Document oDmj0Geypj4x50YbDgKoa0DXo

Laser D Document Print Summary Accounting: Date Printed: Time Printed: Company Name: Exchange: Ticker Symbol: Company #: Document Type: Document Date: Amendment: Document #; Printed: Pages Printed: Disabled 02/13/92 12:20 P.M. USG CORP N USG U940810000 10-K 12/31/90 N/A 91076885 Base 55 DISCLOSURE Another dteumug, Information Service l PLAINTIFF'S | EXHIBIT i Us&sn Laser D Document Print Summary Accounting: Date Printed: Time Printed: Company Name: Exchange: Ticker Symbol: Company #: Document Type: Document Date: Amendment: Document #: Printed: Pages Printed: Disabled 02/13/92 12:21 P.M. USG CORP N USG U940810000 10-K 12/31/90 N/A 91076885 Financial Statements 23 DISCLOSURE Another cksaosum. Information Service WR 22 1991 ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1S34 (FEE REQUIRED) For (lace.1 year ended December 31.1990 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period fromto. Commission File Number 1 -8864 USG CORPORATION (Exact name ofRepslrant as Specified in its Charter) Delaware (Stale or OtherJurisdictionof IneorponlLau orOrganization) 36-3328400 (IJLS. Employer ldeDlifkatfoa Na.) 101S. Wacker Drive, Chicago, Illinois Addrest ofPrincipal Ezacutive Office*) tZipCMfe) Registrant's Telephone Number, Including Area Code: (312) <06-4000 Securities Registered Pursuant to Section 12(b) ofthe Act: Title of Each Clast Common Stock, $0.10 par value Name ofEichange on New York Stock Exchange Midwest Stock Exchange Preferred Share Purchase Rights New York Stock Exchange Midwest Stock Exchange 4.875% Subordinated Debentures, due 1991 New York Stock Exchange 7.875% Sinking Fund Debentures, due 2004 New York Slock Exchange 16%Junior Subordinated Pay-ln-Kind Debentures, due 2008 New York Stock Exchange Midwest Stock Exchange Securities Registered Pursuant to Section 12(g) ofthe Act: None (Title ofChez) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) ofthe Securities Exchange Aet of 1934during 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 past90 days. Yes gj No . As ofFebruary 28,1991, the aggregate market value ofUSG Corporation common stock held by nonaffiliates (baaed upon the New York Stock Exchange closing prices) was approximately $130,844,000. As ofFebruary 28,1991,55,092,148shares ofcommon stock were outstanding. i >1 2 TABLE OP CONTENTS PARTI Item 1. Item 2. Item 3. Item 4. Business ...... .......................................................................... ..................................... Properties ..................................................................................................................... Legal Proceedings.................................... .......... ................................................ SubmiBsionofMatters to a Vote ofSecurity Holders .................................................. UtKS S 6 9 9 PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters ........ Item 6. Selected Financial Data ............. Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition ......................................................................................... Item 8. Financial Statements and Supplementary Data ......................................................... Item 9. Disagreements on Accounting and Financial Disclosure ........................................... 9 9 10 16 48 PART 111 Item 10. Directors and Executive Officers ofthe Registrant ...................................................... Item 11. Executive Compensation ........................................ Item 12. Security Ownership ofCertain Beneficial Owners and Management ....................... Item 13. Certain Relationships and Related Transactions ....................................................... 48 61 51 51 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8- K .......................... 52 DOCUMENTS INCORPORATED BY REFERENCE PARTI Item 1 - Business Pages 6 to 10 of the Annual Report toStockholders for the year ended December 31,1990. PART 111 Item 10- Directionsand Executive Officers ofthe Registrant 1 The Corporation's Definitive Proxy Item 11 - Executive Compensation ) Statement for its 1991 annua) Item 12- Security Ownership ofCertain Beneficial I meeting ofstockholders is to be Owners and Management ) filed with the Commission pursuant Item 13-Certain Relationships and Related Transactions ) to Regulation 14A. PARTIV Item 14- Exhibits, Financial Statement Schedules and Reports on Form 8K I A list ofexhibits incorporated by ) reference iscontained on pages } 52to 55 ofthis report. T 3 PARTI Item 1. BUSINESS (a) General Development ofBusiness United States Gypsum Company was incorporated in 1901. USG Corporation (hereinafter together with consolidated subsidiaries, called "the Corporation") was incorporated in Delaware an October 22,1984. By a vote ofstockholders at a special meeting on December 19,1984, United States Gypsum Company became a wholly owned subsidiary of the Corporation and the stockholders of United States Gypsum Company became the stockholders ofthe Corporation, all effect]ve January 1, 1985. On July 8, 1988, the Corporation's stockholders approved a plan of recapitalisation and restructuring. The recapitalisation became effective on July 13, 1988 when stockholders of record became entitled to receive (37 in cash, a (5 face amount 16.0% junior subordinated pay-in-kind debenture and one new $0.10 par value common share, all in exchange for each share of old USG common stock. Approximately $2.5 billion in new debt was incurred by the Corporation to finance the recapitalisation, pay related costs, and repay certain debt existing at that time. As part of the Corporation's restructuring, Masonite Corporation, a wholly owned subsidiary ofthe Corporation and the Kinltead Division were sold in the fourth quarter of 1988. The Marlite Division ofUSG Interiors, Inc. and Wiss, Janney, Elstner Associates, Inc., another wholly owned subsidiary, were sold in the first quarter of 1969 United States Gypsum Company's construction metal business was also sold during 1989. The net cash proceeds from these asset sales were immediately used to repay debt. On December 31,1990, the Corporation announced that it was developing a long-term financial plan to restructure its debt and address future cash flow needs. A broad outline of the plan was presented to the Corporation's senior lending banks which have indicated that they will participate in the development ofspecific elements of the plan. The restructuring plan is expected to involve an exchange proposal for certain public debt securities; extension of the term loan amortization schedule; substantial equity dilution; and the sale of DAP Inc. In connection with the restructuring plan, the Corporation deferred the repayment of $105 million in term loan principal due to its senior lendingbanks en December 31,1990 in order to maintain adequate liquidity during the restructuring process. The deferral constitutes a default under the term loan agreement. Accordingly, the senior lending banks have notified the Corporation that no payments or distributions may be made to holders ofthe 13.25% senior subordinated debentures while the default continues. (b) Financial Information About Industry Segments Financial information and other related disclosures about the Corporation's industry and geographic segments for the years 1988 through 1990 appear on pages 33 through 36 of this report under "Significant Accounting Policies and Practices", in item 8. "Financial Statements and Supplementary Data." AH financial schedules, statements and accompanying footnotes presented in this report reflect DAP Inc., Masonite Corporation, the Kinkead Division, the Marlite Division of USG Interiors, Inc., Wiaa. Janney, Elstner Associates, Inc. and A.P. Green Industries, Inc. as discontinued operations. The following narratives on the Corporation's business and properties exclude discontinued operations. (c) Narrative Description ofBusiness The Corporation is a major manufacturer of building materials in North America and produces a wide range of products far use in new residential and nooresidential building construction, repair and remodeling, and for certain industrial processes The Corporation also has a growing presence in markets outside of the United States and Canada. Excluding sales in Canada, international sales in 1990 accounted for 9.8% of the Corporation's total net sales. Including Canada, total international sales in 1990 accounted for 18.6% ofthe Corporation's total net sales. 4 Gypsum Products This industry segment includes extracting and processing crude gypsum rock, which is the mqjor ingredient of the fallowing products of the Corporation: wallboard, sheathing, baseboard, mobile home board, lay-in panels, soffit board, lawn and garden gypsum, agricultural gypsum, plaster, industrial gypsum cements and fillers, spray textured finish and textured panels. In addition, this industry segment includes the production and marketing of cement board and joint compound. Gypsum products are produced primarily by the Corporation's wholly owned subsidiary. United States Gypsum Company, and its 76 percent-owned Canadian subsidiary, CGC Inc. Distribution is carried out through mass merchandisers, building materia! dealers, contractors, distributors, and industrial and agricultural users. Gypeum, the major raw material, is obtained from the Corporation's mines and quarries throughout North America. Proven reserves contain approximately 249 million tons, of which about 69% are located in the United States and 31% in Caneda. Additional reserves of 137 million tone exist on two properties not in operation. The Corporation's total average annual production of crude gypsum in the United States and Canada during the past five years was 9.4 million tom, with 1990 production amounting to about 9.5 million tons. The Corporation maintains an active program of finding and developing new reserves. Corporate geologists estimate that recoverable reserves of gypsum are sufficient for more than 30 yearsofoperation based on recent average annual production. Paper for gypeum board is produced from purchased waste paper. Waste paper and other raw materials used by this segment are purchased from numerous local and national firms. Shortages of raw materials used in this segment are not expected in the foreseeable future. Sales of gypsum products are seasonal to the extent that sales are generally greater from the middle of Bpring through the middle of autumn than during the remaining part of the year. The business is also affected by the cyclical behavior of the new residential and nanresidential construction markets. However, demandfor gypsum products has become more stable in recent years as the decline in housing starts has been offset by an increase in the average unit sire of single family homes and significant growth within the repair and remodel market, which tends not to be cyclical. The Corporation competes in North America as the largest of 16 producers of gypsum wallboard products and accounts for approximately one-tiurd of total gypeum wallboard sales in the United States. Principal competitors in the United States and Canada are National Gypsum Company and the Celotex Corporation (both of which filed bankruptcies in 1990 under Chapter 11 of the Bankruptcy Code), along with Domtar, Inc., Georgia-Pacific Corporation and several small, regional competitors. Principal methods of competition are service, pricing, quality and compatibility of systems. Interior Systems This industry segment includes the manufacture and marketing of ceiling tile and ceiling grid suspension systems, access floor and wall systems, and mineral wool products fay the Corporation's wholly owned subsidiary, USG Interiors, Inc. and by CGC Inc.'s interior systems division. Distribution is carried out through building material dealers, distributors, contractors, and original equipment manufacturers. . Principal raw materials used in the production of interior systems products include mineral fiber, steel, aluminum extrusions and high-pressure laminates. Certain of these raw materials are produced internally, while others are obtained from various outside suppliers. Shortages of raw materials used in this segment are not expected in the foreseeable future The interior systems business is affected primarily by the cyclical behavior of Lhe domestic non residential construction market, which is offset somewhat by stable demand from the repair and remodel market and growing demand for interior systems products in Canada and other international markets. 5 The Corporation estimates that its acoustical ceiling tile accounts (or over one-third of the domestic commercial market. Principal competitors of the Corporation's acoustical ceiling tile include Armstrong World Industries Inc. and The Celotex Corporation (which filed bankruptcy in 1060). Principal domestic competitors of the Corporation's ceiling grid include Chicago Metallic Corporation and National Rolling Mills. The Corporation's principal competitor in access floor systems is Tate Aeeeaa Floor Inc. The Corporation's major competitors in wall Bystems are Hauserman, Inc. and National Gypsum Company. Reliable market share estimates for ceiling grid, access floor systems and wall systems are not available. Principal methods of competition for all products in the Interior Systems segment are service, pricing, quality, compatibility of systems, and productdesign features. Building Products Distribution This industry segment represents the distribution of gypsum board, joint compound, ceiling tile, drywell metal products, plaster, roofing, and insulation products by the Corporation's wholly owned subsidiary, LAW Supply Corporation, to contractors in the residential and nonresidential construction markets. Sales are seasonal to the extent that salesare generally greater from the middle ofspring through the middle of autumn than during the remaining part of the year. The business is also affected by the cyclical behavior ofthe new residential and nonresidential construction markets. IAW Supply operated 128 distribution centers as of December 31,1990, and estimates that it supplies approximately 9% of all gypsum board sold in the United States. Principal competitors in the United States are Gypsum Management Supply, which is a nationwide competitor, Gypsum Drywell Management Association in the southern market, Metro Building Supply (which filed bankruptcy in 1990 under Chapter 11 of the Bankruptcy Code) in the Mid-Atlantic market end Strober Building Supply in the northeastern market Principal methods of competition are location, service and pricing. General Information ' Loss of one or more of the patents or licenses held by the Corporation would not have a mqjor impacton the Corporation's business or its ability to continue operations. None ofthe industry segments has any special working capital requirements. None ofthe industry segments is materially dependent on a single customer or a few customers on a regular basis. _ Because of the nature of the manufacturing processes, none of the industry segments has any significant backlog; rather, they fill orders upon receipt. No material part of any industry segment's business is subject to renegotiation of profits or termination ofcontracts or subcontracts at the election ofthe government. All of the Corporation's products regularly require improvement to remain competitive. The Corporation also develops and produces comprehensive systems employing several of its products. In order to maintain its high standards and remain a leader in the building material industry, the Corporation has performed extensive research and makes the necessary capital expenditures to maintain production facilities in sufficient operating condition No single customer of the Corporation accounted for more than 4% of the Corporation's 1990 or 1989consolidated net sales. The average number of persons employed by the Corporation during 1990 and 1989 was 12,700 and 13,400, respectively. Research and Development The Corporation maintains a modern corporate research and development facility located in Libertyville, Illinois. Fire and structural testing, construction systems, and product development test facilities are located in a large pilot plant building adjacent to the main laboratory building which houses product development laboratories and an analytical laboratory. Acoustical testing facilities are located in Round Lake, Illinois. Overall, research and development activities at these locations involve technology relating to gypsum, paper, mineral fiber, acoustical ceiling tile, cement board, joint compounds, textures, coatings and polymers. Development work related to building systems and assemblies is also carried out. For the most part, these incorporate either gypsum or cement board. A separate research and development facility located in Avon, Ohio is operated by the Corporation's subsidiary, USG Interiors, Inc. This facility provides product design, engineering and testing services. It also provides manufacturing process development, primarily in metal forming, with tool and machine design and construction services. These services are provided for facilities producing ceiling products and access floor and wall systems. Fad Supply and Energy The Corporation's gypsum, paper, lime and ceiling tile plants, and transport ships are substantial users of thermal energy. Six major fuel types are used in a mix consisting of 79% natural gas, 8% electricity, 5% coke, 4% coal and 4% oil. With few exceptions, plants which use natural gas are equipped with fuel stand-by systems, principally oil. Primary fuel supplies have been adequate and no curtailment of plant operations hu resulted from insufficient supplies Supplies are likely to remain sufficientfor projected requirements in the foreseeable future. id) Financial Informatiaa About Foreign andDomestic Operations and Export Sales Financial information about foreign and domestic operations and export sales for the years 1968 through 1990 appears on pages 35 and 36 of this report under "Significant Accounting Policies and Practices" in Item 8. "Financial Statements and Supplementary Data." ItemS. PROPERTIES The Corporation's plants, mines, ships, quarries and other facilities are located in North America, Europe, Australia, New Zealand, and Malaysia. Many of these facilities are operating at or near full capacity. All facilities and equipment are in good operating condition and sufficient expenditures have been made annually to maintain them The locations of the production properties of the Corporation's subsidiaries, grouped by industry segment, are as follows (plants are owned unless otherwise indicated): 7 Gypsum Products Gypsum Boardand Other Gypsum Products United States CfrPWfla (*)(**) Baltimore, Maryland * Boston (Charlestown), Massachusetts * Detroit (River Rouge), Michigan * East Chicago, Indiana Empire (Gerlacti), Nevada Fort Dodge, Iowa * Fremont, California ** Galena Park, Texas Gypsum, Ohio Jacksonville, Florida New Orleans, Louisiana * Norfolk, Virginia Oakfield, New York Plaster City, California Plasterco (Saltville), Virginia * Santa Fe Springs, California Shoals, Indiana Sigurd, Utah Southard, Oklahoma Sperry, Iowa * Stony Point, New York Sweetwater, Texas Hagersville, Ontario * Montreal, Quebec * St. Jerome, Quebec Mexico *** Puebla, Puebla (two locations) The gypsum plants utilize locally mined or quarried gypsum rock unless otherwise noted. Disclosures related to crude gypsum rock reserves owned by the Corporation and production appear under Item I, page 4. * Them plants use rock from quarry operations at Alabaster, Michigan; Empire, Nevada; Plaster City, California; or Little Narrows and Windsor, Nova Scotia. ** These plants purchase synthetic gypsum from outside sources. *** These plants purchase all rock from outside sources. Joint Compound Surface preparation and joint treatment products are produced in plants located at Chamblee, Georgia; Dallas, Texas; East Chicago, Indiana; Fort Dodge, Iowa; Gypsum, Ohio; Jacksonville, Florida; Port Reading, New Jersey (leased); Sigurd, Utah; Torrance, California, Hagersville, Ontario, Canada; Montreal, Quebec, Canada; and Puebla, Mexico. Construction MetalProducts Metal lath, plaster and drywall accessories and light gauge steel framing products are manufactured at Puebla, Mexico and Montreal, Quebec, Canada (leased). Paper Paper for gypsum board is manufactured at Clark, New Jersey; Galena Park, Texas; Gypsum, Ohio; Jacksonville, Florida; North Kansas City, Missouri, Oakfield, New York; and South Gate, California. 8 Miscellaneous A mica-processing plant is located at Spruce Pine, North Carolina. Perlite ore is produced at Grants, New Mexico. These minerals are used in the production of joint compound and gypsum products, respectively. Lime products are produced at New Orleans, Louisiana, which purchases raw material from outside suppliers. Miscellaneous building products are produced at Bramalea, Ontario, Canada (leased) (tub and shower enclosures) and San Juan Ixhautepec, Mexico (acoustical ceiling tiles). Metal safety grating products are produced at Burlington, Ontario, Canada (leased); and Richmond, British Columbia. Canada (leased). Ocean Vessels A wholly owned subsidiary of the Corporation, headquartered in Bermuda, owns and operates a fleet of three self-unloading ocean vessels. Under contracL of affreightment, these vessels haul gypsum rock from Nova Scotia to the East Coast and Gulf port plants of United States Gypsum Company, another wholly owned subsidiary of the Corporation. Excess ship lime, when available, is offered for charter on the open market. Interior Systems Ceiling Tile Acoustical ceiling tile and panels are manufactured at Cloquet, Minnesota; Greenville, Mississippi; Gypsum, Ohio; and Walworth, Wisconsin. Construction of a new ceiling tile plant in Aubange, Belgium is expected to be completed during the first halfof 1991. Ceiling Grid Ceiling grid products are manufactured at Cartersville, Georgia; Stockton, California; Westlake. Ohio; Auckland, New Zealand (leased); Dreux, Prance; Oakville, Ontario, Canada; Peterlee, England (leased); Selangor, Malaysia (leased); Viersen, West Germany; and Smithfield, Australia (leased). A coil coaler and slitter plant used in the production ofceiling grid is located at Westlake, Ohio. Access FloorSystems Access floor system products are manufactured at Red Lion, Pennsylvania; Dreux, France; Oakville, Ontario, Canada; Peterlee, England (leased); Selangor, Malaysia (leased); and Viersen, West Germany. Wall Systems Wall system products are manufactured at Medina, Ohio (leased). Mineral Wool Mineral wool products are manufactured at Birmingham, Alabama; Corsicana, Texas; Red Wing, Minnesota; Tacoma, Washington; Wabash, Indiana; and Weston, Ontario, Canada. Commercial Interior Systems On February 28,1990, the Riverside, California (leased) location was closed and the operations were transferred to Westlake, Ohio. 9 ItemS. LEGAL PROCEEDINGS Information on legal proceedings appears on pages 31 through 33 ofthis report under "Significant Accounting Policies and Practices" in Item 6. "Financial Statements and Supplementary Data." Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None during the fourth quarter of 1990. PART 11 Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS (a) Information with respect to the principal market on which the Corporation's common stock is traded and the range of high and low closing market prices for each quarterly period during the past two years appears on page 38 of this report under "Quarterly Financial and Stock Price Highlights" in Item A "Financial Statements and Supplementary Data". (b) As of February 28,1991, there were 15,341 stockholders of record of the Corporation's common stock. (c) There have been no dividends declared since the second quarter of 1988. The Corporation's term loan agreement prohibits the payment of cash dividends until full repayment of the loan (currently scheduled forJune 30,1998). Item 6. SELECTED FINANCIAL DATA Information with respect to selected financial data appears on page 36 of this report under "Comparative Five-YearSummary" in Item 8. "Financial Statements and Supplementary Data". 10 Item 7. MANAGEMENTS DISCUSSION AND ANALYSIS OP RESULTS OP OPERATIONS AND FINANCIAL CONDITION 1910 Compared with 1889 Results ofOperations Consolidated Results Adverse economic conditions and excess production capacity in the gypsum industry, combined with a high level ofinterest expense on debt incurred to finance the 1988 recapitalisation, resulted in a net loss in 1990. Market opportunities were limited for many of USG's product lines as new residential construction was at its lowest level since 1982. Nonresidential opportunity was also down in 1990compared to previous years. Consequently, the Corporation announced on December 31,1990 that it was developing a new long-term financial restructuring plan to address the Corporation's present capital structure and future cash flow needs. As an integral part of the decision to restructure, the Corporation deferred its 8105 million scheduled term-loan repayment due December 31,1990 pending implementation of the entire restructuring program. The new restructuring plan, which is being developed with the participation of its senior lending banks, includes, among other things, the divestiture of DAP Inc. Other elements of the plan are discussed in more detail under liquidity and Capital Resources on pages 12 and 13 ofthis report. Consolidated 1990 net sales from continuing operations of$1,915 million decreased 4.6% from the 1989 level, while gross profit as a percentage of net saleB for 1990 was 21.7%, down from 25.0% for 1989. These declines were primarily attributable to lower realised selling prices on gypsum board. As a resultofcontinued efforts to reduce overhead, selling and administrative expenses decreased for the third consecutive year. For 1990, these expenses were reduced 2.9% from the 1989 level primarily due to lower costs related to employee compensation and benefits. However, selling and administrative expenses as a percentage ofnet sales increased slightly to 10.6% from 10.4% for 1989 reflecting the lower level of1990 net sales. Restructuring expenses totaling $18 million were recorded in 1990, largely for e program implemented in the fourth quarter to improve operating efficiencies in each of USG's businesses. While the Corporation's subsidiaries will remain distinct business units, continuing to pursue their own financial and operating objectives, select staff functions that had previously existed at bath the corporate and subsidiary levels were combined to service the entire organization. This plan resulted in the elimination of over 550 positions, which will favorably affect 1991 operating expenses. Certain additional absorptions related to restructuring were also recorded. Operating profit declined 33.2% from 1989 reflecting a lower level of gross profit, as well as the aforementioned charge for the restructuring program which had no prior year counterpart. Interest expense for 1990 was down slightly versus 19B9. Other expense (net) decreased 66.7% primarily due to a lower 1990 charge for the minority shareholders* interest in CGC's income. In 1990, the Corporation recorded a nonrecurring pre-tax gain of$34 million on the sale of USG's corporate headquarters building. In 1989, nonrecurring pre-tax gains totaling $33 million were recorded. Information on nonrecurring gains is contained in the related footnote on pages 21 and 22 ofthis report. An income tax benefit of $6 million was recorded in 1990 due primarily to a tax benefit on a loss from continuing operations. This benefit is net of tax expense on foreign subsidiary earningB. The effective LaxAhenefit) rate for 1990 was (9.8%) compared to 14.3% for 1989. A loss of$54 million from continuing operations was recorded for 1990 compared with earnings of $20 million for 1989. Gypsum Products Net sales in 1990 for the Gypsum Products segment were down 10.2% reflecting depressed results for both domestic and Canadian gypsum board. U.S. Gypsum's 1990 sales declined versus 1989 primarily due In an 8% decrease in average gypsum board selling prices. However, domestic gypsum 11 board volume was virtually unchanged from 1989 despite a lower level of housing starts. In 1990, U.S. housing starts declined approximately 13% from 1989 following an 8% reduction in 1989 versus 1988. Demand for gypsum products has become more stable in recent years as the decline in housing starts has been offset by an increase in the average unit size of single family homes and significant growth in the repair and remodel market, which tends not to be cyclical. U.S. Gypsum's lower 1990 sales also reflect the absence ofthe construction metal business, which was divested on June 30,1989. Sales of CGC Inc.'s gypsum board were adversely affected by a 15% decrease in volume and a 10% drop in selling prices. In Eastern Canada, where CGC conducts approximately 96% of its gypsum business, housingstarts registered a 21% decrease from the comparable 1989 level. Operating profit in 1990 for the Gypsum Products segment declined 34.4% from 1989. Profitability for this segment, as well as for the Building Products Distribution segment, was adversely affected fay the continuing difficult economic environment. Increased production capacity combined with an overall weaker construction market have had an adverse effect on gypsum board prices. Since the economic environment is not expected to improve in 1991, it unclear at this time when an upward trend for domestic gypsum board prices might begin. U.S. Gypsum's 1990 operating profit was also lowered by restructuring charges of $7 million. However, unit costs for domestic gypsum board were virtually unchanged as U.S. Gypsum continues to closely monitor its energy, labor and raw material costa. Operating profit for CGC declined primarily due to its lower gypsum board volume and prices and a 3% increase in unit costs. These unfavorable trends reflect a slowdown in Canadian construction and increased competition from U.S. imports. However, during the last half of 1990, Canadian gypsum board prices appear to have stabilized. interiors Systems Net sales in 1990 of Interior Systems improved 1.7% over 1989. This increase was primarily attributable to (JSG Interiors Inc.'s international business units as sales improved across all international product lines due to increased market penetration for acoustical ceiling tile and access floors. In addition, a favorable foreign currency translation contributed to the higher level of international sales. Sales in 1990 of domestic acoustical ceiling tile were up slightly, while a small decrease was recorded for commercial grid. Lower sales were also recorded for domestic access doors and walls. Sales of CGC*s interior systems declined 11.1% from 1989 reflecting the slowdown in Canadian construction Operating profit for Interior Systems in 1990 decreased 13.5% reflecting depressed results for USG1 nterror's domestic access floors and walls business and an 18.2% drop in CGCs interior systems operating profit. Restructuring charges of $4 million also had an adverse effect on USG Interiors' 1990 operating profit, while reduced overhead (down 5.1%) and improved operating profit for its growing international businesses were mitigating factors.. The opening of a new ceiling tile plant in Aubange, Belgium in 1991 will provide excellent growth opportunities in Europe. Building Products Distribution This segment, which iB comprised of L&W Supply Corporation's distribution business, recorded a 1.4% decline in net sales compared to 1989. Lower gypsum board prices and volume were offset to a large extent by i mproved sales ofroofing, plaster and drywall metal products reflecting L&Ws efforts to diversify its product lines. Operating profit for L&W Supply decreased 42.9% versus 1989. This decline was largely due to restructuring charges of $2 million in 1990. as well as the aforementioned performance of gypsum board and intense competition from independent distributors 12 Discontinued Operations In the fourth quarter of 1990, the Corporation's Board of Directors authorised the divestiture of DAP Inc., a wholly owned subsidiary. Results for DAP, net of related income taxes, have been reclassified as discontinued operations in the accompanying Consolidated Statement ofEarnings. An after-tax reserve of$41 million related to the planned divestiture of DAP was recorded in the fourth quarter of 1990. Results, net orrelated income taxes, for Masonite Corporation, the Kinkead and Marlite divisions and Wise, Janney. Elstner Associates, Inc., op to the times oftheir respective dispositions, are also set forth separately in the accompanying Consolidated Statement of Earnings. Additional information on discontinued operations is contained in the related footnote on page 21 ofthis report Liquidity and Capital Resources Financial Restructuring From July 13, 1988, the effective date of recapitalization, through September 30, 1990, the Corporation was in compliance with all f its term loan covenants, as amended, and made all principal and interest payments on or ahead of schedule. During this period, the Corporation repaid $760 million, or nearly half of its term loan debt. This was accomplished despite a deteriorating economic environment and reduced business opportunity for construction products. During the fourth quarter of 1990, a series of developments occurred which taken as a whole caused the Corporation to proceed immediately with a long-term financial restructuring program which had been under consideration. Specific items which led to an acceleration of the restructuring timetable included: a further worsening of the Corporation's short-term outlook ai construction activity declined in the second half of the year, the potential impact on the Corporation's trade creditors of Chapter 11 bankruptcy filings by certain of the Corporation's competitors in the building products industry; and the failure to receive cash expected from the Libertyville research facility sale/leaseback transaction which waa terminated by the prospective purchaser. On December 31,1990, the Corporation announced that it was developing a long-term financial plan to restructure its debt and address future cash flow needs. A broad outline of the plan was presented to the Corporation's senior lending banks which have indicated that they will participate in the development of specific elements of the plan. The restructuring plan is expected to involve: an exchange proposal for certain public debt securities, including the 13.26% senior subordinated debentures, due 2000, and the 16.0% junior subordinated debentures, due 2008; extension of the term loan amortization schedule; substantial equity dilution; and the sale of DAP Inc. The exchange proposal may involve a package consisting of any or all of the following: cash, shares of common stock; and new debt. As pert ofthe restructuring, USG is also exploring the feesibtiity of a sale of a significant equity stake to a strategic or financial investor. Proceeds from an equity infusion, if made, and from the sale of DAP will be used as determined by the restructuring plan. In connection with the restructuring plan, the Corporation deferred the repayment of $106 million in term lean principal due to its senior lending banks on December 31, 1990 in order to maintain adequate liquidity during the restructuring process. The Corporation was subsequently notified that an event of default existed under the term loan agreement by reason of its failure to make this scheduled repayment. Accordingly, the senior lending banks have notified the Corporation that no payments or distributions may be made to holders of the 13.25% senior subordinated debentures while the default continues. As a result, payments totaling approximately $40 million due on January 15,1991 to the 13.25% senior subordinated bondholders were not made. The Corporation also was not in compliance with certain other term loan covenants including those regarding interest coverage, debt leverage and net worth as of year-end 1990. Other requirements and restrictions caused by the default condition are explained in the Indebtedness footnote on pages 25 through 27 of this report 13 The Corporation does itoL intend to file Tor protection under Chapter 11 bankruptcy laws. This restructuring is intended to provide an appropriate revision to the Corporation's capital structure without incurring the excessive expense, time and uncertainty typically experienced in bankruptcy proceedings. While it is uncertain when the restructuring will be completed, the Corporation expects the plan will be accomplished before the end of 1991. Working Capital As ofDecember 31,1990, total current liabilities exceeded total current assets by 92.2 billion and the ratio ofcurrent assets to current liabilities was 0.24 to 1,compared to 1.09 to 1 asofDecember 31, 1989 when current assets exceeded current liabilities by $51 million. Current liabilities as of December 31,1990, increased significantly due to the reclassification of the outstanding balance of the term loan, as well as most other long-term debt issues, to current liabilities. In accordance with the term loan agreement, the outstanding balance of the term loan could by notice from the requisite majority of senior lending banks become immediately due and payable. Most of USCsother long-term debt agreements contain clauses which permit the respective lenders to accelerate the due dates, generally if there occurs an acceleration of $50 million or more of other debt Although no demand for acceleration of the maturity of long-term debt has occurred, demand can be made, subject to any applicable notice periods and cure procedures, if an acceleration as described above for the term loan occurs. Accordingly, virtually all long-term debt issues have been reclassified to current liabilities as ofDecember 31,1990. Term loan repayments of$30 million each scheduled for J une 30, and September 30,1991, as well as $100 million of 7.375% senior notes due to mature on December 31,1991 have been reclassified from long-term debt to currently maturing debt. Notes payable increased in 1990 due to borrowings on the term loan's revolving credit facility. As ofDecember31,1990, total net revolvingcredit borrowings of $140 million were outstanding. A higher level of currant assets as of December 31,1990, primarily reflects increased cash as a resultofthe revolving credit borrowings and deferral ofthe term loan repayment One of the Corporation's subsidiaries is a defendant in asbestos litigation, including claims related to property damage and personal injury. In view ofthe current financial circumstances ofthe Corporation, management is unable to determine whether an adverse outcome in the asbestos litigation will have a material adverse effect on the consolidated financial position ofthe Corporation. In addition, the Corporation and its subsidiaries have been named as among numerous "potentially responsible parties" in certain "Superfund" sites in the United States. Management does not presently believe that the resolution of these or any other environmental matters will have a material adverse effect on the consolidated financial position of the Corporation. Information on asbestos litigation and environmental matters is contained in the litigation footnote on pages 31 through 33 of this report. Long-Term Debt As of December 31,1990, total long-term debt, excluding amounts maturing within one year, was $72 million, down significantly from the December 31, 1989 level due to the aforementioned reclassification of most long-term debt issues to current liabilities. Accrued pay-in-kind interest of $54 million was recorded during 1990 on the 16.0% junior subordinated debentures. Debt financing of approximately $40 million was incurred for the construction of the new ceiling tile plant in Aubange, Belgium, of which $30 million is reflected in tang-term debtand about $10 million it included in short-term notes payable. Additional information on long-term debt is contained in the indebtedness footnote on pages 25 through 27 ofthis report. 14 Cash Flow Cash and cash equivalents increased $106 million during 1990 primarily due to the aforementioned borrowings on the revolving credit facility and the decision to defer the year-end 1990 term loan repayment A substantial depletion of existing cash resources would have occurred if the December 31,1990 scheduled term loan repayment had been made. This cash depletion, coupled with the announcement of a major financial restructuring program, could have significantly diminished the trade credit available to the Corporation. USG, with the concurrence of its financial advisors, concluded that it would not be prudent to attempt to implement the restructuring program during an extended period of uncertainty with a substantially reduced cash position. The Corporation intends to pay its trade and operating expenses in a timely manner throughout the restructuring process which will maintain the long-term value of the business for all of its investors and stakeholders. In 1990, financing activities produced a net cash inflow of $118 million. This inflow reflects the revolving credit borrowings, financing for the construction of the new Belgian plant and line of credit borrowings made by subsidiaries in Europe end Canada to satisfy short-term needs. During 1990, the Corporation's debt repayments totaled $82 million, of which $80 million was for term loan repayments nude earlier in the year. Operating activities resulted in a net cash outflow of$2 million. Investing activities in 1990 resulted in a net cash inflow of $1 million, as capital expenditures were slightly more than offset by gains on the sales of assets, ineluding the corporate headquarters building. Capital Expenditure* Capital expenditures during 1990 totaled $64 million These expenditures, which include $24 million for the construction ofthe mw ceiling tile plant in Belgium, were down $12 million, or 15.8%, from 1989. As of December 31, 1990, capital expenditure commitments for the replacement, modernisation and expansion of operations amounted to $20 million, compared to $55 million as of December 31,1989. As a result of the recapitalization in 1988 and in accordance with covenants contained in the term loan agreement, as amended, capital expenditures have been reduced over the past three years and will continue to be maintained substantially below historical levels in order to increase cosh flow. Although management does not expect that this reduction in capital expenditures will have a material adverse affect on the Corporation's competitive position over the near term, it is possible that the Corporation's competitive position could deteriorate over time should reductions continue in the long term. Restrictions capital spending currently contained in the term loan credit agreement are expected to be renegotiated as part of the new financial restructuring plan. 1989 Compared with 1988 Results ofOperations Consolidated Results Consolidated 1989 net sales from continuing operations of $2,007 million declined 3.0% from the 1988 level. Grom profit as a percentage ofnet sales for 1989 was 25.0%, down from 25.8% for 1988. Sailing and administrative expenses were reduced 6.3% versus 1988 primarily due to decreased expenses related to employee compensation and benefits. Selling and administrative expenses as a percentage ofnet sales were 10.4%, compared with 10.8% for 1988. IS While no recapitalization and restructuring charges were recorded in 1989, pre-tax charges totaling $20 million were recorded in 1988 for the buyout of stock options, for transaction costs and for severance costs associated with a salaried workforce reduction program. Operating profit for 1989 improved slightly over 1988 due to the absence of recapitalization and restructuring charges and reduced selling and administrative expenses. Interest expense increased significantly over 1988 due to additional interest recorded in 1989 on the indebtedness incurred in July 1988 to finance the recapitalization. Other expense (net) was virtually unchanged compared to 1988 as a tower charge in 1989 for the minority shareholders' interest in CGC's income was offset by an additional six months of amortisation ofcapitalized financing costs associated with the recapitalization. In 1989, the Corporation recorded nonrecurring pre-tax gains totaling $33 million, while there were no such gains in 1988. Taxes on income for 1989 declined 93.0% from 1988 due to a lower level of pre-tax earnings from continuing operations. The effective tax rate for 1989 declined to 14.3% from 39.4% for 1988. The 1989 provision reflects a carryback benefit for a net operating loss from domestic operations at the statutory rate for 1966 of46%. A comparison of earnings from continuing operations for 1989 and 1988 is not meaningful due to significant variations in interest expense, nonrecurring gains and recapitalization and restructuring expenses. Gypsum Products Net sales in 1989 for the Gypsum Products segment were down 6.3% reflecting lower selling prices for domestic and Canadian gypsum board and the absence ofsecond-half 1989 net sales for the construction metal business U.S. Gypsum's gypsum board selling prices and volume fell 4% and 2%, respectively, versus 1986. These declines were eaused by increased production capacity throughout the gypsum industry and limited market opportunities. Prices and volume for CGC gypsum board declined 16% and 7%, respectively, from 1988 primarily due to increased competition from U.S. imports. Operating profit in 1989 for the Gypsum Products segment declined 14.7% from 1988 due to the lower gypsum board prices. However, unit costs for domestic and Canadian gypsum board each fell 2%, partially offsetting the lower prices. interior Systems Sales of Interior Systems rose slightly in 1969 Improved sales were recorded for USG Interiors' acoustical ceiling tile and for its international business units as well as for CGC's interior systems business. These improvements were partially offset by a sales decline for USG Interiors' wall products, while sales ofdomestic commercial grid were virtually unchanged. Operating profit for the Interior Systems segment in 1989 increased 7.2% reflecting the improved sales performances ofUSG Interiors and CGC Inc. and reduced overhead. Building Products Distribution Net sales for this segment were virtually unchanged compared to 1988, as lower gypsum board prices and volume for L&W Supply Corporation were offset by improved sales of drywall metal, roofing and calling products. Operating profit for L&W Supply decreased 41.7% versus 1986 reflecting lower gypsum board prices and a higher level ofoverhead. 16 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Consolidated Statement ofEarnings - years ended December 31,1990,1889 and 1988 ........................................................................ Consolidated Balance Sheet-as ofDecember 31,1990 and 1989 ........................... Consolidated Statement ofCash Plows - years ended December 31,1990, 1989 and 1988 ........................................................................................................... Significant Accounting Policies and Practices ("notes") 1990,1989and 1988 ........... Report ofIndependent Public Accountants ................................................................ Selected Quarterly Financial Data-for the years ended December 31,1990 and 1989 Comparative Five Year Summary ................... Schedule V - Consolidated Property, Plant and Equipment .............................. Schedule VI - Accumulated Depreciation and Depletion of Property, Plant and Equipment ............................................. Schedule VIII - Valuation and Qualifying Accounts ............................................ .. Schedule IX - Short-Term Borrowings..................................... ........ ................... Schedule X - Supplemental Income Statement Information .......... Report ofIndependent Public Accountants with Respect toSupplemental Financial Statement Schedules .................................................. Supplemental Note on Financial Information for United States Gypsum Company ................................................... Consent ofIndependent Public Accountants with Respect to Supplemental Note to the Financial Statements ................... ............................. I? 18 19 20 37 38 3 40 41 42 43 44 45 46 47 All other schedules have been omitted because they are not applicable, are not required, or the information is included in the financial statements or notes thereto. 17 USG CORPORATION CONSOLIDATED STATEMENT OP EARNINGS (All dollar amounts in millions except per-share figures) Net Sales ............................................................ Cost ofproducts sold ...................................-- Gross Profit ....................................................... Selling and administrative expenses .................. Recapitalization and restructuring expenses___ Operating Profit .............................................. Interest expense .................................................. Interest income ................................................... Other expense, net .............................................. Nonrecurring gains ....................... .................... Earaings/(Loss) from Continuing Operations Before Taxes on Income . ....................... Taxes on income .................................................. Earnings/(Loss) from Continuing Operations Discontinued Operations: Operating earnings, net of taxes .................. Reserve for DAP Inc. planned divestiture and gains on divestitures, net of taxes ............ Net Eamings/(Loss) ......................................... Earnings/(Loss) Per Common Share: Continuing operations ................................. Discontinued operations ............................ . Net Earnings/(Loss) Per Common Share ___ Years ended December 31 1990 1989 IMS 1 1,915 1499 $ 2,007 1506 g 2,070 1.536 416 501 534 203 209 223 18 . 20 195 292 291 292 IB) S m. 297 (10) 15 _____ 1221 178 (13) 16 (60) 23 110 SSL . 2_ 12. (54) 20 67 5 6 15 141) 2 43 28 125 (.99) (66) 11 65) .37 14 _____ ^ 1.26 1.12 2.38 Theaccounting pekoes and prattlers an panes 20 through 3Sanaa integral part ofthis statement. 18 USG CORPORATION CONSOLIDATED BALANCE SHEET (All dollar amounts in mlHioas) Assets Current Assets: CaBh and cash equivalents (primarily lime deposits) ..................... Receivables (net of reserves, 1990-$B, 1989-$11) ............................ Inventories......................................................................................... Net assets ofdiscontinued operations .............................................. Total current assets .............................................................. Property, Plant and Equipment, Net ........................................... Purchased Goodwill, Net .............................................................. Other Assets ................ ....................... ...................... ................. Total assets ..................................... .................................... liabilities and Stockholders' Equity Current Liabilities: Accounts payable .............................................................................. Accrued expenses Interest ....................................................................... ............... Payrolls .................... ................................................................ Taxes other than taxes on income .............................................. Recapitalization and restructuring....... ..................................... Reserve for DAP Inc. planned divestiture.................................. Other ......................................................................................... Notes payable ..................................... ............................................ Long-term debt maturing within one year ......................... .............. Long-term debt and debentures classified as current....................... Taxes on income ............................................. .............................. Total current liabilities ....................................................... Long-Term Debt ....................................................................... .. DeferredIneoaaeTaxes ....................................................... .. Minority Interest in CGC Inc. ....................................................... Stockholders* Equity/!Deficit): Preferred Stock - $1 par value; authorized 36,000,000 shares- $1.80 Convertible Preferred Stock (initial series)outstanding at December 31,1990 and 1988-none................... Common Stock - $0.10 par value: authorized 300,000,000 shares, outstanding at December 31,1990-55,097,676shares and December 31,1989 - 54,165,686 shares (after deducting 422,043 and 102,467 shares, respectively, held in treasury)............ ... . Capital received in excess ofpar value ................................... ........ Deferred currency translation ....................................................... Reinvested earnings/ldeficil) .......................................................... Total Stockholders' equiiy/tdeficit) ..................................... Total liabilities and slock holders' equity..................... -- As of December 81 iw .jm 8 175 282 103 121 697 825 75 _____ m $ 67 275 109 139 690 837 77 _____ SL -L&tt 104 60 12 12 18 43 113 166 268 2,104 ___ . 2.895 72 213 13 123 70 21 14 12 121 1 168 ____a 2,259 211 14 5 23 (1.546) iLm 5 15 (3) <1-4551 __ LL1MI The accounting jwitcie* and practice* im page* 20 through 3d are an integral part oftlu* italement 19 08C CORPORATION CONSOLIDATED STATEMENT OP CASH FLOWS (All dollar amounts in millions) Cash Flows from Operating Activities: Earnings/doss) from continuing operations ......................... Reserve for DAP Inc. planned divestiture, net oftaxes ....... Adjustments to reconcile earnings from continuing operations to net cash Depreciation, depletion and amortisation .......... Interest expense on pay- in-kind debentures .......... Deferred income taxes........................................... Net gain on asset dispositions ................................. (Increasel/decrease in working capital Receivables .............................................. ............. Inventories .............................................................. Payables................................................................... Accrued expenses ..................................................... (IncreaseVdecrease in other assets ....................................... InereaseAdecrease) in minority interest ....... ................... Other, net ............................................................................ Netcash flows (toVfrom operating activities ........... Cash Flows from Investing Activities: Capital expenditures ........................................................... Net proceeds from asset dispositions ................................. Net proceeds from divestituresofdiscontinued operations . Netcash flows (toVfrom investing activities ....... Cash Flows from Financing Activities: Issuance ofdebt ..................... ................................... ......... Repayment ofdebt .............................................................. KevolvingeredUfacility.net ............................................ Cash dividends paid .......................................................... Other, net ............................................................................ Net cash flows (tol/from financing activities ......... Net Cash Flows (ToVProm Discontinued Operations Net lncrease/(Decrease) In Cash and Cash Equivalents Cash and cash equivalents at January I ............................. Cash and cash equivalents at December 31 Supplemental Cash Flow Disclosures: Interest paid ........................................... Income taxes paid .................................... Years ended December 31 1990 1909 1988 $ (54) $ 20 (41) - $ 67 - 76 79 54 46 28 (37) (22) 79 19 12 (6) (7) 6 (23) 20 3 (1) - 121 (20) 1 (27) (14) 14 (6) 2 ____ ai_ (3) 16 7 72 (60) 7 111 ___ m (64) 65 - i_ (76) 53 20 _____ in (81) 27 419 ___ m. 60 4 2,246 (82) (266) (677) 140 - - - - (1.953) (4) 118 (262) (388) (9) (2) 36 108 (186) 222 67 253 _____21. 175 67 253 J*c amtuntiRg pohut* omfpractice* on pages SO through 38 an an inugralpan ufthu thutmttu. 20 U8G CORPORATION SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES Principles ofConsolidation The consolidated financial statements include the accounts ofthe Corporation and its subsidiaries after elimination of intercompany accounts and transactions. Net currency translation gains or looses on foreign subsidiaries, except for those in Mexico, are included in deferred currency translation, a component to stockholders' equity. Mexican currency translation losses are charged to earnings. _ For purposes of the Consolidated Balance Sheet and Statement of Cash Flows, all highly liquid investments with a maturity ofthree months or less at the time ofpurchase are considered to be cash equivalents. Financial Restructuring On December 31,1990, the Corporation announced that it was developing a long-term financial plan to restructure its debt and address future cash flow needs. A broad outline of the plan was presented to the Corporation's senior lending banks which have indicated that they will participate in the development of specific elements of the plan. The restructuring plan is expected to involve: an exchange proposal for certain public debt securities, including the 13.25% senior subordinated debentures, due 2000, and the 16.0%junior subordinated debentures, due 2009; extension ofthe term loan amortization schedule; substantial equity dilution; and the sale of DAP Inc. The exchange proposal may involve a package consisting of any or all of the following: cash; shares of common stock; and new debt. As part of the restructuring, USG is also exploring the feasibility or a sale of a significant equity stoke to a strategic or financial investor. Proceeds from an equity infusion, ifmade, and from the sale ofDAP will be used as determined by the restructuring plan. ' In connection with the restructuring plan, the Corporation deferred the payment of3105 million in term loan principal due to its senior tending banks on December 31, 1990 in order to maintain adequate liquidity during the restructuring process. The Corporation was subsequently notified that an event of default existed as of December 31,1990 under the term loan agreement by reason of its failure to make this scheduled repayment. Accordingly, the senior lending banks have notified the Corporation that no payments or distributions may be mode to holders of the 13.25% senior subordinated debentures while the default continues. As a result, payments totaling approximately $40 million due on January 16,1991 to the 13.25% subordinated bondholders were not made. Other requirements and restrictions caused by the default condition are explained in the Indebtedness footnote on pages 26 through 27 ofthis report The Corporation does not intend to file for protection under Chapter 11 bankruptcy laws. This restructuring is intended to provide an appropriate revision to the Corporation's capital structure without incurring the excessive expense, time and uncertainty typically experienced in bankruptcy proceedings. While it is uncertain when the restructuring will be completed, the Corporation expects the plan will be accomplished before the end of1991. Recapitalization and Restructuring On July 8, 1988, holders of USG common stock approved the Corporation's plan of recapitalisation and restructuring which was previously approved by the Board ofDirectors. The recapitalisation became effective on July 13, 1988. Stockholders of record on that data became entitled to receive $37 in cash, a $6 face amount 16 0% junior subordinated pay-in-kind debenture and one new common share in exchange for each share of old USG common stock. This distribution to stockholders was recorded as a dividend, resulting in a deficit balance in stockholders' equity as of December 31,1990 and 1989 in the accompanying financial statements. To finance the recapitalization, approximately $2.5 billion in new debt was incurred. The majority ofthe costs incurred to secure financing for the recapitalization were capitalized and these costs are being amortised over the file ofthe related borrowings. Pre-tax charges totaling $20 million were incurred in 1986, reflecting $11 million for the buyout of stock options, $6 million for transaction costs and $3 million for costs associated with a salaried workforce reduction program. 21 USG CORPORATION SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (continued) Recapitalization and Restructuring (continued) During the fourth quarter of 1990, the Corporation recorded pre-tax restructuring chargee totaling $18 million related to a salaried workforce reduction program designed to improve operating efficiencies and for certain additional absorptions related to restructuring. There were no recapitalization and restructuring expenses recorded in 1989 Discontinued Operations In the fourth quarter of 1990, the Corporation's Board of Directors authorized the divestiture of DAP Inc., a wholly owned subsidiary. Results for DAP have been reclassified as discontinued operations in the consolidated financial statements and accompanying footnotes presented in this report An after-tax reserve of$41 million relatad to the planned divestiture of DAP was recorded in the fourth quarter of1990. This reserve is net ofa related income tax benefit of$2 million. Results of Masonite Corporation, the Kinkead Division, the Marlite Division of USG Interiors, Inc. and Wiss, Janney, Elstner Associates, Inc., up to the times of their respective dispositions, are also reflected as discontinued operations in this report. In conjunction with the 1988 plan of recapitalization and restructuring. Masonite Corporation, a wholly owned aubeidiary, and the Kinkead Division were sold in the fourth quarter of 1988 for approximately $400 million and $58 million, respectively. The Marlite Division and Wiss, Janney, Elstner Associates, Inc. were sold in the first quarter of 1989 for approximately $18 million and $11 million, respectively. The net cash proceeds from these divestitures were immediately used to repay term loan debt. The after-tax net gains recorded in 1988 on the divestitures ofMasonite and Kinkead were $46 million and $22 million, respectively. These gains were offset in purl by an after-tax charge f $25 million to write down the book value of Marlite's net assets to estimated realizable value. In 1989, an after-tax gain of$2 million was recordedon the sale ofWiss, Janney, Elstner. Net sales of total discontinued operations amounted to $179 million, $184 million and $741 million in 1990,1989 and 1988, respectively. Net assets of discontinued operations at December 31, 1990 in the accompanying Consolidated Balance Sheet reflect DAPs total assets of $184 million, net ofliabilities totaling$17 million. Nonrecurring Gains In January 1990, a nonrecurring pre-tax gain of $34 million was recorded on the sale of USG's corporate headquarters building at 101 South Wacker Drive in Chicago. ThiB gain was calculated after deducting S9 million as a reserve against which lease payments made by the Corporation while occupying the 101 South Wacker facility are being charged. The Corporation will continue to lease office space in this building until it moves to new leased offices scheduled for completion in 1992. Proceeds from this transaction were used to reduce debt. In March 1989, a pre-tax gain of$16 million was recorded on an insurance settlement following a favorable U.S. Appellate Court ruling. This ruling upheld a U.S. Federal District Court judgment in September 1987 which obligated the insurance carrier to pay the Corporation approximately $25 million for claims stemming from the November 1964 subsidence of a mine shaft at United States Gypsum Company's Plasterco, Virginia, gypsum board plant. In April 1989, the Corporation received a payment of $35 million, which included approximately $10 million in pre- and post-judgment interest. In June 1989, a pre-tax gain of $11 million was recorded on the sale of United States Gypsum Company's construction metal business which had been treated as a continuing operation in the consolidated financial statements. The sale, which was part of the 1988 plan of recapitalization and 22 USG CORPORATION SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (continued) Nonrecurring Gains (continued) restructuring, included live plants and the production equipment from another location in Torrance, California. The disposal ofthe assets ofthis business was completed in November 1969 with the sale of the Torrance land. A pre-tax gain of$6 million was recorded on the latter transaction. Research and Development Research and development expenditures are charged to earnings as incurred and amounted to $16 million, $17 million and $19 million during 1990,1989 and 1988, respectively. Taxes on Income and Deferred IncomeTaxes EamingaAloss) from continuing operations before taxes on income were generated as follows: ttw . m. AW., (Dollar amount*ia millionsI Domestic.................................................................... Foreign ...................................................................... Total ......................................................................... $ HOC) 40 $ (36) 59 2$,, $ 38 72 IN Total taxes on income consist of the following: Current: U.S. Federal ................................................ ....... State and local ................................ .................. Foreign .............................................................. . m. jam-- (Dollar amount! in miltioiu) $ (26) - 16 $ (29) - 21 ...ill. $ U) 2 27 _3S_ Deferred: UJ3. Federal .................... ................................ State and local .................................................... Foreign ................................ .............................. Total ...................................................................... s * (1) 4 ,-181- 9 - 2 11 ____L_ 12 1 2 15 43 Deferred income taxes result from certain items being accorded different tax treatment for financial reporting and income tax purposes. The tax effect of such differences is summarised as follows: jm im _ im {Dollar anounIs m milliana) Accelerated tax depreciation .................................... Other, net.................................................................... Total deferred provision ............................................. Classification adjustment ofprior years' deferrals ... Increase in deferred taxes........................................... $2 2 4 _i2L_ -2- $ 13 (2) 11 _____ L_ _____ &- $ 14 1 IS _____ _____UL 23 USG CORPORATION SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (continued) Taxes on Income and Deferred Income Taxes (continued) The actual income tax rale (total taxes on income as a % of eamingB/flosa) from continuing operations before taxes) differs from the U.S. statutory rate as shown in the following reconciliation: Rate(%> US. statutory rate/lbenefit)............................ .......... NOL carryback rate differential .................... ......... Excess tax depletion ....................................... ......... Intangible assetamortization ......................... ......... Foreign tax rate differential ........................... ......... State and local taxes on income, net................ .......... Other, net......................................................... ......... Actual tax rate/(benefit) ............................................ 1MO (34.0) (6.2) (4.6) 15 30.4 0.2 2.9 IMS 340 (16.4) (13.4) 33 41 21 06 tm 34.0 (28) 0.7 4.2 2.3 1.0 _SLi The Corporation does not provide for Federal income taxes on the portion of undistributed earnings of foreign subsidiaries which are intended to be permanently reinvested. The cumulative amount of such undistributed earnings totaled approximately $91 million at December 31, 1990. Future repatriation of undistributed earnings would not, in the opinion of management, result in significant additional taxes. In December 1937, the Financial Accounting Standards Board CFASB") issued Statement of Financial Accounting Standards ("SFAS") No. 96 requiring the Corporation to change its method of accounting for income taxes beginning no later than 1989. The PASB subsequently issued SFAS No. 163 in December 1989 which deferred the effective date for adoption until 1992. The Corporation has not decided when to implement the new pronouncement, nor has it decided whether to restate prior financial statements. Consequently, the effect that the change will have on the repotted consolidated financial poaition and results ofoperations ofthe Corporation has not been determined. BarnLngs/Xoss) Per Share Earnings/Ooss) per share are computed by dividing earnings/tloss), after deducting preferred stock cash dividends when applicable, by the average number of shares ofcommon stock outstanding, including shares issuable upon the exercise ofstock options. Inventories Most domestic and Mexican inventories are valued under the last-in, first-out (UFO) method. The UFO values of these inventories were $69 million and $63 million at December 31, 1990 and 1989, respectively. The remaining inventories are stated at a lower ofcost or market under the firstin, first-out (FIFO) or average production cost methods. Inventories include material, labor and applicable factory overhead costs. Ifall inventories were valued under the FIFO and average production cost methods, inventories would have been $27 million and $25 million higher than those reported at December 31,1990 and 1989, respectively. 24 USG CORPORATION SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (continued) Inventories (continued) Inventory classifications are as follows: iMIil wi (Dollar amounts in millions) Finished goods and work-in-process Raw materials ................................ Supplies ....................................... Total ............................................. $54 40 2__ 105 57 46 109 I The LIFO value of USG Interiors, Inc.'s inventories acquired under the purchase method exceeded that computed for Federal Income tax purposes by $7 million and (8 million as of December 31, 1990 and 1989, respectively. As a result of these inventories, taxable income was $1 million greater than financial reporting income in 1990, while there was no difference between taxable and financial reporting income in 1989. Property, Plant and Equipment Property, plant and equipment classifications are as follows: -isoim (Dollar amoanU in (million*) Land and mineral deposits .............. Buildings and realty improvements ... Machinery and equipment .................. Reserves for depreciation and depletion Total .................................................... $ 43 386 JEW.. 1,400 --T22O2. $ as 386 985 1,380 _... .sax. Property, plant and equipment, including significant renewals and improvements, are capitalized at cost. Provisions for depreciation are determined principally on a straight-line basis over the expected average useful lives ofcomposite asset groups. Depletion is computed on a basis calculated to spread the cost of gypsum and other applicable resources over the estimated quantities of material recoverable. Interest during construction is capitalized on major property additions. The Corporation leases certain of ita offices, buildings, machinery and equipment, and autos under noncancellable operating leases. These leases have various terms and renewal options. Lease expense was 824 million, $21 million and 317 million in 1990,1989 and 1988, respectively. Approximate future minimum lease payments, by year and in the aggregate, under operating leases with initial or remaining noncancellable terms in excess ofone year, at December 31,1990 are as follows: 25 USG CORPORATION SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (continued) Leases (continued) Minimum Uim _______ EWMlfe-------- Dollar amount* in millions) 1991 ............................................................................................................ 1992 ............................................................................................................. 1993 ............................................................................................................ 1994 ............................................................................................................. 1995 ............................................................................................................ Thereafter .................................................................................................. Aggregate minimum payments ................................................................ $ 19 18 17 13 10 43 The Corporation also holds certain assets under capital leases. These lease obligations are not material Indebtedness Total debtconsists ofthe following: -ijgpw- mm (Dollar amount* in million*) Term loan, installmentsdue through 19% ........................................ $ 840 Notes payable ............................................................................ Senior notes: 7.375%, due 1991 ................................................................................... 100 8.0%, due 1996 ................................................................................ 8.0%, due 1997 ................................................................................ Senior Debentures: 100 100 7.875%, due 2004, sinking fund through 2003 ....................... 48 8.75%, due 2017, sinkingfund commencing 1998 ................................ Subordinated Debentures: 200 13.25% senior subordinated, due 2000, sinking fund of$300 million due 7/15/99 ............................................................... 600 16.0%junior subordinated, due 2008, sinking fund commencing 2004 ..................................... 379 Industrial revenue bonds, 5.9% -10.25%, due through 2014 .............. Other debt, average interest rate 10.7%, 38 varyingpayments through 2005 ................................................... 39 T"...................................................................................................... . iiiW $ 900 156 1 100 100 100 52 200 600 325 38 ! -tin. The recapitalisation in 1988 was financed through borrowings under a $1 6 billion term loan agreement (the "Agreement") with a group of commercial banks, from the sale of 8600 million of 13.25% senior subordinated debentures and from the issuance of $260 million of 16.0% junior subordinated debentures to the Corporation's stockholders. The recapitalization also included the repayment of $200 million of long-term and short-term debt existing at the lime of the recapitalisation. 26 USG CORPORATION SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (continued) Indebtedness (continued) The rate ofintension the term loan in 1990 included a margin ofeither 1.0% over the banks1 base rate, 2.0% over the reserve-adjusted Eurodollar rate, or 2.0% over the reserve adjusted certificate of deposit rate, at the election of the Corporation. The average rate of interest on the term loan, including the cost ofinterest rate protection, was 11.5% during 1990. The Agreement, as amended, contains various restrictions and conditions which the Corporation must maintain, including consolidated net worth (as defined) and financial ratios (as defined) relating to interest coverage, current assets to current liabilities and debt leverage (debt to total capital, both as defined). The Agreement restricts, among other things, the incurrence of additional indebtedness, mergers, asset dispositions, investments, prepayment of other debt, dealings with affiliates, capital expenditures, payment of dividends and lease commitments. The Agreement requires the Corporation to protect the variable-rate term loan against increases in short-term interest rates. The minimum required amount to be protected is calculated as the total of the outstanding balance of the term loan phis 150 million limes 75%. The Agreement includes a $200 million revolving credit facility, of which $70 million is established as a tetter of credit subfacility. The stated rate of interest on the revolving credit facility is the same as for the term loan described above. Under the Agreement, for at least 30 consecutive days during each twelve-month period commencing on July 1, 1958, the aggregate outstanding principal balance of revolving credit borrowings may not exceed $75 million. As of December 31,1990, the Corporation's revolving credit borrowings, included in notes payable on the Consolidated Balance Sheet, amounted to $140 million. There were no revolving credit borrowings as of December 31, 1989. Notes payable also include borrowings from several foreign banks by USG Interiors' international business units which are generally not restricted by the specifications of the Agreement. The term loan and revolving credit facility are secured by a pledge of all of the shares of the Corporation's major domestic subsidiaries and 65% ofthe shares ofcertain ofits foreign subsidiaries including CGC Inc. The 13.25% senior subordinated debentures are redeemable in whole or in part at the Corporation's option at any time on or after July 15,1993, initially at $5 over the stated lace amount and thereafter at declining redemption prices together with accrued interest. The 7.875% sinking fluid debentures have a remaining principal amount of $52 million, of which $4 million was held in treasury as of both December 31,1990 and 1989. The 8.75% sinking fund debentures have a principal amount of$200 million. Under conditions of the Agreement, the Corporation must pay interest semiannually on the 16.0% junior subordinated debentures in additional junior debentures for the first five years after issuance. Thereafter, interest must be paid in cash. Commencing July 15,1990, these debentures were redeemable at the Corporation's option at any time at 100% of stated face amount plus accrued interest. As explained in the Financial Restructuring footnote on page 20 of this report, the new long-term financial restructuring plan is expected to involve, among other items, an exchange proposal for certain public debt securities, including the 13.25% senior subordinated debentures and the 16.0% junior subordinated debentures. The exchange proposal may involve a package consisting of any or all of the following; cash; shares of common stock and new debt. An extension of the term loan amortisation schedule is also expected to be included in the new plan. As of December 31,1990, the Corporation was notified that an event of default existed under the Agreement by reason offailure to make the $105 million term loan principal repayment due that day to the lending banks. This deferral coincided with the scheduled maturity on December 31,1990 of interest rate contracts, resulting in a default of the 75% minimum protection covenant described above. In addition, the Corporation was not in compliance with the Agreement's interest coverage ratio, debt leverage ratio and consolidated net worth covenants as of December 31,1990. 27 USG CORPORATION SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (continued) Indebtedness (continued) As a consequence of the notice of default, certain restrictions under the Agreement have taken effect. First, the Corporation is required to pay interest at a rate of 2% higher than the otherwise applicable loan rate. It is the Corporation's present intent to accrue such additional default interest, but not to pay it currently. The accrued amount will be dealt with as part of the overall financial restructuring plan. Second, the term loan must be converted to a base (prime) interest rate loan at the applicable conversion dates. Third, the deferral of the term loan payment prevents the Corporation from making cash payments to holders ofsubordinated debt while the default continues. This included the interest payments due January 15, 1991 on the 13.25% senior subordinated debentures. As of February 15, 1991, these debentures were in default under the applicable indenture provisions. Fourth, the revolving credit facility under the Agreement, including the letter ofcredit subfaeility, is unavailable for further use so longas a default exists thereunder. Also as a result of the default condition, the outstanding balance of the term loan was immediately reclassified to current liabilities. Most of USGfe long-term debt agreements contain clauses which permit the respective lenders to accelerate the due dates of substantially all of the Corporation's debt, generally if there occurs an acceleration of $50 million r more of other debt. Although no demand Cor acceleration of the maturity of long-term debt has occurred, demand can be made, subject to any applicable notice periods and cure procedures, if an acceleration as described above for the term loan occurs. Accordingly, virtually all long-term debt issues have been reclassified to current liabilities as ofDecember 31,1990. Aggregate maturities of long-term debt, excluding the amounts classified as current liabilities, are $5 million, $5 million, $7 million and $7 million for the four years 1992 through 1995, respectively. Pension Plans and Other Post-Employment Benefits The Corporation and mast ofits subsidiaries, including DAP inc., have defined benefit retirement plans for all eligible employees. Benefits of the plans ere generally based on yeare of service and employees' compensation during the last years of employment. The Corporation's contributions are made in accordance with independent actuarial reports which, for most plans, required minimal funding in 1990,1989 and 1988. Net pension expense for 1990,1989 and 1988 included the followingcomponents: lHO 1080 10M (DollaraaMMints in aiiiliom) Service cost-benefits earned during the year . ... ... interest cost on projected benefit obligation_____ ... Actual return on plan assets ................................ ... Unrecognised prior service cost.......................... ... Netamortisation and deferral ............................ ... Net pension expense/fbenefit) .............................. ... $5 29 (4) 2 134} (21 $5 30 (70) 1 35 1 $7 29 (45) 1 12 4 The pension plan assets, which consist primarily of listed common stocks and debt securities, have an estimated fair value in excess of the projected benefit obligation as of December 31, 1990. The following table presents a reconciliation ofthe funded status of the pension plans to the projected benefit obligation. 28 USG CORPORATION SIGNIFICANT ACCOUNTING POLICIES ANl) PRACTICES icontinned) Pension Plans and Other Post-Employment Benefits (continued) Amount ofassets available for benefits: Funded assets of the plans at fair value ........................... Accrued pension expense .................................................. Total assets ofthe plans .............................. ....................... Present value ofestimated pension obligation: Vested benefits .................................................. ............ Nonveeted benefits ....................... ................................... Accumulated benefit obligation .................. ............. ........... Additional benefits based on projected future salary increases Projected benefit obligation ..................................... ............ Assets in excess ofprojected benefit obligation ...................... IMW> 1M1W (Dollar amount* in million*) $ 370 16 386 2 413 . ilflL,m. 261 264 284 289 58 66 342 355 Assets in excess of projected benefit obligation consist, of: Net assets existing at the date of adoption of SPAS No. 87 not yet recognized ................................................... Unrecognized net gain due to changes in assumptions and differences between actual ami estimated experience ................................................ Unrecognized cast ofretroactive benefits granted by plan amendments ....................................................... Assets in exeess ofprojected benefit obligation .................................. H/31/S0 mm (Dollar amount* in million*) $ 42 f 46 16 (141 mmm-JtL--. 46 (14) --mm2SL The expected long-term rale of return on plan assets was 9% for both 1990 and 19B9. To determine the actuarial present value of the accumulated benefit obligation as of December 31,1990 and 1989, a weighted average discount rate of 9% was used for both years and rate of increases in projected future compensation levels was 6.5% for both 1990 and 1989. The unrecognized prior 8erviee cost is being amortized over 13 years. The Corporation and its subsidiaries also provide certain health care and life insurance benefits for retired employees Substantially all employees may become eligible for these benefits ifthey reach retirement age while still working for the Corporation. For some plans, benefits are paid under administrative service contracts. The cost of health care and life insurance benefits is recognized as expense when claims are reported. For ail health care and life insurance plans related to retired employees, $7 million, $7 million and $6 million were charged to expense in 1990,1989 and 1988, respectively. In December 1990, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 106 requiring the Corporation to change its method of accounting for post employment health henefits. The new pronouncement requires companies beginning no later than 1993 to accrue, or set up a reserve for, future medical benefits of retirees rather than deduct these costs from reported profits eaeh year when paid. The Corporation has not decided when to implement the new pronouncement and the effects ofthe pronouncement have not yet been determined. 29 USG CORPORATION SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (continued) Stockholders' Equity Changes in stockholders' equity for 1990,1989 and 1988 are summarized as follows: Common Sloe*. Balance as ofJanuary I ............................................ Conversion of61,283 preferred to 220,499 common .. Cash, debentures and common stock issued to stockholders ........................................................ Balance as of December 31 ......................................... iwo (Dollar &mounts in millions) __ $5 - 85 $ 207 1 .___ 8 ______ (203) ______ 6 _______ 5 Capital Received in Excess ofPar. Balance as ofJanuary 1 ................................. .......... Stock options exercised (143,525 shares) .................. 15 - Restricted Block issuance and amortization (1990- 941,990 shares; 1989-188,411 shares; 1988-1,982,500 shares) .............................................. Conversion of61,263 preferred to 220,499 common .. - Redemption ofpreferred stock and rights (6,598 shares) - Other, net.................................................................... ............ Balance as ofDecember 31 ................................................. 5 23_ 12 - 3 - 15 5 3 2 (1) (3) _6_ 12 Deferred Currency Translation Balance as ofJanuary I ......................................... Currency translation adjustment .............................. Balance as of December 31 ......................................... <31 16) 3 _______3_ .............______________ {31 (9) x 161 Heinoeeted Earnings Balance as ofJanuary 1 .............................. Net earainga/(loss)......................... .............. Dividends (pre-recapitalization) ................ Cash, debentures and common stock issued to stockholders ........................................... Other.net ...................................................... Balance as of December 31 ....... ................ Total Stockholders'Equity ........................... (1.465) (90) lil <1.546) II 518) (1,482) 28 407 125 (29) _______111 (1-458) (1-438) (1,981) 141 H.4B2) (1.471) As of December 31,1990, the Corporation held 422,043 shares of$0.10 par value common stock in treasury. These shares were acquired through the forfeiture of restricted stock. 30 USG CORPORATION SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (continued) Preferred Share Purchase Rights Upon consummation of the recapitalization in 1988, one Preferred Share Purchase Right ("Right") was declared as a dividend for each outstanding share of new common stock. The Rights will become exercisable ten days following a public announcement that a party acquired, or obtained the right to acquire, beneficial ownership of 20% or more of the Corporation's outstanding common shares, or ten days following commencement or announcement of a tender offer or exchange offer for 30% or more ofthe Corporation's outstanding common shares. When exercisable, each Right entitles the registered holder to purchase one-tenth of a share of a Junior Participating Preferred Stock, Series C, $1.00 par value per share, at a price of$35.00 per one-tenth of a preferred share, subject to adjustment Ifthe Corporation is involved in a merger or business combination at any time after the Rights become exercisable, the Rights will entitle the holder to buy a number of shares of common Block of the acquiring company having a market value aL that time of twice the exercise price of each Right 'Hie Rights contain provisions which are intended U> protect stockholders in the event of an unsolicited attempt to acquire the Corporation. Common Stock Option Plans Pursuant to the plan of recapitalization, the 1988 Management Performance Plan (the "1988 Plan") was established. A total of8,600,000common shares was reserved for issuance under the 1988 Plan. The 1988 Plan authorizes the grant ofincentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, deferred Btock, performance shares and performance units. During 1990, nonqualified stock options on 619,900 shares were granted. No incentive stock options were granted. None of the 1990 stock option grants were made in tandem with stock appreciation rights. Information for 1990 on options granted, exercised, cancelled, and outstanding is as follows: December 31,1989 .................................... ................... 1990 Transactions: Granted ............................................... ..................... Exercised.................... ..................... ..................... Cancelled ........................................... ..................... December 31,1990 .................................... ..................... Options 4,471,700 619,900 - ($$9,075} *^2.525 Ootion Price $7,525 7.525 - 7.525 ____ L522-- On August 1,1990, 25% of all outstanding options became exercisable. Cancellation of opLions resulting from terminations ofemployment were pursuant to terms of the grants. As of December 31, 1990, nonqualified stock options were held by 230 persons on 4,435,725 shares, which options will expire on August I, 1998 As noted above, these options became exercisable in cumulative increments of 25% each as of August 1,1990 and continuing on thBt date in 1991,1992 and 1993. In addition, on December 31,1990,20 persons held nonqualified stock options on 286,800 shares, which options will expire on July 31, 1998, and on January 31,1990,15% of those options became exercisable on attainment ofcertain targets. As of December 31,1990, all officers and key employees eligible to receive options under the 1988 Plan had been granted options thereunder. During 1990, grants of 434,473 shares of restricted stock also were made under the 1988 Plan. A total of 1,974,279 shares ofrestricted slock were still outstanding under the 1988 Plan as of December 31, 1990. On January 31, 1990, 290,790 shares of restricted stock were freed of restrictions on attainment ofcertain targets. 31 USG CORPORATION SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (continued) Common Stock Option Plans (continued) As of December 31,1990,366,253 shares of deferred stock also had been awarded under the 1988 Plan. In January 1991, deferral periods on 127,296 of those shares expired and that quantity of shares was issued and delivered to the respective participants. Shares ofcommon stock available as of December 31,1990 for future awards under the 1988 Plan were 1,536,943. litigation One of the Corporation's subsidiaries, United States Gypsum Company ("U S Gypsum" or "the Company"), is among numerous defendants in lawsuits that seek to recover compensatory and in many cases punitive damages for costs associated with maintenance or removal and replacement of products containing asbestos that were installed in buildings more than a decade ago when U.S. Gypsum censed manufacturing such products. These lawsuits have been brought by a variety of plaintiffs, including school districts, state and local governments, colleges and universities, hospitals, and private property owners. Two of these cases have been certified as class actions and others request such certification. U.S. Gypsum is one of many defendants in a class action suit pending in federal court in Pennsylvania on behalf of owners and operators of all elementary and secondary schools in the United States that contain or contained friable asbestos-containing material. Approximately 1,350 school districts opted out of the class, some of which have filed or may file separate lawsuits or are participants in a stale court class action. On May 14.1990, the United States Supreme Court denied a petition by the attorneys general of 29 states seeking leave to file a property damage suit against U.S. Gypsum, USG Corporation and 24 other companies relating to buildings owned by those states. U S Gypsum has denied the substantive allegations of each of the property damage lawsuits and intends to defend them vigorously except when advantageous settlements are possible. As of December 31, 1990, 124 property damage cases were pending againsL U.S. Gypsum; however, the number of buildings involved is greater than the number of cases because, as indicated above, certain of these cases are or purport to be class actions and many of the others also involve multiple buildings. Approximately 84 property damage lawsuits have been threatened against U.S. Gypsum, and it is anticipated that additional eases containing allegations similar to those described above will be filed. U.S. Gypsum has settled property damage claims of approximately 140 plaintiffs, including three cases involving 83 school district plaintiffs that had been combined before a federal court in Texas. All settlements were paid out of reserves. Nineteen cases have been tried to verdict, 12 of which were won by U.S. Gypsum and seven lost Eight ofthese cases have post-trial motions or appeals pending or expected. In the cases lost, compensatory damage awards against U.S, Gypsum have totalled $3.5 million. Punitive damages totaling $1.5 million were entered against U.S. Gypsum in three trials; U.S. Gypsum has appealed those awards. In addition, U.S. Gypsum has obtained dismissals prior to trial in other property damage cases. The plaintiffs have appealed certain ofthese dismissals. U.S. Gypsum also was among numerous defendants in lawsuits and administrative claims involving 36,96? claimants pending as of December 31,1990, that seek to recover compensatory and in many cases punitive damages for personal injury allegedly resulting from exposure to asbestos and asbestos-containing products. It is anticipated that additional personal injury cases containing similar allegations will be filed. Motions are pending in the federal District Court in Beaumont, Texas requesting that the court certify a nationwide class of personal injury plaintiffs againBt numerous defendants, including U S. Gypsum, and the Judicial Panel on Multidistrict Litigation u considering a consolidation or coordination ofall asbestos bodily injury claims pending in the federal courts. Prior to September 3.1985, U.S. Gypsum disposed of3,238 personal injury cases for a nominal 32 USG CORPORATION SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (continued) Litigation (continued) average payment. Between September 3, 1985 and September 30, 1990, the Center for Claims Resolution (described below) and the Asbestos Claims Facility, a similar organization of which U.S. Gypsum was formerly a member, disposed of the claims of 20,04? claimants who had named U.S. Gypsum as a defendant. U.S. Gypsum is a member, together with nineteen other former producers of asbestos-containing products, of the Center for Claims Resolution ("the Center"). The Center has assumed the handling, including the defense and settlement, of all asbestos-related personal injury cases pending against U.S. Gypsum and the other members of the Center. Each member of the Center is assessed a portion of the liability and defense costs of the Center for all asbestos-related personal injury cases handled by the Center, according to predetermined allocation formulas. As of December 31,1990, the Center was handling approximately 77,099 claims involving its members. Claims for punitive damages are defended but not paid by the center, if punitive damages are recovered, insurance coverage may be available depending on the terms of particular policies and applicable state law. Punitive damages have not been awarded against U.S. Gypsum in any personal injury ease. Ail of U.S. Gypsum's insurance carriers that in 1985 signed an Agreement Concerning Asbestos- Related Claims (the "Wellington Agreement") are "Supporting Insurers" of the Center. As Supporting Insurers, they provide coverage for the defense and indemnity costs of the Center's members pursuant to the coverage provisions in the Wellington Agreement. Virtually all of U.S. Gypsum's personal injury liability and defense costs are paid by those ofits insurance carriers that are Supporting Insurers. U.S. Gypsum has substantial personal iryury and properly damage insurance for the years involved in the asbestos litigation. Because U.S. Gypsum's insurance carriers responded to its claims for defense and indemnification with various theories denying or limiting coverage and the applicability of their polities, U.S. Gypsum filed a declaratory judgment action against them in the Circuit Court of Cook County, Illinois in 1983. U.S. Gypsum has voluntarily dismissed from the personal iryury portion of this litigation those defendant insurance carriers who subscribed to the Wellington Agreement On January 7,1991, the trial court ruled on the applicability of U S Gypsum's insurance policies to settlements and one adversejudgment in eight property damage cases. The court ruled that the eight cases were generally covered, and imposed coverage obligations on particular policy years baaed upon the dates when the presence ofasbestos-containing material was "first discovered" in each case. The court awarded reimbursement of approximately $6.2 million spent by U.S. Gypsum to resolve the eight cases. U.S Gypsum has appealed the court's ruling with respect to the policy years available to cover particular claims, and the carriers have appealed other aspects of the court's ruling. Theae appeals are likely to last two years or more. Although no detailed study has yet been undertaken, the "first discovery" dates in the eight cases referred to above (1978 through 1985) are likely to be typical of most pending cases. Some pending cases, as well as some cases filed in the future, may be found to have first discovery dates later than August 1,1984, after which the Company's insurance policies did not provide coverage for asbestos related claims. In addition, as described below, the first layer excess carrier for the years 1980 through 1984 is insolvent and U.S. Gypsum may be required to pay amounts otherwise covered by those and other insolvent policies. Accordingly, if the court's ruling is affirmed, the Company will likely be required to bear a portion of the cost of the property damage litigation. U.S. Gypsum has settled its claims against six carriers and dismissed them from the case entirely. U.S. Gypsum will continue to seek negotiated resolutions with its carriers in order to minimize the expense and delays oflitigation. Insolvency proceedings have been instituted against four of U ,S Gypsum's insurance carriers, one of which provided excess insurance ($4 million excess of $1 million excess of $500 thousand primary 33 USG CORPORATION SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (continued) Litigation (continued) in each policy year) from February 15, 1975 to February 15, 1976; one of which provided excess insurance (615 miDior excess of $1 million primary in each policy year) from August 1, 1960 to December 31,1985; one of which provided excess insurance ($10 million excess of 690 million) from August 1, 1983 to July 31, 1984, and one of which provided the primary layer of insurance (6500 thousand per year) from February 1,1963 to April 15,1971. It is possible that U.S. Gypsum will be required to pay costs that would otherwise have been covered by these policies. It is not possible to predict the number of additional lawsuits alleging asbestos-related claims that may be (lied against l).S. Gypsum. The number of personal injury claims pending against U.S. Gypsum and other members ofthe Center has increased in each of the last several years. In addition, the property damage cases are still at an early stage and the potential liability therefrom is consequently uncertain. In view of the current financial circumstances of the Corporation, management is unable to determine whether an adverse outcome in the asbestos litigation will have a material adverse effect on the consolidated financial position ofthe Corporation. The Corporation and certain of its subsidiaries have been notified by state and federal environ mental protection agencies of possible involvement as one of numerous "potentially responsible parties" in a number of so-called "Superfund" sites in the United States. In substantially all of these sites, the involvement of the Corporation or its subsidiaries is expected to be minimal. One of the Corporation's subsidiaries has been named as a potentially responsible party in a Superfund site in New Jersey in which the subsidiary's liability for cleanup costs could become substantial depending upon future developments. The Corporation does not expect that it will incur significant costs in connection with this site during 1991. The Corporation believes that appropriate reserves have been established for its potential liability in connection with this and all other Superfund sites but is continuing to review its accruals as additional information becomes available. The Corporation doea not presently anticipate any material adverse effect upon its earnings or financial condition arising out of the resolution of these matters or any other known governmental proceeding regarding environmental matters. Industry and Geographic Segments Industry and geographic segments for the years presented in the following tables have been restated to exclude DAP Inc. which had comprised the Other Products industry segment and is now classified as discontinued operations. Descriptions of continuing industry segment operations are on pages 3 through 8 ofthis report. Industry intersegment eliminations largely reflect intercompany sales from United States Gypsum Company to L&W Supply. The Corporation's principal operations are in the United Slates and Canada. Transactions between geographic areas are accounted for on an "arm's-length" basis. Export sales to foreign unaffiliated customers represent less than 1 (Mb ofconsolidated net sales. No single customer accounted for 4% or more ofconsolidated net sales Segment operating profit includes all costs and expenses directly related to the segment involved and an allocation ofexpenses which benefit more than one segment. General corporate expenses (net) for 1990 include restructuring costs of |5 million, while other restructuring costs totaling 613 million were incurred by the various segments. General corporate expenses (net) for 1988 include recapitalization and restructuring costs totaling 620 million for the buyout of slock options, for transaction costs and for costs associated with a salaried workforce reduction program. No recapitalization or restructuring expenses were incurred in 1989. Variations in the levels of corporate identifiable assets primarily reflect fluctuations in the levels of cash and cash equivalents. 34 USG CORPORATION SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (continued) Industry Segments Net Sales Gypsum Products: U.S. Gypsum Company ....................... ......... CGC Inc. (U.S. $) ................................ ......... Other subsidiaries .... .............. .. ......... Total Gypsum Products ..................... ......... Interior Systems: USG interiors, Inc................................. ......... CGC Inc. (U.S |) ................................ ......... Total Interior Systems ..................... ......... Building Products Distribution ................ ____ Intereegment eliminations ..................... .......... Total .................................................. .......... m IMS _ ISM (Dollar amountsin million*I t 928 133 65 1.126 564 40 604 476 ....... \ML --L2JL. 8 1,032 163 59 1,2^4 549 45 594 485 <3M) .... .m. 8 1,119 182 66 -1.3SL 546 39 587 483 13671 --MS- Operating Profit Gypsum Products: U.S. Gypsum Company ................... .......... CGC Inc ........................................... Other subsidiaries ............................. .......... Total Gypsum Products ................... ........... Interior Systems: USG Interiors, Inc............................... ........... CGC Inc (U S $) .............................. ........... Total Interior Systems ..................... ........... Building Products Distribution .............. ........... General corporate expenses, net ............. ........... Total .................................................. ......... 115 18 16 149 68 9 77 4 ......... m. 195 173 38 16 227 78 11 69 7 _____ mi 292 192 66 18 266 75 8 83 12 ____ 1221 Depreciation, Depletion and Amortization: Gypsum Products ................................... ........... 39 39 41 Interior Systems ...................................... .......... 16 16 15 Building Products Distribution .............. ........... 6 9 11 Corporate ................................................ ........... 15 15 12 Total .................................................. ......... 76 79 79 Capita/ Expendil ures: Gypsum Products .................................... .......... Interior Systems ...................................... ........... Building Products Distribution .............. .......... Corporate ............................................... .......... Total .................................................. .......... 26 41 60 37 33 17 113 1 _______ !_ .______ L. ft -76 . 35 USG CORPORATION SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (continued) Industry Segments (continued) Identifiable Assets: Gypsum Products ..................................... ......... Interior Systems ....................... ............... ......... Building Products Distribution ................ ......... Corporate .................................................. ......... Discontinued operations .......................... ......... Total ............................ ....................... ......... ISM im__ 1888 (Dollar amounts in millions t $ 785 409 89 275 137 1,675 1 788 376 102 180 139 1,59$ 8 834 352 101 363 156 1J06 Geographic Segments Net Sales to Trade. United States ............................................ ......... Canada ........... ................ ....................... ......... Other foreign ............................................ ......... Total ................................................... .......... 1980 1888 1888 (Dollar amounts in millions! % 1,558 173 184 1.915 3 1,659 204 144 a,po? $ 1,744 192 134 2.070 Transfers between Geographic Areas: United States to Canada .................................... Canada to United States --.............................. Other foreign to United Slates .................. ......... Total ................................................ .. .......... 25 22 27 .......... 21. Set Sales: United States ........................................... ........... Canada .................................................... ........... Other foreign ........................................... ........... Intersegment eliminations ................................. Total .................................................. .......... 1,583 195 211 ......... 1211 ,,.-L21.. Operating Profit: United States ........................................... ........... Canada ............................................. ...... ........... Other foreign ........................................... ........... General corporate expenses, net ............. ........... Total .................................................. ........... 164 31 35 ......... Q5L 195 30 22 26 ____ 22- 27 23 26 -____2L 1,689 226 170 ___ LZ&L 2,997 1,771 215 160 ___ m. 221L 237 53 33 ___ Ml 292 264 70 37 170) 291 36 USG CORPORATION SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (concluded) Geographic Segments (contin ued} Identifiable Assets United States ......... ......................... .............. Canada ................................................ ................ Other foreign ....................................... .............. Corporate ............................................ ............... Intersegment eliminations ................. .............. Discontinued operations ..................... .............. Total ......................... .................... ................ 189* I9* (Dollar amounts in million*! $ 1,002 116 150 275 14) ......... LL ,LWfc 5 1,058 117 97 180 (6) 122C585 $ 1,096 111 84 363 14) 15L --L82L USG CORPORATION MANAGEMENT REPORT Management is responsible for the preparation and integrity of the financial statements and related notes which appear on pages 17 through 36. These statements have been prepared in accordance with generally accepted accounting principles and, of necessity, include some amounts that are based on management's best estimates and judgments. USG's accounting systems include internal controls designed to provide reasonable assurance of the reliability of its financial records and the proper safeguarding and use of its assets. Such controls ore based on established policies and procedures, are implemented by trained personnel, and are monitored through an internal audit program. The Corporation's policies and procedures prescribe that the Corporation and its subsidiaries are to maintain high, ethical standards and that its business practices are to be consistent with those standards. The Audit Committee of the Board of Directors, consisting solely of outside Directors of USG, maintains an ongoing appraisal, on behalfofthe stockholders, of the effectiveness of the independent auditors and management with respect to the preparation of financial statements, the adequacy of internal controls and the Corporation's accounting policies V 37 REPORT OP INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board ofDirectors of USG Corporation: We have audited the accompanying consolidated balance sheet of USG Corporation (a Delaware corporation) and subsidiaries as of December 31,1990 and 1989 and the related consolidated statements ofearnings and cash flows for each ofthe three years in the period ended December 31, 1990. These financial statements are the responsibility ofthe Corporation's management. Our reaponsibility is to express on opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as weII as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to shove present (airly, in all material respects, the financial position of USG Corporation and subsidiaries as ofDecember 31,1990 and 1989, and the results oftheir operations and thei r cash flows for each of the three years in the period ended December 31,1990, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Corporation will continue as a going concern. As discussed in the Financial Restructuring footnote to the consolidated financial statements, the Corporation ib in default ofits term loan agreement and does not expect to be able to meet its debt service requirements in 1991, which raises substantial doubt about its ability to continue as a going concern without restructuring its debt and selling assets. Management's plans in regard to this matter are described in Lhe Financial Restructuring footnote. The Corporation is also unable to determine whether it would have the financial resources, in the present circumstances, to satisfy any material adverse effects ofasbestos related litigation as discussed in the Litigation footnote. The consolidated financial statements do not include any adjustments relating to the outcome of this proposed restructuring or the impact on those financial statements if the plan is not implemented February 11,1991 Chicago, Illinois USG CORPORATION QUARTERLY FINANCIAL AND STOCK PRICE HIGHLIGHTS (Unaudited) First &aaasL Second Third Fourth Quarter Quarter <Duller amounts in millions) Total Year two Net sales........................................... Gross profit ...................................... Operating profit .............................. RwmingsAioBs) from continuing operations ....................... Net earningsrt loss) ........................ Per common share: Eamings/doss) from continuing operations .............................. Net earningaMloss) ................. Price range** -high .................. low .................... $ 487 107 57 7 8 .13 .14 47* 3 * 485 117 67 (1) 1 1.021 .02 4 3 31/4 * 490 109 60 113) an (.23) (.20) 37*8 1 BA $ 453 83 11 3 1.915 416 195 (47) (68)* (54) (90)* (.87) (1.61) 2 w (.99) (1.65) 47 S/4 1988 Net sales ........................................... Gross profit ...................................... Operating profit .............................. Earnings/(loss) from continuing operations ............................ Netearnings/(loss)....................... . Pier common share: Eamings/Ooss) from continuing operations .............................. Neteamings.............................. Price range** - high .................. low .................... 3 498 lit 62 1 3 .02 .05 7*8 5 3 520 128 76 7 9 13 17 (id 5 3 510 130 80 6 9 11 .16 51/4 35 3 479 127 74 3 2,007 501 292 6 20 7 28 .11 .13 5*8 27 .37 .51 7*8 7A Includes after-urn reserve of 141 million ielated tothe planned divestiture of DAP tnc Stock price ranges are for transactions on the New York Stock Exchange (trading symbol USG). which is the principal market for these securities Stockholders of record as of February 28.1991: Common -15.341; Prefeired-none 39 USG CORPORATION COMPARATIVE FIVE-YEAR SUMMARY 1990 1989 1988 1917 1988 (Dollar amounts in millinraasrepl per-share Figure*) Operating Items* For years ended December 31. Net sales ....................................... $ 1,915 $2,007 $ 2,070 $2,165 $2,077 Castofproducts sold...................... 1,499 1,506 1,536 1,530 1,371 Gross profit ................................... 416 501 534 635 706 Selling and administrative expenses .............................. .. 203 209 223 253 233 Recapitalisation and restructuring expenses........... ...................... 18 20 53 . Operating profit............................. 19S 292 291 329 473 Interest expense .......................... 292 297 178 69 34 Interest income ..... ...................... 18) (10) (13) (5) (6) Other expense, net ....................... 5 15 16 16 3 Nonrecurring gains ................... (34) (33) - (50) - Taxeson income ......................... (61 3 43 129 212 % tax rate ........................... . 19.81 143 394 43.1 48.1 R&rnings/Uoss) from continuing operations ............................ (54) 20 67 170 230 Netearnings/(loss) ............ ........ (90) 28 125 204 226 % to average toLai capital employed ..................... ...... 6.5 182 15.7 15.5 163 Per common share: Earnings/Oossl from continuing operations . ....................... Net earnings/floss).................. (.99) (165) .37 1.26 3.31 3.60 .51 2.38 3.96 3.54 Cashdividends ....................... - .56 1.12 1.04 Capital expenditures .................... 64 76 81 143 157 Financial Items As of December 31: Working capital/fdeficit) .............. Current ratio ................................ Property plant and equipment, net Total assets .................................... Total debt ............................................ Total stockholders'equity/fdeficit) Market val ue per common share .. (2.198) 0.24 825 1,675 2,600 (1,518) G.8t 51 1.09 837 1,585 2,428 (1,438) 4.50 102 1.15 859 1,806 2,643 (1,471) 5.63 561 2.39 862 1,940 795 610 29.13** 375 1.67 848 1,900 853 585 37.75** Average number ofemployees............ 12,700 13,400 14,400 15,200 15,000 * Results reflect DAP Inc, MasontU Corporator), the Kinkead Division, the Marlite Oiveion of USG interiors, inc. Jinney. Elstner Associates. Inc and A P Green industries. Inc., as discontinued operations A. P Green's 1987 results of operations were included in a divestiture reserve and therefore are not reflected n 19B7 consolidated net earnings Financial items reflect the distribution of A P Green common stock as though it had occurred as of December 31.1987 Results foi Oonn Incorporated are included effective with itsdate of acquisition in April 1988 ** Reflects the December 31.1987 and 1986 market value of pre-recapita liaation uSG com mon stock, pa# value 14 pershare 40 U8G CORPORATION SCHEDULE V CONSOLIDATED PROPERTY, PLANT AND EQUIPMENT FOR THE YEARS ENDED DECEMBER 31,1968,1B89 AND 1690 Qawifkatkm Balances! Balance at befliming endef ofwr w -- (Dl)r amount* in milliensi Year ended December 31.1986 Land and mineral deposits........... Buildings and realty improvements Machinery and equipment ______ Construction in progress.............. ToUl 9 39 377 950 ____iSL. im $ 37 387 948 l 1.373 Year Ended December 31.1989 Land and mineral deposits........... Buildings and realty improvements Machinery and equipment ........... Construction in progress.............. Total ............................................. 37 387 948 1 ma, 39 386 956 - ____ lm Year Ended December 31.1690 Land and mineral deposits........... Buildings and realty improvements Machinery and equipment ........... Construction in progress________ Total ............................................. 39 386 955 - L22L. 43 386 972 - ___IM Detailed information regarding additions and deductions is omitted as neither total additions nor total deductions daring each ofthe periods shown above exceeded 10% of the balance at the end of the related period. Total additions were 981 million, 977 milium and $64 million for 1968,1989 and 1990, respectively. Total deductions were $71 million, $70 million and $44 million for 1988,1989 and 1990, respectively. Total deductions include foreign currency translation adjustments which decrease total deductions by $7 million, $3 million and $3 million in 1988,1989 and 1990, respectively. Upon retirement or other disposition of property, applicable cost and accumulated depreciation and depletion are removed from the accounts. Any gains and losses are included in earnings. 41 USG CORPORATION SCHEDULE VI ACCUMULATED DEPRECIATION AND DEPLETION OF PROPERTY. PLANT, AND EQUIPMENT FOR THE YEARS ENDED DECEMBER 31.1988,1989 AND ISM Balance at Balaneaal beginning and of rfiw var (Dollar amounts in millions I Year ended December 31.1988 Land and mineral deposits .............................................. ........ Buildings and realty improvements........................................ Machinery and equipment ....................................................... Construction in progress................................................. . $7 137 357 ________i. Total ....................................................................................... 501 S6 13S 373 514 Year Ended December 31. im Land and mineral deposits ____.. Buildingsand realty improvements Machinery and equipment ........... Construction in progress......... .. Total ............................................. 6 135 373 SLL- 6 139 398 ______m Ygnr Ended December 31. IMP Land and mineral deposits ........... Buildings and realty improvements Machinery and equipment ........... Construction in progress.......... ... Total ........................................ 67 139 141 396 427 ______m Detailed information regarding additions and deductions is omitted as neither total additions nor total deductions ofproperty, plant and equipment (see Schedule V) during each of the periods shown above exceeded 10% of the balance of property, plant and equipment at the end of the related period. Total provisions for depreciation and depletion were (67 million, 363 million and 360 million for 1988,1969 and 1990, respectively. Total deductions were 354 million, 334 million and 328 million for 1988,1989 and 1990, respectively. Total deductions include foreign currency translation adjustments which decrease total deductions by 34 million, 32 million and 31 million in 1988,1989 and 1990, respectively. Upon retirement or other disposition of property, applicable cost and accumulated depreciation and depletion are removed from the accounts. Any gains and losses are included in earnings. 42 USG CORPORATION SCHEDULE VIII VALUATION ANDQUALIFYINC ACCOUNTS An analysis of receivables reserves for 1988,1989 and 1990 is as follows: Doelitfiil Cash Account* PUcaunte (Dollar mounts in million*) Balance as ofJanuary 1,1988 .......................................................... Additions in 1988: Current year provision ................................................................... Other ............................................................. Leas - Receivables written off and discounts allowed..................................................... 8 7 84 4 37 IS)(38) 1- Balance as of December 31,1988 .............................................. -- Additions in 1989: Current year provision.........,............................................... -- Less - Receivables written off and discounts allowed................................................ .............. 7 4 (3) 3 37 (37) Balance as of December 31,1989 ..................................................... Additions in 1990: Current year provision ............ ..................................................... Less - Receivables written off and discounts allowed..................................... ............................. Balance as ofDecember 31,1990 8 8 (10) 6 3 34 (351 l 43 USG CORPORATION SCHEDULE IX SHOHT-TERM BORROWINGS FOR THE YEARS ENDED DECEMBER 31.1988,1989 AND 1990 Category of Aggregate Short-Term Barrewines Balance at at End of Period Weighted Average latere*! Rate During Maxima* Amount Outstanding During the the Period Period (Dollar amounts in millions! Average Amount Outstanding Daring the Period Cal Weighted Average Interest Rate During the Period Ih) Year ended December 31,1988 Notes Payable (c) .................... 8 1 Revolving Credit (d) ................. . - Commercial Paper................... . - 8.9% 83 - 84 82 - 82 10.1% - 6.9% Year ended December 31.1989 Notes Payable (c) ....................... Revolving Credit (dl .................. 1 - 9.1% - 3 25 2 9.9% 4 11.6% Year ended December 31.1990 Notes Payable (c) ....................... Revolving Credit (d) .................. 16 140 11 4% 110% 16 no 5 11.9% 61 11.0% (a) Computed by dividing the total or month end principal balances by 12 with the exception of 1988 commercial paper which represents the average before the recapitalization (b) Computed by dividing the annual interest expense by the average amount of short-term debt outstanding. (c) Represents borrowings from several foreign banks by USC Interiors' international business units which are generally not restricted by the provisions of the term loan agreement. (d) The term loan agreement associated with recap includes a 8200 million revolving credit facility, of which 870 million is established as a letter ofcredit subfacility 44 USG CORPORATION SCHEDULEX SUPPLEMENTAL INCOME STATEMENT INFORMATION The following amounts were charged to costs and expenses during 1990,1989 and 1988: Knn Ended Pwbwll iaao im I Dollar amount* in miliums) Maintenance and repairs .............................. .............. 9 105 Depreciation, depletion and amortizations.................. 76 ( 104 79 $ 110 79 Maintenance and repairs are treated as costs or expenses when incurred. Taxes (excluding payroll and income taxes), rents, royalties and advertising costs are not shown above as individually they do not exceed one percent of"Net Sales" in any ofthe three years. 45 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS WITH RESPECT TO SUPPLEMENTAL FINANCIAL STATEMENT SCHEDULES We have audited in accordance with generally accepted auditing standards, the financial statements of USG Corporation included in this Form 10-K, and have issued our report thereon dated February 11,1991. Our audits were made for the purpose offorming an opinion on those statements taken as a whole. The supplemental financial statement schedules are presented for purposes ofcomplying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. The supplemental financial statement schedules have been subjected to the auditing procedures applied in our audita of the basic financial statements and, in our opinion, are fairly stated in all material respects in relation to the basic financial statements taken as a whole. Chicago, Illinois February 11,1991 46 SUPPLEMENTAL NOTE ON FINANCIAL INFORMATION FOR UNITED STATES GYPSUM COMPANY (A SUBSIDIARY OF UBG CORPORATION) USG Corporation, a holding company, awns several operating subsidiaries, including United States Gypsum Company. On January 1,19B5, all of the issued and outstanding shares of stock of United States Gypsum Company were converted into shares of L'SG Corporation and USG Corporation became ajoint and several obligor for certain debentures and medium-term notes originally issued by United States Gypsum Company. As of December 31, 1990, debentures totaling $48 million were recorded on the holding company's books of account compared with $53 million as of December 31, 1969. Certain medium-term notes were retired in October 1988 in accordance with the terms of the recapitalization Financial results for United States Gypsum Company are presented below in accordance with the disclosure requirements ofthe Securities and Exchange Commission: Summary Statement of Earnings tm v December 31 IMS (Duller amount* in million*) ISM Net sales Cost and expenses (net) Operating profit Other income, net Nonrecurring gain Interest income, net Corporate charges Eaminga/(lo8s) before taxes on income Taxes on income Net earnings $ 928 B13 115 (3) - - 160 (42) (20) S22L I 1,032 859 173 (5) (33) (4) 168 47 19_ 2ft $ Ml# 927 192 <11 - (1) 108 86 30 - ______tt- Summary Balance Sheet AafDtcmaber 31 1990 m (Dollar amount* in million*) Current assets Properties (net) Other assets Total assets Current liabilities Other liabilities and obligations Stockholder's equity Total liabilities and stockholder's equity $ 119 525 8 ____ SSL- 56 226 312_ Ij52 $ 127 541 Si- 707 100 195 ____ UL_ 707 4? CONSENT OP INDEPENDENT PUBLIC ACCOUNTANTS WITH RESPECTTO SUPPLEMENTAL NOTE TO THE FINANCIAL STATEMENTS As independent public accountants, we hereby consent U> the application ofour report dated February 11,1991, on page 3? of this Form 10-K to the supplemental note to the financial statements included on page 46. It should be noted that we have performed no audit procedures subsequent lo February 11,1991, the date of our report. Furthermore, we have not made an examination of any financial statements ofUSG Corporation as ofany date or for any period subsequent to December 31,1990. Chicago, Illinois March 18,1991 48 Item 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE A Form 8-K reporting a change of accountants has not been filed within 24 months prior to the date ofthe moat recent financial statements. PART III Item IS. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information about directors has been omitted from this report as it will be filed with the Commission in a definitive proxy statement pursuant to Regulation 14A, which definitive proxy statement is incorporated herein by reference. Executive Officers of the Registrant There is no arrangement or understanding between any executive officer and any other person pursuant to which he was selected as an officer. There is no family relationship between or among any ofthe executive officers. Naate, Age and fiaaaltt!gss HwUtM Present Position Prior Baiine** Experience iaPatt Five Yenra Eugene B. Connolly, 59 * Chairman ofthe Board and ChiefExecutive Officer (Member ofManagement Committee) June 1990 Anthony J. Falvo, Jr., 60 *President and ChiefOperating Officer (Member ofManagement Committee) June 1990 *U also a Director Group Vice President to March 1985; President and Chief Operating Officer, United States Gypsum Company to Marti) 1987; President and Chief Executive Officer, USG Interiors, Inc. (March 1987 to March 1989) and DAP Inc. (July 1988 to March 1989); Executive Vice President March 1987 to January 1990; President and Chief Executive Officer to June 1990 Group Vice President to March 1985, President and ChiefOperating Officer of Masonite to April 1986; President and ChiefExecutive Officer of Masonite to June 1988; President and C hief Executive Officer of United States Gypsum Company to March 1989, Executive Vice President June 1988 to January 1990; Executive Vice President and ChiefOperating Officer to June 1990 Name,Ago and E&samffidtfss Eugene Miller, 65 * Vice Chairman (Member ofManagement Committee) 49 Hu Held Present Position Blase__ January 1991 Arthur C. Leisten, 49 Senior Vice President and General Counsel (Member of Management Committee) January 1990 Harold E. Pendexter, Jr., 56 Senior Vice President, and Chief Administrative Officer (Member of Management Committee) January 1991 J. Bradford James, 44 Vice President and Chief Financial Officer January 1991 Brian W. Burrows, 51 Vice President, Research March 1987 Prior Buainou Experience in Past Senior Vice President, Corporate Relations and Planning to March 1985; Executive Vice President and Chief Financial Officer to November 1987; Vice Chairman and Chief Financial Officer to January 1991 Senior General Attorney to July 1985; Associate General Counsel to November 1985; Vice President, Associate General Counse 1 to January 1986, Vice President and General Counsel to January 1990 Vice President, Personnel to March 1986; Vice President, Human Resources to June 1988; Vice President, Human Resources and Administration to January 1990; Senior Vice President, Human Resources and Administration to January 1991 Treasurer and Chief Financial Officer, Donn Incorporated to August 1987; Vice President, Finance & Administration, USG Interiors, Lnc. to March 1989; Director, Corporate Strategic Planning, USG Corporation and Vice President, Finance & Administration, USG Interiors, Inc. to January 1990; Vice President, Financial and Strategic Planning, USG Corporation toJanuary 1991 Director, Gould Research Center Laboratory, Gould, Inc. to July 1986; Director, Research to March 1987 *lBlaDR Director K*ne, Age snS PrtMiX Position Richard H. Fleming, 43 Vice President and Treasurer 50 HasHaM Present Position January 1991 John E. Malone, 4? Vice President and Controller Michael P. Kane, 39 Vice President, Regulatory Affairs and ChiefLabor Counsel July 198? January 1991 James S. Phillips, 61 Vice President, Corporate Accounts December 1990 Edwin L. Wade, 59 Corporate Secretary and Assistant General Counsel January 1990 Prior Bushier* Experience in Past Five V*r> Vice President Corporate Planning and Treasurer, Masonite Corporation to September 1985; Vice President Finance and Chief Financial Officer, Masonite Corporation to February 1989; Director, Corporate Finance, USG Corporation to January 1991 Director of Business Systems to July 1987 Director, Labor Relations, United States Gypsum Company to February 1988; Director, Regulatory Services and Corporate Labor Counsel, USG Corporation to July 1988; Director, Regulatory Affairs and Chid'Labor Counsel to January 1991 Associate Director, National Accounts, United States Gypsum Company to May 1986; Director, National Accounts, United States Gypsum Company to June 1987; Vice President, National Accounts, USG Corporation toJanuary 1968; Vice President, National Accounts, United States Gypsum Company to March 1989; Vice President National Accounts, USG Corporation to December 1990 General Attorney toJuly 1966; Corporate Counsel to March 1987; Corporate Secretary to January 1990 Name,Age aid Pniut Position P. Jack O'Bryan, 55 President and Chief Executive Officer, United States Gypsum Company (Member ofManagement Committee) 51 Hu Held Present Postlien SiOM March 1989 Donald E. Roller, 53 President and Chief Executive Officer, USG Interiors, Lac (Member ofManagement Committee) March 1989 Prior Business Experience inPut Five Years Vice President and General Manager, Southern Construction Products Division, United States Gypsum Company to April 1985; President and ChiefOperating Officer, A.P. Green Refractories Company to August 1966; President and ChiefExecutive Officer, A.P. Creen Refractories Company to April 1988; Senior Vice Presidenland General Manager, Central Construction Products Region, United States Gypsum Company to March 1989 General Manager, Kinke&d, USG Industries, Inc. to March 1985; Vice President and General Manager, Central Construction Products Division. United States Gypsum Company to August 1987, Executive Vice President and ChiefOperating Officer, USG Interiors, Inc. to March 1989 Item 11. EXECUTIVE COMPENSATION The information required by Item 11 has been omitted from this report as it will be filed with the Commission in a definitive proxy statement pursuant to Regulation 14A, which definitive proxy statement is incorporated herein by reference. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Item 12 has been omitted from this report as it will be filed with the Commission in a definitive proxy statement pursuant to Regulation 14A, which definitive proxy statement is incorporated herein by reference. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Item 13 has been omitted from this repurt as it will be filed with the Commission in a definitive proxy statement pursuant to Regulation HA, which definitive proxy statement is incorporated herein by reference. 52 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. A 2. ConsolidatedFinancial Statements and Supplemental Finuncial Statement Schedules An index of the Consolidated Financial Statements and Supplemental Financial Statement Schedules appears on page 16 of this report under Item 8. "Financial Statements and Supplementary Data*. 3. Exhibits (Reg. S~K, Item 60ih Exhibit No. Page 3. Articles of incorporation and by-laws. (a) Restated Certificate ofIncorporation ofUSG Corporation, dated February 8,1989, is incorporated herein by reference to Exhibit 3(a) on pages 30 through 38ofthe Corporation's 1988 Annual Report on Form 10-K, dated March 29,1989. (b) By-Laws ofUSG Corporation as of November 14,1990 ....................... 56 4. Instrumentsdefining the rights ofsecurity holders, including indentures: (a) Indenture dated as ofOctober 1,1986, between the Corporation and Harris TruBt and Savings Bank, Trustee, is incorporated herein by reference bo Exhibit 4(a) ofthe Corporation's Registration Statement No. 33-9294 on Form S-3, dated October 7,1986 (b) Resolutions dated December 16,1966, ofa Special Committee created by the Board ofDirectors ofthe Corporation are incorporated by reference bo Exhibit I ofthe Corporation's Current Report on Form 8-K, dated December 16,1986. tc) Resolutions dated March 5,1987, of a Special Committee created by the Board of Directors of the Corporation are incorporated by reference to Exhibit 1 of the Corporation's Current Report on Form 8-K, dated March 9,1987. (d) Resolutions dated March 6,1987, of a Special Committee created by the Board ofDirectors of the Corporation are incorporated by reference to Exhibit 3 ofthe Corporation's Current Reporton Form 8-K, dated March 9,1987. (e) Indenture dated as ofJune 30,1988, between the Corporation and NCNB National Bank ofFlorida, Trustee, covering 16%Junior Subordinated Debentures due 2008, is incorporated herein by reference to Part II, Item 6, Exhibit (d)(4), ofthe Corporation's Quarterly Report on Form 10-Q, dated August 11,1988. (f! Indenture dated as ofJuly 7,1988, between the Corporation and State Street Bank and Trust ofBoston, Trustee, covering 13-1/4% Senior Subordinated Debentures due 2000, is incorporated herein by reference to Part II, Item 6, Exhibit (e)(4). ofthe Corporation's Quarterly Report on Form 10-Q, dated August 11,1988. 53 The Corporation is a joint and several obligor with United States Gypsum Company with respect to long-term debt instruments under which, in each case, the total amount ofsecurities authorized does not exceed 10% of the total assets of the Corporation and its subsidiaries on a consolidated basis. Pursuant to paragraph (bK4Kiii)(A) of Item 601 of Regulation S-K, the Corporation agrees to furnish a copy of such instruments to the Securities and Exchange Commission upon request. Exhibit No. Paae 10. Material contracts. (a) 1988 Management Performance Plan of (JSC Corporation is incorporated herein by reference to Annex I to the Corporation's Registration Statement No. 33-22930 on Form S-B, dated July 12, 1988. (b) 1990 Annual Management Incentive Program - USG Corporation is incorporated herein by reference to Exhibit 10(d) on pages 44 through 50 ofthe Corporation's 1989 Annual Report on Form 10-K, dated March 28,1990. (c) 1991-1993 Management Incentive Compensation Program USG Corporation, as amended ............................................................ 68 (d) Amendment and Restatement ofUSG Corporation Supplemental Retirement Plan is incorporated herein by reference to Exhibit 10(e) on pages 58 through 68 (except for Part 6 of this plan which wsb discontinued in December 1990) ofthe Corporation's 1988 Annual Report on Form 10-K, dated March 29,1989. (e) USG Corporation Supplemental Retirement Plan - First Amendment. dated June 11,1990 ............................................................................ 75 (f) USG Corporation Supplemental Retirement Plan - Second Amendment, dated November 29,1990 ..................................................................... 80 (g) Employment Agreements ..................................... .............................. 82 (b) Termination Compensation Agreements are incorporated herein by reference to Exhibit 10(g) on pages 54 through 64 ofthe Corporation's 1989 Annual Reporton Form 10-K, dated March 28,1990. A revised list ofofficers covered by such agreements is found on page 88. (i) USG Corporation Severance Plan for Key managers, dated August 15, 1989, as amended, is incorporated herein by reference to Exhibit 10(h) on pages 66 through 73 ofthe Corporation's 1989 Annual Report on Form 10-K, dated March 28,1990. (j) Nonqualified Stock Option Agreements are incorporated herein by reference to Exhibit 10(i) on pages 78 through 82 ofthe Corporation's 1988 Annual Report on Form 10-K, dated March 29,1989. A revised list ofofficers covered by such agreements is found on page 89. Exhibit No 54 Page 10. Material contracts (continued). (k) Nonqualified Stock Option Agreements, 1991 .................................... 90 (l) Restricted Stock Award Agreements are incorporated herein by reference to Exhibit 100) on pages 84 through 86 ofthe Corporation's 1988 Annual Reporton Form JO-K, dated March 29,1989. A revised list ofofficers covered by such agreements is found on page 97. (m) Restricted Stock Award Agreements, 1991 ......................................... 98 (n) Agreement toTake Deferred Stock and Matching Restricted Stock is incorporated herein by reference to Exhibit l(Mk) on pages 78 through 81 ofthe Corporation's 1989 Annual Report on Form 1Q-K, dated March 28,1990. A revised list ofofficers covered by such agreements is found on page 102. (o) indemnification Agreements are incorporated by reference to Exhibit HK1) on pages 94 through 97 of the Corporation's 1987 Annual Report on Form 10-K, dated March 30,1988. A revised list ofdirectors and officers covered by such agreements is found on page 103. (pi Stock Compensation Program fur Non-Employee Directors of U9G Corporation is incorporated herein by reference to Exhibit 10 (n) on pages 86 through 91 ofthe Corporation's 1989 Annual Report on Form 10-K,dated March 29,1990. A revised list ofdirectors covered by such documents is found page 104 (ql Rights Agreement, dated as ofJune 30,1988, is incorporated herein by reference to Exhibit I ofthe Corporation's Registration of Preferred Share Purchase Rights on Form 8-A. dated June 22,1988. (r) Credit Agreement, dated asofJuly 1,1988, is incorporated herein by reference to Part II, Item 6, Exhibit (b)( 10) ofthe Corporation's Form 10-Q, dated August 11,1988. (s) Credit Agreement First Amendment and Consent, dated asof January 8,1989, is incorporated herein by reference to Exhibit 10(o) on pages 94 through 103 of the Corporation's 1988 Annual Reporton Form 10-K, dated March 29,1989. (t) Credit Agreement Second Amendment and Consent, dated as of September 30,1989, is incorporated herein by reference to Additional Exhibit to the Corporation's Form 10-Q, dated November 13,1989. (u) Credit AgreementThird Amendment and Consent dated as of March 31,1990 is incorporated herein by reference to Exhibit (aX 10) ofthe Corporation's Form 10-Q, dated May 11,1990 (v) Collateral Trust Agreement by and among USG Corporation, USG Interiors, Inc., L&W Supply Corporation, USG Foreign Investments, Ltd., Sequoyah Carpet Corporation and Wilmington Trust Company and William J. Wade, Trustee, dated as ofJuly 13,1988 is incorporated herein by reference to Exhibit 10(s) on pages 94 through 141 of the Corporation's 1989 Annua) Report on Form 10-K.dated March 26,1990. 55 Exhibit No. 10. Material contracts (continued). (w) Company Pledge Agreement between USG Corporation and Wilmington Trust Company and William J. Wade, Trustee, dated as ofJuly 13,1988 is incorporated herein by reference to Exhibit 10ft> on pages 142 through 157 ofthe Corporation's 1989 Annual Report on Form 10-K, dated March 28,1990. Substantially similar agreements have been executed by, among other, the following subsidiaries of the Corporation: United States Gypsum Company; USG Foreign investments. Ltd.. USG Interiors, Inc., and iJfcWSupply Corporation (x) Company Guaranty executed by USG Corporation dated as ofJuly 13, 1988 is incorporated herein by reference to Exhibit 10(u) on pages 158 through 165 ofthe Corporation's 1989 Annual Report on Form 10-K, dated March 28,1996. Substantially similar guaranties have been executed by among others, the following subsidiaries of the Corporation: United States Gypsum Company; USG Foreign Investments, Ltd.; USG Interiors, Inc.; LftW Supply Corporation, DAP lnc.;and USG Interiors International, Inc. (y) Plan ofRecapitalisation, dated May 2,1988, as amended, is incorporated herein by reference to Exhibit (c)(2) ofthe Corporation's Form 10*0, dated August 11,1988. (z) Amendment and Restatement ofUSG Corporation Investment Plan for Salaried Employees, effective January 1,1989, is incorporated herein by reference to Exhibit 4.18 ofPost-Effective Amendment No. 1, dated November 9,1988, to the Corporation's Registration Statement No. 33-22581 on Form S-8. <aa) First Amendment of USG Corporation Investment Plan, effective January 1,1989, is incorporated herein by reference to Exhibit 4.29 of Post-Effective Amendment No. 2 dated July 5,1989, to the Corporation's Registration Statement No 33-22581 on Form S-8. (bb) Second A mendmenl of USG Corporation investment Plan, efTective January 1,1989, and dated December 29,1989 ................................ 105 (cc) Third Amendment ofUSG Corporation Investment Plan, effective January ], 1989, and dated November 21,1990 .................................. 112 11. Statement of Computation of Earnings/tLoss) Per Common Share .. ........ 122 13. 1990 Annual Report to Stockholders ofthe Corporation ................................ 123 22. Subsidiaries ................................................................................................... 138 24. Consent ofExperts ................................. 139 25. Power of Attorney ......................................................................................... 140 a (b) Reports on Form 8-K: There were no reports Hied on Form 8-K for the three months ended December 31,1990. 17 USG CORPORATION CONSOLIDATED STATEMENT OP EARNINGS (All dollar amounts in millions except per-ahare figures) Net Sales ....................................................... .. Cool ofproducts sold ........................................... Gross Profit ....................................................... Selling and administrative expenses .................. Recapitalization and restructuring expenses___ Operating Profit .............................................. Interest expense .................................................. Interest income ................................................... Otherexpense.net .............................................. Nonrecurring gains ............................................ Earaings/(Loss) from Continuing Operations Before Taxes on Income ........................... Taxes on income .................................................. Earnings/iLoss) from Continuing Operations Discontinued Operations: Operating earnings, net of taxes .................. Reserve for DAP Inc. planned divestiture and gains on divestitures, net of tuxes ............ Net Eamings/(Lossl ......................................... Earnings/iLoss) Per Common Share: Continuing operations ................................. Discontinued operations .............................. Net Earnings/(Loss) Per Common Share ______ Years ended December Si 1990 1989 1988 *1,915 1499 $ 2,007 1.506 * 2,070 1.536 416 501 534 203 209 223 IB _____________________2 195 292 291 292 18) 5 iml 297 (10) 15 _____ m 178 (13) 16 (60) 23 110 (61 3 43 (54) 20 67 5 141) m 6 2 _______2L 15 ia_ ______ (.99) (66) HM .37 1.26 14 1.12 _____ _____________ m Ttuaccounting paltoes and practices on pages 20 through 36 are an integral pan of(Jus statement. 18 USG CORPORATION CONSOLIDATED BALANCE SHEET (All dollar amounts ia millions) Asscts Current Assets: Cash and cash equivalents (primarily lime deposits) ......................... Receivables (net of reserves, 1990-$B, 1989-$11) ............ Inventories................................................ ........................................... Net assets ofdiscontinued operations .................................................. Total current assets ............................... Property, Plant and Equipment, Net .............................................. Purchased Goodwill, Net .................................................................. Other Assets ....................................................................................... Total assets .............................................................................. As of December 81 im jm_ $ 175 282 103 137 697 825 75 76 1.675 $ 67 275 109 139 690 837 77 81 1-685 Liabilities and Stockholders' Equity Current Liabilities: Accounts payable ................................................................................. Accrued expenses Interest ........................................................................ Payrolls .................... Taxes other than taxes on income ................................................ Recapitalisation and restructuring....... .................................... Reserve for DAP Inc. planned divestiture ..................................... Other .............................................................................................. Notea payable ..................................... ............................................ .. Long-term debt maturing within one year ......................... Long-term debt and debenturesclassified as current........................... Taxes on income .................................................................................... Total current liabilities ........................................................... Long-Term Debt ........................................................................... Deferred Income Taxes..................................................................... Minority Interest in CGC Inc. ........................................................... Stockholders* Equity/!Deficit* Preferred Stock - $1 par value; authorized 36,000,000 shares- $1.80Convertible Preferred Stock (initial series)outstanding at December 31,1990 and 1988-none................... Common Stock - $0.10 par value: authorized 300,000.000 shares, outstanding at December 31,1990-55,097,676 shares and December 31,1989 - 54,155,686 shares (after deducting 422,043 and 102,467 shares, respectively, held in treasury)..................... Capital received in excess ofpar value -- ....................................... Deferred currency translation.............................................................. Reinvested earningsAdefirilt .............................................................. Total Stockholders' equilyAdeficiU ........................................ Total liabilities and slock holders'equity ................................ 104 60 12 12 18 43 113 166 268 2,104 5 2,895 72 213 13 5 23 (1.5461 (1.518) 123 70 21 14 12 121 1 168 0 538 2,259 211 14 5 15 (3) (1-4561 (1.4381 awLStSS-i Tkc accounting puUcue* and practice* x page* SO through 3d are on integral part ofthi* tlatement 19 USG CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (AH dollar amounts in millions) Years ended Decembers! 1990 1989 1988 Cash Flows from Operating Activities: EarningsAloss) from continuing operations ..................... .. $ (54) Reserve for DAP Inc. planned divestiture, net oftaxes ... . (41) Adjustments to reconcile earnings from continuing operations to net cash Depreciation, depletion and amortization .................. 76 Interest expense on pay-inkind debentures .......... 54 Deferred income taxes............ ................................... 2 Net gain on asset dispositions ..................................... (37) (Increase^decrease in working capital Receivables ................................................................. (7) Inventories .................................................................. 6 Payables....................................................................... (23) Accrued expenses......................... ............................... 20 (Increase^/decrease in other assets .......................................... 3 Inerease/ldecrea&e) in minority interest ............................... . Other, net .. ............................................................................ (1) . Net cash flows (toVfram operating activities .............. (2) 8 20 - 8 67 79 79 46 19 8 12 (22) (6) (20) 1 (27) (14) 14 (6) 2 SlL_ (5) 16 7 72 (60) 7 _ 01 209 Cash Flows from Investing Activities: Capita] expenditures ................................................................ Net proceeds from asset dispositions .......................... ...... . Net proceeds from divestitures ofdiscontinued operations . Net cash flows (toWrum investing activities.............. Cash Flows from Financing Activities: Issuance ofdebt .................... ..................................... ............ Repayment ofdebt ................................................................... Revolvingcreditfacilily.net ................................................... Cash dividends paid ....................... ....................................... Other.net .................................................................................. Net cash flows (toVfrom financing activities .............. (64) (76) (81) 65 53 27 20 419 1 _____ QL ___ 3S5 60 4 2,246 (82) (266) (677) 140 - - - - (1.953) - (41 118 (262) (388) Net Cash Flows (Toj/From Discontinued Operations . (9) (2) 36 Net IncreaseftDecrease) in Cash and Cash Equivalents .. 108 1186) 222 Cash and cash equivalents at January 1 .................. ............... ____ 2_ Cash and cash equivalents at December 31 253 ____ 2!_ Supplemental Cash Flow Disclosures: Interest paid ........................................... Income taxes paid .................................... 275 100 accounting poUctteaad practice* on page* 20 Ihraitgk 36 arum integralpart oftku etaicmeal. USG CORPORATION SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES Principles ofConsolidation The consolidated financial statements include the accounts ofthe Corporation and its subsidiaries after elimination of intercompany accounts and transactions. Net currency translation gains or lasses on foreign subsidiaries, except for those in Mexico, are included in deferred currency translation, a component to stockholders' equity. Mexican currency translation losses are charged to earnings. For purposes of the Consolidated Balance Sheet and Statement of Cash Flows, all highly liquid investments with a maturity of three months or less at the time of purchase are considered to be cash equivalents. Financial Restructuring On December 31,1990, the Corporation announced that it was developing a long-term financial plan to restructure its debt and address future cash flow needs. A broad outline of the plan was presented to the Corporation's senior lending banks which have indicated that they will participate in the development of specific elements of the plan. The restructuring plan is expected to involve: an exchange proposal for certain public debt securities, including the 13.23% senior subordinated debentures, due 2000, and the 16.0%junior subordinated debentures, due 2006; extension ofthe term loan amortization schedule; substantial equity dilution; and the sale of DAP Inc. The exchange proposal may involve a package consisting of any or all of the following: cash; shares of common stock; and new debt. As part of the restructuring, USG is also exploring the feasibility of a sale of a significant equity stoke to a strategic or financial investor Proceeds from an equity infusion, ifmade, and from the sale of DAP will be used as determined by the restructuring plan. _ In connection with the restructuring plan, the Corporation deferred the payment of$105 million in term loan principal due to its senior tending banks on December 31, 1990 in order to maintain adequate liquidity during the restructuring process. The Corporation was subsequently notified that an event of default existed as of December 31,1990 under the term loan agreement by reason of its failure to make this scheduled repayment. Accordingly, the senior lending banks have notified the Corporation that no payments or distributions may be mode to holders of the 13.25% senior subordinated debentures white the default continues. As a result, payments totaling approximately 340 million due on January 15,1991 to the 13.25% subordinated bondholders were not made. Other requirements and restrictions caused by the default condition are explained in the Indebtedness footnote on pages 25 through 27 ofthis report The Corporation does not intend to file for protection under Chapter 11 bankruptcy laws. This restructuring is intended to provide an appropriate revision to the Corporation's capital structure without incurring the excessive expense, time and uncertainty typically experienced in bankruptcy proceedings. While it is uncertain when the restructuring will be completed, the Corporation expects the plan will be accomplished before the end of1991. Recapitalization and Restructuring On July 8, 1988, holders of USG common stock approved the Corporation's plan of recapitalization and restructuring which was previously approved by the Board ofDirectors The recapitalisation became effective on July 13, 1988. Stockholders of record on that date became entitled to receive $37 in cash, a $5 face amount 160% junior subordinated pay-in-kind debenture and one new common share in exchange for each Bhare of old USG common stock. This distribution to stockholders was recorded as a dividend, resulting in a deficit balance in stockholders' equity as of December 31,1990 and 1989 in the accompanying financial statements. To finance the recapitalization, approximately $2.5 billion in new debt was incurred. The majority ofthe costs incurred to secure financing for the recapitalization were capitalized and (hose costs are being amortised over the life ofthe related borrowings. Pre-tax charges totaling $20 million were incurred in 1988, reflecting $11 million for the buyout of stock options, $6 million for transaction costa and $3 million for costs associated with a salaried workforce reduction program. 21 U8G CORPORATION SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (continued) Recapitalization and Restructuring (continued) During the fourth quarter of 1990, the Corporation recorded pre-tax restructuring charges totaling $18 million related to a salaried workforce reduction program designed to improve operating efficiencies and far certain additional absorptions related to restructuring. There were no recapitalization and restructuring expenses recorded in 1989 Discontinued Operations In the fourth quarter of 1990, the Corporation's Board of Directors authorized the divestiture of DAP Inc., a wholly owned subsidiary. Results for DAP have been reclassified as discontinued operations in the consolidated financial statements and accompanying footnotes presented in this report. An after tax reserve of(41 million related to the planned divestiture of DAP was recorded in the fourth quarter of 1990. This reserve is net ofa related income tax benefit of(2 million. Results of Masonite Corporation, the Kinkead Division, the Marlile Division of USG Interiors, Inc. and Wiss, Janney, Elatner Associates, Inc., up to the times of their respective dispositions, are also reflected as discontinued operations in this report. In conjunction with the 1988 plan of recapitalization and restructuring. Masonite Corporation, a wholly owned subsidiary, and the Kinkead Division were sold in the fourth quarter of 1988 for approximately (400 million and (58 million, respectively. The Marlite Division and Wiss, Janney, Elatner Associates, Inc. were sold in the first quarter of 1989 for approximately (18 million and (11 million, respectively. The net cash proceeds From these divestitures were immediately used to repay term loan debt. The aftertax net gains recorded in 1988 on the divestitures ofMasonite and Kinkead were (46 million and (22 million, respectively. These gains were offset in pari by an after-tax charge f (25 million to write down the book value of Marlite's net assets to estimated realizable value. In 1989, an after-tax gain of(2 million was recorded on the sale ofWise, Janney, Elstner. Net sales of total discontinued operations amounted to $179 million, (184 million and (741 million in 1990,1989 and 1988, respectively. Net assets oF discontinued operations at December 31, 1990 in the accompanying Consolidated Balance Sheet reflect DAPs total assets of (154 million, net ofliabilities totaling $17 million. Nonrecurring Gains In January 1990, a nonrecurring pre-tax gain of $34 million was recorded on the sale of USG's corporate headquarters building at 101 South Wacker Drive in Chicago. ThiB gain was calculated after deducting $9 million as a reserve against which lease payments made by the Corporation while occupying the 101 South Wacker facility are being charged. The Corporation will continue to lease office space In this building until it moves to new leased offices scheduled for completion in 1992. Proceeds from this transaction were used to reduce debt. In March 1989, a pre-tax gain of(16 million was recorded on an insurance settlement fallowing a favorable U.S. Appellate Court ruling. This ruling upheld a U.S. Federal District Courtjudgment in September 1987 which obligated the insurance carrier to pay the Corporation approximately (25 million for claims stemming from the November 1984 subsidence of a mine shaft at United States Gypsum Company's Plasterco, Virginia, gypsum board plant. In April 1989, the Corporation received a payment of (35 million, which included approximately (10 million in pre- and post-judgment interest. In June 1989, a pre-tax gain of (11 million was recorded on the sale of United States Gypsum Company's construction metal business which had been treated as a continuing operation in the consolidated financial statements. The sale, which was part of the 1988 plan of recapitalization and 22 USG CORPORATION SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (continued) Nonrecurring Gains (continued) restructuring, included five plants end the production equipment from another location in Torrance, California. The disposal ofthe assets ofthis business was completed in November 1969 with the sale of the Torrance land. A pre-tax gain of$6 million was recorded on the latter transaction. Research and Development Research and development expenditures are charged to earnings as incurred and amounted to 116 million, $17 million and $19 million during 1990,1989 and 1988, respectively. Taxes on Income and Deferred Income Taxes Earnings^loss) from continuing operations before taxes on income were generated as follows: - tm _ IMS _ _ !$ - (Dollar amount* la million*) Domestic............................................................... Foreign ................................................................ Total .................................................................... $ (100) 40 $ (36) 68 $ 38 ____ 22 --us Total taxes on income consistofthe following: Current: U.S.Federal ... State and local . Foreign ....... ... MW MW (Dollar amount* in millions) ML $ (26) - 16 --JI2L- $ (29) - 21 ___ISL. $ (1) 2 27. ___32. Deferred: UJ5. Federal . State and local Foreign ....... Total ............... 5 ill4 iU 9 - _____ 2-- 11 ____L_ 12 1 _____ l _____IS ___ Deferred income taxes result from certain items being accorded different tax treatment for financial reporting and income tax purposes. The tax effect of such differences is summarized as follows: MM- -MB- --JML.. (Dollar amounts m miilians) Accelerated tax depreciation ...................................... Other, net ......................................................... Total deferred provision ....................................... Classification adjustment ofprior years' deferrals ... Increase in deferred taxes........................................... $ 2 2_ 4 (2) 2 $ 13 _____ l?i 11 ___ 121 _____ L $ 14 1 15 .121 12 23 USG CORPORATION SIGNIFICANTACCOUNTING POLICIES AND PRACTICES (continued) Taxes on Income and Deferred Income Taxes (continued) The actual income tax rate (total taxes on income as a of eamings/Ooss) from continuing operations before taxes) differs from the U S. statutory rate as shown in the following reconciliation: Rate<%) U.S. statutory rate/Ibenefit)............................ ......... NOL carryback rate differential .............................. Excess tax depletion ..................... .......... ....... ......... Intangibleaasetamortization ..................... . ......... Foreign tax rate differential ... ................... ......... State and local taxes on income, net .......................... Other, net......................................................... ......... Actual tax rate/(benefiU .................................. ......... 1SS0 <34.0) (6.2) (4.6) 15 30.4 0.2 2.9 ....... &2L 34 0 (16.4) (13.4) 3.3 41 21 0.6 , 1.12 IMS 34.0 - (28) 0.7 4.2 2.3 1.0 _m The Corporation does not provide for Federal income taxes on the portion of undistributed earnings of foreign subsidiaries which are intended to be permanently reinvested. The cumulative amount of such undistributed earnings totaled approximately $91 million at December 31, 1990. Future repatriation of undistributed earnings would not, in the opinion of management, result in significant additional taxes. In December 1987, the Financial Accounting Standards Board (ttFASBn) issued Statement of Financial Accounting Standards ("SFAS") No. 96 requiring the Corporation to change its method of accounting for income taxes beginning no later than 1989. The FASB subsequently issued SFAS No. 103 in December 1989 which deferred the effective date for adoption until 1992. The Corporation has not derided when to implement the new pronouncement, nor has it decided whether to restate prior financial statements. Consequently, the effect that the change will have on the reported consolidated financial position and results ofoperations ofthe Corporation has not been determined. Earniags/(Loss) Per Share Earnings/Goss) per share are computed by dividing earnings/Itas), after deducting preferred stock cash dividends when applicable, by the average number ofshares ofcommon stock outstanding, including shares issuable upon the exercise atstock options. Inventories Most domestic and Mexican inventories are valued under the last-in, first-out (UFO) method. The UFO values of these inventories were (59 million and (63 million at December 31, 1990 and 1989, respectively. The remaining inventories are stated at a lower ofcost or market under the firatin, first-out (FIFO) or average production cost methods. Inventories include materia), labor and applicable factory overhead costs. Ifall inventories were valued under the FIFO and average production cost methods, inventories would hove been (27 million and (25 million higher than those reported at December 31,1990 and 1989, respectively. 24 USG CORPORATION SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (continued) Inventories (continued) Inventory classifications are as follows: 1M1/M JLtaifli {Dollar amounu in fntllionfc) Finished goods and work-in-process Raw materiala ................................ Supplies ....................................... Total ............. ............................. $54 $ 40 2________ 103 5? 45 _____ 1 109 The UFO value of USG Interiors, Inc.'s inventories acquired under the purchase method exceeded that computed Cor Federal income tax purposes by $7 million and $8 million as of December 31, 1990 and 1989, respectively. As a result of these inventories, taxable income was $1 million greater than financial reporting income in 1990, while there was no difference between taxable and financial reporting income in 1989. Property, Plant and Equipment Property, plant and equipment classifications are as follows: 1X3 MM 1X3M8* (Dollar namu in lallUona) Land and mineral deposits .................. Buildings and realty improvements ... Machinery and equipment .................. Reserves for depreciation and depletion Total ............. .......................... ............ i 43 385 972 1,400 (575) $ 39 386 955 1,380 (5431 --922, Property, plant and equipment, including significant renewals and improvements, are capitalised at cost. Provisions for depreciation are determined principally on * straight-line basis over the expected average useful lives of composite asset groups. Depletion is computed on a basis calculated to spreeui the cost ofgypsum and other applicable resources over the estimated quantities of material recoverable, interest during construction is capitalized on major property additions. The Corporation leases certain of its offices, buildings, machinery and equipment, and autos under noncancellable operating leases. These leases have various terms and renewal options. Lease expense was $24 million, $21 million and $17 million in 1990,1989 and 1988, respectively. Approximate future minimum lease payments, by year and in the aggregate, under operating leases with initial or remaining noncancellable terms in excess ofone year, at December 31,1990 are as follows: 25 USG CORPORATION SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (continued) Leases (eontin ued) Minimum Um ______ ------------------- (DollarunounU in millions) 1991 ............................................................................................................. 1992 ............................................................................................................. 1993 ............................................................................................................ 1994 ............................................................................................................. 1995 ............................................................................................................ Thereafter .................................................................................................. Aggregate minimum payments ................ ............................................... 2 19 18 17 13 10 43 The Corporation also holds certain assets under capital leases. These lease obligations are not material. Indebtedness Total debtconsists ofthe following: mu* .mu*. (Dollar amounts ut millional Term loan, installments due through 1996 ......................................... Notes payable ....................................................................................... Senior notes: 7.375%, due 1991 .............................................................. 8.0%, due 1996 ................................................................................ 8.0%, due 1997 ................................................................................ Senior Debentures: 7.875%. due 2004, sinking fund through 2003 .............................. 8.75%, due 2017, sinkingfund commencing 1998 ......................... Subordinated Debentures: 13.25% senior subordinated, due 2000, sinking fund of|300 million due 7/15/99 ......................................................... 16.0%junior subordinated, due 2008, sinking fund commencing 2004 ....................................................................... Industrial revenue bonds, 5.9% -10.25%, due through 2014 .............. Other debt, average interest rate 10.7%, varying payments through 2005 ................................................... T'*i. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 840 156 100 100 100 48 200 600 379 38 39 .m . $ 900 1 100 100 109 52 200 600 325 38 _____ The recapitalisation in 1988 was financed through borrowings under a $1.6 billion term loan agreement (the "Agreement") with a group of commercial banks, from the sale of 1600 million of 13.25% senior subordinated debentures and from the issuance of $260 million of 16.0% junior subordinated debentures to the Corporation's stockholders. The recapitalization also included the repayment of $200 million of long-term and short-term debt existing at the lime of the recapitalisation. 26 USG CORPORATION SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (continued) Indebtedness (continued) The rale ofinterest on the term loan in 1990 included a margin ofeither 1.0% over the banks* base rate, 2.0% over the reserve-adjusted Eurodollar rate, or 2.0% over the reserve adjusted certificate of deposit rate, at the election of the Corporation. The average rate of interest on the term loan, including the cost of interest rate protection, was U.5% during 1990. The Agreement, as amended, contains various restrictions and conditions which the Corporation must maintain, including consolidated net worth (as defined) and financial ratios (as defined) relating to interest coverage, current assets to current liabilities and debt leverage (debt to total capital, both as defined). The Agreement restricts, among other things, the incurrence of additional indebtedness, mergers, asset dispositions, investments, prepayment of other debt, dealinga with affiliates, capital expenditures, payment of dividends and lease commitments. The Agreement requires the Corporation to protect the variable-rate term loan against increases in short-term interest rates. The minimum required amount to be protected is calculated as the total of the outstanding balance of the term loan plus $60 million times 75%. The Agreement includes a $200 million revolving credit facility, of which $70 million ib established as a letter of credit aubfaciiity. The stated rate of interest on the revolving credit facility is the same as for the term loan described above. Under the Agreement, for at least SO consecutive days during each twelve-month period commencing on July 1, 1968, Lhe aggregate outstanding principal balance of revolving credit borrowings may not exceed $75 million. As of December 31,1990, the Corporation's revolving credit borrowings, included in notes payable on the Consolidated Balance Sheet, amounted to $140 million. There were no revolving eredit borrowings as of December 31, 1989 Notes payable also include borrowings from several foreign banks by USG Interiors' international business units which are generally not restricted by the specifications of the Agreement. The term loan and revolving credit facility are secured by a pledge of all of the shares of the Corporation's major domestic subsidiaries and 65% ofthe shares ofcertain ofits foreign subsidiaries including CGC Inc. The 13.25% senior subordinated debentures are redeemable in whole or in part at the Corporation's option at any time on or after July 15,1993, initially at $5 over the stated lace amount and thereafter at declining redemption prices together with accrued interest. The 7.875% sinking fund debentures have a remaining principal amount of$52 million, of which $4 milium was held in treasury as of both December 31,1990 and 1989. The 8.75% sinking fund debentures have a principal amount of$200million . Under conditions of the Agreement, the Corporation must pay interest semiannually on the 16.0% junior subordinated debentures in additional junior debentures for the first five years after issuance. Thereafter, interest must be paid in cash. Commencing July 15,1990. these debentures were redeemable at the Corporation's option at any time at 100% of stated face amount plus accrued interest. As explained in the Financial Restructuring footnote on page 20 of this report, the new long-term financial restructuring plan is expected to involve, among other items, an exchange proposal for certain public debt securities, including the 13.25% senior subordinated debentures and the 16.0% junior subordinated debentures. The exchange proposal may involve a package consisting of any or all of the following: cash; shares of common stock and new debt An extension of the term loan amortisation schedule is also expected to be included in the new plan. As of December 31,1990, the Corporation was notified that an event of default existed under the Agreement by reason offailure to make the $105 milium term loan principal repayment due that day to the lending banks. This deferral coincided with the scheduled maturity on December 31,1990 of interest rate contracts, resulting in a default of the 75% minimum protection covenant described above. In addition, the Corporation was not in compliance with the Agreement's interest coverage ratio, debt leverage ratio and consolidated net worthcovenants as of December 31,1990. 27 USG CORPORATION SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (continual) Indebtedness (continued) As a consequence of the notice of default, certain restrictions under the Agreement have taken effect First, the Corporation is required to pay interest at a rate of 2% higher than the otherwise applicable loan rate. It is the Corporation's present intent to accrue such additional default interest, but not to pay it currently. The accrued amount will be dealt with as part of the overall financial restructuring plan. Second, the term loan must be converted to a base (prime) interest rate loan at the applicable conversion dates. Third, the deferral of the term loan payment prevents the Corporation from making cash payments to holders of subordinated debt while the default continues. This included the interest payments due January 15, 1991 on the 13.25% senior subordinated debentures. As of February 15, 1991, these debentures were in default under the applicable indenture provisions. Fourth, the revolving credit facility under the Agreement, including the letter ofcredit subfacility, is unavailable for further use so longas a default exists thereunder. Also as a result of the default condition, the outstanding balance of the term loan was immediately reclassified to current liabilities. Most of USG% long-term debt agreements contain clauses which permit the respective lenders to accelerate the due dates of substantially all of the Corporation's debt, generally if there occurs an acceleration of $50 million or more of other debt. Although no demand for acceleration of the maturity of long-term debt has occurred, demand can be made, subject to any applicable notice periods and cure procedures, if an acceleration as described above for the term loan occurs. Accordingly, virtually all tong-term debt issues have been reclassified to current liabilities as ofDecember 31,1990. Aggregate maturities of long-term debt, excluding the amounts classified as current liabilities, are $5 million, $5 million, $7 million and $7 million for the four years 1992 through 1995, respectively. Pension Plans and Other Poet-Employment Benefits The Corporation and most ofits subsidiaries, including DAP inc., have defined benefit retirement plans for all eligible employees. Benefits of the plans are generally based on years of service and employees' compensation during the last years of employment. The Corporation's contributions are made in accordance with independent actuarial reports which, for most plans, required minimal funding in 1990,1989 and 1988. Net pension expense for 1990,1989 and 1988 included the followingcomponents: iwa teas (Dollar anountt in milliaaa) iim Service cost-benefits earned during the year . Interest cost on projected benefit obligation .. Actual return on plan assets ......................... Unrecognised prior service cost..................... Netamortization and deferral ....................... Net pension expenaefibenefiti ....................... 5 29 (4) 2 (34) {21__ $5 30 (70) 1 ___2___ 1 $7 29 (45) 1 12 ____ 4 The pension plan assets, which consist primarily of listed common stocks and debt securities, have an estimated fair value in excess of the projected benefit obligation as of December 31,1990. The following table presents a reconciliation ofthe funded status of the pension plans to the projected benefit obligation. 28 USG CORPORATION SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (continued) Pension PUuis end Other Post-Employment Benefits (continued) Amount ofassets available for benefits: Funded assets ofthe plans at fair value ........................... Accrued pension expense.................................................. Total assets ofthe plans ........................................................ Present value of estimated pension obligation: Vested benefits ................................ .............................. Nonvested benefits ....................... ...................... ............ Accumulated benefit obligation ................... ........................ Additional benefits baaed on projected future salary increases Projected benefit obligation .................................................. Assets in excess ofprojected benefit obligation ..................... IMl/Bt iim9 (Dollar amounts in million*) $ 370 ....16- .. 386-. 261 ja. 284 58 342 $ 413 ___ 2SL ___ m 264 -2L 289 66 m. J&. Assets in excess of projected benefit obligation conaisL of: Net assets existing at the date of adoption of SPAS No. 87 not yet recognized ............... Unrecognized net gain due to changes in assumptions and differences between actual and estimated experience ............ Unrecognized coat ofretroactive benefits granted by plan amendments .................. Assets in excess ofprojected benefit obligation tDollar amuimu in millionel 8 42 8 46 16 46 (14) (14) 44 ____ 2L. The expected long-term rate of return on plan assets was 9% for both 1990 and 1989. To determine the actuarial present value ofthe accumulated benefit obligation as of December 31,1990 and 1989, a weighted average discount rate of 9% was used for both years and rate of increases in projected future compensation levels was 6.5% for both 1990 and 1989. The unrecognized prior service cost is being amortised over 13 yean. The Corporation and its subsidiaries also provide certain health care and life insurance benefits for retired employees Substantial iy all employees may become eligible for these benefits ifthey reach retirement age while still working for the Corporation. For some plans, benefits are paid under administrative service contracts. The cost of health care and life insurance benefits is recognized as expense when claims are reported. For all health care and life insurance plans related to retired employees, $7 million, $7 million and $6 million were charged to expense in 1990,1989 and 1988, respectively. In December 1990, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 106 requiring the Corporation to change its method ofaccounting for post employment health benefits. The new pronouncement requires companies beginning no later than 1993 to accrue, or set up a reserve for, future medical benefits of retirees rather than deduct these costs from reported profits each year when paid. The Corporation has not decided when to implement the new pronouncement and the effects ofthe pronouncement have not yet been determined. 29 USG CORPORATION SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (continued) Stockholders' Equity Changes in stockholders'equity for 1990,1989 and 1988 are summarized as follows: 19B0 last . ItBft(1Dollar amount*in millions) Common Slock: Balance as ofJanuary 1 ............................................ Conversion of61,263 preferred to 220,499 common .. $ 5 3 5$ 207 1 Cash, debentures and common stock issued to stockholders ......................................................... Balance as of December 31 ........................................ 5 (203) 65 Capital Received in Excess ofPar. Balance as ofJanuary 1 ................................. .......... Stock options exercised (143,525 shares) .................. Restricted stock issuance and amortization (1990- 941,990 shares; 1989-188.411 shares; 1988-1,982.500 shares) ..................................... Conversion of61,263 preferred to220,499 common .. Redemption ofpreferred sleek and rights (6,598 shares) Other, net................................ ................................... Balance as ofDecember 31 ......................................... 15 - 5 3 23 12 5 -3 32 - (1) - (3) _6 15 ____12 Deferred Currency Translation. Balance as ofJanuary 1 . .............................. ......... Currency translation adjustment .............................. Balance as of December 31 ......................................... <31 16) 33 . ______ 121 (9) 3 ____ 161 Reinvested Earnings: Balance as ofJanuary 1 ........................................... . Net earnings/(loss) ................................................... . Dividends (pre-recapitalization) ............................. . Cash, debentures and common stock issued to stockholders ....................................................... Other.net .................................................................. - Balance as of December 31 ....................................... Total Stockholders* Equity .................................... .. (1.465) (90) - . ____01 ll,S46i, (1,4821 28 - ill (1.455) -1L22S1 407 125 (29) (1,981) ill . 1M83I ilillil As ofDecember 31,1990, the Corporation held 422,043 shares of$0.10 par value common stock in treasury. These shares were acquired through the forfeiture of restricted stock. 30 USG CORPORATION SIGNIFICANT ACCOUNTING POLICIES ANI) PRACTlCES(continued) Preferred Share Purchase Rights Upon consummation of the recapitalization in 1988, one Preferred Share Purchase Right ("Right") was declared as a dividend for each outstanding share of new common stock. The Rights will become exercisable tea days following a public announcement that a party acquired, or obtained the right to acquire, beneficial ownership of 20% or more of the Corporation's outstanding common shares, or ten days following commencement or announcement of a tender ofTer or exchange offer for 30% or mare ofthe Corporation's outstanding common shares. When exercisable, each Right entities the registered holder to purchase one-tenth of a share of a Junior Participating Preferred Stock, Series C, $1.00 par value per share, at a price of $35.00 per one-tenth of a preferred share, subject to adjustment. Ifthe Corporation is involved in a merger or business combination at any time after the Rights become exercisable, the Rights will entitle the holder to buy a number of shares of common Block of the acquiring company having a market value aL that time of twice the exercise price of each Right The Rights contain provisions which are intended to protect stockholders in the event of an unsolicited attempt to acquire the Corporation. Common Stack Option Plans Pursuant to the plan of recapitalization, the 1988 Management Performance Plan (the "1988 Plan") was established. A total of 8,800,000common shares was reserved for issuance under the 1988 Plan. The 1988 Plan authorizes the grant ofincentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, deferred stock, performance shares and performance units. During 1990, nonqualified stock options on 819,900 shares were granted. No incentive stock options were granted. None of the 1990 stock option grants were made in tandem with stock appreciation rights. Information for 1990 on options granted, exercised, cancelled, and outstanding is as follows: December 31.1989 .................................... ..................... 1990 Transactions: Granted .......................... ................... ....................... Exercised............................................. ............. Cancelled .................................................................. December 31,1990 .................................... ..................... Options 4,471,700 619.900 - (369.075) 4.722.525 -J PI V* OrrtbalVteo $7,525 7.525 - ___L52S___ On August 1,1990,25% of all outstanding options became exercisable. Cancellation of options resulting from terminations ofemployment were pursuant to terms ofthe grants. As of December 31, 1990, nonqualified stock options were held by 230 persons on 4,436,725 shares, which options will expire on August 1, 1998 As noted above, these options became exercisable in cumulative increments of 26% each as of August 1,1990 and continuing on that date in 1991,1992 and 1993. In addition, on December 31,1990,20 persons held nonqualified stock options on 286,800 shares, which options will expire on July 31, 1998, and on January 31,1990,15% of those options became exercisable on attainment ofcertain targets. As of December 31,1990, all officers and key employees eligible to receive options under the 1988 Plan had been granted options thereunder. During 1990, grants of434,473 shares of restricted stock also were made under the 1988 Plan. A total of 1,974,279 shares of restricted slock were still outstanding under the 1988 Plan as of December 31, 1990. On January 31, 1990, 290,790 shares of restricted stock were freed of restrictions on attainment ofcertain targets 31 USG CORPORATION SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES {continued) Common Stock Option Plane (continued) As or December 31,1990, 366,253 shares of deferred stock also had been awarded under the 1988 nan. In January 1991, deferral periods on 127,295 of those shares expired and that quantity of shares was issued and delivered to the respective participants. Shares ofcommon stock available as of December 31,1990 for future awards under the 1988 Plan were 1,536,943. Litigation One of the Corporation's subsidiaries, United States Gypsum Company TILS. Gypsum" or "the Company"), is among numerous defendants in lawsuits that seek bo recover compensatory and in many cases punitive damages for costs associated with maintenance or removal and replacement of products containing asbestos that were installed in buildings more than a decade ago when U.S. Gypsum ceased manufacturing such products. These lawsuits have been brought by a variety of plaintiffs, including school districts, state and local governments, colleges and universities, hospitals, and private property owners. Two of these cases have been certified as class actions and others request such certification. U.S. Gypsum is one of many defendants in a class action suit ponding in federal court in Pennsylvania on behalf of owners and operators of all elementary and secondary schools in the United States that contain or contained friable asbestos-containing material. Approximately 1,350 school districts opted out of the clasB, some of which have filed or may file separate lawsuits or are participants in a stale court class action. On May 14,1990, the United States Supreme Court denied e petition by the attorneys general of 29 states seeking leave to file a property damage suit against U.S. Gypsum, USG Corporation and 24 other companies relating to buildings owned by those states. U.S. Gypsum has denied the substantive allegations of each of the property damage lawsuits and intends to defend them vigorously except when advantageous settlements are possible. As of December 31, 1990, 124 property damage cases were pending against U.S. Gypsum; however, the number of buildings involved is greater than the number of cases because, as indicated above, certain of these cases are or purport to be class actions and many of the others also involve multiple buildings. Approximately 84 property damage lawsuits have been threatened against U.S. Gypsum, and it is anticipated that additional eases containing allegations similar to those described above will be filed. U.S. Gypsum has settled property damage claims of approximately 140 plaintiffs, including three eases involving 83 school district plaintiffs that had been combined before a federal court in Texas. All settlements were paid out of reserves. Nineteen cases have been tried to verdict, 12 of which were won by U.S. Gypsum and seven lost Eight of these cases have post-trial motions or appeals pending or expected. In the cases lost, compensatory damage awards against U.S. Gypsum have totalled $3.5 million. Punitive damages totaling $1.5 million were entered against U.S. Gypsum in three trials; U.S. Gypsum has appealed those awards. In addition, U.S. Gypsum has obtained dismissals prior to trial in other property damage cases. The plaintiffs have appealed certain ofthese dismissals. U.S. Gypsum also was among numerous defendants in lawsuits and administrative claims involving 36,967 claimants pending as of December 31,1990, that seek to recover compensatory and in many cases punitive damages for personal injury allegedly resulting from exposure to asbestos and adbestos-containing products. It is anticipated that additional personal injury cases containing similar allegations will be filed. Motions are pending in the Federal District Court in Beaumont, Texas requesting that the court certify a nationwide class of personal injury plaintiffs against numerous defendants, including U S. Gypsum, and the Judicial Panel on Multidistrict Litigation is considering a consolidation or coordination of all asbestos bodily injury claims pending in the federal courts. Prior to September 3.1985, U.S. Gypsum disposed of 3,238 persona) injury cases for a nominal 32 USG CORPORATION SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (continued) Litigation (continued) average payment. Between September 3, 1985 and September 30, 1990, the Center for Claims Resolution (described below) and the Asbestos Claims Facility, a similar organisation of which U S. Gypsum was formerly a member, disposed of the claims of 20,047 claimants who had named U.S. Gypsum as a defendant. UJS. Gypsum is a member, together with nineteen other former producers of aBbestos-containing products, of the Center for Claims Resolution ("the Center") The Center has assumed the handling, including the defense and settlement, of all asbestos-related personal injury cases pending against (J.S. Gypsum and the other members of the Center. Bach member of the Center is assessed a portion of the liability and defense costs of the Center for all asbestos-related personal iryury cases handled by the Center, according to predetermined allocation formulas. As of December 31,1990, the Center was handling approximately 77,099 claims involving its members. Claims for punitive damages are defended but not paid by the center. If punitive damages are recovered, insurance coverage may be available depending on the terms of particular policies and applicable state law. Punitive damages have not been awarded against U.S. Gypsum in any personal injury case. All of (J.S. Gypsum's insurance carriers that in 1985 signed an Agreement Concerning Aabeatoa Related Claims (the "Wellington Agreement") are "Supporting Insurers" of the Center. As Supporting Insurers, they provide coverage for the defense and indemnity costs of the Center's members pursuant to the coverage provisions in the Wellington Agreement. Virtually all of U.S. Gypsum's personal injury liability and defense costs are paid by thou ofits insurance carriers that are Supporting Insurers. U.S. Gypsum has substantial personal injury and property damage insurance for the years involved in the asbestos litigation. Because U.S. Gypsum's insurance carriers responded to its claims for defense and indemnification with various theories denying or limiting coverage and the applicability of their policies, U.S. Gypsum filed a declaratory judgment action against them in the Circuit Court of Cook County, Illinois in 1983. U.S. Gypsum has voluntarily dismissed from the personal injury portion of this litigation those defendant insurance carriers who subscribed to the Wellington Agreement On January 7,1991, the trial court ruled on the applicability ofU.S. Gypsum's insurance policies to settlements and one adversejudgment in eight property damage cases. The court ruled that the eight cases were generally covered, and imposed coverage obligations on particular policy yean based upon the dates when the presence ofasbestoa-containing material was "first discovered" in each case. The court awarded reimbursement of approximately 56.2 million spent by U.S. Gypsum to resolve the eight eases. U.S Gypsum has appealed the court's ruling with respect to the policy years available to cover particular claims, and the carriers have appealed other aspects of the court's ruling. These appeals are likely to last twoyears or more. Although no detailed study has yet been undertaken, the "first discovery" dates in the eight canes referred to above (1978 through 1985) are likely to be typical of most pending cases. Some pending cases, as well as some cases filed in the future, may be found to have first discovery dates later than August 1,1984, alter which the Company's insurance policies did not provide coverage for asbestosrelated claims. In addition, as described below, the first layer excess carrier for the years 1980 through 1984 is insolvent and U.S. Gypsum may be required to pay amounts otherwise covered by those and other insolvent policies. Accordingly, if the court's ruling is affirmed, the Company will likely be required to bear a portion of the cost of the property damage litigation. US. Gypsum has settled its claims against six carriers and dismissed them from the case entirely. U.S. Gypsum will continue to seek negotiated resolutions with its carriers in order to minimise the expense and delays oflitigation. Insolvency proceedings have been instituted against four of U & Gypsum's insurance carriers, one of which provided excess insurance ($4 million excess of 51 million excess of $500 thousand primary 33 USG CORPORATION SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (continued) Litigation (continued) in each policy year) from February 15, 1975 to February 15, 1978; one of which provided excess insurance ($15 million excess of $1 million primary in each policy year) from August 1, 1980 to December 31,1985; one of which provided excess insurance ($10 million excess of $90 million) from August 1, 1983 to July 31, 1984, and one of which provided the primary layer of insurance ($500 thousand per year) from February 1,1963 U April 15, 1971. It is possible that U.S. Gypsum will be required to pay costs that would otherwise have been covered by these pel icies It is not possible to predict the number of additional lawsuits alleging asbestos-related claims that may be filed against U.S. Gypsum. The number of personal injury claims pending against U S. Gypsum and other members ofthe Center has increased in each of the last several years. In addition, the property damage cases are still at an early stage and the potential liability therefrom is consequently uncertain. In view of the current financial circumstances of the Corporation, management is unable to determine whether an adverse outcome in the asbestos litigation will have a material adverse effect on the consolidated financial position of the Corporation. The Corporation and certain or its subsidiaries have been notified by state and federal environ mental protection agencies of possible involvement as one of numerous 'potentially responsible parties" in a number of so-called "Superfund" sites in the United States. In substantially all of these sites, the involvement of the Corporation or its subsidiaries is expected to be minimal. One of the Corporation's subsidiaries has been named as a potentially responsible parly in a Superfund site in New Jersey in which the subsidiary's liability for cleanup costs could become substantial depending upon future developments. The Corporation does net expecL that it will incur significant costs in connection with this site during 1991. The Corporation believes that appropriate reserves have been established for its potential liability in connection with this and all other Superfund sites but is continuing to review its accruals as additional information becomes available. The Corporation docs not presently anticipate any material adverse effect upon its earnings or financial condition arising out id* the resolution of these matters or any other known governmental proceeding regarding environmental matters. Industry and Geographic Segments Industry and geographic segments for the years presented in the following tables have been restated to exclude DAP Inc. which had comprised the Other Products industry segment and is now classified as discontinued operations. Descriptions of continuing industry segment operation*, are on pages 3 through 8 ofthis report. Industry intersegment eliminations largely reflect intercompany sales from U nited States Gypsum Company to LAW Supply. The Corporation's principal operations are in the United States and Canada. Transactions between geographic areas are accounted for on an "arm's-length" basis. Export sales to foreign unaffiliated customers represent less than 10% ofconsolidated net sales. No tingle customer accounted for 4% or more ofconsolidated net sales. Segment operating profit includes all costs and expenses directly related to the segment involved and an allocation ofexpenses which benefit more than one segment. Genera] corporate expenses (net) for 1990 include restructuring costs of $5 million, while other restructuring costs totaling $13 million were incurred by the various segments. General corporate expenses (net) fur 1988 include recapitalization and restructuring costs totaling $20 million for the buyout of stock options, for transaction costs and for costs associated with a salaried workforce reduction program. No recapitalization or restructuring expenses were incurred in 1989 Variations in the levels of corporate identifiable assets primarily reflect fluctuations in the levels of cash and cash equivalents. * 34 USG CORPORATION SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (contmuedl Industry Segments Net Sales Gypsum Products: U.S. Gypsum Company ........................... .. CGC Inc. (U.S. $1 .................................... .... Other subsidiaries .................................. .... Total Gypsum Produets ......................... .... Interior Systems: USG Interiors, Inc. .................................. .. CGC Inc. (U.S. $) .................................... Total interior Systems ..................... .. ... Building Products Distribution .................... Intersegment eliminations .......................... ... Total ....................................................... ....... IMS IMS (Dollar amount*in millions) $ 928 133 65 U3S, 564 40 604 478 1293) L21L % 1,032 163 59 1,2^4 549 45 594 485 <326) * 1,119 182 66 ...UffiL 548 39 587 483 .13671 Operating Profit Gypsum Products: U.S. Gypsum Company ...................... .... CGC Inc. (U.SD .................................... .... Other subsidiaries .................................. .... Total Gypsum Products ......................... ... Interior Systems: USG Interiors, Inc .................................. .... CGC Inc (U.S $) .......................... .... Total Interior Systems ................... ..... Building Products Distribution ............. . .. General corporate expenses, net .................. .... Total ............................................. 115 18 16 149 68 9 77 4 ___ QSL 1^5 173 38 16 22? 78 11 89 7 ___ mi ____ 222- 192 66 18 266 75 a 83 12 , 1101 291 Depreciation. Depletion and Amortization: Gypsum Products ............................ ..... Interior Systems ............................. ..... Building Products Distribution ............. ..... Corporate .......... ................ .......... ..... Total...................................... ..... 39 16 6 15 , 7. 39 16 9 15 79 41 15 11 12 fg Captlal Expendit ures: Gypsum Products ............................ ..... Interior Systems .............................. ..... Building Products Distribution ............. ..... Corporate ...............................-- ..... Total ....................................... ..... 25 37 1 1 ....... SL 41 33 1 _____l_ 16 60 17 3 _____1_ 81- 35 USG CORPORATION SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (continued) Industry Segments (continued) Identifiable Assets: Gypsum Products ..................................... ......... Interior Systems ....................... ............... ......... Building Products Distribution ................ ......... Corporate ............................. .................. ......... Discontinued operations ....................... ......... Total ................................................... ......... ISM IMS (Dollar amounts in million*) $ 765 409 89 275 137 1-675- % 788 376 102 180 139 1585 t 834 352 101 363 156 1-806 Geographic Segments Net Salts to Trade. United States ............................................ ......... Canada ................................................... ........... Other foreign ........................................... .......... Total ................................ ................. ........... ISM IMS im ... (Dollar amount* in milliomi * 1,658 173 184 1,916 $ 1,669 204 144 2 007 $ 1,744 192 --131. --24KL Transfers between Geographic Areas: United States to Canada ..................... ............ 25 30 27 Canada to United States ..................................... 22 22 23 Other foreign to United Slates ................ ........... 27 26 26 Total .................................................. ........... 74 78 76 Net Sales: United States ......................................... . ........... Canada .................................................... ........... Other foreign ........................................... ........... Intersegment eliminations ..................... ........ Total .................................................. .......... 1,583 195 211 ....... IZiL 1,915 1,689 226 170 LZ&L 2007 1,771 215 160 ____ 2070 Operating Profit: United Stales ........................................... ........... Canada .................................................... ........... Other foreign ........................................... ........... General corporate expenses, net ............. ........ Total .................................................. ........... 164 31 35 ....... I25L 195 237 53 33 ____ OIL 292 264 70 37 ...JflOi 291 USG CORPORATION SIGNIFICANT ACCOUNTING POLICIES AND PRACTICES (concluded) Geographic Segments (conUn ued I Identifiable Assets United States ....................................... ............. Canada ............................................... ............. Other foreign ....................................... .............. Corporate ............................................................ Intersegment eliminations ................ ............. Discontinued operations ...................... ............. Total ........................................... ................ ISM (Dollar amounts in millions) $ 1,002 115 150 275 14) 137 1675 $ 1,056 117 97 180 (6) 139 }.S86 $ 1,096 111 84 363 14) 156 -LSSS. USG CORPORATION MANAGEMENT REPORT Management is responsible Tor the preparation and integrity of the financial statements and related notes which appear on pages 17 through 36. These statements have been prepared in accordance with generally accepted accounting principles and, of necessity, include some amounts that are baaed on management's best estimates and judgments. USG's accounting systems include internal controls designed to provide reasonable assurance of the reliability of its financial records and the proper safeguarding and use of its assets. Such controls are based on established policies and procedures, are implemented by trained personnel, and are monitored through an internal audit program. The Corporation's policies and procedures prescribe that the Corporation and its subsidiaries are to maintain high, ethical standards and that its business practices are to be consistent with these standards. The Audit Committee of the Board of Directors, consisting solely of outside Directors of USG, maintains an ongoing appraisal, on behalfofthe stockholders, of the effectiveness of the independent auditors and management with respect to the preparation of financial statements, the adequacy of internal controls and the Corporation's accounting policies REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To tiie Stockholders and Board ofDirectors of USG Corporation: We have audited the accompanying consolidated balance sheet of USG Corporation (a Delaware corporation) and subsidiaries as of December 31,1990 and 1989 and the related consolidated statements ofearnings and cash flows for each ofthe three years in the period ended December 31, 1990. These financial statements art the responsibility of the Corporation's management Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as we II as evaluating the overall financial statement presentation. We believe thatour audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position ofUSG Corporation and subsidiaries as ofDecember 31,1990 and 1989, and the results oftheir operations and tbei r cash flows for each of the three years in the period ended December 31,1990, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Corporation will continue aa a going concern. As discussed in the Financial Restructuring footnote to the consolidated financial statements, the Corporation is in defaultofits term loan agreement and does not expect to be able to meet its debt service requirements in 1991, which raises substantial doubt about its ability to continue as a going concern without restructuring its debt and selling assets. Management's plana in regard to this matter are described in the Financial Restructuring footnote. The Corporation is also unable todetermine whether it would have the financial resources, in the presentcircumstances, to satisfy any material adverse effects ofasbestos related litigation as discussed in Ike Litigation footnote. The consolidated financial statements do not include any adjustments relating u the outcome ofthis proposed restructuring or the impact on those financial statements ifthe plan is not implemented February 11,1991 Chicago, Illinois i r> 4 * <*' 38 USG CORPORATION QUARTERLY FINANCIAL AND STOCK PRICE HIGHLIGHTS (Unaudited) First J2jSS Second Third Fourth Quarter Quarter Quarter < Duller amounts in millions! Total Year lieo Net Bales........................................... Gross profit ..................................... Operating profit .............................. Eariunn/doBS) from continuing operations .................................. Net earningBflloBs) ...................... .. Per common share: Eamings/Ooss) from continuing operations .......................... Net earninga/doss) .................... Price range** - high .................. hw .................... $ 487 107 57 7 8 .13 .14 47/8 3M 8 485 117 67 (1) 1 1.02) .02 48m 3 1/4 8 490 109 60 (13) (ID (.23) (.20) 37* ] B* 8 453 83 11 8 1,915 416 195 (47) (88)* (54) (90)* (.87) (1.61) 2 3M (.99) (1-65) 47* 3/4 1989 Net sales........................................... Gross profit .............................. ....... Operating profit ....................... ....... Earnings/Oosa) from continuing operations ................ ................. N et earn ings/'( loss)........................... Per common share: Earnings/UossI from continuing operations .............................. Net earnings.............................. Price range** - high .................. low .................... 8 498 116 62 1 3 .02 .05 5 8 520 128 76 7 9 13 17 61/4 5 8 510 130 80 6 9 .11 .16 51/4 3 W8 8 479 127 74 8 2,007 501 292 6 20 7 28 .11 .37 .13 .51 56* 7M8 27 27* * Includes after-tax reserve of 141 m iHion ielated totfte planned divestiture of DAP trie ** Stock pr>ce ranges ne for transactions on the New York Stock Exchange (trading symbol USG). whtch is the principal market for these securities Stockholders of record as of February 18.1991: Common-15.141; Preferred-none US<S CORPORATION COMPARATIVE FIVE-YEAR SUMMARY m. 1M8 1888 HB im (Dollar amount* in millions except per-share figures) Operating Items* For years ended December 31; Netsales ........................................ $1,915 $2,007 $ 2,070 $2,165 $2,077 Cost ofproducts sold...................... 1,499 1,506 1,536 1,530 1,371 Gross profit .................................... 416 501 534 635 706 Selling and administrative expenses .................................. 203 209 223 263 233 Recapitalization and restructuring expenses .............. 18 _ 20 53 . Operating profit............................. 196 292 291 329 473 Interest expense ..... ..................... 292 297 178 69 34 Interest income ............................ (8) (10) (13) (5) (6) Otherexpense.net ..................... 5 15 16 16 3 Nonrecurring gains ................... (34) (33) (50) Taxeson income ......... (6) 3 43 129 212 % tax rate............................. (9.8) 143 394 43.1 461 Rarnings/Uitts) from continuing operations ............................. (64) 20 67 170 230 NetearningsAloss) .............. (90) 28 125 204 226 % lo average total capital employed ............ 6.5 182 15.7 15.5 163 Per common share: Earmngs/Opssl from continuing operations ........................... (.99) .37 1.26 3.31 3.60 Netearnings/doss).................. (165) 51 2.38 3.96 3.54 Cash dividends ....................... - .56 1.12 1.04 Capital expenditures .................... 64 76 81 143 157 Financial Items * As of December 31: Working capital/tdefjcit) .............. Current ratio ................................ Property plant and equipment, nei Total assets .................................... Total debt ...................................... Total stockholders* equity/ldeficit) Market value per common share .. (2,198) 0.24 825 1,675 2,600 (1,518) 0.81 Average number ofemployees............ 12,700 51 1.09 837 1,585 2,428 (1,438) 4.50 13,400 102 1.15 859 1,806 2,643 (1,471) 6.63 14,400 561 2.39 862 1,940 795 610 29.13** 15,200 375 1.67 848 1,900 853 585 37.75** 15,000 * ftetuitt reflect DAP inc.. Masonite Corporation, the Kinkead Division, the Marltte Division ot DSC interior*, im , vast, Janney. Elstnei Associates. Inc. and A P Green Industries. Inc., as discontinued operations A P Green's 1987 results of operator* were included in a divestiture reserve and therefore are not reflected *n 1987 consolidated net earnings Financial items reflect the dtstnbution.of A P Green common nock as though it had occurred as of December 31.1987 Revolts foi Oonn Incorporated are included effective with itsdate of acquisition in April 1988 ** Reflects the December 31.1987 and 1986 market value of pre-recapitalization USG common stock, par value 44 per share