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 March 31, 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 April 30, 1995, 45,088,634 shares of USG common stock were outstanding.
<PAGE>
Table of Contents
PART I FINANCIAL STATEMENTS
Item 1. Financial Statements:
Consolidated Statement of Earnings:
Three Months Ended March 31, 1995 and 1994
Consolidated Balance Sheet:
As of March 31, 1995 and December 31, 1994
Consolidated Statement of Cash Flows:
Three Months Ended March 31, 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
<PAGE>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
USG CORPORATION
CONSOLIDATED STATEMENT OF EARNINGS
(Dollars in millions except per share data)
(Unaudited)
<CAPTION>
Three Months ended
March 31,
1995 1994
<S> <C> <C>
Net sales $ 598 $ 506
Cost of products sold 446 396
Gross profit 152 110
Selling and administrative expenses 60 57
Amortization of excess reorganization value 42 42
Operating profit 50 11
Interest expense 27 37
Interest income (2) (3)
Other expense/(income), net - 1
Earnings/(loss) before taxes on income 25 (24)
Taxes on income 27 10
Net loss (2) (34)
Net loss per common share (0.05) (0.87)
Dividends paid per common share - -
Average number of common shares 45,085,540 39,134,246
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
USG CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollars in millions)
(Unaudited)
<CAPTION>
As of As of
March 31, December 31,
<S> <C> <C>
1995 1994
Assets
Current Assets:
Cash and cash equivalents $ 94 $ 197
Receivables (net of reserves - $16 and $14) 296 274
Inventories 190 173
Total current assets 580 644
Property, plant and equipment (net of reserves
for depreciation and depletion - $90 and $80) 770 755
Excess reorganization value (net of accumulated
amortization - $324 and $282) 519 561
Other assets 171 164
Total Assets 2,040 2,124
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable 145 122
Accrued expenses 217 253
Notes payable 5 1
Long-term debt maturing within one year 3 44
Taxes on income 51 35
Total current liabilities 421 455
Long-term debt 1,018 1,077
Deferred income taxes 177 179
Other liabilities 426 421
Stockholders' Equity/(Deficit):
Preferred stock - -
Common stock 5 5
Capital received in excess of par value 221 221
Deferred currency translation (5) (13)
Reinvested earnings/(deficit) (223) (221)
Total stockholders' equity/(deficit) (2) (8)
Total Liabilities and Stockholders' Equity 2,040 2,124
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
USG CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in millions)
(Unaudited)
<CAPTION>
Three Months ended
March 31,
1995 1994
<S> <C> <C>
Operating Activities:
Net loss $ (2) $ (34)
Adjustments to reconcile net loss to net cash:
Amortization of excess reorganization value 42 42
Depreciation, depletion and other amortization 17 18
Deferred income taxes (2) 7
Net (gain)/loss on asset dispositions (3) -
(Increase)/decrease in working capital:
Receivables (22) (25)
Inventories (17) (21)
Payables 39 15
Accrued expenses (36) 2
Increase in other assets (7) (9)
Increase in other liabilities 5 4
Net cash flows (to)/from operating activities 14 (1)
Investing Activities:
Capital expenditures (24) (7)
Net proceeds from asset dispositions 6 -
Net cash flows to investing activities (18) (7)
Financing Activities:
Issuance of debt 6 114
Repayment of debt (105) (207)
Proceeds from public offering of common stock - 224
Net cash flows (to)/from financing activities (99) 131
Net increase/(decrease) in cash & cash equivalents (103) 123
Cash & cash equivalents at beginning of period 197 211
Cash & cash equivalents at end of period 94 334
Supplemental Cash Flow Disclosures:
Interest paid 25 22
Income taxes paid 13 4
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 March 31, 1995 and December 31, 1994; and
results of operations and cash flows for the three months ended
March 31, 1995 and 1994. 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 $27 million and $10 million for the
three months ended March 31, 1995 and 1994, respectively. 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
exchange of stock for debt, 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 March 31, 1995, 2,750,555 common shares were reserved for
future issuance in conjunction with existing stock option grants.
An additional 11,105 common shares were reserved for future
grants.
(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 are denying coverage for the Property Damage
Cases, although U.S. Gypsum believes that substantial coverage
exists and the trial court and an appellate court in U.S. Gypsum's
Coverage Action have so ruled. The carriers are seeking
reconsideration of the Illinois Supreme Court's refusal to review
the appellate court's ruling. In view of the limited insurance
funding currently available to U.S. Gypsum for Property Damage
Cases resulting from continued resistance by a number of U.S.
Gypsum's insurers to providing coverage, the effect of the
asbestos litigation on the Corporation will depend upon a variety
of factors, including the damages sought in Property Damage Cases
that reach trial prior to the completion of the Coverage Action,
U.S. Gypsum's ability to successfully defend or settle such cases,
and the resolution of the Coverage Action. As a result,
management is unable to determine whether an adverse outcome in
the asbestos litigation will have a material adverse effect on the
results of operations or the consolidated financial position of
the Corporation.
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 March 31, 1995 and December 31,
1994, respectively. Summary financial results for U.S. Gypsum are
presented below (dollars in millions):
<PAGE>
<TABLE>
<CAPTION>
Three Months ended
March 31,
Summary Statement of Earnings 1995 1994
<S> <C> <C>
Net sales $ 332 $ 269
Cost and expenses 255 224
Amortization of excess reorganization value 15 15
Operating profit 62 30
Interest expense, net - -
Corporate charges 22 24
Earnings before taxes on income 40 6
Taxes on income 21 9
Net earnings/(loss) 19 (3)
</TABLE>
<TABLE>
<CAPTION>
As of As of
March 31, Dec. 31,
Summary Balance Sheet 1995 1994
<S> <C> <C>
Current assets $ 381 $ 345
Property, plant and equipment, net 503 491
Excess reorganization value, net 189 204
Other assets 106 103
Total assets 1,179 1,143
Current liabilities 212 197
Other liabilities and obligations 256 256
Stockholder's equity 711 690
Total liabilities and stockholder's equity 1,179 1,143
</TABLE>
(8)As of March 31, 1995, $298 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 Pacific subsidiaries. USG Funding is also a Non-Guarantor.
The long-term debt of the Combined Non-Guarantors of $84 million as of
March 31, 1995 and December 31, 1994, has restrictive covenants that
restrict, among other things, the payment of dividends.
The following condensed consolidating information presents:
(i) Condensed financial statements as of March 31, 1995
and December 31, 1994 and for the three months ended
March 31, 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 3/31/95
Net sales $ - $ 530 $ 97 $ (29) $ 598
Gross profit/(loss) - 132 20 - 152
Operating profit/(loss) (10) 59 1 - 50
Equity in net (earnings)/loss
of the subsidiaries 4 - - (4) -
Interest expense, net 23 - 2 - 25
Corporate service charge (38) 41 (3) - -
Other expense/(income), net (1) 3 (2) - -
Earnings/(loss) before taxes on
income 2 15 4 4 25
Taxes on income 4 20 3 - 27
Net earnings/(loss) (2) (5) 1 4 (2)
Three Months ended 3/31/94
Net sales $ - $ 443 $ 88 $ (25) $ 506
Gross profit/(loss) - 92 18 - 110
Operating profit/(loss) (9) 21 (1) - 11
Equity in net (earnings)/loss
of the subsidiaries 32 4 - (36) -
Interest expense, net 33 - 1 - 34
Corporate service charge (42) 42 - - -
Other expense/(income), net 1 - - - 1
Earnings/(loss) before taxes on
income (33) (25) (2) 36 (24)
Taxes on income 1 7 2 - 10
Net earnings/(loss) (34) (32) (4) 36 (34)
</TABLE>
<PAGE>
<TABLE>
USG CORPORATION
CONDENSED CONSOLIDATING BALANCE SHEET
(Dollars in millions)
<CAPTION>
Combined
Parent Combined Non-
As of 3/31/95 Company Guarantors Guarantors Eliminations Consolidated
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $ 79 $ (9) $ 24 $ - $ 94
Receivables, net 1 138 194 (37) 296
Inventories - 144 50 (4) 190
Total current assets 80 273 268 (41) 580
Property, plant and equipment, net 15 633 122 - 770
Investment in subsidiaries 1,441 268 - (1,709) -
Excess reorganization value, net - 414 105 - 519
Other assets (241) 440 (30) 2 171
Total assets 1,295 2,028 465 (1,748) 2,040
Accounts payable and accrued
expenses 77 307 65 (36) 413
Notes payable and LTD maturing
within one year - 2 6 - 8
Total current liabilities 77 309 71 (36) 421
Long-term debt 897 37 84 - 1,018
Deferred income taxes 6 154 16 1 177
Other liabilities 312 109 4 1 426
Common stock 5 1 6 (7) 5
Capital received in excess
of par value 221 1,438 364 (1,802) 221
Deferred currency translation - - (5) - (5)
Reinvested earnings/(deficit) (223) (20) (75) 95 (223)
Total stockholders' equity/
(deficit) 3 1,419 290 (1,714) (2)
Total liabilities and
stockholders' equity 1,295 2,028 465 (1,748) 2,040
As of 12/31/94
Cash and cash equivalents $ 178 $ (11) $ 30 $ - $ 197
Receivables, net - 135 173 (34) 274
Inventories - 136 43 (6) 173
Total current assets 178 260 246 (40) 644
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) 426 (28) (7) 164
Total assets 1,402 2,017 449 (1,774) 2,124
Accounts payable and accrued
expenses 83 298 63 (34) 410
Notes payable and LTD maturing
within one year 41 2 2 - 45
Total current liabilities 124 300 65 (34) 455
Long-term debt 956 37 84 - 1,077
Deferred income taxes 9 155 15 - 179
Other liabilities 308 109 4 - 421
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-
Three Months ended 3/31/95 Company Guarantors Guarantors Eliminations Consolidated
<S> <C> <C> <C> <C> <C>
Net cash flows (to)/from
operating activities $ (42) $ 67 $ (11) $ - $ 14
Capital expenditures - (21) (3) - (24)
Net proceeds from asset
dispositions - - 6 - 6
Net cash flows (to)/from
investing activities - (21) 3 - (18)
Issuance of debt - - 6 - 6
Repayment of debt (102) - (3) - (105)
Cash dividends (paid)/received - 1 (1) - -
Net cash transfers (to)/from
corporate 45 (45) - - -
Net cash flows (to)/from:
financing activities (57) (44) 2 - (99)
Net increase/(decrease) in cash
& cash equivalents (99) 2 (6) - (103)
Cash & cash equivalents - beginning 178 (11) 30 - 197
Cash & cash equivalents - end 79 (9) 24 - 94
Three Months ended 3/31/94
Net cash flows (to)/from
operating activities $ (23) $ 17 $ 5 $ - $ (1)
Capital expenditures - (6) (1) - (7)
Net proceeds from asset
dispositions - - - - -
Net cash flows (to)/from
investing activities - (6) (1) - (7)
Issuance of debt 85 - 29 - 114
Repayment of debt (189) - (18) - (207)
Proceeds from stock offering 224 - - - 224
Cash dividends (paid)/received - 11 (11) - -
Net cash transfers (to)/from
corporate 26 (26) - - -
Net cash flows (to)/from
financing activities 146 (15) - - 131
Net increase/(decrease) in cash
& cash equivalents 123 (4) 4 - 123
Cash & cash equivalents - beginning 187 (8) 32 - 211
Cash & cash equivalents - end 310 (12) 36 - 334
</TABLE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Results of Operations
Comparing the first three months of 1995 and 1994, net sales increased $92
million, or 18.2%. Improved sales were reported for each of USG Corporation's
core businesses, North American Gypsum and Worldwide Ceilings, as a result of
strong housing starts in the fourth quarter of 1994, growth in repair and
remodel activity and improving commercial and institutional construction.
Gross profit as a percentage of net sales rose to 25.4% from 21.7% due to
higher selling prices for all major product lines.
Selling and administrative expenses increased $3 million, or 5.3%. However,
as a percentage of net sales, these expenses improved to 10.0% from 11.3%.
Amortization of excess reorganization value, which was established in
connection with USG's financial restructuring in May 1993 and is being
amortized over a five-year period, reduced operating profit by $42 million in
each first quarter period.
Because of the continuing amortization of excess reorganization value, USG
reports EBITDA (earnings before interest, taxes, depreciation, depletion and
amortization) to facilitate comparisons of current and historical results.
EBITDA amounted to $106 million in the first three months of 1995, an increase
of $40 million, or 60.6%, versus the corresponding 1994 period. (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 first three months of 1995 declined $10 million, or
27.0%, compared with the first three months of 1994 primarily reflecting a
$389 million net reduction of debt principal since March 31, 1994.
Income tax expense amounted to $27 million and $10 million for the three
months ended March 31, 1995 and 1994, respectively. 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 and $34 million were reported in the first three
months of 1995 and 1994, respectively. However, the non-cash amortization of
excess reorganization value and reorganization debt discount (included in
interest expense) reduced net earnings by $43 million, or $0.96 per share, and
$46 million, or $1.17 per share, in the respective quarters.
The following is an analysis of USG's results of operations by core business
(dollars in millions):
<PAGE>
<TABLE>
<CAPTION>
Three Months ended March 31,
Net Sales EBITDA
1995 1994 1995 1994
<S> <C> <C> <C> <C>
North American Gypsum:
U.S. Gypsum Company $ 332 $ 269 $86 $53
L&W Supply Corporation 174 139 4 1
CGC Inc. (gypsum) 25 24 3 2
Other subsidiaries 17 19 5 5
Eliminations (78) (63) - -
Total North American Gypsum 470 388 98 61
Worldwide Ceilings:
USG Interiors, Inc. 95 96 15 13
USG International 56 45 2 1
CGC Inc. (interiors) 8 8 1 1
Eliminations (10) (9) - -
Total Worldwide Ceilings 149 140 18 15
Corporate - - (10) (10)
Eliminations (21) (22) - -
Total USG Corporation 598 506 106 66
</TABLE>
North American Gypsum
Net sales of $470 million increased $82 million, or 21.1%, and EBITDA of $98
million increased $37 million, or 60.7%, over the first three months of 1994.
For U.S. Gypsum, improved results were driven by the continuing strong demand
for gypsum wallboard and related products. Despite unfavorable weather
conditions in several parts of the United States, wallboard shipments in the
first quarter of 1995 totalled 1.925 billion square feet, a first quarter
record and an increase of 3% over the prior-year period. U.S. Gypsum's
wallboard plants operated at 96% of capacity in the first three months of 1995
compared to an industry average of 93%. Realized selling prices for wallboard
averaged $112.26 per thousand square feet, up 25% and 5% compared to the first
and fourth quarters of 1994, respectively. However, improved wallboard
margins resulting from the higher selling prices were partially offset by
increased unit manufacturing costs as a result of the rising cost of purchased
waste paper. Compared to the fourth quarter of 1994, rising waste paper costs
resulted in a $2.50 per thousand square feet increase in wallboard unit
manufacturing costs. Based on preliminary data issued by the U.S. Bureau of
the Census, first quarter 1995 seasonally adjusted annual housing starts
averaged 1.297 million privately owned units, down 5% from the average
reported a year ago for 1994. Due to the lagged effect on demand for
wallboard, first quarter 1995 housing starts will impact second quarter
shipments. Approximately 50% of industry demand for wallboard is generated by
new housing starts.
L&W Supply Corporation, USG's building products distribution business,
experienced the highest level of first quarter net sales in its history. This
performance resulted from record sales of gypsum products, which account for
approximately 50% of L&W Supply's total sales, and increased sales of most
non-gypsum product lines. Improved results for non-gypsum products were led
by drywall metal, ceiling products and insulation.
Results for CGC Inc.'s gypsum business reflect low levels of new residential
construction in eastern Canada, offset by export opportunities and growth in
the repair and remodel market. Consequently, CGC's net sales and EBITDA
improved slightly compared to the first three months of 1994 due to higher
wallboard selling prices and increased shipments of wallboard to the United
States, offset to a large extent by decreased shipments in eastern Canada.
Worldwide Ceilings
Net sales of $149 million increased $9 million, or 6.4%, and EBITDA of $18
million increased $3 million, or 20.0%, over the first three months of 1994.
Slightly lower net sales for USG Interiors reflect the absence of results in
1995 for the floor division which was divested in December 1994. Excluding
floor division results in 1994, net sales and EBITDA for USG Interiors
increased 7.2% and 15.4%, respectively. These improvements reflect higher
average selling prices for ceiling tile and grid and record first quarter
ceiling tile shipments largely due to strong retail and export sales.
USG International reported increased sales in all three of its principal
geographic markets: Europe, Latin America and the Pacific. Results for Europe
benefited from records in production volume, cost performance and net sales.
Liquidity and Capital Resources
The Corporation significantly strengthened its liquidity and capital resources
through its 1993 financial restructuring and subsequent refinancing
activities. A major financial objective of the Corporation following its 1993
restructuring has been to deleverage its balance sheet. Since May 1993,
outstanding debt has been reduced by over $500 million, eliminating most
scheduled maturities until 2000. 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 of March 31, 1995, working capital (current assets less current
liabilities) amounted to $159 million and the ratio of current assets to
current liabilities was 1.38 to 1, versus December 31, 1994 when working
capital amounted to $189 million and the ratio of current assets to current
liabilities was 1.42 to 1.
In the first three months of 1995, cash and cash equivalents decreased to $94
million from $197 million primarily due to a net reduction in debt of $99
million. 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 bank term loans' credit agreement. Receivables (net of
reserves) increased $22 million, or 8.0%, to $296 million, inventories
increased $17 million, or 9.8%, to $190 million and accounts payable increased
$23 million, or 18.9%, to $145 million. These increases primarily reflect
normal seasonal fluctuations.
In the first quarter of 1995, USG's bank term loans' credit agreement was
amended for the fourth time since the 1993 financial restructuring. The
principal change will permit USG to use excess cash flows generated in the
course of a year to make debt paydowns on senior debt and bank term loans in
equal amounts at any time during the year, which under the former cash sweep
provisions of the credit agreement was limited to year-end payments. This
amendment also provides enhanced financial flexibility in the areas of, among
others, repurchases of certain public debt and capital spending.
Capital expenditures amounted to $24 million in the first three months of
1995, compared with $7 million in the corresponding 1994 period. The
Corporation expects that capital expenditures will exceed $100 million in
1995. Substantial capital investments underway at U.S. Gypsum include various
projects that will be completed in 1995 to increase wallboard capacity by 600
million square feet through line accelerations and to reduce manufacturing
costs. USG Interiors announced a $45 million expansion of its ceiling tile
plant in Greenville, Miss., scheduled for completion in 1996 and L&W Supply
continues to expand by adding distribution centers and diversifying its
product offerings. As of March 31, 1995, capital expenditure commitments for
the replacement, modernization and expansion of operations amounted to $102
million compared with $61 million as of December 31, 1994. The Corporation's
capital investment plans for the next several years anticipate 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
the Corporation's current operations, and the Corporation believes that its
available liquidity would be generally adequate to support appropriate
opportunities.
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 are denying coverage for the Property
Damage Cases, although U.S. Gypsum believes that substantial coverage exists
and the trial court and an appellate court in U.S. Gypsum's Coverage Action
have so ruled. The carriers are seeking reconsideration of the Illinois
Supreme Court's refusal to review the appellate court's ruling. In view of
the limited insurance funding currently available to U.S. Gypsum for Property
Damage Cases resulting from continued resistance by a number of U.S. Gypsum's
insurers to providing coverage, the effect of the asbestos litigation on the
Corporation will depend upon a variety of factors, including the damages
sought in Property Damage Cases that reach trial prior to the completion of
the Coverage Action, U.S. Gypsum's ability to successfully defend or settle
such cases, and the resolution of the Coverage Action. As a result,
management is unable to determine whether an adverse outcome in the asbestos
litigation will have a material adverse effect on the results of operations or
the consolidated financial position of the Corporation.
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 March 31, 1995,
and the related condensed consolidated statement of earnings and the condensed
consolidated statement of cash flows for the three-month period ended March
31, 1995. 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
April 21, 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 March
31, 1995, 40 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 37 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 and others that request such certification. On
April 10, 1992, a state court in Philadelphia certified a class consisting of
all owners of buildings leased to the federal government. (Prince George
Center, Inc. v. U.S. Gypsum Co., et al., Court of Common Pleas, Philadelphia,
Pa.) On September 4, 1992, a Federal district court in South Carolina
conditionally certified a class comprised of all colleges and universities in
the United States, which certification is presently limited to the resolution
of certain allegedly "common" liability issues. (Central Wesleyan College v.
W.R. Grace & Co., et al, U.S.D.C. S.C.).
In October 1994, U.S. Gypsum executed agreements to settle two 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 earning 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
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 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. A case which
has yet to be certified as a class action was filed in federal court in the
Eastern District of Texas on August 8, 1994. (Kirbyville Independent School
District v. U.S. Gypsum, et al., United States District Court for the Eastern
District of Texas, Beaumont Division). The case purports to be a class action
on behalf of all public building owners and political subdivisions of the
State of Texas, including all cities, counties and municipalities. The
damages claimed against U.S. Gypsum in the class action cases are unspecified.
In total, U.S. Gypsum has settled approximately 94 Property Damage Cases,
involving 210 plaintiffs, in addition to the two school class action
settlements referred to above. Twenty-four cases have been tried to verdict,
15 of which were won by U.S. Gypsum and 5 lost; three other cases, one won at
the trial level and two lost, were settled during appeals. Another case that
was lost at the trial court level was reversed on appeal and remanded to the
trial court, which has now entered judgment for U.S. Gypsum. Appeals on post-
trial motions are pending in 4 of the tried cases. In the cases lost,
compensatory damage awards against U.S. Gypsum have totalled $11.5 million.
Punitive damages totalling $5.5 million were entered against U.S. Gypsum in
four trials. Two of the punitive damage awards, totalling $1.45 million, were
paid after appeals were exhausted; and two were settled during the appellate
process.
In 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 54,000 claimants pending as
of March 31, 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 remains 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 250,000 purported class members "opted out,"
or elected to be excluded from the settlement, the district court has found
that many of such opt outs resulted from the dissemination by certain
plaintiffs' attorneys of deceptive information concerning the settlement; as a
result, the court has ordered the resolicitation of individuals who opted out
in order to determine whether they still wish to exclude themselves from the
settlements. 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 are
committed to providing personal injury coverage in accordance with the
Wellington Agreement. U.S. Gypsum's claims against the remaining carriers for
coverage for the Personal Injury Cases have been stayed since 1984.
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. On April 24, 1995,
the carriers requested reconsideration of the Supreme Court's refusal to
review the Appellate Court's ruling. Once 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
that 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.
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 next 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 was paid in April 1995 with the rest to be paid in three annual
installments. 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 carries in the Wellington Agreement, and consumption through
December 31, 1994, carriers providing a total of approximately $94 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 $210 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 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 6. Exhibits and Reports on Form 8-K
(a) (10) Fourth Amendment, dated as of March 17, 1995, to
Amended and Restated Credit Agreement between USG
Corporation and USG Interiors, Inc., as borrowers; the
Financial Institutions listed on the signature pages
thereof, as Senior Lenders; Bankers Trust Company,
Chemical Bank and Citibank, N.A., as Agents; and
Citibank, N.A. as Administrative Agent.
(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 first quarter
of 1995.
Exhibits (10) and (27), which have been filed as part of this Form 10-Q, are
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
May 9, 1995 By / s / Raymond T. Belz
Raymond T. Belz, Vice President and
Controller, USG Corporation
Exhibit (15)
May 11, 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 March 31, 1995, which includes our report dated
April 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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<OTHER-EXPENSES> 60
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EXHIBIT 10
FOURTH AMENDMENT
Dated as of March 17, 1995
to
AMENDED AND RESTATED CREDIT AGREEMENT
Dated as of May 6, 1993
This FOURTH AMENDMENT (this "Fourth Amendment") dated
as of March 17, 1995 is entered into among USG CORPORATION (the
"Company"), USG INTERIORS, INC. ("Interiors") (the Company and
Interiors being sometimes collectively referred to herein as the
"Borrowers"), the FINANCIAL INSTITUTIONS LISTED ON THE SIGNATURE
PAGES HEREOF (collectively referred to herein, together with
their respective successors and assigns, as the "Senior Lenders"
and individually as a "Senior Lender"), BANKERS TRUST COMPANY,
CHEMICAL BANK and CITIBANK, N.A. ("Citibank"), in their
capacities as agents for the Senior Lenders hereunder (in such
capacities, the "Agents"), and CITIBANK, in its separate capacity
as administrative agent for the Senior Lenders hereunder (in such
capacity, the "Administrative Agent").
PRELIMINARY STATEMENTS. (1) The Borrowers, the Senior
Lenders, the Agents and the Administrative Agent have entered
into the Amended and Restated Credit Agreement dated as of May 6,
1993 (as amended pursuant to that certain First Amendment dated
as of August 1, 1993 (the "First Amendment"), that certain Second
Amendment dated as of January 31, 1994 (the "Second Amendment")
and that certain Third Amendment dated as of August 11, 1994 (the
"Third Amendment"), the "Credit Agreement") and have agreed to
further amend the Credit Agreement as hereinafter set forth.
(2) Capitalized terms used herein and not otherwise
defined herein shall have the meanings ascribed to such terms in
the Credit Agreement. Unless referring to a section of this
Fourth Amendment, all section references contained herein are
references to section numbers as they appear in the Credit
Agreement.
SECTION 1. Amendments to the Credit Agreement. Upon
the occurrence of the "Fourth Amendment Effective Date" (as
defined in Section 3 below), the Credit Agreement is amended as
follows:
1.1. Amendments to Defined Terms.
(a) Section 1.01 of the Credit Agreement is hereby
amended as follows:
(i) The defined term "Cash Sweep Termination
Date" is deleted in its entirety.
(ii) The following defined term is inserted in
Section 1.01 immediately following the defined term "CGC
Permitted Indebtedness":
"CGC Stock Purchase Payments" shall have the
meaning ascribed to such term in Section 8.05(vii).
(iii) The defined term "Restricted Subsidiary" is
amended and restated in its entirety as follows:
"Restricted Subsidiary" shall mean (i) each
Subsidiary of the Company which has executed any of the
Subsidiary Guaranties, (ii) each Subsidiary of the
Company the capital stock of which is subject to the
Company Pledge Agreement or any of the Subsidiary
Pledge Agreements, (iii) Donn Canada Limited, a
corporation organized under the laws of Canada, (iv)
C.N.G. Distribution Limited, a corporation organized
under the laws of Canada, and (v) CGC.
(b) Section 1.02 of the Credit Agreement is hereby
amended to delete the term "Cash Sweep Termination Date" in its
entirety.
1.2. Amendments to Mandatory Prepayment of Cash
Available for Sweep. Section 2.06(b)(i) of the Credit Agreement
is amended as follows:
(a) Section 2.06(b)(i)(A) is hereby amended to delete
the following parenthetical phrases which appear therein: (i)
"(unless the Cash Sweep Termination Date has occurred on or
before such Test Date)" and (ii) "(unless the Cash Sweep
Termination Date has occurred on or before the immediately
preceding Test Date)".
(b) Section 2.06(b)(i)(B) is hereby amended to:
(i) Delete in its entirety the definition of the
term "Cash Sweep Termination Date".
(ii) Insert the word "Unrestricted" in the
definition of the term "Minimum Liquidity" immediately
before the words "Retained Amounts" therein.
(iii) Amend and restate the definition of the
term "Sweep Percentage" in its entirety as follows:
"'Sweep Percentage' means (i) 100% for the
Test Dates occurring in 1995 and 1996, (ii) 90% for
each of the Test Dates occurring in 1997 and 1998, and
(iii) 85% for the Test Date occurring in 1999 and any
subsequent Test Dates; provided, that the Sweep
Percentage shall be 50% for any Test Date for which the
ratio of "Debt" as of the last day of the immediately
preceding Fiscal Year to "EBITDA" for such Fiscal Year
(as such terms are defined in Section 9.01 hereof, but
without reference to Section 9.10 hereof) was less than
4.0 to 1.0; and provided, further, that the Sweep
Percentage shall be 0% for any Test Date on which the
aggregate principal amount of outstanding Term Loans is
less than or equal to $150,000,000."
1.3. Amendment to Mandatory Prepayments. Section
2.06(b) of the Credit Agreement is hereby further amended to
insert the following subsection (iii):
"(iii) Certain Public Debt Investments. So long
as (and only to the extent that) the outstanding principal
amount of the Term Loans is greater than $150,000,000, the
Company shall make or cause to be made a mandatory
prepayment of the Term Loans, applied in the order of
maturity, in an amount equal to the amount of each
Investment in Public Debt made under Section 8.03(ix)(b)
hereof, such mandatory prepayment to be made at any time on
or after the making of such Investment, but in no event
later than the tenth (10th) day following the last day of
the calendar quarter in which such Investment was made."
1.4. Amendments to Reporting Covenant. Section 6.01
of the Credit Agreement is hereby amended as follows:
(a) Section 6.01(a) of the Credit Agreement is amended
to add the following proviso at the end thereof:
"provided, that the Company shall have no obligation to
deliver the foregoing documents for any fiscal month for
which the ratio of 'Debt' as of the last day of the
immediately preceding fiscal quarter to 'EBITDA' for the 12-
month period ending on the last day of such fiscal quarter
(as such terms are defined in Section 9.01 hereof, but
without reference to Section 9.10 hereof) was less than 4.0
to 1.0;"
(b) Section 6.01(b) of the Credit Agreement is amended
to insert the following immediately after the word "above" in the
second line thereof: "or pursuant to clause (c) below".
1.5. Amendments to Investments Covenant. Section 8.03
of the Credit Agreement is hereby amended as follows:
(a) Section 8.03(viii) of the Credit Agreement is
amended to delete clause (E) thereof in its entirety.
(b) Section 8.03 of the Credit Agreement is further
amended to delete clauses (ix) and (x) thereof in their entirety
and to substitute therefor the following:
"(ix) Investments in Public Debt, in order to
effectuate the prepayment (or defeasance, subject to
restrictions acceptable to the Agents) of such Public Debt,
made with (a) Unrestricted Retained Amounts or (b) other
funds, provided that with respect to Investments under this
clause (b), Available Liquidity (as defined in Section
2.06(b)(i) hereof but calculated as of the time of such
Investment and after giving effect thereto and to the
mandatory prepayment of the Term Loans required as a result
thereof under Section 2.06(b)(iii)) shall equal or exceed
$100,000,000;
(x) Investments, not otherwise described in
clauses (i) through (ix) above, in 10-1/4% Senior Notes, in
order to effectuate the prepayment (or defeasance, subject
to restrictions acceptable to the Agents) thereof, not
exceeding $30,000,000 in the aggregate amount at any one
time outstanding; and
(xi) any other Investments not otherwise
described in clauses (i) through (x) above, not exceeding
Forty Million Dollars ($40,000,000) in the aggregate at any
one time outstanding; provided, that Investments in Public
Debt under this clause (xi) shall not at any one time exceed
an aggregate amount of $5,000,000."
1.6. Amendment to Restricted Junior Payments Covenant.
Section 8.05 of the Credit Agreement is amended to delete clause
(vii) thereof and to substitute therefor the following:
"(vii) the purchase, repurchase, acquisition or
redemption (as applicable) of the publicly owned common
stock of CGC by (A) CGC, in an amount not to exceed 10% of
its total outstanding shares of common stock in any single
calendar year and/or (B) the Company (each payment by the
Company for such stock being a "CGC Stock Purchase
Payment")."
1.7. Amendment to Capital Expenditures Covenant.
Section 9.08 of the Credit Agreement is hereby amended to (a)
insert the words "Unrestricted Retained Amounts" in clause (v)
thereof, and (b) insert the following at the end of such Section
9.08:
"For the purposes of the foregoing, so long as the aggregate
outstanding principal amount of Term Loans is greater than
$150,000,000, all CGC Stock Purchase Payments made by the
Company during any Fiscal Year shall be deemed Capital
Expenditures and shall reduce the aggregate amount of
Capital Expenditures permitted in such Fiscal Year
accordingly; provided, that the Company may make CGC Stock
Purchase Payments during a Fiscal Year in excess of the then
remaining amount of Capital Expenditures permitted
hereunder, in which case no further Capital Expenditures may
be made by the Company and its Subsidiaries during such
Fiscal Year and the amount of CGC Stock Purchase Payments
made in excess of such remaining amount of permitted Capital
Expenditures shall be allocated to the following Fiscal Year
(and, if necessary, succeeding Fiscal Years). It is
understood that, once the aggregate outstanding principal
amount of Term Loans is less than or equal to $150,000,000,
all such CGC Stock Purchase Payments shall be deemed not to
have been Capital Expenditures ab initio, and the Company
and its Subsidiaries shall be entitled to the use of Base
Capital Expenditures Allowances under clause (viii) above
for prior Fiscal Years without regard to any deemed use on
account of CGC Stock Purchase Payments."
SECTION 2. Release of Capital Stock of CGC and USG
Interiors (Donn) S.A. Pursuant to Section 12.01(c)(ii) of the
Credit Agreement, the Requisite Senior Lenders hereby direct the
Collateral Trustee to (i) release the capital stock of each of
CGC and USG Interiors (Donn) S.A. ("Donn") from the Liens granted
to the Collateral Trustee pursuant to the applicable Subsidiary
Pledge Agreements executed by Foreign Investments, (ii) deliver
the stock certificates and stock powers relating to such
Subsidiaries to the Company, and (iii) cancel and terminate the
Subsidiary Pledge Agreement pursuant to which the capital stock
of Donn was pledged.
SECTION 3. Conditions Precedent to Effectiveness.
This Fourth Amendment shall become effective as of the date (the
"Fourth Amendment Effective Date") on which each of the following
conditions precedent shall have occurred:
(a) Documentation. The Agents shall have received all
of the following:
(i) Counterparts of this Fourth Amendment executed by
both of the Borrowers, the Agents, the Administrative Agent and
Senior Lenders whose Term Loans and Revolving Loan Commitments
aggregate 66-2/3% or more of the sum of the then aggregate unpaid
principal balance of the Term Loans and the then aggregate
principal amount of the Revolving Loan Commitments;
(ii) Reaffirmations of Guaranties executed by the
Company and each Subsidiary party to a Subsidiary Guaranty, in
form and substance reasonably satisfactory to the Agents and
counsel for the Agents;
(iii) The opinion of the Assistant General Counsel of
the Company and Interiors relating to such matters as the Agents
deem appropriate and in form and substance reasonably
satisfactory to the Agents and counsel for the Agents;
(iv) A certificate of the Secretary or Assistant
Secretary of the Company certifying (A) the names and true
signatures of the incumbent officers of the Company authorized to
sign this Fourth Amendment and all other Loan Documents executed
by the Company in connection herewith and (B) the resolutions of
the Company's Board of Directors approving and authorizing the
execution, delivery and performance of this Fourth Amendment and
all other Loan Documents executed by the Company in connection
herewith; and
(v) A certificate of the Secretary or Assistant
Secretary of Interiors certifying (A) the names and true
signatures of the incumbent officers of Interiors authorized to
sign this Fourth Amendment and all other Loan Documents executed
by Interiors in connection herewith and (B) the resolutions of
Interiors' Board of Directors approving and authorizing the
execution, delivery and performance of this Fourth Amendment and
all other Loan Documents executed by Interiors in connection
herewith.
(b) No Events of Default. No Event of Default or
Potential Event of Default shall have occurred and be continuing.
SECTION 4. Confirmation of Credit Agreement. Except
as herein expressly amended, the Credit Agreement is ratified and
confirmed in all respects and shall remain in full force and
effect in accordance with its terms. Each reference in the
Credit Agreement to "this Agreement" shall mean the Credit
Agreement as amended by the First Amendment, the Second
Amendment, the Third Amendment and this Fourth Amendment, and as
hereafter amended or restated.
SECTION 5. Costs and Expenses. Each Borrower agrees
to pay on demand all costs and expenses of the Administrative
Agent and the Agents in connection with the preparation,
reproduction, execution and delivery of this Fourth Amendment,
including the reasonable fees and out-of-pocket expenses of
Sidley & Austin, counsel for the Agents.
SECTION 6. Successors and Assigns. This Fourth
Amendment and the other Loan Documents executed in connection
herewith shall be binding upon the parties hereto and thereto and
their respective successors and assigns (including, without
limitation, a receiver, trustee or debtor-in-possession of any of
the Borrowers) and shall inure to the benefit of the parties
hereto and thereto and the successors and permitted assigns of
the Senior Lenders, the Agents and the Issuing Banks.
SECTION 7. Execution in Counterparts. This Fourth
Amendment may be executed and delivered in any number of
counterparts and by different parties hereto in separate
counterparts, each of which when so executed and delivered shall
be deemed to be an original and all of which taken together shall
constitute one and the same original agreement.
SECTION 8. Governing Law. This Fourth Amendment shall
be governed by and construed in accordance with the laws of the
State of New York.
SECTION 9. Headings. Section headings in this Fourth
Amendment are included herein for convenience of reference only
and shall not constitute a part of this Fourth Amendment for any
other purpose.
IN WITNESS WHEREOF, the parties hereto have caused this
Fourth Amendment to be executed by their respective officers
thereunto duly authorized as of the date first above written.
USG CORPORATION
By____________________________
Title:
USG INTERIORS, INC.
By____________________________
Title:
CITIBANK, N.A.,
as Administrative Agent, as an
Agent and as a Senior Lender
By
Title:
BANKERS TRUST COMPANY, as an
Agent and as a Senior Lender
By
Title:
CHEMICAL BANK, as an Agent
and as a Senior Lender
By
Title:
