FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1996
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
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
125 South Franklin Street, Chicago, Illinois 60606-4678
- ------------------------------------------------------------------------------
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (312) 606-4000
--------------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes X No
----- -----
As of July 31, 1996, 45,514,175 shares of USG common stock were outstanding.
<PAGE>
Table of Contents
PART I FINANCIAL STATEMENTS
Item 1. Financial Statements:
Consolidated Statement of Earnings:
Three Months and Six months Ended
June 30, 1996 and 1995
Consolidated Balance Sheet:
As of June 30, 1996 and December 31, 1995
Consolidated Statement of Cash Flows:
Six Months Ended June 30, 1996 and 1995
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition
Report of Independent Public Accountants
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
<PAGE>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
USG CORPORATION
CONSOLIDATED STATEMENT OF EARNINGS
(Dollars in millions except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
ended June 30, ended June 30,
-------------------- --------------------
1996 1995 1996 1995
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Net sales $ 642 $ 615 $ 1,244 $ 1,213
Cost of products sold 482 466 953 912
--------- --------- --------- -------
Gross profit 160 149 291 301
Selling and administrative
expenses 65 60 132 120
Amortization of excess
reorganization value 42 42 84 84
--------- --------- --------- -------
Operating profit 53 47 75 97
Interest expense 20 25 39 52
Interest income (1) (1) (1) (3)
Other expense, net 1 - 1 -
--------- --------- --------- -------
Earnings before taxes
on income 33 23 36 48
Taxes on income 29 26 47 53
--------- --------- --------- -------
Net earnings/(loss) 4 (3) (11) (5)
========= ========= ========= =======
Net earnings/(loss) per
common share 0.09 (0.07) (0.23) (0.12)
========= ========= ========= =======
Dividends paid per
common share - - - -
Average number of
common shares 45,506,148 45,088,163 45,466,664 45,086,916
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
USG CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollars in millions)
(Unaudited)
<TABLE>
<CAPTION>
As of As of
June 30, December 31,
1996 1995
------------ ------------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 54 $ 70
Receivables (net of reserves - $16 and $14) 296 246
Inventories 176 175
------------ ------------
Total current assets 526 491
Property, plant and equipment (net of reserves
for depreciation and depletion - $148 and $137) 871 842
Excess reorganization value (net of accumulated
amortization - $550 and $466) 295 379
Other assets 197 178
------------ ------------
Total Assets 1,889 1,890
============ ============
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable 142 130
Accrued expenses 173 190
Notes payable 15 7
Long-term debt maturing within one year 73 35
Taxes on income 24 21
------------ ------------
Total current liabilities 427 383
Long-term debt 759 865
Deferred income taxes 195 185
Other liabilities 558 494
Stockholders' Equity/(Deficit):
Preferred stock - -
Common stock 5 5
Capital received in excess of par value 225 223
Deferred currency translation (10) (6)
Reinvested earnings/(deficit) (270) (259)
------------ ------------
Total stockholders' equity/(deficit) (50) (37)
------------ ------------
Total Liabilities and Stockholders' Equity 1,889 1,890
============ ============
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
USG CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in millions)
(Unaudited)
<TABLE>
<CAPTION>
Six Months ended
June 30,
---------------------
1996 1995
--------- --------
<S> <C> <C>
Operating Activities:
Net loss $ (11) $ (5)
Adjustments to reconcile net loss to net cash:
Amortization of excess reorganization value 84 84
Depreciation, depletion and other amortization 33 33
Deferred income taxes 10 (1)
Net gain on asset dispositions (2) (3)
(Increase)/decrease in working capital:
Receivables (50) (21)
Inventories (1) (14)
Payables 15 27
Accrued expenses (14) (40)
Increase in other assets (19) (22)
Increase in other liabilities 64 45
Other, net 1 -
--------- ---------
Net cash flows from operating activities 110 83
--------- ---------
Investing Activities:
Capital expenditures (73) (56)
Net proceeds from asset dispositions 9 6
--------- ---------
Net cash flows to investing activities (64) (50)
--------- ---------
Financing Activities:
Repayment of debt (69) (133)
Short-term borrowings/(repayments), net 7 6
--------- ---------
Net cash flows to financing activities (62) (127)
--------- ---------
Net decrease in cash & cash equivalents (16) (94)
--------- ---------
Cash & cash equivalents at beginning of period 70 197
--------- ---------
Cash & cash equivalents at end of period 54 103
========= =========
Supplemental Cash Flow Disclosures:
Interest paid 39 49
Income taxes paid 33 43
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
USG CORPORATION
Notes to Consolidated Financial Statements
(Unaudited)
(1) The consolidated financial statements of USG Corporation and
its subsidiaries ("USG" or the "Corporation") included
herein have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. The
preparation of financial statements in conformity with
generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenues and expenses.
Actual results could differ from those estimates. In the
opinion of management, the statements reflect all
adjustments, which are of a normal recurring nature,
necessary to present fairly the Corporation's financial
position as of June 30, 1996 and December 31, 1995; results
of operations for the three months and six months ended June
30, 1996 and 1995; and cash flows for the six months ended
June 30, 1996 and 1995. Certain amounts in the prior years'
financial statements have been reclassified to conform with
the 1996 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 1995
Annual Report on Form 10-K dated February 29, 1996.
(2) Income tax expense amounted to $29 million and $47 million
for the three months and six months ended June 30, 1996,
respectively. For the respective 1995 periods, income tax
expense amounted to $26 million and $53 million. The
Corporation's income tax expense is computed based on pre-tax earnings
excluding the noncash 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 $19 million
remaining from 1992. These NOL Carryforwards may be used to
offset U.S. taxable income through 2007. Furthermore, due
to the uncertainty regarding the application of the Internal
Revenue Code to the exchange of stock for debt, the
Corporation's NOL Carryforwards to 1994 and later years
could be reduced or eliminated. The Corporation has a $4
million minimum tax credit which may be used to offset U.S.
regular tax liability in future years.
(3) As of June 30, 1996, 2,783,155 common shares were reserved
for future issuance in conjunction with existing stock
option grants. An additional 458,395 common shares were
reserved for future grants under the Long-Term Equity Plan
approved by the stockholders of the Corporation in 1995.
(4) 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, certain
of U.S. Gypsum's insurance carriers continue to contest
coverage for the Property Damage Cases. 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, although certain additional issues
must be resolved before all of U.S. Gypsum's insurance will
become available. 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.
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.
(5) Under a revolving accounts receivable facility, the trade
receivables of United States Gypsum Company ("U.S. Gypsum")
and USG Interiors, Inc. ("USG Interiors") are being
purchased by USG Funding Corporation ("USG Funding") and
transferred to a trust administered by Chemical Bank as
trustee. Certificates representing an ownership interest of
up to $130 million in the trust have been issued to an
affiliate of Citicorp North America, Inc. USG Funding, a
special purpose subsidiary of USG Corporation, is a separate
corporate entity with its own separate creditors which will
be entitled to be satisfied out of USG Funding's assets
prior to any value in USG Funding becoming available to its
shareholder. Receivables and debt outstanding in connection
with the receivables facility remain in receivables and
long-term debt, respectively, on the Corporation's
consolidated balance sheet.
(6) In the second quarter of 1993, the Corporation completed a
comprehensive restructuring of its debt. 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." 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 currently being amortized over a five-year period
through April 1998.
<PAGE>
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition
Note: As a result of USG's financial restructuring in 1993 and the
restructuring's continuing effect on financial reporting, USG reports EBITDA
(earnings before interest, taxes, depreciation, depletion, amortization and
certain other income and expense items) to facilitate the comparison of
current to historical results. EBITDA is also helpful in understanding cash
flow generated from operations that is available for taxes, debt service and
capital expenditures, EBITDA should not be considered by investors as an
alternative to net earnings as an indicator of the Corporation's operating
performance or to cash flows as a measure of its overall liquidity.
Results of Operations
After the difficult winter weather in the first quarter of 1996, results for
USG rebounded sharply in the second quarter driven by strong demand for
gypsum wallboard and suspended ceilings products. Second quarter net sales of
$642 million were up $27 million, or 4.4%, over the second quarter of 1995,
while EBITDA of $110 million increased $7 million, or 6.8%.
For the first six months of 1996, net sales totaled $1,244 million, an
increase of $31 million, or 2.6%, over the first six months of 1995. However,
EBITDA of $189 million, was down $20 million, or 9.6%, from last year.
Gross profit as a percentage of net sales rose to 24.9% in the second quarter
of 1996 from 24.2% in the prior-year period. This increase primarily reflects
lower wallboard unit costs, partially offset by lower realized selling prices
for wallboard. For the first six months of 1996, the gross profit margin
declined to 23.4% from 24.8% as a result of lower wallboard prices and a
one-time $5 million provision to cost of sales in the first quarter of 1996
associated with actions being implemented to improve the operating
efficiencies of USG's European businesses by reducing manufacturing and
distribution costs.
Selling and administrative expenses in the second quarter and first six months
of 1996 increased 8.3% and 10.0%, respectively, over the prior-year periods.
These increases largely reflect higher levels of expenses related to
compensation and benefits and marketing programs, as well as expenses
associated with a joint initiative by USG's North American Gypsum and
Worldwide Ceilings units to enhance customer service by upgrading their order
fulfillment systems.
Excess reorganization value, which was established in connection with USG's
financial restructuring in 1993, is currently being amortized over a five-year
period through April 1998. This noncash amortization reduced operating profit
by $42 million and $84 million in each 1996 and 1995 second quarter and first
six-month period, respectively.
Interest expense in the second quarter and first six months of 1996 decreased
20.0% and 25.0%, respectively, versus the corresponding 1995 periods. These
declines primarily reflect a lower level of debt in 1996.
Income tax expense amounted to $29 million and $47 million for the three
months and six months ended June 30, 1996, respectively. For the respective
1995 periods, income tax expense amounted to $26 million and $53 million. The
Corporation's income tax expense is computed based on pre-tax earnings
excluding the noncash 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 earnings of $4 million were reported in the second quarter of 1996, while
a net loss of $3 million was reported in the second quarter of 1995. The
noncash amortization of excess reorganization value and reorganization debt
discount (included in interest expense) reduced net earnings by $43 million,
or $0.91 per share, and $43 million, or $0.95 per share, in the respective
quarters. For the first six months of 1996 and 1995, net losses of $11
million and $5 million were reported. Comparable amortizations in the
six-month periods amounted to $86 million, or $1.88 per share, and $86
million, or $1.92 per share, respectively.
<PAGE>
The following is an analysis of USG's results of operations by core business
(dollars in millions):
<TABLE>
<CAPTION>
Net Sales EBITDA
------------------------------ ---------------------------
Periods ended June 30 Three Months Six Months Three Months Six Months
------------- ------------- ------------- ------------
1996 1995 1996 1995 1996 1995 1996 1995
----- ------ ------ ------ ------ ----- _____ _____
North American Gypsum:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Gypsum Company $ 338 $ 325 $ 660 $ 657 $ 84 $ 81 $ 154 $ 167
L&W Supply Corporation 212 191 400 365 7 7 12 11
CGC Inc. (gypsum) 28 27 51 52 4 2 6 5
Other subsidiaries 19 16 35 33 7 5 11 10
Eliminations (85) (76) (161) (154) - - - -
----- ------ ------ ------ ------ ------ ------ ------
Total 512 483 985 953 102 95 183 193
------ ------ ------ ------ ------ ------ ------ ------
Worldwide Ceilings:
USG Interiors, Inc. 100 95 196 190 14 15 26 30
USG International 57 61 112 117 2 1 (3) 3
CGC Inc. (interiors) 7 6 15 14 1 1 2 2
Eliminations (10) (9) (20) (19) - - - -
------ ------ ------ ------ ------ ------ ------ ------
Total 154 153 303 302 17 17 25 35
------ ------ ------ ------ ------ ------ ------ ------
Corporate - - - - (9) (9) (19) (19)
Eliminations (24) (21) (44) (42) - - - -
------ ------ ------ ------ ------ ------ ------ ------
Total USG Corporation 642 615 1,244 1,213 110 103 189 209
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
North American Gypsum
Net sales of $512 million and EBITDA of $102 million in the second quarter of
1996 for North American Gypsum represented increases of 6.0% and 7.4%,
respectively, over the second quarter of 1995. For the first six months of
1996, net sales of $985 million increased 3.4%, while EBITDA of $183 million
was down 5.2% compared to 1995.
Net sales improved in the second quarter of 1996 for U.S. Gypsum as wallboard
shipments increased 9.3% over the comparable 1995 period to 1.969 billion
square feet, the highest level for any second quarter in the company's
history. U.S. Gypsum's wallboard plants operated at 93% of capacity in the
second quarter of 1996 compared to 88% in the second quarter of 1995 and 89%
in the first quarter of 1996. Partially offsetting the increase in volume
were lower wallboard selling prices. The average selling price for U.S.
Gypsum's wallboard was $106.78 per thousand square feet in the second quarter,
down $5.77, or 5.1%, from the second quarter of 1995. However, due to a price
increase in April, this price was up $2.95 per thousand square feet, or 2.8%,
versus the first quarter of 1996. U.S. Gypsum's EBITDA in the second quarter
of 1996 increased slightly compared to the prior year primarily due to the
lower cost of purchased recycled paper, the primary raw material of wallboard
paper. The favorable impact of the lower cost of purchased recycled paper on
EBITDA was approximately $16 million versus the second quarter of 1995.
However, this improvement was offset to a large extent by the lower selling
prices.
L&W Supply Corporation, USG's building products distribution business,
reported record net sales in the second quarter of 1996 due to record
shipments of wallboard and improved demand for nonwallboard product lines.
The record level of sales was achieved even before reflecting the results of
seven additional distribution centers (155 centers as of June 30, 1996 versus
148 centers as of June 30, 1995).
Second quarter results for CGC Inc.'s gypsum business reflect improved
wallboard demand and pricing as a result of increased housing starts in
Eastern Canada and increased wallboard shipments to the United States. In
addition, unit costs were favorably affected by lower paper costs.
Worldwide Ceilings
Net sales of $154 million in the second quarter of 1996 and $303 million in
the first six months of 1996 for Worldwide Ceilings each increased slightly
over the respective 1995 periods. EBITDA of $17 million in the second quarter
was unchanged versus the second quarter of 1995, while EBITDA of $25 million
in the first six months was down 28.6% from a year ago.
These results reflect record ceiling tile shipments attributable to the
improving U.S. commercial market and strong demand in Latin America and Asia.
However, EBITDA was negatively impacted by soft economic conditions in Europe.
In addition, EBITDA for the first six months of 1996 was lowered by a one-time
$5 million provision to cost of sales in the first quarter of 1996 associated
with actions being implemented to improve the operating efficiencies of USG's
European businesses by reducing manufacturing and distribution costs.
Outlook
The outlook is positive for the balance of 1996. As USG enters the third
quarter, shipments of gypsum wallboard and suspended ceilings products
continue to be at high levels. Based on this strong demand, USG announced in
July an $8 per thousand square foot wallboard price increase and a 3% price
increase on ceiling tile and suspension grid. The Corporation expects the U.S.
construction market to continue to benefit from ongoing moderate economic
growth and relatively low interest rates. Conditions in Asia and Latin
America are expected to remain favorable. Finally, Europe and Canada are
starting to show some signs of gradual economic improvement.
Based on preliminary data issued by the U.S. Bureau of the Census, second
quarter 1996 seasonally adjusted annual housing starts averaged 1.484 million
privately owned units, the strongest pace since late 1994. Nonresidential
construction contract awards are expected to decrease slightly, compared with
the extraordinary increase experienced in 1995. However, demand for USG
products from this segment should be strong through 1996, because the building
of interior walls and ceilings tend to follow construction start-up by a year
or more. The Corporation anticipates that demand for USG products from repair
and remodeling of both residential and nonresidential buildings will continue
to grow in 1996.
Liquidity and Capital Resources
The Corporation is currently pursuing a strategy of reducing debt and growing
its core gypsum and ceilings businesses through a balanced application of free
cash flow between debt reduction and capital expenditures with an objective of
achieving investment grade status.
Through the first six months of 1996, the Corporation reduced its principal
amount of total debt by $62 million. As of June 30, 1996, the principal
amount of total debt was $864 million compared with $926 million as of
December 31, 1995. The repayment of $45 million of revolving bank loans and
redemption of $22 million of outstanding 7.875% senior debentures due 2004,
were partially offset by short-term foreign borrowings of $5 million.
Capital expenditures amounted to $73 million in the first six months of 1996,
compared with $56 million in the corresponding 1995 period. The Corporation
expects that capital expenditures will approximate $145 million in 1996. For
North American Gypsum, capital investments in 1996 include cost reduction
projects, such as the installation of stock cleaning equipment to utilize
lower grades of recycled paper and equipment to further utilize synthetic
gypsum. In the Worldwide Ceilings business, a $45 million expansion that
began in 1995 at USG Interiors' ceiling tile plant in Greenville, Miss., has
begun initial operations. As of June 30, 1996, capital expenditure
commitments for the replacement, modernization and expansion of operations
amounted to $30 million compared with $68 million as of December 31, 1995.
The Corporation's capital investment plans for the next couple of years
contemplate spending approximately one-half of its free cash flow on projects
that provide favorable growth and cost-reduction opportunities. In addition,
the Corporation periodically evaluates possible acquisitions or combinations
involving other businesses or companies in businesses and markets related to
its current operations. The Corporation believes that its available liquidity
would be generally adequate to support most opportunities and that it has
access to additional financial resources to take further advantage of other
opportunities.
Working capital (current assets less current liabilities) as of June 30, 1996
amounted to $99 million and the ratio of current assets to current liabilities
was 1.23 to 1. As of December 31, 1995, working capital was $108 million and
the ratio of current assets to current liabilities was 1.28 to 1.
Cash and cash equivalents as of June 30, 1996 amounted to $54 million compared
with $70 million as of December 31, 1995. This decrease reflects first six
months 1996 net cash flows to investing and financing activities of $64
million and $62 million, respectively, partially offset by net cash flows from
operating activities of $110 million. It also reflects the Corporation's
decision to maintain lower cash reserves and make more use of its credit
facilities described below to provide liquidity. Receivables (net of
reserves) increased to $296 million as of June 30, 1996 from $246 million as
of December 31, 1995, while inventories increased to $176 million from $175
million and accounts payable rose to $142 million from $130 million. These
increases reflect normal seasonal fluctuations.
The Corporation has additional liquidity available through the following
financing arrangements: (i) a seven-year revolving credit facility allowing
the Corporation to borrow up to $500 million, including a $125 million letter
of credit subfacility, which, as of June 30, 1996, outstanding revolving loans
totaled $215 million and letters of credit issued and outstanding amounted to
$46 million, leaving the Corporation with $239 million of unused and available
credit, and (ii) a revolving accounts receivable facility (see note 5), which,
as of June 30, 1996, had additional borrowing capacity of $50 million.
Furthermore, a shelf registration statement was filed in 1995 with the
Securities and Exchange Commission allowing the Corporation to offer from time
to time debt securities, shares of preferred and common stock or warrants to
purchase shares of common stock; all having an aggregate initial offering
price not to exceed $300 million. As of the date of this report, no
securities had been issued pursuant to this registration statement.
In April 1996, U.S. Gypsum reached a $111 million settlement with one of its
insurance carriers for past and future asbestos litigation costs (See
discussion of asbestos litigation below). Under the terms of the settlement,
the carrier will reimburse U.S. Gypsum $62 million for past asbestos
litigation costs ($42 million was paid within 30 days of the settlement date
and the balance of $20 million is being paid in five equal monthly
installments). The remaining $49 million of the settlement represents
coverage in place for future settlements. Also, in April 1996, the
Corporation completed the sale of its insulation manufacturing business in the
United States.
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,
certain of U.S. Gypsum's insurance carriers continue to contest coverage for
the Property Damage Cases. U.S. Gypsum believes that substantial coverage
exists and the trial court and an appellate court in U.S. Gypsum's Coverage
Action so ruled, although certain additional issues must be resolved before
all of U.S. Gypsum's insurance will become available. In view of the limited
insurance funding currently available to U.S. Gypsum for Property Damage Cases
resulting from continued resistance by a number of U.S. Gypsum's insurers to
providing coverage, the effect of the asbestos litigation on the Corporation
will depend upon a variety of factors, including the damages sought in
Property Damage Cases that reach trial prior to the completion of the Coverage
Action, U.S. Gypsum's ability to successfully defend or settle such cases, and
the resolution of the Coverage Action. As a result, management is unable to
determine whether an adverse outcome in the asbestos litigation will have a
material adverse effect on the results of operations or the consolidated
financial position of the Corporation.
The Corporation and certain of its subsidiaries have been notified by state
and federal environmental protection agencies of possible involvement as one
of numerous "potentially responsible parties" in a number of so-called
"Superfund" sites in the United States. The Corporation believes that neither
these matters nor any other known governmental proceeding regarding
environmental matters will have a material adverse effect upon its earnings or
consolidated financial position. See Part II, Item 1. "Legal Proceedings" for
more information on legal proceedings.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
USG Corporation:
We have reviewed the accompanying condensed consolidated balance sheet of USG
CORPORATION (a Delaware corporation) AND SUBSIDIARIES as of June 30, 1996, and
the related condensed consolidated statement of earnings for the three-month
and six-month periods ended June 30, 1996 and 1995 and the condensed
consolidated statement of cash flows for the six months ended June 30, 1996
and 1995. These financial statements are the responsibility of the
Corporation'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.
/s/ Arthur Andersen LLP
ARTHUR ANDERSEN LLP
Chicago, Illinois
July 18, 1996
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
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 1930s; 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 seek
to recover compensatory and in many cases punitive damages for personal injury
allegedly resulting from exposure to asbestos and asbestos-containing products
(the "Personal Injury Cases"). 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 $465 million of insurance remained
potentially available as of December 31, 1995. 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, Ill., 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 seven
insurance carriers that provided comprehensive general liability insurance
coverage to U.S. Gypsum between the 1940s and 1984. As discussed below, 11
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 $8.2 million in
1993 and $33.4 million in 1994. In 1995, insurance payments exceeded
aggregate asbestos-related costs by approximately $10 million due to the
receipt of reimbursement in 1995 of amounts expended in prior years.
Property Damage Cases
The Property Damage Cases have been brought against U.S. Gypsum by a variety
of plaintiffs, including school districts, state and local governments,
colleges and universities, hospitals and private property owners. As of June
30, 1996, 27 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.
Class Actions: 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
July 23, 1996, a court approved U.S. Gypsum's settlement of a class action on
behalf 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, U.S. Gypsum will pay $3.6
million, with half paid during 1995 and the remainder payable over the
following 18 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 Co., 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,
Mich.) The Michigan settlement was approved by the Court on December 2, 1994,
and no appeal was filed. The settlement of the nationwide class action 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 trial court has ruled that
claims involving building owners outside South Carolina cannot be included in
the suit. 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.
Results to Date: In total, U.S. Gypsum has settled approximately 99 Property
Damage Cases, involving 232 plaintiffs, in addition to the 3 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; 3 other cases, 1 won at the
trial level and 2 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. 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 2 were settled during the appellate
process.
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 1995, 3 Property Damage Cases were filed
against U.S. Gypsum, 7 cases were dismissed before trial, 3 were settled, 2
were closed following trial or appeal, and 32 were pending at year-end. U.S.
Gypsum expended $36 million for the defense and resolution of Property Damage
Cases and received insurance payments of $48.6 million in 1995.
Estimated Cost: 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 that 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 49,000 claimants pending as
of June 30, 1996, although, as discussed below, approximately 15,000 of such
claims are settled but not yet closed. Another 8,000 of such claims are
enjoined from proceeding because they did not opt out of the Georgine class
action referred to below, although an appellate court has now ruled that the
class action must be decertified. 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.
Center for Claims Resolution: 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 awarded, 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.
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 the 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.
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. During 1995,
approximately 13,000 Personal Injury Cases were filed against U.S. Gypsum, and
17,600 were settled or dismissed. U.S. Gypsum incurred expenses of $32.1
million in 1995 with respect to Personal Injury Cases, of which $30.9 million
was paid by insurance. As of December 31, 1995, 1994, and 1993, approximately
50,000, 54,000, and 59,000 Personal Injury Cases were outstanding against U.S.
Gypsum, respectively.
Georgine Class Action Settlement: 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 or "opt out" request as of
January 24, 1994. As noted below, a court of appeals recently ruled that the
class should be decertified and the settlement vacated. The settlement, if
implemented, would provide an administrative compensation system that will
replace judicial claims for all future Personal Injury Cases, except as noted
below. The Georgine settlement would 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. Each of the defendants has committed to fund a
defined portion of the settlement, up to a stated maximum amount, over the
initial 10-year period of the agreement (which is automatically extended
unless terminated by the defendants). 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. In addition,
approximately 82,000 purported class members "opted out," or elected to be
excluded from, the settlement, thus retaining the right to file suit in the
court system without regard to the provisions of Georgine. Claimants who
attempt to file suit in the courts but have not opted out of Georgine,
including approximately 8,000 of the Personal Injury Cases pending on December
31, 1995, have been enjoined from proceeding against the Center members in the
courts and will be required to pursue their claims against Center members
under the administrative procedures in Georgine.
The Center members, including U.S. Gypsum, have instituted proceedings against
those of their insurance carriers that had not consented to support the
settlement. The action seeks 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 nonconsenting insurers.
On May 10, 1996, the U.S. Court of Appeals for the Third Circuit ruled that
Georgine does not meet the requirements for class certification, and therefore
ordered that the injunction be vacated and that the district court decertify
the class. Rehearing was denied on June 25, 1996, although the Court of
Appeals has stayed the effect of its ruling until at least August 19, 1996, in
order to provide the Center defendants with the opportunity to petition for
review by the U.S. Supreme Court. If the Court of Appeals ruling is not
reversed, the Georgine settlement will be dissolved and future Personal Injury
Cases will be dealt with in the court system unless an alternative to Georgine
can be negotiated. It is also expected that plaintiffs in a substantial
number of pending personal injury suits will amend their complaints to add
Center companies, including U.S. Gypsum, as defendants if the Court of Appeals
ruling is not reversed. Filings of Personal Injury Cases have increased since
the Third Circuit ruling, although most of the new filings have been brought
on behalf of individuals who did not opt out of Georgine, subjecting their
cases to dismissal if the Third Circuit ruling is overturned by the Supreme
Court.
Estimated Cost: If the Georgine settlement were to be implemented in its
current form (which would require a reversal of the Court of Appeals ruling by
the Supreme Court), based upon figures provided by the Center, management
estimates U.S. Gypsum's maximum total exposure in Personal Injury Cases (other
than future Georgine "opt out" cases) during the next 10 years at
approximately $210 million, of which approximately $195 million is expected to
be paid by insurance. This estimated exposure encompasses four components.
First, U.S. Gypsum, through the Center, has reached settlements in
approximately 15,000 of the Personal Injury Cases pending on December 31,
1995, of which U.S. Gypsum's share totals approximately $25 million, to be
paid over a three- to five-year period. Second, the Center estimates that the
remaining approximately 26,000 pending Personal Injury Cases that are not
subject to the Georgine injunction can be settled for between $40 million and
$50 million. This estimate is based primarily upon the Center's and U.S.
Gypsum's experience in the Personal Injury Cases disposed of to date and takes
into account a number of uncertainties. Third, the Center has calculated U.S.
Gypsum's contribution to the Georgine settlement over its 10-year initial term
to be a maximum of $120 million. The estimated cost of Georgine is based upon
the maximum number of claims that could be processed in each year and the
total amount to be made available to the claimants over the 10-year period.
U.S. Gypsum's actual contribution to Georgine may be lower, depending upon the
number and severity of claims that are filed. Finally, the Center estimates
U.S. Gypsum's share of legal fees and expenses at approximately $15 million.
The above figures do not include possible future Personal Injury Cases filed
by persons who opted out of the Georgine class action. U.S. Gypsum's
additional exposure for future "opt out" claims would depend on the number and
severity of any such claims that are filed, which cannot presently be
determined.
If Georgine is not implemented, U.S. Gypsum's exposure in future Personal
Injury Cases would depend on the number and severity of such Cases 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 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.
Property Damage Coverage: 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 access to 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, pursuant to four settlements reached since
the appellate ruling, described below, U.S. Gypsum is receiving approximately
$129 million from four carriers to reimburse it for past property damage
expenses. U.S. Gypsum's only remaining insurance claims relating to its past
expenditures are against carriers that are now insolvent (see "Insolvent
Carriers" below).
Settlements: Eleven carriers, including three of the Supporting Insurers, have
settled U.S. Gypsum's claims for both property damage and personal injury
coverage and have been dismissed from the Coverage Action entirely. Four of
these carriers paid all or a substantial portion of their policy limits to
U.S. Gypsum between 1991 and 1995. Another carrier, which provided both
primary and excess policies to U.S. Gypsum during the 1960s and 1970s, has
agreed to pay U.S. Gypsum a total of $38.4 million, $30 million of which has
been paid, with the remainder to be paid over the next two years. 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 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. Approximately $19 million of the $25 million was paid in December
1995, with the rest received in early 1996. An additional carrier, which
provided $2 million of coverage per year for a 22-month period in the 1960s,
paid U.S. Gypsum $4.2 million in January 1996 as reimbursement for past costs.
In April 1996, another excess carrier which provided $111 million of excess
coverage agreed to pay U.S. Gypsum $62 million as reimbursement for past costs
and to make its remaining $49 million of coverage available in the future for
both bodily injury and property damage costs. The past due amount will be
paid over six months beginning in May 1996. Three other excess carriers,
including two 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 insurance consumption
through December 31, 1995, carriers providing a total of approximately $236
million of insurance that was unexhausted as of December 31, 1995, 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 $150 million of coverage that was unexhausted as of December 31,
1995, 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.
Insolvent Carriers: 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 likely 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.
Conclusion
It is not possible to predict the number of additional lawsuits alleging
asbestos-related claims that may be filed against U.S. Gypsum. Because
reliable information concerning U.S. Gypsum's exposure is lacking in many of
the Property Damage Cases, the liability therefrom is 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.
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.
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
(a) In accordance with the Corporation's notice and proxy statement
dated April 1, 1996, the matters set forth in (c) below were
submitted to a vote of stockholders at the annual meeting of
stockholders held on May 8, 1996.
(b) The directors indicated in paragraph (c) below were elected to a
three-year term to expire in 1999, and the following directors are
those whose terms of office continued after the annual meeting of
stockholders referred to in paragraph (a) above: Keith A. Brown,
James C. Cotting, John B. Schwemm, W. H. Clark, Lawrence M.
Crutcher, William C. Foote, Judith A. Sprieser.
<PAGE>
<TABLE>
<CAPTION>
(c) Votes Abstentions
Votes Withheld and Broker
For or Against Non-Votes
------------- ------------- -------------
<S> <C> <C> <C>
Election of Directors:
Robert L. Barnett 41,428,326 130,843 -
David W. Fox 41,432,584 126,585 -
Philip C. Jackson, Jr. 41,414,989 144,180 -
Marvin E. Lesser 41,419,751 139,418 -
Ratification of Appointment
of Arthur Andersen
LLP as Independent Public
Accountants 41,478,183 31,762 49,224
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) (10) Consulting agreement dated April 1, 1996 between USG
Corporation and Eugene B. Connolly.
(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 second
quarter of 1996.
<PAGE>
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
By /s/ Raymond T. Belz
August 6, 1996 ----------------------
Raymond T. Belz, Vice President and
Controller, USG Corporation
Exhibit (15)
August 6, 1996
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 33-40136 and 33-64217 on Form
S-3 and 33-22581, as amended, 33-22930, 33-36303, 33-52573, 33-52715, 33-63554
and 33-65383 on Form S-8 its Form 10-Q for the quarter ended June 30, 1996,
which includes our report dated July 18, 1996, 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
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 54
<SECURITIES> 0
<RECEIVABLES> 312
<ALLOWANCES> 16
<INVENTORY> 176
<CURRENT-ASSETS> 526
<PP&E> 1,019
<DEPRECIATION> 148
<TOTAL-ASSETS> 1,889
<CURRENT-LIABILITIES> 427
<BONDS> 759
<COMMON> 5
0
0
<OTHER-SE> (55)
<TOTAL-LIABILITY-AND-EQUITY> 1,889
<SALES> 1,244
<TOTAL-REVENUES> 1,244
<CGS> 953
<TOTAL-COSTS> 953
<OTHER-EXPENSES> 132
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 38
<INCOME-PRETAX> 36
<INCOME-TAX> 47
<INCOME-CONTINUING> (11)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11)
<EPS-PRIMARY> (0.23)
<EPS-DILUTED> (0.23)
</TABLE>
EXECUTIVE CONSULTING AGREEMENT
THIS AGREEMENT, entered into as of this 1st day of April
1996, by and between USG Corporation, a corporation organized and
existing under the laws of the State of Delaware (hereinafter
called "USG") and EUGENE B. CONNOLLY, an individual residing in
Barrington, Illinois.
W I T N E S S E T H :
WHEREAS, CONNOLLY has served in executive positions for USG
Corporation including Chairman and Chief Executive Officer for a
number of years and has had extensive experience in the business
and affairs of USG; and
WHEREAS, CONNOLLY retired as an officer of USG March 31,
1996; and
WHEREAS, USG desires to utilize the business experience and
knowledge of CONNOLLY from time to time in handling specific
projects and other special assignments, as appropriate; and
WHEREAS, CONNOLLY desires to make such services and advice
available to USG, provided that the rendering of such services
and advice allows CONNOLLY time for other interests and does not
affect in any way the right of CONNOLLY to receive any benefits
under benefit plans of USG or any contractual entitlement from
USG;
NOW, THEREFORE, for and in consideration of the premises and
mutual promises herein contained, the parties hereto agree as
follows:
ARTICLE 1. CONNOLLY agrees to make himself available to USG
to render services and advice on the business and affairs of USG.
Such services and advice shall be rendered in the manner
hereinafter provided and to the extent and on the days to be
agreed on by USG and CONNOLLY and may include but shall not be
limited to the following: advice and counsel to the Chairman and
Chief Executive Officer with respect to relationships with the
Board of Directors of USG and external parties; advice and
guidance with respect to product liability and general
litigation; and counsel and support with respect to international
joint ventures and acquisitions.
ARTICLE 2. CONNOLLY agrees to make himself available to USG
at such times as the parties may mutually agree, beginning with
the date of this Agreement through December 31, 1996. USG agrees
to pay CONNOLLY a monthly retainer of eleven thousand one hundred
eleven dollars and eleven cents ($11,111.11) per month for each
of the nine (9) months this Agreement is in effect. Each such
monthly retainer shall be paid on or before the fifteenth day of the
following month.
ARTICLE 3. In addition to the retainers set forth in ARTICLE
2, USG agrees to reimburse any reasonable travel, living
expenses, and telephone expenses incurred by CONNOLLY in the
interests of USG and such other extraordinary expenses as USG may
from time to time authorize. Reimbursement for expenditures
shall be made upon presentation of receipts or other evidence of
such expenditures.
ARTICLE 4. During the term of this Agreement, CONNOLLY shall
work closely with the Chairman and Chief Executive Officer, USG
Corporation, and persons designated by him. Said Chairman and
Chief Executive Officer, USG Corporation, or persons designated
by him shall identify the specific consulting projects to be
performed by CONNOLLY, and arrange any necessary conferences
between CONNOLLY, executives of USG and outside parties.
ARTICLE 5. It is understood that nothing in this Agreement
shall be construed to create a partnership or joint venture or
the relationship of employer and employee. CONNOLLY will at all
times be deemed an independent contractor and, accordingly, USG
will not make any deductions required by law to be made from
compensation paid by an employer to an employee. As an
independent contractor, CONNOLLY will be required to perform his
duties hereunder only according to the provisions hereof. In
fulfilling the terms of this Agreement, CONNOLLY will be
responsible for results only, will have no authority to direct
the employees of USG, and will not be subject to the control of
USG or any officers or employees of USG.
ARTICLE 6. CONNOLLY recognizes that by virtue of this
Agreement, he occupies a position of confidence and trust in his
dealings with USG and agrees to use his best efforts to prevent,
either during the term of this Agreement or at any time
thereafter, duplication or disclosure of data, plans,
specifications, formulae, drawings, or any other information,
whether business or technical, of a confidential nature furnished
directly or indirectly, in writing or otherwise and at any time,
to CONNOLLY by USG.
ARTICLE 7. This Agreement shall not be assigned by either
party without the prior written consent of the other party
hereto, except that it may be assigned without such consent to
the successor of USG or to a person, firm or corporation
acquiring all or substantially all of the business and assets of
USG. Nothing herein contained, however, shall be deemed to
prevent USG from assigning this Agreement to any affiliated
company.
ARTICLE 8. CONNOLLY agrees that he will communicate to USG
or its nominee any and all inventions and improvements conceived
by him solely or jointly with others relating to the business and
affairs of USG and arising out of his work as a consultant for
USG and that he will assign to USG or its nominee all his right,
title, and interest to any and all such inventions and
improvements,including both the United States and foreign rights. CONNOLLY
further agrees to execute at any and all times, upon request of
USG or any of its successors or assigns or nominees, any and all
papers necessary or desirable to apply for or obtain Letters
Patent of the United States or foreign countries and to vest
complete title thereto in USG or its successors or nominees, as
the case may be, including, but not by way of limitation, any and
all papers relating to interferences, reissues, continuations,
continuations-in-part, or litigation relating to any of said
improvements or inventions.
ARTICLE 9. CONNOLLY agrees to make all reports and
recommendations to USG in writing upon completion of his work
upon any assigned subject if so requested by USG.
Upon termination of this Agreement for any cause whatsoever, all
designs, reports, and writings prepared for USG not theretofore
delivered to USG shall become the property of USG and be
delivered to USG by CONNOLLY.
CONNOLLY agrees that he will not publish or use, except for the
benefit of USG's business, any information arising out of, in
connection with, or relating to his consulting services performed
hereunder without prior written permission of USG.
ARTICLE 10. The term of this agreement shall be for nine (9)
months from the date first stated above thereby ending December
31, 1996. In the event USG desires to utilize CONNOLLY's
services beyond expiration of said term, it shall so advise him
by no later than the close of business on November 30, 1996.
ARTICLE 11. During the term of this Agreement and for a
period of one (1) year thereafter, CONNOLLY shall not acquire an
interest in, become associated with or employed by, or engage in
consulting work for, any person, firm, or corporation which
competes with USG or any of its subsidiaries or affiliated
companies in any line of business in any section of the United
States, (except in non-competitive fields approved in writing in
advance by USG) or which otherwise has interests adverse to USG.
ARTICLE 12. All notices provided for in this Agreement shall
be given in writing either by personal delivery of such notice or
by depositing the same, postage prepaid, in the United States
mail, addressed to the parties respectively at the following
addresses:
USG: USG Corporation
125 South Franklin Street
Chicago, Illinois 60606
Attention: Chairman, President and Chief
Executive Officer
CONSULTANT: Mr. Eugene B. Connolly
25360 Wagon Wheel Court
Barrington, IL 60010
ARTICLE 13. This Agreement shall be construed and the legal
relationship of the parties determined in accordance with the laws
of the State of Illinois.
ARTICLE 14. This Agreement shall not become effective until
executed by USG. No change in, addition to, or waiver of the
terms and conditions hereof shall be binding upon either party
unless approved in writing by such party or by its authorized
officer or officers. No modification shall be effected by the
acknowledgment or acceptance of commercial forms containing
different terms or conditions.
IN WITNESS WHEREOF, the parties hereto have caused this
agreement to be executed in duplicate and their signatures affixed
hereto as of the day and year first above written.
USG CORPORATION
By:
Senior Vice President and
Chief Administrative Officer
ATTEST:
Corporate Secretary
CONSULTANT:
Eugene B. Connolly
WITNESS:
Name
