-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, pXbPiCPZXHQcIRkHe08hF+9LILd7S2yPze+YEsadHG8ZVlqH1fw/KSQVBmzWVnBM dtKyeZbcuvxIeTFsVCax6Q== 0000757011-94-000008.txt : 19940914 0000757011-94-000008.hdr.sgml : 19940914 ACCESSION NUMBER: 0000757011-94-000008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19940630 FILED AS OF DATE: 19940812 FILER: COMPANY DATA: COMPANY CONFORMED NAME: USG CORP CENTRAL INDEX KEY: 0000757011 STANDARD INDUSTRIAL CLASSIFICATION: 3270 IRS NUMBER: 363329400 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08864 FILM NUMBER: 94543192 BUSINESS ADDRESS: STREET 1: 125 S FRANKLIN ST STREET 2: DEPT. 188 CITY: CHICAGO STATE: IL ZIP: 60606 BUSINESS PHONE: 3126065439 10-Q 1 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, 1994 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 1-8864 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, 1994, 45,058,760 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, 1994, May 7 through June 30, 1993, April 1 through May 6, 1993 and January 1 through March 31, 1993 Consolidated Balance Sheet: As of June 30, 1994 and December 31, 1993 Consolidated Statement of Cash Flows: Six Months Ended June 30, 1994, May 7 through June 30, 1993 and January 1 through May 6, 1993 Notes to Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition Report of Independent Public Accountants PART II OTHER INFORMATION Item 1. Legal Proceedings Item 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: USG CORPORATION CONSOLIDATED STATEMENT OF EARNINGS (Dollars in millions except per share data) (Unaudited)
1994 (a) 1993 (a) 1993 Three Months Six Months May 7 April 1 Three Months ended ended through through ended June 30 June 30 June 30 May 6 March 31 Net Sales $ 562 $ 1,068 $ 315 $ 155 $ 436 Cost of products sold 429 825 252 125 357 Gross Profit 133 243 63 30 79 Selling and administrative expenses 59 116 36 19 52 Amortization of excess reorganization value 42 84 28 - - Operating Profit/(Loss) 32 43 (1) 11 27 Interest expense 33 70 22 11 75 Interest income (2) (5) (1) - (2) Other expense/(income), net 1 2 (2) (1) 7 Reorganization items - - - (778) 69 Earnings/(Loss) Before Taxes on Income, Extraordinary Gain and Changes in Accounting Principles - (24) (20) 779 (122) Taxes on income 17 27 1 10 7 Earnings/(Loss) Before Extraordinary Gain and Changes in Accounting Principles (17) (51) (21) 769 (129) Extraordinary gain, net of taxes - - - 944 - Cumulative effect of changes in accounting principles, net - - - - (150) Net Earnings/(Loss) (17) (51) (21) 1,713 (279) Average number of common shares (b) 45,057,848 41,672,968 37,157,458 Net Loss Per Common Share (b) $ (0.38) $ (1.23) $ (0.57) Dividends paid per common share (b) - - - (a) Due to the Restructuring and implementation of fresh start accounting, financial statements after May 6, 1993 for the restructured company are not comparable to financial statements prior to that date. See "Notes to Consolidated Financial Statements - Note (3)" for more information on the Restructuring and implementation of fresh start accounting. (b) Common shares and per share data for periods prior to May 7, 1993 are omitted because, due to the Restructuring and implementation of fresh start accounting, they are not meaningful. See accompanying Notes to Consolidated Financial Statements.
USG CORPORATION CONSOLIDATED BALANCE SHEET (Dollars in millions) (Unaudited)
As of As of June 30, December 31, 1994 1993 Assets Current Assets: Cash and cash equivalents $ 242 $ 211 Receivables (net of reserves - 1994 $13; 1993 $13) 299 264 Inventories 179 145 Total current assets 720 620 Property, Plant and Equipment (net of reserves for depreciation and depletion - 1994 $61; 1993 $36) 749 754 Excess Reorganization Value (net of accumulated amortization - 1994 $197; 1993 $113) 646 735 Other Assets 164 54 Total assets 2,279 2,163 Liabilities and Stockholders' Equity Current Liabilities: Accounts payable $ 134 $ 104 Accrued expenses 209 208 Notes payable 9 2 Long-term debt maturing within one year 8 165 Taxes on income 36 20 Total current liabilities 396 499 Long-Term Debt 1,251 1,309 Deferred Income Taxes 182 180 Other Liabilities 416 309 Stockholders' Equity/(Deficit): Preferred stock - - Common stock 5 4 Capital received in excess of par value 221 - Deferred currency translation (12) (9) Reinvested earnings/(deficit) (180) (129) Total stockholders' equity/(deficit) 34 (134) Total liabilities and stockholders' equity 2,279 2,163 See accompanying Notes to Consolidated Financial Statements.
USG CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (Dollars in millions) (Unaudited)
Six Months May 7 January 1 ended through through June 30, June 30, May 6, 1994 (a) 1993 (a) 1993 Cash Flows From Operating Activities: Net earnings/(loss) $ (51) $ (21) $ 1,434 Adjustments to reconcile net earnings/(loss) to net cash: Amortization of excess reorganization value 84 28 - Cumulative effect of accounting changes - - 150 Depreciation, depletion and other amortization 35 12 22 Interest expense on pay-in-kind debentures - - 17 Deferred income taxes 2 - (13) Net gain/(loss) on asset dispositions - (2) 4 (Increase)/decrease in working capital: Receivables (35) 21 18 Inventories (34) (3) (8) Payables 46 4 3 Accrued expenses 1 9 15 (Increase)/decrease in other assets (10) 3 (12) Increase in other liabilities 8 - 4 Changes due to reorganization items: Increase in reorganization items - - 65 Net adjustments to fair value - - (759) Gain on discharge of prepetition liabilities - - (944) Payment of liabilities net of collection of letter of credit - - (7) Other, net (2) (3) (3) Net cash flows (to)/from operating activities 44 48 (14) Cash Flows From Investing Activities: Capital expenditures (21) (7) (12) Net proceeds from asset dispositions 1 2 - Net cash flows to investing activities (20) (5) (12) Cash Flows From Financing Activities: Issuance of debt 137 10 5 Repayment of debt (354) (13) (142) Proceeds from public offering of common stock 224 - - Decrease in restricted assets - - 32 Net cash flows (to)/from financing activities 7 (3) (105) Net Increase/(Decrease) in Cash and Cash Equivalents 31 40 (131) Cash and cash equivalents as of beginning of period 211 49 180 Cash and cash equivalents as of end of period 242 89 49 Supplemental Cash Flow Disclosures: Interest paid 58 12 58 Income taxes paid 8 1 3 (a) Due to the Restructuring and implementation of fresh start accounting, financial statements after May 6, 1993 for the restructured company are not comparable to financial statements prior to that date. See "Notes to Consolidated Financial Statements - Note (3)" for more information on the Restructuring and implementation of fresh start accounting. See accompanying Notes to Consolidated Financial Statements.
USG CORPORATION Notes to Consolidated Financial Statements (Unaudited) (1) The consolidated financial statements of USG Corporation and its subsidiaries ("the Corporation") included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the statements reflect all adjustments, which are of a normal recurring nature, necessary to present fairly the Corporation's financial position as of June 30, 1994 and December 31, 1993; results of operations for the three months and six months ended June 30, 1994, and the periods of May 7 through June 30, 1993, April 1 through May 6, 1993, and the three months ended March 31, 1993; and cash flows for the six months ended June 30, 1994 and the periods of May 7 through June 30, 1993 and January 1 through May 6, 1993. While these interim financial statements and accompanying notes are unaudited, they have been reviewed by Arthur Andersen & Co., the Corporation's independent public accountants. These financial statements are to be read in conjunction with the financial statements and notes included in the Corporation's 1993 Annual Report on Form 10-K dated March 14, 1994. (2) In the first quarter of 1994, the Corporation implemented a refinancing plan which included (i) a public offering 14,375,000 shares of common stock (the "Equity Offering"), of which 7,900,000 shares, yielding net proceeds to the Corporation of $224 million, were newly issued by the Corporation and 6,475,000 were sold by Water Street Corporate Recovery Fund I, L.P., a stockholder; (ii) the issuance of $150 million of 9 1/4% senior notes due 2001 to certain institutional investors (the "Note Placement") in exchange for $30 million aggregate principal amount of its outstanding 8% senior notes due 1996 (the "Senior 1996 Notes"), $35 million aggregate principal amount of its outstanding 8% senior notes due 1997 (the "Senior 1997 Notes") and $85 million in cash; and (iii) amendment of the Corporation's bank credit agreement (the "Credit Agreement") for the second time since the Restructuring. This amendment (the "Second Amendment" and, together with the Equity Offering and the Note Placement, the "Transactions") increased the size of the Corporation's revolving credit facility by $70 million and amended mandatory bank term loan prepayment provisions to allow the Corporation, upon the achievement of certain financial tests, to retain additional free cash flow for capital expenditures and repayment of its public debt. The net proceeds from the Equity Offering and Note Placement, along with $158 million of excess cash as of December 31, 1993 (as calculated in accordance with the cash sweep mechanism of the Credit Agreement) are being used by the Corporation to prepay, redeem or repurchase public and bank debt and for general corporate purposes, including capital expenditures for cost reduction, capacity improvement and future growth opportunities. In the first six months of 1994, the Corporation (i) prepaid $140 million of bank term loans in satisfaction of 1997 and 1998 scheduled payments, (ii) purchased $31 million aggregate principal amount of Senior 1996 Notes and $24 million aggregate principal amount of Senior 1997 Notes and (iii) redeemed, at 100% of principal amount, $75 million of its 8% senior notes due 1995 and $35 million of its 9% senior notes due 1998. (3) On May 6, 1993, the Corporation completed a comprehensive restructuring of its debt (the "Restructuring") through the implementation of a "prepackaged" plan of reorganization (the "Prepackaged Plan"). In accordance with the terms of the Prepackaged Plan, $1.4 billion of debt and accrued interest was converted into equity, interest expense was significantly reduced and the maturities of a substantial portion of its remaining debt were extended. The Corporation accounted for the Restructuring using the principles of fresh start accounting as required by AICPA Statement of Position 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code" ("SOP 90-7"). Pursuant to such principles, individual assets and liabilities were adjusted to fair market value as of May 6, 1993. Excess reorganization value, the portion of the reorganization value not attributable to specific assets, is being amortized over a five- year period, effective May 7, 1993. In August 1993, the Corporation completed an exchange offer that converted $138 million of bank debt into senior notes due 2002. See the Corporation's 1993 Annual Report of Form 10-K dated March 14, 1994 for more information on the Restructuring, implementation of fresh start accounting and exchange of senior notes for bank debt. Due to the Restructuring and implementation of fresh start accounting, financial statements after May 6, 1993 for the restructured company are not comparable to financial statements prior to that date. For year-to-year comparability of results, the following unaudited Pro Forma Consolidated Statement of Earnings for the six months ended June 30, 1993 has been prepared giving effect to the consummation of the Prepackaged Plan including the costs related thereto, in accordance with SOP 90-7, as if the consummation had occurred on January 1, 1993. The adjustments set forth under the caption "Pro Forma Adjustments" reflect the assumed effects of the Restructuring and the adoption of fresh start accounting prescribed by SOP 90-7. USG CORPORATION PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS Six Months ended June 30, 1993 (unaudited) (Dollars in millions)
Total Before Pro Forma Adjustments Adjustments Pro Forma Net sales $ 906 $ - $ 906 Cost of products sold 734 - 734 Gross profit 172 - 172 Selling and administrative expenses 107 - 107 Amortization of excess reorganization value 28 57 (a) 85 Operating profit/(loss) 37 (57) (20) Interest expense 108 (42) (b) 66 Interest income (3) - (3) Other expense, net 4 (1) (c) 3 Reorganization items (709) 709 (d) - Earnings/(loss) before taxes on income, extraordinary gain and changes in accounting principles 637 (723) (86) Taxes on income 18 (16) 2 Earnings/(loss) before extraordinary gain and changes in accounting principles 619 (707) (88) (a) Reflects amortization of excess reorganization value which would have been recorded during the period of January 1 through May 6, 1993. (b) Reflects the adjustment to restate interest expense for the first six months of 1993 to the amount that would have been recorded. (c) Represents the reversal of first quarter 1993 amortization of historical capitalized financing costs which were written off in connection with the Restructuring. (d) Represents the reversal of actual reorganization items incurred in connection with the Restructuring in the period of January 1 through May 6, 1993. These expenses would have been recorded in 1992 had the Restructuring occurred on January 1, 1993.
(4) A one-time after-tax charge of $150 million was recorded in the first quarter of 1993 representing the adoption of: (i) Statement of Financial Accounting Standard ("SFAS") No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," - $180 million expense; and (ii) SFAS No. 109, "Accounting for Income Taxes," - $30 million income. Neither of these standards impact cash flow. (5) Income tax expense for the three months and six months ended June 30, 1994 amounted to $17 million and $27 million, respectively. For the period of May 7 through June 30, 1993, income tax expense amounted to $1 million. These expenses resulted primarily from tax expense on foreign subsidiary earnings and the inability to benefit the amortization of excess reorganization value and the domestic net operating loss carryforwards ("NOL Carryforwards"). For the first quarter of 1993 and the period of April 1 through May 6, 1993, income tax expense was $7 million and $10 million, respectively, due to tax expense on foreign subsidiary earnings, the inability to benefit the NOL Carryforwards as an offset to deferred taxes and the non-taxable effect of fresh start accounting. The Corporation has an NOL Carryforward of $99 million remaining from 1992. This NOL Carryforward may be used to offset U.S. taxable income through 2007. The Internal Revenue Code (the "Code") will limit the Corporation's annual use of its NOL Carryforward to the lesser of its taxable income or approximately $30 million plus any unused limit from prior years. Furthermore, due to the uncertainty regarding the application of the Code to the exchange of stock for debt, the Corporation's NOL Carryforward could be further reduced or eliminated. The Corporation has a $4 million minimum tax credit which may be used to offset U.S. regular tax liability in future years. (6) As of June 30, 1994, 2,788,350 common shares were reserved for future issuance in conjunction with stock options. Options for 1,673,000 common shares and 933,000 common shares were granted on June 1, 1993 and February 9, 1994, respectively, leaving an additional 182,350 common shares available for future grants. (7) One of the Corporation's operating subsidiaries, United States Gypsum Company ("U.S. Gypsum"), is a defendant in asbestos lawsuits alleging both property damage and personal injury. This litigation has not had a material effect on the Corporation's liquidity or earnings. Virtually all costs of the Personal Injury Cases are being paid by insurance. However, many of U.S. Gypsum's insurance carriers are denying coverage for the Property Damage Cases, although U.S. Gypsum believes that substantial coverage exists and the trial court in U.S. Gypsum's Coverage Action has so ruled (such ruling has been appealed). In view of the limited insurance funding currently available to U.S. Gypsum for Property Damage Cases resulting from continued resistance by a number of U.S. Gypsum's insurers to providing coverage, the effect of the asbestos litigation on the Corporation will depend upon a variety of factors, including the damages sought in Property Damage Cases that reach trial prior to the completion of the Coverage Action, U.S. Gypsum's ability to successfully defend or settle such cases, and the resolution of the Coverage Action. As a result, management is unable to determine whether an adverse outcome in the asbestos litigation will have a material adverse effect on the results of operations or the consolidated financial position of the Corporation. Effective January 1, 1994, the Corporation adopted the requirements of Financial Accounting Standards Board Interpretation No. 39. In accordance with Interpretation No. 39, U.S. Gypsum recorded an accrual of $100 million for its liabilities for asbestos-related matters which are deemed probable and can be reasonably estimated, and separately recorded an asset of $100 million, the amount of such liabilities that is expected to be paid by uncontested insurance. Due to management's inability to reasonably estimate U.S. Gypsum's liability for Property Damage Cases and (until the implementation of Georgine et al. v. Amchem Products In., et al is deemed probable) future Personal Injury Cases, the liability and asset recorded relate only to pending Personal Injury Cases. The implementation of Interpretation No. 39 did not impact earnings, cash flow or net assets. See Part II, Item 1. "Legal Proceedings" for information on asbestos litigation and definitions of capitalized terms. The Corporation and certain of its subsidiaries have been notified by state and federal environmental protection agencies of possible involvement as one of numerous "potentially responsible parties" in a number of so-called "Superfund" sites in the United States. The Corporation does not presently anticipate any material adverse effect upon its earnings or consolidated financial position arising out of the resolution of these matters or any other pending governmental proceeding regarding environmental matters. (8) USG Corporation, a holding company, owns several operating subsidiaries, including U.S. Gypsum. On January 1, 1985, all of the issued and outstanding shares of stock of U.S. Gypsum were converted into shares of USG Corporation and the holding company became a joint and several obligor for certain debentures originally issued by U.S. Gypsum. The outstanding balance of such debentures, which is carried on the holding company's books of account, totaled $32 million and $36 million as of June 30, 1994 and December 31, 1993, respectively. Summary financial results for U.S. Gypsum are presented below (dollars in millions):
1994 (a) 1993 (a) 1993 Three Months Six Months May 7 April 1 Three Months ended ended through through ended Summary Statement of Earnings June 30 June 30 June 30 May 6 March 31 Net sales $ 290 $ 559 $ 161 $ 74 $ 223 Cost and expenses 230 454 142 67 201 Amortization of excess reorganization value 16 31 10 - - Operating profit 44 74 9 7 22 Corporate charges 22 46 13 13 39 Reorganization items - - - (295) - Earnings/(loss) before taxes on income and change in accounting principle 22 28 (4) 289 (17) Income tax/(tax benefit) 14 23 3 (1) (6) Earnings/(loss) before change in accounting principle 8 5 (7) 290 (11) Cumulative effect of change in accounting principle - - - - 28 Net earnings/loss 8 5 (7) 290 17
As of As of June 30, December 31, Summary Balance Sheet 1994 1993 Current assets $ 257 $ 190 Property, plant and equipment, net 480 483 Excess reorganization value, net 235 265 Other assets 106 3 Total assets 1,078 941 Current liabilities 157 124 Other liabilities and obligations 247 149 Stockholder's equity 674 668 Total liabilities and stockholder's equity 1,078 941 (a) Due to the Restructuring and implementation of fresh start accounting, financial statements after May 6, 1993 for the restructured company are not comparable to financial statements prior to that date. See "Notes to Consolidated Financial Statements - Note (3)" for more information on the Restructuring and implementation of fresh start accounting.
(9) The Corporation issued $478 million aggregate principal amount of 10 1/4% senior notes due 2002 (the "10 1/4% Senior Notes") in 1993. Each of U.S. Gypsum, USG Industries, Inc., USG Interiors, Inc. ("USG Interiors"), USG Foreign Investments, Ltd., L&W Supply Corporation ("L&W Supply"), Westbank Planting Company, USG Interiors International, Inc., American Metals Corporation and La Mirada Products Co., Inc. (together, the "Combined Guarantors") guaranteed, in the manner described below, the obligations of the Corporation under the Credit Agreement and the 10 1/4% Senior Notes. The Combined Guarantors are jointly and severally liable under the guarantees. Holders of the debt issued under the Credit Agreement (the "Bank Debt") have the right to: (i) determine whether, when and to what extent the guarantees will be enforced (provided that each guarantee payment will be applied to the Bank Debt and 10 1/4% Senior Notes pro rata based on the respective amounts owed thereon); and (ii) amend or eliminate the guarantees. The guarantees will terminate when the Bank Debt is retired regardless of whether any 10 1/4% Senior Notes remain outstanding. The liability of each of the Combined Guarantors on its guarantee is limited to the greater of: (i) 95% of the lowest amount, calculated as of July 13, 1988, sufficient to render the guarantor insolvent, leave the guarantor with unreasonably small capital or leave the guarantor unable to pay its debts as they become due (each as defined under applicable law); and (ii) the same amount, calculated as of the date any demand for payment under such guarantee is made, in each case plus collection costs. The guarantees are senior obligations of the applicable guarantor and rank pari passu with all unsubordinated obligations of the guarantor. There are 43 Non-Guarantors (the "Combined Non-Guarantors"), substantially all of which are subsidiaries of Guarantors. The Combined Non-Guarantors primarily include CGC Inc. ("CGC"), the Corporation's 76%-owned Canadian subsidiary, Gypsum Transportation Limited, USG Canadian Mining Ltd. and the Corporation's Mexican, European and Pacific subsidiaries managed by USG International, Ltd. ("USG International"). The long-term debt of the Combined Non-Guarantors of $26 million as of June 30, 1994 has restrictive covenants that restrict, among other things, the payment of dividends. The following condensed consolidating information presents: (i) Condensed financial statements as of June 30, 1994 and December 31, 1993 and for the three months and six months ended June 30, 1994 and for the periods of May 7 through June 30, 1993, April 1 through May 6, 1993 and the three months ended March 31, 1993 of (a) the Corporation on a parent company only basis (the "Parent Company," which was the only entity of the Corporation included in the 1993 bankruptcy proceeding associated with the Restructuring), (b) the Combined Guarantors, (c) the Combined Non-Guarantors and (d) the Corporation on a consolidated basis. (Due to the Restructuring and implementation of fresh start accounting, the financial statements after May 6, 1993 for the restructured company are not comparable to financial statements prior to that date. Except for the following condensed financial statements, separate financial information with respect to the Combined Guarantors is not deemed material to investors and is omitted.) (ii) The Parent Company and Combined Guarantors shown with their investments in their subsidiaries accounted for on the equity method. (iii) Elimination entries necessary to consolidate the Parent Company and its subsidiaries. USG CORPORATION CONDENSED CONSOLIDATING STATEMENT OF EARNINGS (Dollars in millions)
Combined Parent Combined Non- Company Guarantors Guarantors Eliminations Consolidated Three Months ended June 30, 1994 Net Sales $ - $ 494 $ 93 $ (25) $ 562 Gross Profit - 113 20 - 133 Operating Profit/(Loss) (10) 41 1 - 32 Equity in net loss of the Subsidiaries 13 3 - (16) - Interest expense, net 30 1 - - 31 Corporate service charge (39) 39 - - - Other expense, net 1 - - - 1 Earnings/(Loss) Before Taxes on Income (15) (2) 1 16 - Taxes on income 2 11 4 - 17 Net Loss (17) (13) (3) 16 (17) Six Months ended June 30, 1994 Net Sales $ - $ 937 $ 181 $ (50) $ 1,068 Gross Profit - 205 38 - 243 Operating Profit/(Loss) (19) 62 - - 43 Equity in net loss of the Subsidiaries 45 7 - (52) - Interest expense, net 63 1 1 - 65 Corporate service charge (81) 81 - - - Other expense, net 2 - - - 2 Loss Before Taxes on Income (48) (27) (1) 52 (24) Taxes on income 3 18 6 - 27 Net Loss (51) (45) (7) 52 (51)
USG CORPORATION CONDENSED CONSOLIDATING STATEMENT OF EARNINGS (Dollars in millions)
Combined Parent Combined Non- Company Guarantors Guarantors Eliminations Consolidated May 7 through June 30, 1993 Net Sales $ - $ 279 $ 57 $ (21) $ 315 Gross Profit - 51 12 - 63 Operating Profit/(Loss) (6) 6 (1) - (1) Equity in net loss of the Subsidiaries 23 3 - (26) - Interest expense, net 20 1 - - 21 Corporate service charge (27) 27 - - - Other expense/(income), net (1) (4) 1 2 (2) Loss Before Taxes on Income (21) (21) (2) 24 (20) Taxes on income/(income tax benefit) (2) 2 1 - 1 Net Loss (19) (23) (3) 24 (21) April 1 through May 6, 1993 Net Sales $ - $ 132 $ 28 $ (5) $ 155 Gross Profit 1 23 6 - 30 Operating Profit/(Loss) (3) 12 2 - 11 Equity in net (earnings)/loss of the Subsidiaries (762) (165) - 927 - Interest expense, net 10 1 - - 11 Corporate service charge (23) 23 - - - Other income, net (1) - - - (1) Reorganization items (16) (597) (165) - (778) Earnings Before Taxes on Income and Extraordinary Items 789 750 167 (927) 779 Taxes on income/(income tax benefit) 20 (12) 2 - 10 Earnings Before Extraordinary Items 769 762 165 (927) 769 Extraordinary gain, net of taxes 944 - - - 944 Net Earnings 1,713 762 165 (927) 1,713 Three Months ended March 31, 1993 Net Sales $ - $ 369 $ 85 $ (18) $ 436 Gross Profit - 61 18 - 79 Operating Profit/(Loss) (8) 27 8 - 27 Equity in net (earnings)/loss of the Subsidiaries 11 (4) - (7) - Interest expense, net 70 2 1 - 73 Corporate service charge (69) 69 - - - Other expense, net 2 5 - - 7 Reorganization items 69 - - - 69 Earnings/(Loss) Before Taxes on Income and Changes in Accounting Principles (91) (45) 7 7 (122) Taxes on income/(income tax benefit) 17 (12) 2 - 7 Earnings/(Loss) Before Changes in Accounting Principles (108) (33) 5 7 (129) Changes in accounting principles (171) 22 (1) - (150) Net Earnings/(Loss) (279) (11) 4 7 (279)
USG CORPORATION CONDENSED CONSOLIDATING BALANCE SHEET (Dollars in millions)
Combined Parent Combined Non- As of June 30, 1994 Company Guarantors Guarantors Eliminations Consolidated Cash and cash equivalents $ 216 $ (9) $ 35 $ - $ 242 Receivables, net 1 281 52 (35) 299 Inventories - 142 41 (4) 179 Total current assets 217 414 128 (39) 720 Property, Plant and Equipment, Net 20 615 114 - 749 Investment in Subsidiaries 1,463 265 - (1,728) - Excess Reorganization Value, Net - 514 132 - 646 Other Assets (42) 199 13 (6) 164 Total assets 1,658 2,007 387 (1,773) 2,279 Accounts payable and accrued expenses 98 250 64 (33) 379 Notes payable and LTD maturing within one year - 3 14 - 17 Total current liabilities 98 253 78 (33) 396 Long-Term Debt 1,191 34 26 - 1,251 Deferred Income Taxes 19 149 14 - 182 Other Liabilities 304 108 4 - 416 Common stock 5 1 6 (7) 5 Capital received in excess of par value 221 1,472 310 (1,782) 221 Deferred currency translation - - (12) - (12) Reinvested earnings/(deficit) (180) (10) (39) 49 (180) Total stockholders' equity/ (deficit) 46 1,463 265 (1,740) 34 Total liabilities and stockholders' equity 1,658 2,007 387 (1,773) 2,279 As of December 31, 1993 Cash and cash equivalents $ 187 $ (8) $ 32 $ - $ 211 Receivables, net 8 240 44 (28) 264 Inventories - 114 34 (3) 145 Total current assets 195 346 110 (31) 620 Property, Plant and Equipment, Net 21 620 113 - 754 Investment in Subsidiaries 1,511 277 - (1,788) - Excess Reorganization Value, Net - 582 153 - 735 Other Assets (35) 91 3 (5) 54 Total assets 1,692 1,916 379 (1,824) 2,163 Accounts payable and accrued expenses 100 207 52 (27) 332 Notes payable and LTD maturing within one year 158 3 6 - 167 Total current liabilities 258 210 58 (27) 499 Long-Term Debt 1,249 36 24 - 1,309 Deferred Income Taxes 14 151 15 - 180 Other Liabilities 296 8 5 - 309 Common stock 4 1 6 (7) 4 Capital received in excess of par value - 1,472 310 (1,782) - Deferred currency translation - - (9) - (9) Reinvested earnings/(deficit) (129) 38 (30) (8) (129) Total stockholders' equity/ (deficit) (125) 1,511 277 (1,797) (134) Total liabilities and stockholders' equity 1,692 1,916 379 (1,824) 2,163
USG CORPORATION CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (Dollars in millions)
Combined Parent Combined Non- Six Months ended June 30, 1994 Company Guarantors Guarantors Eliminations Consolidated 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 Investing Activities - (16) (4) - (20) Issuance of debt 85 - 52 - 137 Repayment of debt (308) (1) (45) - (354) Proceeds from public offering of stock 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 May 7 through June 30, 1993 Net Cash Flows From Operating Activities $ 7 $ 39 $ 2 $ - $ 48 Capital expenditures - (5) (2) - (7) Net proceeds from asset dispositions - 2 - - 2 Net Cash Flows To Investing Activities - (3) (2) - (5) Issuance of debt - - 10 - 10 Repayment of debt (4) - (9) - (13) Cash dividends (paid)/received - 2 (2) - - Net cash transfers (to)/from Corporate 33 (33) - - - Net Cash Flows (To)/From Financing Activities 29 (31) (1) - (3) Net Increase/(Decrease) in Cash & Cash Equivalents 36 5 (1) - 40 Cash & cash equivalents - beginning 24 (7) 32 - 49 Cash & cash equivalents - end 60 (2) 31 - 89 January 1 through May 6, 1993 Net Cash Flows (To)/From Operating Activities $ (90) $ 76 $ - $ - $ (14) Capital expenditures - (9) (3) - (12) Net proceeds from asset dispositions - - - - - Net Cash Flows To Investing Activities - (9) (3) - (12) Issuance of debt - - 5 - 5 Repayment of debt - (140) (2) - (142) Cash dividends (paid)/received 2 - (2) - - Deposit of restricted cash 44 (12) - - 32 Net cash transfers (to)/from Corporate 9 (9) - - - Net Cash Flows (To)/From Financing Activities 55 (161) 1 - (105) Net Decrease in Cash & Cash Equivalents (35) (94) (2) - (131) Cash & cash equivalents - beginning 59 87 34 - 180 Cash & cash equivalents - end 24 (7) 32 - 49
Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition Results of Operations On May 6, 1993, the Corporation completed the Restructuring. Due to the Restructuring and implementation of fresh start accounting, the Corporation's financial statements after May 6, 1993 are not comparable to financial statements prior to that date. See Part I, Item 1. "Financial Statements: Notes to Consolidated Financial Statements - Note (3)" for information on the Restructuring and implementation of fresh start accounting. To facilitate a meaningful year-to-year comparison of the Corporation's operating performance, 1993 information in the following discussion and analysis is presented on a second quarter and six months basis. Included in the following discussion are comparisons of EBITDA (earnings before interest, taxes, depreciation, depletion and amortization, and, for 1993, reorganization items, extraordinary gain and the cumulative effect of changes in accounting principles). The Corporation believes EBITDA is helpful in understanding cash flow generated from operations that is available for taxes, debt service and capital expenditures. In addition, EBITDA facilitates the monitoring of covenants related to certain long-term debt and other agreements entered into in conjunction with the Restructuring. EBITDA should not be considered by investors as an alternative to net earnings as an indicator of the Corporation's operating performance or as a measure of cash flows and overall liquidity. Consolidated Results (dollars in millions):
Three Months ended Six Months ended June 30 June 30 1994 1993 1994 1993 Net Sales $ 562 $ 470 $ 1,068 $ 906 Gross Profit 133 93 243 172 % of net sales 23.7% 19.8% 22.8% 19.0% Selling and administrative expenses 59 55 116 107 % of net sales 10.5% 11.7% 10.9% 11.8% Amortization of excess reorganization value 42 28 84 28 Operating Profit 32 10 43 37 Calculation of EBITDA: Operating profit $ 32 $ 10 $ 43 $ 37 Amortization of excess reorganization value 42 28 84 28 Depreciation and depletion 13 13 26 28 Other - 3 - 7 EBITDA 87 54 153 100 % of net sales 15.5% 11.5% 14.3% 11.0%
Consolidated net sales in the second quarter of 1994 increased $92 million, or 19.6%, over the second quarter of 1993. For the first six months of 1994, net sales increased $162 million, or 17.9%, over the first six months of 1993. These increases reflect improved 1994 sales for each of the Corporation's core businesses, North American Gypsum and Worldwide Ceilings. Net sales for North American Gypsum increased as a result of rising gypsum wallboard prices and record levels of shipments for its major product lines. Results for Worldwide Ceilings benefited from a record level of ceiling tile shipments. Consolidated gross profit as a percentage of net sales increased to 23.7% and 22.8% in the second quarter and first six months of 1994, respectively, from 19.8% and 19.0% in the prior year periods primarily due to increased prices for gypsum wallboard. Selling and administrative expenses for the second quarter of 1994 increased $4 million, or 7.3%, over the second quarter of 1993 and $9 million, or 8.4% in the first six months of 1994 over the comparable 1993 period. These increases were primarily due to higher expenses for compensation and benefits and for product and marketing programs. As a percentage of net sales, however, these expenses declined to 10.5% for the second quarter of 1994 and 10.9% for the first six months of 1994 from 11.7% and 11.8% in the respective 1993 periods as a result of the increase in 1994 net sales and the continuation of expense control efforts. Effective May 7, 1993, the Corporation began amortizing its excess reorganization value which was established in accordance with fresh start accounting rules. This non-cash amortization, which will continue through April 1998, amounted to $42 million and $84 million in the second quarter and first six months of 1994, respectively. Because this amortization did not begin until May 7, 1993, operating profit for the second quarter and first six months of 1994 is not comparable to the prior year periods. EBITDA in the second quarter of 1994 increased $33 million, or 61.1%, over the comparable 1993 period and, for the first six months of 1994, increased $53 million, or 53.0%, over the first six months of 1993. These increases reflect the improved gross margins in 1994. Industry Segment/Core Business Results (dollars in millions):
Three Months ended June 30 Six Months ended June 30 Net Sales EBITDA Net Sales EBITDA 1994 1993 1994 1993 1994 1993 1994 1993 North American Gypsum: U.S. Gypsum $ 290 $ 235 $ 66 $ 35 $ 559 $ 458 $ 119 $ 64 CGC (gypsum division) 26 21 3 2 50 44 5 4 Other subsidiaries 22 18 7 5 41 35 12 11 Eliminations (20) (16) - - (38) (30) - - Total Gypsum Products 318 258 76 42 612 507 136 79 Building Products Distribution 166 131 5 2 305 244 6 2 Eliminations (50) (39) (1) - (95) (75) (1) - Total North American Gypsum 434 350 80 44 822 676 141 81 Worldwide Ceilings: USG Interiors 102 90 14 12 198 174 27 23 USG International 48 48 1 3 93 91 2 4 CGC (interiors division) 7 7 1 1 15 15 2 3 Eliminations (9) (10) - - (18) (19) - - Total Worldwide Ceilings 148 135 16 16 288 261 31 30 Corporate - - (8) (6) - - (18) (11) Eliminations (20) (15) (1) - (42) (31) (1) - Total USG Corporation 562 470 87 54 1,068 906 153 100
North American Gypsum In the second quarter of 1994, net sales and EBITDA for North American Gypsum increased $84 million, or 24.0%, and $36 million, or 81.8%, respectively, over the second quarter of 1993. For the first six months of 1994, net sales and EBITDA were up $146 million, or 21.6%, and $60 million, or 74.1%, respectively, over the comparable 1993 period. For U.S. Gypsum, continuing improvement in gypsum wallboard prices and record six months shipments of gypsum wallboard, joint compound and DUROCK cement board contributed to the favorable results. Net sales increased $55 million, or 23.4%, in the second quarter of 1994 over the prior year period, while EBITDA increased $31 million, or 88.6%. For the first six months of 1994, net sales increased $101 million, or 22.1%, and EBITDA increased $55 million, or 85.9%, versus 1993. U.S. Gypsum shipped 1.821 billion square feet of gypsum wallboard in the second quarter of 1994, up 5.3% over the second quarter of 1993 and its gypsum wallboard plants ran at 93% of capacity in the second quarter of 1994. The average gypsum wallboard selling price increased to $98.39 per thousand square feet in the second quarter of 1994, up $20.68, or 26.6%, from the second quarter of 1993 and up $8.86, or 9.9%, from the first quarter of 1994. This increase represents the ninth consecutive quarter of improved wallboard prices. For the first six months of 1994, record- setting gypsum wallboard shipments of 3.686 billion square feet were 5.5% above the 1993 level. The average gypsum wallboard price of $93.91 per thousand square feet for the first six months of 1994 was $17.58, or 23.0%, over the six month 1993 level. Gypsum wallboard unit manufacturing cost in 1994 increased approximately 6% over 1993 cost, primarily due to a higher cost of purchased waste paper. Building Products Distribution (L&W Supply) second quarter 1994 net sales were up $35 million, or 26.7%, over the second quarter of 1993. Net sales in the first six months of 1994 represented L&W Supply's highest net sales in any first six month period in its 23-year history and surpassed the comparable 1993 level by $61 million, or 25.0%. EBITDA in the second quarter and first six months of 1994 amounted to $5 million and $6 million, respectively, compared with $2 million reported for each 1993 period. These increases reflect improved results for virtually all of L&W Supply's product lines. CGC's gypsum division achieved increased net sales and EBITDA in 1994 despite the impact of the strengthened U.S. dollar when compared to the Canadian dollar. These favorable results primarily reflect a higher level of CGC gypsum wallboard shipments largely due to increased exports to the United States. Worldwide Ceilings Second quarter and six months 1994 net sales for Worldwide Ceilings increased $13 million, or 9.6%, and $27 million, or 10.3%, respectively, over the second quarter and first six months of 1993. EBITDA for the second quarter of 1994 was unchanged from the year earlier period while increasing $1 million, or 3.3%, in the first six months of 1994 over the first six months of 1993. USG Interiors' second quarter and first six months 1994 net sales increased $12 million, or 13.3%, and $24 million, or 13.8%, respectively, over the corresponding 1993 periods, primarily due to higher U.S. commercial sales. Shipments of ceiling tile in the second quarter of 1994 continued at a record pace. As a result, EBITDA increased $2 million, or 16.7%, in the second quarter and $4 million, or 17.4%, in the first six months of 1994 over the respective 1993 periods. USG International's second quarter 1994 net sales were unchanged from the second quarter of 1993 and EBITDA of $1 million was down from the $3 million level reported a year ago. For the first six months of 1994, net sales increased $2 million, or 2.2%, over the corresponding 1993 period, while EBITDA decreased $2 million, or 50.0%. The decline in 1994 EBITDA was primarily due to lower margins for non-ceilings product lines. Other Consolidated Earnings Information Interest expense of $33 million in the second quarter of 1994, was unchanged from the second quarter of 1993. For the first six months of 1994, interest expense of $70 million was down $38 million, or 35.2% from the first six months of 1993 as a result of the Restructuring. The 1994 amounts include non-cash amortization of reorganization debt discount amounting to $3 million in second quarter 1994 and $7 million in the first six months of 1994. Income tax expense amounted to $17 million and $27 million in the second quarter and first six months of 1994, respectively, primarily due to the inability to benefit the amortization of excess reorganization value and the NOL Carryforwards. In the second quarter and first six months of 1993, income tax expense amounted to $11 million and $18 million respectively. In connection with the Restructuring, a one-time reorganization items gain of $778 million was recorded in the second quarter of 1993, reflecting adjustments associated with the implementation of fresh start accounting. Also in the second quarter of 1993, a one-time after-tax extraordinary gain of $944 million was recorded, primarily reflecting the gain on the exchange of subordinated debt for common stock. Reorganization items expense of $69 million was recorded in the first quarter of 1993 representing Restructuring fees and expenses. A one-time after-tax charge of $150 million was recorded in the first quarter of 1993 representing the adoption of: (i) SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," - $180 million expense; and (ii) SFAS No. 109, "Accounting for Income Taxes," - $30 million income. Neither of these standards impact cash flow. Net losses of $17 million and $51 million were recorded in the second quarter and first six months of 1994, respectively. However, the non-cash amortization of excess reorganization value and reorganization debt discount reduced net earnings by $45 million, or $1.00 per common share in the second quarter of 1994 and $91 million, or $2.18 per common share in the first six months of 1994. See "Results of Operations - Consolidated Results" above for more information of amortization of excess reorganization value and its impact on earnings and the comparability of earnings to prior years. Liquidity and Capital Resources In the first quarter of 1994, the Corporation implemented a refinancing plan which included (i) the Equity Offering, (ii) the Note Placement and (iii) the Second Amendment. These Transactions were designed, among other things, to (i) reduce the Corporation's financial leverage through the retirement of debt, (ii) reduce the amount of debt maturing in 1995 through 1998 and extend the final maturity of a significant portion of the Corporation's debt, (iii) improve the Corporation's financial and operating flexibility under the Credit Agreement and (iv) provide funds for capital expenditures and other general corporate purposes, including capital expenditures for cost reduction, capacity improvement and future growth opportunities. Through use of proceeds from the Transactions and cash generated in 1993, the Corporation has reduced its domestic debt by $220 million (net of the Note Placement) as of June 30, 1994. See Part I, Item 1. "Financial Statements: Notes to Consolidated Financial Statements - Note (2)" for additional information on the Transactions. On August 11, 1994, the Credit Agreement was amended for the third time since the Restructuring. In connection with this amendment (the "Third Amendment"), the Corporation made a prepayment of $25 million of bank term loans, applied to the bank term loans maturing in 1999, which reduced the outstanding balance of all such loans to $283 million. This prepayment represents an advance payment of the mandatory cash sweep prepayment due February 15, 1995. The Third Amendment provided for the following major revisions to the Credit Agreement: (i) Beginning with the January 15, 1995 cash sweep test date, the Corporation will be entitled to retain 50% of its excess cash flow, as calculated under the mandatory prepayment provisions of the Credit Agreement, if the ratio of its debt to EBITDA for the applicable year is less than 4.0 to 1.0. Such retained cash may be used for general corporate purposes, including debt repayment. At such time as the outstanding balance of the bank term loans is less than $150 million, the mandatory prepayment provisions of the Credit Agreement will terminate. (ii) The Corporation is permitted to prepay up to $100 million of 10 1/4% Senior Notes immediately and to employ its share of future excess cash flow for the same purpose. Such prepayment would be funded primarily from proceeds of the aforementioned Equity Offering. (iii) The Corporation is allowed to enter into a revolving accounts receivable sale facility for financing up to $150 million. Under the provisions of the Third Amendment, if such facility matures before December 31, 2000, the first $60 million of proceeds will be retained by the Corporation for repayment of 10 1/4% Senior Notes or other corporate purposes, the next $40 million will be used to prepay bank term loans and any remaining proceeds will be retained by the Corporation for uses permitted by the Credit Agreement. Other modifications to the Credit Agreement as a result of The Third Amendment are as follows: (i) The minimum liquidity amount under the mandatory prepayment provisions was increased to $150 million beginning with January 15, 1996 cash sweep test date. (ii) The Corporation is authorized to prepay its European project financing (approximately $25 million). (iii) The Corporation is permitted to issue up to $25 million of new unsecured industrial revenue bonds, the proceeds to be added to its available liquidity for cash sweep and general corporate purposes. (iv) CGC is allowed to repurchase from its public shareholders up to 10% of its total outstanding shares annually. (v) Certain other changes were made to investment and asset sale covenants to increase the Corporation's operating flexibility. The Corporation's liquidity and capital resources were significantly strengthened by the Transactions and consummation of the Third Amendment. The Corporation believes that cash generated by operations and the estimated levels of liquidity available to it will be sufficient to satisfy its debt service requirements and other capital requirements for the foreseeable future. However, the Corporation is subject to significant business, economic and competitive uncertainties that are beyond its control and there can be no assurance that the Corporation's financial resources will be sufficient for it to satisfy its debt service obligations and other capital requirements under all circumstances or otherwise permit the Corporation to take advantage of any appropriate growth opportunity that may arise. Working Capital As of June 30, 1994, working capital (current assets less current liabilities) amounted to $324 million and the ratio of current assets to current liabilities was 1.82 to 1, versus December 31, 1993 when working capital amounted to $121 million and the ratio of current assets to current liabilities was 1.24 to 1. In the first six months of 1994, cash and cash equivalents increased $31 million to $242 million, primarily due to cash generated from operations and the net impact of the Transactions. On August 11, 1994, the Corporation used $25 million of existing cash to prepay bank term loans in connection with the Third Amendment. The Corporation plans to utilize an additional portion of existing cash to prepay additional debt or for other uses in accordance with the Transactions and the Third Amendment described above. Comparing June 30, 1994 balances with December 31, 1993, accounts receivable (net) increased $35 million, or 13.3%, to $299 million, inventories increased $34 million, or 23.4%, to $179 million and accounts payable increased $30 million, or 28.8%, to $134 million. These increases primarily reflect the increased level of business. Capital Expenditures Capital expenditures amounted to $21 million in first six months of 1994, up $2 million from the first six months of 1993. As a result of the aforementioned refinancing plan, which generated approximately $92 million for capital expenditures, the Corporation augmented its capital spending program. As of June 31, 1994, capital expenditure commitments for the replacement, modernization and expansion of operations amounted to $58 million compared with $11 million as of December 31, 1993. In addition, the Corporation periodically evaluates possible acquisitions or combinations involving other businesses or companies, generally in businesses and markets related to the Corporation's current operations, and the Corporation believes that its available liquidity would be adequate to support any appropriate opportunity. Litigation One of the Corporation's subsidiaries, U.S. Gypsum, is a defendant in asbestos lawsuits alleging both property damage and personal injury. This litigation has not had a material effect on the Corporation's liquidity or earnings. Virtually all costs of the Personal Injury Cases are being paid by insurance. However, many of U.S. Gypsum's insurance carriers are denying coverage for the Property Damage Cases, although U.S. Gypsum believes that substantial coverage exists and the trial court in U.S. Gypsum's Coverage Action has so ruled (such ruling has been appealed). In view of the limited insurance funding currently available to U.S. Gypsum for Property Damage Cases resulting from continued resistance by a number of U.S. Gypsum's insurers to providing coverage, the effect of the asbestos litigation on the Corporation will depend upon a variety of factors, including the damages sought in Property Damage Cases that reach trial prior to the completion of the Coverage Action, U.S. Gypsum's ability to successfully defend or settle such cases, and the resolution of the Coverage Action. As a result, management is unable to determine whether an adverse outcome in the asbestos litigation will have a material adverse effect on the results of operations or the consolidated financial position of the Corporation. Effective January 1, 1994, the Corporation adopted the requirements of Financial Accounting Standards Board Interpretation No. 39. In accordance with Interpretation No. 39, U.S. Gypsum recorded an accrual of $100 million for its liabilities for asbestos-related matters which are deemed probable and can be reasonably estimated, and separately recorded an asset of $100 million, the amount of such liabilities that is expected to be paid by uncontested insurance. Due to management's inability to reasonably estimate U.S. Gypsum's liability for Property Damage Cases and (until the implementation of Georgine is deemed probable) future Personal Injury Cases, the liability and asset recorded in 1994 relate only to pending Personal Injury Cases. The implementation of Interpretation No. 39 did not impact earnings, cash flow or net assets. 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. 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, 1994, and the related condensed consolidated statement of earnings for the three-month and six-month periods ended June 30, 1994 and the condensed consolidated statement of cash flows for the six months ended June 30, 1994. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. As discussed in Note 3, on May 6, 1993, the Corporation completed a comprehensive financial restructuring through the implementation of a prepackaged plan of reorganization under Chapter 11 of Title 11 of the United States Bankruptcy Code and applied fresh start accounting. As such, results of operations through May 6, 1993 are not comparable with results of operations subsequent to that date. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with generally accepted accounting principles. As discussed in Note 7, in view of the limited insurance funding currently available for property damage cases resulting from the continued resistance by a number of U.S. Gypsum's insurers to providing coverage, the effect of the asbestos litigation on the Corporation will depend upon a variety of factors, including the damages sought in property damage cases that reach trial prior to the completion of the coverage action, U.S. Gypsum's ability to successfully defend or settle such cases, and the resolution of the coverage action. As a result, management is unable to determine whether an adverse outcome in the asbestos litigation will have a material adverse effect on the consolidated results of operations or the consolidated financial position of the Corporation. As discussed in Note 7, on January 1, 1994, the Corporation changed its method of accounting for asbestos-related matters. /s/ Arthur Andersen & Co. ARTHUR ANDERSEN & CO. Chicago, Illinois July 25, 1994 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 $625 million of insurance remains potentially available. Because U.S. Gypsum's insurance carriers initially responded to its claims for defense and indemnification with various theories denying or limiting coverage and the applicability of their policies, U.S. Gypsum filed a declaratory judgment action against them in the Circuit Court of Cook County, Illinois on December 29, 1983. (U.S. Gypsum Co. v. Admiral Insurance Co., et al.) (the "Coverage Action"). U.S. Gypsum alleges in the Coverage Action that the carriers are obligated to provide indemnification for settlements and judgments and, in some cases, defense costs incurred by U.S. Gypsum in property damage and personal injury claims in which it is a defendant. The current defendants are ten insurance carriers that provided comprehensive general liability insurance coverage to U.S. Gypsum between the 1940's and 1984. As discussed below, several carriers have settled all or a portion of the claims in the Coverage Action. U.S. Gypsum's aggregate expenditures for all asbestos-related matters, including property damage, personal injury, insurance coverage litigation and related expenses, exceeded aggregate insurance payments by $10.9 million in 1991, $25.8 million in 1992, and $8.2 million in 1993. Property Damage Cases The Property Damage Cases have been brought against U.S. Gypsum by a variety of plaintiffs, including school districts, state and local governments, colleges and universities, hospitals and private property owners. U.S. Gypsum is one of many defendants in three cases that have been certified as class actions and others that request such certification. One class action suit is 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. (Others were participants in a class action involving approximately 333 school districts in Michigan, which was recently settled. Board of Education of the City of Detroit, et al. v. The Celotex Corp., et al., Circuit Court for Wayne County, MI.) 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 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 four above- described class actions. (Anderson County Hospital v. W.R. Grace & Co., et al., Court of Common Pleas, Hampton Co., S.C. (the "Anderson Case"). The Anderson Case also names the Corporation as a defendant, alleging, among other things, that the guarantees executed by U.S. Gypsum in connection with the 1988 Recapitalization, as well as subsequent distributions of cash from U.S. Gypsum to the Corporation, rendered U.S. Gypsum insolvent and constitute a fraudulent conveyance. The suit seeks to set aside the guarantees and recover the value of the cash flow "diverted" from U.S. Gypsum to the Corporation in an amount to be determined. In July 1994, the court in the Anderson Case ruled that claims involving building owners outside South Carolina cannot be included in the suit. No other threshold issues, including whether the South Carolina courts have personal jurisdiction over the Corporation, have been decided. The damages claimed against U.S. Gypsum in the class action cases are unspecified. U.S. Gypsum has denied the substantive allegations of each of the Property Damage Cases and intends to defend them vigorously except when advantageous settlements are possible. As of June 30, 1994, 48 Property Damage Cases were pending against U.S. Gypsum; however, the number of buildings involved is greater than the number of cases because many of these cases, including the class actions referred to above, involve multiple buildings. In addition, approximately 41 property damage claims have been threatened against U.S. Gypsum. In total, U.S. Gypsum has settled approximately 87 property damage cases involving claims of approximately 203 plaintiffs. Twenty-five cases have been tried to verdict, 16 of which were won by U.S. Gypsum and 5 lost; three other cases, one won at the trial level and two lost, were settled during appeals. Another case that was lost at the trial court level was reversed on appeal and remanded to the trial court, which has now entered judgment for U.S. Gypsum. Appeals are pending in 5 of the tried cases. In the cases lost, compensatory damage awards against U.S. Gypsum have totalled $11.5 million. Punitive damages totalling $5.5 million were entered against U.S. Gypsum in four trials. Two of the punitive damage awards, totalling $1.45 million, were paid after appeals were exhausted; and two were settled during the appellate process. In 1991, 13 new Property Damage Cases were filed against U.S. Gypsum, eleven were dismissed before trial, eight were settled, two were closed following trial or appeal, and 100 were pending at year-end; U.S. Gypsum expended $22.2 million for the defense and resolution of Property Damage Cases and received insurance payments of $13.8 million in 1991. During 1992, 7 new Property Damage Cases were filed against U.S. Gypsum, 10 were dismissed before trial, 18 were settled, 3 were closed following trial or appeal, and 76 were pending at year-end. U.S. Gypsum expended $34.9 million for the defense and resolution of Property Damage Cases and received insurance payments of $10.2 million in 1992. In 1993, 5 new Property Damage Cases were filed against U.S. Gypsum, 7 were dismissed before trial, 11 were settled, 1 was closed following trial or appeal, 2 were consolidated into 1, and 61 were pending at year end; U.S. Gypsum expended $13.9 million for the defense and resolution of Property Damage Cases and received insurance payments of $7.6 million in 1993. In the Property Damage Cases litigated to date, a defendant's liability for compensatory damages, if any, has been limited to damages associated with the presence and quantity of asbestos-containing products manufactured by that defendant which are identified in the buildings at issue, although plaintiffs in some cases have argued that principles of joint and several liability should apply. Because of the unique factors inherent in each of the Property Damage Cases, including the lack of reliable information as to product identification and the amount of damages claimed against U.S. Gypsum in many cases, including the class actions described above, management is unable to make a reasonable estimate of the cost of disposing of pending Property Damage Cases. Personal Injury Cases U.S. Gypsum was among numerous defendants in asbestos personal injury suits and administrative claims involving approximately 51,500 claimants pending as of June 30, 1994. All asbestos bodily injury claims pending in the federal courts, including approximately one-third of the Personal Injury Cases pending against U.S. Gypsum, have been consolidated in the United States District Court for the Eastern District of Pennsylvania. U.S. Gypsum is a member, together with 19 other former producers of asbestos- containing products, of the Center for Claims Resolution (the "Center"). The Center has assumed the handling, including the defense and settlement, of all Personal Injury Cases pending against U.S. Gypsum and the other members of the Center. Each member of the Center is assessed a portion of the liability and defense costs of the Center for the Personal Injury Cases handled by the Center, according to predetermined allocation formulas. Five of U.S. Gypsum's insurance carriers that in 1985 signed an Agreement Concerning Asbestos- Related Claims (the "Wellington Agreement") are supporting insurers (the "Supporting Insurers") of the Center. The Supporting Insurers are obligated to provide coverage for the defense and indemnity costs of the Center's members pursuant to the coverage provisions in the Wellington Agreement. Claims for punitive damages are defended but not paid by the Center; if punitive damages are recovered, insurance coverage may be available under the Wellington Agreement depending on the terms of particular policies and applicable state law. Punitive damages have not been awarded against U.S. Gypsum in any of the Personal Injury Cases. Virtually all of U.S. Gypsum's personal injury liability and defense costs are paid by those of its insurance carriers that are Supporting Insurers. The Supporting Insurers provided approximately $350 million of the total coverage referred to above, of which approximately $262 million remains unexhausted. On January 15, 1993, U.S. Gypsum and the other members of the Center were named as defendants in a class action filed 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 complaint generally defines the class of plaintiffs as 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. Simultaneously with the filing of the class action, the parties filed a settlement agreement in which the named plaintiffs, proposed class counsel, and the defendants agreed to settle and compromise the claims of the proposed class. The settlement, if approved by the court, 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. Class members will be given the opportunity to "opt out," or elect to be excluded from the settlement, although the defendants reserve the right to withdraw from the settlement if the number of opt outs is, in their sole judgment, excessive. In addition, in each year a limited number of claimants will have certain rights to prosecute their claims for compensatory (but not punitive) damages in court in the event they reject the compensation offered by the administrative processing of their claim. The Center members, including U.S. Gypsum, have instituted proceedings against those of their insurance carriers that had not consented to support the settlement, seeking a declaratory judgment that the settlement is reasonable and, therefore, that the carriers are obligated to fund their portion of it. Consummation of the settlement is contingent upon, among other things, court approval of the settlement and a favorable ruling in the declaratory judgment proceedings against the non-consenting insurers. It is anticipated that appeals will follow the district court's ruling on the fairness and reasonableness of the settlement. Each of the defendants has committed to fund a defined portion of the settlement, up to a stated maximum amount, over the initial ten year period of the agreement (which is automatically extended unless terminated by the defendants). Taking into account the provisions of the settlement agreement concerning the maximum number of claims that must be processed in each year and the total amount to be made available to the claimants, the Center estimates that U.S. Gypsum will be obligated to fund a maximum of approximately $125 million of the class action settlement, exclusive of expenses, with a maximum payment of less than $18 million in any single year; of the total amount of U.S. Gypsum's obligation, all but approximately $7 million is expected to be paid by U.S. Gypsum's insurance carriers. During 1991, approximately 13,100 Personal Injury Cases were filed against U.S. Gypsum and approximately 6,300 were settled or dismissed. U.S. Gypsum incurred expenses of $15.1 million in 1991 with respect to Personal Injury Cases of which $15.0 million was paid by insurance. During 1992, approximately 20,100 Personal Injury Cases were filed against U.S. Gypsum and approximately 10,600 were settled or dismissed. U.S. Gypsum incurred expenses of $21.6 million in 1992 with respect to Personal Injury Cases of which $21.5 million was paid by insurance. During 1993, approximately 26,900 Personal Injury Cases were filed against U.S. Gypsum and approximately 22,900 were settled or dismissed. U.S. Gypsum incurred expenses of $34.9 million in 1993 with respect to Personal Injury Cases of which $34.0 million was paid by insurance. As of December 31, 1993, 1992, and 1991, approximately 59,000, 54,000 and 43,000 Personal Injury Cases were outstanding against U.S. Gypsum, respectively. U.S. Gypsum's average settlement cost for Personal Injury Cases over the past three years has been approximately $1,600 per claim, exclusive of defense costs. Management anticipates that its average settlement cost is likely to increase due to such factors as the possible insolvency of co-defendants, although this increase may be offset to some extent by other factors, including the possibility for block settlements of large numbers of cases and the apparent increase in the percentage of asbestos personal injury cases that appear to have been brought by individuals with little or no physical impairment. Through the Center, U.S. Gypsum had reached settlements on approximately 26,700 Personal Injury Cases pending on December 31, 1993 for amounts totalling approximately $32 million, to be expended over a three year period. Approximately 22,000 of such cases remained pending as of June 30, 1994. 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, 1993 can be disposed of for a total amount, including both indemnity costs and legal fees and expenses, estimated to be between $100 million and $120 million (of which all but $2 million or $5 million, respectively, is expected to be paid by insurance). The estimated cost of resolving pending claims takes into account, among other factors, (i) an increase in the number of pending claims; (ii) the settlements of certain large blocks of claims for higher per-case averages than have historically been paid; (iii) the committed but unconsummated settlements described above; and (iv) a small increase in U.S. Gypsum's historical settlement average. Assuming that the Georgine class action settlement referred to above is approved substantially in its current form, management estimates, based on assumptions supplied by the Center, U.S. Gypsum's maximum total exposure in Personal Injury Cases during the next ten years (the initial term of the agreement), including liability for pending claims and claims resolved as part of the class action settlement, as well as defense costs and other expenses, at approximately $262 million, of which approximately $250 million is expected to be paid by insurance. U.S. Gypsum's additional exposure for claims filed by persons who have opted out of Georgine would depend on the number of such claims that are filed, which cannot presently be determined. Coverage Action As indicated above, all of U.S. Gypsum's carriers initially denied coverage for the Property Damage Cases and the Personal Injury Cases, and U.S. Gypsum initiated the Coverage Action to establish its right to such coverage. U.S. Gypsum has voluntarily dismissed the Supporting Insurers referred to above from the personal injury portion of the Coverage Action because they are committed to providing personal injury coverage in accordance with the Wellington Agreement. U.S. Gypsum's claims against the remaining carriers for coverage for the Personal Injury Cases have been stayed since 1984. On January 7, 1991, the trial court in the Coverage Action ruled on the applicability of U.S. Gypsum's insurance policies to settlements and one adverse judgment in eight Property Damage Cases. The court ruled that the eight cases were generally covered, and imposed coverage obligations on particular policy years based upon the dates when the presence of asbestos- containing material was "first discovered" by the plaintiff in each case. The court awarded reimbursement of approximately $6.2 million spent by U.S. Gypsum to resolve the eight cases. U.S. Gypsum has appealed the court's ruling with respect to the policy years available to cover particular claims, and the carriers have appealed most other aspects of the court's ruling. The appeal process is likely to take up to a year or more from the date of this report. U.S. Gypsum's experience in the Property Damage Cases suggests that "first discovery" dates in the eight cases referred to above (1978 through 1985) are likely to be typical of most pending cases. U.S. Gypsum's total insurance coverage for the years 1978 through 1984 is approximately $350 million (after subtracting insolvencies and discounts given to settling carriers). However, some pending cases, as well as some cases filed in the future, may be found to have first discovery dates later than August 1, 1984, after which U.S. Gypsum's insurance policies did not provide coverage for asbestos-related claims. In addition, as described below, the first layer excess carrier for the years 1980 through 1984 is insolvent and U.S. Gypsum may be required to pay amounts otherwise covered by those and other insolvent policies. Accordingly, if the court's ruling is affirmed, U.S. Gypsum will likely be required to bear a portion of the cost of the property damage litigation. Eight carriers, including two of the Supporting Insurers, have settled U.S. Gypsum's claims for both property damage and personal injury coverage and have been dismissed from the Coverage Action entirely. Four of these carriers have agreed to pay all or a substantial portion of their policy limits to U.S. Gypsum beginning in 1991 and continuing over the next four years. Three other excess carriers, including the two settling Supporting Insurers, have agreed to provide coverage for the Property Damage Cases and the Personal Injury Cases subject to certain limitations and conditions, when and if underlying primary and excess coverage is exhausted. It cannot presently be determined when such coverage might be reached. Taking into account the above settlements, including participation of certain of the settling carriers in the Wellington Agreement, and consumption through December 31, 1993, carriers providing a total of approximately $90 million of unexhausted insurance have agreed, subject to the terms of the various settlement agreements, to cover both Personal Injury Cases and Property Damage Cases. Carriers providing an additional $250 million of coverage that was unexhausted as of December 31, 1993 have agreed to cover Personal Injury Cases under the Wellington Agreement, but continue to contest coverage for Property Damage Cases and remain defendants in the Coverage Action. U.S. Gypsum will continue to seek negotiated resolutions with its carriers in order to minimize the expense and delays of litigation. Insolvency proceedings have been instituted against four of U.S. Gypsum's insurance carriers. Midland Insurance Company, declared insolvent in 1986, provided excess insurance ($4 million excess of $1 million excess of $500,000 primary in each policy year) from February 15, 1975 to February 15, 1978; Transit Casualty Company, declared insolvent in 1985, provided excess insurance ($15 million excess of $1 million primary in each policy year) from August 1, 1980 to December 31, 1985; Integrity Insurance Company, declared insolvent in 1986, provided excess insurance ($10 million quota share of $25 million excess of $90 million) from August 1, 1983 to July 31, 1984; and American Mutual Insurance Company, declared insolvent in 1989, provided the primary layer of insurance ($500,000 per year) from February 1, 1963 to April 15, 1971. It is possible that U.S. Gypsum will be required to pay a presently indeterminable portion of the costs that would otherwise have been covered by these policies. In addition, portions of various policies issued by Lloyd's and other London market companies between 1966 and 1979 have also become insolvent; under the Wellington Agreement, U.S. Gypsum must pay these amounts, which total approximately $12 million. It is not possible to predict the number of additional lawsuits alleging asbestos-related claims that may be filed against U.S. Gypsum. The number of Personal Injury Cases pending against U.S. Gypsum has increased in each of the last several years. In addition, many Property Damage Cases are still at an early stage and the potential liability therefrom is consequently uncertain. In view of the limited insurance funding currently available for the Property Damage Cases resulting from the continued resistance by a number of U.S. Gypsum's insurers to providing coverage, the effect of the asbestos litigation on the Corporation will depend upon a variety of factors, including the damages sought in the Property Damage Cases that reach trial prior to the completion of the Coverage Action, U.S. Gypsum's ability to successfully defend or settle such cases, and the resolution of the Coverage Action. As a result, management is unable to determine whether an adverse outcome in the asbestos litigation will have a material adverse effect on the results of operations or the consolidated financial position of the Corporation. Accounting Change Effective January 1, 1994, the Corporation adopted the requirements of Financial Accounting Standards Board Interpretation No. 39. In accordance with Interpretation No. 39, U.S. Gypsum recorded an accrual of $100 million for its liabilities for asbestos-related matters which are deemed probable and can be reasonably estimated, and separately recorded an asset of $100 million, the amount of such liabilities that is expected to be paid by uncontested insurance. Due to management's inability to reasonably estimate U.S. Gypsum's liability for Property Damage Cases and (until the implementation of Georgine is deemed probable) future Personal Injury Cases, the liability and asset recorded in 1994 relate only to pending Personal Injury Cases. The implementation of Interpretation No. 39 did not impact earnings, cash flow or net assets. Environmental Litigation The Corporation and certain of its subsidiaries have been notified by state and federal environmental protection agencies of possible involvement as one of numerous "potentially responsible parties" in a number of so-called "Superfund" sites in the United States. In substantially all of these sites, the involvement of the Corporation or its Subsidiaries is expected to be minimal. The Corporation believes that appropriate reserves have been established for its potential liability in connection with all Superfund sites but is continuing to review its accruals as additional information becomes available. Such reserves take into account all known or estimable costs associated with these sites including site investigations and feasibility costs, site cleanup and remediation, legal costs, and fines and penalties, if any. In addition, environmental costs connected with site cleanups on USG- owned property are also covered by reserves established in accordance with the foregoing. The Corporation believes that neither these matters nor any other known governmental proceeding regarding environmental matters will have a material adverse effect upon its earnings or consolidated financial position. Item 4. Submission of Matters to a Vote of Security Holders (a) In accordance with the Corporation's notice and proxy statement dated March 31, 1994, the matters set forth in (c) below were submitted to a vote of stockholders at the annual meeting of stockholders held on May 11, 1994.
Votes Abstentions Votes Withheld and Broker For or Against Non-Votes Election of Directors: Keith A. Brown 35,889,476 58,814 - Eugene B. Connolly 35,888,628 59,662 - James C. Cotting 35,887,295 60,995 - Philip C. Jackson, Jr. 35,887,679 60,611 - John B. Schwemm 35,887,418 60,872 - Ratification of Appointment of Arthur Andersen & Co. as Independent Auditors 35,843,903 36,409 67,978
Item 6. Exhibits and Reports on Form 8-K (a) (10) Third Amendment, dated as of August 11, 1994, 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 & Co. regarding unaudited financial information. (b) There were no reports on Form 8-K filed during the second quarter of 1994. 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 12, 1994 By /s/ Raymond T. Belz Raymond T. Belz, Vice President and Controller, USG Corporation EX-10 2 Exhibit (10) THIRD AMENDMENT Dated as of August 11, 1994 to AMENDED AND RESTATED CREDIT AGREEMENT Dated as of May 6, 1993 This THIRD AMENDMENT (this "Third Amendment") dated as of August 11, 1994 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") and that certain Second Amendment dated as of January 31, 1994 (the "Second 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 Third 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 "Third 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 following defined term is inserted in Section 1.01 immediately following the defined term "Cash Equivalents": "Cash Sweep Termination Date" shall have the meaning ascribed to such term in Section 2.06(b)(i). (ii) The defined term "Excess Proceeds of Issuance of Stock or Debt" is amended to delete the parenthetical phrase in clause (ii) thereof and to substitute therefor the following: "(but excluding the net cash proceeds received by the Company on account of the incurrence of Indebtedness (a) consisting of unsecured industrial development revenue bonds permitted under Section 8.01(xvii) hereof and (b) from and after the Revolving Loan Termination Date in accordance with the requirements set forth in Section 8.01(xii) hereof)" (iii) The defined term "Investment" is amended to delete the word "other" immediately preceding the word "Person" in the fourth line thereof. (b) Section 1.02 of the Credit Agreement is hereby amended as follows: (i) The term "Asbestos Adjustment" therein is deleted in its entirety. (ii) The following is inserted in Section 1.02 immediately following the term "Cash Available for Sweep": "Cash Sweep Termination Date". 1.2. Amendments to Mandatory Prepayment of Cash Available for Sweep. Section 2.06(b)(i) of the Credit Agreement is amended and restated in its entirety as follows (and the applicable provisions of the First Amendment and the Second Amendment, including, without limitation, Section 1.3(a) of the First Amendment, are accordingly superseded): (i) Cash Available for Sweep. (A) Within 30 days after the occurrence of the Test Date in each year (unless the Cash Sweep Termination Date has occurred on or before such Test Date), the Company shall prepare and deliver to the Administrative Agent a work sheet, substantially in the form of Exhibit 8-A, showing its calculation of Cash Available for Sweep as of such Test Date, together with a certificate, substantially in the form of Exhibit 8-B, signed by the chief accounting officer or chief financial officer of the Company, and certifying that such calculation is accurate and that neither the Company nor any Subsidiary of the Company has made any material prepayments (other than prepayments of trade payables, mandatory prepayments required under outstanding credit agreements or indentures, and, to the extent expressly permitted by the terms of this Agreement, prepayments of other Indebtedness) out of the ordinary course of business. On the Sweep Payment Date in each year (unless the Cash Sweep Termination Date has occurred on or before the immediately preceding Test Date), the Company shall make or cause to be made a mandatory prepayment in an amount equal to the Cash Available for Sweep determined as of the immediately preceding Test Date, which prepayment shall be applied as follows: (1) for any Sweep Payment Date occurring in 1995 or 1996 for which the Sweep Percentage is greater than 50%, such mandatory prepayment shall be applied: (x) first, up to $7,000,000 in the aggregate for all such Sweep Payment Dates, to Public Debt having maturities prior to January 1, 1999 and/or Term Loans as the Company shall elect in its discretion, provided, that: (A) any portion of such $7,000,000 of Cash Available for Sweep which is not used to pay such Public Debt prior to the immediately succeeding Test Date shall be applied by the Company to the scheduled installments of the Term Loans in the order of maturity; (B) if on any such Test Date, the Cash Available for Sweep on such Test Date exceeds the then outstanding principal balance of all of the Public Debt having maturities prior to January 1, 1999, such excess, up to $7,000,000 less the aggregate amount of Cash Available for Sweep previously applied under this Section 2.06(b)(i)(A)(1)(x), shall be applied 90% to the scheduled installments of the Term Loans in the order of maturity on the Sweep Payment Date immediately succeeding the applicable Test Date and 10% to the Company as Retained Amounts; and (C) any Investment Premiums paid in connection with the payment of such Public Debt shall be subject to the limitations described in Section 8.03(viii)(C); and (y) second, following the application of the amounts described in item (x) above, 66-2/3% to the scheduled installments of the Term Loans in the order of maturity on the Sweep Payment Date immediately succeeding the applicable Test Date and 33-1/3% to the Company as Retained Amounts, until such Retained Amounts (when added to the Retained Amounts described in item (x) above) equal $50,000,000 at which time 100% of such Cash Available for Sweep shall be applied to the scheduled installments of the Term Loans in the order of maturity on the Sweep Payment Date immediately succeeding the applicable Test Date; and (2) for any Sweep Payment Date occurring in 1995 or 1996 for which the Sweep Percentage is 50%, and for any Sweep Payment Date thereafter, such mandatory prepayment shall be applied (x) with respect to such Sweep Payment Dates in 1995 and 1996, in full to the scheduled installments of the Term Loans in the order of their maturity, and (y) with respect to such Sweep Payment Dates occurring in each subsequent year, one- third (1/3) to the scheduled installments of the Term Loans in the order of their maturity and two-thirds (2/3) to the scheduled installments of the Term Loans in the inverse order of their maturity. (B) The following terms used in this Section 2.06(b)(i) shall have the following meanings (such meanings to be applicable, except to the extent otherwise indicated in a definition of a particular term, both to the singular and the plural forms of the terms defined): "Available Liquidity" means, with respect to any Test Date, (i) the daily average of all domestic Cash during the Test Period ending on such Test Date (excluding any Cash which constitutes Excess Proceeds of Issuance of Stock or Debt and any Cash proceeds of a revolving accounts receivable sale facility entered into by the Company and/or one or more of its Subsidiaries which has been consented to by the Senior Lenders), plus (ii) the daily average of all Cash of the Company's Foreign Subsidiaries in excess of the Minimum Foreign Cash Balances for such Foreign Subsidiaries during such Test Period (subject to the limitations set forth in Sections 2.6(b), 8.4 and 9.2 of the National Westminster Credit Agreement for so long as such Credit Agreement remains in effect), after subtracting (A) taxes which would have been incurred had such Cash been repatriated from such Foreign Subsidiaries, (B) minority interests in such Foreign Subsidiaries and (C) costs of applicable Foreign Exchange Contracts, plus (iii) the average daily amount during such Test Period by which $174,841,297 exceeds the sum of (A) the outstanding principal balance of the Revolving Loans which constitute Working Capital Revolving Loans and (B) the Facility Letter of Credit Obligations. The calculation described in clause (i) above shall be made assuming that all principal payments on Term Loans occurring during the Test Period were made on the date immediately preceding the first day of the Test Period. The calculation described in clause (ii) above with respect to Foreign Subsidiaries other than Restricted Subsidiaries shall be the average of such excess Cash as of December 16th, December 31st and January 15th in each Test Period rather than a daily average. In addition, Available Liquidity will be adjusted as a result of changes in working capital as described in Exhibit 9. "Cash" means, with respect to any Person on any date, the amount which would be shown as "cash" on a balance sheet of such Person prepared in accordance with GAAP as of such date, plus all cash equivalents and readily marketable securities possessed by such Person. "Cash Available for Sweep" means, with respect to each Test Date, an amount equal to the product of (i) the Sweep Percentage in effect on such Test Date, and (ii) the excess, if any, of the Available Liquidity for such Test Date over the Minimum Liquidity for such Test Date. "Cash Sweep Termination Date" means the date on which the aggregate principal amount of outstanding Term Loans has been reduced to an amount less than $150,000,000. "Foreign Exchange Contract" means, with respect to the Company and its Subsidiaries, any foreign currency exchange agreements entered into to hedge the amount of Cash held by the Company or any such Subsidiary. "Foreign Subsidiary" means a Subsidiary of the Company organized under the laws of a jurisdiction other than the United States or any political subdivision thereof. "Minimum Foreign Cash Balance" means the following amounts for the following Foreign Subsidiaries (or groups of Foreign Subsidiaries), in each case plus the then outstanding aggregate balance of loans extended to the applicable Foreign Subsidiary (or group of Foreign Subsidiaries) pursuant to one or more revolving credit facilities in favor of such Foreign Subsidiary (or group of Foreign Subsidiaries), and minus the excess, if any, of (i) the cumulative actual Capital Expenditures made by the applicable Foreign Subsidiary (or group of Foreign Subsidiaries) during the period from January 1, 1993 to the end of the Fiscal Year immediately preceding the applicable Test Date over (ii) the Projected Foreign Capital Expenditures for such Foreign Subsidiary (or group of Foreign Subsidiaries) as of the end of the Fiscal Year immediately preceding the applicable Test Date; for purposes of the foregoing, amounts of foreign currencies shall be deemed to be exchanged into Dollars by using the applicable exchange rate quoted in the Wall Street Journal on the applicable Test Date: Subsidiary (or Group) Minimum Cash Balance GTL $5,000,000 CGC and Canadian Mining $10,000,000 All other Foreign Subsidiaries $35,000,000 "Minimum Liquidity" for each Test Date, shall be (i) $100,000,000 for the Test Date in 1995 and $150,000,000 for each Test Date thereafter, plus (ii) the sum of the Retained Amounts for all prior Test Dates. "National Westminster Credit Agreement" shall mean that certain Credit Agreement dated as of January 29, 1990 among USG Netherlands B.V. and National Westminster Bank plc, as the same may be amended from time to time hereafter in accordance with the terms of Section 8.20 hereof. "Projected Foreign Capital Expenditures" means, for the period from January 1, 1993 through the end of each Fiscal Year, the following amounts for the following Foreign Subsidiaries (or groups of Foreign Subsidiaries) for the indicated Fiscal Year: CGC and Canadian Other Foreign Fiscal Year GTL Mining Subsidiaries 1993 $0.1mm $ 8.0mm $ 9.0mm 1994 0.2mm 16.5mm 23.0mm 1995 0.3mm 25.5mm 33.0mm 1996 0.4mm 34.5mm 43.0mm 1997 0.5mm 44.0mm 60.0mm 1998 0.6mm 53.5mm 76.5mm 1999 0.7mm 63.0mm 93.0mm "Retained Amount" means, for any Test Date, an amount equal to the sum of (i) the product of (a) 100% minus the Sweep Percentage for such Test Date and (b) the excess, if any, of the Available Liquidity for such Test Date over the Minimum Liquidity for such Test Date, plus (ii) any amounts designated as "Retained Amounts" in Section 2.06(b)(i)(A)(1) hereof. "Sweep Payment Date" means each February 15th in each year, commencing with February 15, 1994. "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 to EBITDA (as such terms are defined in Section 9.01 hereof, but without reference to Section 9.10 hereof) as of the immediately preceding December 31 was less than 4.0 to 1.0. "Test Date" means each January 15th in each year, commencing with January 15, 1994. "Test Period" means, with respect to any Test Date, the period commencing on the immediately preceding December 16th and ending on such Test Date. 1.3. Amendments to Mandatory Prepayment of Excess Proceeds of Issuance of Stock or Debt. Section 2.06(b)(ii) of the Credit Agreement is amended and restated in its entirety as follows (and the applicable provisions of the First Amendment and the Second Amendment, including, without limitation, Section 5 of the Second Amendment, are accordingly superseded): (ii) Excess Proceeds of Issuance of Stock or Debt. Within one (1) Business Day of the Company's receipt of any Excess Proceeds of Issuance of Stock or Debt (or, with respect to the Public Debt, within the time period set forth in Section 8.03(viii)(A)), the Company shall make or cause to be made a mandatory prepayment in an amount equal to a portion of such Excess Proceeds of Issuance of Stock or Debt, and shall otherwise be entitled to apply such Excess Proceeds of Issuance of Stock or Debt, as determined as follows: (A) the Excess Proceeds of Issuance of Stock or Debt arising from the issuance of common stock by the Company pursuant to that certain S-1 Registration Statement filed with the Commission on January 7, 1994 shall be applied to the following, as the Company may in its sole discretion elect: (1) to the repayment of 10- 1/4% Senior Notes in an aggregate principal amount not to exceed $70,000,000, (2) to Capital Expenditures permitted under Section 9.08(ix) hereof, and/or (3) in accordance with clause (B) below; provided, that all such amounts not so applied by March 16, 1995 shall cease to constitute Excess Proceeds of Issuance of Stock or Debt for all purposes hereunder (and therefore shall become subject to the calculation of Cash Available for Sweep, if applicable); (B) except as applied pursuant to clauses (A)(1) or (2) above, prior to the payment in full of all Public Debt having maturity dates prior to January 1, 1999, 100% of the Excess Proceeds of Issuance of Stock or Debt shall be applied to the repayment of Public Debt having maturity dates prior to January 1, 1999 and/or the outstanding Term Loans, as the Company may in its discretion elect; provided, that to the extent that any portion of such Excess Proceeds of Issuance of Stock or Debt are not so applied within the time period set forth in Section 8.03(viii)(A), then such portion shall cease to constitute Excess Proceeds of Issuance of Stock or Debt for all purposes hereunder (and therefore shall become subject to the calculation of Cash Available for Sweep, if applicable); and (C) following the payment in full of all Public Debt having maturity dates prior to January 1, 1999, 100% of the Excess Proceeds of Issuance of Stock and Debt shall be applied to the outstanding principal balance of the Term Loans in the order of their maturity, but only until and to the extent that the aggregate outstanding principal balance of the Term Loans exceeds $150,000,000. The Company shall have no obligation to make any mandatory prepayment under this Section 2.06(b)(ii) once the aggregate outstanding principal balance of the Term Loans is less than or equal to $150,000,000. 1.4. Amendment to Indebtedness Covenant. Section 8.01 of the Credit Agreement is hereby amended to add the following at the end thereof: "(xvii) Indebtedness of the Company or any Subsidiary consisting of unsecured industrial revenue bonds issued after the Effective Date which do not in the aggregate exceed $25,000,000." 1.5. Amendment to Sales of Assets Covenant. Section 8.02(a)(v) of the Credit Agreement is hereby amended and restated in its entirety as follows: "(v) any sale for cash by the Company or any of its Restricted Subsidiaries not described in clauses (i) through (iv) above, provided, that the Net Cash Proceeds of Sale received by the Company or any Restricted Subsidiary (x) from any such individual sale or related group of sales does not exceed Fifteen Million Dollars ($15,000,000) and (y) from all such sales in any Fiscal Year of the Company does not exceed an aggregate amount of Thirty Million Dollars ($30,000,000); and" 1.6. Amendments to Investments Covenant. Section 8.03 of the Credit Agreement is hereby amended to delete clauses (viii) through (x) thereof and to substitute therefor the following: "(viii) Investments in Public Debt having final maturities prior to January 1, 2003, in order to effectuate the prepayment (or defeasance, subject to restrictions acceptable to the Agents) of such Public Debt, made with (A) Excess Proceeds of Issuance of Stock or Debt within one year following the receipt of such Excess Proceeds of Issuance of Stock or Debt (as described in Section 2.06(b)(ii)), (B) to the extent not used to make Capital Expenditures permitted hereunder, the amount of Net Cash Proceeds of Sale described in Section 9.08(iii) (referred to therein as "Excess Sale Proceeds"), (C) Cash Available for Sweep as described in Section 2.06(b)(i)(A)(1) hereof, provided, that, to the extent any such Investment under this clause (C) involves the payment of a premium in excess of 100% of the face amount of the applicable Public Debt (such excess being an "Investment Premium"), such Investment Premium shall be paid using Unrestricted Retained Amounts, except that up to an aggregate amount of $10,000,000 of Investment Premiums may be paid when no Unrestricted Retained Amounts exist at the time such Investment is made, (D) solely for Investments in Public Debt having final maturities in 1996 or 1997, proceeds from the borrowing of Public Debt Revolving Loans, and (E) Unrestricted Retained Amounts; (ix) Investments, not otherwise described in clauses (i) through (viii) 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 (x) any other Investments (other than Investments in Public Debt) not otherwise described in clauses (i) through (ix) 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 (x) shall not at any one time exceed an aggregate amount of $5,000,000." 1.7. Amendment to Restricted Junior Payment Covenant. Section 8.05 of the Credit Agreement is hereby amended to add the following at the end thereof: "(vii) the repurchase or redemption by CGC of its publicly-owned common stock, in an amount not to exceed 10% of its total outstanding shares of common stock in any single calendar year." 1.8. Amendment to Fundamental Changes Covenant. Section 8.07 of the Credit Agreement is hereby amended to delete subsection (b) thereof in its entirety. 1.9. Amendment to Prepayment of Indebtedness Covenant. Section 8.16 of the Credit Agreement is hereby amended to delete the parenthetical phrase in clause (y) thereof and to substitute therefor the following: "(except for the prepayment of the Indebtedness under the National Westminster Credit Agreement, or as otherwise expressly permitted pursuant to the terms of this Agreement, or as otherwise required pursuant to the terms of the agreements governing such long-term Indebtedness as in existence on and as of the Effective Date)" 1.10. Amendment to Capital Expenditures Covenant. Section 9.08 of the Credit Agreement is hereby amended to delete clause (v) thereof and to substitute therefor the following: "(v) [Intentionally left blank];" SECTION 2. Consent to Receivables Sale Facility. The Requisite Senior Lenders hereby consent to, and waive any conflict with any provision set forth in Article VIII of the Credit Agreement with respect to, a revolving accounts receivable sale facility established by the Company pursuant to which the Company and/or one or more of its Restricted Subsidiaries sells accounts receivable and other related assets (or otherwise grants a lien upon such accounts receivable or other related assets to secure non-recourse debt); provided, that (i) such facility shall have a maximum principal/investment amount not in excess of $150,000,000, and shall otherwise be on terms and conditions reasonably acceptable to the Agents, (ii) the first $60,000,000 of proceeds from such facility may be applied by the Company to prepay or repurchase 10-1/4% Senior Notes or for other permitted corporate purposes, as the Company may in its discretion elect, (iii) unless the original stated maturity of such facility (without giving effect to any renewals thereof) is after December 31, 2000, the Company shall, upon receipt thereof by the Company or any Restricted Subsidiary, make a prepayment of the Term Loans, in the order of maturity, in an amount equal to the lesser of (a) $40,000,000 and (b) the aggregate proceeds received from such facility in excess of $60,000,000, and (iv) except for the prepayment of the 10-1/4% Senior Notes and/or the Term Loans as described above, the use of the proceeds of such facility shall be subject to the terms and provisions of Article VIII of the Credit Agreement. Notwithstanding anything in the Credit Agreement to the contrary, the proceeds of such a revolving accounts receivable sale facility shall not be Excess Proceeds of Issuance of Stock or Debt subject to Section 2.06(b)(ii) thereof. SECTION 3. Conditions Precedent to Effectiveness. This Third Amendment shall become effective as of the date (the "Third 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 Third 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 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 Third 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 Third 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 Third 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 Third Amendment and all other Loan Documents executed by Interiors in connection herewith. (b) Prepayment of Cash Available for Sweep. The Company shall have paid $25,000,000 to the Administrative Agent, for the account of the Term Senior Lenders, as a prepayment of the Term Loans applied in the order of maturity. To the extent that the Company is required to pay any Cash Available for Sweep to the Senior Lenders after the Third Amendment Effective Date, the Company shall be entitled to offset the foregoing payment against such required payments of Cash Available for Sweep (it being understood that such calculations of Cash Available for Sweep shall be made as if such prepayment had not been made and such amounts remained as Cash held by USG). (c) 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, as further amended by the Second Amendment, as further amended by this Third Amendment, and as hereinafter 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 Third Amendment, including the reasonable fees and out-of-pocket expenses of Sidley & Austin, counsel for the Agents. SECTION 6. Successors and Assigns. This Third 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 and the Issuing Banks. SECTION 7. Execution in Counterparts. This Third 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 Third 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 Third Amendment are included herein for convenience of reference only and shall not constitute a part of this Third Amendment for any other purpose. [Remainder of page intentionally left blank.] IN WITNESS WHEREOF, the parties hereto have caused this Third Amendment to be executed by their respective officers thereunto duly authorized as of the date first above written. USG CORPORATION By /s/ Richard H. Fleming Title: USG INTERIORS, INC. By /s/ Richard H. Fleming Title: CITIBANK, N.A., as Administrative Agent, as an Agent and as a Senior Lender By /s/ Barbara A. Cohen Title: BANKERS TRUST COMPANY, as an Agent and as a Senior Lender By /s/ Mary Jo Jolly Title: CHEMICAL BANK, as an Agent and as a Senior Lender By /s/ Christopher C. Wardell Title: EX-15 3 Exhibit (15) August 12, 1994 USG Corporation 125 South Franklin Street Chicago, Illinois 60606 Gentlemen: We are aware that USG Corporation has incorporated by reference into previously filed Registration Statement Numbers 33-22581, 33-22930, 33-36303, 33-40136 and 33-63554 its Form 10-Q for the quarter ended June 30, 1994, which includes our report dated July 25, 1994, covering the unaudited condensed financial information contained therein. Pursuant to Regulation C of the Securities Act of 1933, these reports are not considered a part of the registration statement prepared or certified by our firm or reports prepared or certified by our firm within the meaning of Sections 7 and 11 of the Act. Very truly yours, /s/ Arthur Andersen & Co. ARTHUR ANDERSEN & CO. -----END PRIVACY-ENHANCED MESSAGE-----