-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SOx+SGaw8jA6erUIdI23lJGmIEu+3TyrMAWp9xnNr3Ij8Ue0Wb2c4Kk27fuSG301 qvWHdlU6K0taC+T9i7aaMg== 0000757011-95-000010.txt : 19951205 0000757011-95-000010.hdr.sgml : 19951205 ACCESSION NUMBER: 0000757011-95-000010 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19950930 FILED AS OF DATE: 19951109 SROS: NYSE 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: 95588582 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, 1995 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission File Number 1-8864 USG CORPORATION (Exact name of registrant as specified in its charter) Delaware 36-3329400 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 125 South Franklin Street, Chicago, Illinois 60606-4678 (Address of principal executive offices) (Zip code) Registrant's telephone number, including area code (312) 606-4000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13, or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes X No As of October 31, 1995, 45,170,858 shares of USG common stock were outstanding. Table of Contents PART I FINANCIAL INFORMATION Item 1. Financial Statements: Consolidated Statement of Earnings: Three Months and Nine Months Ended September 30, 1995 and 1994 Consolidated Balance Sheet: As of September 30, 1995 and December 31, 1994 Consolidated Statement of Cash Flows: Nine Months Ended September 30, 1995 and 1994 Notes to Consolidated Financial Statements Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition Report of Independent Public Accountants PART II OTHER INFORMATION Item 1. Legal Proceedings Item 6. Exhibits and Reports on Form 8-K SIGNATURES PART I FINANCIAL INFORMATION Item 1. Financial Statements USG CORPORATION CONSOLIDATED STATEMENT OF EARNINGS (Dollars in millions except per share data) (Unaudited)
Three Months Nine Months ended September 30, ended September 30, 1995 1994 1995 1994 Net sales $ 629 $ 621 $ 1,842 $ 1,689 Cost of products sold 477 468 1,389 1,293 Gross profit 152 153 453 396 Selling and administrative expenses 61 63 181 179 Amortization of excess reorganization value 43 43 127 127 Operating profit 48 47 145 90 Interest expense 25 33 77 103 Interest income (2) (3) (5) (8) Other expense, net 1 (1) 1 1 Earnings/(loss) before taxes on income 24 18 72 (6) Taxes on income 26 24 79 51 Net loss (2) (6) (7) (57) Net loss per common share (0.04) (0.13) (0.16) (1.34) Dividends paid per common share - - - - Average number of common shares 45,108,206 45,065,991 45,095,230 42,691,615 See accompanying Notes to Consolidated Financial Statements.
USG CORPORATION CONSOLIDATED BALANCE SHEET (Dollars in millions) (Unaudited)
As of As of September 30, December 31, 1995 1994 Assets Current Assets: Cash and cash equivalents $ 64 $ 197 Receivables (net of reserves - $17 and $14) 288 270 Inventories 183 173 Total current assets 535 640 Property, plant and equipment (net of reserves for depreciation and depletion - $118 and $80) 812 755 Excess reorganization value (net of accumulated amortization - $409 and $282) 437 561 Other assets 212 168 Total Assets 1,996 2,124 Liabilities and Stockholders' Equity Current Liabilities: Accounts payable 150 122 Accrued expenses 176 210 Notes payable 7 1 Long-term debt maturing within one year 4 44 Taxes on income 29 35 Total current liabilities 366 412 Long-term debt 923 1,077 Deferred income taxes 178 179 Other liabilities 533 464 Stockholders' Equity/(Deficit): Preferred stock - - Common stock 5 5 Capital received in excess of par value 222 221 Deferred currency translation (3) (13) Reinvested earnings/(deficit) (228) (221) Total stockholders' equity/(deficit) (4) (8) Total Liabilities and Stockholders' Equity 1,996 2,124 See accompanying Notes to Consolidated Financial Statements.
USG CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (Dollars in millions) (Unaudited)
Nine Months ended September 30, 1995 1994 Operating Activities: Net loss $ (7) $ (57) Adjustments to reconcile net loss to net cash: Amortization of excess reorganization value 127 127 Depreciation, depletion and other amortization 50 52 Deferred income taxes (1) 1 Net gain on asset dispositions (3) (2) (Increase)/decrease in working capital: Receivables (18) (51) Inventories (10) (30) Payables 22 54 Accrued expenses (34) 22 Increase in other assets (44) (3) Increase in other liabilities 69 14 Other, net (2) (2) Net cash flows from operating activities 149 125 Investing Activities: Capital expenditures (94) (37) Net proceeds from asset dispositions 6 3 Net cash flows to investing activities (88) (34) Financing Activities: Issuance of debt 651 168 Repayment of debt (845) (435) Proceeds from public offering of common stock - 224 Net cash flows to financing activities (194) (43) Net increase/(decrease) in cash & cash equivalents (133) 48 Cash & cash equivalents at beginning of period 197 211 Cash & cash equivalents at end of period 64 259 Supplemental Cash Flow Disclosures: Interest paid 79 84 Income taxes paid 92 17 See accompanying Notes to Consolidated Financial Statements.
USG CORPORATION Notes to Consolidated Financial Statements (Unaudited) (1) The consolidated financial statements of USG Corporation and its subsidiaries ("USG" or the "Corporation") included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. In the opinion of management, the statements reflect all adjustments, which are of a normal recurring nature, necessary to present fairly the Corporation's financial position as of September 30, 1995 and December 31, 1994; results of operations for the three months and nine months ended September 30, 1995 and 1994; and cash flows for the nine months ended September 30, 1995 and 1994. Certain amounts in the prior years' financial statements have been reclassified to conform with the 1995 presentation. While these interim financial statements and accompanying notes are unaudited, they have been reviewed by Arthur Andersen LLP, the Corporation's independent public accountants. These financial statements and notes are to be read in conjunction with the financial statements and notes included in the Corporation's 1994 Annual Report on Form 10-K dated March 8, 1995. (2) In the third quarter of 1995, the Corporation completed a refinancing that included: (i) the establishment of a new seven- year revolving credit facility to replace its former bank credit agreement; (ii) the sale of $150 million aggregate principal amount of 8 1/2% senior notes due 2005; and (iii) the redemption of the Corporation's remaining $268 million principal amount of 10 1/4% senior notes due 2002 using a combination of proceeds from the sale of the 8 1/2% senior notes, borrowings under the revolving credit facility and cash on hand. Under the new revolving credit facility, the Corporation can borrow up to $500 million from a syndicate of banks, which are essentially the same banks that had been lenders under the former credit agreement. The new revolving credit facility provides USG greater financial flexibility as a result of: (i) less restrictive covenants; (ii) a letter of credit subfacility of up to $125 million; (iii) an expiration in 2002 with no required amortization prior to maturity; and (iv) a simplification of the Corporation's capital structure through the elimination of subsidiary guarantees on any of its senior indebtedness. The revolving loans bear interest at the London Interbank Offered Rate as determined from time to time plus an applicable spread based on the Corporation's net debt to EBITDA ratio (as defined in the new credit agreement) for the preceding four quarters. As of September 30, 1995, the applicable spread was 7/8%. However, in October 1, 1995 the applicable spread was reduced to 3/4%. (3) In the fourth quarter of 1994, the Corporation established a revolving accounts receivable facility. Under this financing program, the trade receivables of United States Gypsum Company ("U.S. Gypsum") and USG Interiors, Inc. ("USG Interiors") are purchased by USG Funding Corporation ("USG Funding") and transferred to a trust administered by Chemical Bank as trustee. Certificates representing an ownership interest of up to $130 million in the trust have been issued to an affiliate of Citicorp North America, Inc. USG Funding, a special purpose subsidiary of USG Corporation, is a separate corporate entity with its own separate creditors which will be entitled to be satisfied out of USG Funding's assets prior to any value in USG Funding becoming available to its shareholder. Receivables and debt outstanding in connection with the receivables facility remain in receivables and long-term debt, respectively, on the Corporation's consolidated balance sheet. (4) On May 6, 1993, the Corporation completed a comprehensive restructuring of its debt through implementation of a "prepackaged" plan of reorganization under United States bankruptcy law. The Corporation accounted for the restructuring using the principles of fresh start accounting as required by AICPA Statement of Position 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code" ("SOP 90-7"). Pursuant to such principles, individual assets and liabilities were adjusted to fair market value. Excess reorganization value, the portion of the reorganization value not attributable to specific assets, is being amortized over a five-year period, effective May 7, 1993. (5) Income tax expense amounted to $26 million and $79 million for the three months and nine months ended September 30, 1995, respectively. For the respective 1994 periods, income tax expense amounted to $24 million and $51 million. The Corporation's income tax expense is computed based on pre-tax earnings excluding the non-cash amortization of excess reorganization value, which is not deductible for federal income tax purposes. Further, under the provisions of SOP 90-7, the benefits of the domestic net operating loss carryforwards ("NOL Carryforwards") discussed below are not reflected in income tax expense. The Corporation has NOL Carryforwards of $49 million remaining from 1992. These NOL Carryforwards may be used to offset U.S. taxable income through 2007. The Internal Revenue Code limits the Corporation's annual use of its NOL Carryforwards to the lesser of its taxable income or approximately $30 million plus any unused limit from prior years. Furthermore, due to the uncertainty regarding the application of the Internal Revenue Code to the conversion of debt to equity related to the 1993 financial restructuring, the Corporation's NOL Carryforwards to 1994 and later years could be reduced or eliminated. The Corporation has a $4 million minimum tax credit which may be used to offset U.S. regular tax liability in future years. (6) As of September 30, 1995, 2,666,675 common shares were reserved for future issuance in conjunction with existing stock option grants. An additional 927,770 common shares were reserved for future grants, of which 900,000 common shares were reserved in accordance with the Long-Term Equity Plan approved by the stockholders of the Corporation at the annual meeting of the stockholders held on May 10, 1995. (7) One of the Corporation's operating subsidiaries, U.S. Gypsum, is a defendant in asbestos lawsuits alleging both property damage and personal injury. Virtually all costs of the Personal Injury Cases are being paid by insurance. However, many of U.S. Gypsum's insurance carriers have denied coverage for the Property Damage Cases, although U.S. Gypsum believes that substantial coverage exists and the trial court and an appellate court in U.S. Gypsum's Coverage Action have so ruled. In view of the limited insurance funding currently available to U.S. Gypsum for Property Damage Cases resulting from continued resistance by a number of U.S. Gypsum's insurers to providing coverage, the effect of the asbestos litigation on the Corporation will depend upon a variety of factors, including the damages sought in Property Damage Cases that reach trial prior to the final resolution of the Coverage Action, U.S. Gypsum's ability to successfully defend or settle such cases, and the resolution of the Coverage Action. As a result, management is unable to determine whether an adverse outcome in the asbestos litigation will have a material adverse effect on the results of operations or the consolidated financial position of the Corporation. The Corporation and certain of its subsidiaries have been notified by state and federal environmental protection agencies of possible involvement as one of numerous "potentially responsible parties" in a number of so-called "Superfund" sites in the United States. The Corporation believes that neither these matters nor any other known governmental proceeding regarding environmental matters will have a material adverse effect upon its earnings or consolidated financial position. (8) On January 1, 1985, all of the issued and outstanding shares of stock of U.S. Gypsum were converted into shares of USG Corporation and the holding company became a joint and several obligor for certain debentures originally issued by U.S. Gypsum. Debentures totaling $22 million and $33 million were recorded on the holding company's books of account as of September 30, 1995 and December 31, 1994, respectively. Summary financial results for U.S. Gypsum are presented below (dollars in millions):
Three Months Nine Months ended ended September 30, September 30, Summary Statement of Earnings 1995 1994 1995 1994 Net sales 330 329 987 888 Cost and expenses 260 256 766 710 Amortization of excess reorganization value 15 15 46 46 Operating profit 55 58 175 132 Interest expense, net - - 1 1 Corporate charges 19 20 57 65 Earnings before taxes on income 36 38 117 66 Taxes on income 19 20 62 43 Net earnings 17 18 55 23
As of As of Sept. 30, Dec.31, Summary Balance Sheet 1995 1994 Current assets $ 215 $ 341 Property, plant and equipment, net 518 491 Excess reorganization value, net 158 204 Other assets 145 107 Total assets 1,036 1,143 Current liabilities 205 154 Other liabilities and obligations 368 299 Stockholder's equity 463 690 Total liabilities and stockholder's equity 1,036 1,143
Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition Results of Operations Third quarter 1995 net sales were $629 million, an increase of $8 million, or 1.3%, over the third quarter of 1994. For the first nine months of 1995, net sales totaled $1,842 million, an increase of $153 million, or 9.1%, over the comparable 1994 period. Net sales were up in each 1995 period for USG Corporation's core businesses. North American Gypsum sales benefited from higher wallboard selling prices and Worldwide Ceilings experienced record ceiling tile shipments and higher selling prices. Demand for USG's wallboard remained strong in the third quarter even though housing starts in 1995 are down from 1994. Growth in repair and remodel and non-residential construction markets contributed to improved sales of wallboard, ceilings and other construction products. Gross profit as a percentage of net sales decreased slightly in the third quarter of 1995 to 24.2% from 24.6% in the prior-year period primarily due to the increased cost of purchased recycled paper, the primary raw material of gypsum wallboard paper. During the first nine months of 1995, gross profit as a percentage of net sales was 24.6%, up from 23.4% for the comparable 1994 period due to higher selling prices for all major product lines, partially offset by the increased cost of recycled paper. Selling and administrative expenses as a percentage of net sales decreased to 9.7% in the third quarter and 9.8% in the first nine months of 1995 from 10.1% and 10.6% in the respective 1994 periods. Excess reorganization value, which was established in connection with USG's financial restructuring in May 1993, is being amortized over a five-year period. This non-cash amortization, which has no tax impact, reduced operating profit by $43 million and $127 million in each 1995 and 1994 third quarter and first nine-month period, respectively. Because of the continuing amortization of excess reorganization value, the Corporation reports EBITDA (earnings before interest, taxes, depreciation, depletion and amortization) which it believes helps to facilitate: (i) comparisons of current and historical results; (ii) the monitoring of covenants related to certain long-term debt; and (iii) an understanding of cash flow generated from operations that is available for taxes, debt service and capital expenditures. EBITDA amounted to $106 million in the third quarter of 1995, compared with $105 million in the corresponding 1994 period. For the first nine months of 1995, EBITDA amounted to $315 million, representing an increase of $57 million, or 22.1%, over the first nine months of 1994. (Note: EBITDA should not be considered as an alternative to net earnings as an indicator of operating performance or to cash flows as a measure of overall liquidity.) Interest expense in the third quarter of 1995 declined $8 million, or 24.2%, compared with the third quarter of 1994. For the first nine months of 1995 interest expense was down $26 million, or 25.2%, versus the first nine months of 1994. These declines primarily reflect the impact of debt repayments in the past year and the recently completed debt refinancing described below under "Liquidity and Capital Resources." Income tax expense amounted to $26 million and $79 million in the three months and nine months ended September 30, 1995, respectively. In the respective 1994 periods, income tax expense amounted to $24 million and $51 million. The Corporation's income tax expense is computed based on pre-tax earnings excluding the non-cash amortization of excess reorganization value, which is not deductible for federal income tax purposes. Further, the benefits of the NOL Carryforwards are not reflected in income tax expense. Net losses of $2 million ($0.04 per share) and $6 million ($0.13 per share) were reported for the third quarter of 1995 and 1994, respectively. However, non-cash amortizations of excess reorganization value and reorganization debt discount reduced net earnings by $44 million ($0.97 per share) and $45 million ($1.01 per share) in the respective periods. For the first nine months of 1995 and 1994, net losses of $7 million ($0.16 per share) and $57 million ($1.34 per share) were reported. Comparable amortizations in the nine months periods amounted to $130 million ($2.88 per share) and $136 million ($3.19 per share), respectively. The following is an analysis of USG's results of operations by core business (dollars in millions):
Net Sales EBITDA Periods ended September 30: Three Months Nine Months Three Months Nine Months 1995 1994 1995 1994 1995 1994 1995 1994 U.S. Gypsum Company $ 330 $ 329 $ 987 $ 888 $ 78 $ 81 $ 245 $ 200 L&W Supply Corporation 198 180 563 485 8 6 19 12 CGC Inc. (gypsum) 26 30 78 80 2 5 7 10 Other subsidiaries 19 24 52 65 7 8 17 20 Eliminations (84) (77) (238) (210) - (1) - (2) North American Gypsum 489 486 1,442 1,308 95 99 288 240 USG Interiors, Inc. 102 105 292 303 16 15 46 42 USG International 61 54 178 147 2 2 5 4 CGC Inc. (interiors) 8 7 22 22 1 1 3 3 Eliminations (10) (9) (29) (27) - - - - Worldwide Ceilings 161 157 463 445 19 18 54 49 Corporate - - - - (8) (13) (27) (31) Eliminations (21) (22) (63) (64) - 1 - - Total USG Corporation 629 621 1,842 1,689 106 105 315 258
North American Gypsum Third quarter 1995 net sales amounted to $489 million, up $3 million, or 0.6%, while EBITDA of $95 million declined $4 million, or 4.0%, compared with the third quarter of 1994. For the first nine months of 1995, net sales of $1,442 million and EBITDA of $288 million represented increases of $134 million, or 10.2%, and $48 million, or 20.0%, respectively, over the comparable 1994 period. These trends largely reflect the performance of U.S. Gypsum. Comparing the third quarter of 1995 to the third quarter of 1994, results for U.S. Gypsum primarily reflect the net effect of higher wallboard selling prices, offset by higher unit manufacturing costs and lower wallboard volume. U.S. Gypsum's third quarter 1995 average wallboard selling price was $109.37 per thousand square feet, up $4.72, or 4.5%, from a year ago. Higher manufacturing costs reflect an increase of approximately $4 per thousand square feet in the cost of purchased recycled paper versus the third quarter of 1994. However, recycled paper costs declined during the third quarter reducing wallboard costs by almost $3 per thousand square feet from the second quarter of 1995. Third quarter 1995 shipments of U.S. Gypsum wallboard totaled 1.957 billion square feet. This level of shipments was the second highest for any quarter, down 4.9% from the record level of 2.059 billion square feet experienced in the third quarter of 1994. U.S. Gypsum's wallboard plants operated at 94% of capacity in the third quarter of 1995, slightly higher than the estimated average rate of 92% for the industry. Based on preliminary data issued by the U.S. Bureau of the Census, third quarter 1995 housing starts were down approximately 3% from the level reported in the third quarter of 1994. Compared to the second quarter of 1995, third quarter 1995 housing starts were up approximately 4%. L&W Supply, the Corporation's building products distribution business, achieved record sales for any quarter and first nine-months period, reflecting improving demand for its gypsum wallboard and non-gypsum products. EBITDA for L&W Supply also increased as a result of gross profit improvements for all of its product lines. CGC Inc.'s gypsum business experienced lower net sales and EBITDA in the third quarter of 1995 as wallboard results were adversely affected by lower housing starts in eastern Canada and the rising cost of wallboard paper. Worldwide Ceilings Third quarter 1995 net sales of $161 million, the highest level for any quarter of record, were up $4 million, or 2.5%, while EBITDA of $19 million increased by $1 million versus the third quarter of 1994. For the first nine months of 1995, record net sales of $463 million increased $18 million, or 4.0%, and EBITDA of $54 million increased $5 million, or 10.2%, over the comparable 1994 period. Excluding results for the domestic floors division, which was divested in December 1994, Worldwide Ceilings third quarter 1995 net sales improved $11 million, or 7.3%, while EBITDA increased $1 million over the third quarter of 1994. Compared to similarly adjusted nine months 1994 results, net sales rose $40 million, or 9.5%, and EBITDA was up $5 million, or 10.2%. These improved results largely reflect third quarter and first nine months records for ceiling tile shipments. For USG Interiors, improved sales, as adjusted to exclude the impact of the divested floors division, primarily reflect increased retail and export volume and higher selling prices. EBITDA for USG Interiors rose slightly, reflecting the higher selling prices in 1995. USG International's net sales increased over the third quarter of 1994 as a result of growing international markets, especially in the Asia Pacific region. Liquidity and Capital Resources The Corporation, which has significantly strengthened its liquidity and capital resources since its 1993 financial restructuring, is currently pursuing a strategy of reducing debt and growing its core gypsum and ceilings businesses through approximately equal application of free cash flow between debt reduction and capital expenditures, with an objective of achieving investment grade status. As a means of further enhancing its ability to implement this strategy, the Corporation completed a refinancing in the third quarter of 1995 that included: (i) the establishment of a new seven-year revolving credit facility to replace its former bank credit agreement; (ii) the sale of $150 million aggregate principal amount of 8 1/2% senior notes due 2005; and (iii) the redemption of the Corporation's remaining $268 million principal amount of 10 1/4% senior notes due 2002 using a combination of proceeds from the sale of the 8 1/2% senior notes, borrowings under the revolving credit facility and cash on hand. As a result of the refinancing and repurchase of $30 million principal amount of 8 3/4% senior debentures due 2017, the Corporation reduced its principal amount of total debt to $955 million as of September 30, 1995 from $1,022 million as June 30, 1995. This marked the first time the Corporation's debt has dropped below the $1 billion level since its recapitalization in 1988. Additionally, as a result of the refinancing, the Corporation reduced its annual interest expense by approximately $7 million. For additional information on the new revolving credit facility, see "Notes to Consolidated Financial Statements - Note No. 2." Substantial capital investments to reduce costs and expand capacity have been made at North American Gypsum plants in 1995. Cost reduction projects included the installation of stock cleaning equipment to utilize lower grades of recycled paper, continued implementation of technology which lowers wallboard weight and additional use of synthetic gypsum at manufacturing facilities at which it is more economical than natural sources of gypsum rock. Projects that will be completed by the end of 1995 to enhance manufacturing efficiency will increase wallboard capacity by approximately 600 million square feet. In the Worldwide Ceilings business, a $45 million expansion underway at USG Interiors' ceiling tile plant in Greenville, Mississippi, is scheduled for completion in 1996. In the first nine months of 1995, total capital expenditures for the Corporation amounted to $94 million, compared with $37 million in the corresponding 1994 period. As of September 30, 1995, capital expenditure commitments for the replacement, modernization and expansion of operations amounted to $100 million compared with $61 million as of December 31, 1994. USG's capital expenditures will exceed $100 million in 1995 and capital investment plans for the next several years contemplate spending at, or above, current levels so long as operating cash flows support such levels and the growth opportunities for such investments remain attractive. The Corporation periodically evaluates possible acquisitions or combinations involving other businesses or companies in businesses and markets related to its current operations, and the Corporation believes that its available liquidity would be generally adequate to support investments in appropriate opportunities. As of September 30, 1995, working capital (current assets less current liabilities) amounted to $169 million and the ratio of current assets to current liabilities was 1.46 to 1. As of December 31, 1994, working capital amounted to $228 million and the ratio of current assets to current liabilities was 1.55 to 1. In the first nine months of 1995, cash and cash equivalents decreased to $64 million from $197 million primarily due to debt repayments. Receivables (net of reserves) increased $18 million, or 6.7%, to $288 million, inventories increased $10 million, or 5.8%, to $183 million and accounts payable increased $28 million, or 23.0%, to $150 million. These increases primarily reflect normal seasonal fluctuations. One of the Corporation's subsidiaries, U.S. Gypsum, is a defendant in asbestos lawsuits alleging both property damage and personal injury. Virtually all costs of the Personal Injury Cases are being paid by insurance. However, many of U.S. Gypsum's insurance carriers have denied coverage for the Property Damage Cases, although U.S. Gypsum believes that substantial coverage exists and the trial court and an appellate court in U.S. Gypsum's Coverage Action have so ruled. In view of the limited insurance funding currently available to U.S. Gypsum for Property Damage Cases resulting from continued resistance by a number of U.S. Gypsum's insurers to providing coverage, the effect of the asbestos litigation on the Corporation will depend upon a variety of factors, including the damages sought in Property Damage Cases that reach trial prior to the final resolution of the Coverage Action, U.S. Gypsum's ability to successfully defend or settle such cases, and the resolution of the Coverage Action. As a result, management is unable to determine whether an adverse outcome in the asbestos litigation will have a material adverse effect on the results of operations or the consolidated financial position of the Corporation. The Corporation and certain of its subsidiaries have been notified by state and federal environmental protection agencies of possible involvement as one of numerous "potentially responsible parties" in a number of so-called "Superfund" sites in the United States. The Corporation believes that neither these matters nor any other known governmental proceeding regarding environmental matters will have a material adverse effect upon its earnings or consolidated financial position. See Part II, Item 1. "Legal Proceedings" for more information on legal proceedings. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of USG Corporation: We have reviewed the accompanying condensed consolidated balance sheet of USG CORPORATION (a Delaware corporation) AND SUBSIDIARIES as of September 30, 1995, and the related condensed consolidated statement of earnings for the three-month and nine-month periods ended September 30, 1995 and 1994 and the condensed consolidated statement of cash flows for the nine months ended September 30, 1995 and 1994. These financial statements are the responsibility of the Company's management. We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion. Based on our review, we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with generally accepted accounting principles. As discussed in Note 7, in view of the limited insurance funding currently available for property damage cases resulting from the continued resistance by a number of U.S. Gypsum's insurers to providing coverage, the effect of the asbestos litigation on the Corporation will depend upon a variety of factors, including the damages sought in property damage cases that reach trial prior to the completion of the coverage action, U.S. Gypsum's ability to successfully defend or settle such cases, and the resolution of the coverage action. As a result, management is unable to determine whether an adverse outcome in the asbestos litigation will have a material adverse effect on the consolidated results of operations or the consolidated financial position of the Corporation. /s/ Arthur Andersen LLP ARTHUR ANDERSEN LLP Chicago, Illinois October 18, 1995 PART II. OTHER INFORMATION Item 1. Legal Proceedings Asbestos Litigation One of the Corporation's subsidiaries, U.S. Gypsum, is among numerous defendants in lawsuits arising out of the manufacture and sale of asbestos- containing building materials. U.S. Gypsum sold certain asbestos-containing products beginning in the 1930's; in most cases the products were discontinued or asbestos was removed from the product formula by 1972, and no asbestos- containing products were sold after 1977. Some of these lawsuits seek to recover compensatory and in many cases punitive damages for costs associated with maintenance or removal and replacement of products containing asbestos (the "Property Damage Cases"). Others of these suits (the "Personal Injury Cases") seek to recover compensatory and in many cases punitive damages for personal injury allegedly resulting from exposure to asbestos and asbestos- containing products. It is anticipated that additional personal injury and property damage cases containing similar allegations will be filed. As discussed below, U.S. Gypsum has substantial personal injury and property damage insurance for the years involved in the asbestos litigation. Prior to 1985, when an asbestos exclusion was added to U.S. Gypsum's policies, U.S. Gypsum purchased comprehensive general liability insurance policies covering personal injury and property damage in an aggregate face amount of approximately $850 million. Insurers that issued approximately $106 million of these policies are presently insolvent. After deducting insolvencies and exhaustion of policies, approximately $550 million of insurance remained potentially available as of December 31, 1994. Because U.S. Gypsum's insurance carriers initially responded to its claims for defense and indemnification with various theories denying or limiting coverage and the applicability of their policies, U.S. Gypsum filed a declaratory judgment action against them in the Circuit Court of Cook County, Illinois on December 29, 1983. (U.S. Gypsum Co. v. Admiral Insurance Co., et al.) (the "Coverage Action"). U.S. Gypsum alleges in the Coverage Action that the carriers are obligated to provide indemnification for settlements and judgments and, in some cases, defense costs incurred by U.S. Gypsum in property damage and personal injury claims in which it is a defendant. The current defendants are ten insurance carriers that provided comprehensive general liability insurance coverage to U.S. Gypsum between the 1940's and 1984. As discussed below, several carriers have settled all or a portion of the claims in the Coverage Action. U.S. Gypsum's aggregate expenditures for all asbestos-related matters, including property damage, personal injury, insurance coverage litigation and related expenses, exceeded aggregate insurance payments by $25.8 million in 1992, $8.2 million in 1993 and $33.4 million in 1994. Property Damage Cases The Property Damage Cases have been brought against U.S. Gypsum by a variety of plaintiffs, including school districts, state and local governments, colleges and universities, hospitals and private property owners. As of September 30, 1995, 35 Property Damage Cases were pending against U.S. Gypsum; however, the number of buildings involved is greater than the number of cases because many of these cases, including the class actions referred to below, involve multiple buildings. In addition, approximately 23 property damage claims have been threatened against U.S. Gypsum. U.S. Gypsum has denied the substantive allegations of each of the Property Damage Cases and intends to defend them vigorously except when advantageous settlements are possible. U.S. Gypsum is one of many defendants in three pending cases that have been certified as class actions, including one that recently has been settled, as well as others that request such certification. The damages claimed against U.S. Gypsum in the class action cases are unspecified. On October 10, 1995, U.S. Gypsum agreed to settle a class action consisting of all owners of buildings leased to the federal government. (Prince George Center, Inc. v. U.S. Gypsum Co., et al., Court of Common Pleas, Philadelphia, Pa.) Under the settlement agreement, which will require court approval after notice to the class, U.S. Gypsum will pay $3.6 million, with half payable during 1995 and the remainder over the following eighteen months. The remaining two class actions are a conditionally certified class of all colleges and universities in the United States, which certification is presently limited to the resolution of certain allegedly "common" liability issues. (Central Wesleyan College v. W.R. Grace & Co., et al, U.S.D.C. S.C.); and a class action on behalf of various public bodies in the State of Texas, including cities, counties, hospitals, port authorities and colleges. (Kirbyville Independent School District v. U.S. Gypsum, et al., United States District Court for the Eastern District of Texas, Beaumont Division.) During 1994 U.S. Gypsum settled two other class actions that are now closed. One suit was brought on behalf of owners and operators of all elementary and secondary schools in the United States that contain or contained friable asbestos-containing material. (In re Asbestos School Litigation, U.S.D.C., E.D. Pa.) Approximately 1,350 school districts opted out of the class, some of which have filed or may file separate lawsuits. The other class action settlement involved approximately 333 school districts in Michigan that had opted out of the nationwide class action. (Board of Education of the City of Detroit, et al. v. The Celotex Corp., et al., Circuit Court for Wayne County, MI.) The Michigan settlement was approved by the Court on December 2, 1994, and no appeal was filed. The settlement of the nationwide class was approved on September 13, 1995, and became final on October 12, 1995. A case pending in state court in South Carolina, which has not been certified as a class action, purports to be a "voluntary" class action on behalf of owners of all buildings containing certain types of asbestos-containing products manufactured by the nine named defendants, including U.S. Gypsum, other than buildings owned by the federal or state governments, single family residences, or buildings at issue in the other described class actions. (Anderson County Hospital v. W.R. Grace & Co., et al., Court of Common Pleas, Hampton Co., S.C. (the "Anderson case").) The Anderson case also names the Corporation as a defendant, alleging, among other things, that the guarantees executed by U.S. Gypsum in connection with the 1988 Recapitalization, as well as subsequent distributions of cash from U.S. Gypsum to the Corporation, rendered U.S. Gypsum insolvent and constitute a fraudulent conveyance. In July 1994, the court in the Anderson case ruled that claims involving building owners outside South Carolina cannot be included in the suit. In total, U.S. Gypsum has settled approximately 95 property damage cases, involving 211 plaintiffs, in addition to the two school class action settlements referred to above. Twenty-four cases have been tried to verdict, 15 of which were won by U.S. Gypsum and 5 lost; three other cases, one won at the trial level and two lost, were settled during appeals. Appeals or post- judgement motions are pending in two cases. Another case that was lost at the trial court level was reversed on appeal and remanded to the trial court, which has now entered judgment for U.S. Gypsum. In the cases lost, compensatory damage awards against U.S. Gypsum have totaled $11.5 million. Punitive damages totaling $5.5 million were entered against U.S. Gypsum in four trials. Two of the punitive damage awards, totaling $1.45 million, were paid after appeals were exhausted; and two were settled during the appellate process. In 1992, 7 Property Damage Cases were filed against U.S. Gypsum, 10 cases were dismissed before trial, 18 were settled, 3 were closed following trial or appeal, and 76 were pending at year-end. U.S. Gypsum expended $34.9 million for the defense and resolution of Property Damage Cases and received insurance payments of $10.2 million in 1992. During 1993, 5 Property Damage Cases were filed against U.S. Gypsum, 7 cases were dismissed before trial, 11 were settled, 1 was closed following trial or appeal, 2 were consolidated into 1, and 61 were pending at year end; U.S. Gypsum expended $13.9 million for the defense and resolution of Property Damage Cases and received insurance payments of $7.6 million in 1993. In 1994, 5 Property Damage Cases were filed against U.S. Gypsum, 5 cases were dismissed before trial, 19 were settled, 1 was closed following trial or appeal, and 41 were pending at year-end. U.S. Gypsum expended $40.6 million for the defense and resolution of Property Damage Cases and received insurance payments of $9 million in 1994. In the Property Damage Cases litigated to date, a defendant's liability for compensatory damages, if any, has been limited to damages associated with the presence and quantity of asbestos-containing products manufactured by that defendant which are identified in the buildings at issue, although plaintiffs in some cases have argued that principles of joint and several liability should apply. Because of the unique factors inherent in each of the Property Damage Cases, including the lack of reliable information as to product identification and the amount of damages claimed against U.S. Gypsum in many cases, including the class actions described above, management is unable to make a reasonable estimate of the cost of disposing of pending Property Damage Cases. Personal Injury Cases U.S. Gypsum was among numerous defendants in asbestos personal injury suits and administrative claims involving approximately 51,000 claimants pending as of September 30, 1995 although, as discussed below, approximately 22,000 of such claims are settled but not yet closed. All asbestos bodily injury claims pending in the federal courts, including approximately one-third of the Personal Injury Cases pending against U.S. Gypsum, have been consolidated in the United States District Court for the Eastern District of Pennsylvania. U.S. Gypsum is a member, together with 19 other former producers of asbestos- containing products, of the Center for Claims Resolution ("the Center"). The Center has assumed the handling, including the defense and settlement, of all Personal Injury Cases pending against U.S. Gypsum and the other members of the Center. Each member of the Center is assessed a portion of the liability and defense costs of the Center for the Personal Injury Cases handled by the Center, according to predetermined allocation formulas. Five of U.S. Gypsum's insurance carriers that in 1985 signed an Agreement Concerning Asbestos- Related Claims (the "Wellington Agreement") are supporting insurers (the "Supporting Insurers") of the Center. The Supporting Insurers are obligated to provide coverage for the defense and indemnity costs of the Center's members pursuant to the coverage provisions in the Wellington Agreement. Claims for punitive damages are defended but not paid by the Center; if punitive damages are recovered, insurance coverage may be available under the Wellington Agreement depending on the terms of particular policies and applicable state law. Punitive damages have not been awarded against U.S. Gypsum in any of the Personal Injury Cases. Virtually all of U.S. Gypsum's personal injury liability and defense costs are paid by those of its insurance carriers that are Supporting Insurers. The Supporting Insurers provided approximately $350 million of the total coverage referred to above, of which approximately $222 million remained unexhausted as of December 31, 1994. On January 15, 1993, U.S. Gypsum and the other members of the Center entered into a class action settlement in the U. S. District Court for the Eastern District of Pennsylvania. (Georgine et al. v. Amchem Products Inc., et al., Case No. 93-CV-0215; hereinafter "Georgine.") The class of plaintiffs includes all persons who have been occupationally exposed to asbestos- containing products manufactured by the defendants, who had not filed an asbestos personal injury suit as of the date of the filing of the class action. The settlement has been approved by the district court, and if upheld on appeal will implement for all future Personal Injury Cases, except as noted below, an administrative compensation system to replace judicial claims against the defendants, and will provide fair and adequate compensation to future claimants who can demonstrate exposure to asbestos-containing products manufactured by the defendants and the presence of an asbestos-related disease. Approximately 87,000 purported class members opted out, or elected to be excluded from, the settlement. As of December 31, 1994, approximately 10,000 claims naming U.S. Gypsum as a defendant had been filed by "opt outs." In addition, in each year a limited number of class members will have certain rights to prosecute their claims for compensatory (but not punitive) damages in court in the event they reject the compensation offered by the administrative processing of their claim. The Center members, including U.S. Gypsum, have instituted proceedings against those of their insurance carriers that had not consented to support the settlement, seeking a declaratory judgment that the settlement is reasonable and, therefore, that the carriers are obligated to fund their portion of it. Consummation of the settlement is contingent upon, among other things, court approval of the settlement and a favorable ruling in the declaratory judgment proceedings against the non-consenting insurers. Each of the defendants has committed to fund a defined portion of the settlement, up to a stated maximum amount, over the initial ten year period of the agreement (which is automatically extended unless terminated by the defendants). Taking into account the provisions of the settlement agreement concerning the maximum number of claims that must be processed in each year and the total amount to be made available to the claimants, the Center estimates that U.S. Gypsum will be obligated to fund a maximum of approximately $125 million of the class action settlement, exclusive of expenses, with a maximum payment of less than $18 million in any single year; of the total amount of U.S. Gypsum's obligation, all but approximately $7 million is expected to be paid by U.S. Gypsum's insurance carriers. During 1992, approximately 20,100 Personal Injury Cases were filed against U.S. Gypsum and approximately 10,600 were settled or dismissed. U.S. Gypsum incurred expenses of $21.6 million in 1992 with respect to Personal Injury Cases of which $21.5 million was paid by insurance. During 1993, approximately 26,900 Personal Injury Cases were filed against U.S. Gypsum and approximately 22,900 were settled or dismissed. U.S. Gypsum incurred expenses of $34.9 million in 1993 with respect to Personal Injury Cases of which $34.0 million was paid by insurance. During 1994, approximately 14,000 Personal Injury Cases were filed against U.S. Gypsum, U.S. Gypsum was added as a defendant in approximately 4,000 cases that had been previously filed, and approximately 23,000 were settled or dismissed. U.S. Gypsum incurred expenses of $38 million in 1994 with respect to Personal Injury Cases of which $37.3 million was paid by insurance. As of December 31, 1994, 1993, and 1992, approximately 54,000, 59,000, and 54,200 Personal Injury Cases were outstanding against U.S. Gypsum, respectively. U.S. Gypsum's average settlement cost for Personal Injury Cases over the past three years has been approximately $1,600 per claim, exclusive of defense costs. Management anticipates that its average settlement cost may increase due to such factors as the possible insolvency of co-defendants, although this increase may be offset to some extent by other factors, including the possibility for block settlements of large numbers of cases and the apparent increase in the percentage of asbestos personal injury cases that appear to have been brought by individuals with little or no physical impairment. Through the Center, U.S. Gypsum had reached settlements on approximately 22,000 Personal Injury Cases pending on December 31, 1994 for amounts totaling approximately $32 million, to be expended over a three to five year period. In management's opinion, based primarily upon U.S. Gypsum's experience in the Personal Injury Cases disposed of to date and taking into consideration a number of uncertainties, it is probable that all asbestos-related Personal Injury Cases pending against U.S. Gypsum as of December 31, 1994, can be disposed of for a total amount, including both indemnity costs and legal fees and expenses, estimated to be between $90 million and $100 million (of which all but less than $5 million is expected to be paid by insurance). The estimated cost of resolving pending claims takes into account, among other factors, (i) the number of pending claims; (ii) the settlements of certain large blocks of claims for higher per-case averages than have historically been paid; (iii) the committed but unconsummated settlements described above; and (iv) a small increase in U.S. Gypsum's historical settlement average. Assuming that the Georgine class action settlement referred to above is approved substantially in its current form, management estimates, based on assumptions supplied by the Center, U.S. Gypsum's maximum total exposure in Personal Injury Cases during the next ten years (the initial term of the agreement), including liability for pending claims and claims resolved as part of the class action settlement, as well as defense costs and other expenses, at approximately $250 million, of which approximately $235 million is expected to be paid by insurance. U.S. Gypsum's additional exposure for claims filed by persons who have opted out of Georgine would depend on the number and severity of such claims that are filed, which cannot presently be determined. Coverage Action As indicated above, all of U.S. Gypsum's carriers initially denied coverage for the Property Damage Cases and the Personal Injury Cases, and U.S. Gypsum initiated the Coverage Action to establish its right to such coverage. U.S. Gypsum has voluntarily dismissed the Supporting Insurers referred to above from the personal injury portion of the Coverage Action because they committed to providing personal injury coverage in accordance with the Wellington Agreement. U.S. Gypsum's claims against the remaining carriers for coverage for the Personal Injury Cases have been stayed since 1984. In the property damage phase of the Coverage Action, the applicability of U.S. Gypsum's insurance policies to settlements and one adverse judgment in eight "test" Property Damage Cases has been decided. On November 4, 1994, the Illinois Appellate Court issued a ruling affirming in part and reversing in part an earlier trial court ruling. The Appellate Court ruled that the eight "test" cases were covered under all insurance policies in effect from the date of installation to the date of removal of asbestos-containing products (known as the "continuous trigger" of coverage). The Court awarded reimbursement of approximately $6.2 million spent by U.S. Gypsum to resolve the eight "test" cases. The defendant carriers' rehearing petition was denied by the Appellate Court in January 1995, and on April 5, 1995 the Illinois Supreme Court denied the insurers' petition for leave to appeal to that Court. Although the appellate process has effectively concluded, further proceedings will be necessary in the trial court to apply the appellate court's ruling to all Property Damage Cases other than the eight "test" cases, as well as to resolve certain other remaining issues, some of which could, if determined adversely to U.S. Gypsum, affect the amount or accessibility of available coverage. No schedule has yet been established for the resolution of these issues. The "continuous trigger" ruling, if applied to the Property Damage Cases generally, and subject to the resolution of the remaining issues referred to above, will allow U.S. Gypsum to access all of its available insurance coverage for Property Damage Cases (although the same coverage must also be used for Personal Injury Cases). Under the continuous trigger, all Property Damage Cases would be covered by insurance unless or until such insurance becomes exhausted. In addition, if applied to the Property Damage Cases generally, the ruling gives U.S. Gypsum the right to reimbursement of its past property damage expenditures, subject to the resolution of the remaining issues referred to above, and further subject to the allocation of costs to insolvent carriers, excess carriers with no defense cost obligations, and carriers that have previously settled. Pursuant to two settlements described below, both reached since the appellate ruling, U.S. Gypsum is receiving approximately $63 million from two carriers to reimburse it for past property damage expenses. U.S. Gypsum is also pursuing a similar amount from two other carriers that it contends are liable for reimbursement of U.S. Gypsum's past expenditures. The timing and amount of additional recoveries for past expenses will depend upon the outcome of settlement negotiations with those two carriers or, if settlements cannot be reached, upon the ultimate resolution of the remaining issues referred to above. Nine carriers, including two of the Supporting Insurers, have settled U.S. Gypsum's claims for both property damage and personal injury coverage and have been dismissed from the Coverage Action entirely. Four of these carriers agreed to pay all or a substantial portion of their policy limits to U.S. Gypsum beginning in 1991 and continuing over the following four years. Another carrier, which provided both primary and excess policies to U.S. Gypsum during the 1960's and 1970's, has agreed to pay U.S. Gypsum a total of $38.4 million, $25 million of which was paid in April 1995 with the rest to be paid in three annual installments. In August 1995, another carrier that provided both primary and excess insurance (and is a Supporting Insurer) agreed to pay U.S. Gypsum approximately $25 million by December 31, 1995 to reimburse U.S. Gypsum for past property damage costs, and to make its remaining $18 million of unexhausted coverage available for future costs as they are incurred. Three other excess carriers, including the two settling Supporting Insurers, have agreed to provide coverage for the Property Damage Cases and the Personal Injury Cases subject to certain limitations and conditions, when and if underlying primary and excess coverage is exhausted. Taking into account the above settlements, including participation of certain of the settling carriers in the Wellington Agreement, and consumption through December 31, 1994, carriers providing a total of approximately $150 million of unexhausted insurance have agreed, subject to the terms of the various settlement agreements, to cover both Personal Injury Cases and Property Damage Cases. Carriers providing an additional $175 million of coverage that was unexhausted as of December 31, 1994 have agreed to cover Personal Injury Cases under the Wellington Agreement, but continue to contest coverage for Property Damage Cases and remain defendants in the Coverage Action. U.S. Gypsum continues to seek negotiated resolutions with its carriers in order to minimize the expense and delays of litigation. Insolvency proceedings have been instituted against four of U. S. Gypsum's insurance carriers. Midland Insurance Company, declared insolvent in 1986, provided excess insurance ($4 million excess of $1 million excess of $500,000 primary in each policy year) from February 15, 1975 to February 15, 1978; Transit Casualty Company, declared insolvent in 1985, provided excess insurance ($15 million excess of $1 million primary in each policy year) from August 1, 1980 to December 31, 1985; Integrity Insurance Company, declared insolvent in 1986, provided excess insurance ($10 million quota share of $25 million excess of $90 million) from August 1, 1983 to July 31, 1984; and American Mutual Insurance Company, declared insolvent in 1989, provided the primary layer of insurance ($500,000 per year) from February 1, 1963 to April 15, 1971. It is possible that U.S. Gypsum will be required to pay a presently indeterminable portion of the costs that would otherwise have been covered by these policies. In addition, portions of various policies issued by Lloyd's and other London market companies between 1966 and 1979 have also become insolvent; under the Wellington Agreement, U.S. Gypsum must pay these amounts, which total approximately $12 million. It is not possible to predict the number of additional lawsuits alleging asbestos-related claims that may be filed against U.S. Gypsum. Many of the Property Damage Cases are still at an early stage and the liability therefrom is consequently uncertain. In view of the limited insurance funding currently available for the Property Damage Cases resulting from the continued resistance by a number of U.S. Gypsum's insurers to providing coverage, the effect of the asbestos litigation on the Corporation will depend upon a variety of factors, including the damages sought in the Property Damage Cases that reach trial prior to the completion of the Coverage Action, U.S. Gypsum's ability to successfully defend or settle such cases, and the resolution of the Coverage Action. As a result, management is unable to determine whether an adverse outcome in the asbestos litigation will have a material adverse effect on the results of operations or the consolidated financial position of the Corporation. Accounting Change Effective January 1, 1994, the Corporation adopted the requirements of Financial Accounting Standards Board Interpretation No. 39. At that time, in accordance with Interpretation No. 39, U.S. Gypsum recorded an accrual of $100 million for its liabilities for asbestos-related matters which are deemed probable and can be reasonably estimated, and separately recorded an asset of $100 million, the amount of such liabilities that is expected to be paid by uncontested insurance. Due to management's inability to reasonably estimate U.S. Gypsum's liability for Property Damage Cases and (until the implementation of Georgine is deemed probable) future Personal Injury Cases, the liability and asset recorded in 1994 relate only to pending Personal Injury Cases. The implementation of Interpretation No. 39 did not impact earnings, cash flow or net assets. Environmental Litigation The Corporation and certain of its subsidiaries had been notified by state and federal environmental protection agencies of possible involvement as one of numerous "potentially responsible parties" in a number of so-called "Superfund" sites in the United States. In substantially all of these sites, the involvement of the Corporation or its Subsidiaries is expected to be minimal. The Corporation believes that appropriate reserves have been established for its potential liability in connection with all Superfund sites but is continuing to review its accruals as additional information becomes available. Such reserves take into account all known or estimable costs associated with these sites including site investigations and feasibility costs, site cleanup and remediation, legal costs, and fines and penalties, if any. In addition, environmental costs connected with site cleanups on USG- owned property are also covered by reserves established in accordance with the foregoing. The Corporation believes that neither these matters nor any other known governmental proceeding regarding environmental matters will have a material adverse effect upon its earnings or consolidated financial position. Item 6. Exhibits and Reports on Form 8-K (a) (15) Letter of Arthur Andersen LLP regarding unaudited financial information. (27) Financial Data Schedule (electronic filing only). (b) There were no reports on Form 8-K filed during the third quarter of 1995. Exhibit (27), which has been filed as part of this Form 10-Q, is not included herein. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. USG CORPORATION By / s / Dean H. Goossen Dean H. Goossen, Corporate Secretary, USG Corporation November 7, 1995 By / s / Raymond T. Belz Raymond T. Belz, Vice President and Controller, USG Corporation EX-15 2 November 7, 1995 USG Corporation 125 South Franklin Street Chicago, Illinois 60606 Gentlemen: We are aware that USG Corporation has incorporated by reference into previously filed Registration Statement Numbers 33-22581, 33-52715, 33-36303, 33-40136 and 33-63554 its Form 10-Q for the quarter ended September 30, 1995, which includes our report dated October 18, 1995, covering the unaudited condensed financial information contained therein. Pursuant to Regulation C of the Securities Act of 1933, these reports are not considered a part of the registration statement prepared or certified by our firm or reports prepared or certified by our firm within the meaning of Sections 7 and 11 of the Act. Very truly yours, /s/ Arthur Andersen LLP ARTHUR ANDERSEN LLP EX-27 3
5 1,000,000 9-MOS DEC-31-1995 SEP-30-1995 64 0 305 17 183 535 930 118 1996 366 923 5 0 0 (9) 1996 1842 1842 1389 1389 181 0 72 72 79 (7) 0 0 0 (7) (0.16) (0.15)
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