-----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, n6q2yTlfILz2BB5R+u+3pn4rZc8m7vu1Qk8t2Y8XxeIJpnEn5+czrLRE+YTmutuu 3Hog6Tw+Y1rMej28glDYcQ== 0000757011-94-000011.txt : 19941116 0000757011-94-000011.hdr.sgml : 19941116 ACCESSION NUMBER: 0000757011-94-000011 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19940930 FILED AS OF DATE: 19941114 SROS: NONE 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: 94559112 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 September 30, 1994 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 1-886 USG CORPORATION (Exact name of registrant as specified in its charter) Delaware 36-3329400 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 125 South Franklin Street, Chicago, Illinois 60606-4678 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code (312) 606-4000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes X No As of October 31, 1994, 45,082,950 shares of USG common stock were outstanding. TABLE OF CONTENTS PART I FINANCIAL INFORMATION Item 1. Financial Statements: Consolidated Statement of Earnings: Three Months and Nine Months ended September 30, 1994, Three months ended September 30, 1993, May 7 through June 30, 1993 and January 1 through May 6, 1993 Consolidated Balance Sheet: As of September 30, 1994 and December 31, 1993 Consolidated Statement of Cash Flows: Nine Months Ended September 30, 1994, May 7 through September 30, 1993 and January 1 through May 6, 1993 Notes to Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition Report of Independent Public Accountants PART II OTHER INFORMATION Item 1. Legal Proceedings Item 6. Exhibits and Reports on Form 8-K SIGNATURES 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 Nine Months Three Months May 7 January 1 ended ended ended through thru September 30 September 30 September 30 June 30 May 6 Net Sales $ 621 $ 1,689 $ 514 $ 315 $ 591 Cost of products sold 468 1,293 409 252 482 Gross Profit 153 396 105 63 109 Selling and administrative expenses 63 179 56 36 71 Amortization of excess reorganization value 43 127 43 28 - Operating Profit/(Loss) 47 90 6 (1) 38 Interest expense 33 103 34 22 86 Interest income (3) (8) (2) (1) (2) Other expense/(income), net (1) 1 (4) (2) 6 Reorganization items - - - - (709) Earnings/(Loss) Before Taxes on Income, Extraordinary Gain and Changes in Accounting Principles 18 (6) (22) (20) 657 Taxes on income 24 51 3 1 17 Earnings/(Loss) Before Extraordinary Gain and Changes in Accounting Principles (6) (57) (25) (21) 640 Extraordinary gain, net of taxes - - - - 944 Cumulative effect of changes in accounting principles, net - - - - (150) Net Earnings/(Loss) (6) (57) (25) (21) 1,434 Average number of common shares (b) 45,065,991 42,691,615 37,157,482 37,157,458 Net Loss Per Common Share (b) $ (0.13) $ (1.34) $ (0.66) $ (0.57) Dividends paid per common share (b) - - - - (a) Due to the Restructuring and implementation of fresh start accounting, financial statements after May 6, 1993 for the restructured company are not comparable to financial statements prior to that date. See "Notes to Consolidated Financial Statements - Note (3)" for more information on the Restructuring and implementation of fresh start accounting. (b) Common shares and per share data for periods prior to May 7, 1993 are omitted because, due to the Restructuring and implementation of fresh start accounting, they are not meaningful. See accompanying Notes to Consolidated Financial Statements.
USG CORPORATION CONSOLIDATED BALANCE SHEET (Dollars in millions) (Unaudited)
As of As of September 30, December 31, 1994 1993 Assets Current Assets: Cash and cash equivalents $ 259 $ 211 Receivables (net of reserves - 1994 $14; 1993 $13) 308 264 Inventories 175 145 Total current assets 742 620 Property, Plant and Equipment (net of reserves for depreciation and depletion - 1994 $75; 1993 $36) 753 754 Excess Reorganization Value (net of accumulated amortization - 1994 $240; 1993 $113) 606 735 Other Assets 165 54 Total assets 2,266 2,163 Liabilities and Stockholders' Equity Current Liabilities: Accounts payable $ 125 $ 104 Accrued expenses 236 208 Notes payable 12 2 Long-term debt maturing within one year 8 165 Taxes on income 53 20 Total current liabilities 434 499 Long-Term Debt 1,202 1,309 Deferred Income Taxes 181 180 Other Liabilities 416 309 Stockholders' Equity/(Deficit): Preferred stock - - Common stock 5 4 Capital received in excess of par value 221 - Deferred currency translation (7) (9) Reinvested earnings/(deficit) (186) (129) Total stockholders' equity/(deficit) 33 (134) Total liabilities and stockholders' equity 2,266 2,163 See accompanying Notes to Consolidated Financial Statements.
USG CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (Dollars in millions) (Unaudited)
Nine Months May 7 January 1 ended through through September 30, September 30, May 6, 1994 (a) 1993 (a) 1993 Cash Flows From Operating Activities: Net earnings/(loss) $ (57) $ (46) $ 1,434 Adjustments to reconcile net earnings/(loss) to net cash: Amortization of excess reorganization value 127 71 - Cumulative effect of accounting changes - - 150 Depreciation, depletion and other amortization 52 29 22 Interest expense on pay-in-kind debentures - - 17 Deferred income taxes 1 3 (13) Net gain/(loss) on asset dispositions (2) (7) 4 (Increase)/decrease in working capital: Receivables (44) 23 18 Inventories (30) 1 (8) Payables 54 5 3 Accrued expenses 28 40 15 (Increase)/decrease in other assets (10) 4 (12) Increase in other liabilities 8 6 4 Changes due to reorganization items: Increase in reorganization items - - 65 Net adjustments to fair value - - (759) Gain on discharge of prepetition liabilities - - (944) Payment of liabilities net of collection of letter of credit - - (7) Other, net (2) (3) (3) Net cash flows (to)/from operating activities 125 126 (14) Cash Flows From Investing Activities: Capital expenditures (37) (16) (12) Net proceeds from asset dispositions 3 9 - Net cash flows to investing activities (34) (7) (12) Cash Flows From Financing Activities: Issuance of debt 168 26 5 Repayment of debt (435) (37) (142) Proceeds from public offering of common stock 224 - - Decrease in restricted assets - - 32 Net cash flows (to)/from financing activities (43) (11) (105) Net Increase/(Decrease) in Cash and Cash Equivalents 48 108 (131) Cash and cash equivalents as of beginning of period 211 49 180 Cash and cash equivalents as of end of period 259 157 49 Supplemental Cash Flow Disclosures: Interest paid 84 34 58 Income taxes paid 17 3 3 (a) Due to the Restructuring and implementation of fresh start accounting, financial statements after May 6, 1993 for the restructured company are not comparable to financial statements prior to that date. See "Notes to Consolidated Financial Statements - Note (3)" for more information on the Restructuring and implementation of fresh start accounting. See accompanying Notes to Consolidated Financial Statements.
USG CORPORATION Notes to Consolidated Financial Statements (Unaudited) (1) The consolidated financial statements of USG Corporation and its subsidiaries ("the Corporation") included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the statements reflect all adjustments, which are of a normal recurring nature, necessary to present fairly the Corporation's financial position as of September 30, 1994 and December 31, 1993; results of operations for the three months and nine months ended September 30, 1994, the three months ended September 30, 1993 and the periods of May 7 through June 30, 1993 and January 1 through May 6, 1993; and cash flows for the nine months ended September 30, 1994 and the periods of May 7 through September 30, 1993 and January 1 through May 6, 1993. While these interim financial statements and accompanying notes are unaudited, they have been reviewed by Arthur Andersen LLP, the Corporation's independent public accountants. These financial statements are to be read in conjunction with the financial statements and notes included in the Corporation's 1993 Annual Report on Form 10-K dated March 14, 1994. (2) On August 11, 1994, the Corporation's bank credit agreement (the "Credit Agreement") was amended for the third time since the Restructuring. In connection with this amendment (the "Third Amendment"), the Corporation made a $25 million prepayment of the mandatory prepayment due February 15, 1995. Major revisions to the Credit Agreement provided by the Third Amendment included (i) modification of the mandatory prepayment provisions to allow the Corporation to retain a greater portion of excess cash flow as calculated under these provisions, subject to certain conditions; (ii) authorization for the Corporation to immediately prepay up to $100 million of 10 1/4% senior notes due 2002 (the "10 1/4% Senior Notes"); and (iii) authorization for the Corporation to enter into a revolving accounts receivable sale facility for financing up to $150 million. Other modifications to the Credit Agreement as a result of The Third Amendment include (i) an increase of the minimum liquidity amount under the mandatory prepayment provisions to $150 million beginning with the January 15, 1996 cash sweep test date; (ii) authorization for the Corporation to prepay its European project financing (approximately $25 million); (iii) authorization for the Corporation to issue up to $25 million of new unsecured industrial revenue bonds, the proceeds to be added to its available liquidity for cash sweep and general corporate purposes; (iv) approval for CGC Inc., a 76%-owned subsidiary of the Corporation, ("CGC") to repurchase from its public shareholders up to 10% of its total outstanding shares annually; and (v) certain other changes to investment and asset sale covenants to increase the Corporation's operating flexibility. In the first quarter of 1994, the Corporation implemented a refinancing plan which included (i) a public offering 14,375,000 shares of common stock (the "Equity Offering"), of which 7,900,000 shares, yielding net proceeds to the Corporation of $224 million, were newly issued by the Corporation and 6,475,000 were sold by Water Street Corporate Recovery Fund I, L.P., a stockholder; (ii) the issuance of $150 million of 9 1/4% senior notes due 2001 to certain institutional investors (the "Note Placement") in exchange for $30 million aggregate principal amount of its outstanding 8% senior notes due 1996 (the "Senior 1996 Notes"), $35 million aggregate principal amount of its outstanding 8% senior notes due 1997 (the "Senior 1997 Notes") and $85 million in cash; and (iii) amendment of the Credit Agreement for the second time since the Restructuring. This amendment (the "Second Amendment" and, together with the Equity Offering and the Note Placement, the "Transactions") increased the size of the Corporation's revolving credit facility by $70 million and amended mandatory bank term loan prepayment provisions to allow the Corporation, upon the achievement of certain financial tests, to retain additional free cash flow for capital expenditures and repayment of its public debt. Utilizing the net proceeds of the Equity Offering and the Note Placement, excess cash as of December 31, 1993 (as calculated in accordance with the mandatory prepayment provisions of the Credit Agreement), cash generated from operations in 1994 and increased flexibility provided by the Second Amendment and the Third Amendment, the Corporation has made significant prepayments, redemptions or purchases of its public debt in 1994. In the first nine months of 1994, these activities included the prepayment, redemption or purchase of (i) $165 million of bank term loans in satisfaction of 1997, 1998 and a portion of 1999 scheduled payments; (ii) $32 million aggregate principal amount of Senior 1996 Notes; (iii) $24 million aggregate principal amount of Senior 1997 Notes; (iv) $75 million aggregate principal amount of its 8% senior notes due 1995; (v) $35 million of its 9% senior notes due 1998; (vi) $15 million aggregate principal amount of 10 1/4% Senior Notes; and (vii) $13 million aggregate principal amount of other debt issues. Further, the Corporation called another $85 million aggregate principal amount of 10 1/4% Senior Notes for redemption effective October 13, 1994. As of the date of this report, these debt prepayments, redemptions and purchases, net of the Note Placement, have reduced the Corporation's total debt by $359 million since December 31, 1993. (3) On May 6, 1993, the Corporation completed a comprehensive restructuring of its debt (the "Restructuring") through the implementation of a "prepackaged" plan of reorganization (the "Prepackaged Plan"). In accordance with the terms of the Prepackaged Plan, $1.4 billion of debt and accrued interest was converted into equity, interest expense was significantly reduced and the maturities of a substantial portion of its remaining debt were extended. The Corporation accounted for the Restructuring using the principles of fresh start accounting as required by AICPA Statement of Position 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code" ("SOP 90-7"). Pursuant to such principles, individual assets and liabilities were adjusted to fair market value as of May 6, 1993. Excess reorganization value, the portion of the reorganization value not attributable to specific assets, is being amortized over a five-year period, effective May 7, 1993. In August 1993, the Corporation completed an exchange offer that converted $138 million of bank debt into 10 1/4% Senior Notes. See the Corporation's 1993 Annual Report on Form 10-K dated March 14, 1994 for more information on the Restructuring, implementation of fresh start accounting and exchange of senior notes for bank debt. Due to the Restructuring and implementation of fresh start accounting, financial statements after May 6, 1993 for the restructured company are not comparable to financial statements prior to that date. For year-to- year comparability of results, the following unaudited Pro Forma Consolidated Statement of Earnings for the nine months ended September 30, 1993 has been prepared giving effect to the consummation of the Prepackaged Plan including the costs related thereto, in accordance with SOP 90-7, as if the consummation had occurred on January 1, 1993. The adjustments set forth under the caption "Pro Forma Adjustments" reflect the assumed effects of the Restructuring and the adoption of fresh start accounting prescribed by SOP 90-7. USG CORPORATION PRO FORMA CONSOLIDATED STATEMENT OF EARNINGS Nine Months ended September 30, 1993 (unaudited) (Dollars in millions)
Total Before Pro Forma Adjustments Adjustments Pro Forma Net sales $ 1,420 $ - $ 1,420 Cost of products sold 1,143 - 1,143 Gross profit 277 - 277 Selling and administrative expenses 163 - 163 Amortization of excess reorganization value 71 57 (a) 128 Operating profit/(loss) 43 (57) (14) Interest expense 142 (42) (b) 100 Interest income (5) - (5) Other expense, net - (1) (c) (1) Reorganization items (709) 709 (d) - Earnings/(loss) before taxes on income, extraordinary gain and changes in accounting principles 615 (723) (108) Taxes on income 21 (16) 5 Earnings/(loss) before extraordinary gain and changes in accounting principles 594 (707) (113) (a) Reflects amortization of excess reorganization value which would have been recorded during the period of January 1 through May 6, 1993. (b) Reflects the adjustment to restate interest expense for the period of January 1 through May 6, 1993 to the amount that would have been recorded. (c) Represents the reversal of first quarter 1993 amortization of historical capitalized financing costs which were written off in connection with the Restructuring. (d) Represents the reversal of actual reorganization items incurred in connection with the Restructuring in the period of January 1 through May 6, 1993. These expenses would have been recorded in 1992 had the Restructuring occurred on January 1, 1993.
(4) A one-time after-tax charge of $150 million was recorded in the first quarter of 1993 representing the adoption of: (i) Statement of Financial Accounting Standard ("SFAS") No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," - $180 million expense; and (ii) SFAS No. 109, "Accounting for Income Taxes," - $30 million income. Neither of these standards impact cash flow. (5) Income tax expense for the three months and nine months ended September 30, 1994 amounted to $24 million and $51 million, respectively. For the three months ended September 30, 1993 and the period of May 7 through June 30, 1993, income tax expense amounted to $3 million and $1 million, respectively. These expenses resulted primarily from (i) tax expense on foreign subsidiary earnings; (ii) the inability to benefit the amortization of excess reorganization value and the domestic net operating loss carryforwards ("NOL Carryforwards") and (iii) for the third quarter of 1993, a one-time charge to adjust deferred taxes for an increase in the statutory tax rate from 34.0% to 35.0%. For the period of January 1 through May 6, 1993, income tax expense was $17 million due to tax expense on foreign subsidiary earnings, the inability to benefit the NOL Carryforwards as an offset to deferred taxes and the non-taxable effect of fresh start accounting. The Corporation has an NOL Carryforward of $99 million remaining from 1992. This NOL Carryforward may be used to offset U.S. taxable income through 2007. The Internal Revenue Code (the "Code") will limit the Corporation's annual use of its NOL Carryforward to the lesser of its taxable income or approximately $30 million plus any unused limit from prior years. Furthermore, due to the uncertainty regarding the application of the Code to the exchange of stock for debt, the Corporation's NOL Carryforward could be further reduced or eliminated. The Corporation has a $4 million minimum tax credit which may be used to offset U.S. regular tax liability in future years. (6) As of September 30, 1994, 2,764,500 common shares were reserved for future issuance in conjunction with existing stock option grants. An additional 50 common shares were reserved for future grants. (7) One of the Corporation's operating subsidiaries, United States Gypsum Company ("U.S. Gypsum"), is a defendant in asbestos lawsuits alleging both property damage and personal injury. This litigation has not had a material effect on the Corporation's liquidity or earnings. Virtually all costs of the Personal Injury Cases are being paid by insurance. However, many of U.S. Gypsum's insurance carriers are denying coverage for the Property Damage Cases, although U.S. Gypsum believes that substantial coverage exists and the trial court and an appellate court in U.S. Gypsum's Coverage Action has so ruled (such rulings may be appealed). In view of the limited insurance funding currently available to U.S. Gypsum for Property Damage Cases resulting from continued resistance by a number of U.S. Gypsum's insurers to providing coverage, the effect of the asbestos litigation on the Corporation will depend upon a variety of factors, including the damages sought in Property Damage Cases that reach trial prior to the completion of the Coverage Action, U.S. Gypsum's ability to successfully defend or settle such cases, and the resolution of the Coverage Action. As a result, management is unable to determine whether an adverse outcome in the asbestos litigation will have a material adverse effect on the results of operations or the consolidated financial position of the Corporation. Effective January 1, 1994, the Corporation adopted the requirements of Financial Accounting Standards Board Interpretation No. 39. In accordance with Interpretation No. 39, U.S. Gypsum recorded an accrual of $100 million for its liabilities for asbestos-related matters which are deemed probable and can be reasonably estimated, and separately recorded an asset of $100 million, the amount of such liabilities that is expected to be paid by uncontested insurance. Due to management's inability to reasonably estimate U.S. Gypsum's liability for Property Damage Cases and (until the implementation of Georgine et al. v. Amchem Products In., et al is deemed probable) future Personal Injury Cases, the liability and asset recorded relate only to pending Personal Injury Cases. The implementation of Interpretation No. 39 did not impact earnings, cash flow or net assets. See Part II, Item 1. "Legal Proceedings" for information on asbestos litigation and definitions of capitalized terms. On November 1, 1994, the Corporation announced that it would record a pre-tax charge of $30 million in the fourth quarter of 1994 in connection with the settlement of two asbestos property damage class action cases. See "Note 10 - Subsequent Event" for more information concerning these settlements. The Corporation and certain of its subsidiaries have been notified by state and federal environmental protection agencies of possible involvement as one of numerous "potentially responsible parties" in a number of so-called "Superfund" sites in the United States. The Corporation does not presently anticipate any material adverse effect upon its earnings or consolidated financial position arising out of the resolution of these matters or any other pending governmental proceeding regarding environmental matters. (8) USG Corporation, a holding company, owns several operating subsidiaries, including U.S. Gypsum. On January 1, 1985, all of the issued and outstanding shares of stock of U.S. Gypsum were converted into shares of USG Corporation and the holding company became a joint and several obligor for certain debentures originally issued by U.S. Gypsum. The outstanding balance of such debentures, which is carried on the holding company's books of account, totaled $32 million and $36 million as of September 30, 1994 and December 31, 1993, respectively. Summary financial results for U.S. Gypsum are presented below (dollars in millions):
1994 (a) 1993 (a) 1993 Three Months Nine Months Three Months May 7 January 1 ended ended ended through thru September 30 September 30 September 30 June 30 May 6 Net sales $ 329 $ 888 $ 259 $ 161 $ 297 Cost and expenses 256 710 222 142 268 Amortization of excess reorganization value 15 46 15 10 - Operating profit 58 132 22 9 29 Interest expense, net - 1 - - - Corporate charges 20 65 23 13 52 Reorganization items - - - - (295) Earnings/(loss) before taxes on income and change in accounting principle 38 66 (1) (4) 272 Income tax/(tax benefit) 20 43 2 3 (7) Earnings/(loss) before change in accounting principle 18 23 (3) (7) 279 Cumulative effect of change in accounting principle - - - - 28 Net earnings/loss 18 23 (3) (7) 307
As of As of September 30, December 31, Summary Balance Sheet 1994 1993 Current assets $ 321 $ 190 Property, plant and equipment, net 482 483 Excess reorganization value, net 219 265 Other assets 106 3 Total assets 1,128 941 Current liabilities 191 124 Other liabilities and obligations 246 149 Stockholder's equity 691 668 Total liabilities and stockholder's equity 1,128 941 (a) Due to the Restructuring and implementation of fresh start accounting, financial statements after May 6, 1993 for the restructured company are not comparable to financial statements prior to that date. See Note (3) for more information on the Restructuring and implementation of fresh start accounting.
(9) As of September 30, 1994, $463 million aggregate principal amount of 10 1/4% Senior Notes were outstanding. Each of U.S. Gypsum, USG Industries, Inc., USG Interiors, Inc. ("USG Interiors"), USG Foreign Investments, Ltd., L&W Supply Corporation ("L&W Supply"), Westbank Planting Company, USG Interiors International, Inc., American Metals Corporation and La Mirada Products Co., Inc. (together, the "Combined Guarantors") guaranteed, in the manner described below, the obligations of the Corporation under the Credit Agreement and the 10 1/4% Senior Notes. The Combined Guarantors are jointly and severally liable under the guarantees. Holders of the debt issued under the Credit Agreement (the "Bank Debt") have the right to: (i) determine whether, when and to what extent the guarantees will be enforced (provided that each guarantee payment will be applied to the Bank Debt and 10 1/4% Senior Notes pro rata based on the respective amounts owed thereon); and (ii) amend or eliminate the guarantees. The guarantees will terminate when the Bank Debt is retired regardless of whether any 10 1/4% Senior Notes remain outstanding. The liability of each of the Combined Guarantors on its guarantee is limited to the greater of: (i) 95% of the lowest amount, calculated as of July 13, 1988, sufficient to render the guarantor insolvent, leave the guarantor with unreasonably small capital or leave the guarantor unable to pay its debts as they become due (each as defined under applicable law); and (ii) the same amount, calculated as of the date any demand for payment under such guarantee is made, in each case plus collection costs. The guarantees are senior obligations of the applicable guarantor and rank pari passu with all unsubordinated obligations of the guarantor. Subsidiaries other than the Combined Guarantors (the "Combined Non- Guarantors"), substantially all of which are subsidiaries of Guarantors, primarily include CGC, Gypsum Transportation Limited, USG Canadian Mining Ltd. and the Corporation's Mexican, European and Pacific subsidiaries managed by USG International, Ltd. ("USG International"). The long-term debt of the Combined Non-Guarantors of $25 million as of September 30, 1994 has restrictive covenants that restrict, among other things, the payment of dividends. The following condensed consolidating information presents: (i) Condensed financial statements as of September 30, 1994 and December 31, 1993 and for the three months and nine months ended September 30, 1994, the three months ended September 30, 1993 and for the periods of May 7 through June 30, 1993 and January 1 through May 6, 1993 of (a) the Corporation on a parent company only basis (the "Parent Company," which was the only entity of the Corporation included in the 1993 bankruptcy proceeding associated with the Restructuring), (b) the Combined Guarantors, (c) the Combined Non-Guarantors and (d) the Corporation on a consolidated basis. (Due to the Restructuring and implementation of fresh start accounting, the financial statements after May 6, 1993 for the restructured company are not comparable to financial statements prior to that date. Except for the following condensed financial statements, separate financial information with respect to the Combined Guarantors is not deemed material to investors and is omitted.) (ii) The Parent Company and Combined Guarantors shown with their investments in their subsidiaries accounted for on the equity method. (iii) Elimination entries necessary to consolidate the Parent Company and its subsidiaries. USG CORPORATION CONDENSED CONSOLIDATING STATEMENT OF EARNINGS (Dollars in millions)
Combined Parent Combined Non- Company Guarantors Guarantors Eliminations Consolidated Three Months ended September 30, 1994 Net Sales $ - $ 545 $ 105 $ (29) $ 621 Gross Profit/(Loss) (2) 132 23 - 153 Operating Profit/(Loss) (14) 57 4 - 47 Equity in net (earnings)/loss of the Subsidiaries - (1) - 1 - Interest expense, net 28 1 1 - 30 Corporate service charge (39) 39 - - - Other expense/(income), net 1 (2) - - (1) Earnings/(Loss) Before Taxes on Income (4) 20 3 (1) 18 Taxes on income 2 20 2 - 24 Net Earnings/(Loss) (6) - 1 (1) (6) Nine Months ended September 30, 1994 Net Sales $ - $ 1,482 $ 286 $ (79) $ 1,689 Gross Profit/(Loss) (2) 337 61 - 396 Operating Profit/(Loss) (33) 119 4 - 90 Equity in net loss of the Subsidiaries 45 6 - (51) - Interest expense, net 91 2 2 - 95 Corporate service charge (120) 120 - - - Other expense/(income), net 3 (2) - - 1 Earnings/(Loss) Before Taxes on Income (52) (7) 2 51 (6) Taxes on income 5 38 8 - 51 Net Loss (57) (45) (6) 51 (57)
USG CORPORATION CONDENSED CONSOLIDATING STATEMENT OF EARNINGS (Dollars in millions)
Combined Parent Combined Non- Company Guarantors Guarantors Eliminations Consolidated Three Months ended September 30, 1993 Net Sales $ - $ 445 $ 90 $ (21) $ 514 Gross Profit - 87 18 - 105 Operating Profit/(Loss) (11) 17 - - 6 Equity in net loss of the Subsidiaries 29 4 - (33) - Interest expense, net 31 1 - - 32 Corporate service charge (41) 41 - - - Other expense/(income), net - (6) 1 1 (4) Loss Before Taxes on Income (30) (23) (1) 32 (22) Taxes on income/(income tax benefit) (6) 6 3 - 3 Net Loss (24) (29) (4) 32 (25) May 7 through June 30, 1993 Net Sales $ - $ 279 $ 57 $ (21) $ 315 Gross Profit - 51 12 - 63 Operating Profit/(Loss) (6) 6 (1) - (1) Equity in net loss of the Subsidiaries 23 3 - (26) - Interest expense, net 20 1 - - 21 Corporate service charge (27) 27 - - - Other expense/(income), net (1) (4) 1 2 (2) Loss Before Taxes on Income (21) (21) (2) 24 (20) Taxes on income/(income tax benefit) (2) 2 1 - 1 Net Loss (19) (23) (3) 24 (21) January 1 through May 6, 1993 Net Sales $ - $ 501 $ 113 $ (23) $ 591 Gross Profit 1 84 24 - 109 Operating Profit/(Loss) (11) 39 10 - 38 Equity in net earnings of the Subsidiaries (751) (169) - (920) - Interest expense, net 80 3 1 - 84 Corporate service charge (92) 92 - - - Other expense, net 1 5 - - 6 Reorganization items 53 (597) (165) - (709) Earnings Before Taxes on Income and Extraordinary Items 698 705 174 (920) 657 Taxes on income/(income tax benefit) 37 (24) 4 - 17 Earnings Before Extraordinary Items 661 729 170 (920) 640 Extraordinary Gain, net of taxes 944 - - - 944 Changes in accounting principles (171) 22 (1) - (150) Net Earnings 1,434 751 169 (920) 1,434
USG CORPORATION CONDENSED CONSOLIDATING BALANCE SHEET (Dollars in millions)
Combined Parent Combined Non- As of September 30, 1994 Company Guarantors Guarantors Eliminations Consolidated Cash and cash equivalents $ 228 $ (9) $ 40 $ - $ 259 Receivables, net 1 290 55 (38) 308 Inventories - 136 42 (3) 175 Total current assets 229 417 137 (41) 742 Property, Plant and Equipment, Net 21 617 115 - 753 Investment in Subsidiaries 1,467 269 - (1,736) - Excess Reorganization Value, Net - 481 125 - 606 Other Assets (109) 263 13 (2) 165 Total assets 1,608 2,047 390 (1,779) 2,266 Accounts payable and accrued expenses 104 285 60 (35) 414 Notes payable and LTD maturing within one year - 3 17 - 20 Total current liabilities 104 288 77 (35) 434 Long-Term Debt 1,143 34 25 - 1,202 Deferred Income Taxes 17 148 16 - 181 Other Liabilities 304 110 2 - 416 Common stock 5 1 6 (7) 5 Capital received in excess of par value 221 1,472 310 (1,782) 221 Deferred currency translation - - (7) - (7) Reinvested earnings/(deficit) (186) (6) (39) 45 (186) Total stockholders' equity/ (deficit) 40 1,467 270 (1,744) 33 Total liabilities and stockholders' equity 1,608 2,047 390 (1,779) 2,266 As of December 31, 1993 Cash and cash equivalents $ 187 $ (8) $ 32 $ - $ 211 Receivables, net 8 240 44 (28) 264 Inventories - 114 34 (3) 145 Total current assets 195 346 110 (31) 620 Property, Plant and Equipment, Net 21 620 113 - 754 Investment in Subsidiaries 1,511 277 - (1,788) - Excess Reorganization Value, Net - 582 153 - 735 Other Assets (35) 91 3 (5) 54 Total assets 1,692 1,916 379 (1,824) 2,163 Accounts payable and accrued expenses 100 207 52 (27) 332 Notes payable and LTD maturing within one year 158 3 6 - 167 Total current liabilities 258 210 58 (27) 499 Long-Term Debt 1,249 36 24 - 1,309 Deferred Income Taxes 14 151 15 - 180 Other Liabilities 296 8 5 - 309 Common stock 4 1 6 (7) 4 Capital received in excess of par value - 1,472 310 (1,782) - Deferred currency translation - - (9) - (9) Reinvested earnings/(deficit) (129) 38 (30) (8) (129) Total stockholders' equity/ (deficit) (125) 1,511 277 (1,797) (134) Total liabilities and stockholders' equity 1,692 1,916 379 (1,824) 2,163
USG CORPORATION CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS (Dollars in millions)
Combined Parent Combined Non- Nine Months ended September 30, 1994 Company Guarantors Guarantors Eliminations Consolidated Net Cash Flows (To)/From Operating Activities $ (109) $ 214 $ 20 $ - $ 125 Capital expenditures (1) (29) (7) - (37) Net proceeds from asset dispositions - 3 - - 3 Net Cash Flows To Investing Activities (1) (26) (7) - (34) Issuance of debt 85 - 83 - 168 Repayment of debt (359) (1) (75) - (435) Proceeds from stock offering 224 - - - 224 Cash dividends (paid)/received - 13 (13) - - Net cash transfers (to)/from Corporate 201 (201) - - - Net Cash Flows (To)/From Financing Activities 151 (189) (5) - (43) Net Increase/(Decrease) in Cash & Cash Equivalents 41 (1) 8 - 48 Cash & cash equivalents - beginning 187 (8) 32 - 211 Cash & cash equivalents - end 228 (9) 40 - 259 May 7 through September 30, 1993 Net Cash Flows From Operating Activities $ 9 $ 109 $ 8 $ - $ 126 Capital expenditures - (12) (4) - (16) Net proceeds from asset dispositions - 9 - - 9 Net Cash Flows To Investing Activities - (3) (4) - (7) Issuance of debt - - 26 - 26 Repayment of debt (4) (9) (24) - (37) Cash dividends (paid)/received - 3 (3) - - Net cash transfers (to)/from Corporate 100 (100) - - - Net Cash Flows (To)/From Financing Activities 96 (106) (1) - (11) Net Increase in Cash & Cash Equivalents 105 - 3 - 108 Cash & cash equivalents - beginning 24 (7) 32 - 49 Cash & cash equivalents - end 129 (7) 35 - 157 January 1 through May 6, 1993 Net Cash Flows (To)/From Operating Activities $ (90) $ 76 $ - $ - $ (14) Capital expenditures - (9) (3) - (12) Net proceeds from asset dispositions - - - - - Net Cash Flows To Investing Activities - (9) (3) - (12) Issuance of debt - - 5 - 5 Repayment of debt - (140) (2) - (142) Cash dividends (paid)/received 2 - (2) - - Deposit of restricted cash 44 (12) - - 32 Net cash transfers (to)/from Corporate 9 (9) - - - Net Cash Flows (To)/From Financing Activities 55 (161) 1 - (105) Net Decrease in Cash & Cash Equivalents (35) (94) (2) - (131) Cash & cash equivalents - beginning 59 87 34 - 180 Cash & cash equivalents - end 24 (7) 32 - 49
(10) Subsequent Event: On November 1, 1994, the Corporation announced that U.S. Gypsum had executed agreements to settle two asbestos property damage class actions: In re Asbestos School Litigation and Board of Education of the City of Detroit v. The Celotex Corp., et al. These two cases include most of the school districts in the country. In the fourth quarter of 1994, the Corporation will record a pre-tax charge of $30 million primarily to cover the cash portion of the settlements. Under the agreements, approximately one-half of the cash will be paid in 1994 with the remainder paid in 1995 and 1996. In connection with In re Asbestos School Litigation, U.S. Gypsum also will issue discount coupons to the school districts in the class for the purchase of U.S. Gypsum plaster products. The coupons will be redeemable over ten years, subject to annual "caps," and will have an aggregate face amount of $50 million. No current charge against earnings will be recorded for future coupon redemptions. Such redemptions will reduce margins but not create a loss when redeemed, and although the amount of redemptions can not be estimated, the impact on results of operations will be immaterial. Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition Results of Operations On May 6, 1993, the Corporation completed the Restructuring. Due to the Restructuring and implementation of fresh start accounting, the Corporation's financial statements after May 6, 1993 are not comparable to financial statements prior to that date. See Part I, Item 1. "Financial Statements: Notes to Consolidated Financial Statements - Note (3)" for information on the Restructuring and implementation of fresh start accounting. To facilitate a meaningful year-to-year comparison of the Corporation's operating performance, the following information is presented on a third quarter and nine months basis and includes comparisons of EBITDA (earnings before interest, taxes, depreciation, depletion and amortization, and, for 1993, reorganization items, extraordinary gain and the cumulative effect of changes in accounting principles). The Corporation believes EBITDA is helpful in understanding cash flow generated from operations that is available for taxes, debt service and capital expenditures. In addition, EBITDA facilitates the monitoring of covenants related to certain long-term debt and other agreements entered into in conjunction with the Restructuring. EBITDA should not be considered by investors as an alternative to net earnings as an indicator of the Corporation's operating performance or as a measure of cash flows and overall liquidity. Consolidated Results (dollars in millions):
Three Months ended Nine Months ended September 30 September 30 1994 1993 1994 1993 Net Sales $ 621 $ 514 $ 1,689 $ 1,420 Gross Profit 153 105 396 277 % of net sales 24.6% 20.4% 23.4% 19.5% Selling and administrative expenses 63 56 179 163 % of net sales 10.1% 10.9% 10.6% 11.5% Amortization of excess reorganization value 43 43 127 71 Operating Profit 47 6 90 43 Calculation of EBITDA: Operating profit $ 47 $ 6 $ 90 $ 43 Amortization of excess reorganization value 43 43 127 71 Depreciation and depletion 15 14 41 42 Other - 2 - 9 EBITDA 105 65 258 165 % of net sales 16.9% 12.6% 15.3% 11.6%
Consolidated net sales for the third quarter and first nine months of 1994 were up $107 million, or 20.8%, and $269 million, or 18.9%, respectively, over the comparable 1993 periods. These increases reflect rising gypsum wallboard prices and record levels of shipments for gypsum wallboard, joint compound, ceiling tile and cement board. Consolidated gross profit as a percentage of net sales increased to 24.6% and 23.4% in the third quarter and first nine months of 1994, respectively, from 20.4% and 19.5% in the prior year periods primarily due to the increased prices for gypsum wallboard. Selling and administrative expenses for the third quarter of 1994 increased $7 million, or 12.5%, over the third quarter of 1993 and $16 million, or 9.8%, in the first nine months of 1994 over the comparable 1993 period. The higher levels of expenses in 1994 primarily reflect increased expenses related to compensation and benefits and product and marketing programs. As a percentage of net sales, however, these expenses improved to 10.1% for the third quarter of 1994 and 10.6% for the first nine months of 1994 from 10.9% and 11.5% in the respective 1993 periods as a result of the increase in 1994 net sales. Amortization of excess reorganization value, which was established in accordance with fresh start accounting rules, amounted to $43 million and $127 million in the third quarter and first nine months of 1994, respectively. Because this non-cash amortization did not begin until May 7, 1993, operating profit for the third quarter and first nine months of 1994 is not comparable to the prior year periods. EBITDA for the third quarter and first nine months of 1994 increased $40 million, or 61.5%, and $93 million, or 56.4%, respectively, over the 1993 periods. These increases reflect the improved gross margins. Industry Segment/Core Business Results (dollars in millions):
Three Months ended September 30 Nine Months ended September 30 Net Sales EBITDA Net Sales EBITDA 1994 1993 1994 1993 1994 1993 1994 1993 North American Gypsum: U.S. Gypsum $ 329 $ 259 $ 81 $ 44 $ 888 $ 717 $ 200 $ 108 CGC (gypsum division) 30 23 5 3 80 67 10 7 Other subsidiaries 24 20 8 5 65 55 20 16 Eliminations (22) (16) - - (60) (46) - - Total Gypsum Products 361 286 94 52 973 793 230 131 Building Products Distribution 180 143 6 3 485 387 12 5 Eliminations (55) (42) (1) - (150) (117) (2) - Total North American Gypsum 486 387 99 55 1,308 1,063 240 136 Worldwide Ceilings: USG Interiors 105 98 15 15 303 272 42 38 USG International 54 49 2 1 147 140 4 5 CGC (interiors division) 7 8 1 1 22 23 3 4 Eliminations (9) (9) - - (27) (28) - - Total Worldwide Ceilings 157 146 18 17 445 407 49 47 Corporate - - (13) (7) - - (31) (18) Eliminations (22) (19) 1 - (64) (50) - - Total USG Corporation 621 514 105 65 1,689 1,420 258 165
North American Gypsum Net sales for North American Gypsum for the third quarter and first nine months of 1994 increased $99 million, or 25.6%, and $245 million, or 23.0%, respectively, over the third quarter and first nine months of 1993. EBITDA for the third quarter and first nine months of 1994 increased $44 million, or 80.0%, and $104 million, or 76.5%, over the respective 1993 periods. For U.S. Gypsum, continuing improvement in gypsum wallboard prices and record quarterly and nine month shipments of gypsum wallboard, joint compound and DUROCK cement board led to higher sales and profits. Net sales increased $70 million, or 27.0%, in the third quarter of 1994 over the third quarter of 1993 and EBITDA increased $37 million, or 84.1%. For the first nine months of 1994, net sales increased $171 million, or 23.8%, while EBITDA increased $92 million, or 85.2%, over the prior-year period. Gypsum wallboard shipments in the third quarter of 1994 reached a record 2.059 billion square feet, an increase of 7.5% over the third quarter of 1993. U.S. Gypsum's wallboard plants operated at 98% of capacity in the third quarter of 1994. The average gypsum wallboard selling price increased to $104.65 per thousand square feet in the third quarter of 1994, up $23.95, or 29.7%, from the third quarter of 1993 and up $6.26, or 6.4%, from the previous 1994 quarter. For the first nine months of 1994, record-setting gypsum wallboard shipments of 5.745 billion square feet were 6.2% above the comparable 1993 level. The average gypsum wallboard price of $97.76 per thousand square feet for the first nine months of 1994 was $19.89, or 25.5%, above the nine month 1993 average price. Higher purchase prices for waste paper contributed to increased gypsum wallboard unit manufacturing cost for 1994, up approximately 7% over the 1993 level. Building Products Distribution (L&W Supply) net sales for the third quarter of 1994 increased $37 million, or 25.9%, over the third quarter of 1993. For the first nine months of 1994, record net sales of $485 million were $98 million, or 25.3%, above the comparable 1993 level. EBITDA for the third quarter of 1994 doubled to $6 million versus the 1993 quarter, and for the first nine months of 1994, increased $7 million, or 140.0%, over the comparable 1993 period. These increases reflect improved sales and gross profits for virtually all of L&W Supply's product lines. CGC's gypsum division net sales and EBITDA for the third quarter of 1994 increased $7 million, or 30.4%, and $2 million, or 66.7%, respectively, over the third quarter of 1993. For the first nine months of 1994, net sales and EBITDA increased $13 million, or 19.4%, and $3 million, or 42.9%, respectively, above the comparable 1993 period. These favorable results primarily reflect increased gypsum wallboard volume and selling prices. Increased residential construction activity in eastern Canada and the exporting of gypsum wallboard to the United States accounted for the improved wallboard volume. Worldwide Ceilings Net sales for the third quarter and first nine months of 1994 for Worldwide Ceilings were up 11 million, or 7.5%, and $38 million, or 9.3%, respectively, over the third quarter and first nine months of 1993. EBITDA improved $1 million, or 5.9%, in the third quarter of 1994 over the year-earlier period while increasing $2 million, or 4.3%, in the first nine months of 1994 over the first nine months of 1993. USG Interiors' record levels of ceiling tile shipments contributed to increased third quarter and nine month 1994 net sales of $7 million, or 7.1%, and $31 million, or 11.4%, respectively, when compared to the prior year periods. EBITDA for the third quarter of 1994 was unchanged from the third quarter of 1993 while increasing $4 million, or 10.5%, in the first nine months of 1994 over the corresponding 1993 period. USG International's third quarter 1994 net sales increased $5 million, or 10.2%, while EBITDA increased to $2 million versus $1 million in the third quarter of 1993. For the first nine months of 1994, net sales were up $7 million, or 5.0%, over the first nine months of 1993, while EBITDA decreased $1 million, or 20.0%. The decline in 1994 EBITDA was primarily due to lower margins for non-ceilings product lines. Other Consolidated Earnings Information Interest expense amounted to $33 million in the third quarter of 1994, down $1 million from the third quarter of 1993. For the first nine months of 1994, interest expense was $103 million, decreasing $39 million from the first nine months of 1993 primarily as a result of the Restructuring and subsequent refinancing activities. Non-cash amortization of reorganization debt discount, which is included in interest expense, amounted to $2 million and $9 million for the third quarter and first nine months of 1994, respectively, compared to $3 million and $5 million for the prior-year periods. Income tax expense amounted to $24 million and $51 million in the third quarter and first nine months of 1994, respectively, primarily due to the inability to benefit the amortization of excess reorganization value and the NOL Carryforwards. In the third quarter and first nine months of 1993, income tax expense amounted to $3 million and $21 million, respectively. In connection with the Restructuring, a reorganization items gain of $709 million was recorded in 1993, reflecting second quarter fresh start accounting adjustments totaling $778 million, net of first quarter restructuring fees and expenses of $69 million. Also in the second quarter of 1993, a one-time after-tax extraordinary gain of $944 million was recorded primarily reflecting the gain on the exchange of subordinated debt for common stock. A one-time after-tax charge of $150 million was recorded in the first quarter of 1993 representing the adoption of: (i) SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," - $180 million expense; and (ii) SFAS No. 109, "Accounting for Income Taxes," - $30 million income. Neither of these standards impact cash flow. Net losses of $6 million and $57 million were recorded in the third quarter and first nine months of 1994, respectively. However, the non-cash amortization of excess reorganization value and reorganization debt discount reduced net earnings by $45 million, or $1.01 per common share in the third quarter of 1994 and $136 million, or $3.19 per common share in the first nine months of 1994. See "Results of Operations - Consolidated Results" above for more information of amortization of excess reorganization value and its impact on earnings and the comparability of earnings to prior years. Liquidity and Capital Resources On August 11, 1994, the Third Amendment was made effective. On the effective date, the Corporation made a $25 million prepayment of the mandatory prepayment due February 15, 1995. Major revisions to the Credit Agreement provided by the Third Amendment included (i) modification of the mandatory prepayment provisions to allow the Corporation to retain a greater portion of excess cash flow as calculated under these provisions, subject to certain conditions; (ii) authorization for the Corporation to immediately prepay up to $100 million of 10 1/4% Senior Notes; and (iii) authorization for the Corporation to enter into a revolving accounts receivable sale facility for financing up to $150 million. Other modifications to the Credit Agreement as a result of The Third Amendment include (i) an increase of the minimum liquidity amount under the mandatory prepayment provisions to $150 million beginning with the January 15, 1996 cash sweep test date; (ii) authorization for the Corporation to prepay its European project financing (approximately $25 million); (iii) authorization for the Corporation to issue up to $25 million of new unsecured industrial revenue bonds, the proceeds to be added to its available liquidity for cash sweep and general corporate purposes; (iv) approval for CGC to repurchase from its public shareholders up to 10% of its total outstanding shares annually; and (v) certain other changes to investment and asset sale covenants to increase the Corporation's operating flexibility. In the first quarter of 1994, the Corporation implemented a refinancing plan which included (i) the Equity Offering, (ii) the Note Placement and (iii) the Second Amendment. These Transactions were designed, among other things, to (i) reduce the Corporation's financial leverage through the retirement of debt, (ii) reduce the amount of debt maturing in 1995 through 1998 and extend the final maturity of a significant portion of the Corporation's debt, (iii) improve the Corporation's financial and operating flexibility under the Credit Agreement and (iv) provide funds for capital expenditures and other general corporate purposes, including capital expenditures for cost reduction, capacity improvement and future growth opportunities. Utilizing the net proceeds of the Equity Offering and the Note Placement, excess cash as of December 31, 1993 (as calculated in accordance with the mandatory prepayment provisions of the Credit Agreement), cash generated from operations in 1994 and increased flexibility provided by the Second Amendment and the Third Amendment, the Corporation has made significant prepayments, redemptions or purchases of its public debt in 1994. As of the date of this report, these debt prepayments, redemptions and purchases, net of the Note Placement, have reduced the Corporation's total debt by $359 million since December 31, 1993. See Part I, Item 1. "Financial Statements: Notes to Consolidated Financial Statements - Note (2)" for additional information on these activities. The Corporation significantly strengthened its liquidity and capital resources by the Transactions, and its flexibility by consummation of the Third Amendment. The Corporation believes that cash generated by operations and the estimated levels of liquidity available to it will be sufficient to satisfy its debt service requirements and other capital requirements for the foreseeable future. Pursuant to the Third Amendment, the Corporation is in the process of implementing an accounts receivable sale financing which is expected to replace $100 million aggregate principal amount of 10 1/4% Senior Notes with a lower interest borrowing maturing in 7 to 10 years and to provide an additional $50 million of revolving debt, the proceeds of which would be used for general corporate purposes. Working Capital As of September 30, 1994, working capital (current assets less current liabilities) amounted to $308 million and the ratio of current assets to current liabilities was 1.71 to 1, versus December 31, 1993 when working capital amounted to $121 million and the ratio of current assets to current liabilities was 1.24 to 1. If the proposed accounts receivable financing described above is consummated, it will be reported as debt of the Corporation for accounting purposes and there will be no change in working capital as a result of this financing. In the first nine months of 1994, cash and cash equivalents increased $48 million to $259 million primarily due to cash generated from operations partially offset by the net impact of the Transactions and debt payments. The Corporation may utilize an additional portion of existing cash to prepay additional debt or for other uses in accordance with the Transactions and the Third Amendment described above. Comparing September 30, 1994 balances with December 31, 1993, accounts receivable (net) increased $44 million, or 16.7%, to $308 million, inventories increased $30 million, or 20.7%, to $175 million and accounts payable increased $21 million, or 20.2%, to $125 million. These increases primarily reflect the increased level of business. Capital Expenditures Capital expenditures amounted to $37 million in first nine months of 1994, up $9 million, or 32.1%, over the first nine months of 1993. As a result of the aforementioned Transactions, which generated approximately $92 million for capital expenditures, the Corporation augmented its capital spending program. As of September 30, 1994, capital expenditure commitments for the replacement, modernization and expansion of operations amounted to $57 million compared with $11 million as of December 31, 1993. In addition, the Corporation periodically evaluates possible acquisitions or combinations involving other businesses or companies, generally in businesses and markets related to the Corporation's current operations, and the Corporation believes that its available liquidity would be generally adequate to support appropriate opportunities. Litigation One of the Corporation's subsidiaries, U.S. Gypsum, is a defendant in asbestos lawsuits alleging both property damage and personal injury. This litigation has not had a material effect on the Corporation's liquidity or earnings. Virtually all costs of the Personal Injury Cases are being paid by insurance. However, many of U.S. Gypsum's insurance carriers are denying coverage for the Property Damage Cases, although U.S. Gypsum believes that substantial coverage exists and the trial court and an appellate court in U.S. Gypsum's Coverage Action has so ruled (such rulings may be appealed). In view of the limited insurance funding currently available to U.S. Gypsum for Property Damage Cases resulting from continued resistance by a number of U.S. Gypsum's insurers to providing coverage, the effect of the asbestos litigation on the Corporation will depend upon a variety of factors, including the damages sought in Property Damage Cases that reach trial prior to the completion of the Coverage Action, U.S. Gypsum's ability to successfully defend or settle such cases, and the resolution of the Coverage Action. As a result, management is unable to determine whether an adverse outcome in the asbestos litigation will have a material adverse effect on the results of operations or the consolidated financial position of the Corporation. Effective January 1, 1994, the Corporation adopted the requirements of Financial Accounting Standards Board Interpretation No. 39. In accordance with Interpretation No. 39, U.S. Gypsum recorded an accrual of $100 million for its liabilities for asbestos-related matters which are deemed probable and can be reasonably estimated, and separately recorded an asset of $100 million, the amount of such liabilities that is expected to be paid by uncontested insurance. Due to management's inability to reasonably estimate U.S. Gypsum's liability for Property Damage Cases and (until the implementation of Georgine is deemed probable) future Personal Injury Cases, the liability and asset recorded in 1994 relate only to pending Personal Injury Cases. The implementation of Interpretation No. 39 did not impact earnings, cash flow or net assets. On November 1, 1994, the Corporation announced that it would record a pre-tax charge of $30 million in the fourth quarter of 1994 in connection with the settlement of two asbestos property damage class action cases. See Part I, Item 1. "Financial Statements: Notes to Consolidated Financial Statements - Note 10 - Subsequent Event" for more information concerning these settlements. The Corporation and certain of its subsidiaries have been notified by state and federal environmental protection agencies of possible involvement as one of numerous "potentially responsible parties" in a number of so-called "Superfund" sites in the United States. The Corporation believes that neither these matters nor any other known governmental proceeding regarding environmental matters will have a material adverse effect upon its earnings or consolidated financial position. See Part II, Item 1. "Legal Proceedings" for more information on legal proceedings. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of USG Corporation: We have reviewed the accompanying condensed consolidated balance sheet of USG CORPORATION (a Delaware corporation) AND SUBSIDIARIES as of September 30, 1994, and the related condensed consolidated statement of earnings for the three-month and nine-month periods ended September 30, 1994 and the condensed consolidated statement of cash flows for the nine months ended September 30, 1994. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. As discussed in Note 3, on May 6, 1993, the Corporation completed a comprehensive financial restructuring through the implementation of a prepackaged plan of reorganization under Chapter 11 of Title 11 of the United States Bankruptcy Code and applied fresh start accounting. As such, results of operations through May 6, 1993 are not comparable with results of operations subsequent to that date. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with generally accepted accounting principles. As discussed in Note 7, in view of the limited insurance funding currently available for property damage cases resulting from the continued resistance by a number of U.S. Gypsum's insurers to providing coverage, the effect of the asbestos litigation on the Corporation will depend upon a variety of factors, including the damages sought in property damage cases that reach trial prior to the completion of the coverage action, U.S. Gypsum's ability to successfully defend or settle such cases, and the resolution of the coverage action. As a result, management is unable to determine whether an adverse outcome in the asbestos litigation will have a material adverse effect on the consolidated results of operations or the consolidated financial position of the Corporation. As discussed in Note 7, on January 1, 1994, the Corporation changed its method of accounting for asbestos-related matters. /s/ Arthur Andersen LLP ARTHUR ANDERSEN LLP Chicago, Illinois October 18, 1994 PART II. OTHER INFORMATION Item 1. Legal Proceedings Asbestos Litigation One of the Corporation's subsidiaries, U.S. Gypsum, is among numerous defendants in lawsuits arising out of the manufacture and sale of asbestos- containing building materials. U.S. Gypsum sold certain asbestos-containing products beginning in the 1930's; in most cases the products were discontinued or asbestos was removed from the product formula by 1972, and no asbestos- containing products were sold after 1977. Some of these lawsuits seek to recover compensatory and in many cases punitive damages for costs associated with maintenance or removal and replacement of products containing asbestos (the "Property Damage Cases"). Others of these suits (the "Personal Injury Cases") seek to recover compensatory and in many cases punitive damages for personal injury allegedly resulting from exposure to asbestos and asbestos- containing products. It is anticipated that additional personal injury and property damage cases containing similar allegations will be filed. As discussed below, U.S. Gypsum has substantial personal injury and property damage insurance for the years involved in the asbestos litigation. Prior to 1985, when an asbestos exclusion was added to U.S. Gypsum's policies, U.S. Gypsum purchased comprehensive general liability insurance policies covering personal injury and property damage in an aggregate face amount of approximately $850 million. Insurers that issued approximately $106 million of these policies are presently insolvent. After deducting insolvencies and exhaustion of policies, approximately $600 million of insurance remains potentially available. Because U.S. Gypsum's insurance carriers initially responded to its claims for defense and indemnification with various theories denying or limiting coverage and the applicability of their policies, U.S. Gypsum filed a declaratory judgment action against them in the Circuit Court of Cook County, Illinois on December 29, 1983. (U. S. Gypsum Co. v. Admiral Insurance Co., et al.) (the "Coverage Action"). U.S. Gypsum alleges in the Coverage Action that the carriers are obligated to provide indemnification for settlements and judgments and, in some cases, defense costs incurred by U.S. Gypsum in property damage and personal injury claims in which it is a defendant. The current defendants are ten insurance carriers that provided comprehensive general liability insurance coverage to U.S. Gypsum between the 1940's and 1984. As discussed below, several carriers have settled all or a portion of the claims in the Coverage Action. U.S. Gypsum's aggregate expenditures for all asbestos-related matters, including property damage, personal injury, insurance coverage litigation and related expenses, exceeded aggregate insurance payments by $10.9 million in 1991, $25.8 million in 1992, and $8.2 million in 1993. Property Damage Cases The Property Damage Cases have been brought against U.S. Gypsum by a variety of plaintiffs, including school districts, state and local governments, colleges and universities, hospitals and private property owners. U.S. Gypsum is one of many defendants in four cases that have been certified as class actions and others that request such certification. On April 10, 1992, a state court in Philadelphia certified a class consisting of all owners of buildings leased to the federal government. (Prince George Center, Inc. v. U.S. Gypsum Co., et al., Court of Common Pleas, Philadelphia, Pa.) On September 4, 1992, a Federal district court in South Carolina conditionally certified a class comprised of all colleges and universities in the United States, which certification is presently limited to the resolution of certain allegedly "common" liability issues. (Central Wesleyan College v. W.R. Grace & Co., et al, U.S.D.C. S.C.). In October 1994, U.S. Gypsum executed agreements to settle two class action cases, subject to court approval following notice to the respective classes. One suit was brought on behalf of owners and operators of all elementary and secondary schools in the United States that contain or contained friable asbestos-containing material. (In re Asbestos School Litigation, U.S.D.C, E.D. Pa.) Approximately 1,350 school districts opted out of the class, some of which have filed or may file separate lawsuits. The other class action settlement involved approximately 333 school districts in Michigan that had opted out of the nationwide class action. Board of Education of the City of Detroit, et al. v. The Celotex Corp., et al., Circuit Court for Wayne County, MI.) In connection with the settlements, the Corporation will record a fourth quarter 1994 pre-tax charge of $30 million, primarily to cover the cash portion of the settlements. Approximately half of the cash payments will be paid in 1994 and the rest over the next two years. In addition, U.S. Gypsum will also issue discount coupons to the school districts in the nationwide class action for the purchase of plaster products. The coupons, which will be redeemable over ten years subject to annual "caps," will have an aggregate face amount of $50 million. A case pending in state court in South Carolina, which has not been certified as a class action, purports to be a "voluntary" class action on behalf of owners of all buildings containing certain types of asbestos-containing products manufactured by the nine named defendants, including U.S. Gypsum, other than buildings owned by the federal or state governments, single family residences, or buildings at issue in the other described class actions. (Anderson County Hospital v. W.R. Grace & Co., et al., Court of Common Pleas, Hampton Co., S.C. (the "Anderson case")). The Anderson case also names the Corporation as a defendant, alleging, among other things, that the guarantees executed by U.S. Gypsum in connection with the 1988 Recapitalization, as well as subsequent distributions of cash from U.S. Gypsum to the Corporation, rendered U.S. Gypsum insolvent and constitute a fraudulent conveyance. The suit seeks to set aside the guarantees and recover the value of the cash flow "diverted" from U.S. Gypsum to the Corporation in an amount to be determined. In July 1994, the court in the Anderson case ruled that claims involving building owners outside South Carolina cannot be included in the suit. No other threshold issues, including whether the South Carolina courts have personal jurisdiction over the Corporation, have been decided. A case which has yet to be certified as a class action was filed in state court in Jasper County, Texas on August 8, 1994. (Kirbyville Independent School District v. U.S. Gypsum, et al., District Court of Jasper County, Texas (the "Kirbyville" case)). The case purports to be a class action on behalf of all public building owners and political subdivisions of the State of Texas, including all cities, counties and municipalities. The damages claimed against U.S. Gypsum in the class action cases are unspecified. U.S. Gypsum has denied the substantive allegations of each of the Property Damage Cases and intends to defend them vigorously except when advantageous settlements are possible. As of September 30, 1994, 46 Property Damage Cases were pending against U.S. Gypsum; however, the number of buildings involved is greater than the number of cases because many of these cases, including the class actions referred to above, involve multiple buildings. In addition, approximately 40 property damage claims have been threatened against U.S. Gypsum. In total, U.S. Gypsum has settled approximately 87 Property Damage Cases, involving 203 plaintiffs, in addition to the two school class action settlements referred to above. Twenty-four cases have been tried to verdict, 15 of which were won by U.S. Gypsum and 5 lost; three other cases, one won at the trial level and two lost, were settled during appeals. Another case that was lost at the trial court level was reversed on appeal and remanded to the trial court, which has now entered judgment for U.S. Gypsum. Appeals are pending in 4 of the tried cases. In the cases lost, compensatory damage awards against U.S. Gypsum have totalled $11.5 million. Punitive damages totalling $5.5 million were entered against U.S. Gypsum in four trials. Two of the punitive damage awards, totalling $1.45 million, were paid after appeals were exhausted; and two were settled during the appellate process. In 1991, 13 new Property Damage Cases were filed against U.S. Gypsum, eleven were dismissed before trial, eight were settled, two were closed following trial or appeal, and 100 were pending at year-end; U.S. Gypsum expended $22.2 million for the defense and resolution of Property Damage Cases and received insurance payments of $13.8 million in 1991. During 1992, 7 new Property Damage Cases were filed against U.S. Gypsum, 10 were dismissed before trial, 18 were settled, 3 were closed following trial or appeal, and 76 were pending at year-end. U.S. Gypsum expended $34.9 million for the defense and resolution of Property Damage Cases and received insurance payments of $10.2 million in 1992. In 1993, 5 new Property Damage Cases were filed against U.S. Gypsum, 7 were dismissed before trial, 11 were settled, 1 was closed following trial or appeal, 2 were consolidated into 1, and 61 were pending at year end; U. S Gypsum expended $13.9 million for the defense and resolution of Property Damage Cases and received insurance payments of $7.6 million in 1993. In the Property Damage Cases litigated to date, a defendant's liability for compensatory damages, if any, has been limited to damages associated with the presence and quantity of asbestos-containing products manufactured by that defendant which are identified in the buildings at issue, although plaintiffs in some cases have argued that principles of joint and several liability should apply. Because of the unique factors inherent in each of the Property Damage Cases, including the lack of reliable information as to product identification and the amount of damages claimed against U.S. Gypsum in many cases, including the class actions described above, management is unable to make a reasonable estimate of the cost of disposing of pending Property Damage Cases. Personal Injury Cases U.S. Gypsum was among numerous defendants in asbestos personal injury suits and administrative claims involving approximately 52,000 claimants pending as of September 30, 1994. All asbestos bodily injury claims pending in the federal courts, including approximately one-third of the Personal Injury Cases pending against U.S. Gypsum, have been consolidated in the United States District Court for the Eastern District of Pennsylvania. U.S. Gypsum is a member, together with 19 other former producers of asbestos- containing products, of the Center for Claims Resolution (the "Center"). The Center has assumed the handling, including the defense and settlement, of all Personal Injury Cases pending against U.S. Gypsum and the other members of the Center. Each member of the Center is assessed a portion of the liability and defense costs of the Center for the Personal Injury Cases handled by the Center, according to predetermined allocation formulas. Five of U.S. Gypsum's insurance carriers that in 1985 signed an Agreement Concerning Asbestos- Related Claims (the "Wellington Agreement") are supporting insurers (the "Supporting Insurers") of the Center. The Supporting Insurers are obligated to provide coverage for the defense and indemnity costs of the Center's members pursuant to the coverage provisions in the Wellington Agreement. Claims for punitive damages are defended but not paid by the Center; if punitive damages are recovered, insurance coverage may be available under the Wellington Agreement depending on the terms of particular policies and applicable state law. Punitive damages have not been awarded against U.S. Gypsum in any of the Personal Injury Cases. Virtually all of U.S. Gypsum's personal injury liability and defense costs are paid by those of its insurance carriers that are Supporting Insurers. The Supporting Insurers provided approximately $350 million of the total coverage referred to above, of which approximately $240 million remains unexhausted. On January 15, 1993, U.S. Gypsum and the other members of the Center entered into a class action settlement in the U. S. District Court for the Eastern District of Pennsylvania. (Georgine et al. v. Amchem Products Inc., et al., Case No. 93-CV-0215; hereinafter "Georgine.") The class of plaintiffs includes all persons who have been occupationally exposed to asbestos- containing products manufactured by the defendants, who had not filed an asbestos personal injury suit as of the date of the filing of the class action. The settlement has been approved by the trial court, and if upheld on appeal will implement for all future Personal Injury Cases, except as noted below, an administrative compensation system to replace judicial claims against the defendants, and will provide fair and adequate compensation to future claimants who can demonstrate exposure to asbestos-containing products manufactured by the defendants and the presence of an asbestos-related disease. Approximately 235,000 individuals "opted out," or elected to exclude themselves from the class, comprised of approximately 200,000 persons who may have been occupationally exposed to asbestos and 35,000 family members of such persons. In addition, in each year a limited number of claimants will have certain rights to prosecute their claims for compensatory (but not punitive) damages in court in the event they reject the compensation offered by the administrative processing of their claim. The Center members, including U.S. Gypsum, have instituted proceedings against those of their insurance carriers that had not consented to support the settlement, seeking a declaratory judgment that the settlement is reasonable and, therefore, that the carriers are obligated to fund their portion of it. Consummation of the settlement is contingent upon, among other things, court approval of the settlement and a favorable ruling in the declaratory judgment proceedings against the non-consenting insurers. Each of the defendants has committed to fund a defined portion of the settlement, up to a stated maximum amount, over the initial ten year period of the agreement (which is automatically extended unless terminated by the defendants). Taking into account the provisions of the settlement agreement concerning the maximum number of claims that must be processed in each year and the total amount to be made available to the claimants, the Center estimates that U.S. Gypsum will be obligated to fund a maximum of approximately $125 million of the class action settlement, exclusive of expenses, with a maximum payment of less than $18 million in any single year; of the total amount of U.S. Gypsum's obligation, all but approximately $7 million is expected to be paid by U.S. Gypsum's insurance carriers. During 1991, approximately 13,100 Personal Injury Cases were filed against U.S. Gypsum and approximately 6,300 were settled or dismissed. U.S. Gypsum incurred expenses of $15.1 million in 1991 with respect to Personal Injury Cases of which $15.0 million was paid by insurance. During 1992, approximately 20,100 Personal Injury Cases were filed against U.S. Gypsum and approximately 10,600 were settled or dismissed. U.S. Gypsum incurred expenses of $21.6 million in 1992 with respect to Personal Injury Cases of which $21.5 million was paid by insurance. During 1993, approximately 26,900 Personal Injury Cases were filed against U.S. Gypsum and approximately 22,900 were settled or dismissed. U.S. Gypsum incurred expenses of $34.9 million in 1993 with respect to Personal Injury Cases of which $34.0 million was paid by insurance. As of December 31, 1993, 1992, and 1991, approximately 59,000, 54,000 and 43,000 Personal Injury Cases were outstanding against U.S. Gypsum, respectively. U.S. Gypsum's average settlement cost for Personal Injury Cases over the past three years has been approximately $1,600 per claim, exclusive of defense costs. Management anticipates that its average settlement cost is likely to increase due to such factors as the possible insolvency of co-defendants, although this increase may be offset to some extent by other factors, including the possibility for block settlements of large numbers of cases and the apparent increase in the percentage of asbestos Personal Injury Cases that appear to have been brought by individuals with little or no physical impairment. Through the Center, U.S. Gypsum had reached settlements on approximately 26,700 Personal Injury Cases pending on December 31, 1993 for amounts totalling approximately $32 million, to be expended over a three year period. In management's opinion, based primarily upon U.S. Gypsum's experience in the Personal Injury Cases disposed of to date and taking into consideration a number of uncertainties, it is probable that all asbestos- related Personal Injury Cases pending against U.S. Gypsum as of September 30, 1994, can be disposed of for a total amount, including both indemnity costs and legal fees and expenses, estimated to be between $100 million and $120 million (of which all but $2 million or $5 million, respectively, is expected to be paid by insurance). The estimated cost of resolving pending claims takes into account, among other factors, (i) an increase in the number of pending claims; (ii) the settlements of certain large blocks of claims for higher per-case averages than have historically been paid; (iii) the committed but unconsummated settlements described above; and (iv) a small increase in U.S. Gypsum's historical settlement average. Assuming that the Georgine class action settlement referred to above is approved substantially in its current form, management estimates, based on assumptions supplied by the Center, U.S. Gypsum's maximum total exposure in Personal Injury Cases during the next ten years (the initial term of the agreement), including liability for pending claims and claims resolved as part of the class action settlement, as well as defense costs and other expenses, at approximately $262 million, of which approximately $250 million is expected to be paid by insurance. U.S. Gypsum's additional exposure for claims filed by persons who have opted out of Georgine would depend on the number and severity of such claims that are filed, which cannot presently be determined. Coverage Action As indicated above, all of U.S. Gypsum's carriers initially denied coverage for the Property Damage Cases and the Personal Injury Cases, and U.S. Gypsum initiated the Coverage Action to establish its right to such coverage. U.S. Gypsum has voluntarily dismissed the Supporting Insurers referred to above from the personal injury portion of the Coverage Action because they are committed to providing personal injury coverage in accordance with the Wellington Agreement. U.S. Gypsum's claims against the remaining carriers for coverage for the Personal Injury Cases have been stayed since 1984. On January 7, 1991, the trial court in the Coverage Action ruled on the applicability of U.S. Gypsum's insurance policies to settlements and one adverse judgment in eight Property Damage Cases. The court ruled that the eight cases were generally covered, and imposed coverage obligations on particular policy years based upon the dates when the presence of asbestos- containing material was "first discovered" by the plaintiff in each case. The court awarded reimbursement of approximately $6.2 million spent by U.S. Gypsum to resolve the eight cases. U.S. Gypsum appealed the court's ruling with respect to the policy years available to cover particular claims, and the carriers appealed most other aspects of the court's ruling. On November 4, 1994, the Illinois Appellate Court issued a ruling affirming the trial court's finding that the eight cases were covered, but expanding the years of coverage available by holding that all insurance policies in effect from the date of installation to the date of removal of asbestos-containing products are obligated to provide coverage (known as the "continuous trigger" of coverage). The defendant carriers may now seek rehearing from the Appellate Court and/or review by the Illinois Supreme Court, which is discretionary with the Court. If the Supreme Court accepts the appeal, the appeal will continue for a year or more. Once the appellate process has concluded, further proceedings will be necessary in the trial court with respect to the application of the appellate ruling to all Property Damage Cases other than the eight cases involved in the earlier trial, as well as resolution of certain other issues. The Appellate Court's ruling, if applied to the Property Damage Cases generally, will allow U.S. Gypsum to access all of its available insurance coverage for Property Damage Cases, subject to reduction for amounts that are spent on Personal Injury Cases. Under the ruling, all Property Damage Cases would be covered by insurance unless or until such insurance becomes exhausted. U.S. Gypsum is evaluating the impact of the ruling on past property damage expenditures and, if the ruling is applied to such expenditures, U.S. Gypsum should be able to recover a substantial portion, subject to the allocation of costs to insolvent carriers, excess carriers with no defense cost obligations, and carriers that have previously settled. The Company is not yet able to estimate the amount of its past property damage expenditures that it could recover or when such recoveries would occur. Eight carriers, including two of the Supporting Insurers, have settled U.S. Gypsum's claims for both property damage and personal injury coverage and have been dismissed from the Coverage Action entirely. Four of these carriers have agreed to pay all or a substantial portion of their policy limits to U.S. Gypsum beginning in 1991 and continuing over the next four years. Three other excess carriers, including the two settling Supporting Insurers, have agreed to provide coverage for the Property Damage Cases and the Personal Injury Cases subject to certain limitations and conditions, when and if underlying primary and excess coverage is exhausted. It is anticipated that one of these settling carriers will begin reimbursing U.S. Gypsum for a portion of its property damage settlements and judgments by the end of 1994. It can not presently be determined when the policies of the other two settled carriers will be reached. Taking into account the above settlements, including participation of certain of the settling carriers in the Wellington Agreement, and consumption through December 31, 1993, carriers providing a total of approximately $90 million of unexhausted insurance have agreed, subject to the terms of the various settlement agreements, to cover both Personal Injury Cases and Property Damage Cases. Carriers providing an additional $250 million of coverage that was unexhausted as of December 31, 1993 have agreed to cover Personal Injury Cases under the Wellington Agreement, but continue to contest coverage for Property Damage Cases and remain defendants in the Coverage Action. U.S. Gypsum will continue to seek negotiated resolutions with its carriers in order to minimize the expense and delays of litigation. Insolvency proceedings have been instituted against four of U. S. Gypsum's insurance carriers. Midland Insurance Company, declared insolvent in 1986, provided excess insurance ($4 million excess of $1 million excess of $500,000 primary in each policy year) from February 15, 1975 to February 15, 1978; Transit Casualty Company, declared insolvent in 1985, provided excess insurance ($15 million excess of $1 million primary in each policy year) from August 1, 1980 to December 31, 1985; Integrity Insurance Company, declared insolvent in 1986, provided excess insurance ($10 million quota share of $25 million excess of $90 million) from August 1, 1983 to July 31, 1984; and American Mutual Insurance Company, declared insolvent in 1989, provided the primary layer of insurance ($500,000 per year) from February 1, 1963 to April 15, 1971. It is possible that U.S. Gypsum will be required to pay a presently indeterminable portion of the costs that would otherwise have been covered by these policies. In addition, portions of various policies issued by Lloyd's and other London market companies between 1966 and 1979 have also become insolvent; under the Wellington Agreement, U.S. Gypsum must pay these amounts, which total approximately $12 million. It is not possible to predict the number of additional lawsuits alleging asbestos-related claims that may be filed against U.S. Gypsum. The number of Personal Injury Cases pending against U.S. Gypsum has increased in each of the last several years. In addition, many Property Damage Cases are still at an early stage and the potential liability therefrom is consequently uncertain. In view of the limited insurance funding currently available for the Property Damage Cases resulting from the continued resistance by a number of U.S. Gypsum's insurers to providing coverage, the effect of the asbestos litigation on the Corporation will depend upon a variety of factors, including the damages sought in the Property Damage Cases that reach trial prior to the completion of the Coverage Action, U.S. Gypsum's ability to successfully defend or settle such cases, and the resolution of the Coverage Action. As a result, management is unable to determine whether an adverse outcome in the asbestos litigation will have a material adverse effect on the results of operations or the consolidated financial position of the Corporation. Accounting Change Effective January 1, 1994, the Corporation adopted the requirements of Financial Accounting Standards Board Interpretation No. 39. In accordance with Interpretation No. 39, U.S. Gypsum recorded an accrual of $100 million for its liabilities for asbestos-related matters which are deemed probable and can be reasonably estimated, and separately recorded an asset of $100 million, the amount of such liabilities that is expected to be paid by uncontested insurance. Due to management's inability to reasonably estimate U.S. Gypsum's liability for Property Damage Cases and (until the implementation of Georgine is deemed probable) future Personal Injury Cases, the liability and asset recorded in 1994 relate only to pending Personal Injury Cases. The implementation of Interpretation No. 39 did not impact earnings, cash flow or net assets. Environmental Litigation The Corporation and certain of its subsidiaries have been notified by state and federal environmental protection agencies of possible involvement as one of numerous "potentially responsible parties" in a number of so-called "Superfund" sites in the United States. In substantially all of these sites, the involvement of the Corporation or its Subsidiaries is expected to be minimal. The Corporation believes that appropriate reserves have been established for its potential liability in connection with all Superfund sites but is continuing to review its accruals as additional information becomes available. Such reserves take into account all known or estimable costs associated with these sites including site investigations and feasibility costs, site cleanup and remediation, legal costs, and fines and penalties, if any. In addition, environmental costs connected with site cleanups on USG- owned property are also covered by reserves established in accordance with the foregoing. The Corporation believes that neither these matters nor any other known governmental proceeding regarding environmental matters will have a material adverse effect upon its earnings or consolidated financial position. Item 6. Exhibits and Reports on Form 8-K (a) (15) Letter of Arthur Andersen LLP regarding unaudited financial information. (b) There were no reports on Form 8-K filed during the third quarter of 1994. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. USG CORPORATION By / S / Dean H. Goossen Dean H. Goossen, Corporate Secretary, USG Corporation November 14, 1994 By / s / Raymond T. Belz Raymond T. Belz, Vice President and Controller, USG Corporation EX-15 2 Exhibit (15) November 14, 1994 USG Corporation 125 South Franklin Street Chicago, Illinois 60606 Gentlemen: We are aware that USG Corporation has incorporated by reference into previously filed Registration Statement Numbers 33-22581, 33-22930, 33-36303, 33-40136 and 33-63554 its Form 10-Q for the quarter ended September 30, 1994, which includes our report dated October 18, 1994, covering the unaudited condensed financial information contained therein. Pursuant to Regulation C of the Securities Act of 1933, these reports are not considered a part of the registration statement prepared or certified by our firm or reports prepared or certified by our firm within the meaning of Sections 7 and 11 of the Act. Very truly yours, /s/ Arthur Andersen LLP ARTHUR ANDERSEN LLP EX-27 3
5 1,000,000 9-MOS DEC-31-1994 SEP-30-1994 259 0 322 14 175 742 828 75 2266 434 1202 5 0 0 28 2266 1689 1689 1293 1293 179 0 103 (6) 51 (57) 0 0 0 (57) (1.34) (1.34)
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