-----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, CEs1JMcG8FdBK8uICmtVEpHa5bmso9oQjDQ/yLt5zpgcqLfhufm2bBac40HhqZNV tAZ//rd99bDiaPnsHegpUQ== 0000757011-96-000011.txt : 19961115 0000757011-96-000011.hdr.sgml : 19961115 ACCESSION NUMBER: 0000757011-96-000011 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961113 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: 96661618 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 FOR THE PERIOD ENDED 09-30-96 FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 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 October 31, 1996, 45,677,965 shares of USG common stock were outstanding. Table of Contents Page -------- PART I FINANCIAL STATEMENTS Item 1. Financial Statements: Consolidated Statement of Earnings: Three Months and Nine Months Ended September 30, 1996 and 1995 3 Consolidated Balance Sheet: As of September 30, 1996 and December 31, 1995 4 Consolidated Statement of Cash Flows: Nine Months Ended September 30, 1996 and 1995 5 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition 8 Report of Independent Public Accountants 14 PART II OTHER INFORMATION Item 1. Legal Proceedings 15 Item 6. Exhibits and Reports on Form 8-K 23 SIGNATURES 24 PART I FINANCIAL INFORMATION Item 1. Financial Statements
USG CORPORATION CONSOLIDATED STATEMENT OF EARNINGS (Dollars in millions except per share data) (Unaudited) Three Months Nine Months ended September 30, ended September 30, -------------------- ---------------------- 1996 1995 1996 1995 -------- -------- -------- -------- Net sales $ 678 $ 629 $ 1,922 $ 1,842 Cost of products sold 499 477 1,452 1,389 --------- ---------- --------- -------- Gross profit 179 152 470 453 Selling and administrative expenses 69 61 201 181 Amortization of excess reorganization value 43 43 127 127 --------- ---------- --------- -------- Operating profit 67 48 142 145 Interest expense 18 25 57 77 Interest income (1) (2) (2) (5) Other expense, net 1 1 2 1 --------- ---------- -------- --------- Earnings before taxes on income 49 24 85 72 Taxes on income 36 26 83 79 --------- ---------- -------- --------- Net earnings/(loss) 13 (2) 2 (7) ========= ========= ========= ========= Net earnings/(loss) per common share 0.26 (0.04) 0.04 (0.16) ========= ========= ========= ========= Dividends paid per common share - - - - Average number of common shares 45,548,584 45,108,206 45,494,731 45,095,230 See accompanying Notes to Consolidated Financial Statements.
USG CORPORATION CONSOLIDATED BALANCE SHEET (Dollars in millions) (Unaudited)
As of As of September 30, December 31, 1996 1995 ------------- ------------- Assets Current Assets: Cash and cash equivalents $ 45 $ 70 Receivables (net of reserves - $17 and $14) 301 246 Inventories 177 175 ------------- ------------- Total current assets 523 491 Property, plant and equipment (net of reserves for depreciation and depletion - $161 and $137) 878 842 Excess reorganization value (net of accumulated amortization - $593 and $466) 252 379 Other assets 187 178 ------------- ------------- Total Assets 1,840 1,890 ============= ============= Liabilities and Stockholders' Equity Current Liabilities: Accounts payable 151 130 Accrued expenses 183 190 Notes payable 12 7 Long-term debt maturing within one year 72 35 Taxes on income 17 21 -------------- ------------ Total current liabilities 435 383 Long-term debt 694 865 Deferred income taxes 195 185 Other liabilities 551 494 Stockholders' Equity/(Deficit): Preferred stock - - Common stock 5 5 Capital received in excess of par value 227 223 Deferred currency translation (10) (6) Reinvested earnings/(deficit) (257) (259) -------------- -------------- Total stockholders' equity/(deficit) (35) (37) -------------- -------------- Total Liabilities and Stockholders' Equity 1,840 1,890 ============== ============== See accompanying Notes to Consolidated Financial Statements.
USG CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (Dollars in millions) (Unaudited)
Nine Months ended September 30, --------------------- 1996 1995 -------- --------- Operating Activities: Net earnings/(loss) $ 2 $ (7) Adjustments to reconcile net earnings/(loss) to net cash: Amortization of excess reorganization value 127 127 Depreciation, depletion and other amortization 49 50 Deferred income taxes 10 (1) Net gain on asset dispositions (2) (3) (Increase)/decrease in working capital: Receivables (55) (18) Inventories (2) (10) Payables 17 22 Accrued expenses (4) (34) Increase in other assets (9) (44) Increase in other liabilities 57 69 Other, net 1 (2) --------- --------- Net cash flows from operating activities 191 149 --------- --------- Investing Activities: Capital expenditures (95) (94) Net proceeds from asset dispositions 10 6 --------- --------- Net cash flows to investing activities (85) (88) --------- --------- Financing Activities: Issuance of debt - 575 Repayment of debt (135) (774) Short-term borrowings/(repayments), net 4 5 --------- --------- Net cash flows to financing activities (131) (194) --------- --------- Net decrease in cash & cash equivalents (25) (133) --------- --------- Cash & cash equivalents at beginning of period 70 197 --------- --------- Cash & cash equivalents at end of period 45 64 ========= ========= Supplemental Cash Flow Disclosures: Interest paid 67 79 Income taxes paid 75 92 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 September 30, 1996 and December 31, 1995; results of operations for the three months and nine months ended September 30, 1996 and 1995; and cash flows for the nine months ended September 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 $36 million and $83 million for the three months and nine months ended September 30, 1996, respectively. For the comparable 1995 periods, income tax expense amounted to $26 million and $79 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, as described in note 6, 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 September 30, 1996, 2,641,060 common shares were reserved for future issuance in conjunction with existing stock option grants. An additional 467,045 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 remaining applicable 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 comparisons of current and 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 Strong construction activity in nearly all markets led to record demand for USG's gypsum wallboard and suspended ceilings in the third quarter of 1996. As a result, net sales of $678 million were up $49 million, or 7.8%, over the third quarter of 1995 and EBITDA of $125 million increased $19 million, or 17.9%. For the first nine months of 1996, net sales totaled $1,922 million, an increase of $80 million, or 4.3%, over the first nine months of 1995. Year-to-date EBITDA continues to recover from the difficult first quarter when results were adversely affected by severe winter weather. EBITDA for the first nine months of 1996 amounted to $314 million, compared with $315 million in the corresponding 1995 period. Gross profit as a percentage of net sales rose to 26.4% in the third quarter of 1996 from 24.2% in the prior-year period. This increase primarily reflects higher realized selling prices and lower wallboard unit costs. For the first nine months of 1996, the gross profit margin declined slightly as a result of a one-time $5 million provision to cost of sales in the first quarter 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 third quarter and first nine months of 1996 increased 13.1% and 11.0%, respectively, over the prior-year periods. These increases largely reflect higher levels of expenses related to compensation and benefits and 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 $43 million and $127 million in each 1996 and 1995 third quarter and first nine-month period, respectively. Interest expense in the third quarter and first nine months of 1996 decreased 28.0% and 26.0%, respectively, versus the corresponding 1995 periods. These declines primarily reflect a lower level of debt in 1996. Income tax expense amounted to $36 million and $83 million for the three months and nine months ended September 30, 1996, respectively. For the comparable 1995 periods, income tax expense amounted to $26 million and $79 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 $13 million were reported in the third quarter of 1996, while a net loss of $2 million was reported in the third 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 $0.89 per share, and $44 million, or $0.97 per share, in the respective quarters. For the first nine months of 1996, net earnings of $2 million were reported, while a net loss of $7 million was reported for the corresponding 1995 period. Comparable amortizations in the nine-month periods amounted to $128 million, or $2.69 per share, and $130 million, or $2.88 per share, respectively. The following is an analysis of USG's results of operations by core business (dollars in millions):
Net Sales EBITDA ----------------------------------------------- -------------------------------------- Periods ended September 30 Three Months Nine Months Three Months Nine Months --------------- ------------- ------------- ------------- 1996 1995 1996 1995 1996 1995 1996 1995 ------ ------ ------ ------ ------ ------ ------ ------ North American Gypsum: U.S. Gypsum Company $ 364 $ 330 $ 1,024 $ 987 $ 94 $ 78 $ 248 $ 245 L&W Supply Corporation 222 198 622 563 9 8 21 19 CGC Inc. (gypsum) 32 26 83 78 6 2 12 7 Other subsidiaries 23 19 58 52 6 7 17 17 Eliminations (98) (84) (259) (238) - - - - ------ ------ ------ ------ ------ ------ ------ ------ Total 543 489 1,528 1,442 115 95 298 288 ------- ------ ------ ------ ------ ------ ------ ------ Worldwide Ceilings: USG Interiors, Inc. 104 102 300 292 16 16 42 46 USG International 58 61 170 178 3 2 - 5 CGC Inc. (interiors) 8 8 23 22 1 1 3 3 Eliminations (12) (10) (32) (29) - - - - ------- ------ ------ ------ ------ ------ ------ ------ Total 158 161 461 463 20 19 45 54 ------- ------ ------ ------ ------ ------ ------ ------ Corporate - - - - (10) (8) (29) (27) Eliminations (23) (21) (67) (63) - - - - ------- ------ ------ ------ ------ ------ ------ ------ Total USG Corporation 678 629 1,922 1,842 125 106 314 315 ======= ======= ====== ====== ====== ====== ====== ======
North American Gypsum Net sales of $543 million and EBITDA of $115 million in the third quarter of 1996 for North American Gypsum represented increases of 11.0% and 21.1%, respectively, over the third quarter of 1995. For the first nine months of 1996, net sales of $1,528 million increased 6.0%, while EBITDA of $298 million was up 3.5% compared to 1995. Net sales and EBITDA improved in the third quarter of 1996 for U.S. Gypsum as wallboard shipments increased 7.3% over the comparable 1995 period to 2.099 billion square feet, the highest level for any quarter in the company's history. U.S. Gypsum's wallboard plants operated at 97% of capacity compared to 94% in the third quarter of 1995 and 93% in the second quarter of 1996. The average selling price for U.S. Gypsum's wallboard was $112.08 per thousand square feet in the third quarter, up $2.71, or 2.5%, from the third quarter of 1995 and up $5.30, or 5.0%, versus the second quarter of 1996. Unit costs for gypsum wallboard continued to be down from 1995 primarily due to the lower furnish prices for wastepaper, the primary raw material of wallboard paper. L&W Supply Corporation, USG's building products distribution business, reported record net sales in the third quarter of 1996 due to record levels of shipments of wallboard and sales of nonwallboard products. The record level of net sales was achieved even before reflecting the results of seven additional distribution centers (157 centers as of September 30, 1996 versus 150 centers as of September 30, 1995). Third 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 $158 million in the third quarter of 1996 for Worldwide Ceilings decreased slightly from the comparable 1995 period, while EBITDA of $20 million increased slightly. These results reflect all-time record shipments of AURATONE ceiling tile for USG Interiors, greater operating efficiencies in Europe and sales growth in the Latin America region. For the first nine months of 1996, net sales for Worldwide Ceilings declined slightly, while EBITDA was down 16.7% versus 1995. EBITDA in 1996 was lowered by a one-time $5 million provision to cost of sales in the first quarter associated with actions being implemented to improve the operating efficiencies of USG's European businesses by reducing manufacturing and distribution costs. Outlook Based on preliminary data issued by the U.S. Bureau of the Census, third quarter 1996 seasonally adjusted annual housing starts averaged 1.479 million privately owned units. Because numerous markets are experiencing very high demand, the Corporation has been utilizing recently expanded wallboard and ceiling tile capacity to service customer needs. With such favorable market conditions, USG realized price increases on wallboard, ceiling tile and ceiling suspension grid during the third quarter. The Corporation announced wallboard price increases of $8 and $6 per thousand square foot effective late September and early December, respectively. The Corporation is optimistic that the U.S. construction market will continue to benefit from ongoing moderate economic growth, relatively low inflation, higher consumer confidence, solid repair and remodel growth, and good home affordability. Asian and Latin American market conditions are expected to remain favorable, while Canada and Europe continue to show signs of a gradual economic recovery. 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. Debt Reduction Through the first nine months of 1996, the Corporation reduced its principal amount of total debt by $131 million. As of September 30, 1996, the principal amount of total debt was $795 million compared with $926 million as of December 31, 1995. The repayment of $110 million of revolving bank loans and redemption of $22 million of outstanding 7.875% senior debentures due 2004, were offset slightly by short-term net foreign borrowings of $1 million. Capital Expenditures Capital expenditures amounted to $95 million in the first nine months of 1996, compared with $94 million in the corresponding 1995 period. The Corporation expects that capital expenditures will approximate $125 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 $35 million project was started during the third quarter of 1996 to replace two old production lines with one modern, high speed line at its ceiling tile plant in Cloquet, Minn. This project is anticipated to be completed by mid-1998. In addition, projects completed in 1996 include a $45 million expansion begun in 1995 at the ceiling tile plant in Greenville, Miss., and the installation of ceiling suspension grid manufacturing in Saudi Arabia and Taiwan, all of which have commenced initial operations. As of September 30, 1996, capital expenditure commitments for the replacement, modernization and expansion of operations amounted to $64 million compared with $68 million as of December 31, 1995. 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 Working capital (current assets less current liabilities) as of September 30, 1996 amounted to $88 million and the ratio of current assets to current liabilities was 1.20 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 September 30, 1996 amounted to $45 million compared with $70 million as of December 31, 1995. This decrease reflects first nine months 1996 net cash flows to investing and financing activities of $85 million and $131 million, respectively, partially offset by net cash flows from operating activities of $191 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 $301 million as of September 30, 1996 from $246 million as of December 31, 1995, while inventories increased to $177 million from $175 million and accounts payable rose to $151 million from $130 million. These increases reflect normal seasonal fluctuations. Available Liquidity 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 September 30, 1996, outstanding revolving loans totaled $150 million and letters of credit issued and outstanding amounted to $46 million, leaving the Corporation with $304 million of unused and available credit, and (ii) a revolving accounts receivable facility (see note 5), which, as of September 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. Legal Contingencies 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 remaining applicable insurance will become available. In view of the limited insurance funding currently available for the 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. In April 1996, U.S. Gypsum reached a $111 million settlement with one of its insurance carriers for past and future asbestos litigation costs. Under the terms of the settlement, the carrier reimbursed U.S. Gypsum $62 million for past asbestos litigation costs ($42 million paid within 30 days of the settlement date and the balance of $20 million paid in five equal monthly installments through October 1996). The remaining $49 million of the settlement represents coverage in place for future settlements. The Corporation and certain of its subsidiaries have been notified by state and federal environmental protection agencies of possible involvement as one of numerous "potentially responsible parties" in a number of so-called "Superfund" sites in the United States. The Corporation believes that neither these matters nor any other known governmental proceeding regarding environmental matters will have a material adverse effect upon its earnings or consolidated financial position. See Part II, Item 1. "Legal Proceedings" for more information on legal proceedings. Subsequent Event On October 31, 1996, USG extended an offer to acquire the approximately six million common shares of publicly held stock of CGC Inc. at a price of $11 (Canadian) per share. The offer is being made with the intention that CGC will become an indirect, wholly owned subsidiary of USG and that CGC will continue its existing operations as a more integrated component of USG's North American businesses. USG currently owns approximately 76% of CGC's common stock; substantially all the publicly held stock was issued in a secondary public offering in 1987. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of USG Corporation: We have reviewed the accompanying condensed consolidated balance sheet of USG CORPORATION (a Delaware corporation) AND SUBSIDIARIES as of September 30, 1996, and the related condensed consolidated statement of earnings for the three-month and nine-month periods ended September 30, 1996 and 1995 and the condensed consolidated statement of cash flows for the nine months ended September 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 October 21, 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 September 30, 1996, 24 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 named 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. However, the fraudulent conveyance claim and the Corporation were voluntarily dismissed from the case by the plaintiff in September, 1996. Results to Date: In total, U.S. Gypsum has settled approximately 102 Property Damage Cases, involving 235 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 59,000 claimants pending as of September 30, 1996, although approximately 11,000 of such claims are settled but not yet closed. Another 27,000 of such claims are enjoined from proceeding because they did not opt out of the Georgine class action referred to below; an appellate court has ruled that the class action must be decertified, although the U.S. Supreme Court has now accepted the case for review. 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 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 would have certain rights to prosecute their claims for compensatory (but not punitive) damages in court in the event they rejected 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 27,000 of the pending Personal Injury Cases, 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 unless the injunction is vacated. The Center members, including U.S. Gypsum, have instituted proceedings against those of their insurance carriers that have 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. However, on November 1, 1996, the U.S. Supreme Court agreed to review the Third Circuit decision. The Third Circuit ruling is stayed until the Supreme Court issues its decision, which is not expected to occur before the second quarter of 1997. If the Third Circuit ruling is not reversed, the Georgine settlement and injunction 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 against other companies will amend their complaints to add Center members, 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, as of December 31, 1995, management estimated 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 was expected to be paid by insurance. This estimated exposure encompassed four components. First, U.S. Gypsum, through the Center, had reached settlements in approximately 15,000 of the Personal Injury Cases pending on December 31, 1995, of which U.S. Gypsum's share totaled approximately $25 million, to be paid over a three- to five-year period. Second, the Center estimated that the remaining approximately 26,000 then-pending Personal Injury Cases that were not subject to the Georgine injunction could be settled for between $40 million and $50 million. This estimate was based primarily upon the Center's and U.S. Gypsum's experience in the Personal Injury Cases disposed of to date and took into account a number of uncertainties. Third, the Center 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 estimated 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 to access all of its available insurance coverage for Property Damage Cases (although the same coverage must also be used for Personal Injury Cases). Under the continuous trigger, all Property Damage Cases would be covered by insurance unless or until such insurance becomes exhausted. In addition, 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 6. Exhibits and Reports on Form 8-K (a) (15) Letter of Arthur Andersen LLP regarding unaudited financial information. (27) Financial Data Schedule (electronic filing only). (b) There were no reports on Form 8-K filed during the third quarter of 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 November 13, 1996 ----------------------------------- Raymond T. Belz, Vice President and Controller, USG Corporation EX-15 2 LETTER OF ARTHUR ANDERSEN LLP November 13, 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 September 30, 1996, which includes our report dated October 21, 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 9-MOS DEC-31-1996 JUL-1-1996 SEP-30-1996 45 0 318 17 177 523 1,039 161 1,840 435 694 0 0 5 (40) 1,840 1,922 1,922 1,452 1,452 201 0 55 85 83 2 0 0 0 2 0.04 0.04
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