FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1994
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-886
USG CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 36-3329400
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
125 South Franklin Street, Chicago, Illinois 60606-4678
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (312) 606-4000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes X No
As of October 31, 1994, 45,082,950 shares of USG common stock were
outstanding.
<PAGE>
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Statement of Earnings:
Three Months and Nine Months ended September 30, 1994,
Three months ended September 30, 1993, May 7 through
June 30, 1993 and January 1 through May 6, 1993
Consolidated Balance Sheet:
As of September 30, 1994 and December 31, 1993
Consolidated Statement of Cash Flows:
Nine Months Ended September 30, 1994, May 7 through
September 30, 1993 and January 1 through May 6, 1993
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition
Report of Independent Public Accountants
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
<PAGE>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
USG CORPORATION
CONSOLIDATED STATEMENT OF EARNINGS
(Dollars in millions except per share data)
(Unaudited)
<CAPTION>
1994 (a) 1993 (a) 1993
Three Months Nine Months Three Months May 7 January 1
ended ended ended through thru
September 30 September 30 September 30 June 30 May 6
<S> <C> <C> <C> <C> <C>
Net Sales $ 621 $ 1,689 $ 514 $ 315 $ 591
Cost of products sold 468 1,293 409 252 482
Gross Profit 153 396 105 63 109
Selling and administrative expenses 63 179 56 36 71
Amortization of excess
reorganization value 43 127 43 28 -
Operating Profit/(Loss) 47 90 6 (1) 38
Interest expense 33 103 34 22 86
Interest income (3) (8) (2) (1) (2)
Other expense/(income), net (1) 1 (4) (2) 6
Reorganization items - - - - (709)
Earnings/(Loss) Before Taxes on
Income, Extraordinary Gain and
Changes in Accounting Principles 18 (6) (22) (20) 657
Taxes on income 24 51 3 1 17
Earnings/(Loss) Before Extraordinary
Gain and Changes in Accounting
Principles (6) (57) (25) (21) 640
Extraordinary gain, net of taxes - - - - 944
Cumulative effect of changes in
accounting principles, net - - - - (150)
Net Earnings/(Loss) (6) (57) (25) (21) 1,434
Average number of common shares (b) 45,065,991 42,691,615 37,157,482 37,157,458
Net Loss Per Common Share (b) $ (0.13) $ (1.34) $ (0.66) $ (0.57)
Dividends paid per common share (b) - - - -
(a) Due to the Restructuring and implementation of fresh start accounting, financial statements after May 6, 1993 for
the restructured company are not comparable to financial statements prior to that date. See "Notes to Consolidated
Financial Statements - Note (3)" for more information on the Restructuring and implementation of fresh start
accounting.
(b) Common shares and per share data for periods prior to May 7, 1993 are omitted because, due to the Restructuring and
implementation of fresh start accounting, they are not meaningful.
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
USG CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollars in millions)
(Unaudited)
<CAPTION>
As of As of
September 30, December 31,
1994 1993
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 259 $ 211
Receivables (net of reserves - 1994 $14; 1993 $13) 308 264
Inventories 175 145
Total current assets 742 620
Property, Plant and Equipment (net of reserves for
depreciation and depletion - 1994 $75; 1993 $36) 753 754
Excess Reorganization Value (net of accumulated
amortization - 1994 $240; 1993 $113) 606 735
Other Assets 165 54
Total assets 2,266 2,163
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable $ 125 $ 104
Accrued expenses 236 208
Notes payable 12 2
Long-term debt maturing within one year 8 165
Taxes on income 53 20
Total current liabilities 434 499
Long-Term Debt 1,202 1,309
Deferred Income Taxes 181 180
Other Liabilities 416 309
Stockholders' Equity/(Deficit):
Preferred stock - -
Common stock 5 4
Capital received in excess of par value 221 -
Deferred currency translation (7) (9)
Reinvested earnings/(deficit) (186) (129)
Total stockholders' equity/(deficit) 33 (134)
Total liabilities and stockholders' equity 2,266 2,163
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
USG CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in millions)
(Unaudited)
<CAPTION>
Nine Months May 7 January 1
ended through through
September 30, September 30, May 6,
1994 (a) 1993 (a) 1993
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net earnings/(loss) $ (57) $ (46) $ 1,434
Adjustments to reconcile net earnings/(loss) to net cash:
Amortization of excess reorganization value 127 71 -
Cumulative effect of accounting changes - - 150
Depreciation, depletion and other amortization 52 29 22
Interest expense on pay-in-kind debentures - - 17
Deferred income taxes 1 3 (13)
Net gain/(loss) on asset dispositions (2) (7) 4
(Increase)/decrease in working capital:
Receivables (44) 23 18
Inventories (30) 1 (8)
Payables 54 5 3
Accrued expenses 28 40 15
(Increase)/decrease in other assets (10) 4 (12)
Increase in other liabilities 8 6 4
Changes due to reorganization items:
Increase in reorganization items - - 65
Net adjustments to fair value - - (759)
Gain on discharge of prepetition liabilities - - (944)
Payment of liabilities net of collection of
letter of credit - - (7)
Other, net (2) (3) (3)
Net cash flows (to)/from operating activities 125 126 (14)
Cash Flows From Investing Activities:
Capital expenditures (37) (16) (12)
Net proceeds from asset dispositions 3 9 -
Net cash flows to investing activities (34) (7) (12)
Cash Flows From Financing Activities:
Issuance of debt 168 26 5
Repayment of debt (435) (37) (142)
Proceeds from public offering of common stock 224 - -
Decrease in restricted assets - - 32
Net cash flows (to)/from financing activities (43) (11) (105)
Net Increase/(Decrease) in Cash and Cash Equivalents 48 108 (131)
Cash and cash equivalents as of beginning of period 211 49 180
Cash and cash equivalents as of end of period 259 157 49
Supplemental Cash Flow Disclosures:
Interest paid 84 34 58
Income taxes paid 17 3 3
(a) Due to the Restructuring and implementation of fresh start accounting, financial statements after May
6, 1993 for the restructured company are not comparable to financial statements prior to that date.
See "Notes to Consolidated Financial Statements - Note (3)" for more information on the Restructuring
and implementation of fresh start accounting.
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
USG CORPORATION
Notes to Consolidated Financial Statements
(Unaudited)
(1) The consolidated financial statements of USG Corporation and its
subsidiaries ("the Corporation") included herein have been prepared
pursuant to the rules and regulations of the Securities and Exchange
Commission. In the opinion of management, the statements reflect all
adjustments, which are of a normal recurring nature, necessary to
present fairly the Corporation's financial position as of September 30,
1994 and December 31, 1993; results of operations for the three months
and nine months ended September 30, 1994, the three months ended
September 30, 1993 and the periods of May 7 through June 30, 1993 and
January 1 through May 6, 1993; and cash flows for the nine months ended
September 30, 1994 and the periods of May 7 through September 30, 1993
and January 1 through May 6, 1993. While these interim financial
statements and accompanying notes are unaudited, they have been reviewed
by Arthur Andersen LLP, the Corporation's independent public
accountants. These financial statements are to be read in conjunction
with the financial statements and notes included in the Corporation's
1993 Annual Report on Form 10-K dated March 14, 1994.
(2) On August 11, 1994, the Corporation's bank credit agreement (the "Credit
Agreement") was amended for the third time since the Restructuring. In
connection with this amendment (the "Third Amendment"), the Corporation
made a $25 million prepayment of the mandatory prepayment due February
15, 1995. Major revisions to the Credit Agreement provided by the Third
Amendment included (i) modification of the mandatory prepayment
provisions to allow the Corporation to retain a greater portion of
excess cash flow as calculated under these provisions, subject to
certain conditions; (ii) authorization for the Corporation to
immediately prepay up to $100 million of 10 1/4% senior notes due 2002
(the "10 1/4% Senior Notes"); and (iii) authorization for the
Corporation to enter into a revolving accounts receivable sale facility
for financing up to $150 million. Other modifications to the Credit
Agreement as a result of The Third Amendment include (i) an increase of
the minimum liquidity amount under the mandatory prepayment provisions
to $150 million beginning with the January 15, 1996 cash sweep test
date; (ii) authorization for the Corporation to prepay its European
project financing (approximately $25 million); (iii) authorization for
the Corporation to issue up to $25 million of new unsecured industrial
revenue bonds, the proceeds to be added to its available liquidity for
cash sweep and general corporate purposes; (iv) approval for CGC Inc., a
76%-owned subsidiary of the Corporation, ("CGC") to repurchase from its
public shareholders up to 10% of its total outstanding shares annually;
and (v) certain other changes to investment and asset sale covenants to
increase the Corporation's operating flexibility.
In the first quarter of 1994, the Corporation implemented a refinancing
plan which included (i) a public offering 14,375,000 shares of common
stock (the "Equity Offering"), of which 7,900,000 shares, yielding net
proceeds to the Corporation of $224 million, were newly issued by the
Corporation and 6,475,000 were sold by Water Street Corporate Recovery
Fund I, L.P., a stockholder; (ii) the issuance of $150 million of 9 1/4%
senior notes due 2001 to certain institutional investors (the "Note
Placement") in exchange for $30 million aggregate principal amount of
its outstanding 8% senior notes due 1996 (the "Senior 1996 Notes"), $35
million aggregate principal amount of its outstanding 8% senior notes
due 1997 (the "Senior 1997 Notes") and $85 million in cash; and (iii)
amendment of the Credit Agreement for the second time since the
Restructuring. This amendment (the "Second Amendment" and, together with
the Equity Offering and the Note Placement, the "Transactions")
increased the size of the Corporation's revolving credit facility by $70
million and amended mandatory bank term loan prepayment provisions to
allow the Corporation, upon the achievement of certain financial tests,
to retain additional free cash flow for capital expenditures and
repayment of its public debt.
Utilizing the net proceeds of the Equity Offering and the Note
Placement, excess cash as of December 31, 1993 (as calculated in
accordance with the mandatory prepayment provisions of the Credit
Agreement), cash generated from operations in 1994 and increased
flexibility provided by the Second Amendment and the Third Amendment,
the Corporation has made significant prepayments, redemptions or
purchases of its public debt in 1994. In the first nine months of 1994,
these activities included the prepayment, redemption or purchase of (i)
$165 million of bank term loans in satisfaction of 1997, 1998 and a
portion of 1999 scheduled payments; (ii) $32 million aggregate principal
amount of Senior 1996 Notes; (iii) $24 million aggregate principal
amount of Senior 1997 Notes; (iv) $75 million aggregate principal amount
of its 8% senior notes due 1995; (v) $35 million of its 9% senior notes
due 1998; (vi) $15 million aggregate principal amount of 10 1/4% Senior
Notes; and (vii) $13 million aggregate principal amount of other debt
issues. Further, the Corporation called another $85 million aggregate
principal amount of 10 1/4% Senior Notes for redemption effective
October 13, 1994. As of the date of this report, these debt
prepayments, redemptions and purchases, net of the Note Placement, have
reduced the Corporation's total debt by $359 million since December 31,
1993.
(3) On May 6, 1993, the Corporation completed a comprehensive restructuring
of its debt (the "Restructuring") through the implementation of a
"prepackaged" plan of reorganization (the "Prepackaged Plan"). In
accordance with the terms of the Prepackaged Plan, $1.4 billion of debt
and accrued interest was converted into equity, interest expense was
significantly reduced and the maturities of a substantial portion of its
remaining debt were extended. The Corporation accounted for the
Restructuring using the principles of fresh start accounting as required
by AICPA Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization under the Bankruptcy Code" ("SOP 90-7"). Pursuant to
such principles, individual assets and liabilities were adjusted to fair
market value as of May 6, 1993. Excess reorganization value, the
portion of the reorganization value not attributable to specific assets,
is being amortized over a five-year period, effective May 7, 1993. In
August 1993, the Corporation completed an exchange offer that converted
$138 million of bank debt into 10 1/4% Senior Notes. See the
Corporation's 1993 Annual Report on Form 10-K dated March 14, 1994 for
more information on the Restructuring, implementation of fresh start
accounting and exchange of senior notes for bank debt.
Due to the Restructuring and implementation of fresh start accounting,
financial statements after May 6, 1993 for the restructured company are
not comparable to financial statements prior to that date. For year-to-
year comparability of results, the following unaudited Pro Forma
Consolidated Statement of Earnings for the nine months ended September
30, 1993 has been prepared giving effect to the consummation of the
Prepackaged Plan including the costs related thereto, in accordance with
SOP 90-7, as if the consummation had occurred on January 1, 1993. The
adjustments set forth under the caption "Pro Forma Adjustments" reflect
the assumed effects of the Restructuring and the adoption of fresh start
accounting prescribed by SOP 90-7.
<PAGE>
<TABLE>
USG CORPORATION
PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS
Nine Months ended September 30, 1993
(unaudited)
(Dollars in millions)
<CAPTION>
Total
Before Pro Forma
Adjustments Adjustments Pro Forma
<S> <C> <C> <C>
Net sales $ 1,420 $ - $ 1,420
Cost of products sold 1,143 - 1,143
Gross profit 277 - 277
Selling and administrative expenses 163 - 163
Amortization of excess
reorganization value 71 57 (a) 128
Operating profit/(loss) 43 (57) (14)
Interest expense 142 (42) (b) 100
Interest income (5) - (5)
Other expense, net - (1) (c) (1)
Reorganization items (709) 709 (d) -
Earnings/(loss) before taxes on
income, extraordinary gain and
changes in accounting principles 615 (723) (108)
Taxes on income 21 (16) 5
Earnings/(loss) before
extraordinary gain and changes
in accounting principles 594 (707) (113)
(a) Reflects amortization of excess reorganization value which would have been recorded during
the period of January 1 through May 6, 1993.
(b) Reflects the adjustment to restate interest expense for the period of January 1 through May
6, 1993 to the amount that would have been recorded.
(c) Represents the reversal of first quarter 1993 amortization of historical capitalized
financing costs which were written off in connection with the Restructuring.
(d) Represents the reversal of actual reorganization items incurred in connection with the
Restructuring in the period of January 1 through May 6, 1993. These expenses would have been
recorded in 1992 had the Restructuring occurred on January 1, 1993.
</TABLE>
(4) A one-time after-tax charge of $150 million was recorded in the first
quarter of 1993 representing the adoption of: (i) Statement of Financial
Accounting Standard ("SFAS") No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," - $180 million expense;
and (ii) SFAS No. 109, "Accounting for Income Taxes," - $30 million
income. Neither of these standards impact cash flow.
(5) Income tax expense for the three months and nine months ended September
30, 1994 amounted to $24 million and $51 million, respectively. For the
three months ended September 30, 1993 and the period of May 7 through
June 30, 1993, income tax expense amounted to $3 million and $1 million,
respectively. These expenses resulted primarily from (i) tax expense on
foreign subsidiary earnings; (ii) the inability to benefit the
amortization of excess reorganization value and the domestic net
operating loss carryforwards ("NOL Carryforwards") and (iii) for the
third quarter of 1993, a one-time charge to adjust deferred taxes for an
increase in the statutory tax rate from 34.0% to 35.0%. For the period
of January 1 through May 6, 1993, income tax expense was $17 million due
to tax expense on foreign subsidiary earnings, the inability to benefit
the NOL Carryforwards as an offset to deferred taxes and the non-taxable
effect of fresh start accounting.
The Corporation has an NOL Carryforward of $99 million remaining from
1992. This NOL Carryforward may be used to offset U.S. taxable income
through 2007. The Internal Revenue Code (the "Code") will limit the
Corporation's annual use of its NOL Carryforward to the lesser of its
taxable income or approximately $30 million plus any unused limit from
prior years. Furthermore, due to the uncertainty regarding the
application of the Code to the exchange of stock for debt, the
Corporation's NOL Carryforward could be further reduced or eliminated.
The Corporation has a $4 million minimum tax credit which may be used to
offset U.S. regular tax liability in future years.
(6) As of September 30, 1994, 2,764,500 common shares were reserved for
future issuance in conjunction with existing stock option grants. An
additional 50 common shares were reserved for future grants.
(7) One of the Corporation's operating subsidiaries, United States Gypsum
Company ("U.S. Gypsum"), is a defendant in asbestos lawsuits alleging
both property damage and personal injury. This litigation has not had a
material effect on the Corporation's liquidity or earnings. Virtually
all costs of the Personal Injury Cases are being paid by insurance.
However, many of U.S. Gypsum's insurance carriers are denying coverage
for the Property Damage Cases, although U.S. Gypsum believes that
substantial coverage exists and the trial court and an appellate court
in U.S. Gypsum's Coverage Action has so ruled (such rulings may be
appealed). In view of the limited insurance funding currently available
to U.S. Gypsum for Property Damage Cases resulting from continued
resistance by a number of U.S. Gypsum's insurers to providing coverage,
the effect of the asbestos litigation on the Corporation will depend
upon a variety of factors, including the damages sought in Property
Damage Cases that reach trial prior to the completion of the Coverage
Action, U.S. Gypsum's ability to successfully defend or settle such
cases, and the resolution of the Coverage Action. As a result,
management is unable to determine whether an adverse outcome in the
asbestos litigation will have a material adverse effect on the results
of operations or the consolidated financial position of the Corporation.
Effective January 1, 1994, the Corporation adopted the requirements of
Financial Accounting Standards Board Interpretation No. 39. In
accordance with Interpretation No. 39, U.S. Gypsum recorded an accrual
of $100 million for its liabilities for asbestos-related matters which
are deemed probable and can be reasonably estimated, and separately
recorded an asset of $100 million, the amount of such liabilities that
is expected to be paid by uncontested insurance. Due to management's
inability to reasonably estimate U.S. Gypsum's liability for Property
Damage Cases and (until the implementation of Georgine et al. v. Amchem
Products In., et al is deemed probable) future Personal Injury Cases,
the liability and asset recorded relate only to pending Personal Injury
Cases. The implementation of Interpretation No. 39 did not impact
earnings, cash flow or net assets. See Part II, Item 1. "Legal
Proceedings" for information on asbestos litigation and definitions of
capitalized terms.
On November 1, 1994, the Corporation announced that it would record a
pre-tax charge of $30 million in the fourth quarter of 1994 in
connection with the settlement of two asbestos property damage class
action cases. See "Note 10 - Subsequent Event" for more information
concerning these settlements.
The Corporation and certain of its subsidiaries have been notified by
state and federal environmental protection agencies of possible
involvement as one of numerous "potentially responsible parties" in a
number of so-called "Superfund" sites in the United States. The
Corporation does not presently anticipate any material adverse effect
upon its earnings or consolidated financial position arising out of the
resolution of these matters or any other pending governmental proceeding
regarding environmental matters.
(8) USG Corporation, a holding company, owns several operating subsidiaries,
including U.S. Gypsum. On January 1, 1985, all of the issued and
outstanding shares of stock of U.S. Gypsum were converted into shares of
USG Corporation and the holding company became a joint and several
obligor for certain debentures originally issued by U.S. Gypsum. The
outstanding balance of such debentures, which is carried on the holding
company's books of account, totaled $32 million and $36 million as of
September 30, 1994 and December 31, 1993, respectively. Summary
financial results for U.S. Gypsum are presented below (dollars in
millions):
<PAGE>
<TABLE>
<CAPTION>
1994 (a) 1993 (a) 1993
Three Months Nine Months Three Months May 7 January 1
ended ended ended through thru
September 30 September 30 September 30 June 30 May 6
<S> <C> <C> <C> <C> <C>
Net sales $ 329 $ 888 $ 259 $ 161 $ 297
Cost and expenses 256 710 222 142 268
Amortization of excess
reorganization value 15 46 15 10 -
Operating profit 58 132 22 9 29
Interest expense, net - 1 - - -
Corporate charges 20 65 23 13 52
Reorganization items - - - - (295)
Earnings/(loss) before taxes on income
and change in accounting principle 38 66 (1) (4) 272
Income tax/(tax benefit) 20 43 2 3 (7)
Earnings/(loss) before change in
accounting principle 18 23 (3) (7) 279
Cumulative effect of change in
accounting principle - - - - 28
Net earnings/loss 18 23 (3) (7) 307
</TABLE>
<TABLE>
<CAPTION>
As of As of
September 30, December 31,
Summary Balance Sheet 1994 1993
<S> <C> <C>
Current assets $ 321 $ 190
Property, plant and equipment, net 482 483
Excess reorganization value, net 219 265
Other assets 106 3
Total assets 1,128 941
Current liabilities 191 124
Other liabilities and obligations 246 149
Stockholder's equity 691 668
Total liabilities and stockholder's equity 1,128 941
(a) Due to the Restructuring and implementation of fresh start accounting, financial statements
after May 6, 1993 for the restructured company are not comparable to financial statements prior
to that date. See Note (3) for more information on the Restructuring and implementation of
fresh start accounting.
</TABLE>
(9) As of September 30, 1994, $463 million aggregate principal amount of 10
1/4% Senior Notes were outstanding. Each of U.S. Gypsum, USG
Industries, Inc., USG Interiors, Inc. ("USG Interiors"), USG Foreign
Investments, Ltd., L&W Supply Corporation ("L&W Supply"), Westbank
Planting Company, USG Interiors International, Inc., American Metals
Corporation and La Mirada Products Co., Inc. (together, the "Combined
Guarantors") guaranteed, in the manner described below, the obligations
of the Corporation under the Credit Agreement and the 10 1/4% Senior
Notes. The Combined Guarantors are jointly and severally liable under
the guarantees. Holders of the debt issued under the Credit Agreement
(the "Bank Debt") have the right to: (i) determine whether, when and to
what extent the guarantees will be enforced (provided that each
guarantee payment will be applied to the Bank Debt and 10 1/4% Senior
Notes pro rata based on the respective amounts owed thereon); and (ii)
amend or eliminate the guarantees. The guarantees will terminate when
the Bank Debt is retired regardless of whether any 10 1/4% Senior Notes
remain outstanding. The liability of each of the Combined Guarantors on
its guarantee is limited to the greater of: (i) 95% of the lowest
amount, calculated as of July 13, 1988, sufficient to render the
guarantor insolvent, leave the guarantor with unreasonably small capital
or leave the guarantor unable to pay its debts as they become due (each
as defined under applicable law); and (ii) the same amount, calculated
as of the date any demand for payment under such guarantee is made, in
each case plus collection costs. The guarantees are senior obligations
of the applicable guarantor and rank pari passu with all unsubordinated
obligations of the guarantor.
Subsidiaries other than the Combined Guarantors (the "Combined Non-
Guarantors"), substantially all of which are subsidiaries of Guarantors,
primarily include CGC, Gypsum Transportation Limited, USG Canadian
Mining Ltd. and the Corporation's Mexican, European and Pacific
subsidiaries managed by USG International, Ltd. ("USG International").
The long-term debt of the Combined Non-Guarantors of $25 million as of
September 30, 1994 has restrictive covenants that restrict, among other
things, the payment of dividends.
The following condensed consolidating information presents:
(i) Condensed financial statements as of September 30,
1994 and December 31, 1993 and for the three months
and nine months ended September 30, 1994, the three
months ended September 30, 1993 and for the periods of
May 7 through June 30, 1993 and January 1 through May
6, 1993 of (a) the Corporation on a parent company
only basis (the "Parent Company," which was the only
entity of the Corporation included in the 1993
bankruptcy proceeding associated with the
Restructuring), (b) the Combined Guarantors, (c) the
Combined Non-Guarantors and (d) the Corporation on a
consolidated basis. (Due to the Restructuring and
implementation of fresh start accounting, the
financial statements after May 6, 1993 for the
restructured company are not comparable to financial
statements prior to that date. Except for the
following condensed financial statements, separate
financial information with respect to the Combined
Guarantors is not deemed material to investors and is
omitted.)
(ii) The Parent Company and Combined Guarantors shown with
their investments in their subsidiaries accounted for
on the equity method.
(iii) Elimination entries necessary to consolidate the
Parent Company and its subsidiaries.
<PAGE>
<TABLE>
USG CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS
(Dollars in millions)
<CAPTION>
Combined
Parent Combined Non-
Company Guarantors Guarantors Eliminations Consolidated
<S> <C> <C> <C> <C> <C>
Three Months ended September 30, 1994
Net Sales $ - $ 545 $ 105 $ (29) $ 621
Gross Profit/(Loss) (2) 132 23 - 153
Operating Profit/(Loss) (14) 57 4 - 47
Equity in net (earnings)/loss
of the Subsidiaries - (1) - 1 -
Interest expense, net 28 1 1 - 30
Corporate service charge (39) 39 - - -
Other expense/(income), net 1 (2) - - (1)
Earnings/(Loss) Before Taxes on
Income (4) 20 3 (1) 18
Taxes on income 2 20 2 - 24
Net Earnings/(Loss) (6) - 1 (1) (6)
Nine Months ended September 30, 1994
Net Sales $ - $ 1,482 $ 286 $ (79) $ 1,689
Gross Profit/(Loss) (2) 337 61 - 396
Operating Profit/(Loss) (33) 119 4 - 90
Equity in net loss of the
Subsidiaries 45 6 - (51) -
Interest expense, net 91 2 2 - 95
Corporate service charge (120) 120 - - -
Other expense/(income), net 3 (2) - - 1
Earnings/(Loss) Before Taxes on
Income (52) (7) 2 51 (6)
Taxes on income 5 38 8 - 51
Net Loss (57) (45) (6) 51 (57)
</TABLE>
<PAGE>
<TABLE>
USG CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF EARNINGS
(Dollars in millions)
<CAPTION>
Combined
Parent Combined Non-
Company Guarantors Guarantors Eliminations Consolidated
<S> <C> <C> <C> <C> <C>
Three Months ended September 30, 1993
Net Sales $ - $ 445 $ 90 $ (21) $ 514
Gross Profit - 87 18 - 105
Operating Profit/(Loss) (11) 17 - - 6
Equity in net loss of the
Subsidiaries 29 4 - (33) -
Interest expense, net 31 1 - - 32
Corporate service charge (41) 41 - - -
Other expense/(income), net - (6) 1 1 (4)
Loss Before Taxes on Income (30) (23) (1) 32 (22)
Taxes on income/(income tax
benefit) (6) 6 3 - 3
Net Loss (24) (29) (4) 32 (25)
May 7 through June 30, 1993
Net Sales $ - $ 279 $ 57 $ (21) $ 315
Gross Profit - 51 12 - 63
Operating Profit/(Loss) (6) 6 (1) - (1)
Equity in net loss of the
Subsidiaries 23 3 - (26) -
Interest expense, net 20 1 - - 21
Corporate service charge (27) 27 - - -
Other expense/(income), net (1) (4) 1 2 (2)
Loss Before Taxes on Income (21) (21) (2) 24 (20)
Taxes on income/(income tax
benefit) (2) 2 1 - 1
Net Loss (19) (23) (3) 24 (21)
January 1 through May 6, 1993
Net Sales $ - $ 501 $ 113 $ (23) $ 591
Gross Profit 1 84 24 - 109
Operating Profit/(Loss) (11) 39 10 - 38
Equity in net earnings of the
Subsidiaries (751) (169) - (920) -
Interest expense, net 80 3 1 - 84
Corporate service charge (92) 92 - - -
Other expense, net 1 5 - - 6
Reorganization items 53 (597) (165) - (709)
Earnings Before Taxes on Income
and Extraordinary Items 698 705 174 (920) 657
Taxes on income/(income tax
benefit) 37 (24) 4 - 17
Earnings Before Extraordinary Items 661 729 170 (920) 640
Extraordinary Gain, net of taxes 944 - - - 944
Changes in accounting principles (171) 22 (1) - (150)
Net Earnings 1,434 751 169 (920) 1,434
</TABLE>
<PAGE>
<TABLE>
USG CORPORATION
CONDENSED CONSOLIDATING BALANCE SHEET
(Dollars in millions)
<CAPTION>
Combined
Parent Combined Non-
As of September 30, 1994 Company Guarantors Guarantors Eliminations Consolidated
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 228 $ (9) $ 40 $ - $ 259
Receivables, net 1 290 55 (38) 308
Inventories - 136 42 (3) 175
Total current assets 229 417 137 (41) 742
Property, Plant and Equipment, Net 21 617 115 - 753
Investment in Subsidiaries 1,467 269 - (1,736) -
Excess Reorganization Value, Net - 481 125 - 606
Other Assets (109) 263 13 (2) 165
Total assets 1,608 2,047 390 (1,779) 2,266
Accounts payable and accrued
expenses 104 285 60 (35) 414
Notes payable and LTD maturing
within one year - 3 17 - 20
Total current liabilities 104 288 77 (35) 434
Long-Term Debt 1,143 34 25 - 1,202
Deferred Income Taxes 17 148 16 - 181
Other Liabilities 304 110 2 - 416
Common stock 5 1 6 (7) 5
Capital received in excess
of par value 221 1,472 310 (1,782) 221
Deferred currency translation - - (7) - (7)
Reinvested earnings/(deficit) (186) (6) (39) 45 (186)
Total stockholders' equity/
(deficit) 40 1,467 270 (1,744) 33
Total liabilities and
stockholders' equity 1,608 2,047 390 (1,779) 2,266
As of December 31, 1993
Cash and cash equivalents $ 187 $ (8) $ 32 $ - $ 211
Receivables, net 8 240 44 (28) 264
Inventories - 114 34 (3) 145
Total current assets 195 346 110 (31) 620
Property, Plant and Equipment, Net 21 620 113 - 754
Investment in Subsidiaries 1,511 277 - (1,788) -
Excess Reorganization Value, Net - 582 153 - 735
Other Assets (35) 91 3 (5) 54
Total assets 1,692 1,916 379 (1,824) 2,163
Accounts payable and accrued
expenses 100 207 52 (27) 332
Notes payable and LTD maturing
within one year 158 3 6 - 167
Total current liabilities 258 210 58 (27) 499
Long-Term Debt 1,249 36 24 - 1,309
Deferred Income Taxes 14 151 15 - 180
Other Liabilities 296 8 5 - 309
Common stock 4 1 6 (7) 4
Capital received in excess
of par value - 1,472 310 (1,782) -
Deferred currency translation - - (9) - (9)
Reinvested earnings/(deficit) (129) 38 (30) (8) (129)
Total stockholders' equity/
(deficit) (125) 1,511 277 (1,797) (134)
Total liabilities and
stockholders' equity 1,692 1,916 379 (1,824) 2,163
</TABLE>
<PAGE>
<TABLE>
USG CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(Dollars in millions)
<CAPTION>
Combined
Parent Combined Non-
Nine Months ended September 30, 1994 Company Guarantors Guarantors Eliminations Consolidated
<S> <C> <C> <C> <C> <C>
Net Cash Flows (To)/From
Operating Activities $ (109) $ 214 $ 20 $ - $ 125
Capital expenditures (1) (29) (7) - (37)
Net proceeds from asset
dispositions - 3 - - 3
Net Cash Flows To
Investing Activities (1) (26) (7) - (34)
Issuance of debt 85 - 83 - 168
Repayment of debt (359) (1) (75) - (435)
Proceeds from stock offering 224 - - - 224
Cash dividends (paid)/received - 13 (13) - -
Net cash transfers (to)/from
Corporate 201 (201) - - -
Net Cash Flows (To)/From
Financing Activities 151 (189) (5) - (43)
Net Increase/(Decrease) in Cash
& Cash Equivalents 41 (1) 8 - 48
Cash & cash equivalents - beginning 187 (8) 32 - 211
Cash & cash equivalents - end 228 (9) 40 - 259
May 7 through September 30, 1993
Net Cash Flows From
Operating Activities $ 9 $ 109 $ 8 $ - $ 126
Capital expenditures - (12) (4) - (16)
Net proceeds from asset
dispositions - 9 - - 9
Net Cash Flows To
Investing Activities - (3) (4) - (7)
Issuance of debt - - 26 - 26
Repayment of debt (4) (9) (24) - (37)
Cash dividends (paid)/received - 3 (3) - -
Net cash transfers (to)/from
Corporate 100 (100) - - -
Net Cash Flows (To)/From
Financing Activities 96 (106) (1) - (11)
Net Increase in Cash & Cash
Equivalents 105 - 3 - 108
Cash & cash equivalents - beginning 24 (7) 32 - 49
Cash & cash equivalents - end 129 (7) 35 - 157
January 1 through May 6, 1993
Net Cash Flows (To)/From
Operating Activities $ (90) $ 76 $ - $ - $ (14)
Capital expenditures - (9) (3) - (12)
Net proceeds from asset
dispositions - - - - -
Net Cash Flows To
Investing Activities - (9) (3) - (12)
Issuance of debt - - 5 - 5
Repayment of debt - (140) (2) - (142)
Cash dividends (paid)/received 2 - (2) - -
Deposit of restricted cash 44 (12) - - 32
Net cash transfers (to)/from
Corporate 9 (9) - - -
Net Cash Flows (To)/From
Financing Activities 55 (161) 1 - (105)
Net Decrease in Cash &
Cash Equivalents (35) (94) (2) - (131)
Cash & cash equivalents - beginning 59 87 34 - 180
Cash & cash equivalents - end 24 (7) 32 - 49
</TABLE>
<PAGE>
(10) Subsequent Event: On November 1, 1994, the Corporation announced that
U.S. Gypsum had executed agreements to settle two asbestos property
damage class actions: In re Asbestos School Litigation and Board of
Education of the City of Detroit v. The Celotex Corp., et al. These two
cases include most of the school districts in the country. In the
fourth quarter of 1994, the Corporation will record a pre-tax charge of
$30 million primarily to cover the cash portion of the settlements.
Under the agreements, approximately one-half of the cash will be paid in
1994 with the remainder paid in 1995 and 1996. In connection with In re
Asbestos School Litigation, U.S. Gypsum also will issue discount coupons
to the school districts in the class for the purchase of U.S. Gypsum
plaster products. The coupons will be redeemable over ten years,
subject to annual "caps," and will have an aggregate face amount of $50
million. No current charge against earnings will be recorded for future
coupon redemptions. Such redemptions will reduce margins but not create
a loss when redeemed, and although the amount of redemptions can not be
estimated, the impact on results of operations will be immaterial.
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Results of Operations
On May 6, 1993, the Corporation completed the Restructuring. Due to the
Restructuring and implementation of fresh start accounting, the Corporation's
financial statements after May 6, 1993 are not comparable to financial
statements prior to that date. See Part I, Item 1. "Financial Statements:
Notes to Consolidated Financial Statements - Note (3)" for information on the
Restructuring and implementation of fresh start accounting.
To facilitate a meaningful year-to-year comparison of the Corporation's
operating performance, the following information is presented on a third
quarter and nine months basis and includes comparisons of EBITDA (earnings
before interest, taxes, depreciation, depletion and amortization, and, for
1993, reorganization items, extraordinary gain and the cumulative effect of
changes in accounting principles). The Corporation believes EBITDA is helpful
in understanding cash flow generated from operations that is available for
taxes, debt service and capital expenditures. In addition, EBITDA facilitates
the monitoring of covenants related to certain long-term debt and other
agreements entered into in conjunction with the Restructuring. EBITDA should
not be considered by investors as an alternative to net earnings as an
indicator of the Corporation's operating performance or as a measure of cash
flows and overall liquidity.
<PAGE>
Consolidated Results (dollars in millions):
<TABLE>
<CAPTION>
Three Months ended Nine Months ended
September 30 September 30
1994 1993 1994 1993
<S> <C> <C> <C> <C>
Net Sales $ 621 $ 514 $ 1,689 $ 1,420
Gross Profit 153 105 396 277
% of net sales 24.6% 20.4% 23.4% 19.5%
Selling and administrative expenses 63 56 179 163
% of net sales 10.1% 10.9% 10.6% 11.5%
Amortization of excess reorganization value 43 43 127 71
Operating Profit 47 6 90 43
Calculation of EBITDA:
Operating profit $ 47 $ 6 $ 90 $ 43
Amortization of excess reorganization value 43 43 127 71
Depreciation and depletion 15 14 41 42
Other - 2 - 9
EBITDA 105 65 258 165
% of net sales 16.9% 12.6% 15.3% 11.6%
</TABLE>
Consolidated net sales for the third quarter and first nine months of 1994
were up $107 million, or 20.8%, and $269 million, or 18.9%, respectively, over
the comparable 1993 periods. These increases reflect rising gypsum wallboard
prices and record levels of shipments for gypsum wallboard, joint compound,
ceiling tile and cement board.
Consolidated gross profit as a percentage of net sales increased to 24.6% and
23.4% in the third quarter and first nine months of 1994, respectively, from
20.4% and 19.5% in the prior year periods primarily due to the increased
prices for gypsum wallboard.
Selling and administrative expenses for the third quarter of 1994 increased $7
million, or 12.5%, over the third quarter of 1993 and $16 million, or 9.8%, in
the first nine months of 1994 over the comparable 1993 period. The higher
levels of expenses in 1994 primarily reflect increased expenses related to
compensation and benefits and product and marketing programs. As a percentage
of net sales, however, these expenses improved to 10.1% for the third quarter
of 1994 and 10.6% for the first nine months of 1994 from 10.9% and 11.5% in
the respective 1993 periods as a result of the increase in 1994 net sales.
Amortization of excess reorganization value, which was established in
accordance with fresh start accounting rules, amounted to $43 million and $127
million in the third quarter and first nine months of 1994, respectively.
Because this non-cash amortization did not begin until May 7, 1993, operating
profit for the third quarter and first nine months of 1994 is not comparable
to the prior year periods.
EBITDA for the third quarter and first nine months of 1994 increased $40
million, or 61.5%, and $93 million, or 56.4%, respectively, over the 1993
periods. These increases reflect the improved gross margins.
<PAGE>
Industry Segment/Core Business Results (dollars in millions):
<TABLE>
<CAPTION>
Three Months ended September 30 Nine Months ended September 30
Net Sales EBITDA Net Sales EBITDA
1994 1993 1994 1993 1994 1993 1994 1993
<S> <C> <C> <C> <C> <C> <C> <C> <C>
North American Gypsum:
U.S. Gypsum $ 329 $ 259 $ 81 $ 44 $ 888 $ 717 $ 200 $ 108
CGC (gypsum division) 30 23 5 3 80 67 10 7
Other subsidiaries 24 20 8 5 65 55 20 16
Eliminations (22) (16) - - (60) (46) - -
Total Gypsum Products 361 286 94 52 973 793 230 131
Building Products Distribution 180 143 6 3 485 387 12 5
Eliminations (55) (42) (1) - (150) (117) (2) -
Total North American Gypsum 486 387 99 55 1,308 1,063 240 136
Worldwide Ceilings:
USG Interiors 105 98 15 15 303 272 42 38
USG International 54 49 2 1 147 140 4 5
CGC (interiors division) 7 8 1 1 22 23 3 4
Eliminations (9) (9) - - (27) (28) - -
Total Worldwide Ceilings 157 146 18 17 445 407 49 47
Corporate - - (13) (7) - - (31) (18)
Eliminations (22) (19) 1 - (64) (50) - -
Total USG Corporation 621 514 105 65 1,689 1,420 258 165
</TABLE>
North American Gypsum
Net sales for North American Gypsum for the third quarter and first nine
months of 1994 increased $99 million, or 25.6%, and $245 million, or 23.0%,
respectively, over the third quarter and first nine months of 1993. EBITDA
for the third quarter and first nine months of 1994 increased $44 million, or
80.0%, and $104 million, or 76.5%, over the respective 1993 periods.
For U.S. Gypsum, continuing improvement in gypsum wallboard prices and record
quarterly and nine month shipments of gypsum wallboard, joint compound and
DUROCK cement board led to higher sales and profits. Net sales increased $70
million, or 27.0%, in the third quarter of 1994 over the third quarter of 1993
and EBITDA increased $37 million, or 84.1%. For the first nine months of
1994, net sales increased $171 million, or 23.8%, while EBITDA increased $92
million, or 85.2%, over the prior-year period. Gypsum wallboard shipments in
the third quarter of 1994 reached a record 2.059 billion square feet, an
increase of 7.5% over the third quarter of 1993. U.S. Gypsum's wallboard
plants operated at 98% of capacity in the third quarter of 1994. The average
gypsum wallboard selling price increased to $104.65 per thousand square feet
in the third quarter of 1994, up $23.95, or 29.7%, from the third quarter of
1993 and up $6.26, or 6.4%, from the previous 1994 quarter. For the first
nine months of 1994, record-setting gypsum wallboard shipments of 5.745
billion square feet were 6.2% above the comparable 1993 level. The average
gypsum wallboard price of $97.76 per thousand square feet for the first nine
months of 1994 was $19.89, or 25.5%, above the nine month 1993 average price.
Higher purchase prices for waste paper contributed to increased gypsum
wallboard unit manufacturing cost for 1994, up approximately 7% over the 1993
level.
Building Products Distribution (L&W Supply) net sales for the third quarter of
1994 increased $37 million, or 25.9%, over the third quarter of 1993. For the
first nine months of 1994, record net sales of $485 million were $98 million,
or 25.3%, above the comparable 1993 level. EBITDA for the third quarter of
1994 doubled to $6 million versus the 1993 quarter, and for the first nine
months of 1994, increased $7 million, or 140.0%, over the comparable 1993
period. These increases reflect improved sales and gross profits for
virtually all of L&W Supply's product lines.
CGC's gypsum division net sales and EBITDA for the third quarter of 1994
increased $7 million, or 30.4%, and $2 million, or 66.7%, respectively, over
the third quarter of 1993. For the first nine months of 1994, net sales and
EBITDA increased $13 million, or 19.4%, and $3 million, or 42.9%,
respectively, above the comparable 1993 period. These favorable results
primarily reflect increased gypsum wallboard volume and selling prices.
Increased residential construction activity in eastern Canada and the
exporting of gypsum wallboard to the United States accounted for the improved
wallboard volume.
Worldwide Ceilings
Net sales for the third quarter and first nine months of 1994 for Worldwide
Ceilings were up 11 million, or 7.5%, and $38 million, or 9.3%, respectively,
over the third quarter and first nine months of 1993. EBITDA improved $1
million, or 5.9%, in the third quarter of 1994 over the year-earlier period
while increasing $2 million, or 4.3%, in the first nine months of 1994 over
the first nine months of 1993.
USG Interiors' record levels of ceiling tile shipments contributed to
increased third quarter and nine month 1994 net sales of $7 million, or 7.1%,
and $31 million, or 11.4%, respectively, when compared to the prior year
periods. EBITDA for the third quarter of 1994 was unchanged from the third
quarter of 1993 while increasing $4 million, or 10.5%, in the first nine
months of 1994 over the corresponding 1993 period.
USG International's third quarter 1994 net sales increased $5 million, or
10.2%, while EBITDA increased to $2 million versus $1 million in the third
quarter of 1993. For the first nine months of 1994, net sales were up $7
million, or 5.0%, over the first nine months of 1993, while EBITDA decreased
$1 million, or 20.0%. The decline in 1994 EBITDA was primarily due to lower
margins for non-ceilings product lines.
Other Consolidated Earnings Information
Interest expense amounted to $33 million in the third quarter of 1994, down $1
million from the third quarter of 1993. For the first nine months of 1994,
interest expense was $103 million, decreasing $39 million from the first nine
months of 1993 primarily as a result of the Restructuring and subsequent
refinancing activities. Non-cash amortization of reorganization debt
discount, which is included in interest expense, amounted to $2 million and $9
million for the third quarter and first nine months of 1994, respectively,
compared to $3 million and $5 million for the prior-year periods.
Income tax expense amounted to $24 million and $51 million in the third
quarter and first nine months of 1994, respectively, primarily due to the
inability to benefit the amortization of excess reorganization value and the
NOL Carryforwards. In the third quarter and first nine months of 1993, income
tax expense amounted to $3 million and $21 million, respectively.
In connection with the Restructuring, a reorganization items gain of $709
million was recorded in 1993, reflecting second quarter fresh start accounting
adjustments totaling $778 million, net of first quarter restructuring fees and
expenses of $69 million. Also in the second quarter of 1993, a one-time
after-tax extraordinary gain of $944 million was recorded primarily reflecting
the gain on the exchange of subordinated debt for common stock.
A one-time after-tax charge of $150 million was recorded in the first quarter
of 1993 representing the adoption of: (i) SFAS No. 106, "Employers' Accounting
for Postretirement Benefits Other Than Pensions," - $180 million expense; and
(ii) SFAS No. 109, "Accounting for Income Taxes," - $30 million income.
Neither of these standards impact cash flow.
Net losses of $6 million and $57 million were recorded in the third quarter
and first nine months of 1994, respectively. However, the non-cash
amortization of excess reorganization value and reorganization debt discount
reduced net earnings by $45 million, or $1.01 per common share in the third
quarter of 1994 and $136 million, or $3.19 per common share in the first nine
months of 1994. See "Results of Operations - Consolidated Results" above for
more information of amortization of excess reorganization value and its impact
on earnings and the comparability of earnings to prior years.
Liquidity and Capital Resources
On August 11, 1994, the Third Amendment was made effective. On the effective
date, the Corporation made a $25 million prepayment of the mandatory
prepayment due February 15, 1995. Major revisions to the Credit Agreement
provided by the Third Amendment included (i) modification of the mandatory
prepayment provisions to allow the Corporation to retain a greater portion of
excess cash flow as calculated under these provisions, subject to certain
conditions; (ii) authorization for the Corporation to immediately prepay up to
$100 million of 10 1/4% Senior Notes; and (iii) authorization for the
Corporation to enter into a revolving accounts receivable sale facility for
financing up to $150 million. Other modifications to the Credit Agreement as a
result of The Third Amendment include (i) an increase of the minimum liquidity
amount under the mandatory prepayment provisions to $150 million beginning
with the January 15, 1996 cash sweep test date; (ii) authorization for the
Corporation to prepay its European project financing (approximately $25
million); (iii) authorization for the Corporation to issue up to $25 million
of new unsecured industrial revenue bonds, the proceeds to be added to its
available liquidity for cash sweep and general corporate purposes; (iv)
approval for CGC to repurchase from its public shareholders up to 10% of its
total outstanding shares annually; and (v) certain other changes to investment
and asset sale covenants to increase the Corporation's operating flexibility.
In the first quarter of 1994, the Corporation implemented a refinancing plan
which included (i) the Equity Offering, (ii) the Note Placement and (iii) the
Second Amendment. These Transactions were designed, among other things, to
(i) reduce the Corporation's financial leverage through the retirement of
debt, (ii) reduce the amount of debt maturing in 1995 through 1998 and extend
the final maturity of a significant portion of the Corporation's debt, (iii)
improve the Corporation's financial and operating flexibility under the Credit
Agreement and (iv) provide funds for capital expenditures and other general
corporate purposes, including capital expenditures for cost reduction,
capacity improvement and future growth opportunities.
Utilizing the net proceeds of the Equity Offering and the Note Placement,
excess cash as of December 31, 1993 (as calculated in accordance with the
mandatory prepayment provisions of the Credit Agreement), cash generated from
operations in 1994 and increased flexibility provided by the Second Amendment
and the Third Amendment, the Corporation has made significant prepayments,
redemptions or purchases of its public debt in 1994. As of the date of this
report, these debt prepayments, redemptions and purchases, net of the Note
Placement, have reduced the Corporation's total debt by $359 million since
December 31, 1993. See Part I, Item 1. "Financial Statements: Notes to
Consolidated Financial Statements - Note (2)" for additional information on
these activities.
The Corporation significantly strengthened its liquidity and capital resources
by the Transactions, and its flexibility by consummation of the Third
Amendment. The Corporation believes that cash generated by operations and the
estimated levels of liquidity available to it will be sufficient to satisfy
its debt service requirements and other capital requirements for the
foreseeable future.
Pursuant to the Third Amendment, the Corporation is in the process of
implementing an accounts receivable sale financing which is expected to
replace $100 million aggregate principal amount of 10 1/4% Senior Notes with a
lower interest borrowing maturing in 7 to 10 years and to provide an
additional $50 million of revolving debt, the proceeds of which would be used
for general corporate purposes.
Working Capital
As of September 30, 1994, working capital (current assets less current
liabilities) amounted to $308 million and the ratio of current assets to
current liabilities was 1.71 to 1, versus December 31, 1993 when working
capital amounted to $121 million and the ratio of current assets to current
liabilities was 1.24 to 1. If the proposed accounts receivable financing
described above is consummated, it will be reported as debt of the Corporation
for accounting purposes and there will be no change in working capital as a
result of this financing.
In the first nine months of 1994, cash and cash equivalents increased $48
million to $259 million primarily due to cash generated from operations
partially offset by the net impact of the Transactions and debt payments. The
Corporation may utilize an additional portion of existing cash to prepay
additional debt or for other uses in accordance with the Transactions and the
Third Amendment described above.
Comparing September 30, 1994 balances with December 31, 1993, accounts
receivable (net) increased $44 million, or 16.7%, to $308 million, inventories
increased $30 million, or 20.7%, to $175 million and accounts payable
increased $21 million, or 20.2%, to $125 million. These increases primarily
reflect the increased level of business.
Capital Expenditures
Capital expenditures amounted to $37 million in first nine months of 1994, up
$9 million, or 32.1%, over the first nine months of 1993. As a result of the
aforementioned Transactions, which generated approximately $92 million for
capital expenditures, the Corporation augmented its capital spending program.
As of September 30, 1994, capital expenditure commitments for the replacement,
modernization and expansion of operations amounted to $57 million compared
with $11 million as of December 31, 1993. In addition, the Corporation
periodically evaluates possible acquisitions or combinations involving other
businesses or companies, generally in businesses and markets related to the
Corporation's current operations, and the Corporation believes that its
available liquidity would be generally adequate to support appropriate
opportunities.
Litigation
One of the Corporation's subsidiaries, U.S. Gypsum, is a defendant in asbestos
lawsuits alleging both property damage and personal injury. This litigation
has not had a material effect on the Corporation's liquidity or earnings.
Virtually all costs of the Personal Injury Cases are being paid by insurance.
However, many of U.S. Gypsum's insurance carriers are denying coverage for the
Property Damage Cases, although U.S. Gypsum believes that substantial coverage
exists and the trial court and an appellate court in U.S. Gypsum's Coverage
Action has so ruled (such rulings may be appealed). In view of the limited
insurance funding currently available to U.S. Gypsum for Property Damage Cases
resulting from continued resistance by a number of U.S. Gypsum's insurers to
providing coverage, the effect of the asbestos litigation on the Corporation
will depend upon a variety of factors, including the damages sought in
Property Damage Cases that reach trial prior to the completion of the Coverage
Action, U.S. Gypsum's ability to successfully defend or settle such cases, and
the resolution of the Coverage Action. As a result, management is unable to
determine whether an adverse outcome in the asbestos litigation will have a
material adverse effect on the results of operations or the consolidated
financial position of the Corporation.
Effective January 1, 1994, the Corporation adopted the requirements of
Financial Accounting Standards Board Interpretation No. 39. In accordance
with Interpretation No. 39, U.S. Gypsum recorded an accrual of $100 million
for its liabilities for asbestos-related matters which are deemed probable and
can be reasonably estimated, and separately recorded an asset of $100 million,
the amount of such liabilities that is expected to be paid by uncontested
insurance. Due to management's inability to reasonably estimate U.S. Gypsum's
liability for Property Damage Cases and (until the implementation of Georgine
is deemed probable) future Personal Injury Cases, the liability and asset
recorded in 1994 relate only to pending Personal Injury Cases. The
implementation of Interpretation No. 39 did not impact earnings, cash flow or
net assets.
On November 1, 1994, the Corporation announced that it would record a pre-tax
charge of $30 million in the fourth quarter of 1994 in connection with the
settlement of two asbestos property damage class action cases. See Part I,
Item 1. "Financial Statements: Notes to Consolidated Financial Statements -
Note 10 - Subsequent Event" for more information concerning these settlements.
The Corporation and certain of its subsidiaries have been notified by state
and federal environmental protection agencies of possible involvement as one
of numerous "potentially responsible parties" in a number of so-called
"Superfund" sites in the United States. The Corporation believes that neither
these matters nor any other known governmental proceeding regarding
environmental matters will have a material adverse effect upon its earnings or
consolidated financial position. See Part II, Item 1. "Legal Proceedings" for
more information on legal proceedings.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
USG Corporation:
We have reviewed the accompanying condensed consolidated balance sheet of USG
CORPORATION (a Delaware corporation) AND SUBSIDIARIES as of September 30,
1994, and the related condensed consolidated statement of earnings for the
three-month and nine-month periods ended September 30, 1994 and the condensed
consolidated statement of cash flows for the nine months ended September 30,
1994. These financial statements are the responsibility of the Company's
management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures
to financial data and making inquiries of persons responsible for financial
and accounting matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
As discussed in Note 3, on May 6, 1993, the Corporation completed a
comprehensive financial restructuring through the implementation of a
prepackaged plan of reorganization under Chapter 11 of Title 11 of the United
States Bankruptcy Code and applied fresh start accounting. As such, results
of operations through May 6, 1993 are not comparable with results of
operations subsequent to that date.
Based on our review, we are not aware of any material modifications that
should be made to the financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
As discussed in Note 7, in view of the limited insurance funding currently
available for property damage cases resulting from the continued resistance by
a number of U.S. Gypsum's insurers to providing coverage, the effect of the
asbestos litigation on the Corporation will depend upon a variety of factors,
including the damages sought in property damage cases that reach trial prior
to the completion of the coverage action, U.S. Gypsum's ability to
successfully defend or settle such cases, and the resolution of the coverage
action. As a result, management is unable to determine whether an adverse
outcome in the asbestos litigation will have a material adverse effect on the
consolidated results of operations or the consolidated financial position of
the Corporation.
As discussed in Note 7, on January 1, 1994, the Corporation changed its method
of accounting for asbestos-related matters.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Chicago, Illinois
October 18, 1994
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Asbestos Litigation
One of the Corporation's subsidiaries, U.S. Gypsum, is among numerous
defendants in lawsuits arising out of the manufacture and sale of asbestos-
containing building materials. U.S. Gypsum sold certain asbestos-containing
products beginning in the 1930's; in most cases the products were discontinued
or asbestos was removed from the product formula by 1972, and no asbestos-
containing products were sold after 1977. Some of these lawsuits seek to
recover compensatory and in many cases punitive damages for costs associated
with maintenance or removal and replacement of products containing asbestos
(the "Property Damage Cases"). Others of these suits (the "Personal Injury
Cases") 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 and
property damage cases containing similar allegations will be filed.
As discussed below, U.S. Gypsum has substantial personal injury and property
damage insurance for the years involved in the asbestos litigation. Prior to
1985, when an asbestos exclusion was added to U.S. Gypsum's policies, U.S.
Gypsum purchased comprehensive general liability insurance policies covering
personal injury and property damage in an aggregate face amount of
approximately $850 million. Insurers that issued approximately $106 million
of these policies are presently insolvent. After deducting insolvencies and
exhaustion of policies, approximately $600 million of insurance remains
potentially available. Because U.S. Gypsum's insurance carriers initially
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 on December 29, 1983. (U. S. Gypsum Co. v. Admiral
Insurance Co., et al.) (the "Coverage Action"). U.S. Gypsum alleges in the
Coverage Action that the carriers are obligated to provide indemnification for
settlements and judgments and, in some cases, defense costs incurred by U.S.
Gypsum in property damage and personal injury claims in which it is a
defendant. The current defendants are ten insurance carriers that provided
comprehensive general liability insurance coverage to U.S. Gypsum between the
1940's and 1984. As discussed below, several carriers have settled all or a
portion of the claims in the Coverage Action.
U.S. Gypsum's aggregate expenditures for all asbestos-related matters,
including property damage, personal injury, insurance coverage litigation and
related expenses, exceeded aggregate insurance payments by $10.9 million in
1991, $25.8 million in 1992, and $8.2 million in 1993.
Property Damage Cases
The Property Damage Cases have been brought against U.S. Gypsum by a variety
of plaintiffs, including school districts, state and local governments,
colleges and universities, hospitals and private property owners. U.S. Gypsum
is one of many defendants in four cases that have been certified as class
actions and others that request such certification. On April 10, 1992, a
state court in Philadelphia certified a class consisting of all owners of
buildings leased to the federal government. (Prince George Center, Inc. v.
U.S. Gypsum Co., et al., Court of Common Pleas, Philadelphia, Pa.) On
September 4, 1992, a Federal district court in South Carolina conditionally
certified a class comprised of all colleges and universities in the United
States, which certification is presently limited to the resolution of certain
allegedly "common" liability issues. (Central Wesleyan College v. W.R. Grace
& Co., et al, U.S.D.C. S.C.).
In October 1994, U.S. Gypsum executed agreements to settle two class action
cases, subject to court approval following notice to the respective classes.
One suit was brought on behalf of owners and operators of all elementary and
secondary schools in the United States that contain or contained friable
asbestos-containing material. (In re Asbestos School Litigation, U.S.D.C,
E.D. Pa.) Approximately 1,350 school districts opted out of the class, some
of which have filed or may file separate lawsuits. The other class action
settlement involved approximately 333 school districts in Michigan that had
opted out of the nationwide class action. Board of Education of the City of
Detroit, et al. v. The Celotex Corp., et al., Circuit Court for Wayne County,
MI.) In connection with the settlements, the Corporation will record a fourth
quarter 1994 pre-tax charge of $30 million, primarily to cover the cash
portion of the settlements. Approximately half of the cash payments will be
paid in 1994 and the rest over the next two years. In addition, U.S. Gypsum
will also issue discount coupons to the school districts in the nationwide
class action for the purchase of plaster products. The coupons, which will be
redeemable over ten years subject to annual "caps," will have an aggregate
face amount of $50 million.
A case pending in state court in South Carolina, which has not been certified
as a class action, purports to be a "voluntary" class action on behalf of
owners of all buildings containing certain types of asbestos-containing
products manufactured by the nine named defendants, including U.S. Gypsum,
other than buildings owned by the federal or state governments, single family
residences, or buildings at issue in the other described class actions.
(Anderson County Hospital v. W.R. Grace & Co., et al., Court of Common Pleas,
Hampton Co., S.C. (the "Anderson case")). The Anderson case also names the
Corporation as a defendant, alleging, among other things, that the guarantees
executed by U.S. Gypsum in connection with the 1988 Recapitalization, as well
as subsequent distributions of cash from U.S. Gypsum to the Corporation,
rendered U.S. Gypsum insolvent and constitute a fraudulent conveyance. The
suit seeks to set aside the guarantees and recover the value of the cash flow
"diverted" from U.S. Gypsum to the Corporation in an amount to be determined.
In July 1994, the court in the Anderson case ruled that claims involving
building owners outside South Carolina cannot be included in the suit. No
other threshold issues, including whether the South Carolina courts have
personal jurisdiction over the Corporation, have been decided. A case which
has yet to be certified as a class action was filed in state court in Jasper
County, Texas on August 8, 1994. (Kirbyville Independent School District v.
U.S. Gypsum, et al., District Court of Jasper County, Texas (the "Kirbyville"
case)). The case purports to be a class action on behalf of all public
building owners and political subdivisions of the State of Texas, including
all cities, counties and municipalities. The damages claimed against U.S.
Gypsum in the class action cases are unspecified. U.S. Gypsum has denied the
substantive allegations of each of the Property Damage Cases and intends to
defend them vigorously except when advantageous settlements are possible.
As of September 30, 1994, 46 Property Damage Cases were pending against U.S.
Gypsum; however, the number of buildings involved is greater than the number
of cases because many of these cases, including the class actions referred to
above, involve multiple buildings. In addition, approximately 40 property
damage claims have been threatened against U.S. Gypsum.
In total, U.S. Gypsum has settled approximately 87 Property Damage Cases,
involving 203 plaintiffs, in addition to the two school class action
settlements referred to above. Twenty-four cases have been tried to verdict,
15 of which were won by U.S. Gypsum and 5 lost; three other cases, one won at
the trial level and two lost, were settled during appeals. Another case that
was lost at the trial court level was reversed on appeal and remanded to the
trial court, which has now entered judgment for U.S. Gypsum. Appeals are
pending in 4 of the tried cases. In the cases lost, compensatory damage awards
against U.S. Gypsum have totalled $11.5 million. Punitive damages totalling
$5.5 million were entered against U.S. Gypsum in four trials. Two of the
punitive damage awards, totalling $1.45 million, were paid after appeals were
exhausted; and two were settled during the appellate process.
In 1991, 13 new Property Damage Cases were filed against U.S. Gypsum, eleven
were dismissed before trial, eight were settled, two were closed following
trial or appeal, and 100 were pending at year-end; U.S. Gypsum expended $22.2
million for the defense and resolution of Property Damage Cases and received
insurance payments of $13.8 million in 1991. During 1992, 7 new Property
Damage Cases were filed against U.S. Gypsum, 10 were dismissed before trial,
18 were settled, 3 were closed following trial or appeal, and 76 were pending
at year-end. U.S. Gypsum expended $34.9 million for the defense and
resolution of Property Damage Cases and received insurance payments of $10.2
million in 1992. In 1993, 5 new Property Damage Cases were filed against U.S.
Gypsum, 7 were dismissed before trial, 11 were settled, 1 was closed following
trial or appeal, 2 were consolidated into 1, and 61 were pending at year end;
U. S Gypsum expended $13.9 million for the defense and resolution of Property
Damage Cases and received insurance payments of $7.6 million in 1993.
In the Property Damage Cases litigated to date, a defendant's liability for
compensatory damages, if any, has been limited to damages associated with the
presence and quantity of asbestos-containing products manufactured by that
defendant which are identified in the buildings at issue, although plaintiffs
in some cases have argued that principles of joint and several liability
should apply. Because of the unique factors inherent in each of the Property
Damage Cases, including the lack of reliable information as to product
identification and the amount of damages claimed against U.S. Gypsum in many
cases, including the class actions described above, management is unable to
make a reasonable estimate of the cost of disposing of pending Property Damage
Cases.
Personal Injury Cases
U.S. Gypsum was among numerous defendants in asbestos personal injury suits
and administrative claims involving approximately 52,000 claimants pending as
of September 30, 1994. All asbestos bodily injury claims pending in the
federal courts, including approximately one-third of the Personal Injury Cases
pending against U.S. Gypsum, have been consolidated in the United States
District Court for the Eastern District of Pennsylvania.
U.S. Gypsum is a member, together with 19 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
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 the Personal Injury Cases handled by the
Center, according to predetermined allocation formulas. Five of U.S. Gypsum's
insurance carriers that in 1985 signed an Agreement Concerning Asbestos-
Related Claims (the "Wellington Agreement") are supporting insurers (the
"Supporting Insurers") of the Center. The Supporting Insurers are obligated
to provide coverage for the defense and indemnity costs of the Center's
members pursuant to the coverage provisions in the Wellington Agreement.
Claims for punitive damages are defended but not paid by the Center; if
punitive damages are recovered, insurance coverage may be available under the
Wellington Agreement depending on the terms of particular policies and
applicable state law. Punitive damages have not been awarded against U.S.
Gypsum in any of the Personal Injury Cases. Virtually all of U.S. Gypsum's
personal injury liability and defense costs are paid by those of its insurance
carriers that are Supporting Insurers. The Supporting Insurers provided
approximately $350 million of the total coverage referred to above, of which
approximately $240 million remains unexhausted.
On January 15, 1993, U.S. Gypsum and the other members of the Center entered
into a class action settlement in the U. S. District Court for the Eastern
District of Pennsylvania. (Georgine et al. v. Amchem Products Inc., et al.,
Case No. 93-CV-0215; hereinafter "Georgine.") The class of plaintiffs
includes all persons who have been occupationally exposed to asbestos-
containing products manufactured by the defendants, who had not filed an
asbestos personal injury suit as of the date of the filing of the class
action. The settlement has been approved by the trial court, and if upheld on
appeal will implement for all future Personal Injury Cases, except as noted
below, an administrative compensation system to replace judicial claims
against the defendants, and will provide fair and adequate compensation to
future claimants who can demonstrate exposure to asbestos-containing products
manufactured by the defendants and the presence of an asbestos-related
disease. Approximately 235,000 individuals "opted out," or elected to exclude
themselves from the class, comprised of approximately 200,000 persons who may
have been occupationally exposed to asbestos and 35,000 family members of such
persons. In addition, in each year a limited number of claimants will have
certain rights to prosecute their claims for compensatory (but not punitive)
damages in court in the event they reject the compensation offered by the
administrative processing of their claim.
The Center members, including U.S. Gypsum, have instituted proceedings against
those of their insurance carriers that had not consented to support the
settlement, seeking a declaratory judgment that the settlement is reasonable
and, therefore, that the carriers are obligated to fund their portion of it.
Consummation of the settlement is contingent upon, among other things, court
approval of the settlement and a favorable ruling in the declaratory judgment
proceedings against the non-consenting insurers.
Each of the defendants has committed to fund a defined portion of the
settlement, up to a stated maximum amount, over the initial ten year period of
the agreement (which is automatically extended unless terminated by the
defendants). Taking into account the provisions of the settlement agreement
concerning the maximum number of claims that must be processed in each year
and the total amount to be made available to the claimants, the Center
estimates that U.S. Gypsum will be obligated to fund a maximum of
approximately $125 million of the class action settlement, exclusive of
expenses, with a maximum payment of less than $18 million in any single year;
of the total amount of U.S. Gypsum's obligation, all but approximately $7
million is expected to be paid by U.S. Gypsum's insurance carriers.
During 1991, approximately 13,100 Personal Injury Cases were filed against
U.S. Gypsum and approximately 6,300 were settled or dismissed. U.S. Gypsum
incurred expenses of $15.1 million in 1991 with respect to Personal Injury
Cases of which $15.0 million was paid by insurance. During 1992,
approximately 20,100 Personal Injury Cases were filed against U.S. Gypsum and
approximately 10,600 were settled or dismissed. U.S. Gypsum incurred expenses
of $21.6 million in 1992 with respect to Personal Injury Cases of which $21.5
million was paid by insurance. During 1993, approximately 26,900 Personal
Injury Cases were filed against U.S. Gypsum and approximately 22,900 were
settled or dismissed. U.S. Gypsum incurred expenses of $34.9 million in 1993
with respect to Personal Injury Cases of which $34.0 million was paid by
insurance. As of December 31, 1993, 1992, and 1991, approximately 59,000,
54,000 and 43,000 Personal Injury Cases were outstanding against U.S. Gypsum,
respectively.
U.S. Gypsum's average settlement cost for Personal Injury Cases over the past
three years has been approximately $1,600 per claim, exclusive of defense
costs. Management anticipates that its average settlement cost is likely to
increase due to such factors as the possible insolvency of co-defendants,
although this increase may be offset to some extent by other factors,
including the possibility for block settlements of large numbers of cases and
the apparent increase in the percentage of asbestos Personal Injury Cases that
appear to have been brought by individuals with little or no physical
impairment. Through the Center, U.S. Gypsum had reached settlements on
approximately 26,700 Personal Injury Cases pending on December 31, 1993 for
amounts totalling approximately $32 million, to be expended over a three year
period. In management's opinion, based primarily upon U.S. Gypsum's
experience in the Personal Injury Cases disposed of to date and taking into
consideration a number of uncertainties, it is probable that all asbestos-
related Personal Injury Cases pending against U.S. Gypsum as of September 30,
1994, can be disposed of for a total amount, including both indemnity costs
and legal fees and expenses, estimated to be between $100 million and $120
million (of which all but $2 million or $5 million, respectively, is expected
to be paid by insurance). The estimated cost of resolving pending claims
takes into account, among other factors, (i) an increase in the number of
pending claims; (ii) the settlements of certain large blocks of claims for
higher per-case averages than have historically been paid; (iii) the committed
but unconsummated settlements described above; and (iv) a small increase in
U.S. Gypsum's historical settlement average.
Assuming that the Georgine class action settlement referred to above is
approved substantially in its current form, management estimates, based on
assumptions supplied by the Center, U.S. Gypsum's maximum total exposure in
Personal Injury Cases during the next ten years (the initial term of the
agreement), including liability for pending claims and claims resolved as part
of the class action settlement, as well as defense costs and other expenses,
at approximately $262 million, of which approximately $250 million is expected
to be paid by insurance. U.S. Gypsum's additional exposure for claims filed
by persons who have opted out of Georgine would depend on the number and
severity of such claims that are filed, which cannot presently be determined.
Coverage Action
As indicated above, all of U.S. Gypsum's carriers initially denied coverage
for the Property Damage Cases and the Personal Injury Cases, and U.S. Gypsum
initiated the Coverage Action to establish its right to such coverage. U.S.
Gypsum has voluntarily dismissed the Supporting Insurers referred to above
from the personal injury portion of the Coverage Action because they are
committed to providing personal injury coverage in accordance with the
Wellington Agreement. U.S. Gypsum's claims against the remaining carriers for
coverage for the Personal Injury Cases have been stayed since 1984.
On January 7, 1991, the trial court in the Coverage Action ruled on the
applicability of U.S. Gypsum's insurance policies to settlements and one
adverse judgment in eight Property Damage Cases. The court ruled that the
eight cases were generally covered, and imposed coverage obligations on
particular policy years based upon the dates when the presence of asbestos-
containing material was "first discovered" by the plaintiff 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 appealed the court's ruling with
respect to the policy years available to cover particular claims, and the
carriers appealed most other aspects of the court's ruling.
On November 4, 1994, the Illinois Appellate Court issued a ruling affirming
the trial court's finding that the eight cases were covered, but expanding the
years of coverage available by holding that all insurance policies in effect
from the date of installation to the date of removal of asbestos-containing
products are obligated to provide coverage (known as the "continuous trigger"
of coverage). The defendant carriers may now seek rehearing from the
Appellate Court and/or review by the Illinois Supreme Court, which is
discretionary with the Court. If the Supreme Court accepts the appeal, the
appeal will continue for a year or more. Once the appellate process has
concluded, further proceedings will be necessary in the trial court with
respect to the application of the appellate ruling to all Property Damage
Cases other than the eight cases involved in the earlier trial, as well as
resolution of certain other issues.
The Appellate Court's ruling, if applied to the Property Damage Cases
generally, will allow U.S. Gypsum to access all of its available insurance
coverage for Property Damage Cases, subject to reduction for amounts that are
spent on Personal Injury Cases. Under the ruling, all Property Damage Cases
would be covered by insurance unless or until such insurance becomes
exhausted. U.S. Gypsum is evaluating the impact of the ruling on past
property damage expenditures and, if the ruling is applied to such
expenditures, U.S. Gypsum should be able to recover a substantial portion,
subject to the allocation of costs to insolvent carriers, excess carriers with
no defense cost obligations, and carriers that have previously settled. The
Company is not yet able to estimate the amount of its past property damage
expenditures that it could recover or when such recoveries would occur.
Eight carriers, including two of the Supporting Insurers, have settled U.S.
Gypsum's claims for both property damage and personal injury coverage and have
been dismissed from the Coverage Action entirely. Four of these carriers have
agreed to pay all or a substantial portion of their policy limits to U.S.
Gypsum beginning in 1991 and continuing over the next four years. Three other
excess carriers, including the two settling Supporting Insurers, have agreed
to provide coverage for the Property Damage Cases and the Personal Injury
Cases subject to certain limitations and conditions, when and if underlying
primary and excess coverage is exhausted. It is anticipated that one of these
settling carriers will begin reimbursing U.S. Gypsum for a portion of its
property damage settlements and judgments by the end of 1994. It can not
presently be determined when the policies of the other two settled carriers
will be reached. Taking into account the above settlements, including
participation of certain of the settling carriers in the Wellington Agreement,
and consumption through December 31, 1993, carriers providing a total of
approximately $90 million of unexhausted insurance have agreed, subject to the
terms of the various settlement agreements, to cover both Personal Injury
Cases and Property Damage Cases. Carriers providing an additional $250
million of coverage that was unexhausted as of December 31, 1993 have agreed
to cover Personal Injury Cases under the Wellington Agreement, but continue to
contest coverage for Property Damage Cases and remain defendants in the
Coverage Action. U.S. Gypsum will continue to seek negotiated resolutions
with its carriers in order to minimize the expense and delays of litigation.
Insolvency proceedings have been instituted against four of U. S. Gypsum's
insurance carriers. Midland Insurance Company, declared insolvent in 1986,
provided excess insurance ($4 million excess of $1 million excess of $500,000
primary in each policy year) from February 15, 1975 to February 15, 1978;
Transit Casualty Company, declared insolvent in 1985, provided excess
insurance ($15 million excess of $1 million primary in each policy year) from
August 1, 1980 to December 31, 1985; Integrity Insurance Company, declared
insolvent in 1986, provided excess insurance ($10 million quota share of $25
million excess of $90 million) from August 1, 1983 to July 31, 1984; and
American Mutual Insurance Company, declared insolvent in 1989, provided the
primary layer of insurance ($500,000 per year) from February 1, 1963 to April
15, 1971. It is possible that U.S. Gypsum will be required to pay a presently
indeterminable portion of the costs that would otherwise have been covered by
these policies. In addition, portions of various policies issued by Lloyd's
and other London market companies between 1966 and 1979 have also become
insolvent; under the Wellington Agreement, U.S. Gypsum must pay these amounts,
which total approximately $12 million.
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 Cases pending against U.S. Gypsum has increased in each of the
last several years. In addition, many Property Damage Cases are still at an
early stage and the potential liability therefrom is consequently uncertain.
In view of the limited insurance funding currently available for the Property
Damage Cases resulting from the continued resistance by a number of U.S.
Gypsum's insurers to providing coverage, the effect of the asbestos litigation
on the Corporation will depend upon a variety of factors, including the
damages sought in the Property Damage Cases that reach trial prior to the
completion of the Coverage Action, U.S. Gypsum's ability to successfully
defend or settle such cases, and the resolution of the Coverage Action. As a
result, management is unable to determine whether an adverse outcome in the
asbestos litigation will have a material adverse effect on the results of
operations or the consolidated financial position of the Corporation.
Accounting Change
Effective January 1, 1994, the Corporation adopted the requirements of
Financial Accounting Standards Board Interpretation No. 39. In accordance
with Interpretation No. 39, U.S. Gypsum recorded an accrual of $100 million
for its liabilities for asbestos-related matters which are deemed probable and
can be reasonably estimated, and separately recorded an asset of $100 million,
the amount of such liabilities that is expected to be paid by uncontested
insurance. Due to management's inability to reasonably estimate U.S. Gypsum's
liability for Property Damage Cases and (until the implementation of Georgine
is deemed probable) future Personal Injury Cases, the liability and asset
recorded in 1994 relate only to pending Personal Injury Cases. The
implementation of Interpretation No. 39 did not impact earnings, cash flow or
net assets.
Environmental Litigation
The Corporation and certain of its subsidiaries have been notified by state
and federal environmental protection agencies of possible involvement as one
of numerous "potentially responsible parties" in a number of so-called
"Superfund" sites in the United States. In substantially all of these sites,
the involvement of the Corporation or its Subsidiaries is expected to be
minimal. The Corporation believes that appropriate reserves have been
established for its potential liability in connection with all Superfund sites
but is continuing to review its accruals as additional information becomes
available. Such reserves take into account all known or estimable costs
associated with these sites including site investigations and feasibility
costs, site cleanup and remediation, legal costs, and fines and penalties, if
any. In addition, environmental costs connected with site cleanups on USG-
owned property are also covered by reserves established in accordance with the
foregoing. The Corporation believes that neither these matters nor any other
known governmental proceeding regarding environmental matters will have a
material adverse effect upon its earnings or consolidated financial position.
Item 6. Exhibits and Reports on Form 8-K
(a) (15) Letter of Arthur Andersen LLP regarding unaudited financial
information.
(b) There were no reports on Form 8-K filed during the third quarter of
1994.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
USG CORPORATION
By / S / Dean H. Goossen
Dean H. Goossen, Corporate Secretary,
USG Corporation
November 14, 1994 By / s / Raymond T. Belz
Raymond T. Belz, Vice President and
Controller, USG Corporation
Exhibit (15)
November 14, 1994
USG Corporation
125 South Franklin Street
Chicago, Illinois 60606
Gentlemen:
We are aware that USG Corporation has incorporated by reference
into previously filed Registration Statement Numbers 33-22581,
33-22930, 33-36303, 33-40136 and 33-63554 its Form 10-Q for the
quarter ended September 30, 1994, which includes our report dated
October 18, 1994, covering the unaudited condensed financial
information contained therein. Pursuant to Regulation C of the
Securities Act of 1933, these reports are not considered a part
of the registration statement prepared or certified by our firm
or reports prepared or certified by our firm within the meaning
of Sections 7 and 11 of the Act.
Very truly yours,
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
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