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 June 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 July 31, 1995, 45,093,362 shares of USG common stock were outstanding.
Table of Contents
PART I FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Statement of Earnings:
Three Months and Six Months Ended
June 30, 1995 and 1994
Consolidated Balance Sheet:
As of June 30, 1995 and December 31, 1994
Consolidated Statement of Cash Flows:
Six Months Ended June 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 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
USG CORPORATION
CONSOLIDATED STATEMENT OF EARNINGS
(Dollars in millions except per share data)
(Unaudited)
<CAPTION>
Three Months Six Months
ended June 30, ended June 30,
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Net sales $ 615 $ 562 $ 1,213 $ 1,068
Cost of products sold 466 429 912 825
Gross profit 149 133 301 243
Selling and administrative
expenses 60 59 120 116
Amortization of excess
reorganization value 42 42 84 84
Operating profit 47 32 97 43
Interest expense 25 33 52 70
Interest income (1) (2) (3) (5)
Other expense, net - 1 - 2
Earnings/(loss) before taxes
on income 23 - 48 (24)
Taxes on income 26 17 53 27
Net loss (3) (17) (5) (51)
Net loss per common share (0.07) (0.38) (0.12) (1.23)
Dividends paid per common share - - - -
Average number of common shares 45,088,163 45,057,848 45,086,916 41,672,968
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
<TABLE>
USG CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollars in millions)
(Unaudited)
<CAPTION>
As of As of
June 30, December 31,
<S> <C> <C>
1995 1994
Assets
Current Assets:
Cash and cash equivalents $ 103 $ 197
Receivables (net of reserves - $16 and $14) 291 270
Inventories 187 173
Total current assets 581 640
Property, plant and equipment (net of reserves
for depreciation and depletion - $103 and $80) 789 755
Excess reorganization value (net of accumulated
amortization - $366 and $282) 478 561
Other assets 190 168
Total Assets 2,038 2,124
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable 138 122
Accrued expenses 170 210
Notes payable 8 1
Long-term debt maturing within one year 4 44
Taxes on income 46 35
Total current liabilities 366 412
Long-term debt 987 1,077
Deferred income taxes 178 179
Other liabilities 509 464
Stockholders' Equity/(Deficit):
Preferred stock - -
Common stock 5 5
Capital received in excess of par value 221 221
Deferred currency translation (2) (13)
Reinvested earnings/(deficit) (226) (221)
Total stockholders' equity/(deficit) (2) (8)
Total Liabilities and Stockholders' Equity 2,038 2,124
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
USG CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in millions)
(Unaudited)
<CAPTION>
Six Months ended
June 30,
1995 1994
<S> <C> <C>
Operating Activities:
Net loss $ (5) $ (51)
Adjustments to reconcile net loss to net cash:
Amortization of excess reorganization value 84 84
Depreciation, depletion and other amortization 33 35
Deferred income taxes (1) 2
Net gain on asset dispositions (3) -
(Increase)/decrease in working capital:
Receivables (21) (40)
Inventories (14) (35)
Payables 27 46
Accrued expenses (40) (6)
Increase in other assets (22) (4)
Increase in other liabilities 45 15
Other, net - (2)
Net cash flows from operating activities 83 44
Investing Activities:
Capital expenditures (56) (21)
Net proceeds from asset dispositions 6 1
Net cash flows to investing activities (50) (20)
Financing Activities:
Issuance of debt 25 137
Repayment of debt (152) (354)
Proceeds from public offering of common stock - 224
Net cash flows (to)/from financing activities (127) 7
Net increase/(decrease) in cash & cash equivalents (94) 31
Cash & cash equivalents at beginning of period 197 211
Cash & cash equivalents at end of period 103 242
Supplemental Cash Flow Disclosures:
Interest paid 49 58
Income taxes paid 43 8
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
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 June 30, 1995 and December 31, 1994;
results of operations for the three months and six months ended
June 30, 1995 and 1994; and cash flows for the six months ended
June 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 fourth quarter of 1994, the Corporation established a
revolving accounts receivable facility. Under this new financing
program, the trade receivables of United States Gypsum Company
("U.S. Gypsum") and USG Interiors, Inc. ("USG Interiors") are
being 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.
(3) 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.
(4) Income tax expense amounted to $26 million and $53 million for the
three months and six months ended June 30, 1995, respectively.
For the respective 1994 periods, income tax expense amounted to
$17 million and $27 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.
(5) As of June 30, 1995, 2,748,195 common shares were reserved for
future issuance in conjunction with existing stock option grants.
An additional 911,105 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.
(6) 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.
(7) 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 June 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 Six Months
ended June 30, ended June 30,
Summary Statement of Earnings 1995 1994 1995 1994
<S> <C> <C> <C> <C>
Net sales 325 290 657 559
Cost and expenses 251 230 506 454
Amortization of excess reorganization
value 16 16 31 31
Operating profit 58 44 120 74
Interest expense, net 1 - 1 -
Corporate charges 16 22 38 46
Earnings before taxes on income 41 22 81 28
Taxes on income 22 14 43 23
Net earnings 19 8 38 5
</TABLE>
<TABLE>
<CAPTION>
As of As of
June 30, Dec.31,
Summary Balance Sheet 1995 1994
<S> <C> <C>
Current assets $ 155 $ 341
Property, plant and equipment, net 512 491
Excess reorganization value, net 173 204
Other assets 122 107
Total assets 962 1,143
Current liabilities 178 154
Other liabilities and obligations 337 299
Stockholder's equity 447 690
Total liabilities and stockholder's equity 962 1,143
</TABLE>
(8) As of June 30, 1995, $268 million aggregate principal amount of 10
1/4% senior notes due 2002 were outstanding. Each of U.S. Gypsum,
USG Industries, Inc., USG Interiors, USG Foreign Investments,
Ltd., L&W Supply Corporation, 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 its bank term loans' credit agreement and 10
1/4% senior notes. The Combined Guarantors are jointly and
severally liable under the guarantees. Holders of the bank term
loans 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 term loans 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 term loans are retired
regardless of whether any such 10 1/4% senior notes remain unpaid.
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 Inc., Gypsum Transportation
Limited, USG Canadian Mining Ltd. and the Corporation's Mexican,
European and Asia Pacific subsidiaries. USG Funding is also a
Non-Guarantor. The long-term debt of the Combined Non-Guarantors
of $83 million and $84 million, as of June 30, 1995 and December
31, 1994, respectively, has restrictive covenants that restrict,
among other things, the payment of dividends.
The following condensed consolidating information presents:
(i) Condensed financial statements as of June 30, 1995 and
December 31, 1994 and for the three months and six
months ended June 30, 1995 and 1994 of (a) the
Corporation on a parent company only basis, (b) the
Combined Guarantors, (c) the Combined Non-Guarantors
and (d) the Corporation on a consolidated basis.
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 6/30/95
Net sales $ - $ 541 $ 101 $ (27) $ 615
Gross profit - 129 20 - 149
Operating profit/(loss) (10) 58 (1) - 47
Equity in net (earnings)/loss
of the subsidiaries 282 3 - (285) -
Interest expense, net 22 1 1 - 24
Corporate service charge (25) 28 (3) - -
Other expense/(income), net (287) 286 1 - -
Earnings/(loss) before taxes on
income (2) (260) - 285 23
Taxes on income 1 24 1 - 26
Net earnings/(loss) (3) (284) (1) 285 (3)
Three Months ended 6/30/94
Net sales $ - $ 494 $ 93 $ (25) $ 562
Gross profit - 113 20 - 133
Operating profit/(loss) (10) 41 1 - 32
Equity in net (earnings)/loss
of the subsidiaries 13 3 - (16) -
Interest expense, net 30 1 - - 31
Corporate service charge (39) 39 - - -
Other expense/(income), net 1 - - - 1
Earnings/(loss) before taxes on
income (15) (2) 1 16 -
Taxes on income 2 11 4 - 17
Net earnings/(loss) (17) (13) (3) 16 (17)
Six Months ended 6/30/95
Net sales $ - $ 1,071 $ 198 $ (56) $ 1,213
Gross profit - 261 40 - 301
Operating profit/(loss) (20) 117 - - 97
Equity in net (earnings)/loss
of the subsidiaries 286 3 - (289) -
Interest expense, net 45 1 3 - 49
Corporate service charge (63) 69 (6) - -
Other expense/(income), net (288) 289 (1) - -
Earnings/(loss) before taxes on
income - (245) 4 289 48
Taxes on income 5 44 4 - 53
Net earnings/(loss) (5) (289) - 289 (5)
Six Months ended 6/30/94
Net sales $ - $ 937 $ 181 $ (50) $ 1,068
Gross profit - 205 38 - 243
Operating profit/(loss) (19) 62 - - 43
Equity in net (earnings)/loss
of the subsidiaries 45 7 - (52) -
Interest expense, net 63 1 1 - 65
Corporate service charge (81) 81 - - -
Other expense/(income), net 2 - - - 2
Earnings/(loss) before taxes on
income (48) (27) (1) 52 (24)
Taxes on income 3 18 6 - 27
Net earnings/(loss) (51) (45) (7) 52 (51)
</TABLE>
<PAGE>
<TABLE> USG CORPORATION
CONDENSED CONSOLIDATING BALANCE SHEET
(Dollars in millions)
<CAPTION>
Combined
Parent Combined Non-
As of 6/30/95 Company Guarantors Guarantors Eliminations Consolidated
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 87 $ (11) $ 27 $ - $ 103
Receivables, net 1 141 188 (39) 291
Inventories - 140 51 (4) 187
Total current assets 88 270 266 (43) 581
Property, plant and equipment, net 15 649 125 - 789
Investment in subsidiaries 1,122 267 - (1,389) -
Excess reorganization value, net - 380 98 - 478
Other assets 10 195 (20) 5 190
Total assets 1,235 1,761 469 (1,427) 2,038
Accounts payable and accrued
expenses 46 280 65 (37) 354
Notes payable and LTD maturing
within one year - 2 10 - 12
Total current liabilities 46 282 75 (37) 366
Long-term debt 868 36 83 - 987
Deferred income taxes 7 154 17 - 178
Other liabilities 314 191 3 1 509
Common stock 5 1 6 (7) 5
Capital received in excess
of par value 221 1,116 364 (1,480) 221
Deferred currency translation - - (2) - (2)
Reinvested earnings/(deficit) (226) (19) (77) 96 (226)
Total stockholders' equity/
(deficit) - 1,098 291 (1,391) (2)
Total liabilities and
stockholders' equity 1,235 1,761 469 (1,427) 2,038
As of 12/31/94
Cash and cash equivalents $ 178 $ (11) $ 30 $ - $ 197
Receivables, net - 131 173 (34) 270
Inventories - 136 43 (6) 173
Total current assets 178 256 246 (40) 640
Property, plant and equipment, net 15 623 117 - 755
Investment in subsidiaries 1,436 261 - (1,697) -
Excess reorganization value, net - 447 114 - 561
Other assets (227) 430 (28) (7) 168
Total assets 1,402 2,017 449 (1,774) 2,124
Accounts payable and accrued
expenses 83 254 63 (34) 366
Notes payable and LTD maturing
within one year 41 2 2 - 45
Total current liabilities 124 256 65 (34) 411
Long-term debt 956 37 84 - 1,077
Deferred income taxes 9 155 15 - 179
Other liabilities 308 153 4 - 465
Common stock 5 1 6 (7) 5
Capital received in excess
of par value 221 1,438 364 (1,802) 221
Deferred currency translation - - (13) - (13)
Reinvested earnings/(deficit) (221) (23) (76) 99 (221)
Total stockholders' equity/
(deficit) 5 1,416 281 (1,710) (8)
Total liabilities and
stockholders' equity 1,402 2,017 449 (1,744) 2,124
</TABLE>
<PAGE>
<TABLE>
USG CORPORATION
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
(Dollars in millions)
<CAPTION>
Combined
Parent Combined Non-
Six Months ended 6/30/95 Company Guarantors Guarantors Eliminations Consolidated
<S> <C> <C> <C> <C> <C>
Net cash flows (to)/from
operating activities $ (102) $ 191 $ (6) $ - $ 83
Capital expenditures - (48) (8) - (56)
Net proceeds from asset
dispositions - 1 5 - 6
Net cash flows (to)/from
investing activities - (47) (3) - (50)
Issuance of debt - - 25 - 25
Repayment of debt (132) (2) (18) - (152)
Cash dividends (paid)/received - 1 (1) - -
Net cash transfers (to)/from
corporate 143 (143) - - -
Net cash flows (to)/from:
financing activities 11 (144) 6 - (127)
Net increase/(decrease) in cash
& cash equivalents (91) - (3) - (94)
Cash & cash equivalents - beginning 178 (11) 30 - 197
Cash & cash equivalents - end 87 (11) 27 - 103
Six Months ended 6/30/94
Net cash flows (to)/from
operating activities $ (71) $ 103 $ 12 $ - $ 44
Capital expenditures - (16) (4) - (20)
Net proceeds from asset
dispositions - - - - -
Net cash flows (to)/from
investing activities - (16) (4) - (20)
Issuance of debt 85 - 52 - 137
Repayment of debt (308) (1) (45) - (354)
Proceeds from stock offering 224 - - - 224
Cash dividends (paid)/received - 12 (12) - -
Net cash transfers (to)/from
corporate 99 (99) - - -
Net cash flows (to)/from
financing activities 100 (88) (5) - 7
Net increase/(decrease) in cash
& cash equivalents 29 (1) 3 - 31
Cash & cash equivalents - beginning 187 (8) 32 - 211
Cash & cash equivalents - end 216 (9) 35 - 242
</TABLE>
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
Results of Operations
Second quarter 1995 net sales were $615 million, an increase of $53 million,
or 9.4%, over the second quarter of 1994. For the first six months of 1995,
net sales totalled $1,213 million, an increase of $145 million, or 13.6%, over
the comparable 1994 period. Improved sales were reported for each of USG
Corporation's core businesses, North American Gypsum and Worldwide Ceilings,
as a result of strong demand from new residential construction, growth in
repair and remodel activity and improving commercial and institutional
construction.
Gross profit as a percentage of net sales rose to 24.2% and 24.8% in the
second quarter and first six months of 1995, respectively, from 23.7% and
22.8% in the prior-year periods due to higher selling prices for all major
product lines, partially offset by increased gypsum wallboard unit
manufacturing costs.
Selling and administrative expenses for the second quarter and first six
months of 1995 increased over the prior-year levels. However, as a percentage
of net sales, these expenses decreased to 9.8% for the second quarter of 1995
and 9.9% for the first six months of 1995 from 10.5% and 10.9% 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 $42 million and $84 million in each 1995 and 1994 second
quarter and first six month period.
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 $103 million in the second
quarter of 1995, an increase of $16 million, or 18.4%, versus the
corresponding 1994 period. For the first six months of 1995, EBITDA amounted
to $209 million, an increase of $56 million, or 36.6%, over the first six
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 second quarter of 1995 declined $8 million, or 24.2%,
compared with the second quarter of 1994. For the first six months of 1995
interest expense was down $18 million, or 25.7%, versus the first six months
of 1994. These declines primarily reflect a lower average level of
outstanding debt in 1995.
Income tax expense amounted to $26 million and $53 million for the three
months and six months ended June 30, 1995, respectively. For the respective
1994 periods, income tax expense amounted to $17 million and $27 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 $3 million ($0.07 per share) and $17 million ($0.38 per share)
were reported for the second quarter of 1995 and 1994, respectively. However,
non-cash amortizations of excess reorganization value and reorganization debt
discount reduced net earnings by $43 million ($0.95 per share) and $45 million
($1.00 per share) in the respective periods. For the first six months of 1995
and 1994, net losses of $5 million ($0.12 per share) and $51 million ($1.23
per share) were reported. Comparable amortizations in the six months periods
amounted to $86 million ($1.92 per share) and $91 million ($2.18 per share),
respectively.
The following is an analysis of USG's results of operations by core business
(dollars in millions):
<TABLE>
<CAPTION>
Net Sales EBITDA
Periods ended June 30 Three Months Six Months Three Months Six Months
1995 1994 1995 1994 1995 1994 1995 1994
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Gypsum Company $ 325 $ 290 $ 657 $ 559 $ 81 $ 66 $ 167 $ 119
L&W Supply Corporation 191 166 365 305 7 5 11 6
CGC Inc. (gypsum) 27 26 52 50 2 3 5 5
Other subsidiaries 16 22 33 41 5 7 10 12
Eliminations (76) (70) (154) (133) - (1) - (1)
North American Gypsum 483 434 953 822 95 80 193 141
USG Interiors, Inc. 95 102 190 198 15 14 30 27
USG International 61 48 117 93 1 1 3 2
CGC Inc. (interiors) 6 7 14 15 1 1 2 2
Eliminations (9) (9) (19) (18) - - - -
Worldwide Ceilings 153 148 302 288 17 16 35 31
Corporate - - - - ( 9) (8) (19) (18)
Eliminations (21) (20) (42) (42) - (1) - (1)
Total USG Corporation 615 562 1,213 1,068 103 87 209 153
</TABLE>
North American Gypsum
Second quarter 1995 net sales of $483 million for North American Gypsum
represented an increase of $49 million, or 11.3%, while EBITDA of $95 million
improved $15 million, or 18.8%, compared with the second quarter of 1994. For
the first six months of 1995, net sales of $953 million increased $131
million, or 15.9%, and EBITDA of $193 million increased $52 million, or 36.9%,
over the comparable 1994 period.
Second quarter 1995 results improved for U.S. Gypsum compared to the second
quarter of 1994 largely due to higher wallboard selling prices, partially
offset by higher unit manufacturing costs and slightly lower wallboard volume.
In addition, sales of non-wallboard products, such as joint compound and
DUROCK, also increased. U.S. Gypsum's average wallboard selling price was
$112.55 per thousand square feet, an increase of 14% compared with the second
quarter of 1994 and virtually unchanged from the first quarter of 1995.
Higher manufacturing costs reflect continuing increases in the cost of
purchased waste paper. Compared to the first quarter of 1995, rising waste
paper costs resulted in an approximate $3.00 per thousand square feet increase
in wallboard unit manufacturing costs, or an aggregate increase of $5.4
million in cost of products sold. Second quarter 1995 shipments of U.S.
Gypsum wallboard totalled 1.801 billion square feet, down 1% from the
comparable 1994 period and down 6% from the first quarter of 1995. U. S.
Gypsum's wallboard plants operated at 88% of capacity in the second quarter of
1995, matching the estimated average rate for the industry.
Based on preliminary data issued by the U.S. Bureau of the Census, second
quarter 1995 private and public housing starts were up approximately 36% over
the level reported in the first quarter of 1995, but approximately 13% below
second quarter 1994 housing starts. Due to the lagged effect on demand for
wallboard, second quarter 1995 housing starts are expected to favorably impact
third quarter shipments as compared to the second quarter. However, U.S.
Gypsum's third quarter 1995 shipments are expected to be down somewhat from
its all-time quarterly record of 2.059 billion square feet posted in the third
quarter of 1994 as a result of the lower level of housing starts in 1995.
L&W Supply, the Corporation's building products distribution business,
achieved its highest quarterly and first six-months levels of sales in its
history, reflecting record sales of gypsum wallboard and non-gypsum products.
EBITDA for L&W Supply also continued to improve as a result of gross profit
improvements for all of its product lines.
CGC Inc.'s gypsum business experienced slightly higher net sales in the second
quarter of 1995 due to increased wallboard volume and higher selling prices.
However, lower EBITDA was attributable to the rising cost of wallboard paper.
Worldwide Ceilings
Second quarter 1995 net sales for Worldwide Ceilings rose $5 million, or 3.4%,
to $153 million, while EBITDA of $17 million reflected an increase of $1
million, or 6.3%, compared with the second quarter of 1994. For the first six
months of 1995, net sales of $302 million increased $14 million, or 4.9%, and
EBITDA of $35 million increased $4 million, or 12.9%, over the comparable 1994
period. Excluding results for the domestic floors division, which was
divested in December 1994, Worldwide Ceilings second quarter 1995 net sales
improved $12 million, or 8.5%, and EBITDA increased $1 million, or 6.3%,
versus the second quarter of 1994. Compared to similarly adjusted six months
1994 results, net sales rose $29 million, or 10.6%, while EBITDA was up $4
million, or 12.9%.
For USG Interiors, net sales in the second quarter of 1995 benefited from
higher prices and favorable demand, while net sales in the prior-year quarter
were boosted by an announced price increase effective in early July 1994.
Consequently, net sales were unchanged quarter-on-quarter (after adjusting for
floors results). EBITDA for USG Interiors improved slightly, reflecting the
higher selling prices in 1995.
USG International's net sales increased over the second quarter of 1994 due to
greater demand. However, EBITDA for USG International was unchanged primarily
due to unfavorable currency adjustments which offset improved gross profit
resulting from the higher level of net sales.
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 the 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, on
July 27, 1995, the Corporation made effective a new seven-year revolving
credit facility under which it 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 Corporation initially drew down $190 million to
repay its previously existing bank term loans. The new 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. 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 new revolving credit facility was part of a larger refinancing that also
included the public offering and sale of $150 million aggregate principal
amount of 8 1/2% senior notes due 2005, which was completed on August 8, 1995.
The Corporation intends to use the proceeds of the note offering and
additional borrowings under the new revolving credit facility to redeem all of
its outstanding 10 1/4% senior notes due 2002. All remaining 10 1/4% senior
notes, which total $268 million principal amount, are expected to be redeemed
by early September. As a result of the refinancing, the Corporation will reduce
its annual interest expense by approximately $7 million.
Substantial capital investments underway at North American Gypsum plants
include various cost reduction and capacity expansion projects, including 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 to enhance
manufacturing efficiency expected to be completed in 1995 are estimated to
increase wallboard capacity by 600 million square feet. In the Worldwide
Ceilings business, USG Interiors has announced a $45 million expansion of its
ceiling tile plant in Greenville, Mississippi, scheduled for completion in
1996. In the first six months of 1995, capital expenditures for the
Corporation amounted to $56 million, compared with $21 million in the
corresponding 1994 period. As of June 30, 1995, capital expenditure
commitments for the replacement, modernization and expansion of operations
amounted to $98 million compared with $61 million as of December 31, 1994.
The Corporation expects that 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 appropriate
opportunities.
In the absence of significant unanticipated cash demands, 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 as described above. As of June
30, 1995, working capital (current assets less current liabilities) amounted
to $215 million and the ratio of current assets to current liabilities was
1.59 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 six months of 1995, cash and cash equivalents decreased to $103
million from $197 million primarily due to debt repayments. First quarter
debt repayments included $91 million of bank term loans, $41 million of which
satisfied the remaining 1994 cash sweep obligation in accordance with the
Corporation's previous credit agreement. During the second quarter, the
Corporation redeemed approximately $30 million principal amount of 10 1/4%
senior notes due 2002 using cash on hand. Compared to December 31, 1994,
receivables (net of reserves) increased $21 million, or 7.8%, to $291 million,
inventories increased $14 million, or 8.1%, to $187 million and accounts
payable increased $16 million, or 13.1%, to $138 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 June 30, 1995, and
the related condensed consolidated statement of earnings for the three-month
and six-month periods ended June 30, 1995 and 1994 and the condensed
consolidated statement of cash flows for the six months ended June 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 6, 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
July 21, 1995
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 June
30, 1995, 38 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 four pending 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.). A case filed in federal court in the
Eastern District of Texas on August 8, 1994 has been certified as a class
action on behalf of all public building owners and political subdivisions of
the State of Texas, including all cities, counties and municipalities
(Kirbyville Independent School District v. U.S. Gypsum, et al., United States
District Court for the Eastern District of Texas, Beaumont Division.)
In October 1994, U.S. Gypsum executed agreements to settle two other class
actions (one of which has now been closed), 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.) The Corporation took a
$30 million charge to pretax earnings in the fourth quarter of 1994 primarily
to cover the cash payments, approximately two-thirds of which was paid in 1994
with the rest payable 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. The Michigan settlement was approved by the Court
on December 2, 1994, and no appeal was filed. The settlement of the
nationwide class action has not yet been presented to the Court for approval.
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 Corporation's recapitalization
in 1988, 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. The damages claimed against U. S. Gypsum in the class action cases are
unspecified.
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. 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. Appeal on a post-
trial motion is pending in one 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 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. During 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 1994, 5 new Property Damage Cases were
filed against U. S. Gypsum, 5 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 June 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,
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
totalling 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. U. S. Gypsum is evaluating the impact of the ruling and
the remaining issues 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 of them, 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.
Ten carriers, including three of the Supporting Insurers, have settled U. S.
Gypsum's claims for both property damage and personal injury coverage and have
been (or will be) 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 approximately $175 million of additional 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; 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 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. 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.
Item 4. Submission of Matters to a Vote of Security Holders
(a) In accordance with the Corporation's notice and proxy statement
dated March 31, 1995, the matters set forth in (c) below were
submitted to a vote of stockholders at the annual meeting of
stockholders held on May 10, 1995.
(c)
<TABLE>
<CAPTION>
Votes Abstentions
Votes Withheld and Broker
For or Against Non-Voters
<S> <C> <C> <C>
Election of Directors:
W. H. Clark 40,187,069 585,510 -
Lawrence M. Crutcher 40,181,336 591,243 -
Wade Fetzer III 40,178,164 594,415 -
William C. Foote 40,184,138 588,441 -
Judith A. Sprieser 40,183,906 588,673 -
Approval of Stock Compensation Program
for Non-Employee Directors 38,330,157 1,809,164 633,258
Approval of 1995 Long-Term Equity Plan 38,300,103 2,346,880 125,596
Ratification of Appointment of Arthur
Andersen LLP as Independent Public
Accountants 40,281,426 454,617 36,536
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) (4) Instruments defining the rights of security holders,
including indentures:
(a) Form of Consent Resolution adopted by a
Special Committee created by the Board of
Directors of USG Corporation relating to USG
Corporation's 8 1/2% Senior Notes due 2005
(incorporated by reference to Exhibit 4(b) of
Amendment No. 3 to USG Corporation's
Registration Statement No. 33-60563 on Form
S-3, dated July 28, 1995).
(10) Material contracts:
(a) Credit Agreement dated as of July 27, 1995,
among USG Corporation and the Banks listed on
the signature page thereto and Chemical Bank
as Agent (incorporated by reference to
Exhibit 99(a) of Amendment No. 3 to USG
Corporation's Registration Statement No. 33-
60563 on Form S-3, dated July 28, 1995).
(b) Collateral Trust Agreement dated as of July
27, 1995 between USG Corporation, certain of
its subsidiaries and Wilmington Trust Company
and William J. Wade, as Trustee (incorporated
by reference to Exhibit 99(b) of Amendment
No. 3 to USG Corporation's Registration
Statement No. 33-60563 on Form S-3, dated
July 28, 1995).
(c) Company Pledge Agreement dated as of July 27,
1995, among USG Corporation, as Pledgor, and
Wilmington Trust Company and William J. Wade,
as Trustee (incorporated by reference to
Exhibit 99(c) of Amendment No. 3 to USG
Corporation's Registration Statement No 33-
60563 on Form S-3, dated July 28, 1995).
(15) Letter of Arthur Andersen LLP regarding unaudited
financial information.
(27) Financial Data Schedule (electronic filing only).
(b) A report on Form 8-K was filed on May 24, 1995 relating to the
termination of an agreement dated February 25, 1993, between the
Corporation and Water Street Corporate Recovery Fund I, L.P.,
which was established in connection with the Corporation's 1993
financial restructuring.
Exhibit (27), which has been filed as part of this Form 10-Q, is not included
herein.
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
August 10, 1995 By / s / Raymond T. Belz
Raymond T. Belz, Vice President and
Controller, USG Corporation
Exhibit (15)
August 10, 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 June 30, 1995, which
includes our report dated July 21, 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
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