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, 1995
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 1-8864
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, 1995, 45,170,858 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, 1995 and 1994
Consolidated Balance Sheet:
As of September 30, 1995 and December 31, 1994
Consolidated Statement of Cash Flows:
Nine Months Ended September 30, 1995 and 1994
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
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
<PAGE>
USG CORPORATION
CONSOLIDATED STATEMENT OF EARNINGS
(Dollars in millions except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
ended September 30, ended September 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Net sales $ 629 $ 621 $ 1,842 $ 1,689
Cost of products sold 477 468 1,389 1,293
Gross profit 152 153 453 396
Selling and administrative
expenses 61 63 181 179
Amortization of excess
reorganization value 43 43 127 127
Operating profit 48 47 145 90
Interest expense 25 33 77 103
Interest income (2) (3) (5) (8)
Other expense, net 1 (1) 1 1
Earnings/(loss) before taxes
on income 24 18 72 (6)
Taxes on income 26 24 79 51
Net loss (2) (6) (7) (57)
Net loss per common share (0.04) (0.13) (0.16) (1.34)
Dividends paid per common share - - - -
Average number of common shares 45,108,206 45,065,991 45,095,230 42,691,615
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
USG CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollars in millions)
(Unaudited)
<TABLE>
<CAPTION>
As of As of
September 30, December 31,
1995 1994
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 64 $ 197
Receivables (net of reserves - $17 and $14) 288 270
Inventories 183 173
Total current assets 535 640
Property, plant and equipment (net of reserves
for depreciation and depletion - $118 and $80) 812 755
Excess reorganization value (net of accumulated
amortization - $409 and $282) 437 561
Other assets 212 168
Total Assets 1,996 2,124
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable 150 122
Accrued expenses 176 210
Notes payable 7 1
Long-term debt maturing within one year 4 44
Taxes on income 29 35
Total current liabilities 366 412
Long-term debt 923 1,077
Deferred income taxes 178 179
Other liabilities 533 464
Stockholders' Equity/(Deficit):
Preferred stock - -
Common stock 5 5
Capital received in excess of par value 222 221
Deferred currency translation (3) (13)
Reinvested earnings/(deficit) (228) (221)
Total stockholders' equity/(deficit) (4) (8)
Total Liabilities and Stockholders' Equity 1,996 2,124
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
USG CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in millions)
(Unaudited)
<TABLE>
<CAPTION>
Nine Months ended
September 30,
1995 1994
<S> <C> <C>
Operating Activities:
Net loss $ (7) $ (57)
Adjustments to reconcile net loss to net cash:
Amortization of excess reorganization value 127 127
Depreciation, depletion and other amortization 50 52
Deferred income taxes (1) 1
Net gain on asset dispositions (3) (2)
(Increase)/decrease in working capital:
Receivables (18) (51)
Inventories (10) (30)
Payables 22 54
Accrued expenses (34) 22
Increase in other assets (44) (3)
Increase in other liabilities 69 14
Other, net (2) (2)
Net cash flows from operating activities 149 125
Investing Activities:
Capital expenditures (94) (37)
Net proceeds from asset dispositions 6 3
Net cash flows to investing activities (88) (34)
Financing Activities:
Issuance of debt 651 168
Repayment of debt (845) (435)
Proceeds from public offering of common stock - 224
Net cash flows to financing activities (194) (43)
Net increase/(decrease) in cash & cash equivalents (133) 48
Cash & cash equivalents at beginning of period 197 211
Cash & cash equivalents at end of period 64 259
Supplemental Cash Flow Disclosures:
Interest paid 79 84
Income taxes paid 92 17
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 ("USG" or 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, 1995 and December 31, 1994;
results of operations for the three months and nine months ended
September 30, 1995 and 1994; and cash flows for the nine months
ended September 30, 1995 and 1994. Certain amounts in the prior
years' financial statements have been reclassified to conform with
the 1995 presentation. While these interim financial statements
and accompanying notes are unaudited, they have been reviewed by
Arthur Andersen LLP, the Corporation's independent public
accountants. These financial statements and notes are to be read
in conjunction with the financial statements and notes included in
the Corporation's 1994 Annual Report on Form 10-K dated March 8,
1995.
(2) In the third quarter of 1995, the Corporation completed a
refinancing that included: (i) the establishment of a new seven-
year revolving credit facility to replace its former bank credit
agreement; (ii) the sale of $150 million aggregate principal
amount of 8 1/2% senior notes due 2005; and (iii) the redemption
of the Corporation's remaining $268 million principal amount of 10
1/4% senior notes due 2002 using a combination of proceeds from
the sale of the 8 1/2% senior notes, borrowings under the
revolving credit facility and cash on hand.
Under the new revolving credit facility, the Corporation can
borrow up to $500 million from a syndicate of banks, which are
essentially the same banks that had been lenders under the former
credit agreement. The new revolving credit facility provides USG
greater financial flexibility as a result of: (i) less restrictive
covenants; (ii) a letter of credit subfacility of up to $125
million; (iii) an expiration in 2002 with no required amortization
prior to maturity; and (iv) a simplification of the Corporation's
capital structure through the elimination of subsidiary guarantees
on any of its senior indebtedness. The revolving loans bear
interest at the London Interbank Offered Rate as determined from
time to time plus an applicable spread based on the Corporation's
net debt to EBITDA ratio (as defined in the new credit agreement)
for the preceding four quarters. As of September 30, 1995, the
applicable spread was 7/8%. However, in October 1, 1995 the
applicable spread was reduced to 3/4%.
(3) In the fourth quarter of 1994, the Corporation established a
revolving accounts receivable facility. Under this financing
program, the trade receivables of United States Gypsum Company
("U.S. Gypsum") and USG Interiors, Inc. ("USG Interiors") are
purchased by USG Funding Corporation ("USG Funding") and
transferred to a trust administered by Chemical Bank as trustee.
Certificates representing an ownership interest of up to $130
million in the trust have been issued to an affiliate of Citicorp
North America, Inc. USG Funding, a special purpose subsidiary of
USG Corporation, is a separate corporate entity with its own
separate creditors which will be entitled to be satisfied out of
USG Funding's assets prior to any value in USG Funding becoming
available to its shareholder. Receivables and debt outstanding in
connection with the receivables facility remain in receivables and
long-term debt, respectively, on the Corporation's consolidated
balance sheet.
(4) On May 6, 1993, the Corporation completed a comprehensive
restructuring of its debt through implementation of a
"prepackaged" plan of reorganization under United States
bankruptcy law. 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. 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.
(5) Income tax expense amounted to $26 million and $79 million for the
three months and nine months ended September 30, 1995,
respectively. For the respective 1994 periods, income tax expense
amounted to $24 million and $51 million. The Corporation's income
tax expense is computed based on pre-tax earnings excluding the
non-cash amortization of excess reorganization value, which is not
deductible for federal income tax purposes. Further, under the
provisions of SOP 90-7, the benefits of the domestic net operating
loss carryforwards ("NOL Carryforwards") discussed below are not
reflected in income tax expense.
The Corporation has NOL Carryforwards of $49 million remaining
from 1992. These NOL Carryforwards may be used to offset U.S.
taxable income through 2007. The Internal Revenue Code limits the
Corporation's annual use of its NOL Carryforwards 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 Internal Revenue Code to the
conversion of debt to equity related to the 1993 financial
restructuring, the Corporation's NOL Carryforwards to 1994 and
later years could be 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, 1995, 2,666,675 common shares were reserved
for future issuance in conjunction with existing stock option
grants. An additional 927,770 common shares were reserved for
future grants, of which 900,000 common shares were reserved in
accordance with the Long-Term Equity Plan approved by the
stockholders of the Corporation at the annual meeting of the
stockholders held on May 10, 1995.
(7) One of the Corporation's operating subsidiaries, U.S. Gypsum, is a
defendant in asbestos lawsuits alleging both property damage and
personal injury. Virtually all costs of the Personal Injury Cases
are being paid by insurance. However, many of U.S. Gypsum's
insurance carriers have denied 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 have so ruled. 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 final resolution 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.
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.
(8) 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. Debentures
totaling $22 million and $33 million were recorded on the holding
company's books of account as of September 30, 1995 and December
31, 1994, respectively. Summary financial results for U.S. Gypsum
are presented below (dollars in millions):
<PAGE>
<TABLE>
<CAPTION>
Three Months Nine Months
ended ended
September 30, September 30,
Summary Statement of Earnings 1995 1994 1995 1994
<S> <C> <C> <C> <C>
Net sales 330 329 987 888
Cost and expenses 260 256 766 710
Amortization of excess reorganization
value 15 15 46 46
Operating profit 55 58 175 132
Interest expense, net - - 1 1
Corporate charges 19 20 57 65
Earnings before taxes on income 36 38 117 66
Taxes on income 19 20 62 43
Net earnings 17 18 55 23
</TABLE>
<TABLE>
<CAPTION>
As of As of
Sept. 30, Dec.31,
Summary Balance Sheet 1995 1994
<S> <C> <C>
Current assets $ 215 $ 341
Property, plant and equipment, net 518 491
Excess reorganization value, net 158 204
Other assets 145 107
Total assets 1,036 1,143
Current liabilities 205 154
Other liabilities and obligations 368 299
Stockholder's equity 463 690
Total liabilities and stockholder's equity 1,036 1,143
</TABLE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Results of Operations
Third quarter 1995 net sales were $629 million, an increase of $8 million, or
1.3%, over the third quarter of 1994. For the first nine months of 1995, net
sales totaled $1,842 million, an increase of $153 million, or 9.1%, over the
comparable 1994 period. Net sales were up in each 1995 period for USG
Corporation's core businesses. North American Gypsum sales benefited from
higher wallboard selling prices and Worldwide Ceilings experienced record
ceiling tile shipments and higher selling prices. Demand for USG's wallboard
remained strong in the third quarter even though housing starts in 1995 are
down from 1994. Growth in repair and remodel and non-residential construction
markets contributed to improved sales of wallboard, ceilings and other
construction products.
Gross profit as a percentage of net sales decreased slightly in the third
quarter of 1995 to 24.2% from 24.6% in the prior-year period primarily due to
the increased cost of purchased recycled paper, the primary raw material of
gypsum wallboard paper. During the first nine months of 1995, gross profit as
a percentage of net sales was 24.6%, up from 23.4% for the comparable 1994
period due to higher selling prices for all major product lines, partially
offset by the increased cost of recycled paper.
Selling and administrative expenses as a percentage of net sales decreased to
9.7% in the third quarter and 9.8% in the first nine months of 1995 from 10.1%
and 10.6% in the respective 1994 periods.
Excess reorganization value, which was established in connection with USG's
financial restructuring in May 1993, is being amortized over a five-year
period. This non-cash amortization, which has no tax impact, reduced
operating profit by $43 million and $127 million in each 1995 and 1994 third
quarter and first nine-month period, respectively.
Because of the continuing amortization of excess reorganization value, the
Corporation reports EBITDA (earnings before interest, taxes, depreciation,
depletion and amortization) which it believes helps to facilitate: (i)
comparisons of current and historical results; (ii) the monitoring of
covenants related to certain long-term debt; and (iii) an understanding of
cash flow generated from operations that is available for taxes, debt service
and capital expenditures. EBITDA amounted to $106 million in the third
quarter of 1995, compared with $105 million in the corresponding 1994 period.
For the first nine months of 1995, EBITDA amounted to $315 million,
representing an increase of $57 million, or 22.1%, over the first nine months
of 1994. (Note: EBITDA should not be considered as an alternative to net
earnings as an indicator of operating performance or to cash flows as a
measure of overall liquidity.)
Interest expense in the third quarter of 1995 declined $8 million, or 24.2%,
compared with the third quarter of 1994. For the first nine months of 1995
interest expense was down $26 million, or 25.2%, versus the first nine months
of 1994. These declines primarily reflect the impact of debt repayments in
the past year and the recently completed debt refinancing described below
under "Liquidity and Capital Resources."
Income tax expense amounted to $26 million and $79 million in the three months
and nine months ended September 30, 1995, respectively. In the respective 1994
periods, income tax expense amounted to $24 million and $51 million. The
Corporation's income tax expense is computed based on pre-tax earnings
excluding the non-cash amortization of excess reorganization value, which is
not deductible for federal income tax purposes. Further, the benefits of the
NOL Carryforwards are not reflected in income tax expense.
Net losses of $2 million ($0.04 per share) and $6 million ($0.13 per share)
were reported for the third quarter of 1995 and 1994, respectively. However,
non-cash amortizations of excess reorganization value and reorganization debt
discount reduced net earnings by $44 million ($0.97 per share) and $45 million
($1.01 per share) in the respective periods. For the first nine months of
1995 and 1994, net losses of $7 million ($0.16 per share) and $57 million
($1.34 per share) were reported. Comparable amortizations in the nine months
periods amounted to $130 million ($2.88 per share) and $136 million ($3.19 per
share), respectively.
<PAGE>
The following is an analysis of USG's results of operations by core business
(dollars in millions):
<TABLE>
<CAPTION>
Net Sales EBITDA
Periods ended
September 30: Three Months Nine Months Three Months Nine Months
1995 1994 1995 1994 1995 1994 1995 1994
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Gypsum Company $ 330 $ 329 $ 987 $ 888 $ 78 $ 81 $ 245 $ 200
L&W Supply Corporation 198 180 563 485 8 6 19 12
CGC Inc. (gypsum) 26 30 78 80 2 5 7 10
Other subsidiaries 19 24 52 65 7 8 17 20
Eliminations (84) (77) (238) (210) - (1) - (2)
North American Gypsum 489 486 1,442 1,308 95 99 288 240
USG Interiors, Inc. 102 105 292 303 16 15 46 42
USG International 61 54 178 147 2 2 5 4
CGC Inc. (interiors) 8 7 22 22 1 1 3 3
Eliminations (10) (9) (29) (27) - - - -
Worldwide Ceilings 161 157 463 445 19 18 54 49
Corporate - - - - (8) (13) (27) (31)
Eliminations (21) (22) (63) (64) - 1 - -
Total USG Corporation 629 621 1,842 1,689 106 105 315 258
</TABLE>
North American Gypsum
Third quarter 1995 net sales amounted to $489 million, up $3 million, or 0.6%,
while EBITDA of $95 million declined $4 million, or 4.0%, compared with the
third quarter of 1994. For the first nine months of 1995, net sales of $1,442
million and EBITDA of $288 million represented increases of $134 million, or
10.2%, and $48 million, or 20.0%, respectively, over the comparable 1994
period.
These trends largely reflect the performance of U.S. Gypsum. Comparing the
third quarter of 1995 to the third quarter of 1994, results for U.S. Gypsum
primarily reflect the net effect of higher wallboard selling prices, offset by
higher unit manufacturing costs and lower wallboard volume. U.S. Gypsum's
third quarter 1995 average wallboard selling price was $109.37 per thousand
square feet, up $4.72, or 4.5%, from a year ago. Higher manufacturing costs
reflect an increase of approximately $4 per thousand square feet in the cost
of purchased recycled paper versus the third quarter of 1994. However,
recycled paper costs declined during the third quarter reducing wallboard
costs by almost $3 per thousand square feet from the second quarter of 1995.
Third quarter 1995 shipments of U.S. Gypsum wallboard totaled 1.957 billion
square feet. This level of shipments was the second highest for any quarter,
down 4.9% from the record level of 2.059 billion square feet experienced in
the third quarter of 1994. U.S. Gypsum's wallboard plants operated at 94% of
capacity in the third quarter of 1995, slightly higher than the estimated
average rate of 92% for the industry. Based on preliminary data issued by the
U.S. Bureau of the Census, third quarter 1995 housing starts were down
approximately 3% from the level reported in the third quarter of 1994.
Compared to the second quarter of 1995, third quarter 1995 housing starts were
up approximately 4%.
L&W Supply, the Corporation's building products distribution business,
achieved record sales for any quarter and first nine-months period, reflecting
improving demand for its gypsum wallboard and non-gypsum products. EBITDA for
L&W Supply also increased as a result of gross profit improvements for all of
its product lines.
CGC Inc.'s gypsum business experienced lower net sales and EBITDA in the third
quarter of 1995 as wallboard results were adversely affected by lower housing
starts in eastern Canada and the rising cost of wallboard paper.
Worldwide Ceilings
Third quarter 1995 net sales of $161 million, the highest level for any
quarter of record, were up $4 million, or 2.5%, while EBITDA of $19 million
increased by $1 million versus the third quarter of 1994. For the first nine
months of 1995, record net sales of $463 million increased $18 million, or
4.0%, and EBITDA of $54 million increased $5 million, or 10.2%, over the
comparable 1994 period.
Excluding results for the domestic floors division, which was divested in
December 1994, Worldwide Ceilings third quarter 1995 net sales improved $11
million, or 7.3%, while EBITDA increased $1 million over the third quarter of
1994. Compared to similarly adjusted nine months 1994 results, net sales rose
$40 million, or 9.5%, and EBITDA was up $5 million, or 10.2%. These improved
results largely reflect third quarter and first nine months records for
ceiling tile shipments.
For USG Interiors, improved sales, as adjusted to exclude the impact of the
divested floors division, primarily reflect increased retail and export volume
and higher selling prices. EBITDA for USG Interiors rose slightly, reflecting
the higher selling prices in 1995.
USG International's net sales increased over the third quarter of 1994 as a
result of growing international markets, especially in the Asia Pacific
region.
Liquidity and Capital Resources
The Corporation, which has significantly strengthened its liquidity and
capital resources since its 1993 financial restructuring, is currently
pursuing a strategy of reducing debt and growing its core gypsum and ceilings
businesses through approximately equal application of free cash flow between
debt reduction and capital expenditures, with an objective of achieving
investment grade status.
As a means of further enhancing its ability to implement this strategy, the
Corporation completed a refinancing in the third quarter of 1995 that
included: (i) the establishment of a new seven-year revolving credit facility
to replace its former bank credit agreement; (ii) the sale of $150 million
aggregate principal amount of 8 1/2% senior notes due 2005; and (iii) the
redemption of the Corporation's remaining $268 million principal amount of 10
1/4% senior notes due 2002 using a combination of proceeds from the sale of
the 8 1/2% senior notes, borrowings under the revolving credit facility and
cash on hand. As a result of the refinancing and repurchase of $30 million
principal amount of 8 3/4% senior debentures due 2017, the Corporation reduced
its principal amount of total debt to $955 million as of September 30, 1995
from $1,022 million as June 30, 1995. This marked the first time the
Corporation's debt has dropped below the $1 billion level since its
recapitalization in 1988. Additionally, as a result of the refinancing, the
Corporation reduced its annual interest expense by approximately $7 million.
For additional information on the new revolving credit facility, see "Notes to
Consolidated Financial Statements - Note No. 2."
Substantial capital investments to reduce costs and expand capacity have been
made at North American Gypsum plants in 1995. Cost reduction projects
included the installation of stock cleaning equipment to utilize lower grades
of recycled paper, continued implementation of technology which lowers
wallboard weight and additional use of synthetic gypsum at manufacturing
facilities at which it is more economical than natural sources of gypsum rock.
Projects that will be completed by the end of 1995 to enhance manufacturing
efficiency will increase wallboard capacity by approximately 600 million
square feet. In the Worldwide Ceilings business, a $45 million expansion
underway at USG Interiors' ceiling tile plant in Greenville, Mississippi, is
scheduled for completion in 1996. In the first nine months of 1995, total
capital expenditures for the Corporation amounted to $94 million, compared
with $37 million in the corresponding 1994 period. As of September 30, 1995,
capital expenditure commitments for the replacement, modernization and
expansion of operations amounted to $100 million compared with $61 million as
of December 31, 1994. USG's capital expenditures will exceed $100 million in
1995 and capital investment plans for the next several years contemplate
spending at, or above, current levels so long as operating cash flows support
such levels and the growth opportunities for such investments remain
attractive. The Corporation periodically evaluates possible acquisitions or
combinations involving other businesses or companies in businesses and markets
related to its current operations, and the Corporation believes that its
available liquidity would be generally adequate to support investments in
appropriate opportunities.
As of September 30, 1995, working capital (current assets less current
liabilities) amounted to $169 million and the ratio of current assets to
current liabilities was 1.46 to 1. As of December 31, 1994, working capital
amounted to $228 million and the ratio of current assets to current
liabilities was 1.55 to 1. In the first nine months of 1995, cash and cash
equivalents decreased to $64 million from $197 million primarily due to debt
repayments. Receivables (net of reserves) increased $18 million, or 6.7%, to
$288 million, inventories increased $10 million, or 5.8%, to $183 million and
accounts payable increased $28 million, or 23.0%, to $150 million. These
increases primarily reflect normal seasonal fluctuations.
One of the Corporation's subsidiaries, U.S. Gypsum, is a defendant in asbestos
lawsuits alleging both property damage and personal injury. Virtually all
costs of the Personal Injury Cases are being paid by insurance. However, many
of U.S. Gypsum's insurance carriers have denied 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
have so ruled. 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 final resolution 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.
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,
1995, and the related condensed consolidated statement of earnings for the
three-month and nine-month periods ended September 30, 1995 and 1994 and the
condensed consolidated statement of cash flows for the nine months ended
September 30, 1995 and 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.
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.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Chicago, Illinois
October 18, 1995
<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 $550 million of insurance remained
potentially available as of December 31, 1994. 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 $25.8 million in
1992, $8.2 million in 1993 and $33.4 million in 1994.
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. As of
September 30, 1995, 35 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 below,
involve multiple buildings. In addition, approximately 23 property damage
claims have been threatened against U.S. Gypsum. 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.
U.S. Gypsum is one of many defendants in three pending cases that have been
certified as class actions, including one that recently has been settled, as
well as others that request such certification. The damages claimed against
U.S. Gypsum in the class action cases are unspecified. On October 10, 1995,
U.S. Gypsum agreed to settle a class action 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.) Under the
settlement agreement, which will require court approval after notice to the
class, U.S. Gypsum will pay $3.6 million, with half payable during 1995 and
the remainder over the following eighteen months. The remaining two class
actions are a conditionally certified class 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.); and a class action on
behalf of various public bodies in the State of Texas, including cities,
counties, hospitals, port authorities and colleges. (Kirbyville Independent
School District v. U.S. Gypsum, et al., United States District Court for the
Eastern District of Texas, Beaumont Division.)
During 1994 U.S. Gypsum settled two other class actions that are now closed.
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.) The Michigan settlement was approved by the Court on December 2, 1994,
and no appeal was filed. The settlement of the nationwide class was approved
on September 13, 1995, and became final on October 12, 1995.
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. In
July 1994, the court in the Anderson case ruled that claims involving building
owners outside South Carolina cannot be included in the suit.
In total, U.S. Gypsum has settled approximately 95 property damage cases,
involving 211 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. Appeals or post-
judgement motions are pending in two cases. 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. In the cases lost,
compensatory damage awards against U.S. Gypsum have totaled $11.5 million.
Punitive damages totaling $5.5 million were entered against U.S. Gypsum in
four trials. Two of the punitive damage awards, totaling $1.45 million, were
paid after appeals were exhausted; and two were settled during the appellate
process.
In 1992, 7 Property Damage Cases were filed against U.S. Gypsum, 10 cases 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. During 1993, 5 Property Damage Cases were
filed against U.S. Gypsum, 7 cases 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 1994, 5 Property Damage Cases were filed
against U.S. Gypsum, 5 cases were dismissed before trial, 19 were settled, 1
was closed following trial or appeal, and 41 were pending at year-end. U.S.
Gypsum expended $40.6 million for the defense and resolution of Property
Damage Cases and received insurance payments of $9 million in 1994.
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 51,000 claimants pending as
of September 30, 1995 although, as discussed below, approximately 22,000 of
such claims are settled but not yet closed. 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 $222 million remained unexhausted as of December 31, 1994.
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 district 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 87,000 purported class members opted out, or elected
to be excluded from, the settlement. As of December 31, 1994, approximately
10,000 claims naming U.S. Gypsum as a defendant had been filed by "opt outs."
In addition, in each year a limited number of class members 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 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. During 1994, approximately 14,000 Personal
Injury Cases were filed against U.S. Gypsum, U.S. Gypsum was added as a
defendant in approximately 4,000 cases that had been previously filed, and
approximately 23,000 were settled or dismissed. U.S. Gypsum incurred expenses
of $38 million in 1994 with respect to Personal Injury Cases of which $37.3
million was paid by insurance. As of December 31, 1994, 1993, and 1992,
approximately 54,000, 59,000, and 54,200 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 may 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
22,000 Personal Injury Cases pending on December 31, 1994 for amounts totaling
approximately $32 million, to be expended over a three to five 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 December 31, 1994, can be
disposed of for a total amount, including both indemnity costs and legal fees
and expenses, estimated to be between $90 million and $100 million (of which
all but less than $5 million is expected to be paid by insurance). The
estimated cost of resolving pending claims takes into account, among other
factors, (i) 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 $250 million, of which approximately $235 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 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.
In the property damage phase of the Coverage Action, the applicability of U.S.
Gypsum's insurance policies to settlements and one adverse judgment in eight
"test" Property Damage Cases has been decided. On November 4, 1994, the
Illinois Appellate Court issued a ruling affirming in part and reversing in
part an earlier trial court ruling. The Appellate Court ruled that the eight
"test" cases were covered under all insurance policies in effect from the date
of installation to the date of removal of asbestos-containing products (known
as the "continuous trigger" of coverage). The Court awarded reimbursement of
approximately $6.2 million spent by U.S. Gypsum to resolve the eight "test"
cases. The defendant carriers' rehearing petition was denied by the Appellate
Court in January 1995, and on April 5, 1995 the Illinois Supreme Court denied
the insurers' petition for leave to appeal to that Court. Although the
appellate process has effectively concluded, further proceedings will be
necessary in the trial court to apply the appellate court's ruling to all
Property Damage Cases other than the eight "test" cases, as well as to resolve
certain other remaining issues, some of which could, if determined adversely
to U.S. Gypsum, affect the amount or accessibility of available coverage. No
schedule has yet been established for the resolution of these issues.
The "continuous trigger" ruling, if applied to the Property Damage Cases
generally, and subject to the resolution of the remaining issues referred to
above, will allow U.S. Gypsum to access all of its available insurance
coverage for Property Damage Cases (although the same coverage must also be
used for Personal Injury Cases). Under the continuous trigger, all Property
Damage Cases would be covered by insurance unless or until such insurance
becomes exhausted. In addition, if applied to the Property Damage Cases
generally, the ruling gives U.S. Gypsum the right to reimbursement of its past
property damage expenditures, subject to the resolution of the remaining
issues referred to above, and further subject to the allocation of costs to
insolvent carriers, excess carriers with no defense cost obligations, and
carriers that have previously settled. Pursuant to two settlements described
below, both reached since the appellate ruling, U.S. Gypsum is receiving
approximately $63 million from two carriers to reimburse it for past property
damage expenses. U.S. Gypsum is also pursuing a similar amount from two other
carriers that it contends are liable for reimbursement of U.S. Gypsum's past
expenditures. The timing and amount of additional recoveries for past
expenses will depend upon the outcome of settlement negotiations with those
two carriers or, if settlements cannot be reached, upon the ultimate
resolution of the remaining issues referred to above.
Nine 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
agreed to pay all or a substantial portion of their policy limits to U.S.
Gypsum beginning in 1991 and continuing over the following four years.
Another carrier, which provided both primary and excess policies to U.S.
Gypsum during the 1960's and 1970's, has agreed to pay U.S. Gypsum a total of
$38.4 million, $25 million of which was paid in April 1995 with the rest to be
paid in three annual installments. In August 1995, another carrier that
provided both primary and excess insurance (and is a Supporting Insurer)
agreed to pay U.S. Gypsum approximately $25 million by December 31, 1995 to
reimburse U.S. Gypsum for past property damage costs, and to make its
remaining $18 million of unexhausted coverage available for future costs as
they are incurred. 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.
Taking into account the above settlements, including participation of certain
of the settling carriers in the Wellington Agreement, and consumption through
December 31, 1994, carriers providing a total of approximately $150 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 $175 million of coverage that was
unexhausted as of December 31, 1994 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
continues 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. Many of the
Property Damage Cases are still at an early stage and the 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. At that time, 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 had 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.
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
(a) (15) Letter of Arthur Andersen LLP regarding unaudited
financial information.
(27) Financial Data Schedule (electronic filing only).
(b) There were no reports on Form 8-K filed during the third quarter
of 1995.
Exhibit (27), which has been filed as part of this Form 10-Q, is not included
herein.
<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 7, 1995 By / s / Raymond T. Belz
Raymond T. Belz, Vice President and
Controller, USG Corporation
November 7, 1995
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, 33-52715, 33-36303,
33-40136 and 33-63554 its Form 10-Q for the quarter ended September 30, 1995,
which includes our report dated October 18, 1995, 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
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> SEP-30-1995
<CASH> 64
<SECURITIES> 0
<RECEIVABLES> 305
<ALLOWANCES> 17
<INVENTORY> 183
<CURRENT-ASSETS> 535
<PP&E> 930
<DEPRECIATION> 118
<TOTAL-ASSETS> 1996
<CURRENT-LIABILITIES> 366
<BONDS> 923
<COMMON> 5
0
0
<OTHER-SE> (9)
<TOTAL-LIABILITY-AND-EQUITY> 1996
<SALES> 1842
<TOTAL-REVENUES> 1842
<CGS> 1389
<TOTAL-COSTS> 1389
<OTHER-EXPENSES> 181
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 72
<INCOME-PRETAX> 72
<INCOME-TAX> 79
<INCOME-CONTINUING> (7)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7)
<EPS-PRIMARY> (0.16)
<EPS-DILUTED> (0.15)
</TABLE>
