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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(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, 1999
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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, 1999, 49,786,991 shares of USG common stock were outstanding.
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TABLE OF CONTENTS
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, 1999 and 1998 3
Consolidated Balance Sheet:
As of June 30, 1999 and December 31, 1998 4
Consolidated Statement of Cash Flows:
Six Months Ended June 30, 1999 and 1998 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 11
Report of Independent Public Accountants 23
PART II OTHER INFORMATION
Item 1. Legal Proceedings 24
Item 4. Submission of Matters to a Vote of Security Holders 28
Item 6. Exhibits and Reports on Form 8-K 29
SIGNATURES 30
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
USG CORPORATION
CONSOLIDATED STATEMENT OF EARNINGS
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
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1999 1998 1999 1998
------- ------- ------- -------
Net sales $ 895 $ 775 $ 1,718 $ 1,510
Cost of products sold 630 554 1,222 1,093
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Gross profit 265 221 496 417
Selling and administrative expenses 82 74 159 146
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Operating profit 183 147 337 271
Interest expense 14 13 27 26
Interest income (2) (1) (3) (2)
Other expense, net - 1 1 3
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Earnings before income taxes 171 134 312 244
Income taxes 67 52 122 95
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Net earnings 104 82 190 149
======= ======= ======= =======
Basic earnings per common share 2.09 1.68 3.83 3.11
Diluted earnings per common share 2.07 1.63 3.78 2.98
Dividends paid per common share 0.10 - 0.20 -
Average common shares 49,882,374 48,604,788 49,772,283 47,932,326
Average diluted common shares 50,494,668 50,294,953 50,419,721 50,038,941
See accompanying Notes to Consolidated Financial Statements.
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USG CORPORATION
CONSOLIDATED BALANCE SHEET
(DOLLARS IN MILLIONS)
(UNAUDITED)
AS OF AS OF
JUNE 30, DECEMBER 31,
1999 1998
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ASSETS
Current Assets:
Cash and cash equivalents $ 168 $ 152
Receivables (net of reserves - $18 and $18) 399 349
Inventories 230 234
Current and deferred income taxes 74 62
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Total current assets 871 797
Property, plant and equipment (net of reserves
for depreciation and depletion - $332 and $298) 1,351 1,214
Other assets 334 346
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Total Assets 2,556 2,357
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable 170 157
Accrued expenses 232 237
Notes payable 13 10
Current portion of long-term debt - 25
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Total current liabilities 415 429
Long-term debt 583 561
Deferred income taxes 173 169
Other liabilities 704 680
Stockholders' Equity:
Preferred stock - -
Common stock 5 5
Treasury stock (11) (10)
Capital received in excess of par value 305 317
Deferred currency translation (34) (30)
Reinvested earnings 416 236
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Total stockholders' equity 681 518
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Total Liabilities and Stockholders' Equity 2,556 2,357
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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)
SIX MONTHS
ENDED JUNE 30,
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1999 1998
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OPERATING ACTIVITIES:
Net earnings $ 190 $ 149
Adjustments to reconcile net earnings to net cash:
Depreciation, depletion and amortization 45 40
Current and deferred income taxes (9) 6
(Increase) decrease in working capital:
Receivables (50) (67)
Inventories 4 (27)
Payables 13 24
Accrued expenses (5) (6)
(Increase) in other assets (22) (1)
Increase (decrease) in other liabilities 60 (5)
Other, net (7) (1)
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Net cash from operating activities 219 112
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INVESTING ACTIVITIES:
Capital expenditures (179) (130)
Net proceeds from asset dispositions 1 2
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Net cash to investing activities (178) (128)
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FINANCING ACTIVITIES:
Issuance of debt 46 58
Repayment of debt (49) (107)
Short-term borrowings, net 3 19
Cash dividends paid (10) -
Issuances of common stock 11 46
Purchases of common stock (26) -
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Net cash (to) from financing activities (25) 16
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Net increase in cash and cash equivalents 16 -
Cash and cash equivalents at beginning of period 152 72
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Cash and cash equivalents at end of period 168 72
========= =========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid 30 28
Income taxes paid 130 84
See accompanying Notes to Consolidated Financial Statements.
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USG CORPORATION
NOTES TO CONSOLIDATED 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. 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, 1999, and December 31, 1998, results of
operations for the three months and six months ended June 30, 1999 and
1998 and cash flows for the six months ended June 30, 1999 and 1998.
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 1998 Annual Report
on Form 10-K dated February 26, 1999.
(2) Total comprehensive income, consisting of net earnings and foreign
currency translation adjustments, amounted to $104 million and $186
million in the three months and six months ended June 30, 1999,
respectively. For the respective 1998 periods, total comprehensive
income amounted to $79 million and $143 million. There was no tax
impact on the foreign currency translation adjustments.
(3) As of June 30, 1999, common shares totaling 1,806,475 were reserved for
future issuance in conjunction with existing stock option grants. In
addition, 567,311 common shares were reserved for future grants. Shares
issued in option exercises may be from original issue or available
treasury shares.
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(4) 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):
NET SHARES PER SHARE
THREE MONTHS ENDED JUNE 30, EARNINGS (000) AMOUNT
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1999
Basic earnings $ 104 49,882 $ 2.09
Effect of Dilutive Securities:
Options 613
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Diluted Earnings 104 50,495 2.07
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1998
Basic earnings 82 48,605 1.68
Effect of Dilutive Securities:
Options 948
Warrants 742
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Diluted Earnings 82 50,295 1.63
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SIX MONTHS ENDED JUNE 30,
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1999
Basic earnings $ 190 49,772 $ 3.83
Effect of Dilutive Securities:
Options 648
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Diluted Earnings 190 50,420 3.78
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1998
Basic earnings 149 47,932 3.11
Effect of Dilutive Securities:
Options 962
Warrants 1,145
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Diluted Earnings 149 50,039 2.98
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(5) USG's operations are organized into two operating segments: North
American Gypsum, which manufactures, markets and distributes gypsum
wallboard and related products in the United States, Canada and Mexico,
and Worldwide Ceilings, which manufactures and markets ceiling tile,
ceiling grid and other interior systems products worldwide. Operating
segment results for the second quarter and first six months of 1999 and
1998 were as follows (dollars in millions):
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NET SALES OPERATING PROFIT
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THREE MONTHS ENDED JUNE 30, 1999 1998 1999 1998
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North American Gypsum $ 763 $ 637 $ 181 $ 141
Worldwide Ceilings 161 163 17 19
Corporate - - (15) (13)
Eliminations (29) (25) - -
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Total 895 775 183 147
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SIX MONTHS ENDED JUNE 30,
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North American Gypsum $ 1,450 $ 1,236 $ 336 $ 263
Worldwide Ceilings 318 323 30 33
Corporate - - (29) (25)
Eliminations (50) (49) - -
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Total 1,718 1,510 337 271
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(6) The Corporation uses derivative instruments to manage well-defined
interest rate, energy cost and foreign currency exposures. The
Corporation does not use derivative instruments for trading purposes.
The criteria used to determine if hedge accounting treatment is
appropriate are (i) the designation of the hedge to an underlying
exposure (ii) whether or not overall uncertainty is being reduced and
(iii) if there is a correlation between the value of the derivative
instrument and the underlying obligation.
Interest Rate Derivative Instruments:
The Corporation utilizes interest rate swap agreements to manage the
impact of interest rate changes on its underlying floating-rate debt.
These agreements are designated as hedges and qualify for hedge
accounting. Amounts payable or receivable under these swap agreements
are accrued as an increase or decrease to interest expense on a current
basis. To the extent the underlying floating-rate debt is reduced, the
Corporation terminates swap agreements accordingly so as not to be in
an overhedged position. In such cases, the Corporation recognizes gains
and/or losses in the period in which the agreement is terminated.
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Energy Derivative Instruments:
The Corporation uses swap agreements to hedge anticipated purchases of
fuel to be utilized in the manufacturing processes for gypsum wallboard
and ceiling tile. Under these swap agreements, the Corporation receives
or makes payments based on the differential between a specified price
and the actual closing price for the current month's energy price
contract. These contracts are designated as hedges and qualify for
hedge accounting. Amounts payable or receivable under these swap
agreements are accrued as an increase or decrease to cost of products
sold, along with the actual spot energy cost of the corresponding
underlying hedge transaction, the combination of which amounts to the
predetermined specified contract price.
Foreign Exchange Derivative Instruments:
The Corporation has operations in a number of countries and has
intercompany transactions among them and, as a result, is exposed to
changes in foreign currency exchange rates. The Corporation manages
these exposures on a consolidated basis, which allows netting of
certain exposures to take advantage of any natural offsets. To the
extent the net exposures are hedged, forward contracts are used. Gains
and/or losses on these foreign currency hedges are included in net
earnings in the period in which the exchange rates change.
(7) 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 results of operations or financial
position. See Part II, Item 1. "Legal Proceedings" for additional
information on environmental litigation.
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(8) Under a revolving accounts receivable facility, the trade receivables
of U.S. Gypsum and USG Interiors, Inc. are being purchased by USG
Funding Corporation 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
CONSOLIDATED RESULTS
NET SALES
USG's net sales in the second quarter of 1999 were a record $895 million, up 15%
from $775 million in the comparable 1998 period. Construction activity continued
to be strong during the second quarter in key North American markets resulting
in record demand and selling prices for USG's SHEETROCK brand gypsum wallboard.
For the first six months of 1999, net sales totaled $1,718 million, up 14% from
$1,510 million in the comparable 1998 period.
GROSS PROFIT
Gross profit as a percent of net sales was 29.6% and 28.9% in the second quarter
and first six months of 1999, respectively, up from 28.5% and 27.6% in the
respective 1998 periods. The 1999 margins primarily reflect the higher selling
prices for SHEETROCK brand wallboard.
SELLING AND ADMINISTRATIVE EXPENSES
Second quarter and first six months 1999 selling and administrative expenses
increased 11% and 9%, respectively, over the prior-year periods. However, as a
percentage of net sales, these expenses were 9.2% in the second quarter and 9.3%
in the first six months of 1999, down from 9.5% and 9.7% in the comparable 1998
periods. The higher levels of expense dollars in the 1999 periods primarily
reflect increases for incentive compensation and information technology.
INTEREST EXPENSE
Interest expense amounted to $14 million and $27 million in the second quarter
and first six months of 1999, up from $13 million and $26 million for the
corresponding 1998 periods.
INCOME TAXES
As a result of higher levels of earnings in 1999, income tax expense increased
to $67 million and $122 million in the three months and six months ended June
30, 1999, respectively, up from $52 million and $95 million for the comparable
prior-year periods.
NET EARNINGS
Net earnings in the second quarter of 1999 were $104 million, up 27% from $82
million in the prior-year period. Diluted earnings per share increased to $2.07
from $1.63 a year ago.
For the first six months of 1999, net earnings were $190 million, or $3.78 per
diluted share. Comparable 1998 net earnings amounted to $149 million, or $2.98
per share.
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CORE BUSINESS RESULTS
(dollars in millions) NET SALES OPERATING PROFIT
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THREE MONTHS ENDED JUNE 30, 1999 1998 1999 1998
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NORTH AMERICAN GYPSUM:
U.S. Gypsum Company $ 504 $ 432 $ 145 $ 123
L&W Supply Corporation 337 274 24 10
CGC Inc. (gypsum) 40 32 6 3
Other subsidiaries* 27 23 6 5
Eliminations (145) (124) - -
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Total 763 637 181 141
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WORLDWIDE CEILINGS:
USG Interiors, Inc. 116 114 17 15
USG International 52 56 - 3
CGC Inc. (ceilings) 8 9 - 1
Eliminations (15) (16) - -
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Total 161 163 17 19
- - ------------------------------------------------------------------------------
Corporate - - (15) (13)
Eliminations (29) (25) - -
- - ------------------------------------------------------------------------------
Total USG Corporation 895 775 183 147
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NET SALES OPERATING PROFIT
- - -----------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 1999 1998 1999 1998
- - -----------------------------------------------------------------------------
NORTH AMERICAN GYPSUM:
U.S. Gypsum Company $ 964 $ 843 $ 279 $ 230
L&W Supply Corporation 637 518 34 15
CGC Inc. (gypsum) 74 66 11 8
Other subsidiaries* 49 43 12 10
Eliminations (274) (234) - -
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Total 1,450 1,236 336 263
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WORLDWIDE CEILINGS:
USG Interiors, Inc. 224 221 29 26
USG International 104 113 - 5
CGC Inc. (ceilings) 18 19 1 2
Eliminations (28) (30) - -
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Total 318 323 30 33
- - ------------------------------------------------------------------------------
Corporate - - (29) (25)
Eliminations (50) (49) - -
- - ------------------------------------------------------------------------------
Total USG Corporation 1,718 1,510 337 271
==============================================================================
*Includes Yeso Panamericano, S.A. de C.V., a building products business in
Mexico, Gypsum Transportation Limited, a shipping company in Bermuda, and USG
Canadian Mining Ltd., a mining operation in Nova Scotia.
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NORTH AMERICAN GYPSUM
Net sales in the second quarter of 1999 increased 20% to
$763 million and operating profit increased 28% to $181 million as compared to
the second quarter of 1998.
First six months 1999 net sales of $1,450 million and operating profit of $336
million, increased 17% and 28%, respectively, versus comparable 1998 levels.
United States Gypsum Company: U.S.Gypsum's second quarter net sales and
operating profit increased 17% and 18%, respectively, versus the comparable 1998
period. With its plants running at full capacity, shipments of SHEETROCK brand
wallboard totaled 2.329 billion square feet, a record for any quarter and a 5%
increase from 2.226 billion square feet a year ago. U.S. Gypsum also reported
record shipments of SHEETROCK brand joint compound and DUROCK brand cement
board. Improved profitability primarily reflected higher selling prices for
SHEETROCK brand wallboard, while unit manufacturing costs were virtually
unchanged. Realized selling prices averaged $149.40 per thousand square feet
during the second quarter, a new all-time high and a 17% increase over the
second quarter of 1998.
These favorable results were partially offset by higher asbestos-related
charges. U.S. Gypsum Company increased its asbestos-related charge to cost of
products sold to $30 million during the second quarter of 1999, up from $4.5
million a year ago. See "Legal Contingencies" below and Part II, Item 1. "Legal
Proceedings" for additional information on asbestos litigation.
L&W Supply Corporation: Net sales in the second quarter of 1999 for L&W Supply,
the leading specialty building products distribution business in the United
States, increased 23%, while operating profit rose 140%. This performance
reflects record wallboard shipments and prices, and record sales of
complementary building materials.
As of June 30, 1999, L&W Supply operated 192 locations in the United States.
CGC Inc.: The gypsum business of Canada-based CGC Inc., reported a 25% increase
in net sales, while operating profit doubled versus the second quarter of 1998.
CGC's results benefited from stronger Canadian demand for wallboard, which
enabled CGC to reduce exports to the U.S. in favor of more profitable domestic
shipments. Higher wallboard prices also contributed to improved profitability.
WORLDWIDE CEILINGS
Net sales in the second quarter of 1999 were $161 million compared with $163
million for the second quarter of 1998. Operating profit of $17 million also was
down $2 million compared to 1998.
First six months 1999 net sales of $318 million and operating profit of $30
million were down 2% and 9%, respectively, from comparable 1998 levels.
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Demand in North America was solid, while international ceilings demand was
generally below 1998 levels. USG's domestic ceilings business, USG Interiors,
reported operating profit of $17 million, an increase of $2 million over the
second quarter of 1998. USG International had a breakeven performance in the
second quarter versus $3 million of operating profit last year. The lower
international profit level reflects continued soft business conditions in
Eastern Europe and Asia.
MARKET CONDITIONS AND OUTLOOK
Based on leading indicators, such as new housing starts, existing home sales and
nonresidential construction activity, market conditions are expected to remain
favorable through 1999 and into 2000. Key drivers of demand for USG's products,
such as consumer confidence, employment rates and interest rates, all remain at
favorable levels. Profit contributions from USG's strategic plan (described
below) should also become increasingly apparent. U.S. Gypsum's new Bridgeport,
Ala., SHEETROCK brand wallboard plant experienced a successful start-up during
the second quarter of 1999.
Housing starts during the first half of the year of 1999 ran at strong levels.
USG is currently forecasting 1999 U.S. housing starts to exceed the 1.617
million units experienced in 1998.
The repair and remodel market has been the fastest growing segment for USG,
accounting for the second-largest portion of its sales. Record 1998 sales of
existing homes of 4.8 million units is supporting residential repair and
remodeling in 1999. This, combined with strong nonresidential repair and
remodeling, is continuing to provide growth in this market segment.
Sales of USG products to the nonresidential construction market are expected to
remain strong throughout 1999. Future demand for USG products from new
nonresidential construction is gauged by floor space for which contracts are
signed. Installation of gypsum and ceilings products follows signing of
construction contracts by about a year. Floor space for which contracts were
signed rose 9% in 1998, although segments that are most relevant to USG's
business, such as offices and stores, grew at a much higher rate.
Most of USG's sales outside of the United States come from Canada, Western
Europe and Latin America. USG's exposure to the economic problems of Asia and
Russia is small. Business conditions continue to be soft in Europe and Asia, but
have remained solid in Latin America.
With the recent start-up of the Bridgeport, Ala., plant, management is
continuing to evaluate its options for the Plasterco, Va., plant, which has been
serving the Southeast market since 1924. Since the inception of the Bridgeport
project, management has stated that this new state-of-the-art capacity would
replace the old, high-cost capacity at Plasterco. A final decision regarding
timing of the
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closure of the Plasterco plant may be forthcoming as soon as the third quarter
of this year. When management determines the timing of its closure, a provision
in the range of $20-$25 million (pretax) would be recorded to cover the
anticipated costs that would be incurred in the implementation of an exit plan
for the Plasterco plant.
LIQUIDITY AND CAPITAL RESOURCES
FINANCIAL STRATEGY
USG is executing a strategy to create future earnings growth through investment
in its businesses and immediate returns to investors through dividends and share
repurchases.
Earnings Growth: USG's plan for earnings growth includes: introducing new
products and product platforms; improving service; strengthening its brands;
adding capacity to serve growing customers and markets; renovating manufacturing
capacity to make USG the undisputed low-cost producer; and expanding
distribution. USG anticipates that these initiatives will also reduce the impact
of cyclicality on its earnings.
Dividends: In 1999, USG paid cash dividends of $0.10 per share in March and
June.
Share Repurchases: USG also began a multiyear share-repurchase program in 1998,
under which it will repurchase up to 5 million shares, or approximately 10% of
USG's common stock currently outstanding. Share repurchases are being made in
the open market or through privately negotiated transactions and are being
financed with available cash from operations. USG has acquired approximately
733,000 shares since the program began in the fourth quarter of last year.
CAPITAL EXPENDITURES
Capital spending amounted to $179 million in the first six months of 1999,
compared with $130 million in the corresponding 1998 period. As of June 30,
1999, capital expenditure commitments for the replacement, modernization and
expansion of operations amounted to $363 million, compared with $481 million as
of December 31, 1998. USG's capital expenditures program includes the following
projects:
Wallboard Capacity Modernization and Expansion: As a major part of USG's
earnings growth strategy, U.S. Gypsum is replacing high-cost wallboard capacity
with new, low-cost plants and production lines. These projects also will add a
net 2 billion square feet of capacity to serve growing regional markets and
customers.
In the Southeast, the construction of a new plant in Bridgeport, Ala. was
successfully completed. This facility, which manufactures SHEETROCK brand
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wallboard, began operation in the second quarter of 1999 and is currently
operating at near-capacity levels.
In the Midwest, U.S. Gypsum is near completion of a new production line for
SHEETROCK brand wallboard at its East Chicago, Ind., plant. This new line is
scheduled for startup in the fourth quarter of 1999.
In the Northeast, U.S. Gypsum is building a new SHEETROCK brand wallboard plant
in Aliquippa, Pa. Construction of this facility is expected to be completed in
early 2000.
In the Northwest, ground was broken during the second quarter of 1999 for a new
wallboard plant in Rainier, Ore. A significant portion of the new capacity
provided by this plant will replace existing USG shipments into the region from
plants as far away as Iowa, Texas and Ontario, Canada. This facility is expected
to be fully operational in 2001.
In the Southwest, ground was also broken during the second quarter of 1999 for a
new production line at U.S. Gypsum's plant in Plaster City, Calif., which will
replace a 41-year-old, high-cost production line. This facility also is expected
to be fully operational in 2001.
Gypsum Fiber Project: Construction continues on a facility to manufacture
FIBEROCK brand gypsum fiber panels, USG's newest product platform. This
production line, which is being built at the Gypsum, Ohio, wallboard plant, is
scheduled for startup in the third quarter of 1999.
Cost-Reduction Projects: Additional capital investments include cost-reduction
projects such as the installation of stock-cleaning equipment to utilize lower
grades of recycled paper and process control upgrades to improve raw material
usage and operating efficiencies.
WORKING CAPITAL
Working capital (current assets less current liabilities) as of June 30, 1999,
amounted to $456 million, compared with $368 million as of December 31, 1998.
The ratio of current assets to current liabilities was 2.1 to 1 as of June 30,
1999, compared with 1.9 to 1 as of December 31, 1998.
Receivables increased to $399 million as of June 30, 1999, from $349 million as
of December 31, 1998. Inventories decreased to $230 million from $234 million,
and accounts payable rose to $170 million from $157 million. These variations
reflect an increased level of business in the second quarter of 1999 as compared
to the fourth quarter of 1998.
Cash and cash equivalents as of June 30, 1999, amounted to $168 million, up from
$152 million as of December 31, 1998. During the first six months of 1999, net
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cash flows from operating activities totaled $219 million. Net cash flows to
investing activities were $178 million. This reflects capital spending of $179
million (discussed above), offset slightly by net proceeds of $1 million from
asset dispositions. Net cash flows to financing activities of $25 million
reflect $26 million used for stock repurchases and $10 million used for cash
dividends, partially offset by $11 million received from the exercise of stock
options. As discussed below, the total level of debt was unchanged from
year-end.
DEBT
As of June 30, 1999, total debt amounted to $596 million, unchanged from
December 31, 1998. During the first half of 1999, USG retired the remaining $25
million of 8.75% debentures due 2017, reduced the level of old higher-cost
industrial revenue bonds (IRBs), and increased the level of IRBs associated with
the Gypsum, Ohio, capital project.
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 $608 million
(including a $125 million letter of credit subfacility in the United States),
under which, as of June 30, 1999, outstanding revolving loans totaled $108
million and letters of credit issued and outstanding amounted to $16 million,
leaving the Corporation with $484 million of unused and available credit. The
Corporation had additional borrowing capacity of $50 million as of June 30,
1999, under a revolving accounts receivable facility. (See Note 8.) 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.
OTHER MATTERS
YEAR 2000 COMPLIANCE
In 1996, USG began an evaluation of its computer-based systems to determine the
extent of the modifications required to make those systems year 2000 compliant
and to devise a plan to complete such modifications prior to January 1, 2000.
The plan that was devised is divided into five phases: identification (a basic
inventory of all systems), assessment, remediation, testing and completion. The
plan encompasses all of USG's computer systems including mainframe, midrange,
client server and desktop systems as well as all specialized control systems for
plant operations or other facilities including those that are considered
embedded systems. USG's mainframe systems are responsible for most of the
information processing done by the Corporation and will receive a majority of
the efforts dedicated to this project as well as a majority of the budget
allocated to it.
-17-
<PAGE> 18
Of the plan phases, identification, assessment and modification
are essentially completed. As of June 30, 1999, approximately 98% of the planned
modifications to USG's mainframe systems had been completed. The remaining 2% of
the modifications are currently in the process of remediation, testing and
completion and are expected to be completed by July 31, 1999. With respect to
the midrange, client server and desktop systems, upgrading to these systems is
expected to be completed by the end of the third quarter of 1999. With respect
to embedded systems, all operations have been assessed and remediation plans,
where necessary, are under way. All necessary upgrades and remediation are
scheduled for completion by the end of the third quarter of 1999. Some of these
activities have been deferred due to the full-time operation of USG's gypsum
wallboard plants in trying to satisfy record customer demand. For purposes of
this description, embedded systems are intended to cover manufacturing plant
control equipment and building information and mechanical systems such as
telecommunication systems, HVAC, security systems and other monitoring
equipment.
Suppliers and Customers: USG's year 2000 compliance plan also includes an
analysis of critical third-party suppliers of material and services to determine
their year 2000 compliance status. Virtually all critical suppliers have been
surveyed regarding their compliance status. At this point, based on responses
received to date, it is not possible to forecast whether there will be, or the
extent of, any significant disruption due to third-party supplier failures.
However, the plan contemplates that USG will be in ongoing contact with its
critical suppliers through at least January 1, 2000, to assure that those
suppliers either are able to continue to perform without disruption or where
feasible are replaced by ones that can so perform. USG also has been in contact
with most of its major customers on the status of each party's year 2000
compliance plans and expects to continue such information exchanges through
January 1, 2000, in order to maintain those business relationships and to obtain
updated information for its own ongoing contingency planning.
Costs: The cost of carrying out USG's compliance plan is currently estimated at
$12 million. As of June 30, 1999, about 61% of the budgeted amount has been
incurred. Much of the balance will be expended in the remaining months of 1999
with a small amount projected for early 2000.
Contingency Plans: It is still too soon to know whether USG might experience
significant disruptions due to year 2000 problems that affect the operating
environment in which it conducts business such as disruptions to transportation,
communications and electric power or other energy systems or due to other
similar causes. However, the inability of USG or its critical suppliers and
customers to effectuate solutions to their respective year 2000 issues on a
timely and cost-effective basis may have a material adverse effect on USG.
In view of the uncertainties that USG faces with respect to year 2000 issues, it
has undertaken to formulate a contingency plan to provide for continuation of
its operations in the event of possible year 2000 disruptions. It expects to
have
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<PAGE> 19
completed an initial version of its contingency plan by August 1999, but
its plan will be continually evaluated and modified as required by developments
and circumstances that may emerge between now and January 1, 2000.
USG's contingency plan provides for the continuation of its business and
operations through the transition period surrounding January 1, 2000. The
planning process involves detailed review by operating personnel of all of the
information that has been gathered concerning critical suppliers, customers and
internal systems to determine all foreseeable risks to the continuation of
business operations. Based on that review process, USG prepares a detailed set
of operating procedures for dealing with the identified risks. These procedures
are specific to each operation and provide for flexible responses to conditions,
as they are perceived to develop towards the critical date of January 1, 2000.
Without suggesting any decisions have been made to implement these plans or that
the following list is in any way exhaustive, the kinds of responses that could
be taken in the appropriate circumstances would be: building up inventories of
raw materials or finished goods, replacing or supplementing existing suppliers,
altering terms of shipment or payment with customers, adding backup power and
communications equipment to certain facilities, and expanding communications
resources by providing cellular phones and laptop computers to more personnel.
Worst-Case Scenario: Based on the status of the Corporation's progress with
respect to its year 2000 compliance plan, the most reasonably likely worst case
scenario is that there might be a local or regional disruption to its plant
production due to temporary power outages or similar disruption of public
service suppliers. The Corporation's contingency planning is aimed at mitigating
the impact of any such disruptions by arranging production at other facilities
in the region to replace any that are impacted by a short-term disruption.
Whether this approach will be feasible depends upon the level of operations
generally at the time of any such occurrence. If the industry continues to
operate at full capacity with production subject to allocation, it will probably
not be feasible to replace disrupted production without further impacting the
short-supply situation. Since the Corporation has gypsum wallboard plants in
many parts of the U.S. and Canada, it is better positioned to deal with
potential disruptions than most of its competitors.
A key uncertainty in contingency planning for possible disruptions is what
impact these may have upon consumers of USG products. In the context of the
worst-case scenario, some consumers will undoubtedly be impacted by the
disruptions with a resultant decrease in demand for USG products. Similarly, the
critical period for likely disruption will fall in the heart of winter (December
- - - February) when the industry typically experiences a seasonal slowing down of
building activity.
USG's contingency planning attempts to analyze the interplay of these various
factors taking advantage of years of operating experience to create a reasonable
and flexible plan to respond to a very unpredictable and largely unique set of
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<PAGE> 20
circumstances.
Conclusion: While USG is still in the process of formulating its contingency
planning at this point, management believes that, in terms of the Corporation's
internal operating systems, it will be able to continue its North American
operations without material disruption. Based on management's present knowledge,
it also does not foresee any significant long-lasting disruptions to USG's
businesses in North America from external causes. Outside of North America,
management is less certain, but still believes that USG's businesses can sustain
themselves through whatever difficulties are encountered without material
adverse consequences to its overall business.
EURO CURRENCY CONVERSION
Effective January 1, 1999, 11 of the 15 countries that are members of the
European Union introduced a new, single currency unit, the euro. Prior to full
implementation of the new currency for the participating countries on January 1,
2002, there will be a three-year transition period during which parties may use
either the existing currencies or the euro. However, during the transition
period, all exchanges between currencies of the participating countries are
required to be first converted through the euro.
USG has conducted a comprehensive analysis to address the euro currency issue.
USG's efforts are focused on two phases. The first phase addresses USG's
European operations during the transition period. The second phase covers the
full conversion of these operations to the euro. The Corporation was ready for
the transition period that began on January 1, 1999, and expects to be ready for
the full conversion by January 1, 2001, one year ahead of the mandatory
conversion date. USG also is prepared to deal with its critical suppliers and
customers during the transition period and will communicate with them as
appropriate. The Corporation does not expect the introduction of the euro
currency to have a material adverse impact on its business, results of
operations or financial position.
LEGAL CONTINGENCIES
One of the Corporation's subsidiaries, U.S. Gypsum, is a defendant in asbestos
lawsuits alleging both property damage and personal injury. U.S. Gypsum
historically has accrued $18 million annually ($4.5 million per quarter) for
asbestos-related costs. In view of the high level of personal injury filings
that followed the termination of the Georgine settlement, as discussed in Part
II, Item 1. "Legal Proceedings," U.S. Gypsum increased its quarterly accrual to
$12.5 million in the fourth quarter of 1998 and the first quarter of 1999.
In the second quarter of 1999, U.S. Gypsum increased its accrual by an
additional $17.5 million to $30 million largely due to an increase in personal
injury case filings during the quarter. The increased number of filings compared
to the first quarter appears to be primarily due to accelerated filings by
plaintiffs' counsel with whom the company has recently negotiated settlement
agreements. Asbestos
-20-
<PAGE> 21
charges for the first six months of 1999 totaled $42.5 million compared with $9
million for the same 1998 period. Although new Personal Injury Cases were filed
in the first six months of 1999 at approximately one-half the rate at which
cases were filed in the first six months of 1998, asbestos charges to results
of operations have been higher in 1999 because the estimated cost of resolving
cases pending during 1998 will, when expended, consume all of U.S. Gypsum's
remaining insurance; as a result, the estimated liability from new case filings
is currently being charged against reported earnings.
U.S. Gypsum expects that periodic accruals will continue to be necessary in the
future in amounts that could be higher or lower than recent quarters. The amount
of future periodic accruals will depend upon factors that include, but may not
be limited to, the rate at which new asbestos-related claims are filed, the
potential imposition of medical criteria, U.S. Gypsum's average settlement cost
and the necessity of higher-cost settlements in particular jurisdictions. In
addition, U.S. Gypsum will continue to evaluate whether its ultimate probable
liability for future personal injury cases can be reasonably estimated. If such
an estimate can be made, it is probable that additional charges to results of
operations would be necessary, although whether such an estimate can be made
and, if so, the timing and amount of the resulting charge to results of
operations cannot presently be determined. However, the amount of the periodic
and other charges described above could be material to results of operations in
the period in which they are taken. The asbestos litigation is not expected to
have a significant impact on the Corporation's liquidity or cash flows during
1999. See Part II, Item 1. "Legal Proceedings" for additional information on
asbestos litigation.
The Corporation and certain of its subsidiaries have been notified by state and
federal environmental protection agencies of possible involvement as one of
numerous "potentially responsible parties" in a number of so-called "Superfund"
sites in the United States. The Corporation believes that neither these matters
nor any other known governmental proceeding regarding environmental matters will
have a material adverse effect upon its results of operations or financial
position. See Part II, Item 1. "Legal Proceedings" for additional information on
environmental litigation.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements related to management's
expectations about future conditions. Actual business or other conditions may
differ significantly from management's expectations and accordingly affect the
Corporation's sales and profitability or other results. Actual results may
differ due to factors over which the Corporation has no control, including
economic activity such as new housing construction, interest rates and consumer
confidence; competitive activity such as price and product competition;
increases in raw material and energy costs; risk of disruption due to year 2000
issues such as those described above; euro currency issues such as the ability
and
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<PAGE> 22
willingness of third parties to convert affected systems in a timely manner
and the actions of governmental agencies or other third parties; and the outcome
of contested asbestos-related litigation, the rate of new asbestos-related
filings and the other factors described herein. The Corporation assumes no
obligation to update any forward-looking information contained in this report.
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<PAGE> 23
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, 1999, and
the related condensed consolidated statement of earnings for the six-month
periods ended June 30, 1999 and 1998 and the condensed consolidated statement of
cash flows for the six months ended June 30, 1999 and 1998. 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 15, 1999
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<PAGE> 24
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 15 to the financial
statements in the Corporation's 1998 Annual Report for additional information
about the asbestos litigation.
U.S. Gypsum is a defendant in 11 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.). Ten additional property damage claims have been threatened
against U.S. Gypsum. During the years 1996-1998, 5 new Property Damage Cases
were filed against U.S. Gypsum while 26 were closed; the Company spent an
average of $23.5 million per year on the defense and settlement of Property
Damage Cases, but received a total of $154.5 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 110,000 claimants, as well as an additional 41,000 claims that
have been settled but will be closed over time. Filings of new Personal Injury
Cases totaled approximately 80,000 claims in 1998, compared to 23,500 claims in
1997, 28,000 claims in 1996 and 14,000 in 1995. Filings of Personal Injury Cases
increased substantially as a result of a 1997 ruling by 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. During the first six months of 1999, approximately 27,000 new Personal
Injury
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<PAGE> 25
Claims were filed against U.S. Gypsum. U.S. Gypsum's average cost to
resolve Personal Injury Cases during the years 1996-1998 was approximately
$1,800 per claim, exclusive of defense costs. Over that period, U.S. Gypsum
expended an average of $40.4 million per year on Personal Injury Cases, of which
an average of $31.4 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. Most of U.S. Gypsum's personal injury liability and defense
costs are currently being paid by its insurance carriers, including those
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 most of its
solvent carriers. As of June 30, 1999, after deducting insolvent coverage and
insurance paid out to date, approximately $207 million of potential insurance
remained, including approximately $162 million of insurance from six carriers
that have agreed, subject to certain limitations and conditions, to cover
asbestos-related costs, and approximately $45 million from three carriers that
have not yet agreed to make their coverage available on acceptable terms. A
minimum of $10 million of the disputed coverage is expected to be available
regardless of the outcome of further proceedings. U.S. Gypsum is attempting to
resolve its disputes with the nonsettling carriers through either a negotiated
resolution or further litigation in the Coverage Action.
U.S. Gypsum's total expenditures for all asbestos-related matters, including
property damage, personal injury, insurance coverage litigation and related
expenses, exceeded aggregate insurance payments by $24 million in 1998, but
insurance payments exceeded asbestos-related expenses by $0.7 million in 1997
and $41 million in 1996, due primarily to nonrecurring reimbursement for amounts
expended in prior years.
Four of U.S. Gypsum's domestic insurance carriers, as well as underwriters of
portions of various policies issued by Lloyds and other London market companies,
providing a total of approximately $106 million of coverage, are insolvent.
Because these policies would already have been consumed by U.S. Gypsum's
asbestos
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<PAGE> 26
expenses to date if the carriers had been solvent, the insolvencies
will not adversely affect U.S. Gypsum's coverage for future asbestos-related
costs. However, U.S. Gypsum is pursuing claims for reimbursement from the
insolvent estates and other sources and expects to recover a presently
indeterminable portion of the policy amounts from these sources.
ESTIMATED COST
The asbestos litigation involves numerous uncertainties that affect U.S.
Gypsum's ability to estimate reliably its probable liability in the Personal
Injury and Property Damage Cases. In the Property Damage Cases, such
uncertainties include the identification and volume of asbestos-containing
products in the buildings at issue in each case, which is often disputed; the
claimed damages associated therewith; the viability of statute of limitations,
product identification and other defenses, which varies depending upon the facts
and jurisdiction of each case; the amount for which such cases can be resolved,
which normally (but not uniformly) has been substantially lower than the claimed
damages; and the viability of claims for punitive and other forms of multiple
damages. Uncertainties in the Personal Injury Cases include the number,
characteristics and venue of Personal Injury Cases that are filed against U.S.
Gypsum; the Center's ability to continue to negotiate pretrial settlements at
historical or acceptable levels; the level of physical impairment of claimants;
the viability of claims for punitive damages; any changes in membership in the
Center; and the ability to develop an alternate claims-handling vehicle that
retains the key benefits of Georgine. As a result, any estimate of U.S. Gypsum's
liability, while based upon the best information currently available, may not be
an accurate prediction of actual costs and is subject to revision as additional
information becomes available and developments occur.
Subject to the above uncertainties, and based in part on information provided by
the Center, U.S. Gypsum estimates that it is probable that Property Damage and
Personal Injury Cases pending at June 30, 1999, can be resolved for an amount
totaling between $335 million and $420 million, including defense costs. Most of
these amounts are expected to be expended over the next three to five years,
although settlements of some Personal Injury Cases will be consummated over
periods as long as seven years. Significant insurance funding is available for
these costs, as detailed below, although resolution of the pending cases is
expected to consume U.S. Gypsum's remaining insurance. At this time, U.S. Gypsum
does not believe that the number and severity of asbestos-related cases that
ultimately will be filed in the future can be predicted with sufficient accuracy
to provide the basis for a reasonable estimate of the liability that will be
associated with such cases.
Accounting for Asbestos Liability: As of June 30, 1999, U.S. Gypsum had reserved
$335 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
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<PAGE> 27
$172 million, the estimated portion of the reserved amount that is
expected to be paid or reimbursed by insurance that is either committed or
probable of recovery. Additional amounts may be reimbursed by insurance
depending upon the outcome of litigation and negotiations relating to the $35
million of insurance that is presently disputed. As of June 30, 1999, U.S.
Gypsum had an additional $35 million reserved for asbestos liabilities and
asbestos-related expenses.
U.S. Gypsum compares its estimates of liability to then-existing reserves and
available insurance assets and from time to time adjusts its reserves as
appropriate. The Company historically has accrued $18 million annually ($4.5
million per quarter) for asbestos costs. In view of the high level of personal
injury filings that followed the termination of Georgine, U.S. Gypsum accrued an
additional $8 million in both the fourth quarter of 1998 and the first quarter
of 1999. In the second quarter of 1999, U.S. Gypsum reserved a total of $30
million largely as a result of the increased rate of filings of Personal Injury
Cases in the quarter. The increased number of filings compared to the first
quarter appears to be primarily due to accelerated filings by plaintiffs'
counsel with whom the Company (through the CCR) has recently negotiated
settlement agreements. Although new Personal Injury Cases were filed in the
first six months of 1999 at approximately one-half the rate at which cases were
filed in the first six months of 1998, asbestos charges to results of operations
have been higher in 1999 because the estimated cost of resolving cases pending
during 1998 will, when expended, consume all of U.S. Gypsum's remaining
insurance; as a result, the estimated liability from new case filings is
currently being charged against reported earnings. Accordingly, the Company
expects that periodic accruals will be necessary in the future, in amounts that
could be higher or lower than recent quarters. The amount of future periodic
accruals will depend upon factors that include, but may not be limited to, the
rate at which new asbestos-related claims are filed, the potential imposition of
medical criteria, U.S. Gypsum's average settlement cost, and the necessity of
higher-cost settlements in particular jurisdictions. In addition, the Company
will continue to evaluate whether its ultimate probable liability for future
Personal Injury Cases can be reasonably estimated. If such an estimate can be
made, it is probable that additional charges to results of operations would be
necessary, although whether such an estimate can be made and, if so, the timing
and amount of the resulting charge to results of operations cannot presently be
determined. However, the amount of the periodic and other charges described
above could be material to results of operations in the period in which they are
taken.
CONCLUSION
The above estimates and reserves are re-evaluated periodically as additional
information becomes available. Additional periodic charges to results of
operations are expected to be necessary in light of future events, and such
charges could be material to results of operations in the period in which they
are taken. However, it is management's opinion, taking into account all of the
above information and uncertainties, including currently available information
concerning U.S. Gypsum's liabilities, reserves and probable insurance coverage,
that the asbestos litigation will not have a material adverse effect on the
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<PAGE> 28
liquidity or financial position of the Corporation.
ENVIRONMENTAL LITIGATION
The Corporation and certain of its subsidiaries have been notified by state and
federal environmental protection agencies of possible involvement as one of
numerous "potentially responsible parties" in a number of so-called "Superfund"
sites in the United States. In most of these sites, the involvement of the
Corporation or its subsidiaries is expected to be minimal. The Corporation
believes that appropriate reserves have been established for its potential
liability in connection with all Superfund sites but is continuing to review its
accruals as additional information becomes available. Such reserves take into
account all known or estimated costs associated with these sites, including site
investigations and feasibility costs, site cleanup and remediation, legal costs,
and fines and penalties, if any. In addition, environmental costs connected with
site cleanups on USG-owned property 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 results of operations or
financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) In accordance with the Corporation's notice and proxy statement
dated March 29, 1999, the matters set forth in (c) below were
submitted to a vote of stockholders at the annual meeting of
stockholders held on May 12, 1999.
(b) The directors indicated in paragraph (c) below were elected to a
three-year term to expire in 2002, 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, W. H. Clark, James C. Cotting, Lawrence M.
Crutcher, William C. Foote, W. Douglas Ford, P. Jack O'Bryan,
John B. Schwemm, and Judith A. Sprieser.
(c)
Votes Abstentions
Votes Withheld and Broker
For or Against Non-Votes
--------------------------------------------
Election of Directors:
Robert L. Barnett 42,655,768 1,132,989 -
David W. Fox 42,655,927 1,132,830 -
Valerie B. Jarrett 42,641,562 1,147,195 -
Marvin E. Lesser 42,655,827 1,132,930 -
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<PAGE> 29
Ratification of Appointment of Arthur
Andersen LLP as Independent Public
Accountants 43,325,468 429,568 33,720
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(15) Letter of Arthur Andersen LLP regarding unaudited financial
information.
(27) Financial Data Schedule (electronic filing only).
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<PAGE> 30
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
-----------------------------------
July 30, 1999
Raymond T. Belz,
Senior Vice President and Controller,
USG Corporation
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<PAGE> 1
Exhibit (15)
July 30, 1999
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, 1999, which
includes our report dated July 15, 1999, 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
-31-
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