FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 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
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(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
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(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (312) 606-4000
---------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes X No
----- -----
As of April 30, 1996, 45,503,219 shares of USG common stock were outstanding.
<PAGE>
Table of Contents
PART I FINANCIAL STATEMENTS
Item 1. Financial Statements:
Consolidated Statement of Earnings:
Three Months Ended March 31, 1996 and 1995
Consolidated Balance Sheet:
As of March 31, 1996 and December 31, 1995
Consolidated Statement of Cash Flows:
Three Months Ended March 31, 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 6. Exhibits and Reports on Form 8-K
SIGNATURES
<PAGE>
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
<PAGE>
USG CORPORATION
CONSOLIDATED STATEMENT OF EARNINGS
(Dollars in millions except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months ended
March 31,
---------------------
1996 1995
-------- ---------
<S> <C> <C>
Net sales $ 602 $ 598
Cost of products sold 471 446
------- --------
Gross profit 131 152
Selling and administrative expenses 67 60
Amortization of excess reorganization value 42 42
-------- ---------
Operating profit 22 50
Interest expense 19 27
Interest income - (2)
--------- ---------
Earnings/(loss) before taxes on income 3 25
Taxes on income 18 27
--------- ---------
Net loss (15) (2)
========== =========
Net loss per common share (0.32) (0.05)
========== =========
Dividends paid per common share - -
Average number of common shares 45,435,757 45,085,540
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
USG CORPORATION
CONSOLIDATED BALANCE SHEET
(Dollars in millions)
(Unaudited)
<TABLE>
<CAPTION>
As of As of
March 31, December 31,
1996 1995
--------- ---------
<S> <C> <C>
Assets
Current Assets:
Cash and cash equivalents $ 28 $ 70
Receivables (net of reserves - $15 and $14) 288 246
Inventories 180 175
--------- ---------
Total current assets 496 491
Property, plant and equipment (net of reserves
for depreciation and depletion - $148 and $137) 866 842
Excess reorganization value (net of accumulated
amortization - $508 and $466) 337 379
Other assets 181 178
---------- ---------
Total Assets 1,880 1,890
========== ==========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable 161 130
Accrued expenses 163 190
Notes payable 13 7
Long-term debt maturing within one year 74 35
Taxes on income 20 21
---------- ----------
Total current liabilities 431 383
Long-term debt 799 865
Deferred income taxes 196 185
Other liabilities 504 494
Stockholders' Equity/(Deficit):
Preferred stock - -
Common stock 5 5
Capital received in excess of par value 225 223
Deferred currency translation (6) (6)
Reinvested earnings/(deficit) (274) (259)
---------- ----------
Total stockholders' equity/(deficit) (50) (37)
---------- ----------
Total Liabilities and Stockholders' Equity 1,880 1,890
========== ==========
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
USG CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
(Dollars in millions)
(Unaudited)
<TABLE>
<CAPTION>
Three Months ended
March 31,
---------------------
1996 1995
--------- ---------
<S> <C> <C>
Operating Activities:
Net loss $ (15) $ (2)
Adjustments to reconcile net loss to net cash:
Amortization of excess reorganization value 42 42
Depreciation, depletion and other amortization 16 17
Deferred income taxes 11 (2)
Net (gain)/loss on asset dispositions - (3)
Increase)/decrease in working capital:
Receivables (42) (22)
Inventories (5) (17)
Payables 30 39
Accrued expenses (27) (39)
Increase in other assets (3) (7)
Increase in other liabilities 10 8
Other, net 2 -
-------- --------
Net cash flows from operating activities 19 14
-------- --------
Investing Activities:
Capital expenditures (42) (24)
Net proceeds from asset dispositions 1 6
-------- --------
Net cash flows to investing activities (41) (18)
--------- --------
Financing Activities:
Issuance of debt 253 6
Repayment of debt (273) (105)
--------- --------
Net cash flows to financing activities (20) (99)
--------- --------
Net decrease in cash & cash equivalents (42) (103)
--------- --------
Cash & cash equivalents at beginning of period 70 197
--------- --------
Cash & cash equivalents at end of period 28 94
========= =========
Supplemental Cash Flow Disclosures:
Interest paid 29 25
Income taxes paid 6 13
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 March 31, 1996 and December 31, 1995; and results of operations
and cash flows for the three months ended March 31, 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 $18 million and $27 million
for the three months ended March 31, 1996 and 1995,
respectively. The Corporation's income tax expense is
computed based on pre-tax earnings excluding the non-cash
amortization of excess reorganization value, which is not
deductible for federal income tax purposes. Further, under
the provisions of SOP 90-7, the benefits of the domestic net
operating loss carryforwards ("NOL Carryforwards") discussed
below are not reflected in income tax expense.
The Corporation has NOL Carryforwards of $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 March 31, 1996, 2,794,600 common shares were reserved
for future issuance in conjunction with existing stock
option grants. An additional 459,395 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, 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 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) In the fourth quarter of 1994, the Corporation established a
revolving accounts receivable facility. Under this new
financing program, the trade receivables of United States
Gypsum Company ("U.S. Gypsum") and USG Interiors, Inc. ("USG
Interiors") are being purchased by USG Funding Corporation
("USG Funding") and transferred to a trust administered by
Chemical Bank as trustee. Certificates representing an
ownership interest of up to $130 million in the trust have
been issued to an affiliate of Citicorp North America, Inc.
USG Funding, a special purpose subsidiary of USG
Corporation, is a separate corporate entity with its own
separate creditors which will be entitled to be satisfied
out of USG Funding's assets prior to any value in USG
Funding becoming available to its shareholder. Receivables
and debt outstanding in connection with the receivables
facility remain in receivables and long-term debt,
respectively, on the Corporation's consolidated balance
sheet.
(6) 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
currently being amortized over a five-year period, effective
May 7, 1993.
(7) On January 1, 1985, all of the issued and outstanding shares
of stock of U.S. Gypsum were converted into shares of USG
Corporation and the holding company became a joint and
several obligor for certain debentures originally issued by
U.S. Gypsum. Debentures totaling $22 million were included
on the holding company's books of account as of March 31,
1996 and December 31, 1995. Summary financial results for
U.S. Gypsum are presented below (dollars in millions):
<PAGE>
<TABLE>
<CAPTION>
Three Months ended
March 31,
---------------------
Summary Statement of Earnings 1996 1995
------------------------------ --------- ---------
<S> <C> <C>
Net sales $ 322 $ 332
Cost and expenses 261 255
Amortization of excess reorganization value 15 15
-------- ---------
Operating profit 46 62
Interest expense, net (2) -
Corporate charges 20 22
-------- ---------
Earnings before taxes on income 28 40
Taxes on income 16 21
-------- ---------
Net earnings 12 19
========= =========
As of As of
March 31, Dec. 31,
Summary Balance Sheet 1996 1995
---------------------- --------- ---------
Current assets $ 251 $ 207
Property, plant and equipment, net 535 529
Excess reorganization value, net 128 143
Other assets 118 120
--------- ---------
Total assets 1,032 999
========= =========
Current liabilities 177 170
Other liabilities and obligations 362 348
Stockholder's equity 493 481
--------- ---------
Total liabilities and stockholder's equity 1,032 999
========= =========
</TABLE>
<PAGE>
Item 2. Management's Discussion and Analysis of Results of Operations and
Financial Condition
Results of Operations
Net sales of $602 million in the first three months of 1996 were up slightly
compared with the first three months of 1995, while EBITDA (earnings before
interest, taxes, depreciation, depletion and amortization) of $79 million
declined $27 million, or 25.5%. Severe winter weather throughout much of the
United States had a significant impact on USG's first-quarter 1996 results.
The unfavorable weather conditions adversely affected wallboard shipments,
capacity utilization and pricing in January and February. However, by the end
of March, wallboard demand had rebounded because of improving weather.
Gross profit as a percentage of net sales decreased in the first quarter of
1996 to 21.8% from 25.4% in the prior-year period. This decline primarily
reflects lower wallboard pricing and a one-time $5 million provision to cost
of sales to improve the operating efficiencies of USG's European businesses
by reducing manufacturing and distribution costs.
Selling and administrative expenses increased $7 million, or 11.7%, largely
due to 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 entry and fulfillment computer systems.
Excess reorganization value, which was established in connection with USG's
financial restructuring in May 1993 is currently being amortized over a
five-year period. This noncash amortization reduced operating profit by $42
million in each first-quarter period. Because of the continuing amortization
of excess reorganization value, USG reports EBITDA to facilitate comparisons
of current and historical results. (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 declined $8 million, or 29.6%, compared with the first three
months of 1995 primarily reflecting a lower level of debt in 1996.
Income tax expense amounted to $18 million and $27 million for the three
months ended March 31, 1996 and 1995, respectively. 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 losses of $15 million and $2 million were reported in the first three
months of 1996 and 1995, respectively. However, the noncash amortization of
excess reorganization value and reorganization debt discount (included in
interest expense) reduced net earnings by $43 million, or $0.93 per share, and
$43 million, or $0.96 per share, in the respective quarters.
<PAGE>
The following is an analysis of USG's results of operations by core business
(dollars in millions):
<TABLE>
<CAPTION>
Three Months ended March 31,
------------------------------------------
Net Sales EBITDA
------------------ ------------------
1996 1995 1996 1995
------ ------ ------ ------
<S> <C> <C> <C> <C>
North American Gypsum:
U.S. Gypsum Company $ 322 $ 332 $ 70 $ 86
L&W Supply Corporation 188 174 5 4
CGC Inc. (gypsum) 23 25 2 3
Other subsidiaries 16 17 4 5
Eliminations (76) (78) - -
------ ------ ------ ------
Total North American Gypsum 473 470 81 98
------ ------ ------ ------
Worldwide Ceilings:
USG Interiors, Inc. 96 95 12 15
USG International 55 56 (5) 2
CGC Inc. (interiors) 8 8 1 1
Eliminations (10) (10) - -
------ ------ ------ ------
Total Worldwide Ceilings 149 149 8 18
------ ------ ------ ------
Corporate - - (10) (10)
Eliminations (20) (21) - -
------ ------ ------ ------
Total USG Corporation 602 598 79 106
====== ====== ====== ======
</TABLE>
North American Gypsum
Net sales increased $3 million, or 0.6%, while EBITDA decreased $17 million,
or 17.3%, versus the first three months of 1995.
Lower net sales and EBITDA for U.S. Gypsum reflect the impact of severe winter
weather. Comparing the first quarter of 1996 to the first quarter of 1995,
wallboard shipments of 1.880 billion square feet were down 2.3% from the
record first quarter level of 1.925 billion square feet; capacity utilization
at U.S. Gypsum's wallboard plants fell to approximately 89% from 96%; and
realized selling prices for wallboard averaged $103.83 per thousand square
feet, down $8.43, or 7.5%. First-quarter 1996 EBITDA for U.S. Gypsum was
also affected by a higher level of selling and administrative expenses. The
cost of purchased recycled paper, the primary raw material of wallboard paper,
declined from a year ago, benefiting EBITDA by approximately $7 million.
However, this improvement was essentially offset by the impact of the severe
weather on energy and other manufacturing costs.
<PAGE>
L&W Supply Corporation, USG's building products distribution business,
experienced the highest level of first quarter sales in its history and
improved EBITDA. Sales and gross profit for wallboard and nonwallboard
products benefited from the contribution of eleven additional centers (155
centers as of March 31, 1996 versus 144 centers as of March 31, 1995) and from
improved demand in the west and southwest regions of the United States.
Together, these factors more than offset lower demand in regions affected by
the severe weather.
Results for CGC Inc.'s gypsum business were adversely affected by reduced
export shipments of wallboard to the United States and higher unit costs.
However, these unfavorable factors were partially offset by improved wallboard
pricing.
Worldwide Ceilings
Net sales were unchanged from the first quarter of 1995, while EBITDA declined
$10 million, or 55.6%.
EBITDA for Worldwide Ceilings was negatively impacted by a one-time pre-tax
charge of $5 million to improve operating efficiencies in USG's European
businesses by reducing manufacturing and distribution costs. In addition, a
number of factors affected first-quarter performance, including higher energy
costs due to harsh winter weather, poor economic conditions and competitive
pressures in Europe and increased selling and administrative expenses.
Outlook
Housing starts in the first quarter of 1996 were strong despite the severe
weather. Based on preliminary data issued by the U.S. Bureau of the Census,
first quarter 1996 seasonally adjusted annual housing starts averaged 1.468
million privately owned units, the strongest pace since late 1994. The
Corporation remains confident about its industry's prospects for the remainder
of 1996 due to favorable interest rates, as well as good consumer confidence
and home affordability. As such, the Corporation expects modest growth in the
housing market, repair and remodel activity and nonresidential construction.
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.
Working capital (current assets less current liabilities) as of March 31, 1996
amounted to $65 million and the ratio of current assets to current liabilities
was 1.15 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.
<PAGE>
Cash and cash equivalents as of March 31, 1996 amounted to $28 million
compared with $70 million as of December 31, 1995. This decrease reflects
first quarter net cash flows to investing and financing activities of $41
million and $20 million, respectively, partially offset by net cash flows from
operating activities of $19 million. In the first quarter of 1996, the
Corporation repaid $25 million of revolving bank loans and increased
short-term foreign borrowings by $5 million. As a result, the Corporation's
principal amount of total debt was reduced to $906 million from $926 million
as of December 31, 1995. Receivables (net of reserves) increased to $288
million as of March 31, 1996 from $246 million as of December 31, 1995, while
inventories increased to $180 million from $175 million and accounts payable
rose to $161 million from $130 million. These increases reflect normal
seasonal fluctuations. Long-term debt maturing within one year increased to
$74 million from $35 million due to the reclassification of 8% senior notes
due in March 1997.
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 to be paid within 30 days of the settlement date
and the balance of $20 million to be 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 business in the United States.
In the fourth quarter of 1995, the Corporation filed a shelf registration
statement with the Securities and Exchange Commission allowing the Corporation
to offer from time to time: (i) debt securities consisting of notes,
debentures or other evidences of indebtedness in one or more series (ii)
shares of $1.00 par value preferred stock in one or more series (iii) shares
of $0.10 par value common stock or (iv) warrants to purchase shares of common
stock (collectively, the "Offered Securities"), all having an aggregate
initial offering price not to exceed $300 million. The Offered Securities may
be offered separately or as units with other Offered Securities. The debt
securities may be (i) senior or subordinated or (ii) secured or unsecured.
The Corporation intends to use the net proceeds from the sale of the Offered
Securities for general corporate purposes that may include the repayment of
existing indebtedness and the financing of capital expenditures and
acquisitions. The shelf registration was declared effective by the Securities
and Exchange Commission on January 3, 1996. As of the date of this report, no
securities had been issued pursuant to this registration.
Capital expenditures amounted to $42 million in the first three months of
1996, compared with $24 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 the additional conversion of
processes to accommodate the use of synthetic gypsum at manufacturing
facilities at which it is more economical than natural sources of gypsum rock.
In the Worldwide Ceilings business, a $45 million expansion that began in 1995
at USG Interiors' ceiling tile plant in Greenville, Miss., is scheduled for
completion in 1996. As of March 31, 1996, capital expenditure commitments for
the replacement, modernization and expansion of operations amounted to $46
million compared with $68 million as of December 31, 1995. The Corporation's
capital investment plans for the next several 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.
<PAGE>
One of the Corporation's subsidiaries, U.S. Gypsum, is a defendant in asbestos
lawsuits alleging both property damage and personal injury. Virtually all
costs of the Personal Injury Cases are being paid by insurance. However, many
of U.S. Gypsum's insurance carriers are denying coverage for the Property
Damage Cases, although U.S. Gypsum believes that substantial coverage exists
and the trial court and an appellate court in U.S. Gypsum's Coverage Action
have so ruled. The carriers are seeking reconsideration of the Illinois
Supreme Court's refusal to review the appellate court's ruling. In view of
the limited insurance funding currently available to U.S. Gypsum for Property
Damage Cases resulting from continued resistance by a number of U.S. Gypsum's
insurers to providing coverage, the effect of the asbestos litigation on the
Corporation will depend upon a variety of factors, including the damages
sought in Property Damage Cases that reach trial prior to the completion of
the Coverage Action, U.S. Gypsum's ability to successfully defend or settle
such cases, and the resolution of the Coverage Action. As a result,
management is unable to determine whether an adverse outcome in the asbestos
litigation will have a material adverse effect on the results of operations or
the consolidated financial position of the Corporation.
The Corporation and certain of its subsidiaries have been notified by state
and federal environmental protection agencies of possible involvement as one
of numerous "potentially responsible parties" in a number of so-called
"Superfund" sites in the United States. The Corporation believes that neither
these matters nor any other known governmental proceeding regarding
environmental matters will have a material adverse effect upon its earnings or
consolidated financial position. See Part II, Item 1. "Legal Proceedings" for
more information on legal proceedings.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
USG Corporation:
We have reviewed the accompanying condensed consolidated balance sheet of USG
CORPORATION (a Delaware corporation) AND SUBSIDIARIES as of March 31, 1996,
and the related condensed consolidated statement of earnings and the condensed
consolidated statement of cash flows for the three-month period ended March
31, 1996. 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
April 29, 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.
<PAGE>
Property Damage Cases
The Property Damage Cases have been brought against U.S. Gypsum by a variety
of plaintiffs, including school districts, state and local governments,
colleges and universities, hospitals and private property owners. As of March
31, 1996, 29 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
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 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 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.
<PAGE>
Results to Date: In total, U.S. Gypsum has settled approximately 97 Property
Damage Cases, involving 231 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 50,000 claimants pending as
of March 31, 1996, although, as discussed below, approximately 15,000 of such
claims are settled but not yet closed, and another 8,000 of such claims are
enjoined from proceeding because they did not opt out of the Georgine class
action referred to below. 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.
<PAGE>
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.
<PAGE>
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. The settlement has been approved by the district court and,
if upheld on appeal, will provide an administrative compensation system that
will replace judicial claims for all future Personal Injury Cases, except as
noted below. The Georgine settlement 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. 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 claims 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 them
under the administrative procedures in Georgine. This injunction is currently
on appeal.
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.
Estimated Cost: Assuming that the Georgine settlement is implemented in its
current form (which depends on the outcome of further proceedings), and based
upon figures provided by the Center, management estimates U.S. Gypsum's
maximum total exposure in Personal Injury Cases (other than 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, for amounts totaling approximately
$25 million, to be expended 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 an amount 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.
<PAGE>
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 to 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 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.
<PAGE>
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.
<PAGE>
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 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 first
quarter of 1996.
Exhibit (27), which has been filed as part of this Form 10-Q, is not included
herein.
<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
May 3, 1996 ---------------------------------
Raymond T. Belz, Vice President and
Controller, USG Corporation
Exhibit (15)
May 3, 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 March 31, 1996,
which includes our report dated April 29, 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
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