter of 1998.
CGC Inc. - The gypsum business of CGC Inc., USG's wholly owned Canadian
subsidiary, reported increased sales and EBITDA in the second quarter of 1998.
CGC's performance reflects higher SHEETROCK wallboard volume and prices despite
a drywall installer strike in Toronto that concluded in late June.
Worldwide Ceilings
Second quarter 1998 net sales of $163 million increased 3% over the second
quarter of 1997. EBITDA was $23 million in the second quarter of 1998 compared
with $22 million in the corresponding 1997 period.
First six months 1998 net sales of $323 million and EBITDA of $41 million were
each up 5% from comparable 1997 levels.
Second quarter 1998 shipments of AURATONE brand ceiling tile, "X"technology
ceiling tile and DONN brand ceiling grid set new records. These records were
attributable to strong demand in the U.S. nonresidential construction market
(both new construction and renovation) and steady international demand.
International results reflect higher sales in Europe and Latin America,
partially offset by a decline in Asia. During the second quarter of 1998, a new
ceiling tile production line in Cloquet, Minn., became fully operational,
replacing two old, high-cost lines.
Construction Market Outlook
Based on leading indicators, such as new housing starts, existing home sales and
nonresidential construction activity, the outlook for 1998 continues to be
positive. Key drivers of demand for USG's products, such as consumer confidence,
employment rates and interest rates, all remain at favorable levels.
In the United States, 1998 housing starts have been running at an annual rate
over 1.5 million units. New nonresidential construction in 1997, which increased
by 10% as measured in floor space for which contracts were awarded, is
supporting increased demand for this segment in 1998 as the finishing of an
interior follows contract awards by about a year or more. Demand for USG's
products from the repair and remodel market is expected to increase again in
1998, continuing a long-term growth trend.
Internationally, construction in Canada and Mexico should continue to
strengthen. Demand continues to grow in Eastern Europe and Latin America, while
conditions in Western Europe are showing signs of improvement. USG's exposure to
Asia is limited as this market represents a relatively minor share of the
Corporation's total sales and earnings.
LIQUIDITY AND CAPITAL RESOURCES
Financial Strategy
USG's financial strategy focuses on earnings growth. The key drivers of this
strategy are USG's investments in cost-reduction and growth initiatives, which
are supported by the financial flexibility of an investment grade capital
structure. These initiatives involve replacing high-cost manufacturing capacity
with low-cost capacity; adding efficient new capacity to serve customers and
thereby increase market share; and expanding sales internationally through
exports and manufacturing overseas. USG anticipates that these initiatives also
will serve to reduce the impact of cyclicality on its earnings.
Capital Expenditures
Capital spending amounted to $130 million in the first six months of 1998,
compared with $56 million in the corresponding 1997 period. As of June 30, 1998,
capital expenditure commitments for the replacement, modernization and expansion
of operations amounted to $426 million compared with $363 million as of December
31, 1997.
Wallboard Capacity Modernization - In April 1998, USG announced plans for a
third major wallboard capacity replacement project, a $112 million plant to be
located in Aliquippa, Pa. The new facility will provide 700 million square feet
of SHEETROCK brand gypsum wallboard capacity to replace existing high-cost
capacity in the region, improve service and accommodate anticipated strong
growth in the Northeast market. The Aliquippa plant will manufacture SHEETROCK
wallboard using 100% synthetic gypsum. Ground-breaking is expected in the third
quarter of 1998 and completion in early 2000.
Ground was broken in June 1997 for a new $110 million plant in Bridgeport, Ala.,
that will serve growing markets in the southeastern United States. This facility
will also manufacture SHEETROCK brand wallboard using 100% synthetic gypsum and
is expected to begin operation in mid-1999.
USG is also investing $90 million to rebuild and modernize its wallboard
manufacturing line at the East Chicago, Ind., plant. This new line is expected
to begin production by the end of 1999.
Gypsum Wood Fiber Project - Construction is underway to build a $90 million
facility to manufacture FIBEROCK brand gypsum wood fiber panels at the Gypsum,
Ohio, wallboard plant. The new production line is expected to begin operating by
the end of 1999 and will complement the fourth quarter 1997 acquisition of a
gypsum fiber panel plant in Port Hawksbury, Nova Scotia.
Cost Reduction Projects - Additional capital investments include cost-reduction
projects, such as the installation of stock cleaning equipment to utilize lower
grades of recycled paper and the additional installation of processes to
accommodate the use of synthetic gypsum at manufacturing facilities where it is
more economical than natural gypsum rock.
Ceiling Tile Capacity Modernization - A $35 million project that included the
replacement of two old production lines with one modern, high-speed line at the
ceiling tile plant in Cloquet, Minn., was completed during the first quarter.
The start-up process of the new line occurred during the second quarter and the
new line is now fully operational.
Working Capital
Working capital (current assets less current liabilities) as of June 30, 1998,
amounted to $322 million, and the ratio of current assets to current liabilities
was 1.8 to 1. As of December 31, 1997, working capital was $264 million, and the
ratio of current assets to current liabilities was 1.7 to 1.
Receivables increased to $364 million as of June 30, 1998, from $297 million as
of December 31, 1997, while inventories increased to $235 million from $208
million and accounts payable rose to $170 million from $146 million. These
variations reflect normal seasonal fluctuations.
Cash and cash equivalents as of June 30, 1998, amounted to $72 million,
unchanged from December 31, 1997. During the first six months of 1998, net cash
flows from operating and financing activities totaled $112 million and $16
million, respectively, while net cash flows to investing activities were $128
million.
Net cash flows from financing activities included cash proceeds of $40 million
from the exercise approximately 2.45 million warrants issued on May 6, 1993, in
connection with a debt restructuring. Each warrant entitled the holder to
purchase one share of USG common stock at a price of $16.14 any time prior to
May 6, 1998. The proceeds from the exercises were added to the cash resources of
the Corporation and is being used for general corporate purposes.
Debt
As of June 30, 1998, total debt amounted to $588 million compared with $620
million as of December 31, 1997. During the first half of 1998, USG retired $67
million of 8.75% senior debentures, while increasing industrial revenue bonds by
$18 million, seasonal foreign borrowings by $9 million and borrowings on its
Canadian revolving credit facility by $8 million.
During the first quarter, USG issued $44 million of 5.65% fixed-rate industrial
revenue bonds due 2033 to investors, the proceeds of which were deposited into a
construction escrow account. These bonds, together with $45 million of
variable-rate industrial revenue bonds due 2032, issued last year in a related
offering, will be used to finance the gypsum wood fiber project. This debt is
being recorded incrementally on USG's books as funds are drawn from the escrow
accounts throughout the construction process. The variable-rate bonds were
converted to 5.60% fixed-rate bonds in the third quarter of 1998.
Available Liquidity
The Corporation has additional liquidity available through several financing
arrangements. Revolving credit facilities in the United States, Canada and
Europe allow the Corporation to borrow up to an aggregate of $609 million
(including a $125 million letter of credit subfacility in the United States),
under which, as of June 30, 1998, outstanding revolving loans totaled $116
million and letters of credit issued and outstanding amounted to $68 million,
leaving the Corporation with $425 million of unused and available credit. The
Corporation had additional borrowing capacity of $50 million as of June 30,
1998, under a revolving accounts receivable facility. (See Note 10.) A shelf
registration statement filed with the Securities and Exchange Commission allows
the Corporation to offer from time to time debt securities, shares of preferred
and common stock or warrants to purchase shares of common stock, all having an
aggregate initial offering price not to exceed $300 million. As of the date of
this report, no securities had been issued pursuant to this registration.
Stockholder Rights Plan
On March 27, 1998, the Corporation approved the redemption of the preferred
share purchase rights declared under a 10-year rights agreement adopted in May
1993 and adopted a new share purchase rights plan. The new plan is designed to
strengthen the previous provisions assuring the fair and equal treatment for all
stockholders in the event of any unsolicited attempt to acquire the Corporation.
The new rights plan, which became effective on April 15, 1998, and will expire
on March 27, 2008, has four basic provisions. First, if an acquirer buys 15% or
more of USG's outstanding common stock, the plan allows other stockholders to
buy, with each right, additional USG shares at a 50% discount. Second, if USG is
acquired in a merger or other business combination transaction, rights holders
will be entitled to buy shares of the acquiring company at a 50% discount.
Third, if an acquirer buys between 15% and 50% of USG's outstanding common
stock, the company can exchange part or all of the rights of the other holders
for shares of the company's stock on a one-for-one basis, or shares of the new
junior preferred stock on a one-for-one-hundredth basis. Fourth, before an
acquirer buys 15% or more of USG's outstanding common stock, the rights are
redeemable for one cent per right at the option of the board of directors. This
provision permits the board to enter into an acquisition transaction that is
determined to be in the best interests of stockholders. The board is authorized
to reduce the 15% threshold to not less than 10%.
Legal Contingencies
One of the Corporation's subsidiaries, U.S. Gypsum, is a defendant in asbestos
lawsuits alleging both property damage and personal injury. See Part II, Item 1.
"Legal Proceedings" for information concerning the asbestos litigation.
The Corporation and certain of its subsidiaries have been notified by state and
federal environmental protection agencies of possible involvement as one of
numerous "potentially responsible parties" in a number of so-called "Superfund"
sites in the United States. The Corporation believes that neither these matters
nor any other known governmental proceeding regarding environmental matters will
have a material adverse effect upon its earnings or consolidated financial
position. See Part II, Item 1. "Legal Proceedings" for additional information on
environmental litigation.
Year 2000
In 1997, USG developed a plan to modify its computer-based systems that are
affected by the year 2000 date change. Anticipated spending for this
modification will not have a material impact on the Corporation's ongoing
results of operations. In addition to modifying the Corporation's own
computer-based systems, the plan includes monitoring the compliance efforts of
the Corporation's critical suppliers. USG intends to complete its year 2000
compliance plan by the first half of 1999 to allow sufficient time to test its
systems thoroughly before January 1, 2000.
Forward-Looking Statements
This report contains forward-looking statements related to management's
expectations about future conditions. Actual business or other conditions may
differ significantly from management's expectations and accordingly affect the
Corporation's sales and profitability or other results. Actual results may
differ due to factors over which the Corporation has no control, including
economic activity, such as new housing construction, interest rates, and
consumer confidence; competitive activity such as price and product competition;
increases in raw material and energy costs; and the outcome of contested
litigation. The Corporation assumes no obligation to update any forward-looking
information contained in this report.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of USG Corporation:
We have reviewed the accompanying condensed consolidated balance sheet of USG
CORPORATION (a Delaware corporation) AND SUBSIDIARIES as of June 30, 1998, and
the related condensed consolidated statement of earnings for the three-month and
six-month periods ended June 30, 1998 and 1997 and the condensed consolidated
statement of cash flows for the six months ended June 30, 1998 and 1997. These
financial statements are the responsibility of the Corporation's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
/s/ ARTHUR ANDERSEN LLP
- - ------------------------
ARTHUR ANDERSEN LLP
Chicago, Illinois
July 20, 1998
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Asbestos and Related Insurance Litigation
One of the Corporation's subsidiaries, U.S. Gypsum, is among many defendants in
lawsuits arising out of the manufacture and sale of asbestos-containing
materials. U.S. Gypsum sold certain asbestos-containing products beginning in
the 1930s; in most cases, the products were discontinued or asbestos was removed
from the formula by 1972, and no asbestos-containing products were produced
after 1977. Some of these lawsuits seek to recover compensatory and in many
cases punitive damages for costs associated with the maintenance or removal and
replacement of asbestos-containing products in buildings (the "Property Damage
Cases"). Others seek compensatory and in many cases punitive damages for
personal injury allegedly resulting from exposure to asbestos-containing
products (the "Personal Injury Cases"). It is anticipated that additional
asbestos-related suits will be filed.
Summary - The following is a brief summary; see Note 16 to the financial
statements in the Corporation's 1997 Annual Report for additional information on
the asbestos litigation.
U.S. Gypsum is a defendant in 15 Property Damage Cases, many of which involve
multiple buildings. One of the cases is a conditionally certified class action
comprised of all colleges and universities in the United States, which
certification is presently limited to the resolution of certain allegedly
"common" liability issues. (Central Wesleyan College v. W.R. Grace & Co., et
al., U.S.D.C.S.C.). Fifteen additional property damage claims have been
threatened against U.S. Gypsum. During the years 1995-1997, 6 new Property
Damage Cases were filed against U.S. Gypsum while 32 were closed; the Company
spent an average of $25 million per year on the defense and settlement of
Property Damage Cases, but received a total of $148 million over the three-year
period from insurance carriers, including reimbursement for expenditures in
prior years.
U.S. Gypsum's estimated cost of resolving pending Property Damage Cases is
discussed below. (See "Estimated Cost.")
U.S. Gypsum is also a defendant in Personal Injury Cases brought by
approximately 99,000 claimants, as well as an additional 22,500 claims that have
been settled but will be closed over time. Filings of new Personal Injury Cases
totaled approximately 51,000 new claims in the first six months of 1998,
compared to 23,500 claims in 1997, 28,000 claims in 1996 and 14,000 in 1995.
Filings of Personal Injury Cases have increased substantially as a result of
rulings by a Federal appellate court and the U.S. Supreme Court rejecting the
Georgine v. Amchem class action settlement, in which U.S. Gypsum had
participated as a member of the Center for Claims Resolution, referred to below.
U.S. Gypsum's average cost to resolve Personal Injury Cases during the past
three years has been approximately $1,600 per claim. Over that period, U.S.
Gypsum has expended an average of $30 million per year on Personal Injury Cases,
of which an average of $26 million was paid by insurance.
U.S. Gypsum is a member, together with 19 other former producers of
asbestos-containing products, of the Center for Claims Resolution (the
"Center"), which has assumed the handling of all Personal Injury Cases pending
against U.S. Gypsum and the other members of the Center. Costs of defense and
settlement are shared among the members of the Center pursuant to predetermined
sharing formulae. Virtually all of U.S. Gypsum's personal injury liability and
defense costs are paid by those of its insurance carriers that in 1985 signed an
Agreement Concerning Asbestos-Related Claims (the "Wellington Agreement"),
obligating them to provide coverage for the defense and indemnity costs incurred
by U.S. Gypsum in Personal Injury Cases. Punitive damages have never been
awarded against U.S. Gypsum in a Personal Injury Case; whether such an award
would be covered by insurance under the Wellington Agreement would depend on
state law and the terms of the individual policies.
U.S. Gypsum's estimated cost of resolving pending Personal Injury Cases is
discussed below. (See "Estimated Cost.")
U.S. Gypsum sued its insurance carriers in 1983 to obtain coverage for asbestos
cases (the "Coverage Action") and has settled all disputes with 12 of its 17
solvent carriers. As of December 31, 1997, after deducting insolvent coverage
and insurance paid out to date, approximately $325 million of potential
insurance remained, including approximately $140 million of insurance from five
carriers that have agreed, subject to certain limitations and conditions, to
cover both property damage and personal injury costs; $140 million from two
carriers that have agreed, subject to certain limitations and conditions, to
cover personal injury but not yet property damage; and approximately $45 million
from three carriers that have not yet agreed to cover either. U.S. Gypsum is
attempting to negotiate a resolution of the Coverage Action with the five
remaining defendant carriers, but may be required to litigate additional issues
in its effort to secure the contested coverage.
Aggregate insurance payments exceeded U.S. Gypsum's total expenditures for all
asbestos-related matters, including property damage, personal injury, insurance
coverage litigation and related expenses, by $2.3 million for 1997, $41 million
in 1996 and $10 million in 1995, due primarily to nonrecurring reimbursement for
amounts expended in prior years.
Estimated Cost - The asbestos litigation involves numerous uncertainties that
affect U.S. Gypsum's ability to estimate reliably its probable liability in the
Personal Injury and Property Damage Cases. In the Property Damage Cases, such
uncertainties include the identification and volume of asbestos-containing
products in the buildings at issue in each case, which is often disputed; the
claimed damages associated therewith; the viability of statute of limitations,
product identification and other defenses, which varies depending upon the facts
and jurisdiction of each case; the amount for which such cases can be resolved,
which has normally (but not uniformly) been substantially lower than the claimed
damages; and the viability of claims for punitive and other forms of multiple
damages. Uncertainties in the Personal Injury Cases include the number,
characteristics and venue of Personal Injury Cases that are filed against U.S.
Gypsum; the Center's ability to continue to negotiate pre-trial settlements at
historical or acceptable levels; the level of physical impairment of claimants;
the viability of claims for punitive damages; and the Center's ability to
develop an alternate claims-handling vehicle that retains the key benefits of
the Georgine settlement. As a result, any estimate of U.S. Gypsum's liability,
while based upon the best information currently available, may not be an
accurate prediction of actual costs and is subject to revision as additional
information becomes available and developments occur.
Pending Cases: Subject to the above uncertainties, and based in part on
information provided by the Center, U.S. Gypsum estimates that it is probable
that Property Damage and Personal Injury Cases pending on June 30, 1998, can be
resolved for an amount totaling between $265 million and $340 million, including
defense costs. These amounts are expected to be expended over the next five
years. The estimated cost of resolving pending cases has increased since
December 31, 1997, reflecting the increased number of pending Personal Injury
Cases resulting from the rejection of the Georgine settlement referred to above.
Significant insurance funding is available for these costs, as detailed below.
Future Cases: U. S. Gypsum is unable to reasonably estimate the cost of
resolving Property Damage Cases and Personal Injury Cases that will be filed in
the future. The Company anticipates that few additional Property Damage Cases
will be filed, as a result of the operation of statutes of limitations and the
impact of certain other factors, although it is possible that any cases that are
filed may seek substantial damages. It is anticipated that Personal Injury Cases
will continue to be filed in substantial numbers for the foreseeable future,
although the percentage of such cases filed by claimants with little or no
physical impairment is expected to remain high. However, the Company does not
believe that the number and severity of future cases can be predicted with
sufficient accuracy to provide the basis for a reasonable estimate of the
liability that will be associated with such cases.
Accounting for Asbestos Liability: As of June 30, 1998, U.S. Gypsum had reserved
$265 million for liability from pending Property Damage and Personal Injury
Cases (equaling the lower end of the estimated range of costs provided above).
U.S. Gypsum had a corresponding receivable from insurance carriers of
approximately $220 million, the estimated portion of the reserved amount that is
expected to be paid or reimbursed by committed insurance. Additional amounts may
be reimbursed by insurance depending upon the outcome of litigation and
negotiations relating to insurance that is presently disputed.
U.S. Gypsum had an additional reserve of $105 million as of June 30, 1998, that
was available for future asbestos liabilities and asbestos-related expenses. The
Company continues to accrue $18 million per year for asbestos costs and will
periodically compare its estimates of liability to then-existing reserves and
available insurance assets and adjust its reserves as appropriate. It is
possible that U.S. Gypsum will determine in the future that additional charges
to results of operations are necessary, although whether additional charges will
be required and, if so, the timing and amount of such charges, cannot presently
be predicted.
Conclusion - The above estimates and reserves will be reevaluated periodically
as additional information becomes available. It is possible that additional
charges to earnings may be necessary in the future if the amounts reflected
above prove insufficient in light of future events, and that any such charge
could be material to results of operations in the period in which it is taken.
However, it is management's opinion, taking into account all of the above
information and uncertainties, including currently available information
concerning U.S. Gypsum's liabilities, reserves, and probable insurance coverage,
that the asbestos litigation will not have a material adverse effect on the
liquidity or consolidated financial position of the Corporation.
Environmental Litigation
The Corporation and certain of its subsidiaries have been notified by state and
federal environmental protection agencies of possible involvement as one of
numerous "potentially responsible parties" in a number of so-called "Superfund"
sites in the United States. In most of these sites, the involvement of the
Corporation or its subsidiaries is expected to be minimal. The Corporation
believes that appropriate reserves have been established for its potential
liability in connection with all "Superfund" sites but is continuing to review
its accruals as additional information becomes available. Such reserves take
into account all known or estimated costs associated with these sites, including
site investigations and feasibility costs, site cleanup and remediation, legal
costs, and fines and penalties, if any. In addition, environmental costs
connected with site cleanups on USG-owned property 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.
<PAGE>
Item 4.Submission of Matters to a Vote of Security Holders
(a) In accordance with the Corporation's notice and proxy statement dated March
27, 1998, the matters set forth in (c) below were submitted to a vote of
stockholders at the annual meeting of stockholders held on May 13, 1998.
(b) The directors indicated in paragraph (c) below were elected to a three-year
term to expire in 1999, and the following directors are those whose terms of
office continued after the annual meeting of stockholders referred to in
paragraph (a) above: Keith A. Brown, James C. Cotting, W. Douglas Ford, John B.
Schwemm, Robert L. Barnett, David W. Fox, Philip C. Jackson Jr., and Marvin E.
Lesser.
<TABLE>
(c) Votes Abstentions
Votes Withheld and Broker
For or Against Non-Votes
--------------------------------------------------------
<S> <C> <C> <C>
Election of Directors:
W.H. Clark 42,569,514 158,228 -
Lawrence M. Crutcher 42,581,315 146,427 -
William C. Foote 42,586,032 141,710 -
P. Jack O'Bryan 42,576,584 151,158 -
Judith A. Sprieser 42,588,339 139,403 -
Ratification of Appointment of Arthur
Andersen LLP as Independent Public
Accountants 42,668,161 21,605 37,976
</TABLE>
Item 6.Exhibits and Reports on Form 8-K
<PAGE>
<TABLE>
<S> <C> <C>
(a) (15) Letter of Arthur Andersen LLP regarding unaudited financial information.
(27) Financial Data Schedule (electronic filing only).
(b) There were no reports on Form 8-K filed during the second quarter of 1998.
</TABLE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
USG CORPORATION
By /s/ DEAN H. GOOSSEN
-----------------------------------
Dean H. Goossen, Corporate Secretary,
USG Corporation
By /s/ RAYMOND T. BELZ
-----------------------------------
Raymond T. Belz, Vice President and
Controller, USG Corporation
July 31, 1998
July 31, 1998
USG Corporation 125 South Franklin Street Chicago, Illinois 60606
Gentlemen:
We are aware that USG Corporation has incorporated by reference into previously
filed Registration Statement Numbers 33-40136 and 33-64217 on Form S-3 and
33-22581, as amended, 33-22930, 33-36303, 33-52573, 33-52715, 33-63554, and
33-65383 on Form S-8 its Form 10-Q for the quarter ended June 30, 1998, which
includes our report dated July 20, 1998, covering the unaudited condensed
financial information contained therein. Pursuant to Regulation C of the
Securities Act of 1933, these reports are not considered a part of the
registration statement prepared or certified by our firm or reports prepared or
certified by our firm within the meaning of Sections 7 and 11 of the Act.
Very truly yours,
/s/ ARTHUR ANDERSEN LLP
- - -----------------------
ARTHUR ANDERSEN LLP
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