-----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,
MmY8/LOkPYKT0ZeLRxQhMEUolODjdCHydsXuKbTvPAsEes6JVv4O4KnUXuna2syX
x4TK+7Q5GSjE+2URBCV/hg==
<SEC-DOCUMENT>0000950137-05-001958.txt : 20050218
<SEC-HEADER>0000950137-05-001958.hdr.sgml : 20050218
<ACCEPTANCE-DATETIME>20050218111830
ACCESSION NUMBER: 0000950137-05-001958
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 13
CONFORMED PERIOD OF REPORT: 20041231
FILED AS OF DATE: 20050218
DATE AS OF CHANGE: 20050218
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-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-08864
FILM NUMBER: 05626214
BUSINESS ADDRESS:
STREET 1: 125 SOUTH FRANKLIN STREET
STREET 2: DEPARTMENT 188
CITY: CHICAGO
STATE: IL
ZIP: 60606
BUSINESS PHONE: 312-606-4000
MAIL ADDRESS:
STREET 1: DEPARTMENT #188
STREET 2: 125 SOUTH FRANKLIN STREET
CITY: CHICAGO
STATE: IL
ZIP: 60606
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<FILENAME>c92112e10vk.txt
<DESCRIPTION>ANNUAL REPORT
<TEXT>
<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 10-K
----------
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2004
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)
<TABLE>
<S> <C>
DELAWARE 36-3329400
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
</TABLE>
<TABLE>
<S> <C>
125 S. FRANKLIN STREET, CHICAGO, ILLINOIS 60606-4678
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
Registrant's Telephone Number, Including Area Code: (312) 606-4000
----------
Securities Registered Pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Name of Exchange on
Title of Each Class Which Registered
------------------- -------------------
<S> <C>
Common Stock, $0.10 par value New York Stock Exchange
Chicago Stock Exchange
Preferred Share Purchase Rights New York Stock Exchange
Chicago Stock Exchange
8.5% Senior Notes, Due 2005 New York Stock Exchange
</TABLE>
Securities Registered Pursuant to Section 12(g) of the Act:
None
(Title of Class)
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2) 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 [ ]
The aggregate market value of the registrant's common stock held by
non-affiliates based on the New York Stock Exchange closing price as of June 30,
2004 (the last business day of the registrant's most recently completed second
fiscal quarter), was approximately $749,743,366.
The number of shares outstanding of the registrant's common stock as of
January 31, 2005, was 43,313,533.
================================================================================
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
Certain sections of USG Corporation's definitive Proxy Statement for use in
connection with the annual meeting of stockholders to be held on May 11, 2005,
are incorporated by reference into Part III of this Form 10-K Report where
indicated.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
PART I
Item 1. Business.................................................................................. 3
Item 2. Properties................................................................................ 8
Item 3. Legal Proceedings......................................................................... 9
Item 4. Submission of Matters to a Vote of Security Holders....................................... 9
PART II
Item 5. Market for the Registrant's Common Stock, Related Stockholder Matters and Issuer Purchases
of Equity Securities................................................................... 10
Item 6. Selected Financial Data................................................................... 11
Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition..... 12
Item 7a. Quantitative and Qualitative Disclosures About Market Risks............................... 29
Item 8. Financial Statements and Supplementary Data............................................... 30
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...... 67
Item 9a. Controls and Procedures................................................................... 67
PART III
Item 10. Directors and Executive Officers of the Registrant........................................ 69
Item 11. Executive Compensation.................................................................... 70
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters.................................................................... 71
Item 13. Certain Relationships and Related Transactions............................................ 71
Item 14. Principal Accounting Fees and Services.................................................... 71
PART IV
Item 15. Exhibits and Financial Statement Schedules................................................ 72
Signatures........................................................................................... 76
</TABLE>
2
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
United States Gypsum Company ("U.S. Gypsum") was incorporated in 1901. USG
Corporation (the "Corporation") was incorporated in Delaware on October 22,
1984. By a vote of stockholders on December 19, 1984, U.S. Gypsum became a
wholly owned subsidiary of the Corporation, and the stockholders of U.S. Gypsum
became the stockholders of the Corporation, all effective January 1, 1985.
Through its subsidiaries, the Corporation is a leading manufacturer and
distributor of building materials, producing a wide range of products for use in
new residential, new nonresidential, and repair and remodel construction as well
as products used in certain industrial processes.
VOLUNTARY REORGANIZATION UNDER CHAPTER 11
On June 25, 2001, the Corporation and 10 of its United States subsidiaries
(collectively, the "Debtors") filed voluntary petitions for reorganization (the
"Filing") under chapter 11 of the United States Bankruptcy Code in the United
States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court").
The chapter 11 cases of the Debtors have been consolidated for purposes of joint
administration as In re: USG Corporation et al. (Case No. 01-2094). This action
was taken to resolve asbestos claims in a fair and equitable manner, to protect
the long-term value of the Debtors' businesses, and to maintain the Debtors'
leadership positions in their markets. The Debtors are operating their
businesses as debtors-in-possession subject to the provisions of the United
States Bankruptcy Code. These cases do not include any of the Corporation's
non-U.S. subsidiaries.
U.S. Gypsum is a defendant in asbestos lawsuits alleging both property
damage and personal injury. Other subsidiaries of the Corporation also have been
named as defendants in a small number of asbestos personal injury lawsuits. As a
result of the Filing, all pending asbestos lawsuits against U.S. Gypsum and
other subsidiaries are stayed, and no party may take any action to pursue or
collect on such asbestos claims absent specific authorization of the Bankruptcy
Court. Since the Filing, U.S. Gypsum has ceased making payments with respect to
asbestos lawsuits, including payments pursuant to settlements of asbestos
lawsuits. See Part II, Item 7, Management's Discussion and Analysis of Results
of Operations and Financial Condition, and Part II, Item 8, Financial Statements
and Supplementary Data - Notes to Consolidated Financial Statements, Note 2,
Voluntary Reorganization Under Chapter 11, and Note 19, Litigation, for
additional information on the bankruptcy proceeding and asbestos litigation.
OPERATING SEGMENTS
The Corporation's operations are organized into three operating segments: North
American Gypsum, Worldwide Ceilings and Building Products Distribution. Net
sales for the respective segments accounted for approximately 53%, 13% and 34%
of 2004 consolidated net sales.
NORTH AMERICAN GYPSUM
BUSINESS
North American Gypsum, which manufactures and markets gypsum and related
products in the United States, Canada and Mexico, includes U.S. Gypsum in the
United States, the gypsum business of CGC Inc. ("CGC") in Canada, and USG
Mexico, S.A. de C.V. ("USG Mexico") in Mexico. U.S. Gypsum is the largest
manufacturer of gypsum wallboard in the United States and accounted for
approximately one-third of total domestic gypsum wallboard sales in 2004. CGC is
the largest manufacturer of gypsum wallboard in eastern Canada. USG Mexico is
the largest manufacturer of gypsum wallboard in Mexico.
PRODUCTS
North American Gypsum's products are used in a variety of building applications
to finish the interior walls, ceilings and floors in residential, commercial and
institutional construction and in certain industrial applications. These
products provide aesthetic as well as sound-dampening, fire-retarding,
abuse-resistance and moisture-control value. The majority of these products are
sold under the SHEETROCK(R) brand name. Also sold under the SHEETROCK(R) brand
name is a line of joint compounds used for finishing wallboard joints. The
DUROCK(R) line of cement board
3
<PAGE>
and accessories provides water-damage-resistant and fire-resistant assemblies
for both interior and exterior construction. The FIBEROCK(R) line of gypsum
fiber panels includes abuse-resistant wall panels and floor underlayment as well
as sheathing panels usable as a substrate for most exterior systems. The
LEVELROCK(R) line of poured gypsum underlayments provides surface leveling and
enhanced sound performance for residential, commercial and multi-family
installations. The Corporation produces a variety of construction plaster
products used to provide a custom finish for residential and commercial
interiors. Like SHEETROCK(R) brand gypsum wallboard, these products provide
aesthetic, sound-dampening, fire-retarding and abuse-resistance value.
Construction plaster products are sold under the trade names RED TOP(R),
IMPERIAL(R) and DIAMOND(R). The Corporation also produces gypsum-based products
for agricultural and industrial customers to use in a number of applications,
including soil conditioning, road repair, fireproofing and ceramics.
MANUFACTURING
North American Gypsum's products are manufactured at 44 plants located
throughout the United States, Canada and Mexico.
Gypsum rock is mined or quarried at 14 company-owned locations in North
America. In 2004, these locations provided approximately 70% of the gypsum used
by the Corporation's plants in North America. Certain plants purchase or acquire
synthetic gypsum and natural gypsum rock from various outside sources. Outside
purchases or acquisitions accounted for 30% of the gypsum used in the
Corporation's plants. The Corporation's geologists estimate that its recoverable
rock reserves are sufficient for more than 25 years of operation based on the
Corporation's average annual production of crude gypsum during the past five
years of 9.5 million tons. Proven reserves contain approximately 243 million
tons. Additional reserves of approximately 148 million tons are found on four
properties not in operation.
About 26% of the gypsum used in the Corporation's plants in North America
is synthetic gypsum which is a byproduct resulting from flue gas
desulphurization carried out by electric generation or industrial plants burning
coal as a fuel. The suppliers of this kind of gypsum are primarily power
companies, which are required to operate scrubbing equipment for their
coal-fired generating plants under federal environmental regulations. The
Corporation has entered into a number of long-term supply agreements that
provide for the acquisition of such gypsum. The Corporation generally takes
possession of the gypsum at the producer's facility and transports it to its
user wallboard plants by water where convenient using ships or river barges, or
by railcar or truck. The supply of synthetic gypsum is continuing to increase as
more power generation plants are fitted with desulphurization equipment.
Synthetic gypsum is supplied fully or partially to 12 of the Corporation's
gypsum wallboard plants.
The Corporation owns and operates seven paper mills located across the
United States. Vertical integration in paper ensures a continuous supply of
high-quality paper that is tailored to the specific needs of the Corporation's
wallboard production processes. The Corporation augments its paper needs through
purchases from outside suppliers. About 6% of the Corporation's paper supply was
purchased from such sources during 2004.
MARKETING AND DISTRIBUTION
Distribution is carried out through L&W Supply Corporation ("L&W Supply"), a
wholly owned subsidiary of the Corporation, other specialty wallboard
distributors, building materials dealers, home improvement centers and other
retailers, and contractors. Sales of gypsum products are seasonal in the sense
that sales are generally greater from spring through the middle of autumn than
during the remaining part of the year. Based on the Corporation's estimates
using publicly available data, internal surveys and gypsum wallboard shipment
data from the Gypsum Association, management estimates that during 2004 about
47% of total industry volume demand for gypsum wallboard was generated by new
residential construction, 39% of volume demand was generated by residential and
nonresidential repair and remodel activity, 8% of volume demand was generated by
new nonresidential construction, and the remaining 6% of volume demand was
generated by other activities such as exports and temporary construction.
COMPETITION
The Corporation accounts for approximately one-third of the total gypsum
wallboard sales in the United States. In 2004, U.S. Gypsum shipped 11.0 billion
square feet of wallboard, the highest level in its history, out of total U.S.
industry shipments (including imports) estimated
4
<PAGE>
by the Gypsum Association at 35.1 billion square feet, the highest level on
record. Competitors in the United States are: National Gypsum Company, BPB
(through its subsidiaries BPB Gypsum, Inc. and BPB America Inc.),
Georgia-Pacific Corporation, American Gypsum (a unit of Eagle Materials Inc.),
Temple-Inland Forest Products Corporation, Lafarge North America, Inc. and PABCO
Gypsum. Competitors in Canada include BPB Canada Inc., Georgia-Pacific
Corporation and Lafarge North America, Inc. The major competitor in Mexico is
Panel Rey, S.A. Principal methods of competition are quality of products,
service, pricing and compatibility of systems.
WORLDWIDE CEILINGS
BUSINESS
Worldwide Ceilings, which manufactures and markets interior systems products
worldwide, includes USG Interiors, Inc. ("USG Interiors"), the international
interior systems business managed as USG International, and the ceilings
business of CGC. Worldwide Ceilings is a leading supplier of interior ceilings
products used primarily in commercial applications. The Corporation estimates
that it is the largest manufacturer of ceiling grid and the second-largest
manufacturer/marketer of acoustical ceiling tile in the world.
PRODUCTS
Worldwide Ceilings manufactures ceiling tile in the United States and ceiling
grid in the United States, Canada, Europe and the Asia-Pacific region. It
markets both ceiling tile and ceiling grid in the United States, Canada, Mexico,
Europe, Latin America and the Asia-Pacific region. Its integrated line of
ceilings products provides qualities such as sound absorption, fire retardation
and convenient access to the space above the ceiling for electrical and
mechanical systems, air distribution and maintenance. USG Interiors' significant
trade names include the AURATONE(R) and ACOUSTONE(R) brands of ceiling tile and
the DONN(R), DX(R), FINELINE(R), CENTRICITEE(R), CURVATURA(R) and COMPASSO(R)
brands of ceiling grid.
MANUFACTURING
Worldwide Ceilings' products are manufactured at 14 plants located in North
America, Europe and the Asia-Pacific region. These include 9 ceiling grid
plants, 3 ceiling tile plants and 2 plants that either produce other interior
systems products or prepare raw materials for ceiling tile and grid. Principal
raw materials used in the production of Worldwide Ceilings' products include
mineral fiber, steel, perlite, starch and high-pressure laminates. Certain of
these raw materials are produced internally, while others are obtained from
various outside suppliers. While the Corporation expects the availability of
steel generally to remain tight and steel prices to remain high, the Corporation
does not anticipate a shortage of steel for use in the manufacture of its
ceiling grid products in 2005.
MARKETING AND DISTRIBUTION
Worldwide Ceilings' products are sold primarily in markets related to the new
construction and renovation of commercial buildings. Marketing and distribution
are conducted through a network of distributors, installation contractors, L&W
Supply and home improvement centers.
COMPETITION
The Corporation estimates that it is the world's largest manufacturer of ceiling
grid. Principal competitors in ceiling grid include WAVE (a joint venture
between Armstrong World Industries, Inc. and Worthington Industries) and Chicago
Metallic Corporation. The Corporation estimates that it is the second-largest
manufacturer/marketer of acoustical ceiling tile in the world. Principal global
competitors include Armstrong World Industries, Inc., OWA Faserplattenwerk GmbH
(Odenwald), BPB America Inc. and AMF Mineralplatten GmbH Betriebs KG. Principal
methods of competition are quality of products, service, pricing, compatibility
of systems and product design features.
BUILDING PRODUCTS DISTRIBUTION
BUSINESS
Building Products Distribution consists of L&W Supply, the leading specialty
building products distribution business in the United States. In 2004, L&W
Supply distributed approximately 11% of all gypsum wallboard in the United
States, including approximately 29% of U.S. Gypsum's wallboard production.
MARKETING AND DISTRIBUTION
L&W Supply was organized in 1971 by U.S. Gypsum. It is a service-oriented
organization that stocks a wide
5
<PAGE>
range of construction materials and delivers less-than-truckload quantities of
construction materials to job sites and places them in areas where work is being
done, thereby reducing the need for handling by contractors. L&W Supply
specializes in the distribution of gypsum wallboard (which accounted for 45% of
its 2004 net sales), joint compound and other gypsum products manufactured by
U.S. Gypsum and others. It also distributes products manufactured by USG
Interiors such as acoustical ceiling tile and grid as well as products of other
manufacturers, including drywall metal, insulation, roofing products and
accessories. L&W Supply leases approximately 89% of its facilities from third
parties. Typical leases have terms ranging from three to 15 years and include
renewal options.
L&W Supply remains focused on opportunities to profitably grow its
specialty business as well as optimize asset utilization. As part of its plan,
L&W Supply acquired three locations, opened one location and consolidated one
location during 2004, leaving a total of 186 locations in 36 states as of
December 31, 2004, compared with 183 locations and 181 locations as of December
31, 2003 and 2002, respectively.
COMPETITION
L&W Supply has a number of competitors, including Gypsum Management Supply, an
independent distributor with locations in the southern, central and western
United States. There are several regional competitors such as Rinker Materials
Corporation in the Southeast (primarily in Florida), KCG, Inc., which is
primarily in the southwestern and central United States, and The Strober
Organization, Inc. in the northeastern and mid-Atlantic states. L&W Supply's
many local competitors include specialty wallboard distributors, lumber dealers,
hardware stores, home improvement centers and acoustical ceiling tile
distributors. Principal methods of competition are location, service, range of
products and pricing.
EXECUTIVE OFFICERS OF THE REGISTRANT
See Part III, Item 10, Directors and Executive Officers of the Registrant -
Executive Officers of the Registrant (as of February 18, 2005).
OTHER INFORMATION
The Corporation performs research and development at the USG Research and
Technology Center in Libertyville, Ill. (the "Research Center"). The staff at
the Research Center provides specialized technical services to the operating
units and does product and process research and development. The Research Center
is especially well-equipped for carrying out fire, acoustical, structural and
environmental testing of products and building assemblies. It also has an
analytical laboratory for chemical analysis and characterization of materials.
Development activities can be taken to an on-site pilot-plant level before being
transferred to a full-size plant. The Research Center also is responsible for an
industrial design group located at the USG Solutions Center(SM) in Chicago, Ill.
Research and development also was performed in 2004 at a facility in Avon,
Ohio. However, in mid-2004, the Corporation announced its decision to close the
Avon facility in December 2004. The Avon facility housed staff and equipment for
product development in support of suspension grid for acoustical ceiling tile.
As of December 31, 2004, research and development activities at the Avon
facility were in the process of being transferred to the Research Center. This
transfer is expected to be completed by mid-2005.
Primary supplies of energy have been adequate, and no curtailment of plant
operations has resulted from insufficient supplies. Supplies are likely to
remain sufficient for projected requirements. Energy price swap agreements are
used by the Corporation to hedge the cost of a substantial majority of purchased
natural gas.
None of the operating segments has any special working capital
requirements. No single customer of the Corporation accounted for 10% or more of
the Corporation's 2004, 2003 or 2002 consolidated net sales, except for The Home
Depot, Inc., which, on a worldwide basis, accounted for approximately 11% in
2004 and 2003 and 10% in 2002. Because orders are filled upon receipt, no
operating segment has any significant order backlog.
Loss of one or more of the patents or licenses held by the Corporation
would not have a major impact on the Corporation's business or its ability to
continue operations.
No material part of any of the Corporation's business is subject to
renegotiation of profits or termination of contracts or subcontracts at the
election
6
<PAGE>
of the government.
All of the Corporation's products regularly require improvement to remain
competitive. The Corporation also develops and produces comprehensive systems
employing several of its products. In order to maintain its high standards and
remain a leader in the building materials industry, the Corporation performs
ongoing extensive research and development activities and makes the necessary
capital expenditures to maintain production facilities in good operating
condition.
In 2004, the average number of employees of the Corporation was 13,800.
See Part II, Item 8, Financial Statements and Supplementary Data - Notes to
Consolidated Financial Statements, Note 17, Segments, for financial information
pertaining to operating and geographic segments.
AVAILABLE INFORMATION
The Corporation maintains a website at www.usg.com and makes available at this
website its annual report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and all amendments to those reports as soon as reasonably
practicable after such material is electronically filed with or furnished to the
Securities and Exchange Commission (the "SEC"). If you wish to receive a hard
copy of any exhibit to the Corporation's reports filed with or furnished to the
Securities and Exchange Commission, such exhibit may be obtained, upon payment
of reasonable expenses, by writing to: J. Eric Schaal, Corporate Secretary and
Associate General Counsel, USG Corporation, P.O. Box 6721, Chicago, IL
60680-6721. You may read and copy any materials the Corporation files with the
SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington,
D.C. 20549. You may obtain information on the operation of the Public Reference
Room by calling the SEC at 1-800-SEC-0330.
7
<PAGE>
ITEM 2. PROPERTIES
The Corporation's plants, mines, quarries, transport ships and other facilities
are located in North America, Europe and the Asia-Pacific region. In 2004, U.S.
Gypsum's SHEETROCK(R) brand gypsum wallboard plants operated at 94% of capacity.
USG Interiors' AURATONE(R) brand ceiling tile plants operated at 88% of
capacity. The locations of the production properties of the Corporation's
subsidiaries, grouped by operating segment, are as follows (plants are owned
unless otherwise indicated):
NORTH AMERICAN GYPSUM
GYPSUM WALLBOARD AND OTHER GYPSUM PRODUCTS
<TABLE>
<S> <C> <C>
Aliquippa, Pa. * Jacksonville, Fla. * Sperry, Iowa *
Baltimore, Md. * New Orleans, La. * Stony Point, N.Y.
Boston (Charlestown), Mass. Norfolk, Va. Sweetwater, Texas
Bridgeport, Ala. * Plaster City, Calif. Hagersville, Ontario, Canada *
Detroit (River Rouge), Mich. Rainier, Ore. * Montreal, Quebec, Canada *
East Chicago, Ind. * Santa Fe Springs, Calif. Monterrey, Nuevo Leon, Mexico
Empire, Nev. Shoals, Ind. * Puebla, Puebla, Mexico
Fort Dodge, Iowa Sigurd, Utah
Galena Park, Texas * Southard, Okla.
</TABLE>
* Plants supplied fully or partially by synthetic gypsum.
JOINT COMPOUND (SURFACE PREPARATION AND JOINT TREATMENT PRODUCTS)
<TABLE>
<S> <C> <C>
Auburn, Wash. Gypsum, Ohio Hagersville, Ontario, Canada
Bridgeport, Ala. Jacksonville, Fla. Montreal, Quebec, Canada
Chamblee, Ga. Phoenix (Glendale), Ariz. (leased) Surrey, British Columbia, Canada
Dallas, Texas Port Reading, N.J. Monterrey, Nuevo Leon, Mexico
East Chicago, Ind. Sigurd, Utah Puebla, Puebla, Mexico
Fort Dodge, Iowa Torrance, Calif. Port Klang, Malaysia (leased)
Galena Park, Texas Calgary, Alberta, Canada (leased)
</TABLE>
CEMENT BOARD
<TABLE>
<S> <C> <C>
Baltimore, Md. New Orleans, La. Santa Fe Springs, Calif.
Detroit (River Rouge), Mich.
</TABLE>
GYPSUM ROCK (MINES AND QUARRIES)
<TABLE>
<S> <C> <C>
Alabaster (Tawas City), Mich. Sigurd, Utah Little Narrows, Nova Scotia, Canada
Empire, Nev. Southard, Okla. Windsor, Nova Scotia, Canada
Fort Dodge, Iowa Sperry, Iowa Manzanillo, Colima, Mexico
Plaster City, Calif. Sweetwater, Texas Monterrey, Nuevo Leon, Mexico
Shoals, Ind. Hagersville, Ontario, Canada
</TABLE>
PAPER FOR GYPSUM WALLBOARD
<TABLE>
<S> <C> <C>
Clark, N.J. Jacksonville, Fla. South Gate, Calif.
Galena Park, Texas North Kansas City, Mo.
Gypsum, Ohio Oakfield, N.Y.
</TABLE>
8
<PAGE>
OTHER PRODUCTS
Synthetic gypsum is processed at Belledune, New Brunswick, Canada. A
mica-processing plant is located at Spruce Pine, N.C. Metal lath, plaster and
drywall accessories and light gauge steel framing products are manufactured at
Puebla, Puebla, Mexico, and Saltillo, Coahuila, Mexico. Gypsum fiber panel
products are produced at Gypsum, Ohio. Paper-faced metal corner bead is
manufactured at Auburn, Wash., and Weirton, W.Va. Sealants and finishes are
produced at La Mirada, Calif.
PLANT CLOSURES
The lime products operation in New Orleans, La., was shut down during the first
quarter of 2004. The joint compound plant at Edmonton, Alberta, Canada, was
closed during the second quarter of 2004.
OCEAN VESSELS
Gypsum Transportation Limited, a wholly owned subsidiary of the Corporation and
headquartered in Bermuda, owns and operates a fleet of three self-unloading
ocean vessels. Under a contract of affreightment, these vessels transport gypsum
rock from Nova Scotia to the East Coast plants of U.S. Gypsum. Excess ship time,
when available, is offered for charter on the open market.
WORLDWIDE CEILINGS
CEILING GRID
<TABLE>
<S> <C> <C>
Cartersville, Ga. Auckland, New Zealand (leased) Peterlee, England (leased)
Stockton, Calif. Dreux, France (leased) Shenzhen, China (leased)
Westlake, Ohio Oakville, Ontario, Canada Viersen, Germany
</TABLE>
A coil coater and slitter plant used in the production of ceiling grid also is
located in Westlake, Ohio. Slitter plants are located in Stockton, Calif.
(leased) and Antwerp, Belgium (leased).
CEILING TILE
Ceiling tile products are manufactured at Cloquet, Minn., Greenville, Miss., and
Walworth, Wis.
OTHER PRODUCTS
Mineral fiber products are manufactured at Red Wing, Minn., and Walworth, Wis.
Metal specialty systems are manufactured at Oakville, Ontario, Canada.
ITEM 3. LEGAL PROCEEDINGS
See Part II, Item 8, Financial Statements and Supplementary Data - Notes to
Consolidated Financial Statements, Note 2, Voluntary Reorganization Under
Chapter 11, and Note 19, Litigation, for information on legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None during the fourth quarter of 2004.
9
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
The Corporation's common stock trades on the New York Stock Exchange (the
"NYSE") and the Chicago Stock Exchange under the trading symbol USG. The NYSE is
the principal market for these securities. As of January 31, 2005, there were
3,578 holders of record of the Corporation's common stock. No dividends are
being paid on the Corporation's common stock.
See Part III, Item 12, Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters, for information regarding common
stock authorized for issuance under equity compensation plans.
The high and low sales prices of the Corporation's common stock in 2004 and
2003 were as follows:
<TABLE>
<CAPTION>
2004 2003
--------------- ---------------
High Low High Low
------ ------ ------ ------
<S> <C> <C> <C> <C>
First quarter $20.17 $15.46 $ 9.04 $ 3.78
Second quarter 19.48 12.30 22.33 4.16
Third quarter 19.95 16.21 23.72 13.05
Fourth quarter 41.67 18.24 18.86 14.20
</TABLE>
Purchases of equity securities by or on behalf of the Corporation during
the fourth quarter of 2004 were as follows:
<TABLE>
<CAPTION>
Total Number Maximum Number
of Shares (or Units) (or Approximate Dollar
Total Number Average Price Purchased as Part of Value) of Shares (or Units)
2004 of Shares (or Units) Paid per Share Publicly Announced That May Yet Be Purchased
Period Purchased (a) (or Unit) (b) Plans or Programs (c) Under the Plans or Programs (c)
- ------ -------------------- -------------- --------------------- -------------------------------
<S> <C> <C> <C> <C>
October -- -- -- --
November -- -- -- --
December 1,904 $40.57 -- --
----- ------ --- ---
Total Fourth Quarter 1,904 40.57 -- --
===== ====== === ===
</TABLE>
(a) Reflects shares reacquired to provide for tax withholdings on shares issued
to employees under the terms of the USG Corporation 1995 Long-Term Equity
Plan, 1997 Management Incentive Plan or 2000 Omnibus Management Incentive
Plan.
(b) The price per share is based upon the mean of the high and the low prices
for a USG Corporation common share on the NYSE on the date of the tax
withholding transaction.
(c) The Corporation currently does not have in place a share repurchase plan or
program.
10
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
USG CORPORATION
FIVE-YEAR SUMMARY
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------
(dollars in millions, except per-share data) 2004 2003 2002 2001 2000
- -------------------------------------------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF EARNINGS DATA:
Net sales $ 4,509 $ 3,666 $ 3,468 $ 3,296 $ 3,781
Cost of products sold 3,672 3,121 2,884 2,882 2,941
Gross profit 837 545 584 414 840
Selling and administrative expenses 317 324 312 279 309
Chapter 11 reorganization expenses 12 11 14 12 --
Provisions for impairment and restructuring -- -- -- 33 50
Provision for asbestos claims -- -- -- -- 850
Operating profit (loss) 508 210 258 90 (369)
Interest expense (a) 5 6 8 33 52
Interest income (6) (4) (4) (5) (5)
Other (income) expense, net -- (9) (2) 10 4
Income taxes (benefit) 197 79 117 36 (161)
Earnings (loss) before cumulative effect of accounting change 312 138 139 16 (259)
Cumulative effect of accounting change -- (16) (96) -- --
Net earnings (loss) 312 122 43 16 (259)
Net Earnings (Loss) Per Common Share:
Cumulative effect of accounting change -- (0.37) (2.22) -- --
Basic 7.26 2.82 1.00 0.36 (5.62)
Diluted 7.26 2.82 1.00 0.36 (5.62)
BALANCE SHEET DATA (as of the end of the year):
Working capital 1,220 1,084 939 914 4
Current ratio 3.14 3.62 3.14 3.85 1.01
Cash, cash equivalents, restricted cash and marketable securities 1,249 947 830 493 70
Property, plant and equipment, net 1,853 1,818 1,788 1,800 1,830
Total assets 4,278 3,799 3,636 3,464 3,214
Total debt (b) 1,006 1,007 1,007 1,007 711
Liabilities subject to compromise 2,242 2,243 2,272 2,311 --
Total stockholders' equity 1,024 689 535 491 464
OTHER INFORMATION:
Capital expenditures 138 111 100 109 380
Stock price per common share (c) 40.27 16.57 8.45 5.72 22.50
Cash dividends per common share -- -- -- 0.025 0.60
Average number of employees 13,800 13,900 14,100 14,300 14,900
</TABLE>
(a) Interest expense excludes contractual interest expense which has not been
accrued or recorded subsequent to June 25, 2001. See Item 7, Management's
Discussion and Analysis of Results of Operations and Financial Condition -
Consolidated Results of Operation - Interest Expense.
(b) Total debt as of December 31, 2004, 2003, 2002 and 2001, includes $1,005
million of debt classified as liabilities subject to compromise.
(c) Stock price per common share reflects the final closing price of the year.
11
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
OVERVIEW
USG Corporation (the "Corporation") and 10 of its United States subsidiaries
(collectively, the "Debtors") are currently operating under chapter 11 of the
United States Bankruptcy Code (the "Bankruptcy Code"). The Debtors took this
action to resolve asbestos claims in a fair and equitable manner, to protect the
long-term value of the Debtors' businesses, and to maintain the Debtors'
leadership positions in their markets. To properly understand the Corporation
and its businesses, investors, creditors or other readers of this report should
first understand the nature of this voluntary reorganization process under
chapter 11 and the potential impacts the reorganization may have on their rights
and interests in the Corporation as described in more detail below. At this
point, there is great uncertainty as to the amount of the Debtors' asbestos
liability and thus the value of any recovery for pre-petition creditors or
stockholders under any final plan of reorganization. No plan of reorganization
has thus far been proposed by the Debtors.
The Corporation had $1,249 million of cash, cash equivalents, restricted
cash and marketable securities as of December 31, 2004, and management believes
that this liquidity plus expected operating cash flows will meet the
Corporation's cash needs, including making regular capital investments to
maintain and enhance its businesses, throughout the chapter 11 proceedings.
The Corporation achieved record net sales in 2004, surpassing 2003 net
sales by 23%. Demand for products sold by the Corporation's North American
Gypsum and Building Products Distribution operating segments was strong in 2004
due to growth in the new housing and repair and remodel markets. The
Corporation's Worldwide Ceilings operating segment also reported increased 2004
net sales as compared with 2003 primarily due to higher selling prices for
ceiling grid and tile. Shipments of gypsum wallboard were at record levels for
the Corporation and the industry in 2004 and are expected to be strong in 2005.
The favorable level of activity in the aforementioned markets and industry
capacity utilization rates in excess of 90% have resulted in a rise in market
selling prices for gypsum wallboard. The nationwide average realized selling
price for United States Gypsum Company's SHEETROCK(R) brand gypsum wallboard was
up 21% from 2003.
The Corporation's gross margin was 18.6% in 2004, up from 14.9% in 2003.
Gross margin improved primarily as a result of higher selling prices for all
major product lines. However, profit margins have been pressured by high levels
of costs related to the price of natural gas (a major source of energy for the
Corporation), employee benefits (pension and medical insurance for active
employees and retirees), the implementation of a new enterprise-wide software
system and the price of wastepaper used in the manufacture of gypsum wallboard
and steel used in the manufacture of ceiling grid. Together, these cost factors
added approximately $105 million to cost of products sold in 2004 as compared
with 2003.
VOLUNTARY REORGANIZATION UNDER CHAPTER 11
On June 25, 2001 (the "Petition Date"), the Debtors filed voluntary petitions
for reorganization (the "Filing") under the Bankruptcy Code. The Debtors'
bankruptcy cases (the "Chapter 11 Cases") are pending in the United States
Bankruptcy Court for the District of Delaware (the "Bankruptcy Court").
At the time of the Filing, Debtor United States Gypsum Company ("U.S.
Gypsum"), a subsidiary of the Corporation, was a defendant in more than 100,000
asbestos personal injury lawsuits. U.S. Gypsum was also a defendant in 11
asbestos lawsuits alleging property damage. In addition, two subsidiaries,
Debtors L&W Supply Corporation ("L&W Supply") and Beadex Manufacturing, LLC
("Beadex"), were defendants in a small number of asbestos personal injury
lawsuits.
DEVELOPMENTS IN THE REORGANIZATION PROCEEDING
As a consequence of the Filing, all asbestos lawsuits and other lawsuits pending
against the Debtors as of the Petition Date are stayed, and no party may take
any action to pursue or collect pre-petition claims except pursuant to an order
of the Bankruptcy Court. The Debtors are operating their businesses without
interruption as debtors-in-possession subject to the provisions of the
Bankruptcy Code, and vendors are being paid for goods furnished and services
provided
12
<PAGE>
after the Filing.
The Debtors' Chapter 11 Cases are assigned to Judge Judith K. Fitzgerald, a
bankruptcy court judge, and Judge Joy Flowers Conti, a district court judge.
Judge Conti recently entered an order stating that she will hear matters
relating to estimation of the Debtors' liability for asbestos personal injury
claims. Other matters will be heard by Judge Fitzgerald. Three creditors'
committees, one representing asbestos personal injury claimants (the "Official
Committee of Asbestos Personal Injury Claimants"), another representing asbestos
property damage claimants (the "Official Committee of Asbestos Property Damage
Claimants"), and a third representing unsecured creditors (the "Official
Committee of Unsecured Creditors"), were appointed as official committees in the
Chapter 11 Cases. The Bankruptcy Court also appointed Dean M. Trafelet as the
legal representative for future asbestos claimants in the Debtors' bankruptcy
proceedings.
The Debtors intend to address their liability for all present and future
asbestos claims, as well as all other pre-petition claims, in a plan or plans of
reorganization approved by the Bankruptcy Court. The Debtors currently have the
exclusive right to file a plan of reorganization until June 30, 2005. The
Debtors may seek one or more additional extensions of the exclusive period
depending upon developments in the Chapter 11 Cases.
Any plan of reorganization ultimately approved by the Bankruptcy Court may
include one or more independently administered trusts under Section 524(g) of
the Bankruptcy Code, which may be funded by the Debtors to allow payment of
present and future asbestos personal injury claims. Under the Bankruptcy Code, a
plan of reorganization creating a Section 524(g) trust may be confirmed only if
75% of the asbestos claimants who are affected by the trust and who vote on the
plan approve the plan. Section 524(g) also requires that such trust own (or have
the right to acquire if specified contingencies occur) a majority of the voting
stock of each relevant Debtor, its parent corporation, or a subsidiary that is
also a Debtor. A plan of reorganization, including a plan creating a Section
524(g) trust, may be confirmed without the consent of non-asbestos creditors and
equity security holders if certain requirements of the Bankruptcy Code are met.
The Debtors also expect that the plan of reorganization will address the
Debtors' liability for asbestos property damage claims, whether by including
those liabilities in a Section 524(g) trust or by other means.
If the confirmed plan of reorganization includes the creation and funding
of a Section 524(g) trust relating to one or more of the Debtors, the Bankruptcy
Court will issue a permanent injunction barring the assertion of present and
future asbestos claims against the relevant Debtors, their successors, and their
affiliates, and channeling those claims to the trust for payment in whole or in
part.
A key factor in determining whether or to what extent there will be any
recovery for pre-petition creditors or stockholders under any plan of
reorganization is the amount that must be provided in the plan to address the
Debtors' liability for present and future asbestos claims.
The amount of the Debtors' asbestos liabilities has not yet been determined
and is subject to substantial uncertainty. The Debtors have stated that they
believe they can pay all legitimate asbestos liabilities in full and that the
Debtors are solvent. The Debtors have requested the court to estimate their
asbestos personal injury liabilities taking into account the Debtors' defenses
to these claims. One of the key issues in estimating the Debtors' asbestos
personal injury liabilities is whether claimants who do not have objective
evidence of asbestos-related disease have valid claims and whether such
claimants, who significantly outnumber cancer claimants, are entitled to vote on
a plan of reorganization. Other important estimation issues include the
determination of the characteristics and number of present and future claimants
who are likely to have had any, or sufficient, exposure to the Debtors'
products, whether the particular type of asbestos present in certain of the
Debtors' products during the relevant time has been shown to cause disease, and
what are the appropriate claim values to apply in the estimation process.
The Official Committee of Asbestos Personal Injury Claimants and the legal
representative for future asbestos claimants have indicated in a court filing
that they estimate that the net present value of the Debtors' liability for
present and future asbestos personal injury claims is approximately $5.5 billion
and that the Debtors are insolvent. The committee and the legal representative
also contend that the Bankruptcy Court does not have the power to deny recovery
to claimants on the grounds that they do not have
13
<PAGE>
objective evidence of disease or do not have adequate exposure to the Debtors'
products where such claimants, or claimants with similar characteristics, are
compensated in the tort system outside of bankruptcy.
In addition to the amount of the Debtors' asbestos liabilities, another key
issue to be addressed in these Chapter 11 Cases is whether the assets of all of
the Debtors should be available to pay the asbestos liabilities of U.S. Gypsum.
In the fourth quarter of 2004, the Debtors other than U.S. Gypsum filed a
complaint for declaratory relief in the Bankruptcy Court requesting a ruling
that the assets of the Debtors other than U.S. Gypsum are not available to
satisfy the asbestos liabilities of U.S. Gypsum. The Official Committee of
Unsecured Creditors has joined the Debtors in this action. In opposition, the
Official Committee of Asbestos Personal Injury Claimants, the legal
representative for future asbestos claimants, and the Official Committee of
Asbestos Property Damage Claimants filed counterclaims asserting that the assets
of all Debtors should be available to satisfy the asbestos liabilities of U.S.
Gypsum under various asserted legal grounds, including successor liability,
piercing the corporate veil, and substantive consolidation. If the assets of all
Debtors are pooled for the payment of all liabilities, including the asbestos
liabilities of U.S. Gypsum, this could materially and adversely affect the
recovery rights of creditors of Debtors other than U.S. Gypsum as well as the
holders of the Corporation's equity. The Official Committee of Asbestos Personal
Injury Claimants, the legal representative for future asbestos claimants, and
the Official Committee of Asbestos Property Damage Claimants have also asserted
claims seeking a declaratory judgment that L&W Supply has direct liability for
asbestos personal injury claims on the asserted grounds that L&W Supply
distributed asbestos-containing products and assumed the liabilities of former
U.S. Gypsum subsidiaries that distributed such products.
The Official Committee of Asbestos Personal Injury Claimants, the legal
representative for future asbestos claimants, and the Official Committee of
Asbestos Property Damage Claimants also have asserted in a court filing that the
Debtors are liable for claims arising from the sale of asbestos-containing
products by A.P. Green Refractories Co. ("A.P. Green"). They allege that U.S.
Gypsum is liable for A.P. Green's liabilities due to U.S. Gypsum's acquisition
of A.P. Green in 1967. They also allege that the other Debtors are liable for
U.S. Gypsum's liabilities, including the alleged liabilities of A.P. Green,
under various asserted legal grounds, including successor liability, piercing
the corporate veil, and substantive consolidation.
A.P. Green, which manufactured and sold products used in refractories, was
acquired by merger into U.S. Gypsum in 1967 and thereafter operated as a wholly
owned subsidiary of U.S. Gypsum until 1985, at which time A.P. Green became a
wholly owned subsidiary of USG Corporation. In 1988, A.P. Green became a
publicly traded company when its shares were distributed to the stockholders of
USG Corporation. In February 2002, A.P. Green (now known as A.P. Green
Industries, Inc.) as well as its parent company, Global Industrial Technologies,
Inc., and other affiliates filed voluntary petitions for reorganization through
which A.P. Green and its affiliates seek to resolve their asbestos liabilities.
The A.P. Green reorganization proceeding is pending in the United States
Bankruptcy Court for the Western District of Pennsylvania and is captioned In
re: Global Industrial Technologies, Inc. (Case No. 02-21626). The draft
disclosure statement filed in July 2003 by the debtors in the A.P. Green
reorganization proceedings indicates that, in early 2002, there were 235,757
asbestos personal injury claims pending against A.P. Green as well as about
59,000 such claims pending against an A.P. Green affiliate, and that A.P. Green
estimates that several hundred thousand additional claims will be asserted
against it and/or its affiliate. The disclosure statement also indicates that,
in early 2002, A.P. Green had approximately $492 million in unpaid pre-petition
settlements and judgments relating to asbestos personal injury claims. The
disclosure statement does not provide an estimate of the cost of resolving A.P.
Green's liability for pending or future asbestos claims.
The Corporation does not have sufficient information to predict whether or
how any plan of reorganization in the Debtors' Chapter 11 Cases might address
any liability based on sales of asbestos-containing products by A.P. Green. The
Corporation also does not have sufficient information to estimate the amount, or
range of amounts, of A.P. Green's asbestos liabilities. If U.S. Gypsum is
determined to be liable for the sale of asbestos-containing products by A.P.
Green or its affiliates, this result likely would materially increase the amount
of U.S. Gypsum's present and
14
<PAGE>
future asbestos liabilities. Such a result could materially and adversely affect
the recovery of other Debtors' pre-petition creditors and the Corporation's
stockholders, depending upon, among other things, the amount of A.P. Green's
alleged asbestos liabilities and whether the other Debtors are determined to be
liable for U.S. Gypsum's liabilities, including alleged A.P. Green liabilities.
POTENTIAL FEDERAL LEGISLATION REGARDING ASBESTOS PERSONAL INJURY CLAIMS
During 2004, there were developments regarding potential federal legislation. On
April 7, 2004, the Fairness in Asbestos Injury Resolution Act of 2004 (Senate
Bill 2290, the "FAIR Bill") was introduced in the United States Senate. The FAIR
Bill has not been approved by the Senate, has not been introduced in the House
of Representatives, and is not law.
The FAIR Bill introduced in the Senate is intended to establish a
nationally administered trust fund to compensate asbestos personal injury
claimants. In the FAIR Bill's current form, companies that have made past
payments for asbestos personal injury claims would be required to contribute
amounts to a national trust fund on a periodic basis that would pay the claims
of qualifying asbestos personal injury claimants. The nationally administered
trust fund would be the exclusive remedy for asbestos personal injury claims,
and such claims could not be brought in state or federal court as long as such
claims are being compensated under the national trust fund.
In the FAIR Bill's current form, the amounts to be paid to the national
trust fund are based on an allocation methodology set forth in the FAIR Bill.
The amounts that participants, including the Debtors, would be required to pay
are not dischargeable in a bankruptcy proceeding. The FAIR Bill also provides,
among other things, that if it is determined that the money in the trust fund is
not sufficient to compensate eligible claimants, the claimants and defendants
would return to the court system to resolve claims not paid by the national
trust fund.
The outcome of the legislative process is inherently speculative, and it
cannot be known whether the FAIR Bill or similar legislation will ever be
enacted or, even if enacted, what the terms of the final legislation might be.
In addition to the organized plaintiffs' bar, many labor organizations,
including the AFL-CIO, as well as some Senators have indicated that they oppose
the FAIR Bill as introduced because, among other things, they believe that the
FAIR Bill does not provide sufficient compensation to asbestos claimants. On
April 22, 2004, the Senate defeated a motion to proceed with floor consideration
of the FAIR Bill.
It is anticipated that a revised version of the FAIR Bill will be
introduced in the 109th Congress. However, it is likely that some of the
opponents identified above will remain opposed to the FAIR Bill when it is
reintroduced, and whether the FAIR Bill will ever be enacted cannot be
predicted. It is also likely that, even if the FAIR Bill is enacted, the terms
of the enacted legislation will differ from those of the FAIR Bill considered in
2004, and those differences may be material to the FAIR Bill's impact on the
Corporation.
Enactment of the FAIR Bill or similar legislation addressing the financial
contributions of the Debtors for asbestos personal injury claims would have a
material impact on the amount of the Debtors' asbestos personal injury liability
and the Debtors' Chapter 11 Cases.
ESTIMATED COST OF ASBESTOS LIABILITY
Prior to the Filing, in the fourth quarter of 2000, U.S. Gypsum recorded a
noncash, pretax provision of $850 million, increasing to $1,185 million its
total accrued reserve for resolving in the tort system the asbestos claims
pending as of December 31, 2000, and expected to be filed through 2003. At that
time, the estimated range of U.S. Gypsum's probable liability for such claims
was between $889 million and $1,281 million, including defense costs. These
amounts are stated before tax benefit and are not discounted to present value.
As of December 31, 2004, the Corporation's accrued reserve for asbestos claims
totaled $1,061 million.
Because of the uncertainties associated with estimating the Debtors'
liability for present and future asbestos claims at this stage of the bankruptcy
proceedings, no change has been made to the previously recorded reserve except
to reflect certain minor asbestos-related costs incurred since the Filing.
Because the Filing and possible federal legislation have changed the basis
upon which the Debtors' asbestos liability would be estimated, there can be no
assurance that the current reserve accurately reflects the Debtors' ultimate
liability for pending and future asbestos claims. At the time the reserve was
increased to its current level in December 2000, the reserve was an estimate of
the cost of resolving in the tort system
15
<PAGE>
U.S. Gypsum's asbestos liability for then-pending claims and those expected to
be filed through 2003. Because of the Filing and the stay of pre-petition
asbestos lawsuits, the Debtors have not participated in the tort system since
June 2001 and thus cannot measure the recorded reserve against actual
experience. However, the reserve is generally consistent with the amount the
Corporation estimates that the Debtors would be required to pay to resolve all
of their asbestos liability if the FAIR Bill, in its current form, is enacted.
As the Chapter 11 Cases and the legislation process proceed, the Debtors
likely will gain more information from which a reasonable estimate of the
Debtors' probable liability for present and future asbestos claims can be
determined. If such estimate differs from the existing reserve, the reserve will
be adjusted, and it is possible that a charge to results of operations will be
necessary at that time. In such a case, the Debtors' asbestos liability could
vary significantly from the recorded estimate of liability and could be greater
than the high end of the range estimated in 2000. This difference could be
material to the Corporation's financial position, cash flows and results of
operations in the period recorded.
POTENTIAL OUTCOMES OF THE FILING
While it is the Debtors' intention to seek a full recovery for their creditors,
it is not possible to predict the amount that will have to be provided in the
plan of reorganization to address present and future asbestos claims, how the
plan of reorganization will treat other pre-petition claims, whether there will
be sufficient assets to satisfy the Debtors' pre-petition liabilities, and what
impact any plan may have on the value of the shares of the Corporation's common
stock. The payment rights and other entitlements of pre-petition creditors and
the Corporation's stockholders may be substantially altered by any plan of
reorganization confirmed in the Chapter 11 Cases. Pre-petition creditors may
receive under the plan of reorganization less than 100% of the face value of
their claims, the pre-petition creditors of some Debtors may be treated
differently from the pre-petition creditors of other Debtors, and the interests
of the Corporation's stockholders are likely to be substantially diluted or
cancelled in whole or in part. There can be no assurance as to the value of any
distributions that might be made under any plan of reorganization with respect
to such pre-petition claims or equity interests.
It is also not possible to predict how the plan of reorganization will
treat intercompany indebtedness, licenses, transfers of goods and services, and
other intercompany arrangements, transactions and relationships that were
entered into before the Petition Date. Certain of these intercompany
transactions have been challenged by various parties in these Chapter 11 Cases
(see Developments in the Reorganization Proceeding, above), and other
arrangements, transactions and relationships may be challenged by parties to
these Chapter 11 Cases. The outcome of such challenges may have an impact on the
treatment of various claims under any plan of reorganization.
See Part II, Item 8, Note 2, Voluntary Reorganization Under Chapter 11, and
Note 19, Litigation, for additional information on the background of asbestos
litigation, developments in the Corporation's reorganization proceedings and
estimated cost.
ACCOUNTING IMPACT
The Corporation is required to follow American Institute of Certified Public
Accountants ("AICPA") Statement of Position 90-7 ("SOP 90-7"), "Financial
Reporting by Entities in Reorganization under the Bankruptcy Code." Pursuant to
SOP 90-7, the Corporation's pre-petition liabilities that are subject to
compromise are reported separately on the consolidated balance sheet. Virtually
all of the Corporation's pre-petition debt is currently in default and was
recorded at face value and classified within liabilities subject to compromise.
U.S. Gypsum's asbestos liability also is classified within liabilities subject
to compromise. See Part II, Item 8, Note 2, Voluntary Reorganization Under
Chapter 11, which includes information related to financial statement
presentation, the debtor-in-possession statements and detail of liabilities
subject to compromise and chapter 11 reorganization expenses.
CONSOLIDATED RESULTS OF OPERATIONS
NET SALES
Net sales were $4,509 million in 2004, $3,666 million in 2003 and $3,468 million
in 2002.
Net sales increased 23% in 2004 as compared with 2003 reflecting increased
sales for all three operating segments. Net sales improved for North American
Gypsum due to record shipments and higher selling
16
<PAGE>
prices for SHEETROCK(R) brand gypsum wallboard, SHEETROCK(R) brand joint
compounds, DUROCK(R) brand cement board and FIBEROCK(R) brand gypsum fiber
panels. Net sales for the Building Products Distribution segment rose due to
record shipments and higher selling prices for gypsum wallboard and increased
sales of complementary products. Net sales for the Worldwide Ceilings segment
increased primarily due to higher selling prices for ceiling grid and tile,
while shipments of these product lines were virtually unchanged.
Net sales increased 6% in 2003 as compared with 2002 primarily due to
increased shipments of SHEETROCK(R) brand gypsum wallboard, SHEETROCK(R) brand
joint compounds and DUROCK(R) brand cement board. Net sales for the Building
Products Distribution segment rose in 2003 due to increased shipments of gypsum
wallboard and increased sales of complementary products. However, net sales for
the Worldwide Ceilings segment were down slightly as a result of decreased
demand for ceiling products.
COST OF PRODUCTS SOLD
Cost of products sold totaled $3,672 million in 2004, $3,121 million in 2003 and
$2,884 million in 2002.
Cost of products sold increased in 2004 and 2003 from the respective prior
years largely due to increased volume for gypsum wallboard and gypsum-related
products. Other key factors for the increases in 2004 and 2003 were higher costs
related to the price of natural gas, employee benefits (pension and medical
insurance for active employees and retirees), the implementation of a new
enterprise-wide software system, the price of steel used in the manufacture of
ceiling grid and, for 2004 only, the price of wastepaper used in the manufacture
of gypsum wallboard. These other key factors accounted for approximately $105
million, or 19%, of the total 2004 versus 2003 increase and approximately $110
million, or 46%, of the total 2003 versus 2002 increase.
GROSS PROFIT
Gross profit was $837 million in 2004, $545 million in 2003 and $584 million in
2002. Gross margin (gross profit as a percentage of net sales) for the
respective years was 18.6%, 14.9% and 16.8%.
Gross profit improved in 2004 as compared with 2003 primarily due to
increased shipments of SHEETROCK(R) brand gypsum wallboard and higher selling
prices for many major product lines, offset in part by the aforementioned margin
pressures affecting costs of products sold.
Gross profit declined in 2003 as compared with 2002 primarily due to the
various margin pressures affecting cost of products sold.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses totaled $317 million in 2004, $324 million
in 2003 and $312 million in 2002. As a percentage of net sales, these expenses
were 7.0%, 8.8% and 9.0% in 2004, 2003 and 2002, respectively.
Selling and administrative expenses include the impact of a Bankruptcy
Court-approved key employee retention plan ("KERP"). Expenses associated with
this plan amounted to $16 million, $23 million and $20 million in 2004, 2003 and
2002, respectively. KERP expense declined in 2004 from prior-year levels
primarily due to accruals in 2003 and 2002 of deferred amounts that were paid in
2004.
The decrease in total 2004 selling and administrative expenses versus 2003
primarily reflected a $7 million decrease in KERP expense. Reduced expenses for
advertising, the impact of a fourth-quarter 2003 salaried workforce reduction
program and other expense reduction initiatives were offset by higher expenses
related to employee incentive compensation associated with the attainment of
profit goals and employee benefits (pension and medical insurance for active
employees and retirees).
The increase in total 2003 expenses versus 2002 primarily reflected (i)
higher expenses related to employee benefits (pension and medical insurance for
active employees and retirees), which increased $11 million year-on-year, (ii) a
fourth-quarter 2003 charge of $3 million for severance related to a salaried
workforce reduction of approximately 70 employees and (iii) a $3 million
increase in KERP expense. These increases were partially offset by a lower level
of employee incentive compensation.
17
<PAGE>
CHAPTER 11 REORGANIZATION EXPENSES
Chapter 11 reorganization expenses consisted of the following:
<TABLE>
<CAPTION>
(millions) 2004 2003 2002
---- ---- ----
<S> <C> <C> <C>
Legal and financial advisory fees $ 24 $19 $22
Bankruptcy-related interest income (12) (8) (8)
---- --- ---
Total 12 11 14
==== === ===
</TABLE>
INTEREST EXPENSE
Interest expense was $5 million, $6 million and $8 million in 2004, 2003 and
2002, respectively. Under SOP 90-7, virtually all of the Corporation's
outstanding debt is classified as liabilities subject to compromise, and
interest expense on this debt has not been accrued or recorded since the
Petition Date.
Contractual interest expense not accrued or recorded on pre-petition debt
totaled $71 million in 2004, $71 million in 2003 and $74 million in 2002. This
calculation assumes that all such interest was paid when required at the
applicable contractual interest rate (after giving effect to any applicable
default rate). However, the calculation excludes the impact of any compounding
of interest on unpaid interest that may be payable under the relevant
contractual obligations, as well as any interest that may be payable under a
plan of reorganization to trade or other creditors that are not otherwise
entitled to interest under the express terms of their claims. The impact of
compounding alone would have increased the contractual interest expense reported
above by $18 million in 2004, $11 million in 2003 and $5 million in 2002.
For financial reporting purposes, no post-petition accruals have been made
for contractual interest expense not accrued or recorded on pre-petition debt.
However, based on discussions with representatives of the Official Committee of
Unsecured Creditors, the Corporation anticipates that the relevant creditors
will seek to recover amounts in respect of such unaccrued interest expense (on a
compounded basis) in the Chapter 11 Cases.
INTEREST INCOME
Non-bankruptcy-related interest income was $6 million, $4 million and $4 million
in 2004, 2003 and 2002, respectively.
OTHER INCOME, NET
Other income, net was zero in 2004, compared with $9 million and $2 million in
2003 and 2002, respectively. The 2003 amount primarily represented net realized
currency gains.
INCOME TAXES
Income taxes amounted to $197 million in 2004, $79 million in 2003 and $117
million in 2002. The Corporation's effective tax rate was 38.6%, 36.6% and 45.6%
in 2004, 2003 and 2002, respectively. The variations in the effective tax rate
over the three-year period were primarily attributable to a reduction of the
Corporation's income tax payable during 2003. This reduction was determined upon
completion of the Corporation's 2002 federal income tax return and resulted from
an actual tax liability that was lower than the estimate of taxes payable as of
December 31, 2002.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE FOR SFAS NO. 143
On January 1, 2003, the Corporation adopted Statement of Financial Accounting
Standard ("SFAS") No. 143, "Accounting for Asset Retirement Obligations." A
noncash, after-tax charge of $16 million ($27 million pretax) was reflected in
the consolidated statement of earnings as a cumulative effect of a change in
accounting principle as of January 1, 2003. See Part II, Item 8, Note 12, Asset
Retirement Obligations, for additional information related to the adoption of
SFAS No. 143.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE FOR SFAS NO. 142
On January 1, 2002, the Corporation adopted SFAS No. 142, "Goodwill and Other
Intangible Assets." In accordance with the provisions of SFAS No. 142, the
Corporation recorded a noncash, non-tax-deductible impairment charge of $96
million. See Part II, Item 8, Note 9, Goodwill and Other Intangible Assets, for
additional information related to the adoption of SFAS No. 142.
NET EARNINGS
Net earnings amounted to $312 million in 2004, $122 million in 2003 and $43
million in 2002. Diluted earnings per share for the respective years were $7.26,
$2.82 and $1.00.
18
<PAGE>
CORE BUSINESS RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
(millions) Net Sales Operating Profit (Loss)
------------------------ -----------------------
2004 2003 2002 2004 2003 2002
------ ------ ------ ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
NORTH AMERICAN GYPSUM:
United States Gypsum Company $2,474 $2,076 $1,962 $348 $157 $211
CGC Inc. (gypsum) 297 256 217 49 33 28
Other subsidiaries* 178 141 137 31 19 22
Eliminations (196) (174) (165) -- -- --
------ ------ ------ ---- ---- ----
Total 2,753 2,299 2,151 428 209 261
====== ====== ====== ==== ==== ====
WORLDWIDE CEILINGS:
USG Interiors, Inc. 488 446 450 42 31 37
USG International 200 168 176 12 2 (13)
CGC Inc. (ceilings) 51 45 40 8 6 5
Eliminations (51) (52) (56) -- -- --
------ ------ ------ ---- ---- ----
Total 688 607 610 62 39 29
====== ====== ====== ==== ==== ====
BUILDING PRODUCTS DISTRIBUTION:
L&W Supply Corporation 1,738 1,295 1,200 103 53 51
------ ------ ------ ---- ---- ----
Corporate -- -- -- (73) (77) (71)
Chapter 11 reorganization expenses -- -- -- (12) (11) (14)
Eliminations (670) (535) (493) -- (3) 2
------ ------ ------ ---- ---- ----
TOTAL USG CORPORATION 4,509 3,666 3,468 508 210 258
====== ====== ====== ==== ==== ====
</TABLE>
* Includes USG Mexico, S.A. de C.V., a building products business in Mexico,
Gypsum Transportation Limited, a shipping company in Bermuda, and USG
Canadian Mining Ltd., a mining operation in Nova Scotia.
NORTH AMERICAN GYPSUM
For the North American Gypsum segment, net sales increased 20% in 2004 and 7% in
2003 as compared with the respective prior years, while operating profit more
than doubled in 2004 after declining 20% in 2003.
United States Gypsum Company: Net sales in 2004 increased 19%, and operating
profit more than doubled compared with 2003 primarily due to record shipments
and higher selling prices for its major product lines.
Strong demand for U.S. Gypsum's SHEETROCK(R) brand gypsum wallboard led to
record shipments of 11.0 billion square feet during 2004, a 6% increase from the
previous record of 10.4 billion square feet in 2003. U.S. Gypsum's wallboard
plants operated at 94% of capacity in 2004, compared with 92% in 2003. Industry
shipments of gypsum wallboard in 2004 were up approximately 8% from 2003.
The nationwide average realized price for SHEETROCK(R) brand gypsum
wallboard was $122.37 per thousand square feet in 2004, up 21% from $101.43 in
2003.
Complementary building products also contributed to the favorable results
in 2004. Record shipments and higher selling prices were reported for
SHEETROCK(R) brand joint compounds, DUROCK(R) brand cement board and FIBEROCK(R)
brand gypsum fiber panels.
Record shipments and improved pricing for all major products as well as the
implementation of various cost-saving initiatives and improved production
efficiencies at U.S. Gypsum's wallboard plants more than offset higher
manufacturing costs. The higher costs were primarily attributable to wastepaper
(a raw material used to produce the facing and backing of
19
<PAGE>
gypsum wallboard) and natural gas.
Comparing 2003 with 2002, net sales rose 6% primarily due to increased
shipments of SHEETROCK(R) brand gypsum wallboard, SHEETROCK(R) brand joint
compounds and DUROCK(R) brand cement board. Slightly higher selling prices for
SHEETROCK(R) brand gypsum wallboard also contributed to the higher level of
sales. However, operating profit fell 26% largely due to higher manufacturing
costs.
Shipments of SHEETROCK(R) brand gypsum wallboard rose 3% in 2003 from the
prior-year level of 10.1 billion square feet. U.S. Gypsum's wallboard plants
operated at 92% of capacity in 2003, compared with 93% in 2002. Industry
shipments of gypsum wallboard were up approximately 6% from 2002.
The nationwide average realized price for SHEETROCK(R) brand gypsum
wallboard in 2003 was $101.43 per thousand square feet, up 1% from $100.43 in
2002.
Manufacturing costs increased in 2003 primarily due to higher costs related
to the price of natural gas and higher employee benefit costs. However,
improved production efficiencies at U.S. Gypsum's wallboard plants and hedging
activities offset a portion of the cost increase.
CGC Inc.: The gypsum business of Canada-based CGC Inc. ("CGC") reported a 16%
increase in net sales and a 48% increase in operating profit in 2004 as compared
with 2003. These results were primarily attributable to increased shipments and
higher selling prices for CGC's SHEETROCK(R) brand gypsum wallboard and the
favorable effects of currency translation.
Comparing 2003 with 2002, net sales and operating profit each increased 18%
primarily due to increased shipments of SHEETROCK(R) brand gypsum wallboard and
the favorable effects of currency translation.
WORLDWIDE CEILINGS
For the Worldwide Ceilings segment, net sales and operating profit in 2004
increased 13% and 59%, respectively, from 2003. Comparing 2003 with 2002, net
sales for the segment were down slightly, while operating profit increased 34%.
However, as explained below, the increase in 2003 operating profit was largely
due to an $11 million charge recorded in 2002 for the downsizing of European
operations.
USG Interiors, Inc.: Net sales and operating profit in 2004 for the
Corporation's domestic ceilings business, USG Interiors, Inc. ("USG Interiors"),
rose 9% and 35%, respectively, from 2003. These increases primarily reflected
higher selling prices for ceiling grid and tile, while shipments of these
product lines were virtually unchanged.
Steel is a major component in the production of ceiling grid, and in the
first half of 2004, market concerns over a global steel shortage and rising
steel costs led to a surge in demand for ceiling grid. In the second half of
2004, demand for grid dropped sharply as a result of the pre-buying in the first
half of the year. In addition, the cost of steel rose throughout the year,
leading to higher costs to produce grid and inventory steel. While the
Corporation expects the availability of steel to generally remain tight and
steel prices to remain high, the Corporation does not anticipate a shortage of
steel for use in the manufacture of its ceiling grid products in 2005.
Net sales for USG Interiors were down 1% in 2003 versus 2002 as lower
shipments of ceiling tile and grid were offset to a large extent by improved
pricing for most of its ceiling product lines. A 16% decline in operating profit
primarily reflected increases in the costs of natural gas, steel and employee
benefits.
USG International: USG International reported a 19% increase in net sales, while
operating profit rose to $12 million from $2 million in 2003 primarily due to
increased demand for ceiling grid in Europe and the favorable effects of
currency translation.
Profitability also improved in 2003 versus 2002 following the shutdown of
the Aubange, Belgium, plant and other downsizing activities in the fourth
quarter of 2002. An operating loss in 2002 included an $11 million charge
related to management's decision to shut down the Aubange, Belgium, ceiling tile
plant and other downsizing activities that addressed the weakness of the
commercial ceilings market in Europe. This charge was included in cost of
products sold.
BUILDING PRODUCTS DISTRIBUTION
L&W Supply, the leading specialty building products distribution business in the
United States, reported increases in net sales and operating profit of 34% and
94%, respectively, in 2004 as compared with 2003. These increases primarily
reflected record shipments and higher selling prices for gypsum wallboard sold
by
20
<PAGE>
L&W Supply. Increased sales of complementary building products such as drywall
metal, ceiling products, joint compound and roofing also contributed to the
improved results. Shipments of gypsum wallboard were up 10%, while selling
prices rose 16% compared with 2003.
L&W Supply remains focused on opportunities to profitably grow its
specialty business, as well as optimize asset utilization. As part of its plan,
L&W Supply acquired three locations, opened one location and consolidated one
location during 2004, leaving a total of 186 locations in the United States as
of December 31, 2004, compared with 183 and 181 locations as of December 31,
2003 and 2002, respectively.
Comparing 2003 with 2002, net sales and operating profit increased 8% and
4%, respectively. These increases reflected record shipments of gypsum wallboard
and complementary building products. Shipments of gypsum wallboard increased 8%,
while selling prices declined 1% compared with 2002.
MARKET CONDITIONS AND OUTLOOK
Industry shipments of gypsum wallboard in the United States were an estimated
35.1 billion square feet in 2004, an all-time record and an 8% increase from
32.5 billion square feet in 2003. The new housing market continued on a
record-setting pace in 2004. Based on preliminary data issued by the U.S. Bureau
of the Census, U.S. housing starts in 2004 were an estimated 1.957 million
units, the highest level since 1978, compared with actual housing starts of
1.848 million units in 2003 and 1.705 million units in 2002.
The repair and remodel market, which includes renovation of both
residential and nonresidential buildings, accounts for the second-largest
portion of the Corporation's sales, behind new housing construction. Because
many buyers begin to remodel an existing home within two years of purchase,
opportunity from the residential repair and remodel market in 2004 was strong,
as sales of existing homes in 2004 are estimated at 6.5 million units, exceeding
2003's record-setting level of 6.1 million units.
The growth in new housing and a strong level of residential remodeling
resulted in the record shipments of gypsum wallboard described above. These two
markets, which together account for nearly two-thirds of all demand for gypsum
wallboard, and utilization rates in excess of 90% for the industry resulted in a
rise of market selling prices for gypsum wallboard in 2004.
Future demand for the Corporation's products from new nonresidential
construction is determined by floor space for which contracts are signed.
Installation of gypsum and ceilings products follows signing of construction
contracts by about a year. Floor space for which contracts were signed was at
historically low levels in 2003 and 2002 as commercial construction was affected
by reduced corporate earnings, resulting in lower investments in office and
other commercial space. However, current information indicates that the decline
in floor space for which contracts were signed leveled off in 2003, and a modest
1.1% increase was experienced in 2004.
The outlook for the Corporation's markets in 2005 is positive. However, a
decline in housing starts and increasing interest rates could reduce the level
of demand from both the new housing and residential remodeling markets. While
office vacancy rates currently remain at relatively high levels, the commercial
construction market, the principal market for the Corporation's ceilings
products, is showing signs of improvement. In addition, the Corporation, like
many other companies, faces many ongoing cost pressures such as higher prices
for natural gas and raw materials and increased costs for employee benefits.
In this environment, the Corporation continues to focus its management
attention and investments on improving customer service, manufacturing costs and
operating efficiencies, as well as investing to grow its businesses. In
addition, the Corporation will diligently continue its attempt to resolve the
chapter 11 proceedings, consistent with the goal of achieving a fair,
comprehensive and final resolution to its asbestos liability.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
As of December 31, 2004, the Corporation had $1,249 million of cash, cash
equivalents, restricted cash and marketable securities, of which $284 million
was held by non-Debtor subsidiaries. The total amount of $1,249 million was up
$302 million, or 32%, from $947 million as of December 31, 2003. Since the
Petition Date, the Corporation's level of liquidity has increased
21
<PAGE>
due to strong operating cash flows and the absence of cash payments related to
asbestos settlements and interest on pre-petition debt. Contractual interest
expense not accrued or recorded on pre-petition debt was $71 million in 2004 and
$257 million since the Petition Date. See Interest Expense, above, for a full
discussion of contractual interest not accrued or recorded.
CASH FLOWS
As shown in the consolidated statement of cash flows, cash and cash equivalents
increased $56 million during 2004. The primary source of cash in 2004 was
earnings from operations. Primary uses of cash were: (i) net purchases of
marketable securities of $214 million, (ii) capital spending of $138 million,
(iii) the designation of $36 million as restricted cash representing cash
collateral primarily to support outstanding letters of credit and (iv) the use
of $5 million for three business acquisitions.
Comparing 2004 with 2003, net cash provided by operating activities
increased to $428 million from $237 million primarily due to the increase in
2004 earnings from operations. Net cash used for investing activities rose to
$387 million from $198 million primarily due to increased net purchases of
marketable securities and a higher level of capital spending in 2004. Net cash
provided by financing activities of $6 million in 2004 primarily reflected cash
received from the issuance of common stock associated with the exercise of stock
options. There were no financing activities in 2003.
CAPITAL EXPENDITURES
Capital spending amounted to $138 million in 2004, compared with $111 million in
2003. As of December 31, 2004, remaining capital expenditure commitments for the
replacement, modernization and expansion of operations amounted to $283 million,
compared with $95 million as of December 31, 2003.
Capital expenditure commitments as of December 31, 2004, include a project
to replace existing capacity at U.S. Gypsum's Norfolk, Va., gypsum wallboard
plant with a new low-cost wallboard line that will position the company for
profitable growth in the mid-Atlantic market. Capital expenditure commitments
also include a mill modernization project for the Plaster City, Calif., gypsum
wallboard plant. Construction on these projects will begin in 2005, and their
costs will be funded by cash from operations.
During the bankruptcy proceeding, the Corporation expects to have limited
ability to access capital other than its own cash, marketable securities and
future cash flows to fund potential future growth opportunities such as new
products, acquisitions and joint ventures. Nonetheless, the Corporation expects
to be able to pursue a program of capital spending aimed at maintaining and
enhancing its businesses.
WORKING CAPITAL
Total working capital (current assets less current liabilities) as of December
31, 2004, amounted to $1,220 million, and the ratio of current assets to current
liabilities was 3.14-to-1. As of December 31, 2003, working capital was $1,084
million, and the ratio of current assets to current liabilities was 3.62-to-1.
Receivables increased to $413 million as of December 31, 2004, from $321
million as of December 31, 2003, primarily reflecting a 27% increase in net
sales for the month of December 2004 as compared with December 2003. Inventories
and payables also were up from December 31, 2003, primarily due to the increased
level of business. Inventories increased to $338 million from $280 million, and
accounts payable increased to $270 million from $202 million. Accrued expenses
increased to $224 million from $206 million as of December 31, 2003.
MARKETABLE SECURITIES
As of December 31, 2004, $450 million was invested in marketable securities, up
$210 million from $240 million as of December 31, 2003. Of the year-end 2004
amount, $312 million was invested in long-term marketable securities and $138
million in short-term marketable securities. The Corporation's marketable
securities are classified as available-for-sale securities and reported at fair
market value with unrealized gains and losses excluded from earnings and
reported in accumulated other comprehensive income (loss) on the consolidated
balance sheets.
RESTRICTED CASH AND LETTERS OF CREDIT
As of December 31, 2004, a total of $43 million was reported as restricted cash
on the consolidated balance sheet. Restricted cash primarily represented
collateral to support outstanding letters of credit.
The Corporation has a $100 million credit agreement, which expires April
30, 2006, with LaSalle
22
<PAGE>
Bank N.A. (the "LaSalle Facility") to be used exclusively to support the
issuance of letters of credit needed to support business operations. As of
December 31, 2004, $35 million of letters of credit under the LaSalle Facility,
which are cash collateralized at 103%, were outstanding.
DEBT
As of December 31, 2004 and 2003, total debt amounted to $1,006 million and
$1,007 million, respectively, of which, for each date, $1,005 million was
included in liabilities subject to compromise. These amounts do not include any
accruals for post-petition contractual interest expense.
CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS
CONTRACTUAL OBLIGATIONS
The following table summarizes the Corporation's commitments to make future
payments under certain contractual obligations as of December 31, 2004:
<TABLE>
<CAPTION>
Payments Due by Period (a)
--------------------------------------
2006- 2008- There-
(millions) Total 2005 2007 2009 after
- ---------- ------ ---- ----- ----- ------
<S> <C> <C> <C> <C> <C>
Debt obligations (b) $ 1 $ 1 $ -- $-- $ --
Operating leases 363 73 113 55 122
Purchase obligations (c) 367 93 230 20 24
Other long-term
liabilities (d) 315 8 6 10 291
------ ---- ---- --- ----
Total 1,046 175 349 85 437
====== ==== ==== === ====
</TABLE>
(a) The table excludes $2,242 million of liabilities subject to compromise
because it is not certain when these liabilities will become due. See Part
II, Item 8, Note 2, Voluntary Reorganization Under Chapter 11, for
additional information on liabilities subject to compromise.
(b) The Corporation has an additional $1,005 million of debt classified under
liabilities subject to compromise.
(c) Purchase obligations primarily consist of contracts to purchase energy and
certain raw materials.
(d) Other long-term liabilities primarily consist of asset retirement
obligations which principally extend over a 50-year period. The majority of
associated payments are due toward the latter part of that period.
The Corporation's defined benefit pension plans have no minimum funding
requirements under the Employee Retirement Income Security Act of 1974
("ERISA"). In accordance with the Corporation's funding policy, the Corporation
expects to voluntarily contribute approximately $75 million of cash to its
pension plans in 2005.
The above table excludes liabilities related to postretirement benefits
(retiree health care and life insurance). The Corporation voluntarily provides
postretirement benefits for all eligible employees and retirees. The portion of
benefit claim payments made by the Corporation in 2004 was $16 million. See Part
II, Item 8, Note 13, Employee Retirement Plans, for additional information on
future expected cash payments.
As of December 31, 2004, purchase obligations, as defined by SFAS No. 47,
"Disclosure of Long-Term Obligations," were immaterial.
OFF-BALANCE-SHEET ARRANGEMENTS
With the exception of letters of credit, it is not the Corporation's general
business practice to use off-balance-sheet arrangements, such as third-party
special-purpose entities or guarantees to third parties.
In addition to the outstanding letters of credit discussed above (see
Restricted Cash and Letters of Credit), the Corporation also had $97 million of
outstanding letters of credit under a pre-petition revolving credit facility
provided by a syndicate of lenders led by JPMorgan Chase Bank (formerly The
Chase Manhattan Bank). To the extent that any of these letters of credit are
drawn, JPMorgan Chase Bank would assert a pre-petition claim in a corresponding
amount against the Corporation in the bankruptcy proceeding.
LEGAL CONTINGENCIES
As a result of the Filing, all pending asbestos lawsuits against the Debtors are
stayed, and no party may take any action to pursue or collect on such asbestos
claims absent specific authorization of the Bankruptcy Court.
U.S. Gypsum has also been named as a defendant in lawsuits claiming
personal injury from exposure to silica allegedly from U.S. Gypsum products.
Pre-petition claims against U.S. Gypsum in silica personal injury lawsuits are
also stayed as a result of the Filing.
23
<PAGE>
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 financial position, cash flows or
results of operations.
See Part II, Item 8, Note 19, Litigation, for additional information on (i)
the background of asbestos litigation, developments in the Corporation's
reorganization proceeding and estimated cost, (ii) silica litigation and (iii)
environmental litigation.
CRITICAL ACCOUNTING POLICIES
The Corporation's consolidated financial statements are prepared in conformity
with accounting policies generally accepted in the United States of America. The
preparation of these financial statements requires management to make estimates,
judgments and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses during the periods presented. The following
is a summary of the accounting policies the Corporation believes are the most
important to aid in understanding its financial results.
VOLUNTARY REORGANIZATION UNDER CHAPTER 11
As a result of the Filing, the Corporation's consolidated financial statements
reflect the provisions of SOP 90-7 and are prepared on a going-concern basis,
which contemplates continuity of operations, realization of assets and
liquidation of liabilities in the ordinary course of business. However, as a
result of the Filing, such realization of assets and liquidation of liabilities,
without substantial adjustments and/or changes of ownership, are subject to
uncertainty. Given this uncertainty, there is substantial doubt about the
Corporation's ability to continue as a going concern. Such doubt includes, but
is not limited to, a possible change in control of the Corporation, as well as a
potential change in the composition of the Corporation's business portfolio. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty. While operating as debtors-in-possession under the
protection of chapter 11 of the Bankruptcy Code and subject to Bankruptcy Court
approval or otherwise as permitted in the ordinary course of business, one or
more of the Debtors may sell or otherwise dispose of assets and liquidate or
settle liabilities for amounts other than those reflected in the consolidated
financial statements. Further, a plan of reorganization could materially change
the amounts and classifications in the historical consolidated financial
statements.
One of the key provisions of SOP 90-7 requires the reporting of the
Debtors' liabilities incurred prior to the commencement of the Chapter 11 Cases
as liabilities subject to compromise. The various liabilities that are subject
to compromise include U.S. Gypsum's asbestos reserve and the Debtors'
pre-petition debt, accounts payable, accrued expenses and other long-term
liabilities. The amounts for these items represent the Debtors' estimate of
known or potential pre-petition claims to be resolved in connection with the
Chapter 11 Cases. Such claims remain subject to future adjustments. Adjustments
may result from (i) negotiations, (ii) actions of the Bankruptcy Court, (iii)
further developments with respect to disputed claims, (iv) rejection of
executory contracts and unexpired leases, (v) the determination as to the value
of any collateral securing claims, (vi) proofs of claim, including unaccrued and
unrecorded post-petition interest expense, (vii) effect of any legislation which
may be enacted or (viii) other events. In particular, the amount of the asbestos
reserve reflects U.S. Gypsum's pre-petition estimate of liability associated
with asbestos claims expected to be filed against U.S. Gypsum in the tort system
through 2003, and this liability, in addition to liability for post-2003 claims,
is the subject of significant dispute in the Chapter 11 Cases.
Other provisions of SOP 90-7 involve interest expense and interest income.
Interest expense on debt classified as liabilities subject to compromise is not
accrued or recorded. Interest income on cash accumulated during the bankruptcy
process to settle claims under a plan of reorganization is netted against
chapter 11 reorganization expenses.
See Part II, Item 8, Note 2, Voluntary Reorganization Under Chapter 11, for
additional information related to the Filing.
ASBESTOS LIABILITY
In 2000, prior to the Filing, an independent consultant completed an actuarial
study of U.S. Gypsum's current and potential future asbestos liabilities. This
study was
24
<PAGE>
based on the assumption that U.S. Gypsum's asbestos liability would continue to
be resolved in the tort system.
As part of this study, the Corporation and its independent consultant
considered various factors that would impact the amount of U.S. Gypsum's
asbestos personal injury liability. These factors included the number, disease,
age, and occupational characteristics of claimants in the Personal Injury Cases;
the jurisdiction and venue in which such cases were filed; the viability of
claims for conspiracy or punitive damages; the elimination of indemnity-sharing
among members of the Center for Claims Resolution (the "Center"), including U.S.
Gypsum, for future settlements and its negative impact on U.S. Gypsum's ability
to continue to resolve claims at historical or acceptable levels; the adverse
impact on U.S. Gypsum's settlement costs of recent bankruptcies of
co-defendants; the possibility of additional bankruptcies of other defendants;
the possibility of significant adverse verdicts due to recent changes in
settlement strategies and related effects on liquidity; the inability or refusal
of former Center members to fund their share of existing settlements and its
effect on such settlement agreements; allegations that U.S. Gypsum and the other
Center members are responsible for the share of certain settlement agreements
that was to be paid by former members that have refused or are unable to pay;
the continued ability to negotiate settlements or develop other mechanisms that
defer or reduce claims from unimpaired claimants; the possibility that federal
legislation addressing asbestos litigation would be enacted; epidemiological
data concerning the incidence of past and projected future asbestos-related
diseases; trends in the propensity of persons alleging asbestos-related disease
to sue U.S. Gypsum; the pre-agreed settlement recommendations in, and the
viability of, the long-term settlements entered into by U.S. Gypsum when it was
a member of the Center; anticipated trends in recruitment of non-malignant or
unimpaired claimants by plaintiffs' law firms; and future defense costs. The
study attempted to weigh relevant variables and assess the impact of likely
outcomes on future case filings and settlement costs.
In connection with the Property Damage Cases, the Corporation considered,
among other things, the extent to which claimants could identify the
manufacturer of any alleged asbestos-containing products in the buildings at
issue in each case; the amount of asbestos-containing products at issue; the
claimed damages; the viability of statute of limitations and other defenses; the
amount for which such cases can be resolved, which normally (but not uniformly)
has been substantially lower than the claimed damages; and the viability of
claims for punitive and other forms of multiple damages.
Based upon the results of the actuarial study, the Corporation determined
that, although substantial uncertainty remained, it was probable that asbestos
claims then pending against U.S. Gypsum and future asbestos claims to be filed
against it through 2003 (both property damage and personal injury) could be
resolved in the tort system for an amount between $889 million and $1,281
million, including defense costs, and that within this range the most likely
estimate was $1,185 million. Consistent with this analysis, in the fourth
quarter of 2000, the Corporation recorded a noncash, pretax charge of $850
million to results of operations, which, combined with the previously existing
reserve, increased U.S. Gypsum's reserve for asbestos claims to $1,185 million.
These amounts are stated before tax benefit and are not discounted to present
value. Less than 10% of the reserve was attributable to defense and
administrative costs. At the time of recording this reserve, it was expected
that the reserve amounts would be expended over a period extending several years
beyond 2003, because asbestos cases in the tort system historically had been
resolved an average of three years after filing. The Corporation concluded that
it did not have adequate information to allow it to reasonably estimate U.S.
Gypsum's liability for asbestos claims to be filed after 2003.
Because of the Filing and activities relating to potential federal
legislation addressing asbestos personal injury claims, the Corporation believes
that there is greater uncertainty in estimating the reasonably possible range of
the Debtors' liability for pending and future asbestos claims as well as the
most likely estimate of liability within this range. There are significant
differences in the treatment of asbestos claims in a bankruptcy proceeding as
compared to the tort litigation system. The factors that impact the estimation
of liability for pending and future asbestos claims in a bankruptcy proceeding
and the amount that must be provided in the plan of reorganization for such
liabilities include: (i) the number of present and future asbestos claims that
will be addressed in the plan of reorganization; (ii) the value that will be
paid to present
25
<PAGE>
and future claims, including the impact historical settlement values for
asbestos claims may have on the estimation of asbestos liability in the
bankruptcy proceedings; (iii) how claims by individuals who have no objective
evidence of impairment will be treated in the bankruptcy proceedings and plan of
reorganization; (iv) how U.S. Gypsum's long-term settlements when it was a
member of the Center will be treated in the plan of reorganization and whether
those settlements will be set aside; (v) how claims for punitive damages will be
treated; (vi) the results of any litigation proceedings in the Chapter 11 Cases
regarding the estimated number or value of present and future asbestos personal
injury claims; (vii) the treatment of asbestos property damage claims in the
bankruptcy proceedings; (viii) the potential asbestos liability of L&W Supply,
Beadex, A.P. Green or any other past or present affiliates of the Debtors and
how any such liability will be addressed in the bankruptcy proceedings and plan
of reorganization; (ix) whether the assets of all of the Debtors are determined
to be available to satisfy the asbestos liabilities of U.S. Gypsum; (x) how the
requirement of Section 524(g) that 75% of the voting asbestos claimants approve
the plan of reorganization will impact the amount that must be provided in the
plan of reorganization for pending and future asbestos claims and (xi) the
impact any relevant potential federal legislation may have on the proceedings.
See Part II, Item 8, Note 2, Voluntary Reorganization Under Chapter 11 -
Potential Federal Legislation Regarding Asbestos Personal Injury Claims. In
addition, the estimates of the Debtors' asbestos liability that would be
recorded as a result of the bankruptcy proceedings or potential federal
legislation are likely to include all expected future asbestos cases to be
brought against the Debtors (as opposed to the cases filed over a three-year
period) and are likely to be computed using the present value of the estimated
liability. These factors, as well as the uncertainties discussed above in
connection with the resolution of asbestos cases in the tort system, increase
the uncertainty of any estimate of asbestos liability.
Because of the uncertainties associated with estimating the Debtors'
asbestos liability at this stage of the proceedings, no change has been made at
this time to the previously recorded reserve for asbestos claims, except to
reflect certain minor asbestos-related costs incurred since the Filing. The
reserve as of December 31, 2004, was $1,061 million.
Because the Filing and possible federal legislation have changed the basis
upon which the Debtors' asbestos liability would be estimated, there can be no
assurance that the current reserve accurately reflects the Debtors' ultimate
liability for pending and future asbestos claims. At the time the reserve was
increased to its current level in December 2000, the reserve was an estimate of
the cost of resolving in the tort system U.S. Gypsum's asbestos liability for
then-pending claims and those expected to be filed through 2003. Because of the
Filing and the stay of pre-petition asbestos lawsuits, the Debtors have not
participated in the tort system since June 2001 and thus cannot measure the
recorded reserve against actual experience. However, the reserve is generally
consistent with the amount the Corporation estimates that the Debtors would be
required to pay to resolve all of their asbestos liability if the FAIR Bill, in
its current form, is enacted.
As the Chapter 11 Cases and the legislation process proceed, the Debtors
likely will gain more information from which a reasonable estimate of the
Debtors' probable liability for present and future asbestos claims can be
determined. If the FAIR Bill or similar legislation is not enacted, the Debtors'
asbestos liability, as determined through the bankruptcy proceedings, could be
materially greater than the accrued reserve. The Official Committee of Asbestos
Personal Injury Claimants and the legal representative for future asbestos
claimants have indicated in a court filing that they estimate that the net
present value of the Debtors' liability for present and future asbestos personal
injury claims is approximately $5.5 billion and that the Debtors are insolvent.
The Debtors have stated that they believe they are solvent if their asbestos
liabilities are fairly and appropriately valued. When the Debtors determine that
there is a reasonable basis for revision of the estimate of their asbestos
liability, the reserve will be adjusted, and it is possible that a charge to
results of operations will be necessary at that time. In such a case, the
Debtors' asbestos liability could vary significantly from the recorded estimate
of liability. This difference could be material to the Corporation's financial
position, cash flows and results of operations in the period recorded.
See Part II, Item 8, Note 19, Litigation, for additional information on the
background of asbestos litigation, developments in the Corporation's
reorganization proceeding and defined terms.
26
<PAGE>
EMPLOYEE RETIREMENT PLANS
The Corporation and its major subsidiaries generally have contributory defined
benefit pension plans for eligible employees. Plans that provide postretirement
benefits (retiree health care and life insurance) for eligible employees also
are maintained by the Corporation. For accounting purposes, these plans are
dependent on assumptions made by management which are used by actuaries engaged
by the Corporation to calculate the projected and accumulated benefit
obligations and the annual expense recognized for these plans. The assumptions
used in developing the required estimates primarily include discount rates,
expected return on plan assets for the funded plans, compensation increase
rates, retirement rates, mortality rates and, for postretirement benefits,
health-care-cost trend rates.
The assumed discount rate is developed by using, as a benchmark, the yield
on investment grade corporate bonds rated AA or better with terms that
approximate the average duration of the Corporation's obligations. The use of a
different discount rate would impact net pension and postretirement benefit
costs and benefit obligations. In determining the expected return on plan
assets, the Corporation uses a "building block" approach, which incorporates
historical experience, its pension plan investment guidelines and expectations
for long-term rates of return. The use of a different rate of return would
impact net pension costs. A one-half percentage-point change in the assumed
discount rate and return-on-plan-asset rate would have the following effects
(dollars in millions):
<TABLE>
<CAPTION>
Increase (Decrease) in
-------------------------
2004
2005 Projected
Net Annual Benefit
Assumption Change Benefit Cost Obligation
- ---------- ------------- ------------ ----------
<S> <C> <C> <C>
Pension Benefits:
Discount rate 0.5% increase $(8) $(66)
Discount rate 0.5% decrease 9 73
Asset return 0.5% increase (4) --
Asset return 0.5% decrease 4 --
Postretirement Benefits:
Discount rate 0.5% increase (3) (26)
Discount rate 0.5% decrease 3 28
</TABLE>
Compensation increase rates are based on historical experience and
anticipated future management actions. Retirement rates are based primarily on
actual plan experience, while standard actuarial tables are used to estimate
mortality rates. Health-care-cost trend rate assumptions are developed based on
historical cost data and an assessment of likely long-term trends.
Results that differ from these assumptions are accumulated and amortized
over future periods and, therefore, generally affect the net benefit cost of
future periods. The sensitivity of assumptions reflects the impact of changing
one assumption at a time and is specific to conditions at the end of 2004.
Economic factors and conditions could affect multiple assumptions
simultaneously, and the effects of changes in assumptions are not necessarily
linear. See Part II, Item 8, Note 13, Employee Retirement Plans, for additional
information regarding costs, plan obligations, plan assets and assumptions.
SELF-INSURANCE RESERVES
The Corporation purchases insurance from third parties for workers'
compensation, automobile, product and general liability claims that exceed
certain levels. However, the Corporation is responsible for the payment of
claims up to such levels. In estimating the obligation associated with incurred
and incurred but not reported losses, the Corporation utilizes estimates
prepared by actuarial consultants. These estimates utilize the Corporation's
historical data to project the future development of losses and take into
account the impact of the Corporation's bankruptcy proceedings. The Corporation
monitors and reviews all estimates and related assumptions for reasonableness.
Loss estimates are adjusted based upon actual claims settlements and reported
claims.
REVENUE RECOGNITION
For the majority of the Corporation's sales, revenue is recognized upon the
shipment of products to customers, which is when title and risk of loss are
transferred to customers. However, for the Corporation's Building Products
Distribution segment, revenue is recognized and title and risk of loss are
transferred when customers receive products, either through delivery by company
trucks or customer pickup. The Corporation believes that these revenue
recognition points are appropriate, as the Corporation has no further
performance obligations unless the customer notifies the Corporation of shortage
of products or defective products shipped within five days after receipt of such
products. With the exception of Building Products Distribution, the
Corporation's
27
<PAGE>
products are generally shipped free on board ("FOB") shipping point.
Provisions for discounts to customers are recorded based on the terms of
sale in the same period in which the related sales are recorded. The Corporation
also records estimated reductions to revenue for shortage of products or
defective products, customer programs and incentive offerings, including
promotions and other volume-based incentives, based on historical information
and review of major customer activity.
RECENT ACCOUNTING PRONOUNCEMENTS
See Part II, Item 8, Note 1, Significant Accounting Policies, for information on
the impact of recent accounting pronouncements on the Corporation.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements related to management's
expectations about future conditions. The effects of the Filing and the conduct,
outcome and costs of the Chapter 11 Cases, as well as the ultimate costs
associated with the Corporation's asbestos litigation, including the possible
impact of any asbestos-related legislation, may differ from management's
expectations. Actual business, market or other conditions may also differ from
management's expectations and accordingly affect the Corporation's sales and
profitability or other results. Actual results may differ due to various other
factors, including economic conditions such as the levels of construction
activity, employment levels, interest rates, currency exchange rates and
consumer confidence; competitive conditions such as price and product
competition; shortages in raw materials; increases in raw material, energy and
employee benefit costs; loss of one or more significant customers; and the
unpredictable effects of acts of terrorism or war upon domestic and
international economies and financial markets. The Corporation assumes no
obligation to update any forward-looking information contained in this report.
28
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
The Corporation uses financial instruments, including fixed and variable rate
debt, to finance its operations in the normal course of business. In addition,
the Corporation uses derivative instruments from time to time to manage selected
commodity price and foreign currency exposures. The Corporation does not use
derivative instruments for trading purposes.
INTEREST RATE RISK
The Corporation has interest rate risk with respect to the fair market value of
its investment portfolio. Derivative instruments are used to enhance the
liquidity of the marketable securities portfolio. The Corporation's investment
portfolio consists of debt instruments that generate interest income for the
Corporation on excess cash balances generated during the Corporation's chapter
11 bankruptcy proceeding. A portion of these instruments contain embedded
derivative features that enhance the liquidity of the portfolio by enabling the
Corporation to liquidate the instrument prior to the stated maturity date, thus
shortening the average duration of the portfolio to less than one year. Based on
results of a sensitivity analysis, for a hypothetical change in interest rates
of 100 basis points, the potential change in the fair market value of the
Corporation's portfolio is $3 million.
COMMODITY PRICE RISK
The Corporation uses swap contracts to manage its exposure to fluctuations in
commodity prices associated with anticipated purchases of natural gas.
Generally, the Corporation has a substantial majority of its anticipated
purchases of natural gas over the next 12 months hedged; however, the
Corporation reviews its positions regularly and makes adjustments as market
conditions warrant. A sensitivity analysis was prepared to estimate the
potential change in the fair value of the Corporation's natural gas swap
contracts assuming a hypothetical 10% change in market prices. Based on results
of this analysis, which may differ from actual results, the potential change in
the fair value of the Corporation's natural gas swap contracts is $27 million.
This analysis does not consider the underlying exposure.
FOREIGN CURRENCY EXCHANGE RISK
The Corporation has operations in a number of countries and uses forward
contracts from time to time to hedge selected risk of changes in cash flows
resulting from forecasted intercompany and third-party sales or purchases
denominated in non-U.S. currencies. As of December 31, 2004, the Corporation had
no outstanding forward contracts.
See Part II, Item 8, Note 1, Significant Accounting Policies, and Note 16,
Derivative Instruments, for additional information on the Corporation's
financial exposures.
29
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
Page
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS:
Statements of Earnings ............................................... 31
Balance Sheets ....................................................... 32
Statements of Cash Flows ............................................. 33
Statements of Stockholders' Equity ................................... 34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS:
1. Significant Accounting Policies ................................ 35
2. Voluntary Reorganization Under Chapter 11 ...................... 38
3. Exit Activities ................................................ 47
4. Stockholder Rights Plan ........................................ 47
5. Earnings Per Share ............................................. 47
6. Marketable Securities .......................................... 48
7. Inventories .................................................... 48
8. Property, Plant and Equipment .................................. 48
9. Goodwill and Other Intangible Assets ........................... 49
10. Accrued Expenses ............................................... 49
11. Accumulated Other Comprehensive Income (Loss) .................. 49
12. Asset Retirement Obligations ................................... 49
13. Employee Retirement Plans ...................................... 49
14. Stock-Based Compensation ....................................... 52
15. Income Taxes ................................................... 53
16. Derivative Instruments ......................................... 54
17. Segments ....................................................... 55
18. Commitments and Contingencies .................................. 56
19. Litigation ..................................................... 56
20. Quarterly Financial Data (unaudited) ........................... 64
Report of Independent Registered Public Accounting Firm.................. 65
Schedule II - Valuation and Qualifying Accounts.......................... 66
</TABLE>
All other schedules have been omitted because they are not required or
applicable or the information is included in the consolidated financial
statements or notes thereto.
30
<PAGE>
USG CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
(millions, except per-share data) Years Ended December 31,
- --------------------------------- ------------------------
2004 2003 2002
------ ------ ------
<S> <C> <C> <C>
Net sales $4,509 $3,666 $3,468
Cost of products sold 3,672 3,121 2,884
------ ------ ------
Gross profit 837 545 584
Selling and administrative expenses 317 324 312
Chapter 11 reorganization expenses 12 11 14
------ ------ ------
Operating profit 508 210 258
Interest expense 5 6 8
Interest income (6) (4) (4)
Other income, net -- (9) (2)
------ ------ ------
Earnings before income taxes and cumulative
effect of accounting change 509 217 256
Income taxes 197 79 117
------ ------ ------
Earnings before cumulative effect of accounting change 312 138 139
Cumulative effect of accounting change -- (16) (96)
------ ------ ------
Net earnings 312 122 43
====== ====== ======
Net Earnings Per Common Share:
Basic and diluted before cumulative effect of accounting change 7.26 3.19 3.22
Cumulative effect of accounting change -- (0.37) (2.22)
------ ------ ------
Basic and diluted 7.26 2.82 1.00
====== ====== ======
</TABLE>
The notes to consolidated financial statements are an integral part of these
statements.
31
<PAGE>
USG CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As of December 31,
------------------
(millions, except share data) 2004 2003
- ----------------------------- ------ ------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 756 $ 700
Short-term marketable securities 138 64
Restricted cash 43 7
Receivables (net of reserves: 2004 - $14; 2003 - $15) 413 321
Inventories 338 280
Income taxes receivable 24 26
Deferred income taxes 25 43
Other current assets 53 57
------ ------
Total current assets 1,790 1,498
------ ------
Long-term marketable securities 312 176
Property, plant and equipment, net 1,853 1,818
Deferred income taxes 152 178
Goodwill 43 39
Other assets 128 90
------ ------
Total assets 4,278 3,799
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable 270 202
Accrued expenses 224 206
Current portion of long-term debt 1 1
Income taxes payable 75 5
------ ------
Total current liabilities 570 414
------ ------
Long-term debt -- 1
Deferred income taxes 25 23
Other liabilities 417 429
Liabilities subject to compromise 2,242 2,243
Commitments and contingencies
Stockholders' Equity:
Preferred stock - $1 par value; authorized 36,000,000 shares;
$1.80 convertible preferred stock (initial series);
outstanding - none -- --
Common stock - $0.10 par value; authorized 200,000,000 shares;
issued: 2004 - 49,985,222 shares; 2003 - 49,985,222 shares 5 5
Treasury stock at cost: 2004 - 6,675,689 shares; 2003 - 6,935,305 shares (256) (258)
Capital received in excess of par value 417 414
Accumulated other comprehensive income (loss) 17 (1)
Retained earnings 841 529
------ ------
Total stockholders' equity 1,024 689
------ ------
Total liabilities and stockholders' equity 4,278 3,799
====== ======
</TABLE>
The notes to consolidated financial statements are an integral part of these
statements.
32
<PAGE>
USG CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(millions) Years Ended December 31,
- ---------- ------------------------
2004 2003 2002
----- ----- -----
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net earnings $ 312 $ 122 $ 43
Adjustments to Reconcile Net Earnings to Net Cash:
Cumulative effect of accounting change -- 16 96
Depreciation, depletion and amortization 120 112 106
Deferred income taxes 49 59 67
Gain on asset dispositions (1) -- --
(Increase) Decrease in Working Capital:
Receivables (92) (34) (9)
Income taxes receivable 2 (12) 62
Inventories (58) (5) (15)
Payables 77 12 54
Accrued expenses 15 (37) 65
Increase in other assets (38) (25) (7)
Increase in other liabilities 31 53 2
Change in asbestos receivable 11 19 22
Decrease in liabilities subject to compromise (1) (29) (39)
Other, net 1 (14) (5)
----- ----- -----
Net cash provided by operating activities 428 237 442
----- ----- -----
INVESTING ACTIVITIES
Capital expenditures (138) (111) (100)
Purchases of marketable securities (546) (256) (237)
Sale or maturities of marketable securities 332 194 56
Net proceeds from asset dispositions 6 2 2
Acquisitions of businesses (5) (20) (10)
Deposit of restricted cash (36) (7) --
----- ----- -----
Net cash used for investing activities (387) (198) (289)
----- ----- -----
FINANCING ACTIVITIES
Repayment of debt (1) -- --
Issuances of common stock 7 -- --
----- ----- -----
Net cash provided by financing activities 6 -- --
----- ----- -----
Effect of exchange rate changes on cash 9 12 3
NET INCREASE IN CASH AND CASH EQUIVALENTS 56 51 156
Cash and cash equivalents at beginning of period 700 649 493
----- ----- -----
Cash and cash equivalents at end of period 756 700 649
===== ===== =====
Supplemental Cash Flow Disclosures:
Interest paid 2 2 2
Income taxes paid (refunded), net 126 19 (39)
</TABLE>
The notes to consolidated financial statements are an integral part of these
statements.
33
<PAGE>
USG CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Capital
Common Received Accumulated
Shares Treasury in Excess Other
Issued Shares Common Treasury of Par Retained Comprehensive
(millions, except share data) (000) (000) Stock Stock Value Earnings Income (Loss) Total
------ -------- ------ -------- --------- -------- ------------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 2001 49,985 (6,528) $5 $(255) $408 $364 $(31) $ 491
------ ------ -- ----- ---- ---- ---- ------
Comprehensive Income:
Net earnings 43 43
Foreign currency translation 8 8
Change in fair value of
derivatives, net of tax of $1 2 2
Minimum pension liability,
net of tax benefit of $7 (11) (11)
------
Total comprehensive income 42
Stock issuances 4 --
Other (223) (2) 4 2
------ ------ -- ----- ---- ---- ---- ------
BALANCE AT DECEMBER 31, 2002 49,985 (6,747) 5 (257) 412 407 (32) 535
====== ====== == ===== ==== ==== ==== ======
Comprehensive Income:
Net earnings 122 122
Foreign currency translation 31 31
Change in fair value of
derivatives, net of tax
benefit of $5 (8) (8)
Minimum pension liability,
net of tax of $6 8 8
------
Total comprehensive income 153
Stock issuances 25 --
Other (213) (1) 2 1
------ ------ -- ----- ---- ---- ---- ------
BALANCE AT DECEMBER 31, 2003 49,985 (6,935) 5 (258) 414 529 (1) 689
====== ====== == ===== ==== ==== ==== ======
Comprehensive Income:
Net earnings 312 312
Foreign currency translation 23 23
Change in fair value of
derivatives, net of tax
benefit of $3 (4) (4)
Loss on marketable securities,
net of tax of zero (1) (1)
------
Total comprehensive income 330
Stock issuances 299 2 5 7
Other (40) (2) (2)
------ ------ -- ----- ---- ---- ---- ------
BALANCE AT DECEMBER 31, 2004 49,985 (6,676) 5 (256) 417 841 17 1,024
====== ====== == ===== ==== ==== ==== ======
</TABLE>
The notes to consolidated financial statements are an integral part of these
statements.
34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Through its subsidiaries, USG Corporation (the "Corporation") is a leading
manufacturer and distributor of building materials, producing a wide range of
products for use in new residential, new nonresidential, and repair and remodel
construction as well as products used in certain industrial processes. The
Corporation's operations are organized into three operating segments: North
American Gypsum, which manufactures SHEETROCK(R) brand gypsum wallboard and
related products in the United States, Canada and Mexico; Worldwide Ceilings,
which manufactures ceiling tile in the United States and ceiling grid in the
United States, Canada, Europe and the Asia-Pacific region; and Building Products
Distribution, which distributes gypsum wallboard, drywall metal, ceilings
products, joint compound and other building products throughout the United
States. The Corporation's products also are distributed through building
materials dealers, home improvement centers and other retailers, specialty
wallboard distributors and contractors. As discussed in Note 2, Voluntary
Reorganization Under Chapter 11, the Corporation and certain of its subsidiaries
are currently operating as debtors-in-possession under chapter 11 of the United
States Bankruptcy Code.
BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with American Institute of Certified Public Accountants ("AICPA")
Statement of Position 90-7 ("SOP 90-7"), "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code."
CONSOLIDATION
The consolidated financial statements include the accounts of the Corporation
and its majority-owned subsidiaries. Subsidiaries in which the Corporation has
less than a 50% ownership interest are accounted for on the equity basis of
accounting and are not material to consolidated operations. All significant
intercompany balances and transactions are eliminated in consolidation.
USE OF ESTIMATES
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions. These estimates and
assumptions affect the reported amounts of assets, liabilities, revenues and
expenses. Actual results could differ from these estimates.
RECLASSIFICATIONS
Certain amounts in the prior years' consolidated financial statements and notes
thereto have been reclassified to conform to the 2004 presentation. These
reclassifications were made to the consolidated statements of cash flows and
consisted of: (i) reclassifying 2003 restricted cash deposits to investing
activities from financing activities and (ii) reclassifying the 2003 and 2002
effect of exchange rate changes on cash to show such amounts as a separate line
item, rather than as part of "other" operating activity cash flows. The
reclassified amounts are not material to the presentation of the consolidated
statements of cash flows.
REVENUE RECOGNITION
For the majority of the Corporation's sales, revenue is recognized upon the
shipment of products to customers, which is when title and risk of loss are
transferred to customers. However, for the Corporation's Building Products
Distribution segment, revenue is recognized and title and risk of loss are
transferred when customers receive products, either through delivery by company
trucks or customer pickup. Provisions for discounts to customers are recorded
based on the terms of sale in the same period in which the related sales are
recorded. The Corporation records estimated reductions to revenue for customer
programs and incentive offerings, including promotions and other volume-based
incentives. With the exception of Building Products Distribution, the
Corporation's products are generally shipped free on board ("FOB") shipping
point.
SHIPPING AND HANDLING COSTS
Shipping and handling costs are included in cost of products sold.
ADVERTISING
Advertising expenses consist of media advertising and related production costs.
Advertising expenses are charged to earnings as incurred and amounted to $13
million, $16 million and $14 million in the years ended December 31, 2004, 2003
and 2002, respectively.
35
<PAGE>
RESEARCH AND DEVELOPMENT
Research and development expenditures are charged to earnings as incurred and
amounted to $17 million, $18 million and $17 million in the years ended December
31, 2004, 2003 and 2002, respectively.
INCOME TAXES
The Corporation accounts for income taxes using the asset and liability method.
Deferred tax assets and liabilities are recognized for the expected future tax
consequences of temporary differences between the carrying amounts and the tax
bases of assets and liabilities. Tax provisions include estimates of amounts
that are currently payable, plus changes in deferred tax assets and liabilities.
EARNINGS PER SHARE
Basic earnings per share are based on the weighted average number of common
shares outstanding. Diluted earnings per share are based on the weighted average
number of common shares outstanding and the dilutive effect of the potential
exercise of outstanding stock options. Diluted earnings per share exclude the
potential exercise of outstanding stock options for any period in which such
exercise would have an anti-dilutive effect.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of highly liquid investments with maturities
of three months or less at the time of purchase.
MARKETABLE SECURITIES
The Corporation invests in marketable securities with maturities greater than
three months. These securities are listed as either short-term or long-term
marketable securities on the consolidated balance sheets based on their
maturities being less than or greater than one year. The securities are
classified as available-for-sale securities and reported at fair market value
with unrealized gains and losses excluded from earnings and recorded to
accumulated other comprehensive income (loss). Realized gains and losses were
not material in 2004, 2003 and 2002.
INVENTORY VALUATION
All of the Corporation's inventories are stated at the lower of cost or market.
Most of the Corporation's inventories in the United States are valued under the
last-in, first-out ("LIFO") cost method. The remaining inventories are valued
under the first-in, first-out ("FIFO") or average production cost methods.
Inventories include material, labor and applicable factory overhead costs.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost, except for those assets that
were revalued under fresh start accounting in May 1993. Provisions for
depreciation of property, plant and equipment are determined principally on a
straight-line basis over the expected average useful lives of composite asset
groups. Estimated useful lives are determined to be 50 years for buildings and
improvements, a range of 10 years to 25 years for machinery and equipment and
five years for computer software and systems development costs. Depletion is
computed on a basis calculated to spread the cost of gypsum and other applicable
resources over the estimated quantities of material recoverable.
LONG-LIVED ASSETS
Long-lived assets include property, plant and equipment, goodwill (the excess of
cost over the fair value of net assets acquired) and other intangible assets.
The Corporation annually reviews goodwill and periodically reviews its other
long-lived assets for impairment by comparing the carrying value of the assets
with their estimated future undiscounted cash flows or fair value, as
appropriate. If impairment is determined, the asset is written down to estimated
fair value.
STOCK-BASED COMPENSATION
The Corporation accounts for stock-based compensation under the provisions of
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees." APB No. 25 prescribes the use of the intrinsic value method,
which measures compensation cost as the quoted market price of the stock at the
date of grant less the amount, if any, that the employee is required to pay. If
the Corporation had elected to recognize compensation cost for stock-based
compensation grants consistent with the fair value method prescribed by
Statement of Financial Accounting Standard ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," net earnings and net earnings per common share would
not have changed from the reported amounts for 2004 and 2003. For 2002, net
earnings would have decreased by $2 million to $41 million, and net earnings per
common share would have decreased by $0.06 to $0.94.
36
<PAGE>
DERIVATIVE INSTRUMENTS
The Corporation uses derivative instruments to manage selected commodity price
and foreign currency exposures. The Corporation does not use derivative
instruments for trading purposes. All derivative instruments must be recorded on
the balance sheet at fair value. For derivatives designated as fair value
hedges, the changes in the fair values of both the derivative instrument and the
hedged item are recognized in earnings in the current period. For derivatives
designated as cash flow hedges, the effective portion of changes in the fair
value of the derivative is recorded to accumulated other comprehensive income
(loss) ("OCI") and is reclassified to earnings when the underlying transaction
has an impact on earnings. The ineffective portion of changes in the fair value
of the derivative is reported in cost of products sold. The amount of
ineffectiveness was not material for 2004, 2003 and 2002.
Commodity Derivative Instruments: The Corporation uses swap contracts to hedge
anticipated purchases of natural gas to be used in its manufacturing operations.
Generally, the Corporation has a substantial majority of its anticipated
purchases of natural gas over the next 12 months hedged; however, the
Corporation reviews its positions regularly and makes adjustments as market
conditions warrant. The current contracts, all of which mature by December 31,
2007, are generally designated as cash flow hedges, with changes in fair value
recorded to OCI until the hedged transaction occurs, at which time it is
reclassified to earnings.
Foreign Exchange Derivative Instruments: The Corporation has operations in a
number of countries and uses forward contracts from time to time to hedge
selected risk of changes in cash flows resulting from forecasted intercompany
and third-party sales or purchases denominated in non-U.S. currencies. These
contracts are generally designated as cash flow hedges, for which changes in
fair value are recorded to OCI until the underlying transaction has an impact on
earnings.
FOREIGN CURRENCY TRANSLATION
Foreign-currency-denominated assets and liabilities are translated into U.S.
dollars at the exchange rates existing as of the respective balance sheet dates.
Translation adjustments resulting from fluctuations in exchange rates are
recorded to OCI on the consolidated balance sheets. Income and expense items are
translated at the average exchange rates during the respective periods. The
aggregate transaction (gain) loss included in other income, net was $2 million,
$(8) million and $(2) million in 2004, 2003 and 2002, respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 123-R: In December 2004, the Financial Accounting Standards Board
("FASB") issued SFAS No. 123-R "Share-Based Payment," which requires companies
to recognize in the income statement the grant-date fair value of stock options
and other equity-based compensation issued to employees. The standard becomes
effective for reporting periods beginning after June 15, 2005. Because the
Corporation is not currently issuing stock options, the adoption of SFAS No.
123-R is not expected to have an impact on the Corporation's financial position,
cash flows or results of operations.
FSP FAS No. 109-1: In December 2004, the FASB issued FASB Staff Position ("FSP")
FAS No. 109-1 "Application of FASB Statement No. 109, Accounting for Income
Taxes, to the Tax Deduction on Qualified Production Activities Provided by the
American Jobs Creation Act of 2004." This FSP, which became effective upon
issuance, provides that the tax deduction for income with respect to qualified
domestic production activities, as part of the American Jobs Creation Act of
2004 that was enacted on October 22, 2004, will be treated as a special
deduction as described in SFAS No. 109. As a result, this deduction has no
effect on the Corporation's deferred tax assets and liabilities existing at the
date of enactment. Instead, the impact of this deduction, which is effective
January 1, 2005, will be reported in the period in which the deduction is
claimed on the Corporation's income tax returns.
FSP FAS No. 109-2: In December 2004, the FASB issued FSP FAS No. 109-2
"Accounting and Disclosure Guidance for the Foreign Earnings Repatriation
Provision within the American Jobs Creation Act of 2004." This FSP, which became
effective upon issuance, allows an enterprise additional time beyond the
financial reporting period of enactment of the American Jobs Creation Act of
2004 to evaluate the effect of this act on its plan for reinvestment or
repatriation of foreign earnings for purposes of applying SFAS No. 109. See Note
15, Income Taxes, for more information on the impact of adopting this FSP.
37
<PAGE>
2. VOLUNTARY REORGANIZATION UNDER CHAPTER 11
On June 25, 2001 (the "Petition Date"), the Corporation and the 10 United States
subsidiaries listed below (collectively, the "Debtors") filed voluntary
petitions for reorganization (the "Filing") under chapter 11 of the United
States Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy
Court for the District of Delaware (the "Bankruptcy Court"). This action was
taken to resolve asbestos claims in a fair and equitable manner, to protect the
long-term value of the Debtors' businesses, and to maintain the Debtors'
leadership positions in their markets.
The chapter 11 cases of the Debtors (collectively, the "Chapter 11 Cases")
are being jointly administered as In re: USG Corporation et al. (Case No.
01-2094). The Chapter 11 Cases do not include any of the Corporation's non-U.S.
subsidiaries. The following subsidiaries filed chapter 11 petitions: United
States Gypsum Company ("U.S. Gypsum"); USG Interiors, Inc. ("USG Interiors");
USG Interiors International, Inc.; L&W Supply Corporation ("L&W Supply"); Beadex
Manufacturing, LLC; B-R Pipeline Company; La Mirada Products Co., Inc.; Stocking
Specialists, Inc.; USG Industries, Inc.; and USG Pipeline Company.
The background of asbestos litigation, developments in the Corporation's
reorganization proceedings and estimated cost are discussed in Note 19,
Litigation.
CONSEQUENCES OF THE FILING
As a consequence of the Filing, all asbestos lawsuits and other lawsuits pending
against the Debtors as of the Petition Date are stayed, and no party may take
any action to pursue or collect pre-petition claims except pursuant to an order
of the Bankruptcy Court. Since the Filing, the Debtors have ceased making both
cash payments and accruals with respect to asbestos lawsuits, including cash
payments and accruals pursuant to settlements of asbestos lawsuits. The Debtors
are operating their businesses without interruption as debtors-in-possession
subject to the provisions of the Bankruptcy Code, and vendors are being paid for
goods furnished and services provided after the Filing.
The Debtors' Chapter 11 Cases are assigned to Judge Judith K. Fitzgerald, a
bankruptcy court judge, and Judge Joy Flowers Conti, a district court judge.
Judge Conti recently entered an order stating that she will hear matters
relating to estimation of the Debtors' liability for asbestos personal injury
claims. Other matters will be heard by Judge Fitzgerald. Three creditors'
committees, one representing asbestos personal injury claimants (the "Official
Committee of Asbestos Personal Injury Claimants"), another representing asbestos
property damage claimants (the "Official Committee of Asbestos Property Damage
Claimants"), and a third representing unsecured creditors (the "Official
Committee of Unsecured Creditors"), were appointed as official committees in the
Chapter 11 Cases. The Bankruptcy Court also appointed Dean M. Trafelet as the
legal representative for future asbestos claimants in the Debtors' bankruptcy
proceedings. Mr. Trafelet was formerly a judge of the Circuit Court of Cook
County, Illinois. The appointed committees, together with Mr. Trafelet, will
play significant roles in the Chapter 11 Cases and resolution of the terms of
any plan of reorganization.
The Debtors intend to address their liability for all present and future
asbestos claims, as well as all other pre-petition claims, in a plan or plans of
reorganization approved by the Bankruptcy Court. The Debtors currently have the
exclusive right to file a plan of reorganization until June 30, 2005. The
Debtors may seek one or more additional extensions of the exclusive period
depending upon developments in the Chapter 11 Cases.
Any plan of reorganization ultimately approved by the Bankruptcy Court may
include one or more independently administered trusts under Section 524(g) of
the Bankruptcy Code, which may be funded by the Debtors to allow payment of
present and future asbestos personal injury claims. Under the Bankruptcy Code, a
plan of reorganization creating a Section 524(g) trust may be confirmed only if
75% of the asbestos claimants who are affected by the trust and who vote on the
plan approve the plan. Section 524(g) also requires that such trust own (or have
the right to acquire if specified contingencies occur) a majority of the voting
stock of each relevant Debtor, its parent corporation, or a subsidiary that is
also a Debtor. A plan of reorganization, including a plan creating a Section
524(g) trust, may be confirmed without the consent of non-asbestos creditors and
equity security holders if certain requirements of the Bankruptcy Code are met.
The Debtors also expect that the plan of reorganization will address the
Debtors' liability for asbestos property damage claims, whether by including
those liabilities in a Section 524(g) trust or by other means.
If the confirmed plan of reorganization includes the creation and funding
of a Section 524(g) trust relating to one or more of the Debtors, the Bankruptcy
Court
38
<PAGE>
will issue a permanent injunction barring the assertion of present and future
asbestos claims against the relevant Debtors, their successors, and their
affiliates, and channeling those claims to the trust for payment in whole or in
part.
Similar plans of reorganization containing Section 524(g) trusts have been
confirmed in the chapter 11 cases of other companies with asbestos liabilities,
but there is no guarantee that the Bankruptcy Court in the Debtors' Chapter 11
Cases will approve creation of a Section 524(g) trust or issue a permanent
injunction channeling to the trust all asbestos claims against the Debtors
and/or their successors and affiliates.
A key factor in determining whether or to what extent there will be any
recovery for pre-petition creditors or stockholders under any plan of
reorganization is the amount that must be provided in the plan to address the
Debtors' liability for present and future asbestos claims. The Official
Committee of Asbestos Personal Injury Claimants and the legal representative for
future asbestos claimants have indicated in a court filing that they estimate
that the net present value of the Debtors' liability for present and future
asbestos personal injury claims is approximately $5.5 billion and that the
Debtors are insolvent. The Debtors have stated that they believe they are
solvent if their asbestos liabilities are fairly and appropriately valued. In
addition, if federal legislation addressing asbestos personal injury claims is
passed, which is speculative at this time, such legislation likely would affect
the amount that will be required to address the Debtors' asbestos personal
injury liability in the Chapter 11 Cases and may affect whether the Debtors
establish a trust under Section 524(g). See Potential Federal Legislation
Regarding Asbestos Personal Injury Claims, below, and Note 19, Litigation, for
additional information regarding Debtors' asbestos liabilities and their
estimated cost.
The Debtors' asbestos liabilities to be funded under a plan of
reorganization have not yet been determined and are subject to substantial
dispute and uncertainty. While it is the Debtors' intention to seek a full
recovery for their creditors, it is not possible to predict the amount that will
have to be provided in the plan of reorganization to address present and future
asbestos claims, how the plan of reorganization will treat other pre-petition
claims, whether there will be sufficient assets to satisfy the Debtors'
pre-petition liabilities, and what impact any plan may have on the value of the
shares of the Corporation's common stock. The payment rights and other
entitlements of pre-petition creditors and the Corporation's stockholders may be
substantially altered by any plan of reorganization confirmed in the Chapter 11
Cases. Pre-petition creditors may receive under the plan of reorganization less
than 100% of the face value of their claims, the pre-petition creditors of some
Debtors may be treated differently from the pre-petition creditors of other
Debtors, and the interests of the Corporation's stockholders are likely to be
substantially diluted or cancelled in whole or in part. There can be no
assurance as to the value of any distributions that might be made under any plan
of reorganization with respect to such pre-petition claims or equity interests.
It is also not possible to predict how the plan of reorganization will
treat intercompany indebtedness, licenses, transfers of goods and services, and
other intercompany arrangements, transactions and relationships that were
entered into before the Petition Date. Certain of these intercompany
transactions have been challenged by various parties in these Chapter 11 Cases,
and other arrangements, transactions and relationships may be challenged by
parties to these Chapter 11 Cases. The outcome of such challenges may have an
impact on the treatment of various claims under any plan of reorganization.
In connection with the Filing, the Corporation implemented a Bankruptcy
Court-approved key employee retention plan that commenced on July 1, 2001, and
continued until June 30, 2004. Effective July 1, 2004, the key employee
retention plan, in an amended form, was extended until December 31, 2005. Under
the amended plan, participants continue to earn awards semiannually. The
amendments introduce a performance feature for the last two (of four) payments
to be made under the extended plan. The cost of the extended plan is projected
to be approximately $19.4 million for the full year 2005 before taking into
account the performance feature, which could increase the final two payments up
to 25% or eliminate them altogether. Because of the performance feature, expense
in 2005 could range from a low of approximately $6.9 million (assuming failure
to meet the performance target, which would result in the final two payments
being eliminated) to a maximum of approximately $22.4 million (assuming full
attainment of the performance target).
Expenses associated with this plan amounted to $16 million in 2004, $23
million in 2003 and $20 million in 2002. Expense declined in 2004 from
prior-year levels primarily due to accruals in 2003 and 2002 of deferred amounts
that were paid in 2004.
39
<PAGE>
POTENTIAL FEDERAL LEGISLATION REGARDING ASBESTOS PERSONAL INJURY CLAIMS
The Corporation has for many years actively supported proposals for federal
legislation addressing asbestos personal injury claims. On April 7, 2004, the
Fairness in Asbestos Injury Resolution Act of 2004 (Senate Bill 2290, the "FAIR
Bill") was introduced in the United States Senate. The FAIR Bill has not been
approved by the Senate, has not been introduced in the House of Representatives,
and is not law.
The FAIR Bill introduced in the Senate is intended to establish a
nationally administered trust fund to compensate asbestos personal injury
claimants. In the FAIR Bill's current form, companies that have made past
payments for asbestos personal injury claims would be required to contribute
amounts to a national trust fund on a periodic basis that would pay the claims
of qualifying asbestos personal injury claimants. The nationally administered
trust fund would be the exclusive remedy for asbestos personal injury claims,
and such claims could not be brought in state or federal court as long as such
claims are being compensated under the national trust fund.
In the FAIR Bill's current form, the amounts to be paid to the national
trust fund are based on an allocation methodology set forth in the FAIR Bill.
The amounts that participants, including the Debtors, would be required to pay
are not dischargeable in a bankruptcy proceeding. The FAIR Bill also provides,
among other things, that if it is determined that the money in the trust fund is
not sufficient to compensate eligible claimants, the claimants and defendants
would return to the court system to resolve claims not paid by the national
trust fund.
The outcome of the legislative process is inherently speculative, and it
cannot be known whether the FAIR Bill or similar legislation will ever be
enacted or, even if enacted, what the terms of the final legislation might be.
In addition to the organized plaintiffs' bar, many labor organizations,
including the AFL-CIO, as well as some Senators have indicated that they oppose
the FAIR Bill as introduced because, among other things, they believe that the
FAIR Bill does not provide sufficient compensation to asbestos claimants. On
April 22, 2004, the Senate defeated a motion to proceed with floor consideration
of the FAIR Bill.
It is anticipated that a revised version of the FAIR Bill will be
introduced in the 109th Congress. However, it is likely that some of the
opponents identified above will remain opposed to the FAIR Bill when it is
reintroduced, and whether the FAIR Bill will ever be enacted cannot be
predicted. It is also likely that, even if the FAIR Bill is enacted, the terms
of the enacted legislation will differ from those of the FAIR Bill considered in
2004, and those differences may be material to the FAIR Bill's impact on the
Corporation.
Enactment of the FAIR Bill or similar legislation addressing the financial
contributions of the Debtors for asbestos personal injury claims would have a
material impact on the amount of the Debtors' asbestos personal injury liability
and the Debtors' Chapter 11 Cases.
During the legislative process, proceedings in the Chapter 11 Cases will
continue. See Consequences of the Filing, above, and Note 19, Litigation.
PRE-PETITION LIABILITIES OTHER THAN ASBESTOS PERSONAL INJURY CLAIMS
Subsequent to the Filing, the Debtors received approval from the Bankruptcy
Court to pay or otherwise honor certain of their pre-petition obligations,
including employee wages, salaries, benefits and other employee obligations, and
from limited available funds, pre-petition claims of certain critical vendors,
real estate taxes, environmental obligations, certain customer programs and
warranty claims, and certain other pre-petition claims.
Pursuant to the Bankruptcy Code, schedules were filed by the Debtors with
the Bankruptcy Court on October 23, 2001, and certain of the schedules were
amended on May 31, 2002, December 13, 2002, and September 30, 2004, setting
forth the assets and liabilities of the Debtors as of the date of the Filing.
The Bankruptcy Court established a bar date of January 15, 2003, by which date
proofs of claim were required to be filed against the Debtors for all claims
other than asbestos-related personal injury claims as defined in the Bankruptcy
Court's order.
Approximately 5,000 proofs of claim for general unsecured creditors
(including pre-petition debtholders and contingent claims, but excluding
asbestos-related claims) totaling approximately $8.7 billion were filed by the
bar date. Of this amount, $5.7 billion worth of claims have been withdrawn from
the case by creditors. The Debtors have been analyzing the remaining proofs of
claim and determined that many of them are duplicates of other proofs of claim
or of liabilities previously scheduled by the Debtors. In addition, many claims
were filed against multiple Debtors or against an incorrect Debtor, or were
incorrectly claiming a priority level higher than general unsecured or an
incorrect dollar amount. To date, the court has expunged 264 claims totaling
$29.5 million as duplicates; expunged 434 claims totaling $198.9 million as
amended or superceded; allowed the reduction of 779 claims by a
40
<PAGE>
total of $19.8 million; and allowed the correction of the Debtors on 1,486
claims and the reclassification of 287 claims to general unsecured claims. The
Debtors continue to analyze and reconcile filed claims.
The deadline to bring avoidance actions in the Chapter 11 Cases was June
25, 2003. Avoidance actions could include claims to avoid alleged preferences
made during the 90-day period prior to the filing (or one-year period for
insiders) and other transfers made or obligations incurred which could be
alleged to be constructive or actual fraudulent conveyances under applicable
law. Effective prior to the avoidance action deadline, the Bankruptcy Court
granted the motion of the committee representing the unsecured creditors to file
a complaint seeking to avoid and recover as preferences certain pre-petition
payments made by the Debtors to 206 creditors, where such payments, in most
cases, exceeded $500,000. The Bankruptcy Court also granted the committee's
request to extend the time by which the summons and complaint are served upon
each named defendant until 90 days after confirmation of a plan of
reorganization filed in connection with the Chapter 11 Cases.
In addition, prior to the deadline for filing avoidance actions, certain of
the Debtors entered into a Tolling Agreement pursuant to which the Debtors
voluntarily agreed to extend the time during which actions could be brought to
avoid certain intercompany transactions that occurred during the one-year period
prior to the filing of the Chapter 11 Cases. The transactions as to which the
Tolling Agreement applies are the creation of liens on certain assets of Debtor
subsidiaries in favor of the Corporation in connection with intercompany loan
agreements; a transfer by U.S. Gypsum to the Corporation of a 9% interest in the
equity of CGC Inc., the principal Canadian subsidiary of the Corporation; and
transfers made by the Corporation to USG Foreign Investments, Ltd., a non-Debtor
subsidiary. The Bankruptcy Court approved the Tolling Agreement in June 2003.
The Debtors expect to address claims for general unsecured creditors
through liquidation, estimation or disallowance of the claims. In connection
with this process, the Debtors will make adjustments to their schedules and
financial statements as appropriate. Any such adjustments could be material to
the Corporation's consolidated financial position, cash flows and results of
operations in any given period. At this time, it is not possible to estimate the
Debtors' liability for these claims. However, it is likely that the Debtors'
liability for these claims will be different from the amounts now recorded by
the Debtors. Proofs of claim alleging asbestos property damage claims are
discussed in Note 19, Litigation, under Developments in the Reorganization
Proceeding.
FINANCIAL STATEMENT PRESENTATION
The accompanying consolidated financial statements have been prepared on a
going-concern basis, which contemplates continuity of operations, realization of
assets and liquidation of liabilities in the ordinary course of business.
However, as a result of the Filing, such realization of assets and liquidation
of liabilities, without substantial adjustments and/or changes of ownership, are
subject to uncertainty. Given this uncertainty, there is substantial doubt about
the Corporation's ability to continue as a going concern. Such doubt includes,
but is not limited to, a possible change in control of the Corporation, as well
as a potential change in the composition of the Corporation's business
portfolio. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty. While operating as
debtors-in-possession under the protection of chapter 11 of the Bankruptcy Code
and subject to Bankruptcy Court approval or otherwise as permitted in the
ordinary course of business, one or more of the Debtors may sell or otherwise
dispose of assets and liquidate or settle liabilities for amounts other than
those reflected in the consolidated financial statements. Further, a plan of
reorganization could materially change the amounts and classifications in the
historical consolidated financial statements.
The Corporation's ability to continue as a going concern is dependent upon,
among other things, (i) the ability of the Corporation to maintain adequate cash
on hand, (ii) the ability of the Corporation to generate cash from operations,
(iii) confirmation of a plan of reorganization under the Bankruptcy Code and
(iv) the Corporation's ability to be profitable following such confirmation. The
Corporation believes that cash and marketable securities on hand and future cash
available from operations will provide sufficient liquidity to allow its
businesses to operate in the normal course without interruption for the duration
of the Chapter 11 Cases. This includes its ability to meet post-petition
obligations of the Debtors and to meet obligations of the non-Debtor
subsidiaries.
41
<PAGE>
LIABILITIES SUBJECT TO COMPROMISE
As reflected in the consolidated financial statements, liabilities subject to
compromise refers to the Debtors' liabilities incurred prior to the commencement
of the Chapter 11 Cases. The amounts of the various liabilities that are subject
to compromise are set forth in the table below. These amounts represent the
Debtors' estimate of known or potential pre-petition claims to be resolved in
connection with the Chapter 11 Cases. Such claims remain subject to future
adjustments. Adjustments may result from (i) negotiations, (ii) actions of the
Bankruptcy Court, (iii) further developments with respect to disputed claims,
(iv) rejection of executory contracts and unexpired leases, (v) the
determination as to the value of any collateral securing claims, (vi) proofs of
claim, including unaccrued and unrecorded post-petition interest expense, (vii)
effect of any legislation which may be enacted or (viii) other events.
The amount shown below for the asbestos reserve reflects the Corporation's
pre-petition estimate of liability associated with asbestos claims expected to
be filed against U.S. Gypsum in the tort system through 2003, and this
liability, in addition to liability for post-2003 claims, is the subject of
significant dispute in the Chapter 11 Cases. See Note 19, Litigation, for
further discussion regarding the asbestos reserve and for additional information
on the background of asbestos litigation and developments in the Corporation's
reorganization proceedings.
Payment terms for liabilities subject to compromise will be established as
part of a plan of reorganization under the Chapter 11 Cases. Liabilities subject
to compromise on the consolidated and debtor-in-possession balance sheets as of
December 31 consisted of the following items:
<TABLE>
<CAPTION>
(millions) 2004 2003
- ---------- ------ ------
<S> <C> <C>
Asbestos reserve $1,061 $1,061
Debt 1,005 1,005
Accounts payable 169 162
Accrued expenses 37 44
Other long-term liabilities 13 14
------ ------
Subtotal 2,285 2,286
Elimination of intercompany accounts payable (43) (43)
------ ------
Total 2,242 2,243
====== ======
</TABLE>
DEBT
As a result of the Filing, virtually all of the Corporation's pre-petition debt
is in default and included in liabilities subject to compromise. Any such debt
that was scheduled to mature since the Filing has not been repaid. Total debt
included in liabilities subject to compromise as of December 31 consisted of the
following:
<TABLE>
<CAPTION>
(millions) 2004 2003
- ---------- ------ ------
<S> <C> <C>
Revolving credit facilities $ 469 $ 469
9.25% senior notes due 2001 131 131
8.5% senior notes due 2005 150 150
Industrial revenue bonds 255 255
------ ------
Total 1,005 1,005
====== ======
</TABLE>
The fair market value of debt classified as liabilities subject to
compromise was $1,121 million and $926 million as of December 31, 2004 and 2003,
respectively. The fair market values were based on quoted market prices or,
where quoted market prices were not available, on instruments with similar terms
and maturities. However, because this debt is subject to compromise, the fair
market value of such debt as of December 31, 2004, is not necessarily indicative
of the ultimate settlement value that will be determined by the Bankruptcy
Court.
INTERCOMPANY TRANSACTIONS
In the normal course of business, the Corporation (also referred to as the
"Parent Company" in the following discussion of intercompany transactions) and
the operating subsidiaries engage in intercompany transactions. To document the
relations created by these transactions, the Parent Company and the operating
subsidiaries, from the formation of the Corporation in 1985, have been parties
to intercompany loan agreements that evidence their obligations as borrowers or
rights as lenders arising out of intercompany cash transfers and various
allocated intercompany charges (the "Intercompany Corporate Transactions").
The Corporation operates a consolidated cash management system under which
the cash receipts of the domestic operating subsidiaries are ultimately
concentrated in Parent Company accounts. Cash disbursements for those operating
subsidiaries originate from those Parent Company concentration accounts.
Allocated intercompany charges from the Parent Company to the operating
subsidiaries primarily include expenses related to rent, property taxes,
information technology, and research and development, while
42
<PAGE>
allocated intercompany charges between certain operating subsidiaries primarily
include expenses for shared marketing, sales, customer service, engineering and
accounting services. Detailed accounting records are maintained of all cash
flows and intercompany charges through the system in either direction. Net
balances, receivables or payables of such cash transactions are reviewed on a
regular basis with interest earned or accrued on the balances. During the first
six months of 2001, the Corporation took steps to secure the obligations from
each of the principal domestic operating subsidiaries under intercompany loan
agreements when it became clear that the asbestos liability claims of U.S.
Gypsum were becoming an increasingly greater burden on the Corporation's cash
resources.
As of December 31, 2004, U.S. Gypsum and USG Interiors had net pre-petition
payable balances to the Parent Company for Intercompany Corporate Transactions
of $295 million and $109 million, respectively. L&W Supply had a net
pre-petition receivable balance from the Parent Company of $33 million. These
pre-petition balances are subject to the provisions of the Tolling Agreement
discussed above. See Pre-Petition Liabilities Other Than Asbestos Personal
Injury Claims, above.
As of December 31, 2004, U.S. Gypsum and L&W Supply had net post-petition
receivable balances from the Parent Company for Intercompany Corporate
Transactions of $399 million and $199 million, respectively. USG Interiors had a
net post-petition payable balance to the Parent Company of $14 million.
In addition to the above transactions, the operating subsidiaries engage in
ordinary-course purchase and sale of products with other operating subsidiaries
(the "Intercompany Trade Transactions"). Detailed accounting records are
maintained of all such transactions, and settlements are made on a monthly
basis. Certain Intercompany Trade Transactions between U.S. and non-U.S.
operating subsidiaries are settled via wire transfer payments utilizing several
payment systems.
CHAPTER 11 REORGANIZATION EXPENSES
Chapter 11 reorganization expenses in the consolidated and debtor-in-possession
statements of earnings consisted of the following:
<TABLE>
<CAPTION>
(millions) 2004 2003 2002
- ---------- ---- ---- ----
<S> <C> <C> <C>
Legal and financial advisory fees $ 24 $19 $22
Bankruptcy-related interest income (12) (8) (8)
---- --- ---
Total 12 11 14
==== === ===
</TABLE>
INTEREST EXPENSE
Contractual interest expense not accrued or recorded on pre-petition debt
totaled $71 million in 2004. From the Petition Date through December 31, 2004,
contractual interest expense not accrued or recorded on pre-petition debt
totaled $257 million. This calculation assumes that all such interest was paid
when required at the applicable contractual interest rate (after giving effect
to any applicable default rate). However, the calculation excludes the impact of
any compounding of interest on unpaid interest that may be payable under the
relevant contractual obligations, as well as any interest that may be payable
under a plan of reorganization to trade or other creditors that are not
otherwise entitled to interest under the express terms of their claims. The
impact of compounding alone would have increased the contractual interest
expense reported above by $18 million in 2004 and $34 million from the Petition
Date through December 31, 2004 .
For financial reporting purposes, no post-petition accruals have been made
for contractual interest expense not accrued or recorded on pre-petition debt.
However, based on discussions with representatives of the Official Committee of
Unsecured Creditors, the Corporation anticipates that the relevant creditors
will seek to recover amounts in respect of such unaccrued interest expense (on a
compounded basis) in the Chapter 11 Cases.
43
<PAGE>
DIP FINANCIAL STATEMENTS
Under the Bankruptcy Code, the Corporation is required to file periodically with
the Bankruptcy Court various documents including financial statements of the
Debtors (the Debtor-In-Possession or "DIP" financial statements). The
Corporation cautions that these financial statements are prepared according to
requirements under the Bankruptcy Code. While these financial statements
accurately provide information required under the Bankruptcy Code, they are
nonetheless unconsolidated, unaudited and prepared in a format different from
that used in the Corporation's consolidated financial statements filed under
United States securities laws. Accordingly, the Corporation believes the
substance and format do not allow meaningful comparison with the Corporation's
regular publicly disclosed consolidated financial statements.
The Debtors consist of the Corporation and the following wholly owned
subsidiaries: U.S. Gypsum, USG Interiors, USG Interiors International, Inc.; L&W
Supply, Beadex Manufacturing, LLC; B-R Pipeline Company; La Mirada Products Co.,
Inc.; Stocking Specialists, Inc.; USG Industries, Inc.; and USG Pipeline
Company.
In 2002, USG Interiors recorded a charge of $82 million to write down the
investment in its Belgian subsidiary, which ceased operations in December 2002.
Also in 2002, USG Funding Corporation, a non-Debtor subsidiary of the
Corporation, declared a dividend in the amount of $30 million payable to the
Corporation, which was paid in effect by eliminating the intercompany payable
from the Corporation. The net impact of these unrelated transactions is included
in other expense, net in the DIP statement of earnings for 2002. The condensed
financial statements of the Debtors are presented as follows:
DEBTOR-IN-POSSESSION STATEMENTS OF EARNINGS (UNAUDITED)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
(millions) 2004 2003 2002
- ---------- ------ ------ ------
<S> <C> <C> <C>
Net sales $4,065 $3,302 $3,127
Cost of products sold 3,389 2,863 2,631
Selling and administrative expenses 267 278 266
Chapter 11 reorganization expenses 12 11 14
Interest expense 4 5 8
Interest income (2) (2) (2)
Other (income) expense, net (2) (6) 51
------ ------ ------
Earnings before income taxes and cumulative
effect of accounting change 397 153 159
Income taxes 162 66 96
------ ------ ------
Earnings before cumulative effect of accounting change 235 87 63
Cumulative effect of accounting change -- (13) (41)
------ ------ ------
Net earnings 235 74 22
====== ====== ======
</TABLE>
44
<PAGE>
DEBTOR-IN-POSSESSION BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
As of December 31,
------------------
(millions) 2004 2003
- ---------- ------ ------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 516 $ 489
Short-term marketable securities 135 64
Restricted cash 38 7
Receivables (net of reserves: 2004 - $10; 2003 - $11) 373 276
Inventories 275 232
Income taxes receivable 24 21
Deferred income taxes 25 41
Other current assets 45 47
------ ------
Total current assets 1,431 1,177
------ ------
Long-term marketable securities 276 176
Property, plant and equipment (net of accumulated depreciation and
depletion: 2004 - $728; 2003 - $645) 1,604 1,576
Deferred income taxes 152 178
Goodwill 43 39
Other assets 361 358
------ ------
Total assets 3,867 3,504
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable 237 168
Accrued expenses 203 186
Income taxes payable 58 4
------ ------
Total current liabilities 498 358
------ ------
Other liabilities 391 403
Liabilities subject to compromise 2,242 2,243
Stockholders' Equity:
Preferred stock -- --
Common stock 5 5
Treasury stock (256) (258)
Capital received in excess of par value 101 101
Accumulated other comprehensive income 3 8
Retained earnings 883 644
------ ------
Total stockholders' equity 736 500
------ ------
Total liabilities and stockholders' equity 3,867 3,504
====== ======
</TABLE>
45
<PAGE>
DEBTOR-IN-POSSESSION STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------
(millions) 2004 2003 2002
- ---------- ----- ----- -----
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net earnings $ 235 $ 74 $ 22
Adjustments to Reconcile Net Earnings to Net Cash:
Cumulative effect of accounting change -- 13 41
Corporate service charge (1) (1) (1)
Depreciation, depletion and amortization 101 94 85
Deferred income taxes 45 54 63
Gain on asset dispositions (1) -- --
(Increase) Decrease in Working Capital:
Receivables (97) (37) --
Income taxes receivable (3) (7) 63
Inventories (43) -- (11)
Payables 66 10 49
Accrued expenses 14 (21) 57
Increase in pre-petition intercompany receivable (38) -- --
(Increase) decrease in post-petition intercompany
receivable 70 (9) (53)
(Increase) decrease in other assets (36) (9) 104
Increase in other liabilities 32 45 --
Change in asbestos receivables 11 19 22
Decrease in liabilities subject to compromise (1) (29) (39)
Other, net (6) (10) (6)
----- ----- -----
Net cash provided by operating activities 348 186 396
----- ----- -----
INVESTING ACTIVITIES
Capital expenditures (118) (88) (75)
Purchases of marketable securities (507) (256) (237)
Sale or maturities of marketable securities 332 194 56
Net proceeds from asset dispositions 1 2 2
Acquisitions of businesses (5) (20) (10)
Deposit of restricted cash (31) (7) --
----- ----- -----
Net cash used for investing activities (328) (175) (264)
----- ----- -----
FINANCING ACTIVITIES
Issuances of common stock 7 -- --
----- ----- -----
Net cash provided by financing activities 7 -- --
----- ----- -----
NET INCREASE IN CASH AND CASH EQUIVALENTS 27 11 132
Cash and cash equivalents at beginning of period 489 478 346
----- ----- -----
Cash and cash equivalents at end of period 516 489 478
===== ===== =====
Supplemental Cash Flow Disclosures:
Interest paid 2 2 2
Income taxes paid (refunded), net 114 2 (52)
</TABLE>
46
<PAGE>
3. EXIT ACTIVITIES
2003 SALARIED WORKFORCE REDUCTION
In the fourth quarter of 2003, the Corporation recorded a charge of $3 million
pretax ($2 million after-tax) for severance related to a salaried workforce
reduction of approximately 70 employees. An additional 56 open positions were
eliminated. The charge was included in selling and administrative expenses.
Payments totaling $1 million were made in the fourth quarter, and a reserve of
$2 million was included in accrued expenses on the consolidated balance sheet as
of December 31, 2003. The remaining payments of $2 million were made during the
first quarter of 2004.
2002 DOWNSIZING PLAN
In the fourth quarter of 2002, the Corporation recorded a non-tax-deductible
charge of $11 million related to the shutdown of the Aubange, Belgium, ceiling
tile plant and other downsizing activities in Europe that addressed the
continuing weakness of the commercial ceilings market in Europe. The charge was
included in cost of products sold for USG International and reflected severance
of $6 million related to a workforce reduction of more than 50 positions
(salaried and hourly), equipment writedowns of $3 million and other reserves of
$2 million. The other reserves primarily related to lease cancellations,
inventories and receivables.
A total of 53 employees were terminated, completing the workforce
reduction. The Aubange plant ceased operations in December 2002. The reserve for
the 2002 downsizing plan was included in accrued expenses on the consolidated
balance sheets. Charges against the reserve included the $3 million writedown of
equipment in 2002 and payments totaling $8 million in 2003. All payments
associated with the 2002 downsizing plan were funded with cash from operations.
An additional $1 million writedown related to the Aubange plant was recorded in
2003.
4. STOCKHOLDER RIGHTS PLAN
The Corporation's stockholder rights plan, which will expire on March 27, 2008,
has four basic provisions. First, if an acquirer buys 15% or more of the
Corporation's outstanding common stock, the plan allows other stockholders to
buy, with each right, additional shares of the Corporation at a 50% discount.
Second, if the Corporation is acquired in a merger or other business combination
transaction, rights holders will be entitled to buy shares of the acquiring
company at a 50% discount. Third, if an acquirer buys between 15% and 50% of the
Corporation's outstanding common stock, the Corporation can exchange part or all
of the rights of the other holders for shares of the Corporation's stock on a
one-for-one basis or shares of a new junior preferred stock on a
one-for-one-hundredth basis. Fourth, before an acquirer buys 15% or more of the
Corporation's outstanding common stock, the rights are redeemable for $0.01 per
right at the option of the Corporation's board of directors (the "Board"). This
provision permits the Board to enter into an acquisition transaction that is
determined to be in the best interests of stockholders without any of the above
provisions becoming effective. The Board is authorized to reduce the 15%
threshold to not less than 10%. The Board has not exercised its authority
regarding these provisions as of the date of this report.
In November 2004, the independent members of the Board reviewed the
Corporation's stockholder rights plan in accordance with its policy, adopted in
2000, to review the rights plan every three years. The independent members of
the Board considered a variety of relevant factors, including the effect of the
Filing, and concluded that the rights plan continued to be in the best interests
of the Corporation and should be retained in its present form.
5. EARNINGS PER SHARE
The reconciliation of basic earnings per share to diluted earnings per share is
shown in the following table:
<TABLE>
<CAPTION>
Weighted
Average
Net Shares Per-Share
(millions, except share data) Earnings (000) Amount
- ----------------------------- -------- ------ ---------
<S> <C> <C> <C>
2004:
Basic earnings $312 43,025 $7.26
---- ------ -----
Diluted earnings 312 43,025 7.26
==== ====== =====
2003:
Basic earnings 122 43,075 2.82
Dilutive effect of stock options 1
---- ------ -----
Diluted earnings 122 43,076 2.82
==== ====== =====
2002:
Basic earnings 43 43,282 1.00
---- ------ -----
Diluted earnings 43 43,282 1.00
==== ====== =====
</TABLE>
Options to purchase 1.9 million, 2.6 million and 2.7 million shares of
common stock as of December 31,
47
<PAGE>
2004, 2003 and 2002, respectively, were not included in the computation of
diluted earnings per share for the respective years because the exercise price
of the options was greater than the average market price of the Corporation's
common stock.
6. MARKETABLE SECURITIES
As of December 31, 2004 and 2003, the amortized cost and fair market value
("FMV") of the Corporation's investments in marketable securities were as
follows:
<TABLE>
<CAPTION>
2004 2003
---------------- ----------------
Amortized Amortized
(millions) Cost FMV Cost FMV
- ---------- --------- ---- --------- ----
<S> <C> <C> <C> <C>
Asset-backed securities $174 $173 $101 $101
U.S. government and
agency securities 121 121 83 83
Municipal securities 36 36 31 32
Corporate securities 112 112 24 24
Time deposits 8 8 -- --
---- ---- ---- ----
Total marketable securities 451 450 239 240
==== ==== ==== ====
</TABLE>
Contractual maturities of marketable securities as of December 31, 2004,
were as follows:
<TABLE>
<CAPTION>
Amortized
(millions) Cost FMV
- ---------- --------- ----
<S> <C> <C>
Due in 1 year or less $135 $135
Due in 1 - 5 years 76 76
Due in 5 - 10 years 5 5
Due after 10 years 61 61
---- ----
277 277
Asset-backed securities 174 173
---- ----
Total marketable securities 451 450
==== ====
</TABLE>
The average duration of the portfolio is less than one year because a
majority of the longer-term securities have paydown or put features and
liquidity facilities.
Investments in marketable securities that were in an unrealized loss
position for less than 12 months as of December 31 consisted of the following:
<TABLE>
<CAPTION>
(millions) 2004 2003
- ---------- ---- ----
<S> <C> <C>
Asset-backed securities $149 $29
U.S. government and agency securities 83 13
Corporate securities 34 8
---- ---
Total FMV 266 50
Aggregate amount of unrealized losses 1 --
==== ===
</TABLE>
Investments that had been in a continuous unrealized loss position for a
period greater than 12 months amounted to $2 million and zero as of December 31,
2004 and 2003, respectively. The unrealized loss for those investments was not
material for 2004.
7. INVENTORIES
Inventories as of December 31 consisted of the following:
<TABLE>
<CAPTION>
(millions) 2004 2003
- ---------- ---- ----
<S> <C> <C>
Finished goods and work in progress $188 $179
Raw materials 133 84
Supplies 17 17
---- ----
Total 338 280
==== ====
</TABLE>
The LIFO value of U.S. inventories was $258 million and $215 million as of
December 31, 2004 and 2003, respectively, and would have been higher by $31
million and $2 million as of the respective dates if they were valued under the
FIFO and average production cost methods. All non-U.S. inventories are valued
under FIFO or average production cost methods. The LIFO value of U.S.
inventories exceeded that computed for U.S. federal income tax purposes by $15
million and $13 million as of December 31, 2004 and 2003, respectively.
8. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of December 31 consisted of the following:
<TABLE>
<CAPTION>
(millions) 2004 2003
- ---------- ------ ------
<S> <C> <C>
Land and mineral deposits $ 102 $ 98
Buildings and improvements 772 740
Machinery and equipment 1,814 1,774
Computer software and systems
development costs 43 22
------ ------
2,731 2,634
Reserves for depreciation and depletion (878) (816)
------ ------
Total 1,853 1,818
====== ======
</TABLE>
48
<PAGE>
9. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill as of December 31, 2004 and 2003, amounted to $43 million and $39
million, respectively. All of the Corporation's goodwill relates to the Building
Products Distribution operating segment. Goodwill increased in 2004 as a result
of the acquisition of three businesses during the year. Other intangible assets,
excluding intangible pension assets, as of December 31, 2004, totaled $2
million, of which $1 million was subject to amortization over a five-year life.
Other intangible assets are included in other assets on the consolidated balance
sheets.
On January 1, 2002, the Corporation adopted SFAS No. 142, "Goodwill and
Other Intangible Assets." As a result of the adoption, the Corporation recorded
a noncash, non-tax-deductible impairment charge of $96 million related to the
North American Gypsum operating segment. This charge is reflected in the
Corporation's consolidated statement of earnings as a cumulative effect of a
change in accounting principle in 2002.
10. ACCRUED EXPENSES
Accrued expenses as of December 31 consisted of the following:
<TABLE>
<CAPTION>
(millions) 2004 2003
- ---------- ---- ----
<S> <C> <C>
Employee compensation $ 74 $ 74
Self insurance reserves 53 48
Other 97 84
---- ----
Total 224 206
==== ====
</TABLE>
11. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
OCI as of December 31 consisted of the following:
<TABLE>
<CAPTION>
(millions) 2004 2003
- ---------- ---- ----
<S> <C> <C>
Gain on derivatives, net of tax $ 6 $10
Foreign currency translation 15 (8)
Minimum pension liability, net of tax (3) (3)
Unrealized gain (loss) on marketable
securities, net of tax (1) --
--- ---
Total 17 (1)
=== ===
</TABLE>
During 2004, accumulated net after-tax gains of $20 million ($33 million
pretax) on derivatives were reclassified from OCI to earnings. As of December
31, 2004, the estimated net after-tax gain expected to be reclassified within
the next 12 months from OCI to earnings is $7 million.
12. ASSET RETIREMENT OBLIGATIONS
Changes in the liability for asset retirement obligations during 2004 and 2003
consisted of the following:
<TABLE>
<CAPTION>
(millions) 2004 2003
- ---------- ---- ----
<S> <C> <C>
Balance as of January 1 $35 $29
Accretion expense 3 3
Liabilities incurred 6 3
Liabilities settled (2) (1)
Foreign currency translation 1 1
--- ---
Balance as of December 31 43 35
=== ===
</TABLE>
On January 1, 2003, the Corporation adopted SFAS No. 143, "Accounting for
Asset Retirement Obligations." This standard requires the recording of the fair
value of a liability for an asset retirement obligation in the period in which
it is incurred. The Corporation's asset retirement obligations include
reclamation requirements as regulated by government authorities related
principally to assets such as the Corporation's mines, quarries, landfills,
ponds and wells. The impact to the Corporation of adopting SFAS No. 143 was an
increase in assets of $14 million, which included a $12 million increase in
deferred tax assets, and an increase in liabilities of $30 million, which
included a $1 million increase in deferred tax liabilities. A noncash, after-tax
charge of $16 million ($27 million pretax) was reflected in the consolidated
statement of earnings as a cumulative effect of a change in accounting principle
as of January 1, 2003.
13. EMPLOYEE RETIREMENT PLANS
The Corporation and its major subsidiaries generally have contributory defined
benefit pension plans for eligible employees. Benefits of the plans are
generally based on employees' years of service and compensation during the final
years of employment.
The Corporation also maintains plans that provide postretirement benefits
(retiree health care and life insurance) for eligible employees. Employees hired
before January 1, 2002, generally become eligible for the postretirement benefit
plans when they meet minimum retirement age and service requirements. The cost
of providing most postretirement benefits is shared with retirees. In response
to continuing retiree health-care cost pressure, effective January 1, 2005, the
Corporation modified its retiree medical cost-sharing
49
<PAGE>
strategy for existing retirees and eligible active employees who may qualify for
retiree medical coverage in the future. The plan amendment resulted in
participants paying a greater portion of their retiree healthcare costs and a
reduction in the Corporation's accumulated postretirement benefit obligation.
On December 8, 2003, the Medicare Act (the "Act") was signed into law. The
Act introduced a prescription drug benefit under Medicare (Medicare Part D), as
well as a federal subsidy to sponsors of retiree health care benefit plans that
provide a benefit that is at least actuarially equivalent to Medicare Part D.
On May 19, 2004, the FASB issued FSP FAS 106-2, "Accounting and Disclosure
Requirements Related to the Medicare Prescription Drug, Improvement and
Modernization Act of 2003." FSP FAS 106-2 provides guidance on accounting for
the effects of prescription drug provisions of the Act for employers that
sponsor postretirement health care plans that provide prescription drug benefits
and requires those employers to provide certain disclosures regarding the effect
of the federal subsidy provided by the Act. The new disclosure requirements were
effective for the first financial reporting period that began after June 15,
2004. The Corporation adopted FSP FAS 106-2 on July 1, 2004, which resulted in
an approximate $40 million reduction in its accumulated postretirement benefit
obligation.
The components of net pension and postretirement benefits costs are
summarized in the following table:
<TABLE>
<CAPTION>
(millions) 2004 2003 2002
- ---------- ---- ---- ----
<S> <C> <C> <C>
Pension Benefits:
Service cost of benefits earned $ 31 $ 27 $ 21
Interest cost on projected
benefit obligation 54 52 49
Expected return on plan assets (53) (52) (55)
Net amortization 19 11 3
---- ---- ----
Net pension cost 51 38 18
==== ==== ====
Postretirement Benefits:
Service cost of benefits earned 14 12 7
Interest cost on projected
benefit obligation 22 21 16
Net amortization 1 -- (2)
---- ---- ----
Net postretirement cost 37 33 21
==== ==== ====
</TABLE>
The Corporation uses a December 31 measurement date for its plans. The
accumulated benefit obligation ("ABO") for the defined benefit pension plans was
$773 million and $690 million as of December 31, 2004 and 2003, respectively.
The following table summarizes projected pension and accumulated postretirement
benefit obligations, plan assets and funded status as of December 31:
<TABLE>
<CAPTION>
Pension Postretirement
-------------- --------------
(millions) 2004 2003 2004 2003
- ---------- ------ ----- ----- -----
<S> <C> <C> <C> <C>
Change in Benefit Obligation:
Benefit obligation as of January 1 $ 907 $ 777 $ 371 $ 310
Service cost 31 27 14 12
Interest cost 54 52 22 21
Participant contributions 13 13 4 4
Benefits paid (65) (52) (16) (15)
Plan amendment -- -- (76) --
Actuarial loss 54 71 29 37
Foreign currency translation 9 19 2 2
------ ----- ----- -----
Benefit obligation as of December 31 1,003 907 350 371
====== ===== ===== =====
Change in Plan Assets:
Fair value as of January 1 704 528 -- --
Actual return on plan assets 72 117 -- --
Employer contributions 78 82 -- --
Participant contributions 13 13 -- --
Benefits paid (65) (52) -- --
Foreign currency translation 8 16 -- --
------ ----- ----- -----
Fair value as of December 31 810 704 -- --
====== ===== ===== =====
Funded Status:
As of December 31 (193) (203) (350) (371)
Unrecognized prior service cost 20 22 (78) (5)
Unrecognized net loss 237 216 97 71
------ ----- ----- -----
Net balance sheet prepaid (liability) 64 35 (331) (305)
====== ===== ===== =====
Components in the Consolidated Balance Sheets:
Long-term other assets 71 44 -- --
Long-term other liabilities (13) (13) (331) (305)
Intangible assets 2 -- -- --
Accumulated other comprehensive loss 4 4 -- --
------ ----- ----- -----
Net balance sheet prepaid (liability) 64 35 (331) (305)
====== ===== ===== =====
</TABLE>
50
<PAGE>
ASSUMPTIONS
The following tables reflect the assumptions used in the accounting for the
plans:
<TABLE>
<CAPTION>
Pension Postretirement
----------- --------------
2004 2003 2004 2003
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted-average assumptions used to determine benefit
obligations as of December 31:
Discount rate 5.75% 6.0% 5.75% 6.0%
Compensation increase rate 4.2% 4.2% -- --
Weighted-average assumptions used to determine net cost
for years ended December 31:
Discount rate 6.0% 6.5% 6.0% 6.5%
Expected return on
plan assets 7.5% 8.0% -- --
Compensation increase rate 4.2% 4.7% -- --
</TABLE>
The assumed health-care-cost trend rate used to measure the postretirement
plans' obligations as of December 31 were as follows:
<TABLE>
<CAPTION>
2004 2003
----- -----
<S> <C> <C>
Health-care-cost trend rate assumed for
next year 10.0% 9.0%
Rate to which the cost trend rate is assumed
to decline (the ultimate trend rate) 5.25% 5.25%
Year that the rate reaches the ultimate
trend rate 2011 2007
</TABLE>
A one-percentage-point change in the assumed health-care-cost trend rate
for the postretirement plans would have the following effects:
<TABLE>
<CAPTION>
One-Percentage- One-Percentage-
(millions) Point Increase Point Decrease
- ---------- --------------- ---------------
<S> <C> <C>
Effect on total service and
interest cost $ 7 $ (6)
Effect on postretirement
benefit obligation 60 (51)
</TABLE>
The assumption for the expected long-term rate of return on plan assets for
the Corporation's pension plans was established using a "building block"
approach. In this approach, ranges of long-term expected returns for the various
asset classes in which the plans invest are estimated. This is done primarily
based upon observations of historical asset returns and their historical
volatility. Consensus estimates of certain market and economic factors that
influence returns such as inflation, Gross Domestic Product growth and dividend
yields are also considered in determining expected returns. An overall range of
likely expected rates of return is then calculated by applying the expected
returns to the plans' target asset allocation. The most likely rate of return is
then determined and is adjusted for investment management fees. Following a
review of the long-term expected rate of return on plan assets, the Corporation
decreased its expected rate of return on pension plan assets to 7.0% effective
January 1, 2005.
PLAN ASSETS
The pension plans' asset allocations by asset categories as of December 31 were
as follows:
<TABLE>
<CAPTION>
Asset Categories 2004 2003
- ----------------- ---- ----
<S> <C> <C>
Equity securities 68% 67%
Debt securities 24% 26%
Other 8% 7%
--- ---
Total 100% 100%
=== ===
</TABLE>
The investment policies and strategies for the Corporation's pension plans'
assets have been established with a goal of maintaining fully funded plans (on
an ABO basis) and maximizing returns on the plans' assets while prudently
considering the plans' tolerance for risk. Factors influencing the level of risk
assumed include the demographics of the plans' participants, the liquidity
requirements of the plans and the financial condition of the Corporation. Based
upon these factors, it has been determined that the plans can tolerate a
moderate level of risk.
To maximize long-term returns, the plans' assets are invested primarily in
a diversified mix of equity and debt securities. The portfolio of equity
securities includes both foreign and domestic stocks representing a range of
investment styles and market capitalizations. Investments in domestic and
foreign equities and debt securities are actively and passively managed. Other
assets are managed by investment managers utilizing strategies with returns
normally expected to have a low correlation to the returns of equities. As of
December 31, 2004, the plans' target asset allocation percentages were 61% for
equity securities, 21% for debt securities and 18% for other. The actual
allocations for equity and debt securities exceeded their targets at year end.
Additional investment opportunities in the "other" category are being
identified, which are expected to bring actual allocations closer to target
allocations in 2005.
Investment risk is monitored by the Corporation on
51
<PAGE>
an ongoing basis, in part through the use of quarterly investment portfolio
reviews, compliance reporting by investment managers, and periodic
asset/liability studies and reviews of the plan's funded status.
CASH FLOWS
The Corporation's defined benefit pension plans have no minimum funding
requirements under the Employee Retirement Income Security Act of 1974
("ERISA"). In accordance with the Corporation's funding policy, the Corporation
expects to voluntarily contribute approximately $75 million of cash to its
pension plans in 2005. Total benefit payments expected to be paid to
participants, which include payments funded from the Corporation's assets as
well as payments from the pension plans and the Medicare subsidy expected to be
received, are as follows:
<TABLE>
<CAPTION>
Years ended December 31
---------------------------------------
Health Care
Expected benefit Pension Postretirement Subsidy
payments (millions) Benefits Benefits Receipts
- ------------------- -------- -------------- -----------
<S> <C> <C> <C>
2005 $ 44 $ 13 $ --
2006 46 15 (2)
2007 46 16 (2)
2008 50 17 (2)
2009 56 18 (3)
2010-2014 379 114 (15)
</TABLE>
14. STOCK-BASED COMPENSATION
There have been no stock options granted since the Filing on June 25, 2001.
Prior to the Filing, the Corporation issued stock options to key employees under
plans approved by stockholders. Under the plans, options were granted at an
exercise price equal to the market value on the date of grant. All options
granted under the plans have 10-year terms and vesting schedules of two or three
years. The options expire on the 10th anniversary of the date of grant, except
in the case of retirement, death or disability, in which case they expire on the
earlier of the fifth anniversary of such event or the expiration of the original
option term.
Stock option activity was as follows:
<TABLE>
<CAPTION>
(options in thousands) 2004 2003 2002
- ---------------------- ------ ------ ------
<S> <C> <C> <C>
Options:
Outstanding, January 1 2,600 2,699 2,738
Granted -- -- --
Exercised (295) (21) --
Canceled (373) (78) (39)
------ ------ ------
Outstanding, December 31 1,932 2,600 2,699
Exercisable, December 31 1,932 2,600 1,912
Available for grant, December 31 2,976 2,188 1,985
------ ------ ------
Weighted Average Exercise Price:
Outstanding, January 1 $34.89 $34.31 $34.29
Granted -- -- --
Exercised 24.04 10.31 --
Canceled 29.15 21.25 33.01
Outstanding, December 31 37.66 34.89 34.31
Exercisable, December 31 37.66 34.89 39.19
</TABLE>
The following table summarizes information about stock options outstanding
as of December 31, 2004:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------- -------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Options Contractual Exercise Options Exercise
Prices (000) Life (yrs.) Price (000) Price
- -------- ------- ----------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
$15 - 25 549 6.0 $22 549 $22
25 - 35 419 1.6 33 419 33
35 - 55 964 3.9 48 964 48
----- --- --- ----- ---
Total 1,932 4.0 38 1,932 38
===== === === ===== ===
</TABLE>
As of December 31, 2004, common shares totaling 1.9 million were reserved
for future issuance in conjunction with existing stock option grants. In
addition, 3.0 million common shares were reserved for future grants. Shares
issued in option exercises may be from original issue or available treasury
shares.
52
<PAGE>
15. INCOME TAXES
Earnings before income taxes and cumulative effect of accounting change
consisted of the following:
<TABLE>
<CAPTION>
(millions) 2004 2003 2002
- ---------- ---- ---- ----
<S> <C> <C> <C>
U.S. $397 $161 $133
Foreign 112 56 123
---- ---- ----
Total 509 217 256
==== ==== ====
</TABLE>
Income taxes consisted of the following:
<TABLE>
<CAPTION>
(millions) 2004 2003 2002
- ---------- ---- ---- ----
<S> <C> <C> <C>
Current:
Federal $113 $20 $ 35
Foreign 29 14 14
State 14 3 9
---- --- ----
156 37 58
==== === ====
Deferred:
Federal 27 36 42
Foreign 3 (1) 8
State 11 7 9
---- --- ----
41 42 59
---- --- ----
Total 197 79 117
==== === ====
</TABLE>
Differences between actual provisions for income taxes and provisions for
income taxes at the U.S. federal statutory rate (35%) were as follows:
<TABLE>
<CAPTION>
(millions) 2004 2003 2002
- ---------- ----- ----- -----
<S> <C> <C> <C>
Taxes on income
at U.S. federal statutory rate $ 178 $ 76 $ 90
Chapter 11 reorganization
expenses 1 3 4
Foreign earnings subject
to different tax rates 2 3 6
State income tax, net of
federal benefit 17 7 11
Valuation allowance adjustment -- (1) 6
Reduction of income tax payable -- (4) --
Other, net (1) (5) --
----- ----- -----
Provision for income taxes 197 79 117
===== ===== =====
Effective income tax rate 38.6% 36.6% 45.6%
===== ===== =====
</TABLE>
Significant components of deferred tax assets and liabilities as of
December 31 were as follows:
<TABLE>
<CAPTION>
(millions) 2004 2003
- ---------- ---- ----
<S> <C> <C>
Deferred Tax Assets:
Pension and postretirement benefits $114 $112
Reserves not deductible until paid:
Asbestos reserves 435 410
Other reserves 20 21
Capitalized interest 9 9
Self insurance 24 25
Net operating loss and tax credit
carryforwards 22 8
Other 12 26
---- ----
Deferred tax assets before valuation
allowance 636 611
Valuation allowance (34) (8)
---- ----
Total deferred tax assets 602 603
==== ====
Deferred Tax Liabilities:
Property, plant and equipment 326 308
Post-petition interest expense 107 73
State taxes 5 11
Derivative instruments 4 8
Inventories 8 5
---- ----
Total deferred tax liabilities 450 405
---- ----
Net deferred tax assets 152 198
==== ====
</TABLE>
A valuation allowance has been established for deferred tax assets relating
to certain foreign and U.S. state net operating loss and tax credit
carryforwards and a portion of the Corporation's reserve for asbestos claims
(U.S. state only) due to uncertainty regarding their ultimate realization. Of
the total valuation allowance as of December 31, 2004, $14 million relates to
the reserve for asbestos claims, $12 million relates to foreign net operating
loss and tax credit carryforwards, and $8 million relates to U.S. state net
operating loss and tax credit carryforwards. The Corporation has net operating
loss and tax credit carryforwards in varying amounts in numerous U.S. state and
foreign jurisdictions. Under applicable law, if not used prior thereto, most of
these carryforwards will expire over periods ranging from five to 20 years.
The income tax receivable of $24 million and $26 million recorded by the
Corporation as of December 31, 2004 and 2003, respectively, relates primarily to
the carryback of various federal and state net operating losses from 2001 and
2002 and the temporary overpayment of taxes in various jurisdictions. The amount
recorded as of December 31, 2004, is expected to be refunded to the Corporation
or utilized to satisfy a portion of its tax liabilities during 2005.
The Corporation's financial statements include amounts recorded for
contingent tax liabilities with
53
<PAGE>
respect to loss contingencies that are deemed probable of occurrence. The
pre-petition portion of such amounts are included in liabilities subject to
compromise on the Corporation's consolidated balance sheets, while the
post-petition portion is included in other liabilities as of December 31, 2003,
and in income taxes payable as of December 31, 2004. These loss contingencies
relate primarily to U.S. federal income tax deductions claimed by the
Corporation with respect to its ceiling tile operations in Belgium (which were
shut down in 2002) and costs incurred with respect to the Chapter 11 Cases. The
Corporation's U.S. income tax returns for 1999 and prior years have been audited
by the Internal Revenue Service and are closed. In the United States, the
Corporation's income tax returns for years after 1999 are open, and the years
2000, 2001 and 2002 are currently under audit by the Internal Revenue Service.
The Corporation does not provide for U.S. income taxes on the portion of
undistributed earnings of foreign subsidiaries that is intended to be
permanently reinvested. The cumulative amount of such undistributed earnings
totaled approximately $381 million as of December 31, 2004. These earnings would
become taxable in the United States upon the sale or liquidation of these
foreign subsidiaries or upon the remittance of dividends. It is not practicable
to estimate the amount of the deferred tax liability on such earnings.
On October 22, 2004, the President signed the American Jobs Creation Act of
2004. This act creates a temporary incentive for U.S. corporations to repatriate
accumulated income earned abroad by providing an 85% dividends received
deduction for certain dividends from controlled foreign corporations. The
deduction is subject to several limitations, and currently, uncertainty remains
as to how to interpret numerous provisions in the act. As a result, the
Corporation is not yet able to determine whether, and to what extent, it will
repatriate foreign earnings that have not yet been remitted to the United
States. Based on the Corporation's analysis to date, however, it is reasonably
possible that the Corporation may repatriate between zero and $50 million of
unremitted foreign earnings as a result of the repatriation provision. It is not
possible at this time to estimate the range of income tax effects of any such
repatriation. The Corporation expects to complete its evaluation of this matter
within a reasonable period of time after the current uncertainty in the law is
resolved.
16. DERIVATIVE INSTRUMENTS
COMMODITY DERIVATIVE INSTRUMENTS
As of December 31, 2004, the Corporation had swap contracts to exchange monthly
payments on notional amounts of natural gas amounting to $258 million. These
contracts mature by December 31, 2007. As of December 31, 2004, the fair value
of these swap contracts, which remained in OCI, was a $7 million ($4 million
after-tax) unrealized gain.
Net after-tax gains or losses resulting from the termination of natural gas
swap contracts are recorded to OCI and reclassified into earnings in the period
in which the hedged forecasted transactions are scheduled to occur. As of
December 31, 2004, $3 million ($2 million after-tax) of such gains are included
in OCI.
FOREIGN EXCHANGE DERIVATIVE INSTRUMENTS
As of December 31, 2004 and 2003, the Corporation had no outstanding forward
contracts to hedge selected risk of changes in cash flows resulting from
forecasted intercompany and third-party sales or purchases denominated in
non-U.S. currencies.
COUNTERPARTY RISK
The Corporation is exposed to credit losses in the event of nonperformance by
the counterparties on its financial instruments. All counterparties have
investment grade credit standing; accordingly, the Corporation anticipates that
these counterparties will be able to satisfy fully their obligations under the
contracts. The Corporation does not generally obtain collateral or other
security to support financial instruments subject to credit risk but monitors
the credit standing of all counterparties. In addition, the Corporation enters
into master agreements which contain netting arrangements that minimize
counterparty credit exposure.
54
<PAGE>
17. SEGMENTS
OPERATING SEGMENTS
<TABLE>
<CAPTION>
(millions) 2004 2003 2002
- ---------- ------ ------ ------
<S> <C> <C> <C>
Net Sales:
North American Gypsum $2,753 $2,299 $2,151
Worldwide Ceilings 688 607 610
Building Products Distribution 1,738 1,295 1,200
Eliminations (670) (535) (493)
------ ------ ------
Total 4,509 3,666 3,468
====== ====== ======
Operating Profit:
North American Gypsum 428 209 261
Worldwide Ceilings 62 39 29
Building Products Distribution 103 53 51
Corporate (73) (77) (71)
Eliminations -- (3) 2
Chapter 11 reorganization
expenses (12) (11) (14)
------ ------ ------
Total 508 210 258
====== ====== ======
Depreciation, Depletion
and Amortization:
North American Gypsum 94 84 79
Worldwide Ceilings 18 19 20
Building Products Distribution 3 4 4
Corporate 5 5 3
------ ------ ------
Total 120 112 106
====== ====== ======
Capital Expenditures:
North American Gypsum 120 97 82
Worldwide Ceilings 14 12 15
Building Products Distribution 2 1 3
Corporate 2 1 --
------ ------ ------
Total 138 111 100
====== ====== ======
Assets:
North American Gypsum 2,042 1,935 1,887
Worldwide Ceilings 438 409 404
Building Products Distribution 417 347 286
Corporate 1,513 1,226 1,148
Eliminations (132) (118) (89)
------ ------ ------
Total 4,278 3,799 3,636
====== ====== ======
</TABLE>
GEOGRAPHIC SEGMENTS
<TABLE>
<CAPTION>
(millions) 2004 2003 2002
- ---------- ------ ------ ------
<S> <C> <C> <C>
Net Sales:
United States $4,065 $3,302 $3,127
Canada 384 330 294
Other Foreign 291 235 243
Geographic transfers (231) (201) (196)
------ ------ ------
Total 4,509 3,666 3,468
====== ====== ======
Long-Lived Assets:
United States 1,684 1,622 1,618
Canada 174 161 119
Other Foreign 123 125 127
------ ------ ------
Total 1,981 1,908 1,864
====== ====== ======
</TABLE>
L&W Supply, which makes up the Building Products Distribution segment,
completed three acquisitions during 2004. These acquisitions, which were
conducted in relation to L&W Supply's strategy to profitably grow its specialty
dealer business, consisted of three distribution locations (one each in Oregon,
Texas and Wisconsin). Total cash payments for these acquisitions amounted to $5
million. As of December 31, 2004, L&W Supply operated out of 186 locations in
the United States.
Transactions between operating and geographic segments are accounted for at
transfer prices that are approximately equal to market value. Intercompany
transfers between operating segments (shown above as eliminations) largely
reflect intercompany sales from U.S. Gypsum to L&W Supply.
No single customer of the Corporation accounted for 10% or more of the
Corporation's 2004, 2003 or 2002 consolidated net sales, except for The Home
Depot, Inc., which, on a worldwide basis, accounted for approximately 11% in
2004 and 2003 and 10% in 2002. Net sales to The Home Depot, Inc. were reported
by all three operating segments.
Revenues are attributed to geographic areas based on the location of the
assets producing the revenues.
Segment operating profit includes all costs and expenses directly related
to the segment involved and an allocation of expenses that benefit more than one
segment. Worldwide Ceilings' operating profit in 2002 included an $11 million
charge related to management's decision to shut down the Aubange, Belgium,
ceiling tile plant and other downsizing activities.
55
<PAGE>
18. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Corporation leases certain of its offices, buildings, machinery and
equipment, and autos under noncancelable operating leases. These leases have
various terms and renewal options. Lease expense amounted to $86 million, $84
million and $77 million in the years ended December 31, 2004, 2003 and 2002,
respectively. Future minimum lease payments required under operating leases with
initial or remaining noncancelable terms in excess of one year as of December
31, 2004, were $73 million in 2005, $65 million in 2006, $48 million in 2007,
$33 million in 2008 and $22 million in 2009. The aggregate obligation subsequent
to 2009 was $122 million.
LETTERS OF CREDIT AND RESTRICTED CASH
The Corporation has a $100 million credit agreement, which expires April 30,
2006, with LaSalle Bank N.A. (the "LaSalle Facility") to be used exclusively to
support the issuance of letters of credit needed to support business operations.
As of December 31, 2004, $35 million of letters of credit under the LaSalle
Facility, which are cash collateralized at 103%, were outstanding.
As of December 31, 2004, a total of $43 million was reported as restricted
cash on the consolidated balance sheet. Restricted cash primarily represented
collateral to support outstanding letters of credit.
LEGAL CONTINGENCIES
See Note 19, Litigation, for information on asbestos litigation, the bankruptcy
proceeding and environmental litigation. See Note 2, Voluntary Reorganization
Under Chapter 11, for additional information on the bankruptcy proceeding.
19. LITIGATION
ASBESTOS AND RELATED BANKRUPTCY LITIGATION
One of the Corporation's subsidiaries, U.S. Gypsum, is among many defendants in
more than 100,000 asbestos lawsuits alleging personal injury or property damage
liability. Most of the asbestos lawsuits against U.S. Gypsum seek compensatory
and, in many cases, punitive damages for personal injury allegedly resulting
from exposure to asbestos-containing products (the "Personal Injury Cases").
Certain of the asbestos lawsuits seek to recover compensatory and, in many
cases, punitive damages for costs associated with the maintenance or removal and
replacement of asbestos-containing products in buildings (the "Property Damage
Cases").
U.S. Gypsum's asbestos liability derives from its sale of certain
asbestos-containing products beginning in the late 1920s. In most cases, the
products were discontinued or asbestos was removed from the formula by 1972, and
no asbestos-containing products were produced after 1978.
In addition to the Personal Injury Cases pending against U.S. Gypsum, two
other Debtors, L&W Supply and Beadex Manufacturing, LLC ("Beadex"), have been
named as defendants in a small number of asbestos personal injury cases.
Recently, the Official Committee of Asbestos Personal Injury Claimants, the
legal representative for future asbestos claimants, and the Official Committee
of Asbestos Property Damage Claimants asserted in a court filing that the
Debtors are liable for the asbestos liabilities of A.P. Green Refractories Co.
("A.P. Green"), a former subsidiary of U.S. Gypsum and USG Corporation.
More information regarding the Property Damage and Personal Injury Cases
against U.S. Gypsum and the asbestos personal injury cases against L&W Supply,
Beadex and A.P. Green is set forth below.
The amount of the Debtors' present and future asbestos liabilities is the
subject of significant dispute in Debtors' Chapter 11 Cases. If the amount of
the Debtors' asbestos liabilities is not resolved through negotiation in the
Chapter 11 Cases or addressed by federal legislation, the amount of those
liabilities may be determined through litigation proceedings in the Chapter 11
Cases, the outcome of which is speculative.
Developments in the Reorganization Proceeding: The Debtors' Chapter 11 Cases are
assigned to Judge Judith K. Fitzgerald, a bankruptcy court judge, and Judge Joy
Flowers Conti, a district court judge, who was recently assigned to the Debtors'
Chapter 11 Cases. Judge Conti has entered an order stating that she will hear
matters relating to estimation of the Debtors' liability for asbestos personal
injury claims. Other matters will be heard by Judge Fitzgerald.
In 2002, the Debtors filed a motion requesting Judge Wolin, the district
court judge then assigned to Debtors' Chapter 11 Cases, to conduct hearings to
substantively estimate the Debtors' liability for asbestos personal injury
claims. The Debtors requested that the Court hear evidence and make rulings
regarding the characteristics of valid asbestos personal injury claims against
the Debtors and then estimate the Debtors'
56
<PAGE>
liability for present and future asbestos personal injury claims based upon
these rulings. One of the key liability issues is whether claimants who do not
have objective evidence of asbestos-related disease have valid claims and are
entitled to be compensated by the Debtors or whether such claimants are entitled
to compensation only if and when they develop asbestos-related disease. Other
important estimation issues include the determination of the characteristics and
number of present and future claimants who are likely to have had any, or
sufficient, exposure to the Debtors' products, whether the particular type of
asbestos present in certain of the Debtors' products during the relevant time
has been shown to cause disease, and what are the appropriate claim values to
apply in the estimation process.
The Official Committee of Asbestos Personal Injury Claimants and the legal
representative for future asbestos claimants oppose the substantive estimation
hearings proposed by the Debtors. The committee and the legal representative
contend that the Debtors' liability for present and future asbestos personal
injury claims should be based on extrapolation from the settlement history of
such claims and not on litigating liability issues in the bankruptcy
proceedings. The committee and the legal representative also contend that the
Bankruptcy Court does not have the power to deny recovery to claimants on the
grounds that they do not have objective evidence of disease or do not have
adequate exposure to the Debtors' products where such claimants, or claimants
with similar characteristics, are compensated in the tort system outside of
bankruptcy.
In response to the Debtors' motion seeking substantive estimation of the
Debtors' asbestos personal injury liability, Judge Wolin issued a Memorandum
Opinion and Order (the "Order") on February 19, 2003, setting forth a procedure
for estimating the Debtors' liability for present and future asbestos personal
injury claims alleging cancer. The Order provides that the court will set a bar
date for the filing of asbestos personal injury claims alleging cancer and that
the court will hold an estimation hearing regarding these claims under 11 U.S.C.
Section 502(c), at which the "debtors will be permitted to present their
defenses."
No timetable was set for implementation of the Order or any hearing on
estimation of the Debtors' liability for cancer claims.
In 2002, the Debtors also filed a motion requesting a ruling that putative
claimants who cannot satisfy objective standards of asbestos-related disease are
not entitled to vote on a Section 524(g) plan. To date, there has been no ruling
or hearing on the motion.
In May 2004, in response to a motion by Debtors and the Official Committee
of Unsecured Creditors, the Third Circuit Court of Appeals issued an opinion and
order directing Judge Wolin to remove himself from presiding over Debtors'
Chapter 11 Cases.
In the third quarter of 2004, the parties, including the committees,
engaged in non-binding mediation relating to the Debtors' asbestos personal
injury liability and the potential terms of a plan of reorganization. The
mediation was conducted before David Geronemus, who was appointed mediator by
Judge Fitzgerald. The mediation has not resulted in an agreement regarding the
Debtors' asbestos liability or the terms of a plan of reorganization.
In September 2004, the Third Circuit Court of Appeals assigned Judge Conti
to Debtors' Chapter 11 Cases to replace Judge Wolin.
In the fourth quarter of 2004, the Debtors other than U.S. Gypsum filed a
complaint for declaratory relief in the Bankruptcy Court requesting a ruling
that the assets of the Debtors other than U.S. Gypsum are not available to
satisfy the asbestos liabilities of U.S. Gypsum. The Official Committee of
Unsecured Creditors has joined the Debtors in this action. In opposition, the
Official Committee of Asbestos Personal Injury Claimants, the legal
representative for future asbestos personal injury claimants, and the Official
Committee of Asbestos Property Damage Claimants filed counterclaims asserting
that the assets of all Debtors should be available to satisfy the asbestos
liabilities of U.S. Gypsum under various asserted legal grounds, including
successor liability, piercing the corporate veil, and substantive consolidation.
If the assets of all Debtors are pooled for the payment of all liabilities,
including the asbestos liabilities of U.S. Gypsum, this could materially and
adversely affect the recovery rights of creditors of Debtors other than U.S.
Gypsum as well as the holders of the Corporation's equity. The Official
Committee of Asbestos Personal Injury Claimants, the legal representative for
future asbestos claimants, and the Official Committee of Asbestos Property
Damage Claimants have also asserted claims seeking a declaratory judgment that
L&W Supply has direct liability for asbestos personal injury claims on the
asserted grounds that L&W Supply distributed asbestos-containing products and
assumed the liabilities of former U.S. Gypsum subsidiaries that distributed such
products.
The Official Committee of Asbestos Personal Injury Claimants, the legal
representative for future
57
<PAGE>
asbestos claimants, and the Official Committee of Asbestos Property Damage
Claimants also have asserted in a court filing that the Debtors are liable for
claims arising from the sale of asbestos-containing products by A.P. Green. They
allege that U.S. Gypsum is liable for A.P. Green's liabilities due to U.S.
Gypsum's acquisition of A.P. Green in 1967. They also allege that the other
Debtors are liable for U.S. Gypsum's liabilities, including the alleged
liabilities of A.P. Green, under various asserted legal grounds, including
successor liability, piercing the corporate veil, and substantive consolidation.
A.P. Green, which manufactured and sold products used in refractories, was
acquired by merger into U.S. Gypsum in 1967 and thereafter operated as a wholly
owned subsidiary of U.S. Gypsum until 1985, at which time A.P. Green became a
wholly owned subsidiary of USG Corporation. In 1988, A.P. Green became a
publicly traded company when its shares were distributed to the stockholders of
USG Corporation. In February 2002, A.P. Green (now known as A.P. Green
Industries, Inc.) as well as its parent company, Global Industrial Technologies,
Inc., and other affiliates filed voluntary petitions for reorganization through
which A.P. Green and its affiliates seek to resolve their asbestos liabilities.
The A.P. Green reorganization proceeding is pending in the United States
Bankruptcy Court for the Western District of Pennsylvania and is captioned In
re: Global Industrial Technologies, Inc. (Case No. 02-21626). The draft
disclosure statement filed in July 2003 by the debtors in the A.P. Green
reorganization proceedings indicates that, in early 2002, there were 235,757
asbestos personal injury claims pending against A.P. Green as well as about
59,000 such claims pending against an A.P. Green affiliate, and that A.P. Green
estimates that several hundred thousand additional claims will be asserted
against it and/or its affiliate. The disclosure statement also indicates that,
in early 2002, A.P. Green had approximately $492 million in unpaid pre-petition
settlements and judgments relating to asbestos personal injury claims. The
disclosure statement does not provide an estimate of the cost of resolving A.P.
Green's liability for pending or future asbestos claims.
The Corporation does not have sufficient information to predict whether or
how any plan of reorganization in the Debtors' Chapter 11 Cases might address
any liability based on sales of asbestos-containing products by A.P. Green. The
Corporation also does not have sufficient information to estimate the amount, or
range of amounts, of A.P. Green's asbestos liabilities. If U.S. Gypsum is
determined to be liable for the sale of asbestos-containing products by A.P.
Green or its affiliates, this result likely would materially increase the amount
of U.S. Gypsum's present and future asbestos liabilities. Such a result could
materially and adversely affect the recovery of other Debtors' pre-petition
creditors and the Corporation's stockholders, depending upon, among other
things, the amount of A.P. Green's alleged asbestos liabilities and whether the
other Debtors are determined to be liable for U.S. Gypsum's liabilities,
including alleged A.P. Green liabilities.
After the assignment of Judge Conti to Debtors' Chapter 11 Cases, the
Debtors renewed their request that the court conduct substantive estimation
hearings regarding Debtors' asbestos personal injury liability and that these
hearings relate to all asbestos personal injury claims, not just those alleging
cancer. The Official Committee of Asbestos Personal Injury Claimants and the
legal representative for future asbestos personal injury claimants renewed their
request that estimation of Debtors' asbestos personal injury liability be based
solely on extrapolation from U.S. Gypsum's settlement history.
As a result of the recent assignment of Judge Conti to the Debtors' Chapter
11 Cases, the Corporation does not know when estimation proceedings regarding
the Debtors' liability for asbestos personal injury claims will occur. The
Corporation also does not know what issues Judge Conti will consider in
conducting estimation proceedings or whether the Court will ultimately address
the validity and voting rights of non-malignant claims where there is no
objective evidence of asbestos-related disease.
With regard to asbestos property damage claims, the Bankruptcy Court
established a bar date requiring all such claims against the Debtors to be filed
by January 15, 2003. Approximately 1,400 asbestos property damage claims were
filed, representing more than 2,000 buildings. In contrast, as of the Petition
Date, 11 Property Damage Cases were pending against U.S. Gypsum. Approximately
500 of the asbestos property damage claims filed by the bar date assert a
specific dollar amount of damages, and the total damages alleged in those claims
is approximately $1.6 billion. However, this amount reflects numerous duplicate
claims filed against multiple Debtors. Approximately 900 claims do not specify a
damage amount. Recently, counsel for the Official Committee of Asbestos Property
Damage Claimants stated in a court hearing that the committee believes that the
amount of
58
<PAGE>
the asbestos property damage claims will reach $1 billion.
Most of the asbestos property damage claims filed do not provide any
evidence that the Debtors' products were ever installed in any of the buildings
at issue. Certain of the proof of claim forms purport to file claims on behalf
of two classes of claimants that were the subject of pre-petition class actions.
One of these claim forms was filed on behalf of a class of colleges and
universities that was certified for certain purposes in a pre-petition lawsuit
filed in federal court in South Carolina. However, many of the putative members
of this class also filed individual claim forms. Four of the claim forms were
filed by a claimant allegedly on behalf of putative members of certified and
uncertified classes in connection with a pre-petition lawsuit pending in South
Carolina state court.
The Debtors believe that they have substantial defenses to many of the
property damage claims, including the lack of evidence that the Debtors'
products were ever installed in the buildings at issue, the failure to file the
claims within the applicable statutes of limitation, and the lack of evidence
that the claimants have any damages. The Debtors intend to address many of these
claims through an objection and disallowance process in the Bankruptcy Court. In
2004, the Debtors began this process by issuing written notices to claimants
that failed to provide evidence that any of the Debtors' products were ever
installed in the buildings at issue. To date, the Debtors have issued these
deficiency notices with regard to more than 1,600 buildings. In December 2004,
the Debtors filed their first objections to a group of claims that did not
provide any evidence that the Debtors' products were installed in the buildings
at issue. Recently, Judge Fitzgerald issued an order disallowing virtually all
of the claims that were the subject of the objection. The Debtors have filed a
second set of objections to certain property damage claims and expect to file
additional objections to deficient asbestos property damage claims. Because of
the preliminary nature of the objection process, the Corporation cannot predict
the outcome of these proceedings or the impact the proceedings may have on the
estimated cost of resolving asbestos property damage claims. See Estimated Cost,
below.
The following is a summary of the Personal Injury and Property Damage Cases
pending against U.S. Gypsum and certain other Debtors as of the Petition Date.
Personal Injury Cases: As reported by the Center for Claims Resolution (the
"Center"), U.S. Gypsum was a defendant in more than 100,000 pending Personal
Injury Cases as of the Petition Date, as well as an additional approximately
52,000 Personal Injury Cases that may be the subject of settlement agreements.
In the first half of 2001, up to the Petition Date, approximately 26,200 new
Personal Injury Cases were filed against U.S. Gypsum, as reported by the Center,
as compared to 27,800 new filings in the first half of 2000.
Prior to the Filing, U.S. Gypsum managed the handling and settlement of
Personal Injury Cases through its membership in the Center. From 1988 up to
February 1, 2001, the Center administered and arranged for the defense and
settlement of Personal Injury Cases against U.S. Gypsum and other Center
members. During that period, costs of defense and settlement of Personal Injury
Cases were shared among the members of the Center pursuant to predetermined
sharing formulas. Effective February 1, 2001, the Center members, including U.S.
Gypsum, ended their prior settlement-sharing arrangement. Up until the Petition
Date, the Center continued to administer and arrange for the defense and
settlement of the Personal Injury Cases, but liability payments were not shared
among the Center members.
In 2000 and years prior, U.S. Gypsum and other Center members negotiated a
number of settlements with plaintiffs' law firms that included agreements to
resolve over time the firms' pending Personal Injury Cases as well as certain
future claims (the "Long-Term Settlements"). With regard to future claims, these
Long-Term Settlements typically provide that the plaintiffs' firms will
recommend to their future clients that they defer filing, or accept nominal
payments on, personal injury claims that do not meet established disease
criteria and, with regard to those claims meeting established disease criteria,
that the future clients agree to settle those claims for specified amounts.
These Long-Term Settlements typically resolve claims for amounts consistent with
historical per-claim settlement costs paid to the plaintiffs' firms involved. As
a result of the Filing, cash payments by U.S. Gypsum under these Long-Term
Settlements have ceased, and U.S. Gypsum expects that its obligations under
these settlements will be determined in the bankruptcy proceedings and plan of
reorganization.
In 2000, U.S. Gypsum closed approximately 57,000 Personal Injury Cases.
U.S. Gypsum's cash payments in 2000 to defend and resolve Personal Injury Cases
totaled $162 million, of which $90 million was
59
<PAGE>
paid or reimbursed by insurance. In 2000, the average settlement per case was
approximately $2,600, exclusive of defense costs. U.S. Gypsum made cash payments
of $100 million in 1999 and $61 million in 1998 to resolve Personal Injury
Cases, of which $85 million and $45.5 million, respectively, were paid or
reimbursed by insurance.
During late 2000 and in 2001, following the bankruptcy filings of other
defendants in asbestos personal injury litigation, plaintiffs substantially
increased their settlement demands to U.S. Gypsum. In response to these
increased settlement demands, U.S. Gypsum attempted to manage its asbestos
liability by contesting, rather than settling, a greater number of cases that it
believed to be non-meritorious. As a result, in the first and second quarters of
2001, U.S. Gypsum agreed to settle fewer Personal Injury Cases, but at a
significantly higher cost per case.
In the first half of 2001, up to the Petition Date, U.S. Gypsum closed
approximately 18,900 Personal Injury Cases. In the first half of 2001, up to the
Petition Date, U.S. Gypsum's total asbestos-related cash payments, including
defense costs, were approximately $124 million, of which approximately $10
million was paid or reimbursed by insurance. A portion of these payments were
for settlements agreed to in prior periods. As of March 31, 2001, U.S. Gypsum
had estimated that cash expenditures for Personal Injury Cases in 2001 would
total approximately $275 million before insurance recoveries of approximately
$37 million.
In addition to the Personal Injury Cases pending against U.S. Gypsum, one
of the Corporation's subsidiaries and a Debtor in the bankruptcy proceedings,
L&W Supply, was named as a defendant in approximately 21 pending Personal Injury
Cases as of the Petition Date. L&W Supply, a distributor of building products
manufactured by U.S. Gypsum and other building products manufacturers, has not
made any payments in the past to resolve Personal Injury Cases.
One of U.S. Gypsum's subsidiaries and a Debtor in the bankruptcy
proceedings, Beadex, manufactured and sold joint compound containing asbestos
from 1963 through 1978 in the northwestern United States. As of the Petition
Date, Beadex was a named defendant in approximately 40 Personal Injury Cases
pending primarily in the states of Washington and Oregon. Beadex has
approximately $11 million in primary or umbrella insurance coverage available to
pay asbestos-related costs, as well as $15 million in available excess coverage.
The Corporation expects that any asbestos-related liability of L&W Supply
and Beadex will be addressed in the plan of reorganization. However, because of,
among other things, the small number of Personal Injury Cases pending against
L&W Supply and Beadex to date, the Corporation does not have sufficient
information at this time to predict how any plan of reorganization will address
any asbestos-related liability of L&W Supply and Beadex.
Property Damage Cases: As of the Petition Date, U.S. Gypsum was a defendant in
11 Property Damage Cases, most of which involved multiple buildings. One of the
cases is a conditionally certified class action comprising 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.). As a result of the Filing,
all Property Damage Cases are stayed against U.S. Gypsum. U.S. Gypsum's
estimated cost of resolving the Property Damage Cases is discussed in Estimated
Cost, below.
Insurance Coverage: As of December 31, 2004, all prior receivables relating to
insurance remaining to cover asbestos-related costs had been collected by U.S.
Gypsum.
Estimated Cost: In 2000, prior to the Filing, an independent consultant
completed an actuarial study of U.S. Gypsum's current and potential future
asbestos liabilities. This study was based on the assumption that U.S. Gypsum's
asbestos liability would continue to be resolved in the tort system.
As part of this study, the Corporation and its independent consultant
considered various factors that would impact the amount of U.S. Gypsum's
asbestos personal injury liability. These factors included the number, disease,
age, and occupational characteristics of claimants in the Personal Injury Cases;
the jurisdiction and venue in which such cases were filed; the viability of
claims for conspiracy or punitive damages; the elimination of indemnity-sharing
among Center members, including U.S. Gypsum, for future settlements and its
negative impact on U.S. Gypsum's ability to continue to resolve claims at
historical or acceptable levels; the adverse impact on U.S. Gypsum's settlement
costs of recent bankruptcies of co-defendants; the possibility of additional
bankruptcies of other defendants; the possibility of significant adverse
60
<PAGE>
verdicts due to recent changes in settlement strategies and related effects on
liquidity; the inability or refusal of former Center members to fund their share
of existing settlements and its effect on such settlement agreements;
allegations that U.S. Gypsum and the other Center members are responsible for
the share of certain settlement agreements that was to be paid by former members
that have refused or are unable to pay; the continued ability to negotiate
settlements or develop other mechanisms that defer or reduce claims from
unimpaired claimants; the possibility that federal legislation addressing
asbestos litigation would be enacted; epidemiological data concerning the
incidence of past and projected future asbestos-related diseases; trends in the
propensity of persons alleging asbestos-related disease to sue U.S. Gypsum; the
pre-agreed settlement recommendations in, and the viability of, the Long-Term
Settlements; anticipated trends in recruitment of non-malignant or unimpaired
claimants by plaintiffs' law firms; and future defense costs. The study
attempted to weigh relevant variables and assess the impact of likely outcomes
on future case filings and settlement costs.
In connection with the Property Damage Cases, the Corporation considered,
among other things, the extent to which claimants could identify the
manufacturer of any alleged asbestos-containing products in the buildings at
issue in each case; the amount of asbestos-containing products at issue; the
claimed damages; the viability of statute of limitations and other defenses; the
amount for which such cases can be resolved, which normally (but not uniformly)
has been substantially lower than the claimed damages; and the viability of
claims for punitive and other forms of multiple damages.
Based upon the results of the actuarial study, the Corporation determined
that, although substantial uncertainty remained, it was probable that asbestos
claims then pending against U.S. Gypsum and future asbestos claims to be filed
against it through 2003 (both property damage and personal injury) could be
resolved in the tort system for an amount between $889 million and $1,281
million, including defense costs, and that within this range the most likely
estimate was $1,185 million. Consistent with this analysis, in the fourth
quarter of 2000, the Corporation recorded a noncash, pretax charge of $850
million to results of operations, which, combined with the previously existing
reserve, increased U.S. Gypsum's reserve for asbestos claims to $1,185 million.
These amounts are stated before tax benefit and are not discounted to present
value. Less than 10% of the reserve was attributable to defense and
administrative costs. At the time of recording this reserve, it was expected
that the reserve amounts would be expended over a period extending several years
beyond 2003, because asbestos cases in the tort system historically had been
resolved an average of three years after filing. The Corporation concluded that
it did not have adequate information to allow it to reasonably estimate U.S.
Gypsum's liability for asbestos claims to be filed after 2003.
Because of the Filing and activities relating to potential federal
legislation addressing asbestos personal injury claims, the Corporation believes
that there is greater uncertainty in estimating the reasonably possible range of
the Debtors' liability for pending and future asbestos claims as well as the
most likely estimate of liability within this range. There are significant
differences in the treatment of asbestos claims in a bankruptcy proceeding as
compared to the tort litigation system. The factors that impact the estimation
of liability for pending and future asbestos claims in a bankruptcy proceeding
and the amount that must be provided in the plan of reorganization for such
liabilities include: (i) the number of present and future asbestos claims that
will be addressed in the plan of reorganization; (ii) the value that will be
paid to present and future claims, including the impact historical settlement
values for asbestos claims may have on the estimation of asbestos liability in
the bankruptcy proceedings; (iii) how claims by individuals who have no
objective evidence of impairment will be treated in the bankruptcy proceedings
and plan of reorganization; (iv) how the Long-Term Settlements will be treated
in the plan of reorganization and whether those settlements will be set aside;
(v) how claims for punitive damages will be treated; (vi) the results of any
litigation proceedings in the Chapter 11 Cases regarding the estimated number or
value of present and future asbestos personal injury claims; (vii) the treatment
of asbestos property damage claims in the bankruptcy proceedings; (viii) the
potential asbestos liability of L&W, Beadex, A.P. Green or any other past or
present affiliates of the Debtors and how any such liability will be addressed
in the bankruptcy proceedings and plan of reorganization; (ix) whether the
assets of all of the Debtors are determined to be available to satisfy the
asbestos liabilities of U.S. Gypsum; (x) how the requirement of Section 524(g)
that 75% of the voting asbestos claimants approve the plan of reorganization
will impact the amount that must be provided in the plan of reorganization for
pending
61
<PAGE>
and future asbestos claims and (xi) the impact any relevant potential federal
legislation may have on the proceedings. See Note 2. Voluntary Reorganization
Under Chapter 11 - Potential Federal Legislation Regarding Asbestos Personal
Injury Claims. In addition, the estimates of the Debtors' asbestos liability
that would be recorded as a result of the bankruptcy proceedings or potential
federal legislation are likely to include all expected future asbestos cases to
be brought against the Debtors (as opposed to the cases filed over a three-year
period) and are likely to be computed using the present value of the estimated
liability. These factors, as well as the uncertainties discussed above in
connection with the resolution of asbestos cases in the tort system, increase
the uncertainty of any estimate of asbestos liability.
Because of the uncertainties associated with estimating the Debtors'
asbestos liability at this stage of the proceedings, no change has been made at
this time to the previously recorded reserve for asbestos claims, except to
reflect certain minor asbestos-related costs incurred since the Filing. The
reserve as of December 31, 2004, was $1,061 million.
Because the Filing and possible federal legislation have changed the basis
upon which the Debtors' asbestos liability would be estimated, there can be no
assurance that the current reserve accurately reflects the Debtors' ultimate
liability for pending and future asbestos claims. At the time the reserve was
increased to its current level in December 2000, the reserve was an estimate of
the cost of resolving in the tort system U.S. Gypsum's asbestos liability for
then-pending claims and those expected to be filed through 2003. Because of the
Filing and the stay of pre-petition asbestos lawsuits, the Debtors have not
participated in the tort system since June 2001 and thus cannot measure the
recorded reserve against actual experience. However, the reserve is generally
consistent with the amount the Corporation estimates that the Debtors would be
required to pay to resolve all of their asbestos liability if the FAIR Bill, in
its current form, is enacted.
As the Chapter 11 Cases and the legislation process proceed, the Debtors
likely will gain more information from which a reasonable estimate of the
Debtors' probable liability for present and future asbestos claims can be
determined. If the FAIR Bill or similar legislation is not enacted, the Debtors'
asbestos liability, as determined through the bankruptcy proceedings, could be
materially greater than the accrued reserve. The Official Committee of Asbestos
Personal Injury Claimants and the legal representative for future asbestos
personal injury claimants have indicated in a court filing that they estimate
that the net present value of the Debtors' liability for present and future
asbestos personal injury claims is approximately $5.5 billion and that the
Debtors are insolvent. The Debtors have stated that they believe they are
solvent if their asbestos liabilities are fairly and appropriately valued. When
the Debtors determine that there is a reasonable basis for revision of the
estimate of their asbestos liability, the reserve will be adjusted, and it is
possible that a charge to results of operations will be necessary at that time.
In such a case, the Debtors' asbestos liability could vary significantly from
the recorded estimate of liability and could be greater than the high end of the
range estimated in 2000. This difference could be material to the Corporation's
financial position, cash flows and results of operations in the period recorded.
Bond to Secure Certain Center Obligations: In January 2001, U.S. Gypsum
obtained a performance bond from Safeco Insurance Company of America ("Safeco")
in the amount of $60.3 million to secure certain obligations of U.S. Gypsum for
extended payout settlements of Personal Injury Cases and other obligations owed
by U.S. Gypsum to the Center. The bond is secured by an irrevocable letter of
credit obtained by the Corporation in the amount of $60.3 million and issued by
JPMorgan Chase Bank (formerly Chase Manhattan Bank) ("JPMorgan Chase") to
Safeco. After the Filing, by a letter dated November 16, 2001, the Center made a
demand to Safeco for payment of $15.7 million under the bond, and, by a letter
dated December 28, 2001, the Center made a demand to Safeco for payment of
approximately $127 million under the bond. The amounts for which the Center made
demand were for the payment of, among other things, settlements of Personal
Injury Cases that were entered into pre-petition. The total amount demanded by
the Center under the bond, approximately $143 million, exceeds the original
penal sum of the bond, which is $60.3 million. Safeco has not made any payment
under the bond.
On November 30, 2001, the Corporation and U.S. Gypsum filed an Adversary
Complaint in the Chapter 11 Cases to, among other things, enjoin the Center from
drawing on the bond and enjoin Safeco from paying on the bond during the
pendency of these bankruptcy proceedings. This Adversary Proceeding is pending
in the United States Bankruptcy Court for the District of Delaware and is
captioned USG Corporation and United States Gypsum Company v. Center for Claims
Resolution, Inc. and Safeco Insurance Company of
62
<PAGE>
America, No. 01-08932. Judge Wolin consolidated the Adversary Proceeding with
similar adversary proceedings brought by Federal-Mogul Corp., et al., and
Armstrong World Industries, Inc., et al., in their bankruptcy proceedings.
The parties filed cross-motions for summary judgment in the consolidated
proceedings. On March 28, 2003, in response to the cross-motions for summary
judgment, Judge Wolin issued an order and memorandum opinion which granted in
part and denied in part the Center's motion for summary judgment. Although the
court ruled that Safeco is not required to remit any surety bond proceeds to the
Center at this time, the court stated that certain settlements that were
completed before U.S. Gypsum's Petition Date likely are covered by the surety
bond but that the bond does not cover settlement payments that were not yet
completed as of the Petition Date. The court did not rule on whether the bond
covers other disputed obligations and reserved these issues to a subsequent
phase of the litigation. As a result of the court's decision, it is likely that,
absent a settlement of this matter, some portion of the bond may be drawn but
that the amount drawn may be substantially less than the full amount of the
bond. To the extent that Safeco were to pay all or any portion of the bond, it
is likely that Safeco would draw down the JPMorgan Chase letter of credit to
cover the bond payment and JPMorgan Chase would assert a pre-petition claim in a
corresponding amount against the Corporation in the bankruptcy proceedings.
It is expected that the Center bond litigation will be addressed by Judge
Conti, who was recently appointed to preside over the Debtors' Chapter 11 Cases.
Conclusion: There are many uncertainties associated with the resolution of the
asbestos liability in the bankruptcy proceeding. The Corporation will continue
to review its asbestos liability as the Chapter 11 Cases progress and as issues
relating to the estimation of the Debtors' asbestos liabilities are addressed.
If such review results in the Debtors' estimate of the probable liability for
present and future asbestos claims being different from the existing reserve,
the reserve will be adjusted, and such adjustment could be material to the
Corporation's financial position, cash flows and results of operations in the
period recorded.
SILICA LITIGATION
During the 10 years prior to the Filing, Debtor U.S. Gypsum was named as a
defendant in approximately 10 lawsuits claiming personal injury from exposure to
silica allegedly from U.S. Gypsum products. The claims against U.S. Gypsum in
silica personal injury lawsuits pending at the time of the Filing were stayed as
a result of the Filing. Only one proof of claim alleging silica personal injury
liability was filed against any of the Debtors as of the bar date in the
Bankruptcy Case. However, it has been estimated that tens of thousands of silica
personal injury lawsuits have been filed against other defendants nationwide in
recent years.
In the fourth quarter of 2004, U.S. Gypsum was served with 17 complaints
involving more that 400 plaintiffs alleging personal injury resulting from
exposure to silica. These complaints were filed in various Mississippi state
courts, and each names from 178 to 195 defendants. U.S. Gypsum expects that the
claims against it in these lawsuits will be stayed as a result of the Filing.
The Corporation does not have sufficient information to estimate the likely cost
of resolving these claims. However, the Corporation believes that it has
significant defenses to these claims if they are allowed to proceed. The
Corporation has provided notice of these recent complaints to its insurance
carriers.
ENVIRONMENTAL LITIGATION
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. In most 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 estimated undiscounted 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 Corporation-owned property
also are covered by reserves established in accordance with the foregoing. The
Debtors have been given permission by the Bankruptcy Court to satisfy
environmental obligations up to $12 million. The Corporation believes that
neither these matters nor any
63
<PAGE>
other known governmental proceedings regarding environmental matters will have a
material adverse effect upon its financial position, cash flows or results of
operations.
20. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Quarter
(millions, except ------------------------------------
share data) First Second Third Fourth
- ----------------- -------- ------ ------ -------
<S> <C> <C> <C> <C>
2004:
Net sales $1,020 $1,145 $1,175 $1,169
Gross profit 171 216 234 216
Operating profit 92 133 148 135
Net earnings 57 80 90 85
Per Common Share:
Basic (a) 1.33 1.86 2.10 1.98
Diluted 1.33 1.86 2.10 1.97
2003:
Net sales 862 914 963 927
Gross profit 117 134 147 147
Operating profit 35 50 67 58
Net earnings 6(b) 31 39 46
Per Common Share:
Basic 0.13 0.73 0.89 1.07
Diluted 0.13 0.73 0.89 1.07
</TABLE>
(a) The sum of the four quarters is not the same as the total for the year.
(b) Includes a noncash, after-tax charge for asset retirement obligations of
$16 million related to the adoption of SFAS No. 143. Earnings before
cumulative effect of accounting change were $22 million, or $0.50 per share
(basic and diluted).
64
<PAGE>
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of USG Corporation:
We have audited the accompanying consolidated balance sheets of USG Corporation
(a Delaware Corporation) and subsidiaries as of December 31, 2004 and 2003 and
the related consolidated statements of earnings, cash flows and stockholders'
equity for each of the three years in the period ended December 31, 2004. Our
audits also included the accompanying financial statement schedules, Schedule II
- - Valuation and Qualifying Accounts. These financial statements and financial
statement schedules are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on the financial statements and
financial statement schedules based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of USG Corporation and
subsidiaries as of December 31, 2004 and 2003, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2004, in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, such financial statement
schedules, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
As discussed in Note 2 to the consolidated financial statements, USG
Corporation and certain subsidiaries voluntarily filed for Chapter 11 bankruptcy
protection on June 25, 2001 (the "Filing"). The accompanying financial
statements do not purport to reflect or provide for the consequences of the
bankruptcy proceedings. In particular, such financial statements do not purport
to show (a) as to assets, their realizable value on a liquidation basis or their
availability to satisfy liabilities; (b) as to pre-petition liabilities, the
amounts that may be allowed for claims or contingencies, or the status and
priority thereof; (c) as to stockholder accounts, the effect of any changes that
may be made in the capitalization of the Corporation; or (d) as to operations,
the effect of any changes that may be made in its business.
The accompanying consolidated financial statements have been prepared
assuming that the Corporation will continue as a going concern. As discussed in
Note 2 to the consolidated financial statements, there is significant
uncertainty as to the resolution of the Corporation's asbestos litigation,
which, among other things, may lead to possible changes in the composition of
the Corporation's business portfolio, as well as changes in the ownership of the
Corporation. This uncertainty raises substantial doubt about the Corporation's
ability to continue as a going concern. Management's plans concerning this
matter are also described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
As discussed in Note 12, effective January 1, 2003, the Corporation changed
its method of accounting for asset retirement obligations upon adoption of
Statement of Financial Accounting Standards (SFAS) No. 143, "Accounting for
Asset Retirement Obligations."
As discussed in Note 9, effective January 1, 2002, the Corporation changed
its method of accounting for goodwill and intangible assets upon adoption of
SFAS No. 142, "Goodwill and Other Intangible Assets."
We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of the
Corporation's internal control over financial reporting as of December 31, 2004,
based on criteria established in Internal Control - Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated February 8, 2005, expressed an unqualified opinion on management's
assessment of the effectiveness of the Corporation's internal control over
financial reporting and an unqualified opinion on the effectiveness of the
Corporation's internal control over financial reporting.
(DELOITTE & TOUCHE LLP)
Chicago, Illinois
February 8, 2005
65
<PAGE>
USG CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Beginning Ending
(millions) Balance Additions (a) Deductions (b) Balance
- ---------- --------- ------------- -------------- -------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 2004:
Doubtful accounts $12 $ 5 $ (6) $11
Cash discounts 3 43 (43) 3
YEAR ENDED DECEMBER 31, 2003:
Doubtful accounts 14 2 (4) 12
Cash discounts 3 50 (50) 3
YEAR ENDED DECEMBER 31, 2002:
Doubtful accounts 13 5 (4) 14
Cash discounts 4 53 (54) 3
</TABLE>
(a) Reflects provisions charged to earnings.
(b) Reflects receivables written off as related to doubtful accounts and
discounts allowed as related to cash discounts.
66
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9a. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES.
The Corporation's chief executive officer and chief financial officer, after
evaluating the effectiveness of the Corporation's "disclosure controls and
procedures" (as defined in Rule 13a-15(e) of the Securities Exchange Act of
1934), have concluded that, as of the end of the fiscal year covered by this
report on Form 10-K, the Corporation's disclosure controls and procedures were
adequate and designed to ensure that material information relating to the
Corporation and its consolidated subsidiaries would be made known to them by
others within those entities.
(a) MANAGEMENT REPORT ON INTERNAL CONTROLS OVER FINANCIAL REPORTING
The management of USG Corporation and its subsidiaries (the "Corporation") is
responsible for establishing and maintaining adequate internal control over
financial reporting. The Corporation's internal control system was designed to
provide reasonable assurance to management and the Corporation's board of
directors regarding the preparation and fair presentation of published financial
statements.
All internal control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be effective can
provide only reasonable assurance with respect to financial statement
preparation and presentation.
Management assessed the effectiveness of the Corporation's internal control
over financial reporting as of December 31, 2004. In making this assessment,
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission ("COSO") in Internal Control -
Integrated Framework. Based on its assessment, management believes that, as of
December 31, 2004, the Corporation's internal control over financial reporting
is effective based on those criteria.
The Corporation's independent auditors have issued an audit report on
management's assessment of internal control over financial reporting. This
report appears below.
February 8, 2005
(b) REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of USG Corporation:
We have audited management's assessment, included in the accompanying Management
Report on Internal Controls Over Financial Reporting, that USG Corporation and
subsidiaries (the "Corporation") maintained effective internal control over
financial reporting as of December 31, 2004, based on criteria established in
Internal Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission ("COSO"). The Corporation's management
is responsible for maintaining effective internal control over financial
reporting and for its assessment of the effectiveness of internal control over
financial reporting. Our responsibility is to express an opinion on management's
assessment and an opinion on the effectiveness of the Corporation's internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an
67
<PAGE>
understanding of internal control over financial reporting, evaluating
management's assessment, testing and evaluating the design and operating
effectiveness of internal control, and performing such other procedures as we
considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinions.
A corporation's internal control over financial reporting is a process
designed by, or under the supervision of, the corporation's principal executive
and principal financial officers, or persons performing similar functions, and
effected by the corporation's board of directors, management, and other
personnel to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A corporation's
internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of
the corporation; (2) provide reasonable assurance that transactions are recorded
as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the corporation are being made only in accordance with authorizations of
management and directors of the corporation; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition,
use, or disposition of the corporation's assets that could have a material
effect on the financial statements.
Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not be
prevented or detected on a timely basis. Also, projections of any evaluation of
the effectiveness of the internal control over financial reporting to future
periods are subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
In our opinion, management's assessment that the Corporation maintained
effective internal control over financial reporting as of December 31, 2004, is
fairly stated, in all material respects, based on the criteria established in
COSO. Also in our opinion, the Corporation maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2004,
based on the criteria established in COSO.
We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the accompanying
consolidated balance sheets of USG Corporation and subsidiaries as of December
31, 2004 and 2003 and the related consolidated statements of earnings, cash
flows and stockholders' equity for each of the three years in the period ended
December 31, 2004. Our audit also included the accompanying financial statement
schedules, Schedule II - Valuation and Qualifying Accounts. Our report dated
February 8, 2005 expressed an unqualified opinion on those financial statements
and accompanying financial statement schedules and included an explanatory
paragraph regarding (i) matters which raise substantial doubt about the
Corporation's ability to continue as a going concern and (ii) changes in methods
of accounting for asset retirement obligations and goodwill and other intangible
assets due to the Corporation's adoption of Statement of Financial Accounting
Standards ("SFAS") No. 143, "Accounting for Asset Retirement Obligations" in
2003, and SFAS No. 142, "Goodwill and Other Intangible Assets" in 2002.
(DELOITTE & TOUCHE LLP)
Chicago, Illinois
February 8, 2005
(c) CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING.
There was no change in the Corporation's "internal control over financial
reporting" (as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934)
identified in connection with the evaluation required by Rule 13a-15(d) of the
Securities Exchange Act of 1934 that occurred during the fourth quarter of the
fiscal year covered by this report on Form 10-K that has materially affected, or
is reasonably likely to materially affect, the Corporation's internal control
over financial reporting.
68
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS OF THE REGISTRANT (AS OF FEBRUARY 18, 2005):
<TABLE>
<CAPTION>
NAME, AGE AND PRESENT POSITION
PRESENT POSITION BUSINESS EXPERIENCE DURING THE LAST FIVE YEARS HELD SINCE
- ---------------- ---------------------------------------------- ----------------
<S> <C> <C>
William C. Foote, 53 Same position. August 1999
Chairman, Chief Executive Officer
and President
Edward M. Bosowski, 50 President and Chief Executive Officer, United March 2004
Executive Vice President, Marketing States Gypsum Company, to November 2000;
and Corporate Strategy; President, President, Growth Initiatives and
USG International International, to February 2001; Senior Vice
President, Marketing and Corporate Strategy;
President, USG International, to February
2004.
Stanley L. Ferguson, 52 Associate General Counsel to May 2000; Vice March 2004
Executive Vice President and President and General Counsel to May 2001;
General Counsel Senior Vice President and General Counsel to
February 2004.
Richard H. Fleming, 57 Same position. February 1999
Executive Vice President and
Chief Financial Officer
James S. Metcalf, 47 Executive Vice President and Chief Operating March 2004
Executive Vice President; Officer, L&W Supply Corporation, to March
President, Building Systems 2000; President and Chief Executive Officer,
L&W Supply Corporation, to March 2002; Senior
Vice President; President, Building Systems,
to February 2004.
Brian J. Cook, 47 Vice President, Human Resources to February February 2005
Senior Vice President, Human 2005.
Resources
Marcia S. Kaminsky, 46 Vice President, Communications to February February 2005
Senior Vice President, 2005.
Communications
Karen L. Leets, 48 Assistant Treasurer, McDonald's Corporation, March 2003
Vice President and Treasurer to March 2003.
Michael C. Lorimer, 65 Vice President, Operations, L&W Supply March 2002
Vice President; President and Chief Corporation, to March 2002.
Operating Officer, L&W Supply
Corporation
</TABLE>
69
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE AND PRESENT POSITION
PRESENT POSITION BUSINESS EXPERIENCE DURING THE LAST FIVE YEARS HELD SINCE
- ---------------- ---------------------------------------------- ----------------
<S> <C> <C>
D. Rick Lowes, 50 Vice President and Treasurer, USG Corporation, October 2002
Vice President and Controller to October 2002.
Peter K. Maitland, 63 Same position. February 1999
Vice President, Compensation,
Benefits and Administration
Donald S. Mueller, 57 Vice President of Research and Chief February 2005
Vice President, Research and Technology Officer, Ashland Specialty Chemical
Development Co., to October 2003; Director, Industrial and
State Relations for Environmental Science
Institute, Ohio State University, to December
2004.
Clarence B. Owen, 56 Senior Vice President, International, USG January 2003
Vice President and Chief Interiors, Inc., to May 2001; Vice President
Technology Officer to May 2001; Vice President, International and
Technology, to January 2003.
John Eric Schaal, 61 Assistant General Counsel to August 2000; February 2002
Corporate Secretary and Associate General Counsel to February 2002.
Associate General Counsel
</TABLE>
COMMITTEE CHARTERS AND CODE OF BUSINESS CONDUCT
The Corporation's code of business conduct and ethics (which applies to
directors, officers and employees and is known as the Code of Business Conduct),
its corporate governance guidelines, and the charters of committees of the board
of directors, including the audit committee, governance committee, and
compensation and organization committee, are available on the Corporation's
website at www.usg.com. Shareholders may request a copy of this information by
writing to: J. Eric Schaal, Corporate Secretary and Associate General Counsel,
USG Corporation, P.O. Box 6721, Chicago, IL 60680-6721. Any waivers of, or
changes to, the Corporation's Code of Business Conduct that apply to the
Corporation's executive officers, directors, or persons performing similar
functions, will be promptly disclosed on the Corporation's website in the
"Investors" section, as required by the Securities and Exchange Commission and
the New York Stock Exchange ("NYSE").
Following the annual meeting of stockholders held on May 12, 2004, the CEO
of the Corporation filed a certificate with the NYSE declaring that he was not
aware of any violation by the Corporation of the NYSE's Corporate Governance
Listing Standards.
Other information required by Item 10 is included in the Corporation's
definitive Proxy Statement, which is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information required by Item 11 is included in the Corporation's definitive
Proxy Statement, which is incorporated herein by reference.
70
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth information about the Corporation's common stock
that may be issued upon exercise of options, and rights associated with any such
option exercises, under all of the Corporation's equity compensation plans as of
December 31, 2004, including the Long-Term Incentive Plan and Omnibus Management
Incentive Plan. Each of the plans was approved by the Corporation's
stockholders.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
FUTURE ISSUANCE UNDER
NUMBER OF SECURITIES TO WEIGHTED AVERAGE EQUITY COMPENSATION
BE ISSUED UPON EXERCISE EXERCISE PRICE OF PLANS (EXCLUDING
OF OUTSTANDING OPTIONS OUTSTANDING OPTIONS AND SECURITIES REPORTED IN
PLAN CATEGORY AND RIGHTS RIGHTS COLUMN ONE)
- ------------- ----------------------- ----------------------- -----------------------
<S> <C> <C> <C>
Equity compensation
plans approved by
stockholders 1,932,100 $37.66 2,975,620
Equity compensation
plans not approved by
stockholders -- -- --
--------- ------ ---------
Total 1,932,100 37.66 2,975,620
========= ====== =========
</TABLE>
Other information required by Item 12 is included in the Corporation's
definitive Proxy Statement, which is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information required by Item 13 is included in the Corporation's definitive
Proxy Statement, which is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information required by Item 14 is included in the Corporation's definitive
Proxy Statement, which is incorporated herein by reference.
71
<PAGE>
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) 1. and 2. See Part II, Item 8. Financial Statements and Supplementary Data
for an index of the Corporation's consolidated financial statements and
supplementary data schedule.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER 3. EXHIBITS (REG. S-K, ITEM 601)
- ------- ----------------------------------------------------------------------
<S> <C>
ARTICLES OF INCORPORATION AND BY-LAWS:
3.1 Restated Certificate of Incorporation of USG Corporation (incorporated
by reference to Exhibit 3.1 of USG Corporation's Form 8-K, dated May
7, 1993).
3.2 Certificate of Designation of Junior Participating Preferred Stock,
series D, of USG Corporation (incorporated by reference to Exhibit A
of Exhibit 4 to USG Corporation's Form 8-K, dated March 27, 1998).
3.3 Amended and Restated By-Laws of USG Corporation, dated as of May 12,
2004 (incorporated by reference to Exhibit 3 (ii) of USG Corporation's
Form 10-Q dated July 30, 2004).
INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES:
4.1 Indenture dated as of October 1, 1986, between USG Corporation and
National City Bank of Indiana, successor Trustee to Bank One, which
was successor Trustee to Harris Trust and Savings Bank (incorporated
by reference to Exhibit 4(a) of USG Corporation's Registration
Statement No. 33-9294 on Form S-3, dated October 7, 1986).
4.2 Rights Agreement dated March 27, 1998, between USG Corporation and
Harris Trust and Savings Bank, as Rights Agent (incorporated by
reference to Exhibit 4 of USG Corporation's Form 8-K, dated March 27,
1998).
4.3 Form of Common Stock certificate (incorporated by reference to Exhibit
4.4 to USG Corporation's Form 8-K, dated May 7, 1993).
The Corporation and certain of its consolidated subsidiaries are
parties to long-term debt instruments under which the total amount of
securities authorized does not exceed 10% of the total assets of the
Corporation and its subsidiaries on a consolidated basis. Pursuant to
paragraph (b)(4)(iii)(A) of Item 601 of Regulation S-K, the
Corporation agrees to furnish a copy of such instruments to the
Securities and Exchange Commission upon request.
MATERIAL CONTRACTS:
10.1 Management Performance Plan of USG Corporation (incorporated by
reference to Annex C of Amendment No. 8 to USG Corporation's
Registration Statement No. 33-40136 on Form S-4, dated February 3,
1993). *
10.2 First Amendment to Management Performance Plan, effective November 15,
1993, and dated February 1, 1994 (incorporated by reference to Exhibit
10(aq) of Amendment No. 1 of USG Corporation's Registration Statement
No. 33-51845 on Form S-1). *
</TABLE>
72
<PAGE>
<TABLE>
<S> <C>
10.3 Second Amendment to Management Performance Plan, dated June 27, 2000
(incorporated by reference to Exhibit 10(a) of USG Corporation's Form
10-Q, dated November 6, 2000). *
10.4 Amendment and Restatement of USG Corporation Supplemental Retirement
Plan, effective July 1, 1997, and dated August 25, 1997 (incorporated
by reference to Exhibit 10(c) of USG Corporation's Annual Report on
Form 10-K, dated February 20, 1998). *
10.5 First Amendment to Supplemental Retirement Plan, effective July 1,
1997 (incorporated by reference to Exhibit 10(d) of USG Corporation's
Annual Report on Form 10-K, dated February 26, 1999). *
10.6 Second Amendment to Supplemental Retirement Plan, effective November
8, 2000 (incorporated by reference to Exhibit 10(f) of USG
Corporation's Annual Report on Form 10-K, dated March 5, 2001). *
10.7 Third Amendment to Supplemental Retirement Plan, effective November 8,
2000 (incorporated by reference to Exhibit 10(g) of USG Corporation's
Annual Report on Form 10-K, dated March 5, 2001). *
10.8 Fourth Amendment to Supplemental Retirement Plan, effective April 11,
2001 (incorporated by reference to Exhibit 10(a) of USG Corporation's
Form 10-Q, dated March 31, 2001). *
10.9 Fifth Amendment to Supplemental Retirement Plan, effective December
21, 2001 (incorporated by reference to Exhibit 10(i) of USG
Corporation's Annual Report on Form 10-K, dated March 1, 2002). *
10.10 Sixth Amendment to Supplemental Retirement Plan, effective January 1,
2005 (incorporated by reference to Exhibit 10.3 of USG Corporation's
Form 8-K, dated November 17, 2004). *
10.11 Form of Termination Compensation Agreement, dated January 1, 2000
(incorporated by reference to Exhibit 10(e) of USG Corporation's
Annual Report on Form 10-K, dated February 29, 2000). *
10.12 Form of Indemnification Agreement (incorporated by reference to
Exhibit 10(g) of Amendment No. 1 to USG Corporation's Registration
Statement No. 33-51845 on Form S-1).
10.13 Form of Employment Agreement, dated January 1, 2000 (incorporated by
reference to Exhibit 10(g) of USG Corporation's Annual Report on Form
10-K, dated February 29, 2000). *
10.14 Five-Year Credit Agreement, dated as of June 30, 2000, among USG
Corporation and the banks listed on the signature pages thereto and
The Chase Manhattan Bank, as Administrative Agent (incorporated by
reference to Exhibit 10(a) of USG Corporation's Form 10-Q, dated
August 7, 2000).
10.15 364-Day Credit Agreement, dated as of June 30, 2000, among USG
Corporation and the banks listed on the signature pages thereto and
The Chase Manhattan Bank, as Administrative Agent (incorporated by
reference to Exhibit 10(b) of USG Corporation's Form 10-Q, dated
August 7, 2000).
10.16 Master Letter of Credit Agreement, Rider to Master Letter of Credit
Agreement, and Related Pledge Agreement, Acknowledgement Agreement if
Collateral Held at LaSalle Bank National Association Trust Department,
LaSalle Bank National Association Trust Department Internal, Pledge
Agreement between USG Corporation and LaSalle Bank National
Association, dated June 11, 2003 (incorporated by reference to Exhibit
10 of USG Corporation's Form 10-Q, dated June 30, 2003).
</TABLE>
73
<PAGE>
<TABLE>
<S> <C>
10.17 1995 Long-Term Equity Plan of USG Corporation (incorporated by
reference to Annex A to USG Corporation's Proxy Statement and Proxy,
dated March 31, 1995). *
10.18 First Amendment to 1995 Long-Term Equity Plan of USG Corporation,
dated June 27, 2000 (incorporated by reference to Exhibit 10(b) of USG
Corporation's Form 10-Q, dated November 6, 2000). *
10.19 2004 Annual Management Incentive Program - USG Corporation. * **
10.20 2005 Annual Management Incentive Program - USG Corporation - with
revisions approved on February 9, 2005 (incorporated by reference to
Exhibit 10.1 of USG Corporation's Form 8-K, dated February 15,
2005). *
10.21 Omnibus Management Incentive Plan (incorporated by reference to Annex
A to USG Corporation's Proxy Statement and Proxy, dated March 28,
1997). *
10.22 First Amendment to Omnibus Management Incentive Plan, dated November
11, 1997 (incorporated by reference to Exhibit 10(p) of USG
Corporation's Annual Report on Form 10-K, dated February 20, 1998). *
10.23 Second Amendment to Omnibus Management Incentive Plan, dated as of
June 27, 2000 (incorporated by reference to Exhibit 10(c) of USG
Corporation's Form 10-Q, dated November 6, 2000). *
10.24 Third Amendment to Omnibus Management Incentive Plan, dated as of
March 25, 2004. * **
10.25 Amended and Restated Stock Compensation Program for Non-Employee
Directors of USG Corporation, dated July 1, 1997 (incorporated by
reference to Exhibit 10(q) of USG Corporation's Annual Report on Form
10-K, dated February 20, 1998). *
10.26 Key Employee Retention Plan, dated May 16, 2001, as amended September
20, 2001 (incorporated by reference to Exhibit 10(v) of USG
Corporation's Annual Report on Form 10-K, dated March 1, 2002). *
10.27 Key Employee Retention Plan (July 1, 2004 - December 31, 2005), dated
July 1, 2004, (incorporated by reference to Exhibit 10 of USG
Corporation's Form 10-Q, dated July 30, 2004). *
10.28 Senior Executive Severance Plan, dated May 16, 2001, as amended
September 20, 2001 (incorporated by reference to Exhibit 10(w) of USG
Corporation's Annual Report on Form 10-K, dated March 1, 2002). *
10.29 Senior Executive Severance Plan, dated January 1, 2005. * **
10.30 Revolving Credit and Guaranty Agreement, dated as of June 25, 2001,
among USG Corporation and certain of its subsidiaries, as debtors, USG
Foreign Investments, Ltd., as guarantor, and The Chase Manhattan Bank,
as agent and lender, and the other lenders named therein (incorporated
by reference to Exhibit 10(x) of USG Corporation's Annual Report on
Form 10-K, dated March 1, 2002).
10.31 First Amendment to Revolving Credit and Guaranty Agreement, dated
August 2, 2001 (incorporated by reference to Exhibit 10(y) of USG
Corporation's Annual Report on Form 10-K, dated March 1, 2002).
10.32 Second Amendment to Revolving Credit and Guaranty Agreement, dated
August 24, 2001 (incorporated by reference to Exhibit 10(z) of USG
Corporation's Annual Report on Form 10-K, dated March 1, 2002).
</TABLE>
74
<PAGE>
<TABLE>
<S> <C>
10.33 Third Amendment to Revolving Credit and Guaranty Agreement, dated
December 10, 2001 (incorporated by reference to Exhibit 10(aa) of USG
Corporation's Annual Report on Form 10-K, dated March 1, 2002).
10.34 Fourth Amendment to Revolving Credit and Guaranty Agreement, dated
August 9, 2002 (incorporated by reference to Exhibit 10.28 of USG
Corporation's Annual Report on Form 10-K, dated February 27, 2003).
10.35 Security and Pledge Agreement, dated June 25, 2001, among USG
Corporation and each of its direct and indirect subsidiaries party to
the Credit Agreement, other than USG Foreign Investments, Ltd., and
The Chase Manhattan Bank (incorporated by reference to Exhibit 10(ab)
of USG Corporation's Annual Report on Form 10-K, dated March 1, 2002).
10.36 Amendment and Restatement of USG Corporation Retirement Plan, dated
December 29, 1999. * **
10.37 First Amendment of USG Corporation Retirement Plan, dated May 22,
2001. * **
10.38 Second Amendment of USG Corporation Retirement Plan, dated December
21, 2001 (incorporated by reference to Exhibit 10(ac) of USG
Corporation's Annual Report on Form 10-K, dated March 1, 2002). *
10.39 Third Amendment of USG Corporation Retirement Plan, dated August 22,
2002 (incorporated by reference to Exhibit 10.31 of USG Corporation's
Annual Report on Form 10-K, dated February 27, 2003). *
10.40 Fourth Amendment of USG Corporation Retirement Plan, dated November 4,
2004 (incorporated by reference to Exhibit 10.2 to USG Corporation's
Form 8-K, dated November 17, 2004). *
OTHER:
21 Subsidiaries **
23 Consents of Experts and Counsel **
24 Power of Attorney **
31.1 Rule 13a - 14(a) Certifications of USG Corporation's Chief Executive
Officer **
31.2 Rule 13a - 14(a) Certifications of USG Corporation's Chief Financial
Officer **
32.1 Section 1350 Certifications of USG Corporation's Chief Executive
Officer **
32.2 Section 1350 Certifications of USG Corporation's Chief Financial
Officer **
</TABLE>
- ----------
* Management contract or compensatory plan or arrangement required to be
filed as an exhibit pursuant to Item 15 of Form 10-K.
** Filed or furnished herewith.
75
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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
February 18, 2005
By: /s/ Richard H. Fleming
-------------------------------
Richard H. Fleming
Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the date indicated.
/s/ William C. Foote February 18, 2005
- ---------------------------------------
WILLIAM C. FOOTE
Chairman, Chief Executive Officer
and President
(Principal Executive Officer)
/s/ Richard H. Fleming February 18, 2005
- ---------------------------------------
RICHARD H. FLEMING
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
/s/ D. Rick Lowes February 18, 2005
- ---------------------------------------
D. RICK LOWES
Vice President and Controller
(Principal Accounting Officer)
ROBERT L. BARNETT, KEITH A. BROWN, ) By: /s/ Richard H. Fleming
JAMES C. COTTING, LAWRENCE M. CRUTCHER, -------------------------------
W. DOUGLAS FORD, DAVID W. FOX, ) Richard H. Fleming
VALERIE B. JARRETT, MARVIN E. LESSER, ) Attorney-in-fact
JOHN B. SCHWEMM, JUDITH A. SPRIESER ) Pursuant to Power of Attorney
Directors ) (Exhibit 23 hereto)
) February 18, 2005
76
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.19
<SEQUENCE>2
<FILENAME>c92112exv10w19.txt
<DESCRIPTION>2004 ANNUAL MANAGEMENT INCENTIVE PROGRAM
<TEXT>
<PAGE>
EXHIBIT 10-19
YEAR 2004
ANNUAL
MANAGEMENT INCENTIVE
PROGRAM
USG CORPORATION
<PAGE>
PURPOSE
To enhance USG Corporation's ability to attract, motivate, reward and retain key
employees of the Corporation and its operating subsidiaries and to align
management's interests with those of the Corporation's stockholders by providing
incentive award opportunities to managers who make a measurable contribution to
the Corporation's business objectives.
INTRODUCTION
This Annual Management Incentive Program (the "Program") is in effect from
January 1, 2004 through December 31, 2004.
ELIGIBILITY
Individuals eligible for participation in this Program are those officers and
other key employees occupying management positions in Broadband 11 or higher.
Employees who participate in any other annual incentive program of the
Corporation or any of its subsidiaries are not eligible to participate in this
Program but could be considered for special awards.
GOALS
For the 2004 Annual Management Incentive Program, Consolidated Net Earnings and
consolidated, subsidiary and profit center Strategic Focus Targets will be
determined by the Compensation and Organization Committee of the USG Board of
Directors (the "Committee") after considering recommendations submitted from
management of USG Corporation and the Operating Subsidiaries.
1
<PAGE>
AWARD VALUES
For the Annual Management Incentive Program, position target incentive values
are based on level of accountability and are expressed as a percent of approved
annualized salary. Resulting award opportunities represent a fully competitive
incentive opportunity for 100% (target) achievement of goals:
<TABLE>
<CAPTION>
POSITION TITLE OR POSITION TARGET
SALARY REFERENCE POINT INCENTIVE
---------------------- ---------------
<S> <C>
- - Chairman & CEO, USG Corporation 70%
- - Executive Vice President & Chief Financial Officer, USG
Corporation 50%
- - Senior Vice President, USG Corporation & President
Building Systems
- - Senior Vice President Marketing & Corporate Strategy,
USG Corporation and President International
- - Senior Vice President & General Counsel, USG Corporation
- - Senior Vice President Financial Operations,
USG Corporation
- - Vice President Human Resources, USG Corporation 45%
- - Vice President Communications, USG Corporation
- - Vice President, USG Corporation & President & COO,
L & W Supply Corp. 40%
- - Vice President Research & Technology, USG Corporation
- - Vice President & Controller, USG Corporation
- - Vice President International & Technology,
USG Corporation
- - Vice President & Treasurer, USG Corporation
- - Vice President Compensation, Benefits & Administration,
USG Corporation
- - Corporate Secretary & Associate General Counsel,
USG Corporation
- - Position Reference Point: $177,675 and over 35%
- - Position Reference Point: $163,215 - $177,674 30%
- - Position Reference Point: $148,815 - $163,214 25%
- - Position Reference Point: $133,610 - $148,814 20%
- - Position Reference Point: $119,025 - $133,609 15%
- - Position Reference Point: $104,815 - $119,024 10%
</TABLE>
2
<PAGE>
AWARDS
Incentive awards for all participants in the 2004 Annual Management
Incentive Program will be reviewed and approved by the Committee. For all
participants, the annual incentive award par opportunity is the annualized
salary in effect at the beginning of the calendar year (March 1, 2004 of
the calendar year for the fifteen most senior executives) multiplied by the
applicable position target incentive value percent.
Incentive awards for 2004 will be based on a combination of the following
elements:
I. CONSOLIDATED NET EARNINGS 50% OF INCENTIVE
Consolidated Net Earnings will be as reported on the Corporation's year-end
financial statements with adjustments for significant non-operational
charges. Such adjustments have in the past been for Fresh Start Accounting,
asbestos, restructuring charges, bankruptcy expenses and the cumulative
impact of new accounting pronouncements (goodwill impairment). For 2004,
likely adjustments would include bankruptcy expenses and FAS #143. For all
participants, this portion of the award represents 50% of the incentive
par. This portion of the award will be paid from a pool funded by
Consolidated Net Earnings results according to the following schedule:
<TABLE>
<S> <C>
$0 to $50 Million Net Earnings 2.50% of this tier will fund the pool
$51 to $150 Million Net Earnings 2.25% of this tier will fund the pool
$151 to $400 Million Net Earnings 1.75% of this tier will fund the pool
$401 Million and above 1.00% of this tier will fund the pool
</TABLE>
Each tier of earnings is calculated separately and added together to
determine the total pool. This amount is then divided by the total plan par
(sum of each individual participant's Net Earnings par, or 50% of each
participant's total par). The factor derived from this method is then
applied to each participant's Net Earnings par to determine the individual
award for this segment. There is no maximum award in this segment.
II. STRATEGIC FOCUS TARGETS: 50% OF INCENTIVE
Strategic Focus Targets will be measurable, verifiable and derived from the
formal strategic planning process. For 2004, Strategic Focus Targets will
include Overhead Reduction, Working Capital Reduction, Cost Reduction,
Customer Satisfaction and Business Unit Operating Profit. The award
adjustment factor for this segment will range from 0.5 (after achieving a
minimum threshold performance level) to 2.0 for maximum attainment. The
weighting on any individual Strategic Focus Target will be in 5% increments
and not be less than 10%. The weighting of all assigned Strategic Focus
Targets will equal 50% of the individual's total par.
3
<PAGE>
WEIGHTINGS OF PROGRAM ELEMENTS
All participants in this Program, including the fifteen most senior
executives, will have the same overall weightings, 50% on Consolidated Net
Earnings and 50% on Strategic Focus Targets.
SPECIAL AWARDS
In addition to the incentive opportunity provided by this Program, a
special award may be recommended for any participant or non-participant,
other than a Corporation Officer, who has made an extraordinary
contribution to the Corporation's welfare or earnings.
GENERAL PROVISIONS
1. The Compensation and Organization Committee of the USG Board of
Directors reserves the right to adjust award amounts either up or down
based on its assessment of the Corporation's overall performance
relative to market conditions.
2. The Committee shall review and approve the awards recommended for
officers and other employees who are eligible participants in the 2004
Annual Management Incentive Program. The Committee shall submit to the
Board of Directors, for their ratification, a report of the awards for
all eligible participants including corporate officers approved by the
Committee in accordance with the provisions of the Program.
3. The Committee shall have full power to make the rules and regulations
with respect to the determination of achievement of goals and the
distribution of awards. No awards will be made until the Committee has
certified financial achievements and applicable awards in writing.
4. The judgement of the Committee in construing this Program or any
provisions thereof, or in making any decision hereunder, shall be
final and conclusive and binding upon all employees of the Corporation
and its subsidiaries whether or not selected as beneficiaries
hereunder, and their heirs, executors, personal representatives and
assignees.
5. Nothing herein contained shall limit or affect in any manner or degree
the normal and usual powers of management, exercised by the officers
and the Board of Directors or committees thereof, to change the duties
or the character of employment of any employee of the Corporation or
to remove the individual from the employment of the Corporation at any
time, all of which rights and powers are expressly reserved.
6. The awards made to employees shall become a liability of the
Corporation or the appropriate subsidiary as of December 31, 2004 and
all payments to be made hereunder will be made as soon as practicable
after said awards have been approved by the Committee.
4
<PAGE>
ADMINISTRATIVE GUIDELINES
1. Award values will be based on annualized salary in effect for each
qualifying participant at the beginning of the year (March 1, 2004 for
the fifteen most senior executives). Any change in duties, dimensions
or responsibilities of a current position resulting in an increase or
decrease in salary range reference point or market rate will result in
pro-rata incentive award. Respective reference points, target
incentive values or goals will be applied based on the actual number
of full months of service at each position.
2. As provided by the Program, no award is to be paid to any participant
who is not a regular full-time employee, (or a part time employee as
approved by the Vice President Human Resources, USG Corporation) in
good standing at the end of the calendar year to which the award
applies. However, if an eligible participant with three (3) or more
months of active service in the Program year subsequently retires,
becomes disabled, dies, is discharged from the employment of the
Company without cause, or is on an approved unpaid leave, the
participant (or beneficiary) may be recommended for an award which
would otherwise be payable based on goal achievement, prorated for the
actual months of active service during the year.
3. Employees participating in any other incentive or bonus program of the
Corporation or a Subsidiary who are transferred during the year to a
position covered by the Annual Management Incentive Program will be
eligible to receive a potential award prorated for actual full months
of service in the two positions with the respective incentive program
and target incentive values to apply. For example, a Marketing Manager
promoted to Director, Marketing on August 1, will be eligible to
receive a pro-rata award for seven months based on the Marketing
Manager Plan provisions and values, and for five months under the
Annual Management Incentive Program provisions and target incentive
values.
4. In the event of transfer of an employee from an assignment which does
not qualify for participation in any incentive or bonus plan to a
position covered by the Annual Management Incentive Program, the
employee is eligible to participate in the Annual Management Incentive
Program with any potential award prorated for the actual months of
service in the position covered by the Program during the year. A
minimum of three months of service in the eligible position is
required.
5. Participation during the current Program year for individuals employed
from outside the Corporation is possible with any award to be prorated
for actual full months of service in the eligible position. A minimum
of three full months of eligible service is required for award
consideration.
6. Exceptions to established administrative guidelines can only be made
by the Committee.
5
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.24
<SEQUENCE>3
<FILENAME>c92112exv10w24.txt
<DESCRIPTION>THIRD AMENDMENT TO OMNIBUS INSTRUMENT
<TEXT>
<PAGE>
EXHIBIT 10-24
THIRD AMENDMENT
TO
OMNIBUS MANAGEMENT INCENTIVE PLAN
OF USG CORPORATION
THIRD AMENDMENT (this "Third Amendment"), to the Omnibus Management
Incentive Plan of USG Corporation originally approved by the stockholders of the
Corporation on May 14, 1997, and last amended on June 27, 2000 (collectively,
the "Plan").
WHEREAS, the Compensation and Organization Committee of the Board of
Directors approved an amendment to the Plan on March 25, 2004 to remove the
$1,000,000 limit on annual incentive awards under the Plan.
NOW, THEREFORE, in consideration of the premises, the Plan is hereby
amended as set forth below:
1. The penultimate sentence of Section 4 of the Plan is hereby amended in
its entirety to read as follows:
"Annual incentive awards may be in the form of cash payments, stock
awards or a combination thereof, provided, however, that the aggregate
value of an annual incentive award to an individual may not exceed two
times such individual's base salary at the commencement of the
relevant annual performance period".
2. Except as expressly amended and modified by this Third Amendment, the
Plan is hereby ratified and confirmed in all respects.
IN WITNESS WHEREOF, the Corporation has caused this Third Amendment to be
executed by its officers thereunto duly authorized as of the 10th day of August,
2004.
Attest: USG CORPORATION
By
- ------------------------------------- -------------------------------------
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.29
<SEQUENCE>4
<FILENAME>c92112exv10w29.txt
<DESCRIPTION>SENIOR EXECUTIVE SEVERANCE PLAN
<TEXT>
<PAGE>
January 1, 2005
EXHIBIT 10-29
USG CORPORATION
SENIOR EXECUTIVE SEVERANCE PLAN
You are a key member of the senior executive team of USG Corporation
(hereinafter, together with its participating subsidiaries, including in
particular the business entity which pays your salary and benefits and which
will be primarily responsible for the performance of the Corporation's
obligations under this Plan, collectively referred to as the "Corporation"). The
Corporation, accordingly has an interest in creating and preserving an
environment that will permit you to give undivided attention to your duties and
responsibilities. That interest would be especially strong during the
potentially distracting circumstances created by the current business
environment and asbestos litigation.
The USG Corporation Senior Executive Severance Plan (the "Plan") addresses the
above needs. It is intended to provide you with ongoing compensation and
benefits or a lump sum payment in the event you are involuntarily terminated
between January 1, 2005 through and including the effective date of a Plan of
Reorganization. The Plan, of course, asks something of you as well, since in any
agreement each party has to promise to do or to give up something.
Please read the provisions of the Plan that follow. If you find them acceptable
and agree to be bound by them, please so indicate by signing the enclosed
Statement of Acceptance and returning it to the office indicated. You will not
be covered by the Plan until you have taken these steps.
You are under no obligation to participate in the Plan and should feel no
pressure to do so. The Corporation believes the Plan is in both its and your
best interests. Whether you participate, however, is ultimately your decision.
If you do elect to receive severance benefits under this Plan, you will not be
eligible to also receive severance benefits under any other USG severance plan,
employment agreement or termination compensation agreement.
1. IMPORTANT DEFINITIONS
Under this Plan, "employment loss" means:
A. any actual termination by the Corporation of the Senior Executive's
employment between January 1, 2005 through and including the effective date
of a Plan of Reorganization, which is not due to voluntary resignation
(except as in subsection B below), voluntary retirement, death or
disability and does not constitute termination for "cause" (as defined
below); or
B. a resignation of employment by you due to 1) any reduction in Base Salary
as in effect on January 1, 2005 or as increased thereafter; or 2) any
material reduction in title, responsibilities, or authority as in effect on
January 1, 2005.
Page 1 of 6
<PAGE>
January 1, 2005
"Employment loss" shall not include 1) termination based on "cause," which for
this Plan shall mean continued failure by the Senior Executive to substantially
perform his or her duties after a demand for substantial performance has been
delivered by the Senior Executive's manager specifically identifying the manner
in which it is believed the Senior Executive has not substantially performed his
or her duties; or 2) willful misconduct by the Senior Executive which is
materially injurious to the Corporation or any related or affiliated company.
"Base Salary - Option A" means the sum of the Senior Executive's annual salary
and the par award opportunity for the applicable fiscal year under the annual
incentive portion of the Corporation's Management Incentive Compensation Program
(or any similar annual program in which the Senior Executive then participates)
at the value in effect at the time of termination or January 1, 2005, whichever
is higher. Such sum shall be divided by fifty-two if a weekly figure is desired
and by twelve if a monthly figure is desired.
"Base Salary - Option B" means the Senior Executive's annual salary in effect at
the time of termination. It does not include the par award opportunity for the
applicable fiscal year under the annual incentive portion of the Corporation's
Management Incentive Compensation Program (or any similar annual program in
which the Senior Executive then participates). Such sum shall be divided by
fifty-two if a weekly figure is desired and by twelve if a monthly figure is
desired.
2. INITIAL ELIGIBILITY AND COMMITMENTS
All Senior Executives (as defined herein) are eligible to participate in this
Plan. A "Senior Executive" is an employee who between January 1, 2005 through
and including the effective date of a Plan of Reorganization would be eligible
for a two year Employment Agreement with the Corporation or one of its domestic
subsidiaries.
Under this Plan, the Senior Executive agrees to remain in the employ of the
Corporation through and including the effective date of a Plan of
Reorganization, except as may be permitted by other provisions of this Plan or
any employment agreement. It is understood that nothing in this document shall
be construed as limiting the Corporation's right to terminate employment at any
time, subject only to providing the compensation and benefits to which the
Senior Executive would be entitled under this Plan or under any employment
agreement in effect at the time of termination. Payment of compensation and
benefits to which the Senior Executive is entitled under this Plan or under any
employment agreement shall constitute the Senior Executive's sole remedy in the
event of employment loss regardless of whether compensation and benefits are
payable under this Plan or under the provisions of any employment agreement.
Page 2 of 6
<PAGE>
January 1, 2005
3. COMMITMENTS OF THE CORPORATION
Compensation and benefits shall become due and payable under this Plan if the
Senior Executive suffers an employment loss as defined under this Plan between
January 1, 2005 through and including the effective date of a Plan of
Reorganization, in which case the Senior Executive may elect to receive either
Option A or Option B, but not both.
OPTION A
The Corporation shall be obligated to pay and provide the Senior Executive for
twenty-four full months of the following:
- Base Salary - Option A as defined above in this Plan, plus
- Participation in all benefits to which the Senior Executive would
normally be entitled including, but not limited to, all retirement and
investment plans, all life, health and disability insurance, and all
salary continuation plans, together with bonuses and such other grants
of additional compensation or supplemental benefits as may be granted
from time to time (subject to periodic changes in such benefits as are
applicable generally to all Senior Executives in the Plans). This
participation would not include continued participation in the Key
Employee Retention Plan, the retention of a company vehicle, computer
and office equipment, or company paid club memberships.
The Corporation also shall be obligated to pay to the Senior Executive an amount
equal to all legal fees and expenses incurred by the Senior Executive to enforce
any right or benefit under this Plan. The Corporation shall not have an
obligation to pay such amount, however, if a court has decided that there has
been no "employment loss" as defined under this Plan.
Any stock option granted to the Senior Executive under any long-term equity plan
of the Corporation ("Equity Plan") but not yet exercisable, any restricted stock
granted to the Senior Executive under any Equity Plan and not yet freed of
restrictions, and any other equity awards or incentives shall be dealt with, for
time and performance vesting and all other purposes as if the Senior Executive
continued as an employee of the Corporation during the period of payments under
this Option A.
The compensation and benefits paid under this Option A shall be subject to
deductions required by law or authorized by the Senior Executive.
Page 3 of 6
<PAGE>
January 1, 2005
During the twenty four full months of payments under Option A of this Plan the
Senior Executive will not engage or participate, directly or indirectly, as a
partner, officer, director, employee, advisor, or otherwise, in any corporation,
business, or activity which competes with the Corporation or any of its
subsidiary companies in the manufacture or sale of any line of products in any
state of the United States, any province of Canada and any state of Mexico where
the Corporation manufactures or sells its products. Further the Senior Executive
will not directly or indirectly through another entity; induce or attempt to
induce any employee of the Corporation to leave the employ of the Corporation,
or in any way interfere with the relationship between the Corporation and any
employee thereof; hire any person who was an employee of the Corporation at any
time during the Senior Executive's period of employment with the Corporation, or
induce or attempt to induce any customer, supplier, licensee, licensor,
franchisee or other business relation of the Corporation to cease doing business
with the Corporation or in any way interfere with the relationship between any
such customer, supplier, licensee, licensor, franchisee or business relation and
the Corporation, including, without limitation, by making any negative
statements or communications about the Corporation or its products, services or
business opportunities. The Senior Executive acknowledges that the Corporation's
agreement to pay the compensation and benefits set forth in this Plan is
conditioned upon the Senior Executive's faithful performance of obligations
under this paragraph. If the Senior Executive fails to do so, the Senior
Executive agrees that the Corporation will be relieved of any obligation to make
any further payments under the Plan.
OPTION B
The Corporation shall, within thirty days of receipt of a signed and unaltered
Agreement and General Release, be obligated to pay the Senior Executive a lump
sum equal to:
- one and one half (1.5) weeks of Base Salary - Option B as defined
above in this Plan for each full year of continuous service with the
Corporation or any of its subsidiaries at the rate in effect
immediately prior to such termination subject to a minimum of two
months Base Salary - Option B, plus
- two weeks of Base Salary - Option B at the rate in effect immediately
prior to such termination date, for each full $15,000 of annualized
Base Salary - Option B at the same rate, plus
- a lump sum cash payment equal to the cost of continuation of the
Senior Executive's current level of medical, vision and dental
benefits for a period equal to the total number of whole weeks
provided under the preceding service and compensation components, plus
- career counseling and job search assistance selected by and fully paid
for by the Corporation.
Page 4 of 6
<PAGE>
January 1, 2005
The benefit under Option B shall not exceed twenty-four months of Base Salary -
Option B at the rate in effect at the date of termination and of course shall be
subject to deductions required by law or authorized by the Senior Executive. The
benefit under Option B shall not include the benefits under the Key Employee
Retention Plan. No such payment under Option B of this Plan shall be considered
as pay for purposes of the USG Corporation Retirement Plan or the USG
Corporation Investment Plan.
4. NO MITIGATION
The Senior Executive will not be required to mitigate the amount of the above
pay-out by seeking other employment or otherwise, nor shall such amount be
reduced by any compensation received from other employment. The Corporation, of
course, shall also be obligated to pay full salary through the date of
termination plus accrued unused vacation.
5. BINDING ON SUCCESSORS
The Corporation shall be obligated to require any successor (whether direct or
indirect, by purchase, merger, consolidation, or otherwise) to all or
substantially all of the business and/or assets of the Corporation or the
appropriate subsidiary, by a written agreement which is part of such
transaction, to assume and perform in their entirety all provisions of this
Plan.
6. CERTAIN TERMINATION PROCEDURES
Any claims of employment loss under this Plan must be communicated in writing to
the Vice President, Human Resources, USG Corporation within one hundred-eighty
(180) days of the employment loss and shall indicate the specific provisions of
this Plan relied on and shall set forth in reasonable detail all relevant facts
and circumstances to support a claim of employment loss under this Plan.
The Senior Executive's failure to assert a claim of employment loss under this
Plan within one hundred eighty (180) days of the employment loss shall be deemed
a waiver of such claim.
7. EFFECTIVE PERIOD OF THE PLAN
This Plan will be in effect from January 1, 2005 through and including the
effective date of a Plan of Reorganization, at which time it shall terminate.
This Plan shall not be terminated earlier or otherwise amended without the prior
written consent of both the Senior Executive and the Corporation.
Page 5 of 6
<PAGE>
January 1, 2005
8. ADMINISTRATIVE RULES AND DETERMINATIONS
Administrative guidelines for the Senior Executive Severance Plan are developed
and administered by the Vice President, Human Resources, USG Corporation, who
shall have full power to interpret the rules and regulations and to determine
and distribute awards.
Nothing herein contained shall limit or affect in any manner or degree the
normal and usual powers of management, exercised by the officers and the Boards
of Directors or committees thereof, to change the duties or the character of
employment of any employee of the Corporation or to remove the individual from
the employment of the Corporation at any time, all of which rights and powers
are expressly reserved.
Page 6 of 6
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.36
<SEQUENCE>5
<FILENAME>c92112exv10w36.txt
<DESCRIPTION>AMENDMENT AND RESTATEMENT OF USG CORPORATION RETIREMENT PLAN
<TEXT>
<PAGE>
EXHIBIT 10-36
AMENDMENT AND RESTATEMENT
OF
USG CORPORATION RETIREMENT PLAN
WHEREAS, USG CORPORATION RETIREMENT PLAN (the "Plan") was established effective
July 1, 1958 (and then was named "United States Gypsum Company Retirement
Plan"); and
WHEREAS, the Plan, as amended and restated effective as of January 1, 1984, has
subsequently been amended from time to time and it now is considered desirable
to further amend and restate the Plan in its entirety;
NOW, THEREFORE, pursuant to the amending power reserved to USG Corporation as
the "company" under subsection 14.1 of the Plan, as amended, the Plan be and
hereby is further amended and restated in its entirety effective as of January
1, 1999 in the form attached hereto.
* * *
IN WITNESS WHEREOF, the Company has caused these presents to be signed on its
behalf by an officer thereunto duly authorized this 29th day of December, 1999.
USG CORPORATION
By:
------------------------------------
<PAGE>
USG CORPORATION RETIREMENT PLAN
As Amended and Restated Effective January 1, 1999
McDermott, Will & Emery
Chicago
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SECTION 1 ...................................................................... 1
Introduction ................................................................ 1
1.1 Plan, Company .................................................... 1
1.2 Purpose .......................................................... 1
1.3 Restatement Effective Date, Plan Year ............................ 1
1.4 Subsidiaries, Employers, USG Companies ........................... 2
1.5 Plan Administration, the Committee ............................... 2
1.6 Trustees, Trust Agreements, Trust Funds .......................... 2
1.7 Preservation of Benefits ......................................... 2
1.8 Predecessor Plans ................................................ 3
1.9 Supplements ...................................................... 3
1.10 Examination of Plan Documents .................................... 4
1.11 Gender and Number ................................................ 4
1.12 Notices .......................................................... 4
1.13 Combination Defined Benefit and Defined Contribution Plan ........ 4
SECTION 2 ...................................................................... 6
Eligibility for Participation and ........................................... 6
Participant Contributions ................................................... 6
2.1 Covered Employee, Participant, Eligibility Date .................. 6
2.2 Eligibility ...................................................... 7
2.3 Notice of Eligibility, Enrollment ................................ 7
2.4 Leave of Absence ................................................. 7
2.5 Participant Contributions ........................................ 8
2.6 Separate Accounts ................................................ 8
2.7 U.S. Foreign Service Employee .................................... 11
2.8 Leased Employees ................................................. 11
SECTION 3 ...................................................................... 13
Retirement Dates, Employment Termination Date ............................... 13
3.1 Normal Retirement Date ........................................... 13
3.2 Deferred Retirement Date ......................................... 13
3.3 Early Retirement Date ............................................ 13
3.4 Disability Retirement Date ....................................... 13
3.5 Retirement Date .................................................. 14
</TABLE>
-i-
<PAGE>
<TABLE>
PAGE
----
<S> <C>
3.6 Employment Termination Date ...................................... 14
3.7 Retirement or Termination While on Leave of Absence .............. 14
SECTION 4 ...................................................................... 15
Bases of Retirement Income and Other Benefits ............................... 15
4.l General .......................................................... 15
4.2 Credited Service ................................................. 15
4.3 Benefit Service .................................................. 18
4.4 Special Rules as to Credited Service and Benefit Service ......... 19
4.5 Earnings ......................................................... 21
4.6 Final Average Earnings ........................................... 22
4.7 Primary Social Security Benefit .................................. 23
4.8 Monthly Separate Account Benefit ................................. 24
4.9 Determination of Bases of Benefits ............................... 25
SECTION 5 ...................................................................... 26
Amount of Retirement Income ................................................. 26
5.1 Normal Retirement ................................................ 26
5.2 Deferred Retirement .............................................. 26
5.3 Early Retirement Benefits ........................................ 27
5.4 Election of Early Commencement of Early Retirement Benefits ...... 28
5.5 Lump Sum Payment of Early Retirement Benefits Derived from
Participants' Contributions .................................. 29
5.6 Disability Retirement ............................................ 30
5.7 Total and Permanent Disability ................................... 31
5.8 Conditions as to Payment of Disability Benefits .................. 31
5.9 Accrued Monthly Benefit .......................................... 32
5.10 Increased Benefits for Certain Retired Participants .............. 32
5.11 Benefit Commencement Consent Requirements ........................ 33
SECTION 6 ...................................................................... 34
Termination Before Retirement, Death During Employment ...................... 34
6.1 Monthly Deferred Vested Benefit .................................. 34
6.2 Election of Early Commencement of Deferred Vested Benefits ....... 34
6.3 Lump Sum Payment of Deferred Vested Benefits
Derived from Participants' Contributions ...................... 34
6.4 Termination Prior to Five Years of Credited Service .............. 35
6.5 Death During Employment .......................................... 36
6.6 Pre-Retirement Spouse's Benefit .................................. 38
6.7 Benefit Commencement Consent Requirements ........................ 38
</TABLE>
-ii-
<PAGE>
<TABLE>
PAGE
----
<S> <C>
SECTION 7 ...................................................................... 39
Payment of Retirement Income and Other Benefits ............................. 39
7.1 Benefit Commencement Date, Combined Benefit Reference ............ 39
7.2 Eligible Spouse .................................................. 39
7.3 Normal Form of Payment of Benefits ............................... 39
7.4 Benefit Options .................................................. 41
7.5 Rules as to Election and Discontinuance of
Benefit Options ............................................... 42
7.6 Applicable Election Period ....................................... 45
7.7 Relating to Qualified Joint and Survivor Annuity ................. 45
7.8 Benefit Commencement Requirements ................................ 46
7.9 Payment of Small Amounts ......................................... 49
7.10 Benefits Derived from Employer and Participant
Contributions ................................................. 49
7.11 Designation of Beneficiaries ..................................... 50
7.12 Missing Participants or Beneficiaries ............................ 51
7.13 Direct Transfer of Eligible Rollover Distributions ............... 52
SECTION 8 ...................................................................... 53
Maximum and Minimum Benefit Limitations, Offset for Other Plan Benefits ..... 53
8.1 Maximum Retirement Income and Deferred Vested Benefits ........... 53
8.2 Limitation Year and Total Compensation ........................... 53
8.3 Defined Benefit Plan and Defined Contribution Plan Limitations ... 53
8.4 Combining of Plans ............................................... 54
8.5 Maximum Benefits as a Result of the Annual Compensation Limit .... 54
8.7 Maximum Retirement Income and Deferred Vested Benefit ............ 57
8.8 Minimum Retirement Income and Deferred Vested Benefit ............ 57
8.9 Minimum Death Benefits ........................................... 57
8.10 Offset for Other Plan Benefits ................................... 58
8.11 Special Rules for Benefit Transfers .............................. 58
8.12 Section 401(m) Limitations as to Participant Separate
Account Contributions ......................................... 59
8.13 Special Provisions Applicable to Section 401(m) Limitations ...... 60
8.14 Highly Compensated Participant ................................... 61
SECTION 9 ...................................................................... 62
Reemployment ................................................................ 62
9.1 Rehired Employee ................................................. 62
9.2 Rehired Participant .............................................. 62
9.3 One-Year Break in Service, Extended Break in Service ............. 63
</TABLE>
-iii-
<PAGE>
<TABLE>
PAGE
----
<S> <C>
9.4 Credited and Benefit Service ..................................... 63
9.5 Prior Accrued Benefit ............................................ 66
9.6 Benefits After Reemployment Ends ................................. 68
SECTION 10 ..................................................................... 70
General Provisions .......................................................... 70
10.1 Interests Not Transferable ....................................... 70
10.2 Facility of Payment .............................................. 71
10.3 Absence of Guaranty .............................................. 71
10.4 Employment Rights ................................................ 71
10.5 Litigation by Participants or Other Persons ...................... 71
10.6 Actuarially Equivalent Benefits .................................. 72
10.7 Evidence ......................................................... 72
10.8 Waiver of Notice ................................................. 72
10.9 Controlling Law .................................................. 72
10.10 Severability ..................................................... 72
10.11 Fiduciary Responsibilities ....................................... 73
SECTION 11 ..................................................................... 74
The Committee ............................................................... 74
11.1 Membership ....................................................... 74
11.2 General Powers, Rights and Duties ................................ 74
11.3 Manner of Action ................................................. 75
11.4 Information Required by Committee ................................ 76
11.5 Committee Decision Final ......................................... 76
11.6 Review of Benefit Determinations ................................. 76
11.7 Uniform Rules .................................................... 76
11.8 Committee Member Who is a Participant ............................ 76
SECTION 12 ..................................................................... 77
Funding of Plan Benefits .................................................... 77
12.1 Employer and Participant Contributions ........................... 77
12.2 Minimum Funding Standards ........................................ 77
12.3 Application of Forfeited Benefits ................................ 77
SECTION 13 ..................................................................... 78
Relating to the Employers ................................................... 78
13.1 Action by Employers .............................................. 78
13.2 Additional Employers ............................................. 78
13.3 Successor Employers .............................................. 78
13.4 Restrictions as to Reversion of Trust Assets to Employers ........ 78
</TABLE>
-iv-
<PAGE>
<TABLE>
PAGE
----
<S> <C>
SECTION 14 ..................................................................... 80
Amendment, Termination or Plan Merger ....................................... 80
14.1 Amendment ........................................................ 80
14.2 Termination ...................................................... 80
14.3 Plan Merger or Consolidation ..................................... 80
14.4 Notice of Amendment, Termination or Plan Merger .................. 80
14.5 Nonforfeitability on Termination ................................. 81
14.6 Limitations on Termination ....................................... 81
SECTION 15 ..................................................................... 82
Allocation and Distribution of Assets on Termination ........................ 82
SECTION 16 ..................................................................... 83
Annual Benefit Payment Restrictions ......................................... 83
16.1 Restrictions on Annual Payments .................................. 83
16.2 Responsibility of Committee ...................................... 83
SECTION 17 ..................................................................... 84
Special Rules for Top-heavy Plans ........................................... 84
17.1 Purpose .......................................................... 84
17.2 Top-heavy Plan ................................................... 84
17.3 Key Employee ..................................................... 85
17.4 Minimum Vesting .................................................. 86
17.5 Minimum Benefit .................................................. 86
17.6 Aggregation of Plans ............................................. 87
17.7 No Duplication of Benefits ....................................... 87
17.8 Adjustment of Combined Benefit Limitations ....................... 87
17.9 Use of Terms ..................................................... 88
SECTION 18 ..................................................................... 89
Special Restrictions and Overriding Provisions Applicable During a
Restricted Period ........................................................ 89
18.1 Overriding Provisions Effective During Restricted Period ......... 89
18.2 Definitions ...................................................... 89
18.3 Restrictions on Eligibility to Participate ....................... 92
18.4 Prohibition Against Mergers and Transfers of Assets
and Liabilities ............................................... 92
18.5 Timing and Method of Distribution ................................ 92
18.6 Prohibition Against Reversion of Plan Assets if Plan Terminated .. 93
18.7 Conditions and Limitations ....................................... 95
18.8 Prohibition Against Amendment .................................... 96
</TABLE>
-v-
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
EXHIBIT A
SUPPLEMENT 1
Titles of Supplements in Effect Immediately Prior to the Restatement
Effective Date
</TABLE>
-vi-
<PAGE>
USG CORPORATION RETIREMENT PLAN
(As Amended and Restated Effective as of January 1, 1999)
SECTION 1
INTRODUCTION
1.1 PLAN, COMPANY
USG Corporation (the "company") maintains USG Corporation Retirement
Plan (the "Plan") for the benefit of its eligible employees. The plan was
originally established effective as of July 1, 1958 by United States Gypsum
Company and was then known as the United States Gypsum Company Retirement Plan.
On January 1, 1985 United States Gypsum Company became a wholly-owned subsidiary
of USG Corporation and the subsidiaries of United States Gypsum Company became
direct or indirect subsidiaries of USG Corporation. By agreement made as of
December 20, 1984 the plan was amended effective January 1, 1985 to substitute
USG Corporation for United States Gypsum Company as the "company" under the
plan, to provide for United States Gypsum Company continuing as an employer
under the plan, and to change the name of the plan to USG Corporation Retirement
Plan. The provisions of this subsection and the following provisions constitute
an amendment and restatement of the plan (as previously amended) effective as of
January 1, 1999, subject to any subsequent amendments. The term "company" as
used in the plan means USG Corporation.
1.2 PURPOSE
The purpose of the plan is to provide retirement and other benefits
for eligible employees of the company and of its subsidiaries that are employers
under the plan.
1.3 RESTATEMENT EFFECTIVE DATE, PLAN YEAR
The term "restatement effective date" as used in the plan means
January 1, 1999. The plan is administered on the basis of a plan year (the "plan
year") beginning on the applicable January 1 and ending on the next following
December 31.
<PAGE>
1.4 SUBSIDIARIES, EMPLOYERS, USG COMPANIES
Certain subsidiaries of the company adopted the plan prior to the
restatement effective date for the benefit of their employees. Any other
subsidiary of the company may adopt the plan on or after the restatement
effective date in accordance with the provisions of subsection 13.2 with the
consent of the pension committee described in subsection 1.5. For purposes of
the plan, a "subsidiary" of the company is any corporation 80 percent or more of
the voting stock of which is owned, directly or indirectly, by the company. The
company and its subsidiaries which adopt the plan are referred to below
collectively as the "employers" and individually as an "employer". The term "USG
Companies" means the employers and all subsidiaries that have not adopted the
plan and each such corporation is referred to as a "USG Company". Any
corporation that is not an employer and does not qualify as a subsidiary but is
a member of a controlled group of corporations (within the meaning of Section
1563(a) of the Internal Revenue Code, determined without regard to Sections
1563(a)(4) and 1563(e)(3)(C) thereof) which contains an employer and each trade
or business (whether or not incorporated) which, along with an employer, is
considered to be under common control pursuant to Section 414(c) of the Internal
Revenue Code shall, for purposes of the plan, be considered as a subsidiary that
has not adopted the plan.
1.5 PLAN ADMINISTRATION, THE COMMITTEE
The plan is administered by the Pension and Investment Committee (the
"committee") consisting of three or more members appointed by the company, as
provided in Section 11.
1.6 TRUSTEES, TRUST AGREEMENTS, TRUST FUNDS
Funds contributed by the employers and employees participating in the
plan are held and invested in one or more trust funds, until distributed, by one
or more corporate trustees appointed by the committee. The trustee of each such
trust fund acts under a trust agreement between the employers and that trustee.
Unless indicated otherwise by the context, the terms "trustee", "trust fund" and
"trust agreement" shall mean, respectively, all trustees, trust funds and trust
agreements described above.
1.7 PRESERVATION OF BENEFITS
The benefits provided under the plan on and after the restatement
effective date for or with respect to any participant who retired or whose
employment with the USG Companies otherwise terminated prior to the restatement
effective date will, except as otherwise specifically provided herein or
required by law, continue to be governed by the
-2-
<PAGE>
terms of the plan as in effect as of the date of the participant's retirement or
other termination of employment. As to employees participating in the plan on
the restatement effective date, it is intended that the benefits they earned
under the plan prior to that date shall be preserved unless limited by Section
8. If the committee determines that any such benefits have not been provided for
under the terms and provisions of the plan as in effect on and after the
restatement effective date, the committee shall direct the payment of such
benefits from the plan to the participant or other person entitled to them. The
benefits provided under the plan for or with respect to any participant who
retired or whose employment with the USG Companies otherwise terminated prior to
the date an amendment to the plan became effective or a provision of the plan
was deleted pursuant to an amendment will, except as otherwise specifically
provided herein or required by law, continue to be governed by the terms of the
plan as in effect on the date of the participant's retirement or other
termination of employment.
1.8 PREDECESSOR PLANS
Certain pension plans maintained by subsidiaries of the company were
merged into this plan prior to the restatement effective date and special
provisions relating to persons covered under those plans were or are attached to
this plan as a part thereof. Any such pension plan merged into this plan before
the restatement effective date and any pension or profit sharing plan merged
into this plan on or after the restatement effective date is referred to below
as a "predecessor plan". Any other pension plan or any profit sharing plan
maintained by the company or any subsidiary which adopts this plan may be merged
into this plan with the consent of the company. Special provisions relating to
employees or other persons covered under any such pension or profit sharing plan
when it is merged into this plan may be set forth in one or more supplements
which, by amendment, will be attached to and form a part of this plan.
1.9 SUPPLEMENTS
In addition to supplements described in subsection 1.8, from time to
time, by amendment, supplements have been and may continue to be attached to
this plan, which supplements shall form a part of this plan for the purpose of
modifying provisions of the plan to the extent such provisions apply to any
particular group of employees or other persons entitled to benefits under the
plan. If it is deemed necessary or desirable to set forth additional, substitute
or retroactive terms and provisions of the plan as applied to such group of
employees or other persons, including provisions to preserve benefits
attributable to an employee's participation in any other pension plan maintained
by an employer or predecessor of an employer, such supplement will specify the
group of employees or other persons to which it applies and will supersede the
provisions of this plan to the extent necessary to eliminate any inconsistencies
between the plan and such
-3-
<PAGE>
supplement. Prior to the restatement effective date, the plan had eleven
Supplements (the titles of which are listed in Supplement 1). The provisions of
such supplements as in effect immediately prior to the restatement effective
date are incorporated herein by reference.
1.10 EXAMINATION OF PLAN DOCUMENTS
Copies of the plan and trust agreement, and any amendments thereto,
will be on file at the principal office of each employer where they may be
examined by any participant. The provisions of and benefits under the plan are
subject to the terms and provisions of the trust agreement.
1.11 GENDER AND NUMBER
Where the context admits, words in the masculine gender shall include
the feminine and neuter genders, the plural shall include the singular, and the
singular shall include the plural.
1.12 NOTICES
Any notice or document required to be given to or filed with the
committee shall be considered as given or filed if delivered or mailed by
registered mail, postage prepaid, to the corporate secretary of the company, 125
South Franklin Street, Chicago, Illinois 60606.
1.13 COMBINATION DEFINED BENEFIT AND DEFINED CONTRIBUTION PLAN
Since its establishment, the plan has been designed to meet the
requirements of a qualified defined benefit plan under Section 401(a) of the
Internal Revenue Code. As described in subsection 2.5 and pursuant to Section
414(k) of the Internal Revenue Code, each participant's contributions made for
periods beginning on or after January 1, 1991 have been or shall be credited to
a separate account maintained under the plan in the participant's name.
Participant contributions credited to separate accounts shall be invested under
the trust fund, and the separate accounts shall be adjusted to reflect
investment gain or losses and unrealized appreciation or depreciation in the
value of the trust fund, all as provided for in subsection 2.6. As a result of
the establishment of separate accounts, Section 414(k) of the Internal Revenue
Code requires that the plan be treated as a defined contribution plan for
purposes of Section 410 of the Internal Revenue Code (relating to minimum
participation standards) and that for purposes of Internal Revenue Code Sections
72(d) (relating to treatment of employee
-4-
<PAGE>
contributions as a separate contract), 411(a)(7)(A) (relating to minimum vesting
standards), 415 (relating to limitations on benefits and contributions under
qualified plans), and 401(m) (relating to nondiscrimination tests for employee
after-tax contributions) the plan be treated as a defined contribution plan to
the extent benefits are based on the separate accounts of participants and as a
defined benefit plan with respect to the remaining portion of benefits provided
under the plan.
-5-
<PAGE>
SECTION 2
ELIGIBILITY FOR PARTICIPATION AND
PARTICIPANT CONTRIBUTIONS
2.1 COVERED EMPLOYEE, PARTICIPANT, ELIGIBILITY DATE
The term "covered employee" means an employee who is a member of a
group of employees of an employer to which the plan has been and continues to be
extended by the company or by agreement, and who, effective January 1, 2000, is
not classified by the employer as a temporary employee. The term "participant"
means an employee of a USG Company who, after becoming eligible for
participation in the plan, is enrolled in the plan pursuant to this Section 2
and also means a former employee of the USG Companies who either is receiving
benefits under the plan or is entitled to receive benefits under the plan
commencing on a future date. The term "eligibility date" means for any employee
the first day of the calendar month that is determined, in accordance with
uniform and consistent rules established by the committee, by reference to (and
not later than the 90 days after) the date on which the employee first performs
an hour of service as a covered employee. In the case of an employee who
declines to make contributions under subsection 2.5 when the employee is first
eligible to do so, the term "eligibility date" means the first day of a
subsequent calendar month. In the case of a former employee who is reemployed by
an employer, the term "eligibility date" also includes any other date described
in subparagraphs 9.1(a) and 9.2(b) on which such employee is entitled to become
enrolled in the plan. If an employee of a USG Company becomes a covered employee
more than six months after the date the employee completes twelve months of
employment with the USG Companies, the date the employee so becomes a covered
employee also shall be an "eligibility date." For purposes of determining
eligibility to become a participant in the plan, the term "employee" for any
plan year means any individual who is treated and/or classified by the employer
for such plan year as an employee for purposes of employment taxes and wage
withholding for Federal income tax. Except as specifically provided in
subparagraph 2.8(c), individuals who perform services for an employer as
independent contractors, leased employees, or through agencies are not employees
of the employer and therefore are not eligible for benefits under this plan. If
an individual is not considered to be an employee of an employer for purposes of
employment taxes and wage withholding, a subsequent determination by the
employer, any governmental agency or court that the individual is a common law
employee of the employer, even if such determination is applicable to prior
years, will not have a retroactive effect for purposes of eligibility to
participate in the plan for any plan year. A temporary employee is an employee
who is classified as such by the employer and is employed usually for less than
90 days with a specified date beyond which employment will not continue; interns
(i.e. students who are employed during
-6-
<PAGE>
summer and other vacations) and co-op students (i.e. students who receive school
credit for employment with the employer) are considered temporary employees.
2.2 ELIGIBILITY
Subject to the conditions and limitations of the plan, each employee
of an employer who is a participant in the plan immediately before the
restatement effective date will continue as such on and after that date so long
as the employee remains a covered employee. Each other employee of an employer
will be eligible to become enrolled in the plan and become a participant on any
eligibility date occurring on or after that date if the employee then is a
covered employee.
2.3 NOTICE OF ELIGIBILITY, ENROLLMENT
Each employee will be notified of the date the employee is eligible to
become enrolled in the plan and become a participant and will be furnished with
appropriate enrollment materials pursuant to procedures established by the
committee in regard to enrollment. An eligible employee will be deemed to have
elected to make the contributions described in subsection 2.5 unless the
employee elects not to become a participant in accordance with such procedures.
By becoming enrolled in the plan, the participant authorizes the employer to
deduct from the compensation otherwise payable to the employee by such employer
the contributions the employee is required to make under subsection 2.5 in order
to become a participant in the plan.
2.4 LEAVE OF ABSENCE
A "leave of absence" as used in the plan means:
(a) A leave of absence required by law or granted by a USG Company on
account of service in military or governmental branches described
in any applicable statute granting reemployment rights to
employees who entered such branches, or any other military or
governmental branch designated by the company.
(b) Any other absence from active employment with a USG Company under
conditions which are not treated by it as a termination of
employment. A participant shall be considered on a paid leave of
absence for the period over which the participant receives
payment from an employer as a "continuing employee" in accordance
with the terms of a
-7-
<PAGE>
written employment or other agreement between the participant and
the employer.
Leaves of absence granted by a USG Company will be governed by rules uniformly
applied to all employees similarly situated. An employee on a leave of absence
will be considered an employee of an employer for all purposes of the plan, and
a participant on a paid leave of absence will continue to be eligible to
participate in the plan.
2.5 PARTICIPANT CONTRIBUTIONS
Prior to January 1, 1999, an employee elected to enroll in the plan by
affirmatively electing to make contributions to the plan through payroll
deduction in such amount as provided in the plan as amended from time to time.
Effective January 1, 1999, an employee who is eligible to participate in the
plan under subsection 2.2 shall be deemed to have elected to make contributions
to the plan by payroll deduction in an amount equal to 2 percent of the
employee's earnings unless the employee affirmatively elects not to make such
contributions, any such election to be made at such time and in such manner as
the committee may determine. A participant's earnings shall be subject to the
limitation imposed by Section 401(a)(17) of the Internal Revenue Code for the
purpose of determining the amount of the participant's contributions, as well as
for other purposes, as described in subsection 8.5. However, if a participant
should discontinue making contributions, the period of discontinuance shall not
be included in the participant's number of years of credited service and benefit
service (as defined in subsections 4.2 and 4.3). If a participant discontinues
making contributions under the plan, at any time thereafter the participant may
elect to resume making contributions (provided the participant is a covered
employee) by electing, in such form and at such time as the committee may
determine to authorize the employer to deduct contributions from the
participant's earnings. The committee shall maintain a separate account under
the plan in the name of each participant ("separate account") pursuant to
Section 414(k) of the Internal Revenue Code and all participant contributions
for periods commencing on or after January 1, 1999 shall be credited to
participant separate accounts as provided in subsection 2.6, (along with any
such contributions made for the period commencing January 1, 1991 and ending
December 31, 1998).
2.6 SEPARATE ACCOUNTS
Pursuant to Section 414(k) of the Internal Revenue Code, the committee
shall maintain separate accounts in the name of each participant, and the
following shall apply:
-8-
<PAGE>
(a) No participant contributions may be made to the plan other than
participant contributions in amounts determined under subsection
2.5 that are allocated and credited to participants' separate
accounts. Such contributions shall be invested in one or more
investment funds (the "investment funds") maintained within the
trust funds that are selected by the committee, as provided in
the trust agreement. Participant contributions made and credited
to their separate accounts shall be subject to the
nondiscrimination requirements of Section 401(m) of the Internal
Revenue Code, as described in subsections 8.12 and 8.13. Prior to
January 1, 1991, participants made contributions to the plan but
such contributions were not allocated to separate accounts in the
participant's name; participant contributions for periods on or
after January 1, 1991 have been or will be allocated to the
separate accounts described in this subsection.
(b) At the end of each plan year participants' separate accounts
shall be adjusted to reflect actual investment gains or losses
and unrealized appreciation or depreciation in the value of the
assets of the investment funds; provided, however, that the
separate account of a participant whose retirement date or
employment termination date occurs during a plan year shall be
adjusted as of the end of the calendar month in which the
participant's retirement or employment termination occurs to
reflect the account's pro rata share of investment experience of
the investment funds since the end of the next preceding plan
year.
(c) A participant always shall have a fully vested and nonforfeitable
interest in the participant's separate account as adjusted from
time to time as described in subparagraph (b) next above and in
the participant's monthly separate account benefit in the event
the participant's separate account balance is converted into such
a benefit.
(d) If upon a participant's retirement date or employment termination
date the participant becomes entitled to a monthly retirement
income or a deferred vested benefit in addition to a monthly
benefit provided by the balance in the participant's separate
account, the amount of such monthly retirement income or deferred
vested benefit shall be
-9-
<PAGE>
determined in accordance with the applicable provisions of
Section 5 or Section 6, but with the resulting amount reduced on
an actuarially equivalent basis by the amount of monthly benefit
that could be provided with the participant's separate account
balance. Unless within the 90-day period next following the
participant's retirement date or employment termination date the
participant is eligible to and elects that the participant's
separate account balance be distributed in a lump sum pursuant to
subsection 5.5 or 6.3, or unless the participant's entire plan
benefits are to be distributed either pursuant to the
participant's election, if eligible therefor, of the lump sum
option provided under subparagraph 7.4(d) or because of the
provisions of subsection 7.9, the participant's separate account
balance shall be converted to a monthly separate account benefit
which shall be combined with the monthly retirement income or
deferred vested benefits the participant is entitled to receive
under the plan and distributed pursuant to the provisions of
Section 7.
(e) If a participant's employment with the USG Companies terminates
for a reason other than retirement under the plan or death, and
prior to completion of five years of credited service, then,
subject to the consent requirements set forth in subparagraph
7.8(a), the balance in the participant's separate account as
adjusted as of the end of the calendar month in which the
participant's employment termination occurred shall be
distributed to the participant in a lump sum as provided in
subsection 6.4 along with benefits attributable to the
participant's pre-1991 participant contributions.
(f) If a participant's death occurs during employment, death benefits
attributable to the participant's separate account as well as the
participant's pre-1991 participant contributions shall be payable
as provided in subsection 6.5.
(g) The entire benefits a participant becomes entitled to under the
plan, including the accrued benefits derived from the
participant's separate account (as defined in subparagraph
7.10(d)), shall be subject to the provisions of Section 7
relating to the normal and optional forms of benefit payments,
including qualified joint and survivor annuity requirements.
-10-
<PAGE>
2.7 U.S. FOREIGN SERVICE EMPLOYEE
It is intended that a U.S. foreign service employee (as defined below)
may become eligible to become a participant in the plan and share in the
benefits provided under the plan to the same extent as if the employee were
employed by the company. A "U.S. foreign service employee" means a person who is
a citizen of the United States and is employed:
(a) By a subsidiary incorporated outside the United States that
qualifies as a "foreign affiliate", as defined in Section 406 of
the Internal Revenue Code, and as to which the company has
entered into an agreement under Section 3121(1) of the Internal
Revenue Code; or
(b) By a subsidiary that qualifies as a "domestic subsidiary" of an
employer that qualifies as a "domestic parent corporation", both
as defined in Section 407 of the Internal Revenue Code,
and for whom contributions under a funded plan of deferred compensation (whether
or not a plan described in Section 401(a) or 403(a) of the Internal Revenue
Code) are not provided by any other person with respect to remuneration paid to
such individual by that foreign affiliate or domestic subsidiary.
2.8 LEASED EMPLOYEES
Leased employees shall be treated under the plan as follows:
(a) Leased employees shall be considered employees of the USG
Companies for purposes of determining whether the plan satisfies
the requirements for plan qualification set forth in Section
414(n)(3) of the Internal Revenue Code. In making this
determination, contributions and benefits provided by the leasing
organization that are attributable to services performed for the
USG Companies shall be treated as provided by the USG Companies.
(b) If leased employees do not constitute more than 20 percent of the
USG Companies' nonhighly compensated workforce, subparagraph (a)
next above shall not apply to a leased employee who is covered by
a plan described in Section 414(n)(5)(B) of the Internal Revenue
Code.
-11-
<PAGE>
(c) Leased employees shall be eligible to participate in this plan
only if and to the extent necessary to satisfy the applicable
requirements set forth in Section 414(n)(3) of the Internal
Revenue Code. With respect to any leased employee (including a
leased employee who becomes a participant in this plan through
operation of this subsection 2.9 or otherwise), the requirements
of Section 414(n)(4)(B) of the Internal Revenue Code relating to
"years of service" shall be taken into account for purposes of
subsection 9.3.
(d) A "leased employee" means any person who is not otherwise an
employee of a USG Company and who, pursuant to an agreement
between USG Corporation and any other person, has performed
services for USG Corporation, or for USG Corporation and related
persons (determined in accordance with Section 414(n)(6) of the
Internal Revenue Code), on a substantially full-time basis for a
period of at least one year, and effective January 1, 1997 such
services are performed under the primary direction or control of
USG Corporation.
-12-
<PAGE>
SECTION 3
RETIREMENT DATES, EMPLOYMENT TERMINATION DATE
3.1 NORMAL RETIREMENT DATE
A participant's "normal retirement date" will be the first day of the
calendar month next following the calendar month in which the participant
attains age 65 years ("normal retirement age").
3.2 DEFERRED RETIREMENT DATE
A participant's "deferred retirement date" will be the first day of
the calendar month next following the calendar month in which the participant
retires or is retired from the employ of the USG Companies after the
participant's normal retirement date.
3.3 EARLY RETIREMENT DATE
A participant's "early retirement date" will be the first day of the
calendar month next following the calendar month in which the participant
retires or is retired from the employ of the USG Companies before the
participant attains normal retirement age but after the participant has:
(a) both attained age 55 years and completed ten years of credited
service; or
(b) both attained age 50 years and completed fifteen years of
credited service.
3.4 DISABILITY RETIREMENT DATE
A participant's "disability retirement date" will be the first day of
the calendar month next following the calendar month in which the participant is
retired from the employ of the USG Companies before the participant's normal
retirement date because of total and permanent disability (as described in
subsection 5.7), but after the participant has completed ten years of credited
service.
-13-
<PAGE>
3.5 RETIREMENT DATE
Reference to the "retirement date" of a participant who retires or is
retired under the plan means the participant's normal retirement date if the
participant's retirement date occurs on that date, but otherwise means the
participant's deferred retirement date, early retirement date or disability
retirement date, whichever applies in the participant's case.
3.6 EMPLOYMENT TERMINATION DATE
A participant's "employment termination date" will be the date on
which the participant's employment with the USG Companies terminates before the
participant qualifies for retirement on a retirement date.
3.7 RETIREMENT OR TERMINATION WHILE ON LEAVE OF ABSENCE
A participant otherwise eligible to retire or terminate employment and
become entitled to retirement income or deferred vested benefits under the plan
may do so without returning to active employment with the USG Companies if the
participant is absent from work because of a leave of absence (as defined in
subsection 2.4).
-14-
<PAGE>
SECTION 4
BASES OF RETIREMENT INCOME AND OTHER BENEFITS
4.1 GENERAL
A participant's eligibility for benefits under the plan will be based
on the participant's credited service, as well as the participant's age, and the
amount of the benefits payable to a participant will be based on the
participant's age and on the participant's benefit service, final average
earnings and primary social security benefit, as defined in, or determined in
accordance with, the following provisions of this Section 4. To the extent the
records of the USG Companies are not sufficient to provide all required data and
information in making such determinations, reasonable estimates shall be used.
4.2 CREDITED SERVICE
Subject to the provisions of subsections 2.2 and 4.4, and Section 9, a
participant's "credited service" means the total of the period or periods of
credited service granted to the participant in accordance with the following:
(a) Pre-1976 Service. The participant shall be granted credited
service attributable to the participant's last continuous period
of employment with the USG Companies, if any, up to January 1,
1976, as determined in accordance with the provisions of the plan
as in effect prior to that date.
(b) Post-1976 Service.
(i) If the participant had joined the plan before January 1,
1976 the participant shall be granted a month of credited
service for each calendar month beginning on or after that
date in which the participant is a participant in the plan
and makes the contributions required of the participant
under subsection 2.5.
(ii) If the participant joins the plan on or after January 1,
1976 and on the first eligibility date the participant is
eligible to do so:
(A) The participant shall be granted a year of credited
service for
-15-
<PAGE>
each plan year beginning on or after January 1, 1976 in
which the participant has been employed by one or more
of the USG Companies for at least 90 days, and a month
of credited service for each calendar month within each
plan year beginning on or after January 1, 1985 in
which the participant works for the USG Companies less
than 90 days, provided each such plan year occurs prior
to the plan year in which the participant becomes a
participant; and
(B) The participant shall be granted a month of credited
service for each calendar month in which the
participant is a participant in the plan and makes the
contributions required of the participant under
subsection 2.5 and, if the eligibility date on which
the participant was first eligible to join and on which
the participant joined the plan occurred on July 1, the
participant will be granted a month of credited service
for each calendar month occurring during the six month
period ending immediately before that eligibility date.
(iii) If the participant joins the plan after January 1, 1976 and
after the first eligibility date the participant is eligible
to do so:
(A) The participant shall be granted a year of credited
service for each plan year beginning on or
-16-
<PAGE>
after January 1, 1976 in which the participant has been
employed by one or more of the USG Companies for at
least 90 days, and a month of credited service for each
calendar month within each plan year beginning on or
after January 1, 1985 in which the participant works
for the USG Companies less than 90 days, provided each
such plan year occurs prior to the plan year in which
the participant is first eligible to join the plan; and
(B) The participant shall be granted a month of credited
service for each calendar month occurring prior to the
first eligibility date on which the participant could
have joined the plan but in the plan year in which that
date occurs and a month of credited service for each
subsequent calendar month in which the participant is a
participant in the plan and makes the contributions
required of the participant under subsection 2.5, but
the period beginning on the first eligibility date on
which the participant could have joined the plan and
ending immediately before the eligibility date on which
the participant did join the plan shall not be
considered as credited service.
-17-
<PAGE>
4.3 BENEFIT SERVICE
Subject to the provisions of subsections 2.2, 4.4, and Section 9, a
participant's "benefit service" means the total of the period or periods of
benefit service granted to the participant in accordance with the following:
(a) Pre-1976 Service. The participant, if eligible therefor pursuant
to subsection 4.4, shall be granted benefit service equal to the
period of credited service granted to the participant, if any,
under subparagraph 4.2(a) based upon the participant's last
continuous period of employment with the USG Companies up to
January 1, 1976; except that the participant shall not be granted
benefit service for any portion of such credited service which
extends beyond the participant's normal retirement date.
(b) Post-1976 Service.
(i) If the participant had joined the plan before January 1,
1976 the participant shall be granted a month of benefit
service for each calendar month beginning on or after that
date in which the participant is a participant in the plan
and makes the contributions required of the participant
under subsection 2.5.
(ii) If the participant joins the plan on or after January 1,
1976 and on the first eligibility date the participant is
eligible to do so, the participant shall be granted a month
of benefit service for each calendar month beginning on or
after January 1, 1976 in which the participant is employed
by one or more of the USG Companies as a covered employee
and which ends prior to the date the participant became a
participant, unless the committee determines otherwise or
unless the participant is granted additional benefit service
based on employment with a predecessor company pursuant to
subparagraph 4.4(d), and the participant also will be
granted a month of benefit service for each calendar month
in which the participant is a participant in the
-18-
<PAGE>
plan and makes the contributions required of the participant
under subsection 2.5.
(iii) If the participant joins the plan after January 1, 1976 and
after the first eligibility date the participant is eligible
to do so, the participant shall be granted a month of
benefit service for each calendar month in which the
participant is a participant in the plan and makes the
contributions required of the participant under subsection
2.5, but any period of service beginning after January 1,
1976 and ending prior to the eligibility date on which the
participant joined the plan shall not be considered as
benefit service.
4.4 SPECIAL RULES AS TO CREDITED SERVICE AND BENEFIT SERVICE
(a) The period a participant is on an unpaid leave of absence
described in subsection 2.4 shall be disregarded in determining
the participant's credited service and benefit service for
purposes of the plan except that the portion of a leave of
absence described in subparagraph 2.4(a) due to active military
service not in excess of five years shall be considered as
credited service and benefit service for all purposes of the plan
if:
(i) In the case of a leave of absence that ended on or prior to
December 4, 1994, the leave satisfied the requirements of
the Plan as in effect on the date such leave ended.
(ii) In the case of any such leave that ends on or after December
4, 1994, credited service and benefit service shall be
granted in accordance with Section 414(u) of the Internal
Revenue Code, provided within a period of time not in excess
of three times the period of military service (but not in
excess of five years), the participant contributes to the
plan an amount equal to the contributions the participant
would have been required to make had the participant
-19-
<PAGE>
not been on such leave of absence (assuming that the
participant received compensation during the entire period
of such leave of absence at the same level or rate of the
participant's compensation immediately prior to the
commencement of such leave).
(b) If a participant in another pension plan maintained by an
employer or by a USG Company that has not adopted this plan is
transferred to a group of employees of an employer to which this
plan has been extended, if the committee determines that the
provisions of this subparagraph (b) apply with respect to such
transfer, and if the participant enrolls in the plan and becomes
a participant when first eligible to do so and makes all
contributions required of the participant under this plan prior
to the participant's retirement date or employment termination
date, then, in addition to the credited service and benefit
service the participant is granted under this plan as a result of
the participant's employment with the USG Companies, the
participant shall be granted credited service and benefit service
for purposes of the plan equal to the service the participant had
been granted under such other pension plan for the same purposes,
but any benefits the participant is entitled to receive under
this plan shall be offset by any benefits the participant is
entitled to receive under such other pension plan to the extent
provided in subsection 8.10 of this plan.
(c) A period of concurrent employment with two or more employers will
be considered as employment with only one employer during that
period.
(d) Unless otherwise provided in the plan, or unless otherwise
specified by the committee or required by law:
(i) an employee's service with a predecessor company will not be
considered as service with a USG Company if the employee is
transferred to employment with a USG Company; and
(ii) if a predecessor company becomes a subsidiary of the
company, service with the predecessor
-20-
<PAGE>
company before it becomes a subsidiary will not be
considered as service with a USG Company.
For the purpose of determining a participant's eligibility to receive a
retirement income or deferred vested benefit, or for the purpose of computing
the amount of a participant's retirement income or deferred vested benefit, the
participant's "number of years of credited service" or "number of years of
benefit service" means the total of the participant's years and months of such
service determined in accordance with the foregoing provisions of this
subsection for that purpose.
4.5 EARNINGS
Subject to the annual compensation limit (as defined in subsection
8.5), a participant's "earnings" means the total compensation payable to the
participant for services rendered to the employers as an employee that is
subject to withholding for United States federal income tax purposes (before
taking into account any withholding exemptions), or would be subject to such
withholding if the participant were employed by a United States employer, and
also means the participant's before-tax contributions made under USG Corporation
Investment Plan and before-tax contributions, if any, made under an employer's
cafeteria plan described in Section 125 of the Internal Revenue Code, and any
qualified transportation fringe payable by an employer that is not includible in
income by reason of Section 132 (f)(4) of the Internal Revenue Code, exclusive
of:
(a) any compensation paid in a form other than cash (except that
awards granted in the form of travel paid for by the company
shall be included), or paid for a period the participant either
has discontinued contributions the participant otherwise is
required to make or has ceased to be a covered employee, and any
compensation paid, or deemed to have been paid for tax purposes,
under a nonqualified deferred compensation plan or program that
had been earned but deferred in the current or a prior taxable
year;
(b) any transfer or relocation bonus;
(c) any amounts paid to the participant pursuant to a Termination
Compensation Agreement and any other severance payments made as a
result of the participant's termination of employment;
-21-
<PAGE>
(d) any income realized as a result of the exercise of an option or
options to acquire employer stock, the receipt of a cash
appreciation payment in lieu of the exercise of such an option or
options, the disposition of stock acquired as a result of the
exercise of such an option or options, or the transfer of
restricted employer stock or property; and
(e) any SELECTBENEFITS credits realized as a result of the exchange
of vacation time or medical plan coverage for compensation under
USG SelectBenefits.
Compensation paid to a participant by a USG Company or a predecessor company for
a period of service before the participant became a participant that is
designated as benefit service pursuant to subparagraph 4.4(b) or (d) shall be
considered as compensation paid by the employers in determining the
participant's "earnings". Except as otherwise provided in the next preceding
sentence, any compensation paid to an employee or participant by a USG Company
that is not an employer under the plan or by a predecessor company (or that
would have been paid but for the employee's or participant's salary reduction
authorization in effect under a defined contribution plan or cafeteria plan by
any such corporation) shall not be considered as "earnings" for purposes of the
plan. Any lump sum payment payable to a participant as a "hiring bonus" or cash
incentive to become employed by a USG Company (even if such payment is
contingent on the participant remaining employed by a USG Company for a
specified period of time) shall be considered earnings for purposes of the plan.
4.6 FINAL AVERAGE EARNINGS
The "final average earnings" of a participant means the monthly
average of the earnings paid to the participant (or, because of a salary
reduction authorization, deemed to have been paid) during the period of 36
consecutive calendar months in which the participant received the participant's
highest earnings within the period of 180 consecutive calendar months ending
with the calendar month next preceding the calendar month in which the
participant's employment with all of the USG Companies terminates by retirement
or otherwise. Such average shall be computed by dividing the total of the
participant's earnings for such period of 36 consecutive calendar months by 36,
or by the number of calendar months within that period for which the participant
received earnings, if less than 36. A participant's earnings shall be subject to
the annual compensation limit in determining the amount of the participant's
final average earnings, as described in subsection 8.5.
-22-
<PAGE>
4.7 PRIMARY SOCIAL SECURITY BENEFIT
The term "primary social security benefit" means:
(a) With respect to a participant who retires:
(i) on a normal retirement date or who retires on a deferred
retirement date but did not accrue any benefits after the
participant's normal retirement date, the Primary Insurance
Amount payable to the participant under the Social Security
Act as in effect as of the date the participant attains
normal retirement age; or
(ii) on a deferred retirement date and had accrued benefits after
the participant's normal retirement date, the Primary
Insurance Amount payable to the participant under the Social
Security Act as in effect as of the participant's deferred
retirement date.
(b) With respect to a participant who retires on an early retirement
date, or becomes entitled to receive a deferred vested benefit
under Section 6, the Primary Insurance Amount payable to the
participant at the participant's normal retirement date under the
Social Security Act as in effect on the date the participant's
employment with all of the USG Companies terminates because of
retirement or otherwise, based upon the assumptions that (i) the
participant's annual compensation in the calendar years prior to
the year of the participant's retirement or earlier termination
of employment (annualized, where the participant worked for less
than a full year) had increased at the same rate as the actual
change in average national wages as determined by the Social
Security Administration, (ii) the participant would have
continued in covered employment for purposes of the Act until the
participant would have attained normal retirement age under the
Act, and (iii) the participant would have continued to receive
earnings from a USG Company until the participant attained normal
retirement age at a rate equal to the rate in effect immediately
prior to the participant's early retirement date or employment
termination date, but multiplied by a fraction, the numerator of
which is the participant's years of
-23-
<PAGE>
benefit service at the participant's retirement or earlier
termination of employment and the denominator of which is the
years of benefit service the participant would have had in the
event the participant had continued in the employ of the USG
Companies until the participant's normal retirement date.
Notwithstanding the foregoing, within a reasonable period of time
following the participant's early retirement date or employment
termination date and the time the participant is notified of the
benefit to which the participant is entitled under the plan, a
participant may provide the committee with a record prepared by
the Social Security Administration of the participant's covered
compensation for prior years, which record of prior compensation
will be used in determining the participant's estimated Primary
Insurance Amount payable to the participant at the participant's
normal retirement date.
(c) With respect to a participant who is retired on a disability
retirement date, the Disability Insurance Benefit payable to the
participant at or after the participant's disability retirement
date under the Social Security Act as in effect on that date.
The applicable portion of a participant's primary social security benefit will
be deducted in accordance with the provisions of Section 5 or 6, as the case may
be, in determining the amount of benefits payable to the participant under the
plan even though the participant may not be receiving or may not be eligible to
receive social security benefits because of failure to apply for them, entry
into covered or restricted employment, or otherwise.
4.8 MONTHLY SEPARATE ACCOUNT BENEFIT
For purposes of the plan, a participant's "monthly separate account
benefit" means the amount of monthly benefit that could be provided to the
participant for life commencing on the participant's normal retirement date (or
on the participant's deferred retirement date if the participant's normal
retirement date has occurred) with the balance in the participant's separate
account as adjusted as described in subparagraph 2.6(b) as at the end of the
calendar month in which the participant's retirement or other termination of
employment occurs, determined on the basis of the actuarial factors and
assumptions set forth in paragraphs A-4 and A-6 of Exhibit A.
-24-
<PAGE>
4.9 DETERMINATION OF BASES OF BENEFITS
A participant's credited service, benefit service, final average
earnings, primary social security benefit and any other factors relating to
benefits payable to the participant under the plan shall be determined by the
committee pursuant to the foregoing provisions of this Section 4 on the basis of
the employers' records and on the basis of reasonable estimates where such
records are not sufficient to provide all required data and information.
-25-
<PAGE>
SECTION 5
AMOUNT OF RETIREMENT INCOME
5.1 NORMAL RETIREMENT
Subject to the conditions and limitations of the plan, if on or after
the restatement effective date, a participant retires during the calendar month
in which the participant attains normal retirement age, the participant will be
entitled to a monthly retirement income for life commencing on the participant's
normal retirement date in an amount equal to the greater of:
(a) 1 percent of the participant's final average earnings multiplied
by the participant's number of years of benefit service; or
(b) 1.6 percent of the participant's final average earnings
multiplied by the participant's number of years of benefit
service, reduced by an amount equal to 50 percent of the
participant's primary social security benefit,
but reduced by the participant's monthly separate account benefit, and the
participant also shall be entitled to a monthly benefit for life commencing on
the participant's normal retirement date equal to the participant's monthly
separate account benefit.
5.2 DEFERRED RETIREMENT
Subject to the conditions and limitations of the plan, if a
participant retires after the calendar month in which the participant attains
normal retirement age the participant will be entitled to the participant's
monthly separate account benefit plus a monthly retirement income for life
commencing on the participant's deferred retirement date, determined as follows:
(a) If the participant did not make participant contributions after
the participant's normal retirement date pursuant to subsection
2.5, the participant's monthly retirement income will equal the
monthly amount that would have been payable in accordance with
subsection 5.1 if the participant had retired during the calendar
month in which the participant attained normal retirement age,
but the portion of the participant's monthly retirement income
equal to the accrued benefits derived from the participant's
pre-1991 contributions
-26-
<PAGE>
(as defined in subparagraph 7.10(c)) shall be increased on an
actuarially equivalent basis to reflect the commencement of the
participant's monthly retirement income on the participant's
deferred retirement date rather than on the participant's normal
retirement date, determined on the basis of the actuarial factors
and assumptions set forth in paragraphs A-5 and A-6 of Exhibit A.
(b) If the participant made participant contributions after the
participant's normal retirement date pursuant to subsection 2.5,
the participant's monthly retirement income will be determined in
accordance with subsection 5.1 but based on the participant's
final average earnings, number of years of benefit service,
primary social security benefit, and monthly separate account
benefit as at the participant's deferred retirement date.
(c) If during any calendar month within the period beginning on the
participant's normal retirement date and ending immediately prior
to the participant's deferred retirement date the participant
received compensation from the employers for hours of service (as
defined in United States Department of Labor Regulations
2530.200(b)-2(a)(1) and (2)) performed in fewer than eight days
or separate work shifts, the portion of the participant's monthly
retirement income equal to the accrued benefits derived from
employer contributions (as defined in subparagraph 7.10(e)) shall
be increased on an actuarially equivalent basis to reflect such
calendar month as required by United States Department of Labor
Regulation 2530.203-3, but, if subparagraph (b) next above
applies to the participant, only to the extent such increased
amount would exceed the monthly benefit the participant accrues
for the same calendar month.
5.3 EARLY RETIREMENT BENEFITS
The provisions of this subsection and of subsections 5.4 and 5.5 and
any other provisions of the plan relating to the payment of early retirement
benefits shall not apply to participants who terminate employment with the USG
Companies after having completed ten or more years of credited service but
before their early retirement date (as defined in subsection 3.3) nor to
participants who are retired because of total and permanent disability after
having completed ten or more years of credited service,
-27-
<PAGE>
irrespective of their age. Subject to the conditions and limitations of the
plan, if a participant retires or is retired on an early retirement date the
participant will be entitled to a monthly retirement income for life commencing
on the participant's normal retirement date plus the participant's monthly
separate account benefit. The amount of the participant's monthly retirement
income shall be in an amount equal to the participant's accrued monthly benefit
(as defined in subsection 5.9) as at the participant's early retirement date.
5.4 ELECTION OF EARLY COMMENCEMENT OF EARLY RETIREMENT BENEFITS
Subject to the conditions and limitations of the plan, a participant
who because of the participant's retirement on an early retirement date is
entitled to the participant's monthly separate account benefit and a monthly
retirement income under subsection 5.3 commencing on the participant's normal
retirement date may elect to receive in lieu thereof a reduced monthly separate
account benefit and reduced monthly retirement income commencing on the
participant's early retirement date or on the first day of any subsequent
calendar month that occurs before the participant's normal retirement date by
filing a written election with the committee prior to the date on which payment
of such benefits is to commence. If such a participant elects early commencement
of the participant's monthly separate account benefit and monthly retirement
income, the amount of monthly separate account benefit and monthly retirement
income that otherwise would have been payable to the participant at the
participant's normal retirement date but for the participant's election shall be
reduced by 5/12 of 1 percent for each full calendar month that the commencement
date of such monthly separate account benefit and monthly retirement income
precedes the participant's normal retirement date, except that:
(a) If the participant had attained age 62 years and the
participant's attained age and number of years of benefit service
at the participant's early retirement date equaled 82 or more but
less than 90, the reduction shall be at the rate of 1/4 of 1
percent rather than 5/12 of 1 percent.
(b) If the participant had attained age 62 years and the
participant's attained age and number of years of benefit service
at the participant's early retirement date equaled 90 or more,
there shall be no reduction.
(c) If the participant had not attained age 62 years but the
participant's attained age and number of years of benefit service
at the participant's early retirement date equaled 90 or more,
the reduction shall be the percentage set forth below
-28-
<PAGE>
which corresponds to the age the participant had attained on the
participant's early retirement date, but adjusted on a pro rata
basis to reflect the fractional period, if any, in excess of the
full years of the participant's attained age at the participant's
early retirement date:
<TABLE>
<CAPTION>
Age Percentage
--- ----------
<S> <C>
61 3%
60 6%
59 9%
58 12%
57 15%
56 18%
55 21%
</TABLE>
5.5 LUMP SUM PAYMENT OF EARLY RETIREMENT BENEFITS DERIVED FROM PARTICIPANTS'
CONTRIBUTIONS
Subject to the consent requirements set forth in subparagraph 7.8(a),
a participant who retires or is retired on an early retirement date may file a
written election with the committee within the 90-day period next following the
participant's early retirement date for a lump sum payment equal to the
participant's pre-1991 participant contributions with interest thereon computed
in accordance with paragraph A-2 of Exhibit A up to the date such lump sum
payment is made plus an amount equal to the participant's separate account
balance as adjusted as of the end of the calendar month immediately prior to the
date such lump sum payment is made. Such lump sum payment shall be made to the
participant as soon as practicable thereafter; provided, however, that:
(a) If the lump sum actuarially equivalent value of the participant's
accrued benefits derived from employer contributions does not
exceed $5,000 (but subject to the consent requirements set forth
in subparagraph 7.8(a) if the lump sum actuarially equivalent
value of the participant's total accrued benefits exceeds
$5,000), the lump sum payment will be an amount equal to the lump
sum actuarially equivalent value of the participant's total
accrued benefits. Unless the participant subsequently is
reemployed by an employer and again becomes an active participant
and makes the required contributions, no other benefits shall be
payable under the plan to, or with respect to, the participant.
-29-
<PAGE>
(b) If the lump sum actuarially equivalent value of the participant's
total accrued benefits is not paid to the participant pursuant to
subparagraph (a) next above, the monthly retirement income
otherwise payable to the participant commencing at the
participant's normal retirement date (or any earlier date
permitted above) shall be based on the participant's total
accrued benefits reduced on an actuarially equivalent basis to
reflect the lump sum payment made under this subsection, unless
the participant subsequently is reemployed by an employer and
again becomes an active participant and makes required
contributions.
5.6 DISABILITY RETIREMENT
The provisions of this subsection and subsections 5.7 and 5.8, and any
other provisions of the plan, relating to the payment of disability benefits
shall not apply to a participant who terminates employment with the USG
Companies for a reason other than retirement under the plan (including
retirement because of total and permanent disability) and for a reason other
than the participant's death but after having completed ten or more years of
credited service, irrespective of whether the participant may later become
totally and permanently disabled. Subject to the conditions and limitations of
the plan, if a participant is retired on a disability retirement date because of
total and permanent disability, then, commencing on the participant's disability
retirement date, the participant will be entitled to a monthly retirement income
equal to the participant's accrued monthly benefit (as defined in subsection
5.9) plus an amount that is actuarially equivalent as at that date to the
participant's monthly separate account benefit. However, the portion of the
participant's monthly retirement income derived from employer contributions
shall be reduced by any benefits payable from time to time under Workers
Compensation or Occupational Disease laws for which the participant's employer
is liable (except fixed statutory payments for the loss of, or 100 percent loss
of use of, any bodily member). The offset required under subsection 5.1 with
respect to a participant's primary social security benefit shall assume the
participant is entitled to receive primary disability insurance benefits under
the Social Security Act. Any lump sum payment on account of Workers'
Compensation or Occupational Disease laws that is deductible pursuant to this
subsection shall be prorated on a monthly basis from the date of payment and no
monthly retirement income shall be due under the plan until such lump sum (as
prorated) is exhausted.
-30-
<PAGE>
5.7 TOTAL AND PERMANENT DISABILITY
A participant will be considered to be totally and permanently
disabled for the purposes of the plan if the participant is unable to engage in
any substantially gainful activity by reason of a medically determinable
physical or mental disability which has existed for six continuous months and
which can be reasonably expected to continue for at least 60 additional months
or result in death, exclusive of disability resulting from service in the armed
forces of any country or resulting from an intentional self-inflicted injury, or
participation in a felonious criminal act. The committee shall have the
responsibility for determining whether a participant has incurred a total and
permanent disability and, before approving payment of any disability retirement
income, may require reasonable proof of such disability.
5.8 CONDITIONS AS TO PAYMENT OF DISABILITY BENEFITS
For purposes of this subsection, reference to a participant's
"disability retirement income" means the sum of the monthly retirement income
the participant becomes entitled to receive under subsection 5.6 commencing on
the participant's disability retirement date and an amount that as of that date
is actuarially equivalent to the participant's monthly separate account benefit.
A participant's disability retirement income will be payable to the participant
pursuant to the applicable provisions of Section 7, subject to the following:
(a) If prior to the participant's normal retirement date the
committee determines that the participant no longer is totally
and permanently disabled (applying the description of total and
permanent disability set forth in subsection 5.7, but
irrespective of the period that has elapsed since the participant
first became totally and permanently disabled), or if the
participant refuses to submit to a medical examination at any
reasonable time prior to the participant's normal retirement date
(but not more frequently than semiannually) for the purpose of
verifying the continuance of the participant's disability,
payment of the participant's disability retirement income shall
cease and the participant shall be treated as if the participant
had terminated employment with the USG Companies on the
participant's disability retirement date for a reason other than
retirement because of disability. However, no disability
retirement income payments previously made to the participant
shall be deducted from any deferred vested benefit payments or
monthly retirement income payments to which the participant is
entitled
-31-
<PAGE>
thereafter; no lump sum payment shall be made to the participant
pursuant to subsection 6.3; and, in applying the provisions of
the plan relating to minimum benefits payable thereunder to a
participant, the disability retirement income payments previously
made to the participant shall be considered to have been deferred
vested benefit payments or monthly retirement income payments.
(b) If the participant's disability retirement income is not
discontinued prior to the participant's normal retirement date
pursuant to the provisions of subparagraph (a) next above, the
participant shall continue to be entitled to the same disability
retirement income on and after the participant's normal
retirement date, subject to the provisions of Section 7.
5.9 ACCRUED MONTHLY BENEFIT
For purposes of subsections 5.3, 5.6 and 6.1, a participant's "accrued
monthly benefit" as at any date means an amount equal to the greater of:
(a) 1 percent of the participant's final average earnings multiplied
by the participant's number of years of benefit service; or
(b) 1.6 percent of the participant's final average earnings
multiplied by the participant's number of years of benefit
service, reduced by an amount equal to 50 percent of the
participant's primary social security benefit,
but reduced by an amount that is actuarially equivalent to the participant's
monthly separate account benefit.
5.10 INCREASED BENEFITS FOR CERTAIN RETIRED PARTICIPANTS
Prior to the restatement effective date, the plan provided for an
increase in benefits payable for certain retirees effective prior to the
restatement effective date, and such increases shall continue after the
restatement effective date to those eligible under the terms of the plan as in
effect prior to such date. In addition, the monthly benefits otherwise payable
under the plan for the month of January 1999 (or such later calendar month
specified below), and for each subsequent calendar month, to the persons
described below shall be increased by 10 percent; provided, however, that such
monthly increase
-32-
<PAGE>
shall not be less than thirty dollars nor more than fifty dollars. Such increase
shall be made with respect to each participant who retired under the plan on or
before January 1, 1988 on the participant's normal retirement date or on an
early, disability or deferred retirement date and whose entire benefits were not
distributed to the participant in a lump sum or, if such participant's death
occurred before January 1, 1988, the person, if any, to whom survivor benefits
are payable under the plan because of the participant's death; provided such
increase shall only be paid to a person who immediately prior to the increase is
receiving a payment from the plan of $500 or less.
5.11 BENEFIT COMMENCEMENT CONSENT REQUIREMENTS
If the lump sum actuarially equivalent value of a participant's
nonforfeitable accrued benefits is greater than $5,000, written consent of the
participant and, if the participant has an eligible spouse at the time of the
commencement of the distribution of such benefits, the participant's eligible
spouse (or, if either the participant or the participant's eligible spouse has
died, the survivor), may be required before the commencement of the distribution
of any part of the participant's accrued benefits as described in subparagraph
7.8(a).
-33-
<PAGE>
SECTION 6
TERMINATION BEFORE RETIREMENT,
DEATH DURING EMPLOYMENT
6.1 MONTHLY DEFERRED VESTED BENEFIT
Subject to the conditions and limitations of the plan, if a
participant's employment with the USG Companies terminates for a reason other
than retirement under the plan or the participant's death, but after the
participant has completed five years of credited service, the participant shall
be eligible to receive a monthly deferred vested benefit commencing at the
participant's normal retirement date and continuing for the balance of the
participant's life. The participant's monthly deferred vested benefit commencing
at the participant's normal retirement date shall equal the sum of the
participant's accrued monthly benefit (as defined in subsection 5.9) as at the
participant's employment termination date and the participant's monthly separate
account benefit as at that date.
6.2 ELECTION OF EARLY COMMENCEMENT OF DEFERRED VESTED BENEFITS
Subject to the conditions and limitations of the plan, a participant
who is entitled to a monthly deferred vested benefit under subsection 6.1
commencing on the participant's normal retirement date in addition to the
participant's monthly separate account benefit may elect to receive, in lieu
thereof, a reduced monthly deferred vested benefit and monthly separate account
benefit commencing on the first day of the calendar month next following the
month in which the participant attains age 50 years or on the first day of any
calendar month thereafter that occurs prior to the participant's normal
retirement date by filing a written election with the committee prior to the
date on which payment of such benefits is to commence. If a participant elects
early commencement of the participant's monthly deferred vested benefit and
monthly separate account benefit, the total amount of such benefits otherwise
payable to the participant at the participant's normal retirement date shall be
reduced by 5/12 of 1 percent for each full calendar month that the commencement
date of payment of such benefits precedes the participant's normal retirement
date.
6.3 LUMP SUM PAYMENT OF DEFERRED VESTED BENEFITS DERIVED FROM PARTICIPANTS'
CONTRIBUTIONS
Subject to the consent requirements set forth in subparagraph 7.8(a),
a participant who is entitled to monthly deferred vested benefits may elect by
writing filed with the committee within the 90-day period next following the
participant's employment
-34-
<PAGE>
termination date to receive a lump sum payment equal to the participant's
undistributed pre-1991 participant contributions with interest thereon computed
in accordance with paragraph A-2 of Exhibit A up to the date such lump sum
payment is made plus an amount equal to the participant's separate account
balance as adjusted as at the end of the calendar month immediately prior to the
date such lump sum payment is made. Such lump sum payment shall be made to the
participant as soon as practicable thereafter; provided, however, that:
(a) If the lump sum actuarially equivalent value of the participant's
accrued benefits derived from employer contributions does not
exceed $5,000 (but subject to the consent requirements set forth
in subparagraph 7.8(a) if the lump sum actuarially equivalent
value of the participant's total accrued benefits exceeds
$5,000), the lump sum payment will be an amount equal to the lump
sum actuarially equivalent value of the participant's total
accrued benefits. Unless the participant subsequently is
reemployed by an employer and again becomes an active participant
and makes the required contributions, no other benefits shall be
payable under the plan to, or with respect to, the participant.
(b) If the lump sum actuarially equivalent value of the participant's
total accrued benefits is not paid to the participant pursuant to
subparagraph (a) next above, the monthly deferred vested benefit
and monthly separate account benefit otherwise payable to the
participant commencing at the participant's normal retirement
date (or any earlier date permitted above) shall be based on the
participant's total accrued benefits reduced on an actuarially
equivalent basis to reflect the lump sum payment made under this
subsection, unless the participant subsequently is reemployed by
an employer, again becomes an active participant and makes the
required contributions.
6.4 TERMINATION PRIOR TO FIVE YEARS OF CREDITED SERVICE
If a participant's employment with the USG Companies terminates for a
reason other than retirement under the plan or the participant's death, and
prior to the participant's completion of five years of credited service, no
benefits shall be payable to the participant under the plan attributable to the
participant's employment with the employers except that as soon as practicable
after the participant's employment termination date there shall be paid to the
participant in a lump sum an amount equal to:
-35-
<PAGE>
(a) The greater of:
(i) the participant's undistributed pre-1991 participant
contributions made under the plan with interest thereon
computed up to the date such lump sum payment is made in
accordance with paragraph A-3 of Exhibit A; or
(ii) the lump sum actuarially equivalent value of the accrued
benefits derived from the participant's pre-1991 participant
contributions (as defined in subparagraph 7.10(c)); plus
(b) The balance in the participant's separate account as adjusted as
of the end of the calendar month in which the participant's
employment termination occurred.
6.5 DEATH DURING EMPLOYMENT
If a participant's death occurs prior to the participant's termination
of employment with the USG Companies, the only benefits attributable to the
participant's employment with the employers payable under the plan shall be
those described below (but subject to the minimum death benefits provided for in
subsection 8.9):
(a) If at the time of the participant's death the participant had not
attained normal retirement age and had completed less than five
years of credited service (irrespective of whether the
participant then had an eligible spouse), as soon as practicable
after the participant's death a lump sum payment shall be made to
the participant's beneficiary (as defined in subsection 7.11)
equal to the sum of the participant's undistributed pre-1991
participant contributions with interest thereon as determined
under paragraph A-3 of Exhibit A and the balance in the
participant's separate account as adjusted as of the end of the
calendar month in which the participant's death occurred.
(b) If at the time of the participant's death the participant had not
attained normal retirement age but was eligible to retire on an
early retirement date or had completed five or more years of
credited service, the participant's eligible spouse at the time
of the participant's death, if any, shall be entitled to a
pre-
-36-
<PAGE>
retirement spouse's benefit in accordance with subsection 6.6. If
such participant did not have an eligible spouse at the time of
the participant's death, as soon as practicable thereafter a lump
sum payment shall be made to the participant's beneficiary equal
to the sum of the participant's undistributed pre-1991
participant contributions with interest thereon as determined
under paragraph A-3 of Exhibit A and the balance in the
participant's separate account as adjusted as of the end of the
calendar month in which the participant's death occurred.
(c) If at the time of the participant's death the participant had
attained normal retirement age and had an eligible spouse, the
participant's eligible spouse shall be entitled to a
pre-retirement spouse's benefit in accordance with subsection
6.6. Notwithstanding the next preceding sentence, if the
participant had elected the life and period certain option or the
joint and survivor option under subsection 7.4, and that option
was in effect at the time of the participant's death, benefits
shall be payable under the option as if the participant's
retirement date had occurred immediately prior to the
participant's death; provided, however, that a portion of the
benefit shall be paid to the surviving spouse sufficient to
provide the pre-retirement's spouse's benefit in accordance with
the last paragraph of subsection 7.3.
(d) If at the time of the participant's death the participant had
attained normal retirement age but did not have an eligible
spouse, then, unless the participant had elected the life and
period certain option or joint and survivor option under
subsection 7.4 and the option was in effect at the time of the
participant's death, as soon as practicable thereafter a lump sum
payment shall be made to the participant's beneficiary equal to
the sum of the participant's undistributed pre-1991 participant
contributions with interest thereon as determined under paragraph
A-3 of Exhibit A and the balance in the participant's separate
account as adjusted as of the end of the calendar month in which
the participant's death occurred. If the participant had elected
either option, the benefits payable under the plan attributable
to the participant's employment shall be paid under the option as
if the participant's
-37-
<PAGE>
retirement date had occurred immediately prior to the
participant's death.
6.6 PRE-RETIREMENT SPOUSE'S BENEFIT
If a participant's eligible spouse qualifies for a pre-retirement
spouse's benefit as described in subparagraph 6.5(b) or (c), a monthly benefit
shall be payable to the participant's eligible spouse for life in an amount
equal to 50 percent of the sum of the monthly retirement income and monthly
separate account benefit that would have been payable to the participant under
subsection 5.1 as a life annuity if the participant had retired on the last day
of the calendar month in which the participant's death occurred and died
thereafter and if the participant had attained normal retirement age prior to
the participant's retirement but with such sum determined on the basis of the
participant's benefit service, final average earnings, primary social security
benefit and separate account balance as at the end of the calendar month in
which the participant's death occurs. The first payment to a participant's
eligible spouse under this subsection shall be made as of the beginning of the
calendar month next following the calendar month during which the participant's
death occurs and the final payment shall be made as of the beginning of the
calendar month during which the eligible spouse's death occurs.
6.7 BENEFIT COMMENCEMENT CONSENT REQUIREMENTS
If the lump sum actuarially equivalent value of a participant's
nonforfeitable accrued benefits is greater than $5,000, written consent of the
participant and, if the participant has an eligible spouse at the time of the
commencement of the distribution of such benefits, the participant's eligible
spouse (or, if either the participant or the participant's eligible spouse has
died, the survivor), may be required before the commencement of the distribution
of any part of the participant's accrued benefits as described in subparagraph
7.8(a).
-38-
<PAGE>
SECTION 7
PAYMENT OF RETIREMENT INCOME AND OTHER BENEFITS
7.1 BENEFIT COMMENCEMENT DATE, COMBINED BENEFIT REFERENCE
For purposes of this Section 7, except where the context provides
otherwise, reference to a participant's monthly retirement income or deferred
vested benefit shall mean the monthly retirement income or deferred vested
benefit the participant becomes entitled to plus the participant's monthly
separate account benefit. A participant's "benefit commencement date" means the
date on which payment of the participant's monthly retirement income or deferred
vested benefit commences or the lump sum actuarially equivalent value of such
monthly benefit is distributed to the participant. If a lump sum payment is made
to a participant pursuant to subsection 5.5 or 6.3 equal to the sum of the
participant's pre-1991 participant contributions and interest thereon and the
participant's separate account balance before the participant receives or
commences to receive additional benefits to which the participant is entitled
under the plan, the participant's benefit commencement date will not be deemed
to have occurred until the date the participant receives or commences to receive
such additional benefits.
7.2 ELIGIBLE SPOUSE
For purposes of the plan, the spouse of a participant will be
considered as an "eligible spouse" as of any date only if at least six months
prior thereto the participant and spouse were lawfully married under the laws of
the state where the marriage was contracted and the marriage remains legally
effective.
7.3 NORMAL FORM OF PAYMENT OF BENEFITS
Except as otherwise specifically provided, payment of a participant's
monthly retirement income or deferred vested benefits shall be made to the
participant, and payment of monthly benefits shall be made to the participant's
spouse, if eligible for such benefits, as follows:
(a) Life Annuity. A participant whose retirement date or employment
termination date has occurred shall receive payment of the
participant's monthly retirement income or deferred vested
benefit on a life annuity basis if the participant either is not
eligible for a qualified joint and survivor annuity under
subparagraph (b) next below and the participant's monthly benefit
is not payable under a benefit
-39-
<PAGE>
option described in subsection 7.4 or during the applicable
election period the participant had elected not to receive
payment in the form of a qualified joint and survivor annuity
under subparagraph (b) next below (and the participant's eligible
spouse, if any, had consented to such election).
(b) Qualified Joint and Survivor Annuity. A participant whose
retirement date or employment termination date has occurred and
who has an eligible spouse immediately preceding the
participant's benefit commencement date shall receive payment of
the participant's monthly benefit in the form of a "qualified
joint and survivor annuity" unless in lieu thereof and during the
applicable election period (as defined in subsection 7.6) the
participant had elected to receive payment either in the form of
a life annuity under subparagraph (a) next above or under a
benefit option described in subsection 7.4 that was in effect on
the participant's benefit commencement date (and the
participant's eligible spouse had consented to such election).
Such qualified joint and survivor annuity, which shall be the
actuarial equivalent of a single annuity for the life of the
participant, shall consist of a reduced monthly benefit
continuing during the participant's lifetime and, if the
participant's eligible spouse is living at the time of the
participant's death, payment of one-half of such reduced monthly
benefit shall be made to the participant's eligible spouse until
the spouse's death occurs.
If a participant who otherwise is entitled to receive payment of the
participant's monthly retirement income in the form of a life annuity or
qualified joint and survivor annuity dies before the participant's benefit
commencement date, or if a participant who has an hour of service or an hour of
paid leave after August 22, 1984 and who otherwise is entitled to receive
payment of the participant's deferred vested benefit in the form of a life
annuity or a qualified joint and survivor annuity dies before the participant's
benefit commencement date, the participant's eligible spouse shall be entitled
to receive a monthly benefit for life equal to 50 percent of the amount of
monthly benefit that would have been payable to the participant as a life
annuity commencing on the later to occur of the participant's normal retirement
date or the date of the participant's death if such date had been the
participant's benefit commencement date. The first payment to the participant's
eligible spouse shall be made as of the beginning of the calendar month next
following the later to occur of the date of the participant's death or the date
the participant would have attained age 55 years or, if the participant
terminated employment on or after December 1, 1994, age 50 years
-40-
<PAGE>
and the final payment shall be made as of the beginning of the calendar month
during which the eligible spouse's death occurs.
7.4 BENEFIT OPTIONS
In lieu of the normal forms and amounts of retirement income or
deferred vested benefits specified in subsection 7.3, but subject to the
provisions of subsection 7.5 (including rules as to benefit options established
by the committee pursuant to that subsection), a participant may elect a
retirement income or deferred vested benefit of actuarially equivalent value in
one or more of the following forms:
(a) Life and Period Certain Option. A smaller retirement income or
deferred vested benefit terminating at the participant's death
and, if the participant dies before the tenth anniversary of the
participant's benefit commencement date, a continuing payment of
the same amount to a person or persons designated by the
participant for the balance of such ten-year period.
(b) Joint and Survivor Option. A smaller retirement income or
deferred vested benefit payable to the participant during the
participant's lifetime and, if another person the participant had
designated is living at the time of the participant's death,
payment of the same amount or 75 percent or 50 percent of that
amount to such other person as long as such other person lives;
provided, however, that if the participant designates someone
other than the participant's spouse, the lump sum actuarially
equivalent value of the monthly retirement income or deferred
vested benefit payable to the participant under the option over
the participant's life expectancy shall be greater than 50
percent of the lump sum actuarially equivalent value of the
monthly retirement income or deferred vested benefit that
otherwise would be payable to the participant on a life annuity
basis.
(c) Level Payment Option. If a participant retires on an early
retirement date and payment of the participant's monthly
retirement income begins before the earlier of the date the
participant is eligible to receive, or the date the participant
commences receiving, Old Age Insurance Benefits under the Social
Security Act, or if a participant terminates employment before
retirement under the plan but after
-41-
<PAGE>
becoming entitled to receive a monthly deferred vested benefit
and payment of the participant's monthly deferred vested benefit
begins before the participant commences receiving Old Age
Insurance Benefits under the Social Security Act, a larger
monthly retirement income or deferred vested benefit payable to
the participant until the first to occur of the date of the
participant's death or the earliest date on which the participant
becomes eligible to apply for and receive Old Age Insurance
Benefits under the Social Security Act (either reduced or
unreduced, as specified in the election), and, where the full
actuarial equivalent of the normal form and amount of the
participant's retirement income or deferred vested benefit has
not been provided under the option, with a continuance of a
smaller amount of retirement income or deferred vested benefit
after the latter date and until the participant's death.
(d) Lump Sum Option. If a participant retires on the participant's
normal retirement date, a deferred retirement date, or an early
retirement date after having attained age 55 years, a lump sum
payment as soon as practicable after the participant's retirement
date of an amount equal to the lump sum actuarially equivalent
value at the participant's retirement date of the monthly
retirement income otherwise payable to the participant in
accordance with the plan.
7.5 RULES AS TO ELECTION AND DISCONTINUANCE OF BENEFIT OPTIONS
A participant's election of an optional form of retirement income or
deferred vested benefit specified in subsection 7.4 shall be subject to the
following:
(a) A participant's election of a benefit option shall be subject to
the provisions of the plan as in effect at the time of such
election and its approval by the committee. A participant may
elect a benefit option under subsection 7.4 at any time prior to
the participant's retirement date or earlier termination of
employment date. The election must be in writing and signed by
the participant. If the participant has an eligible spouse, the
written consent of the eligible spouse to the benefit option
election must be provided to the extent required by the
Retirement Equity Act of 1984, as it may be amended from time to
time.
-42-
<PAGE>
(b) If a participant is retired on a disability retirement date
within twelve months of the date the participant elects the life
and period certain option, joint and survivor option or level
payment option under subsection 7.4, or if a participant who had
elected the lump sum option under subsection 7.4 is retired on a
disability retirement date or terminates employment and becomes
entitled to a monthly deferred vested benefit, such option
election then shall be automatically cancelled.
(c) If payment of a participant's retirement income or deferred
vested benefit otherwise would be required in the form of a
qualified joint and survivor annuity, the participant's option
election also must contain the participant's election that
payment not be made in that form, and the participant's eligible
spouse must consent to that election pursuant to subparagraph
7.7(c).
(d) A participant who has elected a benefit option may revoke it at
any time prior to the participant's retirement date or earlier
termination of employment date by writing filed with the
committee. A participant who has elected an option may change it
at any time prior to the participant's retirement date or earlier
retirement or termination of employment date. If and to the
extent required by the Retirement Equity Act of 1984, as it may
be amended from time to time, a revocation of a benefit option
election made by a participant shall constitute a revocation of
the participant's election that payment of the participant's
benefits not be made in the form of a qualified joint and
survivor annuity and a change in an option elected by a
participant shall be treated as a new election of a benefit
option by that participant for purposes of the spousal consent
requirements described in subparagraph (a) next above.
(e) Except as otherwise provided below, if a participant who had
elected a benefit option under subsection 7.4 dies before the
participant's retirement date or earlier termination of
employment date, or if a participant who had elected a benefit
option under subsection 7.4 dies after the participant's
retirement date or earlier termination of employment date but
before the participant's benefit commencement date, the
-43-
<PAGE>
option elected automatically will be cancelled and no benefits
will be paid to any person under the option. If the participant
had elected the life and period certain or joint and survivor
option under subsection 7.4 and had continued in the employ of
the USG Companies after attaining normal retirement age, then
survivorship benefits will be paid in accordance with the option
elected in the same manner and amount as would have been payable
if the participant had retired on the last day of the calendar
month in which the participant's death occurred and died on that
day immediately after the participant's retirement, except that
if the participant had elected the life and period certain option
all payments under the option shall be made within five years of
the date of the participant's death; provided, however, that a
portion of the benefit shall be paid to the surviving spouse
sufficient to provide the pre-retirement spouse's benefit in
accordance with the last paragraph of subsection 7.3.
(f) If a participant elects the life and period certain option under
subparagraph 7.4(a) and the person or persons designated by the
participant under the option predecease the participant, the
option shall remain in effect. Unless the participant designates
another person or persons to receive any benefits payable under
the option after the participant's death, such benefits shall be
payable to the participant's beneficiary. If the participant
wishes to designate another person or persons to receive any
benefits payable under the option after the participant's death,
such designation shall be treated as a new benefit option
election for purposes of the spousal consent requirements
described in subparagraph (a) next above.
(g) If the participant elects the joint and survivor option under
subparagraph 7.4(b) and the person the participant had designated
to receive payment under the option after the participant's death
dies before the participant's retirement date or earlier
termination of employment date, the option elected automatically
will be cancelled. The participant's retirement income or
deferred vested benefit will be paid to the participant in the
normal form and amount unless a new election can be and is made
by the participant.
-44-
<PAGE>
(h) If a participant does not have an eligible spouse when the
participant elects a benefit option under subsection 7.4 but the
participant does have an eligible spouse after such election but
on or prior to the participant's benefit commencement date, the
option automatically will be cancelled. Whether the participant
again may elect a benefit option under subsection 7.4 shall be
determined under the provisions thereof as well as the provisions
of this subsection, and any such election shall be subject to the
requirements described in subparagraph (c) next above that the
participant elect that payment of the participant's benefits not
be made in the form of a qualified joint and survivor annuity
and, if the participant's benefit commencement date will occur
after December 31, 1984, the participant's eligible spouse
consent to such election, as well as the provisions of
subparagraph (e) next above.
7.6 APPLICABLE ELECTION PERIOD
The term "applicable election period" means, with respect to an
election by a participant pursuant to subparagraph 7.3(b) to waive the qualified
joint and survivor annuity, the 90-day period ending on the participant's
benefit commencement date.
7.7 RELATING TO QUALIFIED JOINT AND SURVIVOR ANNUITY
The foregoing provisions of the plan which relate to qualified joint
and survivor annuities shall be subject to the following:
(a) The committee will provide each participant with a general
explanation of the qualified joint and survivor annuity form of
payment, the circumstances under which it will be provided, and
the availability of the election that distribution not be made in
that form. The committee also will provide a general explanation
of the relative financial effect upon the participant's plan
benefits of an election that distribution not be made in the form
of a qualified joint and survivor annuity, the right of the
participant's eligible spouse to consent to such an election and
the right of a participant to revoke (and the effect of a
revocation) of such an election.
-45-
<PAGE>
(b) Subject to such regulations as the Secretary of the Treasury
issues for this purpose, the explanation described in
subparagraph (a) next above as to the qualified joint and
survivor annuity will be provided within a reasonable period of
time before the participant's benefit commencement date.
(c) An election out of the qualified joint and survivor annuity must
be in writing and filed with the committee during the applicable
election period. Such election will not be effective unless the
participant's spouse consents to and acknowledges the effect of
the election. Such consent and acknowledgment must be in writing,
filed with the committee, and witnessed by the committee, an
authorized representative of the committee or a notary public.
Consent shall not be required if the committee establishes to its
satisfaction that consent cannot be obtained because the spouse
cannot be located, or because of such other reason as may be
specified by regulations issued by the Secretary of the Treasury.
(d) An election out of the qualified joint and survivor annuity may
be revoked by a participant at any time prior to the
participant's benefit commencement date by writing filed with the
committee. Subsequent elections (and revocations) may be made by
the participant in accordance with subparagraph (c) next above
during the applicable election period. The committee may
establish rules from time to time as to whether consents given by
eligible spouses to participants' elections out of the qualified
joint and survivor annuity may be revoked or shall be
irrevocable, which rules shall meet the requirements of
applicable law and shall be applied on a uniform and
nondiscriminatory basis.
7.8 BENEFIT COMMENCEMENT REQUIREMENTS
The distribution of benefits under the plan shall be subject to the
following requirements:
(a) Consent to the Commencement of Benefits Prior to Normal
Retirement Age. Irrespective of the manner in which benefits are
to be distributed under the plan to a participant or to the
participant's eligible spouse, if the lump sum
-46-
<PAGE>
actuarially equivalent value of the participant's accrued
benefits exceeds $5,000:
(i) Distributions to the participant may not be made or commence
before the participant attains normal retirement age without
the written consent of the participant and the participant's
eligible spouse, if any.
(ii) Distributions to the participant's eligible spouse may not
be made or commence before the date the participant would
have attained normal retirement age but for the
participant's death without the written consent of the
participant's eligible spouse.
Written consent as to any distribution must be obtained not more
than 90 days before the commencement of the distribution of any
part of the participant's accrued benefits. For purposes of this
subparagraph, the lump sum actuarially equivalent value of a
participant's accrued benefits shall be treated as greater than
$5,000 at all times after the commencement of a distribution of
all or part of the participant's accrued benefits that was
subject to the foregoing consent requirement. The committee may
establish rules from time to time as to whether consents required
by the foregoing provisions of this subparagraph may be revoked
or shall be irrevocable, which rules shall meet the requirements
of applicable law and shall be applied on a uniform and
nondiscriminatory basis. The foregoing provisions of this
subparagraph shall be applied by the committee only to the extent
required by the Retirement Equity Act of 1984, as it may be
amended from time to time.
(b) Latest Benefit Commencement Date. Unless an election by a
participant to defer payment is made in accordance with rules
established by the committee, payment of benefits under the plan
to a participant shall commence not later than the 60th day after
the latest of the end of the calendar year in which:
(i) The participant attains normal retirement age;
-47-
<PAGE>
(ii) The tenth anniversary of the year in which the participant
commenced participation in the plan occurs; or
(iii) The participant terminates the participant's employment
with the USG Companies.
Payment of a participant's benefits must commence by the
participant's required commencement date. A participant's
"required commencement date" means:
(A) Except as provided in Paragraph (B) below, April 1 of
the calendar year following the later to occur of the
calendar year in which the participant attained age
70-1/2 years or the calendar year in which the
participant's retirement date occurred;
(B) In the case of a participant who is a five percent
owner (as defined in Section 416 of the Internal
Revenue Code) with respect to the plan year ending in
the calendar year in which the participant attains age
70-1/2, April 1 of the calendar year next following the
calendar year in which the participant attains age
70-1/2.
Notwithstanding the foregoing provisions of this subparagraph,
(I) the required commencement date of a participant who attained
age 70-1/2 prior to January 1, 2000, shall be April 1 of the
calendar year following the calendar year in which the
participant attained age 70-1/2; and (II) the required
commencement date of a participant who filed a written election
with the committee before January 1, 1984 to have payment of the
participant's benefits commence on a date permitted under the
terms of the plan as in effect on December 31, 1983 shall be the
date specified in the election.
-48-
<PAGE>
In the event payment of a participant's benefits begins after
April 1 of the calendar year following the calendar year in which
the participant attains age 70-1/2 years, the participant's
accrued benefit under the plan shall be actuarially increased
(net of any additional benefit accrual) to take into account the
period after such April 1 during which the participant was not
receiving benefit payments under the plan.
7.9 PAYMENT OF SMALL AMOUNTS
If the lump sum actuarially equivalent value of a participant's
accrued benefits (as defined in subparagraph 7.10(a)) does not exceed $5,000, or
if the participant's accrued benefits are payable to a participant's eligible
spouse or any other person because of the death of the participant before the
participant's benefit commencement date and the lump sum actuarially equivalent
value of such benefits does not exceed $5,000, a lump sum payment equal to the
lump sum actuarially equivalent value of such benefits shall be paid to the
participant, the participant's eligible spouse or such other person, as the case
may be. For purposes of this subsection, the lump sum actuarially equivalent
value shall be determined in accordance with paragraph A-4 of Exhibit A. If a
participant's accrued benefits derived from employer contributions are zero, the
participant shall be deemed to have received a distribution of such benefits.
7.10 BENEFITS DERIVED FROM EMPLOYER AND PARTICIPANT CONTRIBUTIONS
For purposes of the plan, the terms "accrued benefits", "accumulated
pre-1991 contributions", "accrued benefits derived from pre-1991 participant
contributions", "accrued benefits derived from the participant's separate
account" and "accrued benefits derived from employer contributions" shall have
the following meanings as of any applicable date:
(a) "Accrued benefits" means a participant's monthly separate account
benefit plus the amount of monthly retirement income or deferred
vested benefit payable to the participant on a life annuity
basis, commencing on the participant's normal retirement date (or
deferred retirement date if the participant's normal retirement
date has occurred) as determined in accordance with the plan as
of the applicable date.
-49-
<PAGE>
(b) "Accumulated pre-1991 contributions" as of the applicable date
means a participant's undistributed pre-1991 participant
contributions with interest thereon as determined under paragraph
A-3 of Exhibit A to the date the participant would attain normal
retirement age.
(c) "Accrued benefits derived from pre-1991 participant
contributions" means an amount equal to a participant's
accumulated pre-1991 contributions as of the applicable date
expressed as a monthly benefit commencing on the participant's
normal retirement date, determined on the basis of actuarial
factors and assumptions set forth in paragraphs A-4 and A-6 of
Exhibit A as of that date.
(d) "Accrued benefits derived from the participant's separate
account" as of the applicable date means the amount that then is
actuarially equivalent to the participant's monthly separate
account benefit, calculated by applying the actuarial factors and
assumptions set forth in paragraphs A-4 and A-6 of Exhibit A as
of that date.
(e) "Accrued benefits derived from employer contributions" means the
excess of a participant's accrued benefits as of the applicable
date over the sum of the accrued benefits derived from the
participant's pre-1991 participant contributions and the accrued
benefits derived from the participant's separate account as of
that date.
7.11 DESIGNATION OF BENEFICIARIES
Each participant may, from time to time, designate any person or
persons (who may be designated concurrently, contingently or successively) to
whom any death benefits payable on behalf of such participant are to be
distributed (other than any death benefits required to be paid to the
participant's eligible spouse pursuant to subsection 6.6 or 7.3 or any death
benefits payable to the participant's eligible spouse or any other person
pursuant to an option in effect at the time of the participant's death pursuant
to subsection 7.4). A beneficiary designation will be effective only when it is
signed and filed with the committee while the participant is still alive and
will cancel all beneficiary forms previously signed and filed by the
participant. Except as otherwise provided in the next sentence, if a participant
fails to designate a beneficiary as provided above, or if the beneficiary
designated by a deceased participant dies before the participant or before
-50-
<PAGE>
complete payment of the benefits payable on account of the participant's death,
the committee in its discretion may direct payment of such benefits as follows:
(a) To or for the benefit of any one or more of the participant's
relatives by blood, marriage or adoption, in such proportions as
the committee determines; or
(b) To the legal representative or representatives of the estate of
the last to die of the participant and the designated
beneficiary.
If permitted by law, a participant's beneficiary designation in effect under a
predecessor plan immediately before its merger into this plan shall be deemed to
be a valid beneficiary designation filed with the committee under this plan
unless and until the participant revokes such beneficiary designation or makes a
new beneficiary designation under this plan. The term "designated beneficiary"
as used in the plan means the person or persons designated by a participant as
the participant's beneficiary in the last effective form filed with the
committee under this subsection and to whom a deceased participant's benefits
are payable under the plan. The term "beneficiary" as used in the plan means the
person or persons to whom a deceased participant's benefits are payable under
this subsection.
7.12 MISSING PARTICIPANTS OR BENEFICIARIES
Each participant and each designated beneficiary must file with the
committee from time to time in writing the participant's or the beneficiary's,
as the case may be, post office address and each change of post office address.
Any communication, statement or notice addressed to a participant or beneficiary
at the last post office address filed with the committee, or if no address is
filed with the committee then at the last post office address as shown on the
records of the USG Companies, will be binding on the participant and the
participant's beneficiary for all purposes of the plan. None of the committee,
the trustee and the USG Companies shall be required to search for or locate a
participant or beneficiary. If the committee notifies a participant or
beneficiary that the participant or beneficiary is entitled to a distribution
and also notifies the participant or beneficiary of the provisions of this
subsection, and the participant or beneficiary fails to claim benefits under the
plan or make the participant's or beneficiary's whereabouts known to the
committee within five years after the notification, the benefits under the plan
of the participant or beneficiary will be disposed of as follows:
(a) If the whereabouts of the participant is unknown but the
whereabouts of the participant's designated beneficiary then is
known to the committee, distribution will be made to the
beneficiary.
-51-
<PAGE>
(b) If the whereabouts of the participant and the participant's
designated beneficiary then is unknown to the committee, but the
whereabouts of one or more relatives by blood or marriage of the
participant is known to the committee, the committee may direct
the trustee to distribute such benefits to any one or more of
such relatives and in such proportions as the committee
determines.
(c) If the whereabouts of the participant, the participant's
designated beneficiary and any relatives by blood or marriage of
the participant then is unknown to the committee, such benefits
shall be forfeited to the extent permitted by federal law.
7.13 DIRECT TRANSFER OF ELIGIBLE ROLLOVER DISTRIBUTIONS
If a participant's distribution constitutes an eligible rollover
distribution under Section 402(c)(4) of the Internal Revenue Code, then the
participant may elect to have such distribution paid directly to an eligible
retirement plan described in Section 402(c)(8)(B) of the Internal Revenue Code.
Each election by a participant under this subsection 7.13 shall be made at such
time and in such manner as the committee shall determine, and shall be effective
only in accordance with such rules as shall be established from time to time by
the committee.
-52-
<PAGE>
SECTION 8
MAXIMUM AND MINIMUM BENEFIT LIMITATIONS,
OFFSET FOR OTHER PLAN BENEFITS
8.1 MAXIMUM RETIREMENT INCOME AND DEFERRED VESTED BENEFITS
Section 415 of the Internal Revenue Code imposes certain limitations
on the amount of benefits that may be provided for a participant in a defined
benefit plan (as defined in Section 414(j) of the Internal Revenue Code) and in
a defined contribution plan (as defined in Section 414(i) of the Internal
Revenue Code). This plan is a defined benefit plan but for certain purposes,
including the application of Section 415, the plan is required to be treated as
a defined contribution plan to the extent it provides benefits based on pre-1991
participant contributions and participants' separate accounts. For purposes of
this Section 8, references to a participant's monthly retirement income or
monthly deferred vested benefit shall be deemed to include the participant's
monthly separate account benefit or, where appropriate, an amount that is
actuarially equivalent to such benefit.
8.2 LIMITATION YEAR AND TOTAL COMPENSATION
For purposes of this Section 8:
(a) A "limitation year" means the twelve-month period ending on
December 31 of each year; and
(b) A participant's "total compensation" means, with respect to any
limitation year, the total amount of compensation (as defined in
Internal Revenue Code Section 415(c)(3)) paid to the participant
during that year for services rendered to the USG Companies as an
employee.
8.3 DEFINED BENEFIT PLAN AND DEFINED CONTRIBUTION PLAN LIMITATIONS
With respect to each participant whose retirement date (as defined in
subsection 3.5) or employment termination date occurs on or before December 31,
1999, there will be determined with respect to the participant a defined benefit
plan fraction and a defined contribution plan fraction in accordance with
Section 415 of the Internal Revenue Code, but taking into account adjustments to
defined benefit or defined contribution plan limitations, or combined
limitations, permitted under public laws that modify Section 415 where a
participant's accrued benefits immediately prior to the effective date of any
such law exceed the maximum accrued benefits permitted by such
-53-
<PAGE>
law; the benefits provided for any such participant under this plan will be
adjusted to the extent necessary so that the sum of such fractions determined
with respect to the participant does not exceed 1.0. The provisions of this
subsection 8.3 shall not apply to a participant who retires or otherwise
terminates employment on or after January 1, 2000.
8.4 COMBINING OF PLANS
In applying the limitations set forth in subsections 8.2 and 8.3,
reference to the plan shall mean the plan and all other defined benefit plans
(whether or not terminated) maintained by the USG Companies, reference to a
defined contribution plan maintained by the USG Companies shall mean that plan
and all other defined contribution plans (whether or not terminated) maintained
by the USG Companies, and reference to the USG Companies shall include any
subsidiary of the company more than 50 percent of the voting stock of which is
owned, directly or indirectly, by the company.
8.5 MAXIMUM BENEFITS AS A RESULT OF THE ANNUAL COMPENSATION LIMIT
A participant's earnings as defined in subsection 4.5 are subject to
the annual compensation limit (as defined below) for purposes of determining the
amount of the participant's contributions required under subsection 2.5 and
determining the amount of the retirement income or deferred vested benefit
(exclusive of the participant's separate account benefit) the participant may
become entitled to receive under the plan. The "annual compensation limit" means
the limitation on compensation imposed by Section 401(a)(17) of the Internal
Revenue Code, applied as follows:
(a) For purposes of determining the amount of a participant's
contributions required under subsection 2.5, the annual
compensation limit is $160,000 for the plan year commencing on
January 1, 1999 and for each subsequent plan year shall be
$160,000 (or such greater amount as permitted as a result of an
adjustment under Section 401(a)(17)(B)(II) of the Internal
Revenue Code effective for that plan year).
(b) For the purpose of determining a participant's final average
earnings, the annual compensation limit for any 12 month period
commencing in a plan year shall be $160,000 (or such greater
amount as permitted as a result of an adjustment under Section
401(a)(17)(B) of the Internal Revenue Code effective for the plan
year in which such 12 month period begins).
-54-
<PAGE>
As a result of the annual compensation limit the retirement
income or deferred vested benefit (exclusive of the participant's
separate account benefit) of a participant in the plan on January
1, 1994 who then was employed by a USG Company shall be the
greater of:
(i) the participant's December 31, 1993 accrued benefit (as
defined below), if any, plus the participant's post-1993
accrued benefit (as defined below); or
(ii) the participant's final accrued benefit (as defined below).
For purposes of this subsection:
(A) A participant's "December 31, 1993 accrued benefit"
means the participant's accrued retirement income or
deferred vested benefit as of December 31, 1993 as
determined under the terms and provisions of the plan
as then in effect. The terms of the plan as in effect
on December 31, 1993 shall be construed (both in
determining the December 31, 1993 accrued benefit and
the accrued benefit of a participant who retired or
otherwise terminated employment on or before that date)
so as to apply the limitations of Section 401(a)(17) of
the Internal Revenue Code in the manner most favorable
to the participant as permitted by the Internal Revenue
Service.
(B) A participant's "post-1993 accrued benefit" means the
retirement income or deferred
-55-
<PAGE>
vested benefit the participant accrues after December
31, 1993 on the basis of the portion of the
participant's benefit service attributable to
employment with the employers after that date and the
participant's final average earnings as determined as
of the end of the calendar month next preceding the
calendar month in which the participant's retirement or
other termination of employment with the USG Companies
occurs, calculated by applying the annual compensation
limit to all of the participant's earnings.
(C) The social security offset under subparagraph 5.1(b) or
subparagraph 5.9(b) shall be applied to the aggregate
of the December 31, 1993 accrued benefit and the
post-1993 accrued benefit, as determined under
subparagraph 5.1(b) or subparagraph 5.9(b), whichever
is applicable.
(D) A participant's "final accrued benefit" means the
participant's retirement income or deferred vested
benefit as determined at the time of the participant's
actual retirement or other termination of employment on
the basis of the participant's total period of benefit
service and the participant's final average earnings as
determined as of the end of the calendar month next
preceding the calendar month in
-56-
<PAGE>
which the participant's retirement or other termination
of employment with the USG Companies occurs, calculated
by applying the applicable annual compensation limit to
all of the participant's earnings.
8.7 MAXIMUM RETIREMENT INCOME AND DEFERRED VESTED BENEFIT
The amount of retirement income or deferred vested benefit payable
under the plan to a participant for any month shall not exceed an amount which
would cause the sum of such monthly benefit, the benefits payable to the
participant for that month under Workers' Compensation or Occupational Disease
laws for which an employer is liable (except fixed statutory payments for the
loss of any bodily member) and the participant's primary social security benefit
to exceed an amount equal to 1/12 of 100 percent of the participant's final
average earnings.
8.8 MINIMUM RETIREMENT INCOME AND DEFERRED VESTED BENEFIT
Notwithstanding the provisions of Sections 5 and 6, but subject to the
foregoing provisions of this Section 8, the monthly retirement income or
deferred vested benefit payable to a participant who qualifies for such monthly
benefit shall not be less than an amount that is actuarially equivalent to the
participant's accrued benefits derived from pre-1991 participant contributions
and the accrued benefits derived from the participant's separate account,
determined on the basis of the actuarial factors and assumptions set forth in
paragraphs A-4 and A-6 of Exhibit A. The monthly retirement income payable on a
life annuity basis to a participant who retires on or after the participant's
normal retirement date but had qualified for retirement on an early retirement
date shall not be less than the largest monthly retirement income the
participant would have been entitled to receive on a life annuity basis, without
regard to any payment option, if the participant had retired on an early
retirement date.
8.9 MINIMUM DEATH BENEFITS
Notwithstanding any other provisions of the plan, in no event shall
the aggregate benefits payable under the plan to a participant and to any other
person entitled to receive benefits thereunder as a result of the participant's
employment with the employers and participation in the plan be less than an
amount equal to the sum of the participant's pre-1991 participant contributions,
with interest thereon as determined under
-57-
<PAGE>
paragraph A-3 of Exhibit A to the date payment commences to the participant or
such other person or to the date of the participant's death, if earlier, plus an
amount equal to what the balance in the participant's separate account would
have been as of the end of the calendar month in which the participant's
termination of employment occurs or the date of the participant's death, if
earlier, if such separate account had continued to be maintained and adjusted
through the end of that calendar month. If the aggregate benefits paid under the
plan to the participant and such other person up to the death of the participant
or such other person, whichever occurs later, should be less than the amount
described in the next preceding sentence, an amount equal to the difference
shall be payable to the participant's beneficiary.
8.10 OFFSET FOR OTHER PLAN BENEFITS
Notwithstanding any other provisions of the plan, the amount of any
monthly retirement income or deferred vested benefit a participant otherwise is
entitled to under the plan will be reduced by the actuarial equivalent of any
pension benefits that the participant becomes entitled to (or previously
received) under any other pension plan qualified under Section 401(a) of the
Internal Revenue Code that a USG Company (or by a former USG Company) maintains
or contributes to, to the extent that the pension benefits paid or payable to
the participant under such other pension plan are attributable to the same
period of employment for which benefits are otherwise payable to the participant
under this plan. The committee shall apply the provisions of this subparagraph
in a uniform manner to participants similarly situated for the purpose of
avoiding duplication of benefits.
8.11 SPECIAL RULES FOR BENEFIT TRANSFERS
From time to time, an employee will be transferred to an employer from
employment with a USG Company in Canada or from an employer to employment with a
USG Company in Canada. Except as otherwise required by law, in any such case,
the employee's pension benefit, if any, will be paid from the pension plan in
which the employee participates at the time of the participant's retirement or
other termination of employment with all USG Companies, taking into account the
participant's credited service and benefit service with all USG Companies, as
determined under the terms of the plan that pays the participant's benefits,
provided, however, that the benefit shall never be less than the benefit payable
under the terms of this plan calculated as of the date the participant last
participates in this plan; provided further that benefit payments from one plan
shall be offset to take into account any payments made from the other plan.
-58-
<PAGE>
8.12 SECTION 401(M) LIMITATIONS AS TO PARTICIPANT SEPARATE ACCOUNT CONTRIBUTIONS
Participants' contributions made to their separate accounts shall be
subject to the nondiscrimination requirements of Section 401(m) of the Internal
Revenue Code, as follows:
(a) Section 401(m) of the Internal Revenue Code requires that such
participant contributions be tested each plan year and, where
required, be limited in order to meet the actual contribution
percentage test set forth in Section 401(m) of the Internal
Revenue Code (the "ACP test"). The ACP test shall be met by this
plan using the "current year testing method" (as defined in
Internal Revenue Service Notice 98-1), and for this purpose the
provisions of Section 401(m) of the Internal Revenue Code, the
regulations thereunder and any Internal Revenue Service guidance
issued subsequent to the effective date are incorporated in this
plan by reference.
(b) If any such participant contributions are made under the plan for
any plan year with respect to one or more highly compensated
participants (as defined in subsection 8.14) that otherwise would
result in the plan's failure to meet the ACP test, such
contributions will be reduced to the extent necessary to meet the
ACP test, in descending order, beginning with participant
contributions made with respect to highly compensated
participants who prior to such reduction have made the largest
contributions. The portion of participant contributions that are
so reduced are referred to as "excess participant separate
account contributions".
(c) The committee shall direct that excess participant separate
account contributions (and income allocable to such contributions
as determined under subsection 8.13) for any plan year be
distributed to the highly compensated participants who made them
not later than 12 months after the end of that plan year.
(d) If an excess participant separate account contribution has been
distributed to a participant pursuant to subparagraph (c) next
above then, notwithstanding any other provisions of the plan,
only for the purpose of reducing the amount of monthly retirement
income or monthly deferred vested benefit that
-59-
<PAGE>
otherwise would be payable to the participant under subsection
5.1, 5.2, 5.3 or 6.1 by the participant's monthly separate
account benefit or by an amount that is actuarially equivalent to
such benefit, the participant's separate account balance shall be
increased to equal what the balance in such account would be if
no excess participant separate account contributions had been
distributed to the participant.
8.13 SPECIAL PROVISIONS APPLICABLE TO SECTION 401(m) LIMITATIONS
The following provisions shall apply to subsection 8.12:
(a) Multiple Use of Alternative Limitation. In accordance with
Treasury Regulation Section 1.401(m)-(2)(c), multiple use of the
alternative limitation that occurs as a result of testing under
this plan in accordance with subsection 8.12 and under qualified
plans maintained by USG Companies as required by Section 401(k)
and 401(m) of the Internal Revenue Code will be corrected in the
manner described in Treasury Regulation Section 1.401(m)-1(e).
The term "alternative limitation" as used above means the
alternative methods of compliance with Sections 401(k) and 401(m)
of the Internal Revenue Code contained in Sections 401(k)(3)(A)
(ii)(II) and 401(m)(2)(A)(ii) thereof, respectively.
(b) Income Allocable for Plan Year. The income allocable to