-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, WSDDQ1GQpXsfDCCy0j1rIQg7TVsAVHev3OSQUINo8+bYRpm3bHXVIsVEHqcd65uS 9zS7epvX7UhkeX6UOU+PTQ== 0000757011-96-000008.txt : 19960809 0000757011-96-000008.hdr.sgml : 19960809 ACCESSION NUMBER: 0000757011-96-000008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960808 SROS: CSX SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: USG CORP CENTRAL INDEX KEY: 0000757011 STANDARD INDUSTRIAL CLASSIFICATION: CONCRETE GYPSUM PLASTER PRODUCTS [3270] IRS NUMBER: 363329400 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-08864 FILM NUMBER: 96605695 BUSINESS ADDRESS: STREET 1: 125 S FRANKLIN ST STREET 2: DEPT. 188 CITY: CHICAGO STATE: IL ZIP: 60606 BUSINESS PHONE: 3126064000 10-Q 1 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 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 - ------------------------------------------------------------------------------ (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. 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 PART I FINANCIAL INFORMATION Item 1. Financial Statements USG CORPORATION CONSOLIDATED STATEMENT OF EARNINGS (Dollars in millions except per share data) (Unaudited)
Three Months Six Months ended June 30, ended June 30, -------------------- -------------------- 1996 1995 1996 1995 --------- --------- --------- -------- 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.
USG CORPORATION CONSOLIDATED BALANCE SHEET (Dollars in millions) (Unaudited)
As of As of June 30, December 31, 1996 1995 ------------ ------------ 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.
USG CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (Dollars in millions) (Unaudited)
Six Months ended June 30, --------------------- 1996 1995 --------- -------- 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.
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. 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. The following is an analysis of USG's results of operations by core business (dollars in millions):
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: 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 ====== ====== ====== ====== ====== ====== ====== ======
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. 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 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. 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.
(c) Votes Abstentions Votes Withheld and Broker For or Against Non-Votes ------------- ------------- ------------- 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
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. 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 EX-15 2 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 EX-27 3
5 1,000,000 6-MOS DEC-31-1996 JUN-30-1996 54 0 312 16 176 526 1,019 148 1,889 427 759 5 0 0 (55) 1,889 1,244 1,244 953 953 132 0 38 36 47 (11) 0 0 0 (11) (0.23) (0.23)
EX-10 4 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 -----END PRIVACY-ENHANCED MESSAGE-----