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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, 2003
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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 is an accelerated filer (as
defined in Exchange Act Rule 12b-2). 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, 2003, 43,036,758 shares of USG common stock were outstanding.
TABLE OF CONTENTS
Page
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PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Statements of Earnings:
Three Months Ended March 31, 2003 and 2002 3
Consolidated Balance Sheets:
As of March 31, 2003 and December 31, 2002 4
Consolidated Statements of Cash Flows:
Three Months Ended March 31, 2003 and 2002 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 40
Item 4. Controls and Procedures 52
Report of Independent Public Accountants 53
PART II OTHER INFORMATION
Item 1. Legal Proceedings 55
Item 6. Exhibits and Reports on Form 8-K 55
SIGNATURES 56
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PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
USG CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
(DOLLARS IN MILLIONS EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS
ENDED MARCH 31,
----------------------------
2003 2002
------------ ------------
Net sales $ 862 $ 829
Cost of products sold 745 697
Selling and administrative expenses 80 82
Chapter 11 reorganization expenses 2 2
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Operating profit 35 48
Interest expense 1 1
Interest income (1) (1)
Other expense, net - 1
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Earnings before income taxes and cumulative
effect of accounting change 35 47
Income taxes 13 21
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Earnings before cumulative effect of accounting change 22 26
Cumulative effect of accounting change, net of tax (16) (96)
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Net earnings (loss) 6 (70)
============ ============
EARNINGS (LOSS) PER COMMON SHARE:
Basic and diluted before cumulative effect
of accounting change 0.50 0.60
Cumulative effect of accounting change (0.37) (2.22)
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Basic and diluted 0.13 (1.62)
============ ============
Dividends paid per common share - -
Average common shares 43,137,883 43,354,025
Average diluted common shares 43,137,883 43,354,025
See accompanying Notes to Consolidated Financial Statements.
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USG CORPORATION
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS)
(UNAUDITED)
AS OF AS OF
MARCH 31, DECEMBER 31,
2003 2002
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ASSETS
Current Assets:
Cash and cash equivalents $ 592 $ 649
Short-term marketable securities 47 50
Receivables (net of reserves - $17 and $17) 355 284
Inventories 286 270
Income taxes receivable 14 14
Deferred income taxes 49 49
Other current assets 73 77
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Total current assets 1,416 1,393
Long-term marketable securities 129 131
Property, plant and equipment (net of accumulated
depreciation and depletion - $733 and $701) 1,789 1,788
Deferred income taxes 197 199
Other assets 106 106
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Total Assets 3,637 3,617
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable 199 170
Accrued expenses 192 243
Income taxes payable 23 25
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Total current liabilities 414 438
Long-term debt 2 2
Other liabilities 398 370
Liabilities subject to compromise 2,271 2,272
Stockholders' Equity:
Preferred stock - -
Common stock 5 5
Treasury stock (258) (257)
Capital received in excess of par value 413 412
Accumulated other comprehensive loss (21) (32)
Retained earnings 413 407
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Total stockholders' equity 552 535
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Total Liabilities and Stockholders' Equity 3,637 3,617
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See accompanying Notes to Consolidated Financial Statements.
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USG CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
THREE MONTHS
ENDED MARCH 31,
--------------
2003 2002
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OPERATING ACTIVITIES:
Net earnings (loss) $ 6 $ (70)
Adjustments to reconcile net earnings (loss) to net cash:
Cumulative effect of accounting change 16 96
Depreciation, depletion and amortization 25 26
Deferred income taxes 12 27
(Increase) decrease in working capital:
Receivables (71) (48)
Income taxes receivable - (6)
Inventories (16) (9)
Payables 27 24
Accrued expenses (53) 12
(Increase) decrease in other assets (3) 1
Increase (decrease) in other liabilities (3) 5
Decrease in asbestos receivables 15 3
Decrease in liabilities subject to compromise (1) (16)
Other, net 1 -
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Net cash (used for) provided by operating activities (45) 45
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INVESTING ACTIVITIES:
Capital expenditures (17) (15)
Purchases of marketable securities (32) -
Sales or maturities of marketable securities 37 -
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Net cash used for investing activities (12) (15)
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FINANCING ACTIVITIES:
Net cash provided by financing activities - -
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Net (decrease) increase in cash and cash equivalents (57) 30
Cash and cash equivalents at beginning of period 649 493
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Cash and cash equivalents at end of period 592 523
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SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid - 1
Income taxes refunded, net 4 (1)
See accompanying Notes to Consolidated Financial Statements.
-5-
USG CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) PREPARATION OF FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements of USG
Corporation and its subsidiaries ("the Corporation") have been prepared
in accordance with applicable United States Securities and Exchange
Commission guidelines pertaining to interim financial information. The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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
financial statements reflect all adjustments, which are of a normal
recurring nature, necessary for a fair presentation of the
Corporation's financial results for the interim periods. These
financial statements and notes are to be read in conjunction with the
financial statements and notes included in the Corporation's 2002
Annual Report on Form 10-K which was filed on February 27, 2003.
(2) VOLUNTARY REORGANIZATION UNDER CHAPTER 11
On June 25, 2001 (the "Petition Date"), the parent company (the "Parent
Company") of the Corporation and the 10 United States subsidiaries
listed below (collectively, the "Debtors") filed voluntary petitions
for reorganization (the "Filing") under chapter 11 of the United States
Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy
Court for the District of Delaware (the "Bankruptcy Court"). The
chapter 11 cases of the Debtors (collectively, the "Chapter 11 Cases")
are being jointly administered as In re: USG Corporation et al. (Case
No. 01-2094). The Chapter 11 Cases do not include any of the
Corporation's non-U.S. subsidiaries. The following subsidiaries filed
chapter 11 petitions: United States Gypsum Company; USG Interiors,
Inc.; USG Interiors International, Inc.; L&W Supply Corporation; Beadex
Manufacturing, LLC; B-R Pipeline Company; La Mirada Products Co., Inc.;
Stocking Specialists, Inc.; USG Industries, Inc.; and USG Pipeline
Company.
This action was taken to resolve asbestos claims in a fair and
equitable manner, to protect the long-term value of the Debtors'
businesses, and to maintain the Debtors' leadership positions in their
markets.
CONSEQUENCES OF THE FILING
The Debtors are operating their businesses without interruption as
debtors-in-possession subject to the provisions of the Bankruptcy Code.
All vendors are being paid for all goods furnished and services
provided after the Filing. However, as a consequence of the Filing,
pending
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litigation against the Debtors as of the Petition Date is stayed, and
no party may take any action to pursue or collect pre-petition claims
except pursuant to an order of the Bankruptcy Court.
Three creditors' committees, one representing asbestos personal injury
claimants, another representing asbestos property damage claimants, and
a third representing general unsecured creditors, were appointed as
official committees in the Chapter 11 Cases and, in accordance with the
provisions of the Bankruptcy Code, will have the right to be heard on
all matters that come before the Bankruptcy Court. The Bankruptcy Court
also appointed the Honorable Dean M. Trafelet as the legal
representative for future asbestos claimants in the Debtors' bankruptcy
proceeding. Mr. Trafelet was formerly a judge of the Circuit Court of
Cook County, Illinois. The Debtors expect that the appointed
committees, together with Mr. Trafelet, will play important roles in
the Chapter 11 Cases and the negotiation of the terms of any plan of
reorganization.
Debtors intend to address all pending and future asbestos personal
injury claims as well as all other pre-petition claims in a plan or
plans of reorganization confirmed by the Bankruptcy Court. Debtors also
intend that the plan will include the creation of one or more
independently administered trusts under Section 524(g) of the
Bankruptcy Code, which will be funded by Debtors to allow payment of
present and future asbestos personal injury claims and demands. Debtors
expect that the plan of reorganization will also address Debtors'
liability for asbestos property damage claims, whether by including
those liabilities in a Section 524(g) trust or by other means.
It is anticipated that, as a result of creation and funding of the
Section 524(g) trust(s), the Bankruptcy Court will issue a permanent
injunction barring the assertion of present and future asbestos claims
against Debtors, their successors, and their affiliates, and channeling
those claims to the trust(s) for payment in whole or in part. Section
524(g) contains specific requirements for issuance of such a permanent
injunction, including the requirement that the trust must own, or have
the right to own upon the occurrence of contingencies specified in the
plan of reorganization, a majority of the voting shares of the debtor
or its parent. Section 524(g) also requires that the plan be approved
by 75% of the voting asbestos claimants whose claims are addressed by
the trust. Similar plans of reorganization containing Section 524(g)
trusts have been confirmed in the chapter 11 cases of other companies
with asbestos liabilities, but there is no guarantee that the
Bankruptcy Court in Debtors' Chapter 11 Cases will approve creation of
a Section 524(g) trust or issue a permanent injunction channeling to
the trust all asbestos claims against Debtors, and/or their successors
and affiliates.
Pursuant to the Bankruptcy Code, the Debtors had the exclusive right to
propose a plan of reorganization for 120 days following the Petition
Date, unless extended. The Bankruptcy Court has granted requests by the
Debtors to extend the period of exclusivity, which currently runs
through
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September 1, 2003. The Debtors intend to seek one or more additional
extensions depending upon developments in the Chapter 11 Cases. If the
Debtors fail to file a plan of reorganization during such extension
period, or if such plan is not accepted by the requisite numbers of
creditors and equity holders entitled to vote on the plan, other
parties in interest in the Chapter 11 Cases may be permitted to propose
their own plan(s) of reorganization for the Debtors.
While it is the Debtors' intention to seek a full recovery for their
creditors, it is not possible to predict how the plan of reorganization
will treat asbestos and other pre-petition claims and what impact any
plan may have on the value of the shares of the Corporation's common
stock and other outstanding securities. Under the Bankruptcy Code, a
plan of reorganization, including a plan creating a Section 524(g)
trust, may be confirmed without the consent of non-asbestos creditors
and equity security holders if certain requirements of the Code are
met. There is no assurance that there will be sufficient assets to
satisfy the Debtors' pre-petition liabilities in whole or in part, and
the pre-petition creditors of some Debtors may be treated differently
from the pre-petition creditors of other Debtors. The payment rights
and other entitlements of pre-petition creditors and USG shareholders
may be substantially altered by any plan or plans of reorganization
confirmed in the Chapter 11 Cases. Pre-petition creditors may receive
under the plan of reorganization less than 100% of the face value of
their claims, and the interests of the Corporation's equity security
holders are likely to be substantially diluted or cancelled in whole or
in part.
It is also not possible to predict at this time how the plan of
reorganization will treat intercompany indebtedness, licenses,
transfers of goods and services and other intercompany arrangements,
transactions, and relationships that were entered into before the
Petition Date. These arrangements, transactions, and relationships may
be challenged by various parties in the Chapter 11 Cases, and the
outcome of those challenges, if any, may have an impact on the
treatment of various claims under any plan of reorganization.
Whether the Corporation's equity has significant value and Debtors'
non-asbestos creditors recover the full value of their claims depend
upon the outcome of the analysis of the amount of Debtors' assets and
liabilities, especially asbestos liabilities, that must be funded under
the plan. Counsel for the Official Committee of Asbestos Personal
Injury Claimants and counsel for the legal representative for future
asbestos personal injury claimants have advised the court that is
presiding over the Chapter 11 Cases that they believe Debtors' asbestos
liabilities exceed the value of Debtors' assets and that Debtors are
insolvent. The Debtors have advised the court that they believe they
are solvent if their asbestos liabilities are fairly and appropriately
valued. Toward that end, the Debtors filed a motion with the court
requesting the court to begin proceedings to estimate the value of
Debtors' asbestos personal injury liabilities.
-8-
In response to the Debtors' motion requesting an estimation of asbestos
personal injury liabilities, the court issued an order and memorandum
opinion on February 19, 2003, setting forth a procedure for estimating
Debtors' liability for asbestos personal injury claims alleging cancer.
(See Note 12. Litigation, for additional information on this
procedure.) At this stage in the proceedings, Debtors do not know when
estimation of Debtors' liability for these cancer claims will occur,
what the outcome of that proceeding will be, what impact that
proceeding will have on estimating Debtors' liability for asbestos
personal injury claims alleging other diseases, and whether the
estimation proceeding will lead to a negotiated resolution of Debtors'
asbestos personal injury liabilities. Debtors also cannot predict at
this time the estimated cost of resolving asbestos property damage
claims (see Note 12, Litigation, for additional information.) If the
amount of the Debtors' asbestos liabilities cannot be resolved through
negotiation, as has been the case to date, the outcome of the
estimation proceedings regarding Debtors' liability for cancer claims,
as provided in the Court's order, likely will be a significant
component of determining Debtors' asbestos personal injury liability,
Debtors' solvency, and the recovery of Debtors' pre-petition creditors
and equity security holders under any plan or plans of reorganization.
As a result of this uncertainty, it is not possible at this time to
predict the timing or outcome of the Chapter 11 Cases, the terms and
provisions of any plan or plans of reorganization, or the effect of the
chapter 11 reorganization process on the claims of pre-petition
creditors of the Debtors or the interests of the Corporation's equity
security holders. There can be no assurance as to the value of any
distributions that might be made under any plan or plans of
reorganization with respect to such pre-petition claims, equity
interests, or other outstanding securities. Recent developments in the
Corporation's bankruptcy proceeding are discussed in Note 12.
Litigation.
In connection with the Filing, the Corporation implemented a Bankruptcy
Court approved key employee retention plan that commenced on July 1,
2001, and continues until the date the Corporation emerges from
bankruptcy, or June 30, 2004, whichever occurs first. Under the plan,
participants receive semiannual payments that began in January 2002.
Expenses associated with this plan amounted to $5.6 million in the
first quarter of 2003 and 2002.
CHAPTER 11 FINANCING
On July 31, 2001, a $350 million debtor-in-possession financing
facility (the "DIP Facility") was approved by the Bankruptcy Court to
supplement liquidity and fund operations during the reorganization
process. In January 2003, the Corporation reduced the size of the DIP
Facility to $100 million. This action was taken at the election of the
Corporation due to the levels of cash and marketable securities on hand
and to reduce costs associated with the DIP Facility. The resulting DIP
Facility is used largely to support the issuance of standby letters of
credit needed for business operations. The DIP Facility is provided by
a syndicate of
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lenders led by JPMorgan Chase Bank (formerly The Chase Manhattan Bank)
as agent and matures on June 25, 2004. Borrowing availability under the
DIP Facility is based primarily on accounts receivable and inventory
levels and, to a lesser extent, property, plant and equipment. Given
these levels, as of March 31, 2003, the Corporation had the capacity to
borrow up to $100 million. There were no outstanding borrowings under
the DIP Facility as of March 31, 2003. However, $16 million of standby
letters of credit were outstanding, leaving $84 million of unused
borrowing capacity available as of March 31, 2003.
PRE-PETITION LIABILITIES
Subsequent to the Filing, the Debtors received approval from the
Bankruptcy Court to pay or otherwise honor certain of their
pre-petition obligations, including employee wages, salaries, benefits
and other employee obligations, and from limited available funds,
pre-petition claims of certain critical vendors, real estate taxes,
environmental obligations, certain customer programs and warranty
claims, and certain other pre-petition claims.
Pursuant to the Bankruptcy Code, schedules were filed by the Debtors
with the Bankruptcy Court on October 23, 2001, and certain of the
schedules were amended on May 31, 2002 and December 13, 2002, setting
forth the assets and liabilities of the Debtors as of the date of the
Filing. The Bankruptcy Court established a bar date of January 15,
2003, by which proofs of claim were required to be filed against the
Debtors for all claims other than asbestos related personal injury
claims as defined in the Court's order.
Approximately 5,000 proofs of claim for general unsecured creditors,
totaling approximately $8.7 billion were filed by the bar date. Since
the bar date, the Debtors have received 109 late-filed proofs of claim
totaling approximately $191 million. The Debtors have begun the process
of analyzing the proofs of claim filed by the bar date. A preliminary
analysis of these proofs of claim suggests that many are duplicates of
other proofs of claim or of liabilities previously scheduled by the
Debtors. In addition, many claims were filed against multiple debtors
or against an incorrect Debtor. Early in the review process, the
Debtors have already identified approximately $5.7 billion in duplicate
claims and approximately $500 million in contingent claims and continue
to analyze filed claims on an on-going basis.
The Debtors expect to address claims for general unsecured creditors
through liquidation, estimation or disallowance of the claims. In
connection with this process, Debtors will make adjustments to their
schedules and financials statements as appropriate. Any such
adjustments could be material to the Company's consolidated financial
position and results of operations in any given period. At this time,
it is not possible to estimate the Debtors' liability for these claims.
However, it is likely that the Debtors' liability for these claims will
be different from the amounts presently recorded by the Debtors. Proofs
of claim
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alleging asbestos property damage claims are discussed in Note 12.
Litigation, under Developments in the Reorganization Process.
FINANCIAL STATEMENT PRESENTATION
The accompanying consolidated financial statements have been prepared
in accordance with AICPA Statement of Position 90-7 ("SOP 90-7"),
"Financial Reporting by Entities in Reorganization Under the Bankruptcy
Code," and on a going-concern basis, which contemplates continuity of
operations, realization of assets and liquidation of liabilities in the
ordinary course of business. However, as a result of the Filing, such
realization of assets and liquidation of liabilities, without
substantial adjustments and/or changes of ownership, are subject to
uncertainty. Given this uncertainty, there is substantial doubt about
the Corporation's ability to continue as a going concern. Such doubt
includes, but is not limited to, a possible change in control of the
Corporation, as well as a potential change in the composition of the
Corporation's business portfolio. The financial statements do not
include any adjustments that might result from the outcome of this
uncertainty. While operating as debtors-in-possession under the
protection of chapter 11 of the Bankruptcy Code and subject to
Bankruptcy Court approval or otherwise as permitted in the ordinary
course of business, the Debtors, or any of them, may sell or otherwise
dispose of assets and liquidate or settle liabilities for amounts other
than those reflected in the consolidated financial statements. Further,
a plan of reorganization could materially change the amounts and
classifications in the historical consolidated financial statements.
The appropriateness of using the going-concern basis for the
Corporation's financial statements is dependent upon, among other
things, (i) the Corporation's ability to comply with the terms of the
DIP Facility and the cash management order entered by the Bankruptcy
Court in connection with the Chapter 11 Cases (ii) the ability of the
Corporation to maintain adequate cash on hand (iii) the ability of the
Corporation to generate cash from operations (iv) confirmation of a
plan or plans of reorganization under the Bankruptcy Code and (v) the
Corporation's ability to achieve profitability following such
confirmation. The Corporation believes that cash and marketable
securities on hand and future cash available from operations will
provide sufficient liquidity to allow its businesses to operate in the
normal course without interruption for the duration of the chapter 11
proceedings. This includes its ability to meet post-petition
obligations of the Debtors and to meet obligations of the non-Debtor
subsidiaries.
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LIABILITIES SUBJECT TO COMPROMISE: As reflected in the consolidated
financial statements, liabilities subject to compromise refers to
Debtors' liabilities incurred prior to the commencement of the Chapter
11 Cases. The amounts of the various liabilities that are subject to
compromise are set forth in the table below. These amounts represent
the Debtors' estimate of known or potential pre-petition claims to be
resolved in connection with the Chapter 11 Cases. Such claims remain
subject to future adjustments. Adjustments may result from (i)
negotiations, (ii) actions of the Bankruptcy Court, (iii) further
developments with respect to disputed claims, (iv) rejection of
executory contracts and unexpired leases, (v) the determination as to
the value of any collateral securing claims, (vi) proofs of claim, or
(vii) other events.
The amount shown below for the asbestos reserve reflects the
Corporation's pre-petition estimate of liability associated with
asbestos claims to be filed in the tort system through 2003, and this
liability, including liability for post-2003 claims, is the subject of
significant legal proceedings and negotiation in the Chapter 11 Cases.
See Note 12. Litigation for additional information on asbestos and
related bankruptcy litigation.
As of the date of this report, virtually all of the Corporation's
pre-petition debt is in default due to the Filing and included in
liabilities subject to compromise. This includes debt outstanding of
$469 million under the pre-petition bank credit facilities and $536
million of other outstanding debt. Payment terms for liabilities
subject to compromise will be established as part of a plan of
reorganization under the Chapter 11 Cases.
Liabilities subject to compromise in the consolidated and DIP balance
sheets consist of the following items (dollars in millions):
As of As of
March 31, December 31,
2003 2002
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Accounts payable $ 157 $ 157
Accrued expenses 55 56
Debt 1,005 1,005
Asbestos reserve 1,061 1,061
Other long-term liabilities 36 36
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Subtotal 2,314 2,315
Elimination of intercompany accounts payable (43) (43)
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Total liabilities subject to compromise 2,271 2,272
==========================================================================================================
-12-
INTERCOMPANY TRANSACTIONS: In the normal course of business, the
operating subsidiaries and the Parent Company engage in intercompany
transactions. To document the relations created by these transactions,
the Parent Company and the operating subsidiaries, from the formation
of USG Corporation in 1985, have been parties to intercompany loan
agreements that evidence their obligations as borrowers or rights as
lenders arising out of intercompany cash transfers and various
allocated intercompany charges (the "Intercompany Corporate
Transactions").
The Corporation operates a consolidated cash management system under
which the cash receipts of the domestic operating subsidiaries are
ultimately concentrated in Parent Company accounts. Cash disbursements
for those operating subsidiaries originate from those Parent Company
concentration accounts. Allocated intercompany charges from the Parent
Company to the operating subsidiaries primarily include expenses
related to rent, property taxes, information technology, and research
and development, while allocated intercompany charges between certain
operating subsidiaries primarily include expenses for shared marketing,
sales, customer service, engineering and accounting services. Detailed
accounting records are maintained of all cash flows and intercompany
charges through the system in either direction. Net balances,
receivables or payables of such cash transactions, are reviewed on a
regular basis with interest earned or accrued on the balances. During
the first six months of 2001, the Corporation took steps to secure the
obligations from each of the principal domestic operating subsidiaries
under the intercompany loan agreements when it became clear that the
asbestos liability claims of U.S. Gypsum were becoming an increasingly
greater burden on the Corporation's cash resources.
As of March 31, 2003, U.S. Gypsum and USG Interiors had net
pre-petition payable balances to the Parent Company for Intercompany
Corporate Transactions of $294 million and $109 million, respectively.
L&W Supply had a net pre-petition receivable balance from the Parent
Company of $33 million. On a post-petition basis, U.S. Gypsum and L&W
Supply had net receivable balances from the Parent Company for
Intercompany Corporate Transactions of $158 million and $154 million,
respectively. USG Interiors had a net post-petition payable balance to
the Parent Company of $5 million.
In addition to the above transactions, the operating subsidiaries
engage in ordinary course purchase and sale of products with other
operating subsidiaries (the "Intercompany Trade Transactions").
Detailed accounting records also are maintained of all such
transactions, and settlements are made on a monthly basis. Certain
Intercompany Trade Transactions between U.S. and non-U.S. operating
subsidiaries are settled via wire transfer payments utilizing several
payment systems.
-13-
CHAPTER 11 REORGANIZATION EXPENSES: Chapter 11 reorganization expenses
in the consolidated and DIP statements of earnings consist of the
following (dollars in millions):
Three Months ended March 31,
----------------------------------
2003 2002
----------------------------------
Legal and financial advisory fees $ 4 $ 4
Bankruptcy-related interest income (2) (2)
---------------------------------------------------------------------------------------------------------
Total chapter 11 reorganization expenses 2 2
=========================================================================================================
INTEREST EXPENSE: For the first quarter of 2003, contractual interest
expense not accrued or recorded on pre-petition debt totaled $18
million. From the Petition Date through March 31, 2003, contractual
interest expense not accrued or recorded on pre-petition debt totaled
$133 million.
DIP FINANCIAL STATEMENTS: Under the Bankruptcy Code, the Corporation is
required to file periodically with the Bankruptcy Court various
documents including financial statements of the Debtors (the
"Debtor-In-Possession" or "DIP" financial statements). The Corporation
cautions that these financial statements are prepared according to
requirements under the Bankruptcy Code. While these financial
statements accurately provide information required under the Bankruptcy
Code, they are nonetheless unconsolidated, unaudited and prepared in a
format different from that used in the Corporation's consolidated
financial statements filed under the securities laws. Accordingly, the
Corporation believes the substance and format do not allow meaningful
comparison with the Corporation's regular publicly disclosed
consolidated financial statements. The Debtors consist of the Parent
Company and the following wholly owned subsidiaries: United States
Gypsum Company; USG Interiors, Inc.; USG Interiors International, Inc.;
L&W Supply Corporation; Beadex Manufacturing, LLC; B-R Pipeline
Company; La Mirada Products Co., Inc.; Stocking Specialists, Inc.; USG
Industries, Inc.; and USG Pipeline Company.
On March 1, 2002, USG Funding, a non-Debtor subsidiary of USG
Corporation, declared a dividend in the amount of $50 million
(subsequently reduced to $30 million in the second quarter) payable to
the Parent Company, which was paid in effect by eliminating the
intercompany payable from USG Corporation. This payment is included in
other (income) expense, net in the DIP statement of earnings for the
three months ended March 31, 2002. The condensed financial statements
of the Debtors are presented as follows:
-14-
USG CORPORATION
DEBTOR-IN-POSSESSION STATEMENT OF EARNINGS
(DOLLARS IN MILLIONS)
(UNAUDITED)
THREE MONTHS
ENDED MARCH 31,
---------------
2003 2002
----- -----
Net sales $ 781 $ 750
Cost of products sold 684 640
Selling and administrative expenses 69 71
Chapter 11 reorganization expenses 2 2
Interest expense 1 2
Interest income - -
Other (income) expense, net (2) (50)
----- -----
Earnings before income taxes and cumulative effect of
accounting change 27 85
Income taxes 12 18
----- -----
Earnings before cumulative effect of accounting change 15 67
Cumulative effect of accounting change (13) (41)
----- -----
Net earnings 2 26
===== =====
-15-
USG CORPORATION
DEBTOR-IN-POSSESSION BALANCE SHEETS
(DOLLARS IN MILLIONS)
(UNAUDITED)
AS OF AS OF
MARCH 31, DECEMBER 31,
2003 2002
--------- -----------
ASSETS
Current Assets:
Cash and cash equivalents $ 439 $ 478
Short-term marketable securities 47 50
Receivables (net of reserves - $13 and $13) 293 235
Inventories 242 227
Income taxes receivable 14 14
Deferred income taxes 49 49
Other current assets 57 67
------- -------
Total current assets 1,141 1,120
Long-term marketable securities 129 131
Property, plant and equipment (net of accumulated
depreciation and depletion - $580 and $557) 1,563 1,572
Deferred income taxes 215 218
Other assets 384 378
------- -------
Total Assets 3,432 3,419
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable 171 142
Accrued expenses 165 207
Income taxes payable 24 20
------- -------
Total current liabilities 360 369
Other liabilities 382 362
Liabilities subject to compromise 2,271 2,272
Stockholders' Equity:
Preferred stock - -
Common stock 5 5
Treasury stock (258) (257)
Capital received in excess of par value 100 99
Accumulated other comprehensive income 5 4
Retained earnings 567 565
------- -------
Total stockholders' equity 419 416
------- -------
Total Liabilities and Stockholders' Equity 3,432 3,419
======= =======
-16-
USG CORPORATION
DEBTOR-IN-POSSESSION STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
THREE MONTHS
ENDED MARCH 31,
--------------
2003 2002
----- -----
OPERATING ACTIVITIES:
Net earnings $ 2 $ 26
Adjustments to reconcile net earnings to net cash:
Cumulative effect of accounting change 13 41
Depreciation, depletion and amortization 22 21
Deferred income taxes 11 28
(Increase) decrease in working capital:
Receivables (58) (37)
Income taxes receivable - (4)
Inventories (15) (9)
Payables 33 26
Accrued expenses (45) 11
Decrease in pre-petition intercompany receivable - -
Increase in post-petition intercompany receivable (7) (51)
Decrease in other assets 2 6
(Decrease) increase in other liabilities (5) 4
Decrease in asbestos receivables 15 3
Decrease in liabilities subject to compromise (1) (16)
Other, net (1) (1)
----- -----
Net cash (used for) provided by operating activities (34) 48
----- -----
INVESTING ACTIVITIES:
Capital expenditures (10) (13)
Purchases of marketable securities (32) -
Sale or maturities of marketable securities 37 -
Net proceeds from asset dispositions - -
----- -----
Net cash used for investing activities (5) (13)
----- -----
FINANCING ACTIVITIES:
Net cash provided by financing activities - -
----- -----
Net (decrease) increase in cash and cash equivalents (39) 35
Cash and cash equivalents at beginning of period 478 346
----- -----
Cash and cash equivalents at end of period 439 381
===== =====
SUPPLEMENTAL CASH FLOW DISCLOSURES:
Interest paid 1 1
Income taxes refunded, net - (5)
-17-
(3) EXIT ACTIVITIES
2002 DOWNSIZING PLAN: In the fourth quarter of 2002, the Corporation
recorded a nontaxable charge of $11 million related to the shutdown of
the Aubange, Belgium, ceiling tile plant and other downsizing
activities in Europe to address the continuing weakness of the
commercial ceilings market in Europe. The charge was included in cost
of products sold for USG International and reflected severance of $6
million related to a workforce reduction of over 50 positions (salaried
and hourly), equipment writedowns of $3 million and other reserves of
$2 million. The other reserves primarily related to lease
cancellations, inventories and receivables.
As of March 31, 2003, 49 employees were terminated. The Aubange,
Belgium, plant ceased operations in December 2002. The reserve for the
2002 downsizing plan was included in accrued expenses on the
consolidated balance sheets. Charges against the reserve included the
$3 million write-off of equipment in 2002 and payments totaling $3
million in the first quarter of 2003. All payments associated with the
2002 downsizing plan are being funded with cash from operations.
2001 RESTRUCTURING PLAN: In the fourth quarter of 2001, the Corporation
recorded a charge of $12 million pretax ($10 million after-tax) related
to a restructuring plan that included the shutdown of a gypsum
wallboard plant in Fremont, Calif., a drywall steel plant in Prestice,
Czech Republic, a ceiling tile plant in San Juan Ixhuatepec, Mexico, a
ceiling tile manufacturing line in Greenville, Miss., and other
restructuring activities. Included in the $12 million pretax charge was
$8 million for severance related to a workforce reduction of more than
350 positions (primarily hourly positions), $2 million for the
write-off of property, plant and equipment, and $2 million for line
shutdown and removal and contract cancellations. The 2001 restructuring
was intended to allow the Corporation to optimize its manufacturing
operations.
As of March 31, 2003, 348 employees were terminated, and 26 open
positions were eliminated, and the ceiling tile manufacturing line at
Greenville, Miss., and the plants in San Juan Ixhuatepec, Mexico, and
Prestice, Czech Republic, were shut down. The Fremont, Calif., plant
ceased production in the second quarter of 2002. The reserve for the
2001 restructuring plan was included in accrued expenses on the
consolidated balance sheets. Charges against the reserve in 2001
included the $2 million write-off of property, plant and equipment and
payments totaling $2 million. An additional $3 million of payments were
made and charged against the reserve in 2002. The remaining $5 million
of payments were made and charged against the reserve in the first
quarter of 2003. All payments associated with the 2001 restructuring
plan were funded with cash from operations.
The following table details the reserves and activity for the 2002
downsizing and 2001 restructuring plan (dollars in millions):
-18-
Writedown of Reserve
Provisions for Assets to Net Cash Balance
Restructuring Realizable Value Payments 3/31/03
-------------------------------------------------------------------------------------------------------
2002 Downsizing:
Severance (salaried and hourly) $ 6 $ - $ (3) $ 3
Equipment write-off 3 (3) - -
Other reserves 2 - - 2
-------------------------------------------------------------------------------------------------------
Subtotal 11 (3) (3) 5
-------------------------------------------------------------------------------------------------------
2001 Restructuring:
Severance (primarily hourly) 8 - (8) -
Property, plant and equipment write-off 2 (2) - -
Line shutdown/removal and contract cancellations 2 - (2) -
-------------------------------------------------------------------------------------------------------
Subtotal 12 (2) (10) -
-------------------------------------------------------------------------------------------------------
Total 23 (5) (13) 5
=======================================================================================================
(4) EARNINGS PER SHARE
Basic earnings per share are based on the weighted average number of
common shares outstanding. Diluted earnings per share are based on the
weighted average number of common shares outstanding and the dilutive
effect of the potential exercise of outstanding stock options. Diluted
earnings per share exclude the potential exercise of outstanding stock
options for any period in which such exercise would have an
anti-dilutive effect. 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
Earnings Shares Per Share
Three Months Ended March 31, (Loss) (000) Amount
--------------------------------------------------------------------------------------------------------
2003:
Basic earnings $ 6 43,138 $ 0.13
Dilutive effect of stock options -
--------------------------------------------------------------------------------------------------------
Diluted earnings 6 43,138 0.13
========================================================================================================
2002:
Basic loss (70) 43,354 (1.62)
Dilutive effect of stock options -
--------------------------------------------------------------------------------------------------------
Diluted loss (70) 43,354 (1.62)
========================================================================================================
-19-
(5) MARKETABLE SECURITIES
As of March 31, 2003, the Corporation's investments in marketable
securities consisted of the following:
Fair
Amortized Market
Cost Value
--------------------------
Asset-backed securities $ 72 $ 72
U.S. government and agency securities 55 55
Municipal securities 30 30
Time deposits 6 6
Corporate securities 13 13
------------------------------------------------------------------------------------------------------------
Total marketable securities 176 176
============================================================================================================
Contractual maturities of marketable securities as of March 31, 2003,
were as follows (dollars in millions):
Fair
Amortized Market
Cost Value
--------------------------
Due in 1 year or less $ 41 $ 41
Due in 1-5 years 39 39
Due in 5-10 years 7 7
Due after 10 years 17 17
------------------------------------------------------------------------------------------------------------
Asset-backed securities 72 72
------------------------------------------------------------------------------------------------------------
Total marketable securities 176 176
============================================================================================================
The average duration of the portfolio is less than one year because a
majority of the longer-term securities have paydown or put features and
liquidity facilities.
-20-
(6) ADOPTION OF SFAS NO. 143
On January 1, 2003, the Corporation adopted Statement of Financial
Accounting Standards ("SFAS") No. 143, "Accounting for Asset Retirement
Obligations." This standard requires the recording of the fair value of
a liability for an asset retirement obligation in the period in which
it is incurred. The Corporation's asset retirement obligations include
reclamation requirements as regulated by government authorities related
principally to assets such as the Corporation's mines, quarries,
landfills, ponds and wells. The impact of adopting SFAS No. 143 was an
increase in the Corporation's assets and liabilities of $14 million and
$30 million, respectively. An after-tax charge of $16 million ($27
million pretax) was reflected on the consolidated statement of earnings
as a cumulative effect of a change in accounting principle as of
January 1, 2003.
(7) ADOPTION OF SFAS NO. 142
On January 1, 2002, the Corporation adopted SFAS No. 142,
"Goodwill and Other Intangible Assets." Although SFAS No. 142
eliminated the amortization of goodwill and certain other intangible
assets, it initiated an annual assessment of goodwill for impairment.
The initial assessment was completed as of the adoption date. The
assessment was performed for each reporting unit (as defined by SFAS
No. 142) that had goodwill. For the Corporation, the reporting units
with goodwill were the North American Gypsum and the Building Products
Distribution operating segments.
The Corporation determined that goodwill for its Building Products
Distribution segment was not impaired, but will be reviewed at least
annually for impairment. However, goodwill for its North American
Gypsum segment was impaired. This impairment was attributable to U.S.
Gypsum's asbestos liability and related filing for bankruptcy
protection on June 25, 2001. As a result, the Corporation recorded a
noncash, nontaxable impairment charge of $96 million. This charge
included a $90 million write-off of goodwill (net of accumulated
amortization of $8 million) and a $6 million write-off of deferred
currency translation. In accordance with SFAS No. 142, the Corporation
reflected this charge in its financial statements as a cumulative
effect of a change in accounting principle as of January 1, 2002.
-21-
(8) DERIVATIVE INSTRUMENTS
The Corporation uses derivative instruments to manage selected
commodity price and foreign currency exposures. The Corporation does
not use derivative instruments for trading purposes. Under SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," as
amended, all derivative instruments must be recorded on the balance
sheet at fair value. For derivatives designated as fair value hedges,
the changes in the fair values of both the derivative instrument and
the hedged item are recognized in earnings in the current period. For
derivatives designated as cash flow hedges, the effective portion of
changes in the fair value of the derivative is recorded to accumulated
other comprehensive loss and is reclassified to earnings when the
underlying transaction has an impact on earnings.
COMMODITY DERIVATIVE INSTRUMENTS: The Corporation uses swap contracts
from time to time to hedge anticipated purchases of natural gas,
wastepaper and fuel to be used in its manufacturing and shipping
operations. The current contracts, all of which mature by December 31,
2004, are generally designated as cash flow hedges, with changes in
fair value recorded to accumulated other comprehensive loss until the
hedged transaction occurs, at which time it is reclassified to
earnings.
As of March 31, 2003, the fair value of these swap contracts, which
remained in accumulated other comprehensive loss, was $15 million ($9
million after-tax).
FOREIGN EXCHANGE DERIVATIVE INSTRUMENTS: The Corporation has operations
in a number of countries and uses forward contracts from time to time
to hedge selected risk of changes in cash flows resulting from
forecasted intercompany and third-party sales or purchases in foreign
currencies. These contracts are generally designated as cash flow
hedges, for which changes in fair value are recorded to accumulated
other comprehensive loss until the underlying transaction has an impact
on earnings. As of March 31, 2003, the Corporation had foreign currency
contracts in place which mature on the anticipated date of the
underlying transaction, and all contracts mature by December 31, 2003.
The notional amounts of foreign currency contracts as of March 31,
2003, was $1 million. The fair value of these contracts as of March 31,
2003, was zero.
COUNTERPARTY RISK: The Corporation is exposed to credit losses in the
event of nonperformance by the counterparties on its financial
instruments. All counterparties have investment grade credit standing;
accordingly, the Corporation anticipates that these counterparties will
be able to satisfy fully their obligations under the contracts. The
Corporation does not generally obtain collateral or other security to
support financial instruments subject to credit risk but monitors the
credit standing of all counterparties.
-22-
(9) COMPREHENSIVE INCOME (LOSS)
The components of comprehensive income (loss) are summarized in the
following table (dollars in millions):
Three Months
ended March 31
---------------------
2003 2002
---------------------
Net earnings (loss) $ 6 $ (70)
--------------------------------------------------------------------------------------------
Pretax gain (loss) on derivatives - 13
Income tax benefit (expense) - (5)
--------------------------------------------------------------------------------------------
After-tax gain (loss) on derivative - 8
--------------------------------------------------------------------------------------------
Deferred currency translation 11 1
--------------------------------------------------------------------------------------------
Unrealized gain (loss) on marketable
securities - -
--------------------------------------------------------------------------------------------
Total comprehensive income (loss) 17 (61)
============================================================================================
There was no tax impact on the foreign currency translation
adjustments. The components of accumulated other comprehensive loss
included on the consolidated balance sheet are summarized in the
following table (dollars in millions):
As of As of
March 31, December 31,
2003 2002
---------------------------
Gain on derivatives, net of tax $ 18 $ 18
Deferred currency translation (28) (39)
Minimum pension liability, net of tax (11) (11)
Unrealized gain (loss) on marketable securities - -
--------------------------------------------------------------------------------------------
Total accumulated other comprehensive loss (21) (32)
============================================================================================
During the first quarter of 2003, $8 million of accumulated net
after-tax gains ($13 million pretax) on derivatives were reclassified
from accumulated other comprehensive loss to earnings. As of March 31,
2003, the estimated net after-tax gain expected to be reclassified
within the next 12 months from accumulated other comprehensive loss
into earnings is $16 million.
-23-
(10) STOCK-BASED COMPENSATION
The Corporation accounts for stock-based compensation under the
provisions of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees." APB No. 25 prescribes the
use of the intrinsic value method, which measures compensation cost as
the quoted market price of the stock at the date of grant less the
amount, if any, that the employee is required to pay. If the
Corporation had elected to recognize compensation cost for stock-based
compensation grants consistent with the fair value method prescribed by
SFAS No. 123, "Accounting for Stock-Based Compensation," as amended by
SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure," net earnings (loss) and net earnings (loss) per common
share would have changed to the following pro forma amounts:
Three Months
ended March 31,
-------------------------
2003 2002
-------------------------
NET EARNINGS (LOSS):
Net Earnings(Loss): As reported $ 6 $ (70)
Deduct: Fair value method of stock
-based employee compensation
expense, net of tax - (1)
------------------------------------------------------------------------------------------------
Pro forma net earnings(loss) 6 (71)
================================================================================================
BASIC AND DILUTED EARNINGS (LOSS) PER SHARE:
As reported 0.13 (1.62)
Pro forma 0.13 (1.64)
================================================================================================
Subsequent to the Filing, no stock option grants have been issued. The
deduction of $1 million shown above to first quarter 2002 net earnings
reflects the vesting of options granted prior to the Filing.
As of March 31, 2003, common shares totaling 2,695,325 were reserved
for future issuance in conjunction with existing stock option grants.
In addition, 2,189,670 common shares were reserved for future grants.
Shares issued in option exercises may be from original issue or
available treasury shares.
-24-
(11) OPERATING SEGMENTS
The Corporation's operations are organized into three operating
segments: North American Gypsum, which manufactures SHEETROCK brand
gypsum wallboard and joint compounds, DUROCK brand cement board and
other related building products in the United States, Canada and
Mexico; Worldwide Ceilings, which manufactures ceiling tile in the
United States and ceiling grid in the United States, Canada, Europe and
the Asia-Pacific region; 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 were as follows (dollars in millions):
Net Sales Operating Profit
----------------------------------------------------------------------------------------------------------
Three Months Ended March 31, 2003 2002 2003 2002
----------------------------------------------------------------------------------------------------------
North American Gypsum $ 542 $ 525 $ 38 $ 58
Worldwide Ceilings 147 148 8 5
Building Products Distribution 295 275 8 7
Corporate - - (18) (20)
Chapter 11 reorganization expenses - - (2) (2)
Eliminations (122) (119) 1 -
----------------------------------------------------------------------------------------------------------
Total 862 829 35 48
==========================================================================================================
(12) LITIGATION
ASBESTOS AND RELATED BANKRUPTCY 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. On June 25, 2001 (the "Petition Date"),
U.S. Gypsum, the Parent Company, and other domestic subsidiaries (the
"Debtors") filed voluntary petitions for reorganization ("Filing")
under chapter 11 of the U.S. Bankruptcy Code to manage the growing
costs of resolving asbestos claims and to achieve a fair and final
resolution of liability for both pending and future asbestos claims.
The Debtors' chapter 11 cases ("Chapter 11 Cases") are being jointly
administered as In re: USG Corporation et al. (Case No. 01-2094) in the
United States Bankruptcy Court for the District of Delaware (the
"Bankruptcy Court").
U.S. Gypsum's asbestos liability derives from its sale of certain
asbestos-containing products beginning in the late 1920s; in most
cases, the products were discontinued or asbestos was removed from the
formula by
-25-
1972, and no asbestos-containing products were produced after 1978.
Certain of the asbestos lawsuits against U.S. Gypsum 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"). Other asbestos
lawsuits seek compensatory and, in many cases, punitive damages for
personal injury allegedly resulting from exposure to
asbestos-containing products (the "Personal Injury Cases"). A more
detailed description of the Property Damage and Personal Injury Cases
against U.S. Gypsum and certain other Debtors is set forth below.
As a result of the Filing, all pending Personal Injury and Property
Damage Cases against U.S. Gypsum are stayed, and no party may take any
action to pursue or collect on these claims absent specific
authorization of the Bankruptcy Court. Since the Filing, U.S. Gypsum
has ceased making both cash payments and accruals with respect to
asbestos lawsuits, including cash payments and accruals pursuant to
settlements of asbestos lawsuits. The Bankruptcy Court has approved
creditors' committees that represent claimants in Personal Injury and
Property Damage Cases and, as noted below, a legal representative for
future asbestos claimants.
Debtors anticipate that U.S. Gypsum's liability for asbestos personal
injury and property damage claims will be addressed in a plan of
reorganization developed and approved in the bankruptcy proceeding. The
Debtors' exclusive right to propose such a plan of reorganization has
been extended by the Bankruptcy Court to September 1, 2003. The Debtors
intend to seek one or more additional extensions depending upon
developments in the Chapter 11 Cases.
It is the Debtors' intention that the plan of reorganization will
include creation of one or more independently administered trusts under
Section 524(g) of the Bankruptcy Code, which will be funded by Debtors
to allow payment of present and future asbestos personal injury claims
and demands. Debtors intend that the plan of reorganization will also
address Debtors' liability for asbestos property damage claims, whether
by including those liabilities in a Section 524(g) trust or by other
means. It is anticipated that, as a result of creation and funding of
the Section 524(g) trust(s), the Bankruptcy Court will issue a
permanent injunction barring the assertion of present and future
asbestos claims against Debtors, their successors, and their
affiliates, and channeling those claims to the trust(s) for payment in
whole or in part. Similar plans of reorganization containing Section
524(g) trusts have been confirmed in the chapter 11 cases of other
companies with asbestos liabilities, but there is no guarantee that the
Bankruptcy Court in Debtors' Chapter 11 Cases will approve creation of
a Section 524(g) trust or issue a permanent injunction channeling to
the trust all asbestos claims against Debtors and/or their successors
and affiliates.
-26-
While it is the Debtors' intention to seek a full recovery for their
creditors, it is not possible to predict how the plan of reorganization
will treat asbestos and other pre-petition claims and what impact any
plan may have on the value of the shares of the Corporation's common
stock and other outstanding securities. Under the Bankruptcy Code, a
plan of reorganization, including a plan creating a Section 524(g)
trust, may be confirmed without the consent of non-asbestos creditors
and equity security holders if certain requirements of the Code are
met. There is no assurance that there will be sufficient assets to
satisfy the Debtors' pre-petition liabilities in whole or in part, and
the pre-petition creditors of some Debtors may be treated differently
from the pre-petition creditors of other Debtors. The payment rights
and other entitlements of pre-petition creditors and USG shareholders
may be substantially altered by any plan or plans of reorganization
confirmed in the Chapter 11 Cases. Pre-petition creditors may receive
under the plan of reorganization less than 100% of the face value of
their claims, and the interests of the Corporation's equity security
holders are likely to be substantially diluted or cancelled in whole or
in part.
Whether the Corporation's equity has significant value and Debtors'
non-asbestos creditors recover the full value of their claims depend
upon the outcome of the analysis of the amount of Debtors' assets and
liabilities, especially asbestos liabilities, that must be funded under
the plan. Counsel for the Official Committee of Asbestos Personal
Injury Claimants and counsel for the legal representative for future
asbestos personal injury claimants have advised the court that is
presiding over the Chapter 11 Cases that they believe Debtors' asbestos
liabilities exceed the value of Debtors' assets and that Debtors are
insolvent. The Debtors have advised the court that they believe they
are solvent if their asbestos liabilities are fairly and appropriately
valued. Toward that end, the Debtors filed a motion with the court
requesting the court to begin proceedings to estimate the value of
Debtors' asbestos personal injury liabilities.
In response to the Debtors' motion requesting an estimation of asbestos
personal injury liabilities, the court issued an order and memorandum
opinion on February 19, 2003, setting forth a procedure for estimating
Debtors' liability for asbestos personal injury claims alleging cancer.
(see Developments in the Reorganization Proceeding, below.) At this
stage in the proceedings, Debtors do not know when estimation of
Debtors' liability for these cancer claims will occur, what the outcome
of that proceeding will be, what impact that proceeding will have on
estimating Debtors' liability for asbestos personal injury claims
alleging other diseases, and whether the estimation proceeding will
lead to a negotiated resolution of Debtors' asbestos personal injury
liabilities. Debtors also cannot predict at this time the estimated
cost of resolving asbestos property damage claims. If the amount of the
Debtors' asbestos liabilities cannot be resolved through negotiation,
as has been the case to date, the outcome of the estimation proceeding
regarding Debtors' liability for
-27-
cancer claims likely will be a significant component of determining
Debtors' asbestos personal injury liability, Debtors' solvency, and the
recovery of Debtors' pre-petition creditors and equity security holders
under any plan or plans of reorganization.
As a result of this uncertainty, it is not possible at this time to
predict the timing or outcome of the Chapter 11 Cases, the terms and
provisions of any plan or plans of reorganization, or the effect of the
chapter 11 reorganization process on the claims of pre-petition
creditors of the Debtors or the interests of the Corporation's equity
security holders. There can be no assurance as to the value of any
distributions that might be made under any plan or plans of
reorganization with respect to such pre-petition claims, equity
interests, or other outstanding securities.
Recent developments in the Corporation's bankruptcy proceeding and a
more detailed discussion of the Debtors' asbestos liabilities are
addressed below.
DEVELOPMENTS IN THE REORGANIZATION PROCEEDING: During the fourth
quarter of 2001, the Corporation's bankruptcy proceeding, along with
four other asbestos-related bankruptcy proceedings pending in the
federal courts in the District of Delaware, were assigned to the
Honorable Alfred M. Wolin of the United States District Court for the
District of New Jersey. Judge Wolin has indicated that he will handle
all issues relating to asbestos personal injury claims and that other
bankruptcy claims and issues in the Chapter 11 Cases, including issues
relating to asbestos property damage claims, will remain assigned to
Bankruptcy Judge Randall J. Newsome in the United States Bankruptcy
Court for the District of Delaware.
In July 2002, the Bankruptcy Court appointed the Honorable Dean M.
Trafelet as the legal representative for future asbestos claimants in
the Debtors' bankruptcy proceeding. Mr. Trafelet was formerly a judge
of the Circuit Court of Cook County, Illinois.
The Debtors filed a motion requesting Judge Wolin to conduct hearings
to substantively estimate the Debtors' liability for asbestos personal
injury claims. The Debtors requested that the court hear evidence and
make rulings regarding the characteristics of valid asbestos personal
injury claims against the Debtors, and then estimate the Debtors'
liability for present and future asbestos personal injury claims based
upon these rulings. One of the key liability issues is whether
claimants who do not have objective evidence of asbestos-related
disease have valid claims and are entitled to be compensated by
Debtors, or whether such claimants are entitled to compensation only if
and when they develop asbestos-related disease.
The Official Committee of Asbestos Personal Injury Claimants opposed
the substantive estimation hearings proposed by Debtors. The committee
contends that U.S. Gypsum's liability for present and future asbestos
personal
-28-
injury claims should be based on extrapolation from U.S. Gypsum's
settlement history of such claims and not on litigating liability
issues in the bankruptcy proceeding. The committee contends that the
Court does not have the power to exclude claimants who do not meet
objective evidence of asbestos-related disease if such claimants are
compensated in the tort system outside of bankruptcy.
In August 2002, Debtors also filed a motion with Judge Wolin requesting
a ruling that putative claimants who cannot satisfy objective standards
of asbestos-related disease are not entitled to vote on a Section
524(g) plan. The Debtors' motion on this voting issue has been stayed
by order of Judge Wolin. It is expected that the Official Committee of
Asbestos Personal Injury Claimants will oppose the Debtors' motion.
In response to the Debtors' motion seeking substantive estimation of
Debtors' asbestos personal injury liability, Judge Wolin issued a
Memorandum Opinion and Order ("Order") on February 19, 2003, setting
forth a procedure for estimating Debtors' liability for asbestos
personal injury claims alleging cancer. The Order states that a bar
date will be established for filing claims by all persons who wish to
assert an asbestos personal injury claim alleging cancer against
Debtors. The bar date will not apply to non-malignant claims, which the
Order states will not be addressed at this time.
The Order provides that after the claims bar date for these cancer
claims has passed, the Court will hold an estimation hearing under 11
U.S.C. Section 502(c) at which the "debtors will be permitted to
present their defenses." Although the Order explicitly contemplates a
bar date for filing these cancer claims, the Order does not establish a
bar date or a date for the subsequent estimation hearing. The Order
contemplates that after the estimation of Debtors' liability for
present and future cancer claims, the Court will determine whether
Debtors' liability for these claims exceeds Debtors' assets. The Court
notes that the Official Committee of Asbestos Personal Injury Claimants
has asserted that the Debtors are insolvent and do not have sufficient
assets to pay cancer claimants, without regard to Debtors' liability
for non-malignant asbestos personal injury claims. The Court further
notes that Debtors dispute this contention. According to the Order, the
determination of whether the Debtors have sufficient assets to pay
legitimate cancer claimants will guide the Court in determining whether
the Debtors' resources should be spent resolving the issue of the
validity of non-malignant claims where there is no objective evidence
of asbestos-related disease.
Pursuant to the Order, on March 21, 2003, the Debtors submitted to the
court a proposed timetable for the bar date for cancer claims, a
proposed proof of claim form, and a plan for providing notice of the
bar date. The court has not yet determined when the bar date for the
cancer claims will be or set a date for a hearing on estimation of
Debtors' liability for
-29-
these claims.
At this stage in the proceedings, Debtors do not know when estimation
of Debtors' liability for these cancer claims will occur, what the
outcome of the estimation proceeding will be, what impact that
proceeding will have on estimating Debtors' liability for asbestos
personal injury claims alleging other diseases, and whether the
estimation proceeding will lead to a negotiated resolution of Debtors'
asbestos liabilities. Debtors also do not know whether the Court will
ultimately address the validity and voting rights of non-malignant
claims. If the amount of the Debtors' asbestos liabilities cannot be
resolved through negotiation, as has been the case to date, the outcome
of the estimation proceeding regarding Debtors' liability for cancer
claims likely will be a significant component of determining Debtors'
asbestos personal injury liability, Debtors' solvency, and the recovery
of Debtors' pre-petition creditors and equity security holders under
any plan or plans of reorganization.
There have also been developments in the reorganization proceedings
regarding asbestos property damage claims. The Bankruptcy Court
established a bar date of January 15, 2003, by which all entities with
asbestos-related property damage claims or any other types of claims
(except asbestos personal injury claims or claims derivative thereof)
must file their claims against the Debtors in the bankruptcy
proceeding. The Debtors mailed and published notice of the claims bar
date to potential asbestos property damage claimants as well as other
claimants affected by the bar date.
The Debtors have made a preliminary analysis of the asbestos-related
property damage claims received as of the claims bar date.
Approximately 1,400 asbestos property damage claims were filed,
representing more than 2,000 buildings. In contrast, as of the Petition
Date, 11 Property Damage Cases were pending against U.S. Gypsum.
Approximately 500 of the asbestos property damage claims filed by the
bar date assert a specific dollar amount of damages, and the total
damages alleged in those claims is approximately $1.6 billion. However,
this amount reflects numerous duplicate claims filed against multiple
Debtors, and therefore, likely overstates the claimed damages.
Approximately 900 claims do not specify a damage amount. Many of the
filed claims do not provide any evidence that Debtors' products were
ever installed in any of the buildings at issue, and some of the claims
are duplicates of other claims. Debtors believe that they have
substantial defenses to many of these property damage claims, including
the lack of evidence that Debtors' products were ever installed in the
buildings at issue, the claims are barred by the applicable statutes of
limitation, and the claims lack evidence that the claimants have any
damages. Debtors intend to address many of these claims through an
objection and disallowance process in the bankruptcy court. Because of
the preliminary nature of this process, Debtors' cannot predict the
outcome of these proceedings or the impact the proceedings may have on
the estimated cost of resolving asbestos property damage claims (see
Estimated Cost,
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below).
The following is a summary of the Property Damage and Personal Injury
Cases pending against U.S. Gypsum and certain other Debtors as of the
Petition Date.
PROPERTY DAMAGE CASES: As of the Petition Date, U.S. Gypsum was a
defendant in 11 Property Damage Cases, most of which involved multiple
buildings. One of the cases is a conditionally certified class action
comprising all colleges and universities in the United States, which
certification is presently limited to the resolution of certain
allegedly "common" liability issues. (Central Wesleyan College v. W.R.
Grace & Co., et al., U.S.D.C. S.C.). On June 15, 2001, a Property
Damage Case was filed by The County of Orange, Texas, in the district
court of Orange County, Texas, naming as defendants U.S. Gypsum and
other manufacturers of asbestos-containing materials. This was the
first Property Damage case filed against U.S. Gypsum since June 1998.
The Orange County case is a putative class action brought by The County
of Orange on behalf of an alleged class comprising the State of Texas,
its public colleges and universities, and all political subdivisions of
the State of Texas. As to U.S. Gypsum, the putative class also includes
all private and/or non-public colleges, universities, junior colleges,
community colleges, and elementary and secondary schools in the State
of Texas. The Orange County action seeks recovery of the costs of
removing and replacing asbestos-containing materials in buildings at
issue as well as punitive damages. The complaint does not specify how
many buildings are at issue. As a result of the Filing, all Property
Damage Cases, including the Central Wesleyan and Orange County cases,
are stayed against U.S. Gypsum. U.S. Gypsum's estimated cost of
resolving the Property Damage Cases is discussed below (see Estimated
Cost).
PERSONAL INJURY CASES: As reported by the Center for Claims Resolution
(the "Center"), U.S. Gypsum was a defendant in approximately 106,000
pending Personal Injury Cases as of the Petition Date, as well as an
additional approximately 52,000 Personal Injury Cases that are the
subject of settlement agreements. In the first half of 2001, up to the
Petition Date, approximately 26,200 new Personal Injury Cases were
filed against U.S. Gypsum, as reported by the Center, as compared to
27,800 new filings in the first half of 2000. Filings of new Personal
Injury Cases totaled approximately 53,000 claims in 2000, 48,000 claims
in 1999, and 80,000 claims in 1998.
Prior to the Filing, U.S. Gypsum managed the handling and settlement of
Personal Injury Cases through its membership in the Center. From 1988
up to February 1, 2001, the Center administered and arranged for the
defense and settlement of Personal Injury Cases against U.S. Gypsum and
other Center members. During that period, costs of defense and
settlement of Personal Injury Cases were shared among the members of
the Center pursuant to predetermined sharing formulae. Effective
February 1, 2001, the Center
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members, including U.S. Gypsum, ended their prior settlement-sharing
arrangement. The Center continued to administer and arrange for the
defense and settlement of the Personal Injury Cases, but liability
payments were not shared among the Center members. As of the Petition
Date and as a result of the stay of asbestos lawsuits against U.S.
Gypsum, U.S. Gypsum no longer requires the services of the Center in
negotiating or defending Personal Injury Cases.
In 2000 and years prior, U.S. Gypsum and other Center members
negotiated a number of settlements with plaintiffs' law firms that
included agreements to resolve over time the firms' pending Personal
Injury Cases as well as certain future claims (the "Long-Term
Settlements"). With regard to future claims, these Long-Term
Settlements typically provide that the plaintiffs' firms will recommend
to their future clients that they defer filing, or accept nominal
payments on, personal injury claims that do not meet established
disease criteria, and, with regard to those claims meeting established
disease criteria, that the future clients accept specified amounts to
settle those claims. These Long-Term Settlements typically resolve
claims for amounts consistent with historical per-claim settlement
costs paid to the plaintiffs' firms involved. As a result of the
Filing, cash payments by U.S. Gypsum under these Long-Term Settlements
have ceased, and U.S. Gypsum expects that its obligations under these
settlements will be determined in the bankruptcy proceeding and plan of
reorganization.
In 2000, U.S. Gypsum closed approximately 57,000 Personal Injury Cases.
U.S. Gypsum's cash payments in 2000 to defend and resolve Personal
Injury Cases totaled $162 million, of which $90 million was paid or
reimbursed by insurance. In 2000, the average settlement per case was
approximately $2,600, exclusive of defense costs. U.S. Gypsum made cash
payments of $100 million in 1999 and $61 million in 1998 to resolve
Personal Injury Cases, of which $85 million and $45.5 million,
respectively, were paid or reimbursed by insurance.
In the first and second quarters of 2001, prior to the Filing, payments
to resolve Personal Injury Cases increased dramatically, primarily as a
result of the bankruptcy filings of other defendants in asbestos
personal injury lawsuits. Following these bankruptcy filings,
plaintiffs substantially increased their settlement demands to the
remaining defendants, including U.S. Gypsum. In response to these
increased settlement demands, U.S. Gypsum attempted to manage its
asbestos liability by contesting, rather than settling, a greater
number of cases that it believed to be non-meritorious. As a result, in
the first and second quarters of 2001, U.S. Gypsum agreed to settle
fewer Personal Injury Cases, but at a significantly higher cost per
case.
In the first half of 2001 (up to the Petition Date), U.S. Gypsum closed
approximately 18,900 Personal Injury Cases. In the first half of 2001
(up to the Petition Date), U.S. Gypsum's total asbestos-related cash
payments,
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including defense costs, were approximately $124 million, of which
approximately $10 million was paid or reimbursed by insurance. A
portion of these payments were for settlements agreed to in prior
periods. As of March 31, 2001, U.S. Gypsum had estimated that cash
expenditures for Personal Injury Cases in 2001 would total
approximately $275 million before insurance recoveries of approximately
$37 million.
In addition to the Personal Injury Cases pending against U.S. Gypsum,
one of the Corporation's subsidiaries and a Debtor in the bankruptcy
proceeding, L&W Supply, was named as a defendant in approximately 21
pending Personal Injury Cases as of the Petition Date. L&W Supply, a
distributor of building products manufactured by U.S. Gypsum and other
building products manufacturers, has not made any payments in the past
to resolve Personal Injury Cases. Because of the small number of
Personal Injury Cases against L&W Supply to date and the lack of
development of the cases against L&W Supply, the Corporation does not
have sufficient information at this time to predict as to how any plan
or plans of reorganization will address any asbestos-related liability
of L&W Supply and whether any such liability will be limited to L&W
Supply's role as a distributor of U.S. Gypsum products.
One of U.S. Gypsum's subsidiaries and a Debtor in the bankruptcy
proceeding, Beadex Manufacturing, LLC ("Beadex"), manufactured and sold
joint compound containing asbestos from 1963 through 1978 in the
northwest United States. As of the Petition Date, Beadex was a named
defendant in approximately 40 Personal Injury Cases pending primarily
in the states of Washington and Oregon. Beadex has approximately $11
million in primary or umbrella insurance coverage available to pay
asbestos-related costs, as well as $15 million in available excess
coverage. The Corporation expects that any asbestos-related liability
of Beadex will be addressed in the plan of reorganization. However,
because of the small number of Personal Injury Cases pending against
Beadex to date, the Corporation does not have sufficient information at
this time to predict as to how any plan or plans of reorganization will
address any asbestos-related liability of Beadex.
INSURANCE COVERAGE: During the first quarter of 2003, U.S. Gypsum
received $15 million of insurance payments. As of March 31, 2003, U.S.
Gypsum had $15 million of insurance remaining to cover asbestos-related
costs. The remaining insurance is scheduled to be collected at various
times through the next 12 months and is included in other current
assets on the consolidated balance sheet.
ESTIMATED COST: In evaluating U.S. Gypsum's estimated asbestos
liability prior to the Filing, the Corporation considered numerous
uncertainties that made it difficult to estimate reliably U.S. Gypsum's
asbestos liability in the tort system for both pending and future
asbestos claims.
In the Property Damage Cases, such uncertainties included, but were not
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limited to, 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 included, but were not
limited to, the number, disease and occupational characteristics, and
venue of Personal Injury Cases that are filed against U.S. Gypsum; the
age and level of asbestos-related disease of claimants; the viability
of claims for conspiracy or punitive damages; the elimination of
indemnity sharing among Center members for future settlements and its
negative impact on U.S. Gypsum's ability to continue to resolve claims
at historical or acceptable levels; the adverse impact on U.S. Gypsum's
settlement costs of recent bankruptcies of co-defendants; the continued
solvency of other defendants and the possibility of additional
bankruptcies; the possibility of significant adverse verdicts due to
recent changes in settlement strategies and related effects on
liquidity; the inability or refusal of former Center members to fund
their share of existing settlements and its effect on such settlement
agreements; the continued ability to negotiate settlements or develop
other mechanisms that defer or reduce claims from unimpaired claimants;
and the possibility that federal legislation addressing asbestos
litigation would be enacted. The Corporation reported that adverse
developments with respect to any of these uncertainties could have a
material impact on U.S. Gypsum's settlement costs and could materially
increase the cost above the estimated range discussed below.
Prior to the fourth quarter of 2000, the Corporation, in the opinion of
management, was unable to reasonably estimate the probable cost of
resolving future asbestos claims in the tort system, although the
Corporation had estimated and reserved for costs associated with
then-pending claims. However, in 1999 and increasingly in 2000, as U.S.
Gypsum entered into Long-Term Settlements of Personal Injury Cases, the
Corporation undertook a detailed, independent study of U.S. Gypsum's
current and potential future asbestos liability. This analysis was
based on the assumption that U.S. Gypsum's asbestos liability would
continue to be resolved in the tort system. The analysis was completed
in the fourth quarter of 2000.
As part of this analysis, the Corporation reviewed, among other things,
historical case filings and increasing settlement costs; the type of
products U.S. Gypsum sold and the occupations of claimants expected to
bring future asbestos-related claims; epidemiological data concerning
the incidence of past and projected future asbestos-related diseases;
trends in the propensity of persons alleging asbestos-related disease
to sue U.S.
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Gypsum; the adverse effect on settlement costs of historical reductions
in the number of solvent defendants available to pay claims, including
reductions in membership of the Center; the pre-agreed settlement
recommendations in, and the continued viability of, the Long-Term
Settlements described above; and anticipated trends in recruitment by
plaintiffs' law firms of non-malignant or unimpaired claimants. The
study attempted to weigh relevant variables and assess the impact of
likely outcomes on future case filings and settlement costs. In
addition, the Corporation considered future defense costs, as well as
allegations that U.S. Gypsum and the other Center members bear joint
liability for the share of certain settlement agreements that was to be
paid by former members that now have refused or are unable to pay.
In the fourth quarter of 2000, the Corporation concluded that it was
possible to provide a reasonable estimate of U.S. Gypsum's liability in
the tort system for asbestos cases to be filed through 2003 as well as
those currently pending. Based on an independent study, the Corporation
determined that, although substantial uncertainty remained, it was
probable that asbestos claims currently pending against U.S. Gypsum and
future asbestos claims to be filed against it through 2003 (both
property damage and personal injury) could be resolved in the tort
system for an amount between $889 million and $1,281 million, including
defense costs, and that within this range the most likely estimate was
$1,185 million. Consistent with this analysis, in the fourth quarter of
2000, the Corporation recorded a pretax noncash charge of $850 million
to results of operations, which, combined with the previously existing
reserve, increased U.S. Gypsum's reserve for asbestos claims to $1,185
million. Substantially all of this reserve relates to the estimated
costs of resolving then-pending asbestos personal injury claims and
those expected to be filed through 2003, and the reserve reflected
management's expectation that U.S. Gypsum's average payment per
asbestos personal injury claim would increase at least in the short
term due to distortions caused by the bankruptcy filings of other
asbestos personal injury defendants discussed above. Less than 10
percent of the reserve is attributable to defense and administrative
costs.
At the time of recording this reserve, it was expected that the reserve
amounts would be expended over a period extending several years beyond
2003, because asbestos cases have historically been resolved an average
of three years after filing. The Corporation concluded that it did not
have adequate information to allow it to reasonably estimate the number
of claims to be filed after 2003, or the liability associated with such
claims.
During 2001 up to the Filing, U.S. Gypsum's cash payments for asbestos
claims and related legal fees totaled approximately $124 million,
reducing its reserve for asbestos claims to $1,061 million as of June
30, 2001. The reserve remained at $1,061 million as of March 31, 2003.
The above amounts are stated before tax benefit and are not discounted
to present value.
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It is the Corporation's view that, as a result of the Filing, there is
even greater uncertainty in estimating the reasonably possible range of
asbestos liability for pending and future claims as well as the most
likely estimate of liability within this range. There are significant
differences in the treatment of asbestos claims in a bankruptcy
proceeding as compared to the tort litigation system. Among other
things, these uncertainties include how the Long-Term Settlements will
be treated in the bankruptcy proceeding and plan of reorganization and
whether those settlements will be set aside; the number of
asbestos-related claims that will be filed in the proceeding; the
number of future claims that will be estimated in connection with
preparing a plan of reorganization; how claims for punitive damages and
claims by persons with no asbestos-related disease will be treated and
whether such claims will be allowed; the impact historical settlement
values for asbestos claims may have on the estimation of asbestos
liability in the bankruptcy proceeding; the results of the estimation
proceeding regarding asbestos personal injury claims alleging cancer;
the treatment of asbestos property damage claims in the bankruptcy
proceeding; and the impact any relevant potential federal legislation
may have on the proceeding. These factors, as well as the uncertainties
discussed above in connection with the resolution of asbestos cases in
the tort system, increase the uncertainty of any estimate of asbestos
liability.
As a result, it is the Corporation's view that no change should be made
at this time to the previously recorded reserve for asbestos claims,
except to reflect certain minor asbestos-related costs incurred since
the Filing. However, it is possible that the cost of resolving asbestos
claims in the Chapter 11 Cases will be greater than that set forth in
the high end of the range estimated in 2000. Counsel for the Official
Committee of Asbestos Personal Injury Claimants and counsel for the
legal representative for future asbestos personal injury claimants,
appointed in the Chapter 11 Cases, have indicated that they believe
that the liabilities for pending and future asbestos claims exceed the
value of Debtors' assets, and, therefore, are significantly greater
than both the reserved amount and the high end of the range estimated
in 2000. As the Chapter 11 Cases proceed, and the court addresses the
issues relating to estimation of Debtors' asbestos liabilities, the
Debtors likely will gain more information from which a reasonable
estimate of the Debtors' probable asbestos liability may be determined.
If such estimate differs from the existing reserve, the reserve will be
adjusted to reflect the estimate, and it is possible that a charge to
results of operations will be necessary at that time. It is also
possible that, in such a case, the Debtors' asbestos liability may vary
significantly from the recorded estimate of liability and that this
difference could be material to the Corporation's financial position,
results of operations and cash flows in the period recorded.
BOND TO SECURE CERTAIN CCR OBLIGATIONS: In January 2001, U.S. Gypsum
obtained a performance bond from Safeco Insurance Company of America
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("Safeco") in the amount of $60.3 million to secure certain obligations
of U.S. Gypsum for extended payout settlements of Personal Injury Cases
and other obligations owed by U.S. Gypsum to the Center. The bond is
secured by an irrevocable letter of credit obtained by the Corporation
in the amount of $60.3 million and issued by Chase Manhattan Bank to
Safeco. After the Filing, by letter dated July 6, 2001, the Center
stated that certain amounts allegedly covered by the bond, totaling
approximately $15.7 million, were overdue from U.S. Gypsum to the
Center. In subsequent letters dated November 19, 2001, and December 11,
2001, the Center stated that additional amounts allegedly covered by
the bond totaling approximately $14 million and $113 million,
respectively, were also overdue from U.S. Gypsum. The amounts for which
the Center made demand were for the payment of, among other things,
settlements of Personal Injury Cases that were entered into
pre-petition. By letter dated November 16, 2001, the Center made a
demand to Safeco for payment of $15.7 million under the bond, and by
letter dated December 28, 2001, the Center made a demand to Safeco for
payment of approximately $127 million under the bond. The total amount
demanded by the Center under the bond, approximately $143 million,
exceeds the original penal sum of the bond, which is $60.3 million.
Safeco has not made any payment under the bond.
On November 30, 2001, the Corporation and U.S. Gypsum filed an
Adversary Complaint in the Chapter 11 Cases to, among other things,
enjoin the Center from drawing on the bond and enjoin Safeco from
paying on the bond during the pendency of these bankruptcy proceedings.
This Adversary Proceeding is pending in the United States Bankruptcy
Court for the District of Delaware and is captioned USG Corporation and
United States Gypsum Company v. Center for Claims Resolution, Inc. and
Safeco Insurance Company of America, No. 01-08932. Judge Wolin has
consolidated the Adversary Proceeding with similar adversary
proceedings brought by Federal-Mogul Corp., et al., and Armstrong World
Industries, Inc., et al., in their bankruptcy proceedings. The parties
filed cross-motions for summary judgment in the consolidated
proceedings.
On March 28, 2003, in response to the cross-motions for summary
judgment, Judge Wolin issued an order and memorandum opinion which
granted in part and denied in part the CCR's motion for summary
judgment. Although the court ruled that Safeco is not required to remit
any surety bond proceeds to the CCR at this time, the court stated that
certain settlements that were completed before U.S. Gypsum's Petition
Date likely are covered by the surety bond but that the bond does not
cover settlement payments that were not yet due as of the Petition
Date. The court did not rule on whether the bond covers other disputed
obligations and reserved these issues to a subsequent phase of the
litigation. As a result of the court's decision, it is likely that,
absent a settlement of this matter, some portion of the bond may be
drawn but that the amount drawn will be substantially less than the
full amount of the bond. To the extent that Safeco were to pay any
portion of the bond, it is likely that Safeco would draw down the Chase
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letter of credit to cover the bond payment and Chase would assert a
pre-petition claim in a corresponding amount against the Corporation in
the bankruptcy proceeding.
CONCLUSION: There are many uncertainties associated with the resolution
of asbestos liability in the bankruptcy proceeding. These uncertainties
include, among others, the number of asbestos-related claims that will
be filed against the Debtors in the proceeding; the number of future
claims that will be estimated in connection with preparing a plan of
reorganization; how the Long-Term Settlements will be treated in the
bankruptcy proceeding and plan of reorganization, and whether those
settlements will be set aside; how claims for punitive damages and
claims by persons with no asbestos-related physical impairment will be
treated and whether such claims will be allowed; the impact historical
settlement values for asbestos claims may have on the estimation of
asbestos liability in the bankruptcy proceeding; the results of the
estimation proceeding regarding asbestos personal injury claims
alleging cancer; the treatment of asbestos property damage claims in
the bankruptcy proceeding; and the impact any relevant potential
federal legislation may have on the proceeding. The Corporation has not
revised its previously recorded reserve for asbestos liability. The
Corporation will continue to review its asbestos liability as the
Chapter 11 Cases progress. When a reasonable estimate can be made of
the Debtors' probable liability for asbestos claims, if such estimate
differs from the existing reserve, the reserve will be adjusted to
reflect the estimate, and it is possible that a charge to results of
operations will be necessary at that time. It is possible that the
Corporation's asbestos liability may vary significantly from the
recorded estimate of liability and that this difference could be
material to the Corporation's financial position, results of operations
and cash flows in the period recorded.
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, undiscounted 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
Corporation-owned property also are covered by reserves established in
accordance with the foregoing. The Debtors have been given permission
by the Bankruptcy Court to satisfy environmental
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obligations up to $12 million. The Corporation believes that neither
these matters nor any other known governmental proceeding regarding
environmental matters will have a material adverse effect upon its
financial position, results of operations or cash flows.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
VOLUNTARY REORGANIZATION UNDER CHAPTER 11
On June 25, 2001 (the "Petition Date"), the parent company (the "Parent
Company") of the Corporation and the 10 United States subsidiaries listed below
(collectively, the "Debtors") filed voluntary petitions for reorganization (the
"Filing") under chapter 11 of the United States Bankruptcy Code (the "Bankruptcy
Code") in the United States Bankruptcy Court for the District of Delaware (the
"Bankruptcy Court"). The chapter 11 cases of the Debtors (collectively, the
"Chapter 11 Cases") are being jointly administered as In re: USG Corporation et
al. (Case No. 01-2094). The Chapter 11 Cases do not include any of the
Corporation's non-U.S. subsidiaries. The following subsidiaries filed chapter 11
petitions: United States Gypsum Company; USG Interiors, Inc.; USG Interiors
International, Inc.; L&W Supply Corporation; Beadex Manufacturing, LLC; B-R
Pipeline Company; La Mirada Products Co., Inc.; Stocking Specialists, Inc.; USG
Industries, Inc.; and USG Pipeline Company.
This action was taken to resolve asbestos-related claims in a fair and equitable
manner, to protect the long-term value of the Debtors' businesses and to
maintain the Debtors' leadership positions in their markets.
BACKGROUND OF THE FILING
U.S. Gypsum, a subsidiary of the Parent Company, is a defendant in asbestos
lawsuits alleging both property damage and personal injury. Since 1994, U.S.
Gypsum has been named in more than 250,000 asbestos personal injury claims and
made cash payments of approximately $575 million (before insurance recoveries)
to manage and resolve asbestos-related claims. During 2000 and early 2001,
chapter 11 filings by other companies subject to asbestos litigation caused a
dramatic increase in U.S. Gypsum's asbestos costs beyond its legitimate
liabilities. Plaintiffs in asbestos lawsuits substantially increased their
settlement demands to U.S. Gypsum to replace the expected payments of the
bankruptcy defendants. Although the Corporation has been and continues to be
committed to finding a legislative solution to the increase in asbestos costs,
it became apparent in 2001 that a timely resolution to the problem through
legislation was not feasible. The Corporation determined that voluntary
protection under chapter 11 would be the best alternative for obtaining a fair
and final resolution of U.S. Gypsum's asbestos liability and the best way to
preserve value for stakeholders. See Part I, Item 1. Note 12. Litigation, for
additional information on asbestos litigation.
Based on an independent study conducted in 2000 and on U.S. Gypsum's historical
experience of litigating asbestos claims in the tort system, the Corporation
estimated that U.S. Gypsum's probable liability for costs associated with
asbestos cases pending as of December 31, 2000, and expected to be filed through
2003 to be between $889 million and $1,281 million, including defense costs. In
the fourth quarter of 2000, U.S. Gypsum recorded a noncash, pretax provision of
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$850 million, increasing its total accrued reserve for asbestos claims to $1,185
million as of December 31, 2000. Substantially all of this reserve related to
personal injury claims and reflected management's expectation that U.S. Gypsum's
average cost per case would increase, at least in the short term, due to
distortions in the tort system resulting from the bankruptcies of other
defendants that led to increased settlement demands from asbestos plaintiffs.
Less than 10% of the reserve related to defense and administrative costs.
Between January 1, 2001, and the Petition Date, according to the Center for
Claims Resolution (the "Center"), U.S. Gypsum was served with more than 26,000
new claims. On a cash basis, U.S. Gypsum's asbestos-related personal injury
costs (before insurance) rose from $30 million in 1997 to $162 million in 2000
and, absent the Filing, were expected to exceed $275 million in 2001.
Because of the Filing, there is greater uncertainty concerning the liability
associated with asbestos cases. As a result, it is the Corporation's view that
no change should be made at this time to the previously recorded reserve for
asbestos claims, except to reflect certain minor asbestos-related costs incurred
since the Filing. However, it is possible that the cost of resolving asbestos
claims in the Chapter 11 Cases will be greater than that set forth in the high
end of the range estimated in 2000. Counsel for the Official Committee of
Asbestos Personal Injury Claimants and counsel for the legal representative for
future asbestos personal injury claimants, appointed in the Chapter 11 Cases,
have indicated that they believe that the liabilities for pending and future
asbestos claims exceed the value of Debtors' assets, and, therefore, are
significantly greater than both the reserved amount and the high end of the
range estimated in 2000. As the Chapter 11 Cases proceed, and the court
addresses the issues relating to estimation of Debtors' asbestos liabilities,
the Debtors likely will gain more information from which a reasonable estimate
of the Debtors' probable asbestos liability may be determined. If such estimate
differs from the existing reserve, the reserve will be adjusted to reflect the
estimate, and it is possible that a charge to results of operations will be
necessary at that time. It is also possible that, in such a case, the Debtors'
asbestos liability may vary significantly from the recorded estimate of
liability and that this difference could be material to the Corporation's
financial position, results of operations and cash flows in the period recorded.
CONSEQUENCES OF THE FILING
The Debtors are operating their businesses without interruption as
debtors-in-possession subject to the provisions of the Bankruptcy Code. All
vendors are being paid for all goods furnished and services provided after the
Filing. However, as a consequence of the Filing, pending litigation against the
Debtors as of the Petition Date is stayed, and no party may take any action to
pursue or collect pre-petition claims except pursuant to an order of the
Bankruptcy Court.
Three creditors' committees, one representing asbestos personal injury
claimants, another representing asbestos property damage claimants, and a third
representing general unsecured creditors, were appointed as official committees
in the Chapter 11 Cases and, in accordance with the provisions of the Bankruptcy
Code, will have
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the right to be heard on all matters that come before the Bankruptcy Court. The
Bankruptcy Court also appointed the Honorable Dean M. Trafelet as the legal
representative for future asbestos claimants in the Debtors' bankruptcy
proceeding. Mr. Trafelet was formerly a judge of the Circuit Court of Cook
County, Illinois. The Debtors expect that the appointed committees, together
with Mr. Trafelet, will play important roles in the Chapter 11 Cases and the
negotiation of the terms of any plan of reorganization.
Debtors intend to address all pending and future asbestos personal injury claims
as well as all other pre-petition claims in a plan or plans of reorganization
confirmed by the Bankruptcy Court. Debtors also intend that the plan will
include the creation of one or more independently administered trusts under
Section 524(g) of the Bankruptcy Code, which will be funded by Debtors to allow
payment of present and future asbestos personal injury claims and demands.
Debtors expect that the plan of reorganization will also address Debtors'
liability for asbestos property damage claims, whether by including those
liabilities in a Section 524(g) trust or by other means.
It is anticipated that, as a result of creation and funding of the Section
524(g) trust(s), the Bankruptcy Court will issue a permanent injunction barring
the assertion of present and future asbestos claims against Debtors, their
successors, and their affiliates, and channeling those claims to the trust(s)
for payment in whole or in part. Section 524(g) contains specific requirements
for issuance of such a permanent injunction, including the requirement that the
trust must own, or have the right to own upon the occurrence of contingencies
specified in the plan of reorganization, a majority of the voting shares of the
debtor or its parent. Section 524(g) also requires that the plan be approved by
75% of the voting asbestos claimants whose claims are addressed by the trust.
Similar plans of reorganization containing Section 524(g) trusts have been
confirmed in the chapter 11 cases of other companies with asbestos liabilities,
but there is no guarantee that the Bankruptcy Court in Debtors' Chapter 11 Cases
will approve creation of a Section 524(g) trust or issue a permanent injunction
channeling to the trust all asbestos claims against Debtors, and/or their
successors and affiliates.
Pursuant to the Bankruptcy Code, the Debtors had the exclusive right to propose
a plan of reorganization for 120 days following the Petition Date, unless
extended. The Bankruptcy Court has granted requests by the Debtors to extend the
period of exclusivity, which currently runs through September 1, 2003. The
Debtors intend to seek one or more additional extensions depending upon
developments in the Chapter 11 Cases. If the Debtors fail to file a plan of
reorganization during such extension period, or if such plan is not accepted by
the requisite numbers of creditors and equity holders entitled to vote on the
plan, other parties in interest in the Chapter 11 Cases may be permitted to
propose their own plan(s) of reorganization for the Debtors.
While it is the Debtors' intention to seek a full recovery for their creditors,
it is not possible to predict how the plan of reorganization will treat asbestos
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and other pre-petition claims and what impact any plan may have on the value of
the shares of the Corporation's common stock and other outstanding securities.
Under the Bankruptcy Code, a plan of reorganization, including a plan creating a
Section 524(g) trust, may be confirmed without the consent of non-asbestos
creditors and equity security holders if certain requirements of the Code are
met. There is no assurance that there will be sufficient assets to satisfy the
Debtors' pre-petition liabilities in whole or in part, and the pre-petition
creditors of some Debtors may be treated differently from the pre-petition
creditors of other Debtors. The payment rights and other entitlements of
pre-petition creditors and USG shareholders may be substantially altered by any
plan or plans of reorganization confirmed in the Chapter 11 Cases. Pre-petition
creditors may receive under the plan of reorganization less than 100% of the
face value of their claims, and the interests of the Corporation's equity
security holders are likely to be substantially diluted or cancelled in whole or
in part.
It is also not possible to predict at this time how the plan of
reorganization will treat intercompany indebtedness, licenses, transfers of
goods and services and other intercompany arrangements, transactions, and
relationships that were entered into before the Petition Date. These
arrangements, transactions, and relationships may be challenged by various
parties in the Chapter 11 Cases, and the outcome of those challenges, if any,
may have an impact on the treatment of various claims under any plan of
reorganization.
Whether the Corporation's equity has significant value and Debtors' non-asbestos
creditors recover the full value of their claims depend upon the outcome of the
analysis of the amount of Debtors' assets and liabilities, especially asbestos
liabilities, that must be funded under the plan. Counsel for the Official
Committee of Asbestos Personal Injury Claimants and counsel for the legal
representative for future asbestos personal injury claimants have advised the
court that is presiding over the Chapter 11 Cases that they believe Debtors'
asbestos liabilities exceed the value of Debtors' assets and that Debtors are
insolvent. The Debtors have advised the court that they believe they are solvent
if their asbestos liabilities are fairly and appropriately valued. Toward that
end, the Debtors filed a motion with the court requesting the court to begin
proceedings to estimate the value of Debtors' asbestos personal injury
liabilities.
In response to the Debtors' motion requesting an estimation of asbestos personal
injury liabilities, the court issued an order and memorandum opinion on February
19, 2003, setting forth a procedure for estimating Debtors' liability for
asbestos personal injury claims alleging cancer. (See Note 12. Litigation, for
additional information on this procedure.) At this stage in the proceedings,
Debtors do not know when estimation of Debtors' liability for these cancer
claims will occur, what the outcome of that proceeding will be, what impact that
proceeding will have on estimating Debtors' liability for asbestos personal
injury claims alleging other diseases, and whether the estimation proceeding
will lead to a negotiated resolution of Debtors' asbestos personal injury
liabilities. Debtors also cannot predict at this time the estimated cost of
resolving asbestos
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property damage claims (see Note 12, Litigation, for additional information.) If
the amount of the Debtors' asbestos liabilities cannot be resolved through
negotiation, as has been the case to date, the outcome of the estimation
proceedings regarding Debtors' liability for cancer claims likely will be a
significant component of determining Debtors' asbestos personal injury
liability, Debtors' solvency, and the recovery of Debtors' pre-petition
creditors and equity security holders under any plan or plans of reorganization.
As a result of this uncertainty, it is not possible at this time to predict the
timing or outcome of the Chapter 11 Cases, the terms and provisions of any plan
or plans of reorganization, or the effect of the chapter 11 reorganization
process on the claims of pre-petition creditors of the Debtors or the interests
of the Corporation's equity security holders. There can be no assurance as to
the value of any distributions that might be made under any plan or plans of
reorganization with respect to such pre-petition claims, equity interests, or
other outstanding securities. Recent developments in the Corporation's
bankruptcy proceeding are discussed in Note 12. Litigation.
CHAPTER 11 FINANCING
On July 31, 2001, a $350 million debtor-in-possession financing facility (the
"DIP Facility") was approved by the Bankruptcy Court to supplement liquidity and
fund operations during the reorganization process. In January 2003, the
Corporation reduced the size of the DIP Facility to $100 million. This action
was taken at the election of the Corporation due to the levels of cash and
marketable securities on hand and to reduce costs associated with the DIP
Facility. The resulting DIP Facility will be used largely to support the
issuance of standby letters of credit needed for the Corporation's business
operations. The Corporation believes that cash and marketable securities on hand
and future cash available from operations will provide sufficient liquidity to
allow its businesses to operate in the normal course without interruption for
the duration of the chapter 11 proceedings. The DIP Facility is provided by a
syndicate of lenders led by JPMorgan Chase Bank (formerly The Chase Manhattan
Bank) as agent and matures on June 25, 2004. See "Available Liquidity" below for
more information on the DIP Facility.
ACCOUNTING IMPACT
The Corporation is required to follow AICPA Statement of Position 90-7 ("SOP
90-7"), "Financial Reporting by Entities in Reorganization under the Bankruptcy
Code." Pursuant to SOP 90-7, the Corporation's pre-petition liabilities that are
subject to compromise are reported separately on the consolidated balance sheet.
Virtually all of the Corporation's pre-petition debt is currently in default and
was recorded at face value and classified within liabilities subject to
compromise. U.S. Gypsum's asbestos liability also is classified within
liabilities subject to compromise. See Part I, Item 1. Note 2. Voluntary
Reorganization Under Chapter 11, which includes information related to financial
statement presentation, the debtor-in-possession statements and detail of the
liabilities subject to compromise and chapter 11 reorganization expenses.
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CONSOLIDATED RESULTS
NET SALES
Net sales in the first quarter of 2003 were $862 million, up 4% from $829
million in the first quarter of 2002. Net sales for North American Gypsum and
Building Products Distribution rose 3% and 7%, respectively, while net sales for
Worldwide Ceilings were down slightly.
COST OF PRODUCTS SOLD
Cost of products sold in the first quarter of 2003 was $745 million, up 7% from
$697 million a year ago. A key factor for this increase was higher energy costs.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses decreased 2% versus the first quarter of
2002. As a percent of net sales, selling and administrative expenses were 9.3%
in the first quarter of 2003, down from 9.9% in the comparable 2002 period.
CHAPTER 11 REORGANIZATION EXPENSES
In connection with the Filing, the Corporation recorded chapter 11
reorganization expenses of $2 million in the first quarter of 2003 and 2002. For
both periods, these expenses consisted of legal and financial advisory fees of
$4 million, partially offset by bankruptcy-related interest income of $2
million.
OPERATING PROFIT
Operating profit in the first quarter of 2003 was $35 million, down 27% from $48
million in the first quarter of 2002.
INTEREST EXPENSE
Interest expense of $1 million was recorded in the first quarter of 2003 and
2002. Under SOP 90-7, virtually all of the Corporation's outstanding debt is
classified as liabilities subject to compromise, and interest expense on this
debt has not been accrued or recorded since the Petition Date. Contractual
interest expense not accrued or recorded on pre-petition debt totaled $18
million in the first quarter of 2003 and 2002.
INTEREST INCOME
Interest income of $1 million was recorded in the first quarter of 2003 and
2002. These amounts represent interest earned on cash held by non-debtor
subsidiaries.
INCOME TAXES
Income tax expense amounted to $13 million and $21 million in the first quarter
of 2003 and 2002, respectively. The effective tax rates were 38.5% and 44.4% for
the respective periods. The decrease in the effective tax rate was primarily due
to the benefit of a tax rate change applicable to one of the Corporation's
foreign subsidiaries.
CUMULATIVE EFFECT OF ACCOUNTING CHANGES
On January 1, 2003, the Corporation adopted Statement of Financial Accounting
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Standards ("SFAS") No. 143, "Accounting for Asset Retirement Obligations." This
standard requires the recording of the fair value of a liability for an asset
retirement obligation in the period in which it is incurred. The Corporation's
asset retirement obligations include reclamation requirements as regulated by
government authorities related principally to assets such as the Corporation's
mines, quarries, landfills, ponds and wells. The impact of adopting SFAS No. 143
was an increase in the Corporation's assets and liabilities of $14 million and
$30 million, respectively. An after-tax charge of $16 million ($27 million
pretax) was reflected on the consolidated statement of earnings as a cumulative
effect of a change in accounting principle as of January 1, 2003.
On January 1, 2002, USG Corporation adopted SFAS No. 142, "Goodwill and Other
Intangible Assets." In accordance with the provisions of SFAS No. 142, the
Corporation determined that goodwill for its North American Gypsum segment was
impaired and recorded a noncash, nontaxable impairment charge of $96 million.
This charge, which includes a $6 million deferred currency translation
write-off, is reflected on the Corporation's consolidated statement of earnings
as a cumulative effect of a change in accounting principle as of January 1,
2002.
NET EARNINGS
Net earnings in the first quarter of 2003 were $6 million, or $0.13 per share.
In the first quarter of 2002, a net loss of $70 million, or $1.62 per share, was
recorded.
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CORE BUSINESS RESULTS
(dollars in millions) Net Sales Operating Profit
- -------------------------------------------------------------------------------------------------------------
Three Months Ended March 31, 2003 2002 2003 2002
- -------------------------------------------------------------------------------------------------------------
NORTH AMERICAN GYPSUM:
U.S. Gypsum Company $ 496 $ 483 $ 30 $ 46
CGC Inc. (gypsum) 57 50 5 6
Other subsidiaries* 28 30 3 6
Eliminations (39) (38) - -
- -------------------------------------------------------------------------------------------------------------
Total 542 525 38 58
- -------------------------------------------------------------------------------------------------------------
WORLDWIDE CEILINGS:
USG Interiors, Inc. 110 111 6 7
USG International 40 42 1 (3)
CGC Inc. (ceilings) 10 10 1 1
Eliminations (13) (15) - -
- -------------------------------------------------------------------------------------------------------------
Total 147 148 8 5
- -------------------------------------------------------------------------------------------------------------
BUILDING PRODUCTS DISTRIBUTION:
L&W Supply Corporation 295 275 8 7
- -------------------------------------------------------------------------------------------------------------
Corporate - - (18) (20)
Chapter 11 reorganization expenses - - (2) (2)
Eliminations (122) (119) 1 -
- -------------------------------------------------------------------------------------------------------------
Total USG Corporation 862 829 35 48
=============================================================================================================
*Includes USG Mexico, 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.
NORTH AMERICAN GYPSUM
Net sales of $542 million increased 3% from the first quarter of 2002, while
operating profit of $38 million was down 34%.
Net sales for U.S. Gypsum increased 3% primarily reflecting higher selling
prices for SHEETROCK brand gypsum wallboard and record first quarter shipments
of SHEETROCK brand joint compounds and DUROCK brand cement board. U.S. Gypsum's
nationwide average realized price for wallboard was $97.13 per thousand square
feet in the first quarter of 2003. This price was up 1% from $95.84 in the first
quarter of 2002, but down 6% from $102.98 in the fourth quarter of 2002. Selling
prices were down from the fourth quarter of 2002 primarily reflecting lower
demand due to normal seasonal factors and harsher-than-usual winter weather in
certain parts of the country.
U.S. Gypsum sold 2.51 billion square feet of SHEETROCK brand gypsum wallboard
during the first quarter of 2003, a 3% decrease from the strong level of 2.59
billion square feet in the first quarter of 2002. U.S. Gypsum's wallboard plants
operated at 89% of capacity in the first quarter of 2003 versus 95% for the same
period in 2002. Industry shipments of gypsum wallboard were down approximately
2% from the first quarter of 2002.
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First quarter 2003 operating profit for U.S. Gypsum was down 35% from the first
quarter of 2002. This decline primarily reflected higher manufacturing costs for
SHEETROCK brand gypsum wallboard due to higher energy and wastepaper costs. The
increase in energy costs related to wallboard manufacturing accounted for a $12
million increase to cost of products sold.
The gypsum business of Canada-based CGC Inc. reported a 14% increase in first
quarter net sales as compared with the first quarter of 2002 primarily due to
increased volume (up 5%) and selling prices (up 6%) for SHEETROCK brand gypsum
wallboard. However, operating profit fell 17% primarily due to higher energy
costs.
WORLDWIDE CEILINGS
Net sales decreased $1 million to $147 million, while operating profit increased
$3 million to $8 million as compared with the first quarter of 2002.
USG Interiors, Inc., the Corporation's domestic ceilings business, reported
slightly lower net sales primarily due to lower volume for its ceiling tile and
grid product lines. Shipments are down in 2003 as the level of commercial
construction, the primary market for USG Interiors' products, continues to be
weak. Operating profit for USG Interiors decreased to $6 million from $7 million
a year ago reflecting the lower volume and increased manufacturing costs,
partially offset by higher selling prices for ceiling tile and grid.
Net sales for USG International were down versus the first quarter of 2002.
However, operating profit of $1 million was reported for the first quarter of
2003 compared with an operating loss of $3 million in the first quarter of 2002.
Profitability for USG International improved following the shutdown of the
Aubange, Belgium, ceiling tile plant in December 2002 and other downsizing
activities.
Net sales and operating profit for the ceilings division of CGC Inc. were
unchanged from the first quarter of 2002.
BUILDING PRODUCTS DISTRIBUTION
L&W Supply Corporation, the leading specialty building products distribution
business in the United States, reported net sales of $295 million and operating
profit of $8 million, representing increases of 7% and 14%, respectively, from
the first quarter of 2002. These results primarily reflected increased sales and
profit for L&W Supply's complementary building products, primarily drywall
metal, joint treatment, ceiling products and roofing. Also, sales and profit for
gypsum wallboard were up due to increased shipments (up 4%). Slightly higher
unit costs for gypsum wallboard were partially offset by slightly higher selling
prices. L&W Supply currently operates 181 locations in the United States
distributing a variety of gypsum, ceilings and related building materials.
-48-
MARKET CONDITIONS AND OUTLOOK
The outlook for the Corporation's markets in 2003 is mixed. Demand for gypsum
wallboard is expected to remain strong primarily due to the continued high
demand for new homes. Housing starts are expected to exceed 1.6 million units in
2003. Despite the strong demand, the gypsum wallboard industry continues to
experience a large amount of excess capacity. Nonresidential construction, the
principal market for the Corporation's ceiling products and a major market for
its distribution business, is expected to remain weak. In addition, the
Corporation, like many other companies, faces cost pressures in areas such as
energy and raw material costs, employee and retiree medical expenses and
insurance premiums. In this environment, the Corporation is focusing its
management attention and investments on improving customer service,
manufacturing costs and operating efficiencies, as well as selectively investing
to grow its businesses. In addition, the Corporation will diligently continue
its attempt to resolve the chapter 11 proceedings, consistent with the goal of
achieving a fair, comprehensive and final resolution to its asbestos liability.
LIQUIDITY AND CAPITAL RESOURCES
WORKING CAPITAL
Working capital (current assets less current liabilities) as of March 31, 2003,
amounted to $1,002 million, and the ratio of current assets to current
liabilities was 3.42-to-1. As of December 31, 2002, working capital amounted to
$955 million, and the ratio of current assets to current liabilities was
3.18-to-1.
Cash, cash equivalents and marketable securities as of March 31, 2003, amounted
to $768 million, compared with $830 million as of December 31, 2002. During the
first quarter of 2003, net cash flows used in operating activities totaled $45
million largely reflecting cash used to fund seasonal working capital needs and
payments associated with employee benefit and compensation plans. Net cash flows
used in investing activities totaled $12 million and consisted of capital
spending of $17 million, offset by sales and maturities of marketable
securities, net of purchases, of $5 million. Because of the Filing, there were
no financing activities during the first three months of 2003.
As of March 31, 2003, $129 million was invested in long-term marketable
securities and $47 million in short-term marketable securities. The
Corporation's marketable securities are classified as available-for-sale
securities and reported at fair market value with unrealized gains and losses
excluded from earnings and reported in accumulated other comprehensive loss on
the consolidated balance sheet.
Receivables increased to $355 million as of March 31, 2003, from $284 million as
of December 31, 2002, primarily reflecting a 13% increase in net sales for the
month of March 2003 as compared with December 2002. Inventories and payables
also
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were up from December 31, 2002, primarily due to the increased level of
business. Inventories increased to $286 million from $270 million, and accounts
payable increased to $199 million from $170 million.
DEBT
As of March 31, 2002, total debt amounted to $1,007 million, of which $1,005
million was included in liabilities subject to compromise. These amounts were
unchanged from the December 31, 2002, levels.
AVAILABLE LIQUIDITY
As of March 31, 2003, the Corporation, on a consolidated basis, had $768 million
of cash and marketable securities, of which $153 million was held by non-Debtor
subsidiaries. The Corporation also had a $100 million DIP Facility available to
supplement liquidity and fund operations during the reorganization process.
Borrowing availability under the DIP Facility is based primarily on accounts
receivable and inventory levels and, to a lesser extent, property, plant and
equipment. Given these levels, as of March 31, 2003, the Corporation had the
capacity to borrow up to $100 million. There were no outstanding borrowings
under the DIP Facility as of March 31, 2003. However, $16 million of standby
letters of credit were outstanding, leaving $84 million of unused borrowing
capacity available as of March 31, 2003.
CAPITAL EXPENDITURES
Capital spending amounted to $17 million in the first quarter of 2003 compared
with $15 million in the corresponding 2002 period. As of March 31, 2003,
remaining capital expenditure commitments for the replacement, modernization and
expansion of operations amounted to $51 million, compared with $56 million as of
December 31, 2002.
During the bankruptcy proceeding, the Corporation expects to have limited
ability to access capital other than its own cash flows to fund potential future
growth opportunities such as new products, acquisitions and joint ventures. In
addition, one of the terms of the DIP Facility limits capital spending to a
total of $175 million per year. Within such constraints, the Corporation expects
to be able to maintain a program of capital spending aimed at maintaining and
enhancing its businesses.
EXIT ACTIVITIES
2002 DOWNSIZING PLAN: In the fourth quarter of 2002, the Corporation recorded a
nontaxable charge of $11 million related to the shutdown of the Aubange,
Belgium, ceiling tile plant and other downsizing activities in Europe to address
the continuing weakness of the commercial ceilings market in Europe. The charge
was included in cost of products sold and reflected severance of $6 million
related to a workforce reduction of over 50 positions (salaried and hourly),
equipment writedowns of $3 million and other reserves of $2 million. The other
reserves primarily related to lease cancellations, inventories and receivables.
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As of March 31, 2003, 49 employees were terminated. The Aubange, Belgium, plant
ceased operations in December 2002. The reserve for the 2002 downsizing plan was
included in accrued expenses on the consolidated balance sheets. Charges against
the reserve included the $3 million write-off of equipment in 2002 and payments
totaling $3 million in the first quarter of 2003. All payments associated with
the 2002 downsizing plan are being funded with cash from operations.
2001 RESTRUCTURING PLAN: In the fourth quarter of 2001, the Corporation recorded
a charge of $12 million pretax ($10 million after-tax) related to a
restructuring plan that included the shutdown of a gypsum wallboard plant in
Fremont, Calif., a drywall steel plant in Prestice, Czech Republic, a ceiling
tile plant in San Juan Ixhuatepec, Mexico, a ceiling tile manufacturing line in
Greenville, Miss., and other restructuring activities. Included in the $12
million pretax charge was $8 million for severance related to a workforce
reduction of more than 350 positions (primarily hourly positions), $2 million
for the write-off of property, plant and equipment, and $2 million for line
shutdown and removal and contract cancellations. The 2001 restructuring was
intended to allow the Corporation to optimize its manufacturing operations.
As of March 31, 2003, 348 employees were terminated, and 26 open positions were
eliminated, and the ceiling tile manufacturing line at Greenville, Miss., and
the plants in San Juan Ixhuatepec, Mexico, and Prestice, Czech Republic, were
shut down. The Fremont, Calif., plant ceased production in the second quarter of
2002. Annual savings from the full implementation of the 2001 restructuring
initiatives are estimated at $11 million. The reserve for the 2001 restructuring
plan was included in accrued expenses on the consolidated balance sheets.
Charges against the reserve in 2001 included the $2 million write-off of
property, plant and equipment and payments totaling $2 million. An additional $3
million of payments were made and charged against the reserve in 2002. The
remaining $5 million of payments were made and charged against the reserve in
the first quarter of 2003. All payments associated with the 2001 restructuring
plan were funded with cash from operations.
See Part I, Item 1. Note 3. Exit Activities for additional information related
to payments and reserve balances.
OTHER MATTERS
LEGAL CONTINGENCIES
As a result of the Filing, all pending asbestos lawsuits against U.S. Gypsum and
other subsidiaries are stayed, and no party may take any action to pursue or
collect on such asbestos claims absent specific authorization of the Bankruptcy
Court. See Part I, Item 1. Note 2. Voluntary Reorganization Under Chapter 11 and
Note 12. Litigation for recent developments in the Corporation's reorganization
proceedings. See Part I. Item 1. Note 12. Litigation for additional information
on asbestos litigation.
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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 I, Item 1. Note 12. Litigation for additional information on
environmental litigation.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements related to management's
expectations about future conditions. The effects of the Filing and the conduct,
outcome and costs of the Chapter 11 Cases, as well as the ultimate costs
associated with the Corporation's asbestos litigation, may differ from
management's expectations. Actual business or other conditions may also differ
significantly from management's expectations and accordingly affect the
Corporation's sales and profitability or other results. Actual results may
differ due to various other factors, including economic conditions such as the
levels of construction activity, interest rates, currency exchange rates and
consumer confidence; competitive conditions such as price and product
competition; shortages in raw materials; increases in raw material and energy
costs; and the unpredictable effects of the global war on terrorism upon
domestic and international economies and financial markets. The Corporation
assumes no obligation to update any forward-looking information contained in
this report.
ITEM 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
The Corporation's chief executive officer and chief financial officer,
after evaluating the effectiveness of the Corporation's "disclosure
controls and procedures" (as defined in the Rules 13a-14(c) and 15-d-14(c)
of the Securities Exchange Act of 1934) as of a date (the "Evaluation
Date") within 90 days before the filing date of this quarterly report,
have concluded that as of the Evaluation Date, the Corporation's
disclosure controls and procedures were adequate and designed to ensure
that material information relating to the Corporation and its consolidated
subsidiaries would be made known to them by others within those entities.
(b) Changes in internal controls.
There were no significant changes in the Corporation's internal controls
or in other factors that could significantly affect the Corporation's
internal controls subsequent to the Evaluation Date.
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REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of USG Corporation:
We have reviewed the accompanying consolidated balance sheet of USG Corporation
and subsidiaries as of March 31, 2003 and the related consolidated statements of
earnings and cash flows for the three month periods ended March 31, 2003 and
2002. These interim financial statements are the responsibility of the
Corporation's management.
We conducted our reviews 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 and
making inquiries of persons responsible for financial and accounting matters. It
is substantially less in scope than an audit conducted in accordance with
auditing standards generally accepted in the United States of America, 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 reviews, we are not aware of any material modifications that should
be made to the accompanying interim financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of USG
Corporation and subsidiaries as of December 31, 2002, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
year then ended (not presented herein); and in our report dated February 3, 2003
(February 19, 2003 as to paragraphs 13, 14 and 15 of Note 18), we expressed an
unqualified opinion on those consolidated financial statements and included
explanatory paragraphs concerning (i) the Corporation's Chapter 11 bankruptcy
filing, (ii) matters that raised substantial doubt about the Corporation's
ability to continue as a going concern, and (iii) transitional disclosures
related to the change in accounting for goodwill. In our opinion, the
information set forth in the accompanying condensed consolidated balance sheet
as of December 31, 2002 is fairly stated, in all material respects, in relation
to the consolidated balance sheet from which it has been derived.
As discussed in Note 2 to the consolidated financial statements, USG Corporation
and certain subsidiaries voluntarily filed for Chapter 11 bankruptcy protection
on June 25, 2001. The accompanying consolidated financial statements do not
purport to reflect or provide for the consequences of the bankruptcy
proceedings. In particular, such financial statements do not purport to show (a)
as to assets, their realizable value on a liquidation basis or their
availability to satisfy liabilities; (b) as to pre-petition liabilities, the
amounts that may be allowed for claims or contingencies, or the status and
priority thereof; (c) as to
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stockholder accounts, the effect of any changes that may be made in the
capitalization of the Corporation; or (d) as to operations, the effect of any
changes that may be made in its business.
The accompanying consolidated financial statements have been prepared assuming
that the Corporation will continue as a going concern. As discussed in Notes 2
and 12 to the consolidated financial statements, there is significant
uncertainty as to the resolution of the Corporation's asbestos litigation,
which, among other things, may lead to possible changes in the composition of
the Corporation's business portfolio, as well as changes in the ownership of the
Corporation. This uncertainty raises substantial doubt about the Corporation's
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Notes 2 and 12 to the financial statements. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Chicago, Illinois
April 23, 2003
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
See Part I, Item 1. Note 12. Litigation for information concerning the asbestos
and related bankruptcy litigation and environmental litigation.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
15. Letter from Deloitte & Touche LLP regarding unaudited
financial information.
99. Certifications of USG Corporation's Chief Executive Officer
and Chief Financial Officer pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
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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/ William C. Foote
-----------------------------------
William C. Foote,
Chairman, Chief Executive Officer
and President
By /s/ Richard H. Fleming
-----------------------------------
Richard H. Fleming
Executive Vice President and
Chief Financial Officer,
By /s/ D. Rick Lowes
-----------------------------------
D. Rick Lowes,
Vice President and Controller,
May 5, 2003
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ANNUAL AND QUARTERLY CERTIFICATIONS
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, William C. Foote, certify that:
1. I have reviewed this quarterly report on Form 10-Q of USG Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of USG Corporation as of, and for, the periods presented in this
quarterly report;
4. USG Corporation's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for USG Corporation and we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to USG Corporation,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of USG Corporation's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. USG Corporation's other certifying officer and I have disclosed, based on
our most recent evaluation, to USG Corporation's auditors and the audit
committee of USG Corporation's board of directors:
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect USG
Corporation's ability to record, process, summarize and
report financial data and have identified for USG
Corporation's auditors any material weaknesses in internal
controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in USG
Corporation's internal controls; and
6. USG Corporation's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
May 5, 2003 /s/ William C. Foote
-----------------------------------------------
William C. Foote
Chairman, Chief Executive Officer and President
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ANNUAL AND QUARTERLY CERTIFICATIONS
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Richard H. Fleming, certify that:
1. I have reviewed this quarterly report on Form 10-Q of USG Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of USG Corporation as of, and for, the periods presented in this
quarterly report;
4. USG Corporation's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for USG Corporation and we have:
(a) designed such disclosure controls and procedures to ensure
that material information relating to USG Corporation,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
(b) evaluated the effectiveness of USG Corporation's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
(c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures
based on our evaluation as of the Evaluation Date;
5. USG Corporation's other certifying officer and I have disclosed, based on
our most recent evaluation, to USG Corporation's auditors and the audit
committee of USG Corporation's board of directors:
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect USG
Corporation's ability to record, process, summarize and
report financial data and have identified for USG
Corporation's auditors any material weaknesses in internal
controls; and
(b) any fraud, whether or not material, that involves management
or other employees who have a significant role in USG
Corporation's internal controls; and
6. USG Corporation's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of their evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
May 5, 2003 /s/ Richard H. Fleming
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Richard H. Fleming
Executive Vice President and Chief Financial
Officer
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