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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 March 31, 2000
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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 March 31, 2000, 46,827,513 shares of USG common stock were outstanding.
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TABLE OF CONTENTS
Page
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Statement of Earnings:
Three Months Ended March 31, 2000 and 1999 3
Consolidated Balance Sheet:
As of March 31, 2000 and December 31, 1999 4
Consolidated Statement of Cash Flows:
Three Months Ended March 31, 2000 and 1999 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 10
Report of Independent Public Accountants 18
PART II OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURES 24
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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
ENDED MARCH 31,
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2000 1999
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Net sales $ 938 $ 823
Cost of products sold 670 592
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Gross profit 268 231
Selling and administrative expenses 84 77
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Operating profit 184 154
Interest expense 12 13
Interest income (2) (1)
Other expense, net 1 1
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Earnings before income taxes 173 141
Income taxes 67 55
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Net earnings 106 86
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Basic earnings per common share 2.19 1.73
Diluted earnings per common share 2.18 1.71
Dividends paid per common share 0.15 0.10
Average common shares 48,137,789 49,691,088
Average diluted common shares 48,388,042 50,351,176
See accompanying Notes to Consolidated Financial Statements.
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USG CORPORATION
CONSOLIDATED BALANCE SHEET
(DOLLARS IN MILLIONS)
(UNAUDITED)
AS OF AS OF
MARCH 31, DECEMBER 31,
2000 1999
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ASSETS
Current Assets:
Cash and cash equivalents $ 61 $ 197
Receivables (net of reserves of $19 and $18) 425 361
Inventories 264 256
Current and deferred income taxes 26 59
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Total current assets 776 873
Property, plant and equipment (net of reserves
for depreciation and depletion of $389 and $373) 1,657 1,568
Other assets 331 332
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Total Assets 2,764 2,773
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable 187 172
Accrued expenses 249 303
Notes payable 13 16
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Total current liabilities 449 491
Long-term debt 592 577
Deferred income taxes 124 138
Other liabilities 717 700
Stockholders' Equity:
Preferred stock - -
Common stock 5 5
Treasury stock (130) (56)
Capital received in excess of par value 310 316
Deferred currency translation (36) (33)
Reinvested earnings 733 635
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Total stockholders' equity 882 867
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Total Liabilities and Stockholders' Equity 2,764 2,773
========= =========
See accompanying Notes to Consolidated Financial Statements.
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USG CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
THREE MONTHS
ENDED MARCH 31,
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2000 1999
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OPERATING ACTIVITIES:
Net earnings $ 106 $ 86
Adjustments to reconcile net earnings to net cash:
Depreciation, depletion and amortization 26 22
Current and deferred income taxes 19 37
(Increase) decrease in working capital:
Receivables (64) (57)
Inventories (8) 6
Payables 15 20
Accrued expenses (54) (33)
Increase in other assets (8) (16)
Increase in other liabilities 25 26
Other, net (4) (6)
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Net cash from operating activities 53 85
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INVESTING ACTIVITIES:
Capital expenditures (116) (92)
Net proceeds from asset dispositions 2 1
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Net cash to investing activities (114) (91)
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FINANCING ACTIVITIES:
Issuance of debt 117 16
Repayment of debt (105) (33)
Short-term borrowings, net - 10
Cash dividends paid (7) (5)
Issuances of common stock - 6
Purchases of common stock (80) (12)
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Net cash to financing activities (75) (18)
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Net decrease in cash and cash equivalents (136) (24)
Cash and cash equivalents at beginning of period 197 152
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Cash and cash equivalents at end of period 61 128
========= ========
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid 20 26
Income taxes paid 46 18
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 March 31, 2000, and December 31, 1999, and results of
operations and cash flows for the three months ended March 31, 2000 and
1999. 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 1999 Annual Report
on Form 10-K dated February 29, 2000.
(2) 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):
Three Months Ended Net Shares Per Share
March 31, Earnings (000) Amount
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2000
Basic earnings $ 106 48,138 $ 2.19
Effect of Dilutive Securities:
Options 250
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Diluted Earnings 106 48,388 2.18
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1999
Basic earnings 86 49,691 1.73
Effect of Dilutive Securities:
Options 660
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Diluted Earnings 86 50,351 1.71
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(3) Total comprehensive income, consisting of net earnings and foreign
currency translation adjustments, amounted to $103 million and $82
million for the three months ended March 31, 2000 and 1999,
respectively. There was no tax impact on the foreign currency
translation adjustments.
(4) USG's operations are organized into three operating segments: North
American Gypsum, which manufactures and markets gypsum wallboard and
related products in the United States, Canada and Mexico; Worldwide
Ceilings, which manufactures and markets ceiling tile, ceiling grid and
other interior systems products worldwide; and Building Products
Distribution, which distributes gypsum wallboard, drywall metal,
ceiling products, joint compound and other building products throughout
the United States. Operating segment results for the first quarters of
2000 and 1999 were as follows (dollars in millions):
Net Sales Operating Profit
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Three Months Ended March 31, 2000 1999 2000 1999
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North American Gypsum $ 553 $ 488 $ 154 $ 145
Worldwide Ceilings 167 157 17 13
Building Products Distribution 356 300 27 10
Corporate - - (16) (14)
Eliminations (138) (122) 2 -
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Total 938 823 184 154
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(5) 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
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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.
Energy Derivative Instruments:
The Corporation uses swap and option contracts to hedge anticipated
purchases of fuel to be utilized in the manufacturing processes for
gypsum wallboard and ceiling tile. These contracts are designated as
hedges and qualify for hedge accounting. Unrealized gains and losses
and option premiums are deferred and included in net earnings as part
of the underlying transaction.
Foreign Exchange Derivative Instruments:
The Corporation has operations in a number of countries and due to
intercompany and third-party transactions 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 and/or option 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.
(6) As of March 31, 2000, common shares totaling 2,115,600 were reserved
for future issuance in conjunction with existing stock option grants.
In addition, 18,478 common shares were reserved for future grants.
Shares issued in option exercises may be from original issue or
available treasury shares.
(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.
(8) Under a revolving accounts receivable facility, the trade receivables
of U.S. Gypsum and USG Interiors, Inc. are being purchased by USG
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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, when
applicable, 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 first quarter of 2000 were $938 million, a record level
for any first quarter and a 14% increase compared with $823 million for the same
period in 1999. This performance reflects increased sales for each of USG's
businesses, a 13% increase in the selling prices of United States Gypsum
Company's SHEETROCK brand gypsum wallboard and the addition of net sales for
Sybex, Inc., which was acquired in late 1999.
GROSS PROFIT
Gross profit as a percent of net sales improved to 28.6% in the first quarter of
2000, up from 28.1% in the prior-year period. The increase in margin primarily
reflects the higher level of selling prices for SHEETROCK brand gypsum
wallboard. This gain was partially offset by a higher asbestos-related charge in
the first quarter of 2000. See "Legal Contingencies" below for additional
information on asbestos-related costs.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses in the first quarter of 2000 totaled $84
million, up 9% from $77 million a year ago. However, these expenses as a percent
of net sales improved to 9.0% from 9.4%. The increase in expense dollars
primarily reflects information technology initiatives, a higher level of
compensation and benefits, and the addition of overhead for Sybex, Inc.
INTEREST EXPENSE
Interest expense of $12 million was incurred in the first quarter of 2000,
compared with $13 million in the prior-year period.
INCOME TAXES
Taxes on income amounted to $67 million and $55 million in the first quarters of
2000 and 1999, respectively.
NET EARNINGS
Net earnings in the first quarter of 2000 were $106 million, up 23% from $86
million in the prior-year period. Diluted earnings per share increased to $2.18
from $1.71 a year ago. Average diluted shares outstanding decreased 4%
year-on-year to 48.4 million from 50.4 million as a result of USG's share
repurchase program.
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CORE BUSINESS RESULTS
(dollars in millions) NET SALES OPERATING PROFIT
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THREE MONTHS ENDED MARCH 31, 2000 1999 2000 1999
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NORTH AMERICAN GYPSUM:
U.S. Gypsum Company $ 513 $ 460 $ 141 $ 134
CGC Inc. (gypsum) 45 34 8 5
Other subsidiaries 24 22 5 6
Eliminations (29) (28) - -
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Total 553 488 154 145
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WORLDWIDE CEILINGS:
USG Interiors, Inc. 118 108 15 12
USG International 57 52 1 -
CGC Inc. (ceilings) 10 10 1 1
Eliminations (18) (13) - -
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Total 167 157 17 13
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BUILDING PRODUCTS DISTRIBUTION:
L&W Supply Corporation 356 300 27 10
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Corporate - - (16) (14)
Eliminations (138) (122) 2 -
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Total USG Corporation 938 823 184 154
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NORTH AMERICAN GYPSUM
Net sales in the first quarter of 2000 increased 13% to $553 million and
operating profit increased 6% to $154 million as compared to the first quarter
of 1999.
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United States Gypsum Company: U.S. Gypsum's net sales and operating profit were
the highest for any first quarter in the company's history. This performance was
led by improved pricing for SHEETROCK brand gypsum wallboard, which averaged
$159.80 per thousand square feet during the first quarter of 2000, up 13% from
$141.33 for the same period in 1999. The improved pricing more than offset
slightly lower volume and higher manufacturing costs. Shipments of SHEETROCK
brand gypsum wallboard totaled 2.167 billion square feet, 2% below first quarter
1999 shipments of 2.201 billion square feet. Manufacturing costs for wallboard
rose in the first quarter of 2000 due to higher prices for wastepaper (the
primary raw material of wallboard paper) and energy costs. U.S. Gypsum's plants
operated at 92% of capacity during the first quarter of 2000 reflecting the
normal seasonal slowdown for this business during the winter months.
CGC Inc.: Net sales and operating profit for the gypsum business of Canada-based
CGC Inc. increased 32% and 60%, respectively, compared with the first quarter of
1999. The improved sales and profitability were due primarily to higher
wallboard prices.
WORLDWIDE CEILINGS
Net sales in the first quarter of 2000 increased 6% to $167 million versus the
first quarter of 1999. Operating profit of $17 million was up $4 million.
Solid levels of demand in North America and improved demand in international
markets resulted in record first quarter shipments of DONN brand ceiling grid
and AURATONE brand ceiling tile. USG's domestic ceilings business, USG
Interiors, Inc., reported the highest first quarter net sales (up 9% versus
1999) and operating profit (up 25% versus 1999) in its history. USG
International experienced a 10% increase in sales, while its operating profit
was $1 million, compared with a breakeven performance in the first quarter of
last year. Sales and operating profit for the ceilings division of CGC Inc. were
unchanged from last year's first quarter.
BUILDING PRODUCTS DISTRIBUTION
L&W Supply, the leading specialty building products distribution business in the
United States, reported first quarter 2000 net sales of $356 million, up 19%,
while operating profit rose to $27 million from $10 million in the first quarter
of 1999. Net sales, operating profit and wallboard prices were the highest for
any first quarter, while wallboard volume was a record for any quarter in L&W
Supply's history. In addition, first quarter sales and gross profit for L&W
Supply's complementary building materials also were the highest for any first
quarter in L&W Supply's history. L&W Supply currently operates out of 193
locations in the United States, distributing a variety of gypsum, ceilings and
related building materials.
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MARKET CONDITIONS AND OUTLOOK
Based on leading indicators, such as new housing starts, existing home sales and
nonresidential construction activity, the outlook for 2000 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.
Housing starts during the first three months of 2000 ran at a strong level. The
Corporation is currently forecasting U.S. housing starts in 2000 to be 1.6
million units, down slightly from the 1.667 million units in 1999. However, this
decline in new residential construction is expected to be offset by continued
strength in repair and remodeling and new nonresidential construction.
The repair and remodel market has been the fastest growing segment for USG,
accounting for the second-largest portion of its sales. Record 1999 sales of
existing homes of 5.2 million units will support residential repair and
remodeling in 2000. This, combined with strong nonresidential repair and
remodeling, will continue to provide growth in this market segment.
Sales of USG products to the new nonresidential construction market are expected
to remain solid in 2000. 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 3%
in 1999.
Most of USG's sales outside of North America come from Western Europe, Latin
America and the Asia Pacific region. However, USG's exposure in these markets
represents a relatively minor share of the Corporation's total sales and
earnings.
The U.S. market for gypsum wallboard has transitioned from allocation, as
experienced in 1999, to free supply. In addition, new industry capacity will
come on stream during the remainder of 2000. As a result, management anticipates
downward pressure on gypsum wallboard prices as the year unfolds. However, 2000
looks to be another great year for USG due to solid demand for wallboard and
related products combined with strategic investments in low-cost capacity,
incremental volume and new product introductions.
LIQUIDITY AND CAPITAL RESOURCES
FINANCIAL STRATEGY
USG is focused on building long-term stockholder value through dividends, share
repurchases and the five elements of its strategic growth plan.
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Dividends: In the first quarter of 2000, USG paid a cash dividend of $0.15 per
share. In 1999, USG paid cash dividends of $0.10 per share in the first, second
and third quarters. Because of record earnings in 1999 and the forecast of a
strong performance in 2000, USG increased its quarterly dividend to $0.15 in the
fourth quarter of 1999.
Share Repurchases: During the first quarter of 2000, USG substantially increased
the acquisition of its stock under its stock buyback program. The Corporation
purchased 2.3 million shares during the quarter and an additional 500 thousand
shares in early April. As of April 30, 2000, USG has acquired 4.8 million shares
of a 5 million share repurchase program that began in the fourth quarter of
1998. On March 24, 2000, USG's Board of Directors authorized the purchase of an
additional 5 million shares. Share repurchases are being made in the open market
or through privately negotiated transactions and are being funded with available
cash from operations.
Strategic Growth Plan: USG is investing in its businesses under five central
strategies - building for growth by adding capacity and lowering production
costs, leading in product innovation, expanding its building products
distribution business, enhancing customer service and promoting its brand names.
CAPITAL EXPENDITURES
Capital spending amounted to $116 million in the first quarter of 2000, compared
with $92 million in the corresponding 1999 period. As of March 31, 2000, capital
expenditure commitments for the replacement, modernization and expansion of
operations amounted to $165 million, compared with $260 million as of December
31, 1999.
USG's current capital spending program includes construction of new SHEETROCK
brand gypsum wallboard plants in Aliquippa, Pa., and Rainier, Ore. In addition,
U.S. Gypsum is replacing a 41-year-old high-cost production line with a new
production line at its Plaster City, Calif., plant. The Aliquippa plant is on
schedule to begin operating in the second quarter of 2000. Startups for the new
Plaster City line and the new Rainier plant are expected in the third quarter
and fourth quarter of this year, respectively.
USG also evaluates potential acquisitions of companies in the building products
industry, as well as divestitures and joint ventures, on an ongoing basis. USG
has external sources of capital available and adequate financial resources and
liquidity to fund future growth opportunities such as new products, acquisitions
and joint ventures.
WORKING CAPITAL
Working capital (current assets less current liabilities) as of March 31, 2000,
amounted to $327 million, compared with $382 million as of December 31, 1999.
The ratio of current assets to current liabilities was 1.73 to 1 as of March 31,
2000, compared with 1.78 to 1 as of December 31, 1999.
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Receivables increased to $425 million as of March 31, 2000, from $361 million as
of December 31, 1999. Inventories increased to $264 million from $256 million,
and accounts payable rose to $187 million from $172 million. These variations
reflect an increased overall level of business in the first quarter of 2000 as
compared to the fourth quarter of 1999.
Cash and cash equivalents as of March 31, 2000, amounted to $61 million, down
from $197 million as of December 31, 1999. During the first quarter of 2000, net
cash flows to investing activities were $114 million. This reflects capital
spending of $116 million, offset slightly by net proceeds of $2 million from
asset dispositions. Net cash flows to financing activities of $75 million
reflect $80 million used for stock repurchases and $7 million used for cash
dividends, partially offset by a $12 million net increase in debt. Net cash
flows from operating activities totaled $53 million.
DEBT
As of March 31, 2000, total debt amounted to $605 million, up $12 million from
$593 million as of December 31, 1999. First quarter debt activity primarily
consisted of an increase of $115 million in industrial revenue bonds, mostly
associated with the Aliquippa, Pa., capital project, partially offset by
paydowns of $80 million related to the accounts receivable credit facility and
$25 million related to the U.S. revolving credit facility.
AVAILABLE LIQUIDITY
USG 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 $598 million (including a $125
million letter of credit subfacility in the United States), under which, as of
March 31, 2000, outstanding revolving loans totaled $60 million and letters of
credit issued and outstanding amounted to $16 million, leaving the Corporation
with $522 million of unused and available credit.
USG had additional borrowing capacity of $130 million as of March 31, 2000,
under its revolving accounts receivable facility. Furthermore, 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
As described in USG's Form 10-K for the year ended December 31, 1999, USG had
developed a plan to assure that its computer-based systems were made year 2000
compliant in advance of January 1, 2000. As of January 1, 2000 and since that
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date, USG has experienced no material disruption to its business operations nor
does it know of any material disruptions due to year 2000 issues occurring at
critical suppliers or customers. USG continues to monitor its operations and
maintain its contingency plan in effect although it does not believe at this
point that there will be any future disruption attributable to year 2000 issues
anywhere in its business. The total cost of carrying out USG's year 2000
compliance plan was approximately $11 million.
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 is 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 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
full conversion by January 1, 2002, 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. In the quarter ended
March 31, 2000, U.S. Gypsum recorded a charge of $22.0 million, reflecting new
filings during the quarter. This compares to a $12.5 million charge taken in the
first quarter of 1999. Although new Personal Injury Cases have been filed in
1999 and 2000 at a rate significantly below the rate at which cases were filed
in 1998, asbestos charges to results of operations were higher in 1999 and 2000
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 additional periodic charges will be
necessary in the future, in amounts that could be higher or lower than recent
quarters, and which could be material to the period in which they are taken. The
amount of future periodic charges 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, the impact of changes in membership of
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the Center for Claims Resolution (the "Center"), the continued solvency of other
defendants, changes in U.S. Gypsum's settlement cost and the estimated cost of
resolving pending claims, and the necessity of higher-cost settlements in
particular jurisdictions. In addition, U.S. Gypsum will continue to evaluate
whether its probable liability for future Personal Injury Cases can be
reasonably estimated. The ability to make such an estimate will require an
assessment of the impact on future case filings and settlement values of the
uncertainties identified above, including the outcome of negotiations currently
underway between the Center and certain plaintiffs' firms concerning settlements
that would, among other things, apply medical criteria to the firm's future
Personal Injury Cases. When such an estimate can be made, it is probable that an
additional charge to results of operations will be necessary. Although the
timing and amount of the resulting charge cannot presently be determined, the
amount is expected to 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 financial position of the Corporation. 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 future disruption
attributable to year 2000 issues; euro currency issues such as the ability and
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> 18
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 March 31, 2000, and
the related condensed consolidated statement of earnings for the three-month
periods ended March 31, 2000 and 1999 and the condensed consolidated statement
of cash flows for the three months ended March 31, 2000 and 1999. 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 accounting principles generally accepted in the United States.
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Chicago, Illinois
April 18, 2000
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<PAGE> 19
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 1930's; 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 1999 Annual Report for additional information
about the asbestos litigation.
U.S. Gypsum is a defendant in 10 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.). During the years 1997-1999, three new Property Damage Cases
were filed against U.S. Gypsum while 16 were closed; the Company spent an
average of $14 million per year on the defense and settlement of Property Damage
Cases, but received a total of $61.5 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 100,000 claimants, as well as an additional 52,000 claims that
have been settled but will be closed over time. Filings of new Personal Injury
Cases totaled approximately 48,000 claims in 1999, compared to 80,000 claims in
1998 and 23,500 claims in 1997. The Company believes that the higher rate of
personal injury case filings in 1998 resulted, at least in part, from a Supreme
Court ruling striking down a class action settlement that included an injunction
against the filing of certain Personal Injury Cases from September 1994 until
July 1997. It is anticipated that Personal Injury Cases will continue to be
filed in substantial numbers for the foreseeable future, although the percentage
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<PAGE> 20
of such cases filed by claimants with little or no physical impairment is
expected to remain high. U.S. Gypsum's average cost to resolve Personal Injury
Cases during the past several years has been approximately $1,800 per claim,
exclusive of defense costs. Over that period, U.S. Gypsum expended an average of
$64.2 million per year on Personal Injury Cases (including $100 million in
1999), of which an average of $52 million ($85 million in 1999) was paid by
insurance.
U.S. Gypsum is a member, together with 14 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 have been paid by its insurance carriers. Punitive damages have never been
awarded against U.S. Gypsum in a Personal Injury Case; whether such an award
would be covered by insurance would depend on state law and the terms of the
individual policies.
U.S. Gypsum and other Center members have stated their intention to pursue
alternatives to the current tort system, including settlements with plaintiffs'
firms that include agreements to resolve over time the firms' pending claims, as
well as the firms' agreement to recommend to their future clients that they
defer filing, or accept nominal payments on, personal injury claims that do not
meet established disease criteria. The Center reached several such agreements in
1999 and will continue to attempt to negotiate similar agreements in the future.
The impact of such agreements cannot be determined at this time.
During 1999, three companies left the Center and the membership of another
company was terminated by the Center's Board. One of the former Center members
has refused to pay its share of certain settlements agreed to by the Center
while that company was a member. Although to date plaintiffs in such cases have
been successful in obtaining orders requiring the former member to pay its share
of the settlements, further defaults by the former member may significantly
increase the cost of resolving these cases for the remaining Center members,
including U.S. Gypsum. In addition, during the first four months of 2000, two
defendants in the Personal Injury Cases (not members of the Center) filed
bankruptcy petitions. The absence of these defendants from the litigation may
increase the cost of resolving Personal Injury Cases for other defendants,
including the Center and U. S. Gypsum. The amount of such increase, if any,
cannot presently be ascertained.
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 its solvent
carriers. As of March 31, 2000, after deducting insolvent coverage and insurance
paid out to date, approximately $102 million of insurance remained with eight
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<PAGE> 21
carriers, all of which have agreed, subject to certain limitations and
conditions, to cover asbestos-related costs. In addition, U.S. Gypsum is
pursuing claims for reimbursement from estates of certain insolvent carriers and
may recover additional reimbursement in amounts that are presently
indeterminable but are not expected to be material.
Insurance payments to U.S. Gypsum for all asbestos-related matters, including
property damage, personal injury, insurance coverage litigation and related
expenses, exceeded asbestos-related expenses by $6 million for 1999 and $0.7
million in 1997 due primarily to nonrecurring reimbursement for amounts expended
in prior years. However, U.S. Gypsum's total asbestos-related expenditures
exceeded aggregate insurance payments by $24 million in 1998.
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 resolve claims at historical or
acceptable levels; the level of physical impairment of claimants; the viability
of claims for punitive damages; the effect of recent changes in membership in
the Center and any future changes in Center membership; the continued solvency
of other defendants; the refusal of the former Center member described above to
fund its share of existing settlement agreements; and the continued ability to
negotiate settlements or develop other mechanisms that defer or reduce claims
from unimpaired claimants. 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 March 31, 2000, can be resolved for an amount
totaling between $332 million and $475 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. Insurance funding is available for a portion of
these costs, as detailed below, although resolution of the pending cases will
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
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<PAGE> 22
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, although, as noted below, the Company is actively engaged in
examining the feasibility of such an estimate with the objective of providing
such information when possible.
Accounting for Asbestos Liability: As of March 31, 2000, U.S. Gypsum had
reserved $332 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 $102 million, the estimated portion of the reserved amount that is
expected to be paid or reimbursed by insurance. As of March 31, 2000, U.S.
Gypsum had an additional $34 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. U.S. Gypsum charged results of operations a total of $26 million in
1998 and $80.5 million in 1999 for asbestos-related costs, based largely on new
filings during those years. In the quarter ended March 31, 2000, the Company
took a charge of $22 million, reflecting new filings during the quarter.
Although new Personal Injury Cases have been filed in 1999 and 2000 at a rate
significantly below the rate at which cases were filed in 1998, asbestos charges
to results of operations were higher in 1999 and 2000 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 additional periodic charges will be necessary in the
future, in amounts that could be higher or lower than recent quarters, and which
could be material to the period in which they are taken. The amount of future
periodic charges 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, the impact of changes in membership of the
Center, changes in U.S. Gypsum's settlement cost and the estimated cost of
resolving pending claims, and the necessity of higher-cost settlements in
particular jurisdictions.
In addition, U.S. Gypsum will continue to evaluate whether its probable
liability for future Personal Injury Cases can be reasonably estimated. The
ability to make such an estimate will require an assessment of the impact on
future case filings and settlement values of the uncertainties identified above,
including the outcome of negotiations currently underway between the Center and
certain plaintiffs' firms concerning settlements that would, among other things,
apply medical criteria to the firms' future Personal Injury Cases. When such an
estimate can be made, it is probable that an additional charge to results of
operations will be necessary. Although the timing and amount of the resulting
charge cannot presently be determined, the amount is expected to be material to
results of operations in the period in which it is taken.
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<PAGE> 23
CONCLUSION - The above estimates and reserves are re-evaluated periodically as
additional information becomes available. Additional 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
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 continuously reviews 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 also are 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 6. EXHIBITS AND REPORTS ON FORM 8-K
(15) Letter from Arthur Andersen LLP regarding unaudited financial
information.
(27) Financial Data Schedule (electronic filing only).
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<PAGE> 24
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
-----------------------------------
May 9, 2000
Raymond T. Belz,
Senior Vice President and Controller,
USG Corporation
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<PAGE> 1
Exhibit (15)
May 9, 2000
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 March 31, 2000, which
includes our report dated April 18, 2000, 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
-25-
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