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<SEC-DOCUMENT>0000950137-07-002382.txt : 20070216
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<ACCEPTANCE-DATETIME>20070216132728
ACCESSION NUMBER: 0000950137-07-002382
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 15
CONFORMED PERIOD OF REPORT: 20061231
FILED AS OF DATE: 20070216
DATE AS OF CHANGE: 20070216
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: 07630446
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>
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<TYPE>10-K
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<FILENAME>c12346e10vk.txt
<DESCRIPTION>ANNUAL REPORT
<TEXT>
<PAGE>
================================================================================
UNITED STATES
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, 2006
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>
Title of Each Class Name of Exchange on Which Registered
- ------------------- ------------------------------------
<S> <C>
Common Stock, $0.10 par value New York Stock Exchange
Chicago Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
(subject to Rights Agreement dated Chicago Stock Exchange
December 21, 2006)
</TABLE>
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Exchange Act. Yes [ ] No [X]
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 a large accelerated filer,
an accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as
defined in Exchange Act Rule 12b-2) Yes [ ] No [X]
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 [ ] Not applicable. Although the registrant was
involved in bankruptcy proceedings during the preceding five years, it did not
distribute securities under its confirmed plan of reorganization.
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,
2006 (the last business day of the registrant's most recently completed second
fiscal quarter) was approximately $2,882,045,000.
The number of shares of the registrant's common stock outstanding as of
January 31, 2007 was 89,865,616.
DOCUMENTS INCORPORATED BY REFERENCE: Certain sections of USG Corporation's
definitive Proxy Statement for use in connection with the 2007 annual meeting of
stockholders, to be filed subsequently, are incorporated by reference into Part
III of this Form 10-K Report where indicated.
================================================================================
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I
Item 1. Business...................................................... 3
Item 1A. Risk Factors.................................................. 8
Item 1B. Unresolved Staff Comments..................................... 13
Item 2. Properties.................................................... 14
Item 3. Legal Proceedings............................................. 15
Item 4. Submission of Matters to a Vote of Security Holders........... 15
PART II
Item 5. Market for the Registrant's Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities.......... 16
Item 6. Selected Financial Data....................................... 17
Item 7. Management's Discussion and Analysis of Results of Operations
and Financial Condition.................................... 18
Item 7A. Quantitative and Qualitative Disclosures About Market Risks... 34
Item 8. Financial Statements and Supplementary Data................... 35
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure................................... 63
Item 9A. Controls and Procedures....................................... 63
Item 9B. Other Information............................................. 65
PART III
Item 10. Directors, Executive Officers and Corporate Governance........ 65
Item 11. Executive Compensation........................................ 67
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters............................ 67
Item 13. Certain Relationships and Related Transactions, and Director
Independence............................................... 68
Item 14. Principal Accountant Fees and Services........................ 68
PART IV
Item 15. Exhibits and Financial Statement Schedules.................... 68
Signatures............................................................... 73
</TABLE>
2
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PART I
ITEM 1. BUSINESS
In this annual report on Form 10-K, "USG," "we," "our" and "us" refer to USG
Corporation, a Delaware corporation, and its subsidiaries included in the
consolidated financial statements, except as otherwise indicated or as the
context otherwise requires.
GENERAL
USG, through its subsidiaries, 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.
In 1901, United States Gypsum Company, or U.S. Gypsum, was incorporated. In
1984, USG Corporation was incorporated in Delaware, and by a vote of
stockholders on December 19, 1984, U.S. Gypsum became a wholly owned subsidiary
of USG. Effective January 1, 1985, the stockholders of U.S. Gypsum became the
stockholders of USG.
RESOLUTION OF USG'S REORGANIZATION PROCEEDINGS
On June 25, 2001, USG Corporation and 10 of its United States subsidiaries,
collectively referred to as the debtors, filed voluntary petitions for
reorganization under Chapter 11 of the United States Bankruptcy Code in the
United States Bankruptcy Court for the District of Delaware. The Chapter 11
cases were consolidated as In re: USG Corporation et al. (Case No. 01-2094).
These cases did not include any of our non-U.S. subsidiaries or companies that
our subsidiary L&W Supply Corporation acquired after we filed the bankruptcy
petitions.
In the second quarter of 2006, the debtors emerged from their Chapter 11
reorganization proceedings as a result of a plan of reorganization that was
confirmed by the bankruptcy court and the United States District Court for the
District of Delaware. The plan became effective on June 20, 2006, which is
referred to in this report as the Effective Date. The plan achieved our goals of
resolving asbestos claims in a fair and equitable manner, protecting the
long-term value of our businesses and maintaining our leadership positions in
markets in which we compete.
As part of the plan, the following important events have occurred:
- - We created and funded a trust under Section 524(g) of the Bankruptcy Code
for the payment of asbestos personal injury claims against the debtors.
This trust is also referred to as the Asbestos Trust or the Trust.
- - On the Effective Date, we paid $890 million to the Asbestos Trust and
issued to the Trust an interest-bearing note in the amount of $10 million,
which we paid on December 21, 2006.
- - On December 21, 2006, we also paid $3.05 billion to the Asbestos Trust.
This additional $3.05 billion payment was due because the plan of
reorganization required that we pay this amount if the 109th Congress did
not pass the Fairness in Asbestos Injury Resolution Act of 2005 or
substantially similar legislation before Congress adjourned. Because the
109th Congress adjourned in December 2006 without passing this legislation,
we made the $3.05 billion payment to the Trust. As a result of this
payment, we have fully funded the Trust and have no further payment
obligations to the Trust.
- - The bankruptcy court entered a channeling injunction which provides that
all present and future asbestos personal injury claims against the debtors
must be brought against the Trust and no one may bring such a claim against
the debtor companies.
- - Asbestos property damage claims against the debtors are not part of the
channeling injunction or the Asbestos Trust, which deal only with asbestos
personal injury or related claims. We have reached agreements to settle all
remaining asbestos property damage claims asserted against the debtors,
with the exception of one small claim brought by a homeowner. In 2006, we
paid approximately $99 million for asbestos property damage claim
settlements. The estimated cost of
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the unpaid settlements of the remaining asbestos property damage claims,
including associated legal fees, is approximately $48 million and is
included in accrued expenses.
- - Pursuant to the plan of reorganization, allowed claims of all other
creditors have been, or will be, paid in full, with interest where agreed
or required.
- - In connection with the plan of reorganization, we conducted an offering in
which we issued to stockholders as of June 30, 2006 the right to purchase,
at $40.00 per share, one new share of our common stock for each share
owned. This offering is referred to as the Rights Offering. In connection
with the Rights Offering, Berkshire Hathaway Inc. agreed to purchase at
that price all shares underlying any unexercised rights. We received net
proceeds of approximately $1.7 billion and issued 44.92 million new shares
of our common stock in connection with completion of the Rights Offering in
the third quarter of 2006.
The following subsidiaries were debtors in the Chapter 11 proceedings: U.S.
Gypsum; USG Interiors, Inc., or USG Interiors; USG Interiors International,
Inc.; L&W Supply Corporation, or 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 plan of reorganization resolving
the debtors' asbestos personal injury liabilities and the injunction channeling
those liabilities to the Trust do not include any of our non-U.S. subsidiaries,
any companies that L&W Supply acquired after we filed the bankruptcy petitions
or any companies that we may acquire in the future.
Additional information about funding the plan of reorganization is included
under "Liquidity and Capital Resources" in Management's Discussion and Analysis
of Results of Operations and Financial Condition and in Note 3 to the
Consolidated Financial Statements. Additional information about the Rights
Offering is included in Note 4 to the Consolidated Financial Statements.
Asbestos property damage claims are discussed in Note 19 to the Consolidated
Financial Statements.
OPERATING SEGMENTS
Our operations are organized into three operating segments: North American
Gypsum, Worldwide Ceilings and Building Products Distribution, the net sales of
which accounted for approximately 53%, 11% and 36%, respectively, of our 2006
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., or CGC, in Canada, and USG
Mexico, S.A. de C.V., or USG Mexico, in Mexico. U.S. Gypsum is the largest
manufacturer of gypsum wallboard in the United States and accounted for
approximately 30% of total domestic gypsum wallboard sales in 2006. 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. A line of joint compounds used for
finishing wallboard joints is also sold under the SHEETROCK(R) brand name. The
DUROCK(R) line of cement board 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 and as roof cover board sold under the SECUROCK(R) brand name.
The LEVELROCK(R) line of poured gypsum underlayments provides surface leveling
and enhanced sound performance for residential, commercial and multifamily
installations. We also produce a variety of construction plaster products used
to provide a custom finish for residential and commercial interiors. Like
SHEETROCK(R) brand gypsum wallboard, these
4
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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). We also produce 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 manufactures products 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 2006, these locations provided approximately 71% of the gypsum used
by our plants in North America. Some of our manufacturing plants purchase or
acquire synthetic gypsum and natural gypsum rock from outside sources. Outside
purchases or acquisitions accounted for 29% of the gypsum used in our plants in
2006. As of December 31, 2006, our geologists estimated that our recoverable
rock reserves are sufficient for more than 21 years of operation based on our
average annual production of crude gypsum during the past five years of 9.9
million tons. Proven reserves contain approximately 210 million tons. Additional
reserves of approximately 157 million tons are found on four properties not in
operation.
About 24% of the gypsum used in our plants in North America is synthetic
gypsum, which is a byproduct of flue gas desulphurization carried out by
electric generation or industrial plants that burn 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. We have entered into a number of long-term supply
agreements to acquire synthetic gypsum. We generally take possession of the
gypsum at the producer's facility and transport it to our wallboard plants by
ship, river barge, railcar or truck. The supply of synthetic gypsum continues to
increase as more power generation plants are fitted with desulphurization
equipment. Eleven of our 24 gypsum wallboard plants use some or all synthetic
gypsum in their operations.
We own and operate seven paper mills located across the United States.
Vertical integration in paper helps to ensure a continuous supply of
high-quality paper that is tailored to the specific needs of our wallboard
production processes. We augment our paper needs through purchases from outside
suppliers. About 6% of our paper supply was purchased from outside suppliers
during 2006.
MARKETING AND DISTRIBUTION
Our gypsum products are distributed through L&W Supply, our wholly owned
subsidiary, 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 our estimates using publicly available data, internal surveys and gypsum
wallboard shipment data from the Gypsum Association, we estimate that during
2006:
- - New residential construction generated about 46% of total industry volume
demand for gypsum wallboard;
- - Residential and nonresidential repair and remodel activity generated about
40% of volume demand;
- - New nonresidential construction generated about 9% of volume demand; and
- - Other activities such as exports and temporary construction generated the
remaining 5% of volume demand.
COMPETITION
U.S. Gypsum accounts for approximately 30% of the total gypsum wallboard sales
in the United States. In 2006, U.S. Gypsum shipped 10.8 billion square feet of
wallboard. The Gypsum Association estimated that U.S. industry shipments
(including imports) in 2006 were 36.2 billion square feet, the second highest
level in history.
Our competitors in the United States are: National Gypsum Company, BPB
Gypsum Inc. and BPB America Inc. (subsidiaries of Compagnie de Saint-Gobain SA),
Georgia-Pacific (a subsidiary of Koch Industries, Inc.), American Gypsum (a unit
of Eagle Materials Inc.), Temple-Inland Forest Products Corporation, Lafarge
North America, Inc., Federal Gypsum Company and PABCO Gypsum. Our
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competitors in Canada include BPB Canada Inc. (a subsidiary of Compagnie de
Saint-Gobain SA), Georgia-Pacific (a subsidiary of Koch Industries, Inc.),
Lafarge North America, Inc. and Federal Gypsum Company. Our major competitor in
Mexico is Panel Rey, S.A. The principal methods of competition are quality of
products, service, pricing, compatibility of systems and product design
features.
WORLDWIDE CEILINGS
BUSINESS
Worldwide Ceilings, which manufactures and markets interior systems products
worldwide, includes USG Interiors, the international interior systems business
managed as USG International, and the ceilings business of CGC. We are a leading
supplier of interior ceilings products used primarily in commercial
applications. We estimate that we are 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. We market
both ceiling tile and ceiling grid in the United States, Canada, Mexico, Europe,
Latin America and the Asia-Pacific region. Our 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 manufactures products at 17 plants located in North America,
Europe and the Asia-Pacific region. Principal raw materials used to produce
Worldwide Ceilings' products include mineral fiber, steel, perlite, starch and
high-pressure laminates. We produce some of these raw materials internally and
obtain others from outside suppliers.
MARKETING AND DISTRIBUTION
Worldwide Ceilings sells products primarily in markets related to the
construction and renovation of nonresidential buildings. Ceiling products are
marketed and distributed through a network of distributors, installation
contractors, L&W Supply locations and home improvement centers.
COMPETITION
Our principal competitors in ceiling grid include WAVE (a joint venture between
Armstrong World Industries, Inc. and Worthington Industries) and Chicago
Metallic Corporation. Our principal global competitors in acoustical ceiling
tile include Armstrong World Industries, Inc., OWA Faserplattenwerk GmbH
(Odenwald), BPB America Inc. and BPB Canada Inc. (subsidiaries of Compagnie de
Saint-Gobain SA) and AMF Mineralplatten GmbH Betriebs KG (owned by Gebr. Knauf
Verwaltungsgellschaft 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 2006, L&W
Supply distributed approximately 12% of all gypsum wallboard in the United
States, including approximately 32% of U.S. Gypsum's wallboard production.
MARKETING AND DISTRIBUTION
L&W Supply was organized in 1971. It is a service-oriented business that stocks
a wide range of construction materials. It 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
54% of its 2006 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
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approximately 90% of its facilities from third parties. Typical leases have
terms of five years and include renewal options.
L&W Supply remains focused on opportunities to profitably grow its
specialty business as well as optimize asset utilization. L&W Supply increased
the number of its locations, largely through acquisitions, to 220 in 36 states
as of December 31, 2006, compared with 192 locations as of December 31, 2005 and
186 locations as of December 31, 2004.
COMPETITION
L&W Supply competes with a number of specialty wallboard distributors, lumber
dealers, hardware stores, home improvement centers and acoustical ceiling tile
distributors. Its competitors include Gypsum Management Supply with locations in
the southern, central and western United States, KCG, Inc. in the southwestern
and central United States, The Strober Organization, Inc. in the northeastern
and mid-Atlantic states, and Allied Building Products Corporation in the
northeastern, central and western United States. Principal methods of
competition are location, service, range of products and pricing.
EXECUTIVE OFFICERS OF THE REGISTRANT
See Part III, Item 10, Directors, Executive Officers and Corporate Governance -
Executive Officers of the Registrant (as of February 16, 2007).
OTHER INFORMATION
RESEARCH AND DEVELOPMENT
We perform research and development at the USG Research and Technology
Innovation Center in Libertyville, Ill. Research team members provide product
support and new product development for our operating units. With unique fire,
acoustical, structural and environmental testing capabilities, the research
center can evaluate products and systems. Chemical analysis and materials
characterization support product development and safety/quality assessment
programs. Development activities can be taken to an on-site pilot plant before
being transferred to a full-size plant. We also conduct research at two
satellite locations where industrial designers and fabricators work on new
ceiling grid concepts and prototypes. In 2006, we formed a new exploratory
research group that gives special focus to innovation, further enhancing the
research team's commitment to supporting our growth.
We charge research and development expenditures to earnings as incurred.
These expenditures amounted to $20 million in 2006, $17 million in 2005 and $17
million in 2004.
ENERGY
Our primary supplies of energy have been adequate, and we have not been required
to curtail operations as a result of insufficient supplies. Supplies are likely
to remain sufficient for our projected requirements. Currently, we use energy
price swap agreements to hedge the cost of a substantial majority of purchased
natural gas. Generally, we have a substantial majority of our anticipated
purchases of natural gas over the next 12 months hedged; however, we review our
positions regularly and make adjustments as market conditions warrant.
SIGNIFICANT CUSTOMER
On a worldwide basis, The Home Depot, Inc. accounted for approximately 11% of
our consolidated net sales in each of 2006, 2005 and 2004.
OTHER
Because we fill orders upon receipt, no operating segment has any significant
order backlog.
None of our operating segments has any special working capital
requirements.
Loss of one or more of our patents or licenses would not have a material
impact on our business or our ability to continue operations.
No material part of any of our business is subject to renegotiation of
profits or termination of contracts or subcontracts at the election of the
government.
All of our products regularly require improvement to remain competitive. We
also develop and produce comprehensive systems employing several of our
products. To maintain our high standards and remain a leader in the building
materials industry, we perform extensive research and development activities and
make the necessary capital expenditures to maintain production facilities in
good operating condition.
In 2006, our average number of employees was 14,700.
See Note 17 to the Consolidated Financial Statements for financial
information pertaining to operating and geographic segments and Item 1A, Risk
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Factors, for information regarding the possible effects that compliance with
environmental laws and regulations may have on our businesses and operating
results.
AVAILABLE INFORMATION
We maintain a website at www.usg.com and make available at this website our
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 they are electronically filed with or furnished to the Securities and
Exchange Commission, or SEC. If you wish to receive a paper copy of any exhibit
to our reports filed with or furnished to the SEC, the exhibit may be obtained,
upon payment of reasonable expenses, by writing to: Corporate Secretary, USG
Corporation, P.O. Box 6721, Chicago, IL 60680-6721.
ITEM 1A. RISK FACTORS
Our business, operations and financial condition are subject to various risks
and uncertainties. We have described below significant factors that may
adversely affect our business, operations, industry or future financial
performance. You should carefully consider these factors, together with all of
the other information in this annual report on Form 10-K and in other documents
that we file with the SEC, before making any investment decision about our
securities. Adverse developments or changes related to any of the factors listed
below could affect our business, financial condition, results of operations and
growth.
OUR BUSINESSES ARE CYCLICAL IN NATURE, AND PROLONGED PERIODS OF WEAK DEMAND OR
EXCESS SUPPLY MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL
CONDITION AND OPERATING RESULTS.
Our businesses are cyclical in nature and sensitive to changes in general
economic conditions, including, in particular, conditions in the housing and
construction-based markets. Prices for our products and services are affected by
overall supply and demand in the markets for our products and for our
competitors' products. Market prices of building products historically have been
volatile and cyclical. There is currently significant excess wallboard
production capacity industry-wide, and we expect approximately 1 billion square
feet of additional capacity, net of recent closures, to become operational in
the industry in 2007, with more new capacity expected in 2008. Prolonged periods
of weak demand or excess supply in any of our businesses may have a material
adverse effect on our revenues and margins and harm our business, financial
condition and operating results.
The markets that we serve, including in particular the housing and
construction-based markets, are affected by the movement of interest rates.
Higher interest rates could have a material adverse effect on our business,
financial condition and results of operations. Our business is also affected by
a variety of other factors beyond our control, including employment levels,
foreign currency exchange rates, office vacancy rates, unforeseen inflationary
pressures and consumer confidence. Since our operations occur in a variety of
geographic markets, our businesses are subject to the economic conditions in
each of these geographic markets. General economic downturns or localized
downturns in the regions where we have operations may have a material adverse
effect on our business, financial condition and operating results.
THE SEASONAL NATURE OF OUR BUSINESSES MAY MATERIALLY AND ADVERSELY AFFECT THE
TRADING PRICES OF OUR SECURITIES.
A majority of our businesses are seasonal, with peak sales typically occurring
from spring through the middle of autumn. Quarterly results have varied
significantly in the past and are likely to vary significantly from quarter to
quarter in the future. Those variations may materially and adversely affect our
financial performance and the trading prices of our securities.
WE FACE COMPETITION IN EACH OF OUR OPERATING SEGMENTS. IF WE CANNOT SUCCESSFULLY
COMPETE IN THE MARKETPLACE, OUR BUSINESS, FINANCIAL CONDITION AND OPERATING
RESULTS MAY BE MATERIALLY AND ADVERSELY AFFECTED.
We face competition in each of our operating segments. Principal methods of
competition include quality of products, service, location, pricing,
compatibility of systems, range of products and
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product design features. Actions of our competitors could lead to lower pricing
by us in an effort to maintain market share. To achieve and/or maintain
leadership positions in key product categories, we must continue to develop
brand recognition and loyalty, enhance product quality and performance and
develop our manufacturing and distribution capabilities.
We also compete through our use and improvement of information technology.
In order to remain competitive, we need to provide customers with timely,
accurate, easy-to-access information about product availability, orders and
delivery status using state-of-the-art systems. While we have provided manual
processes for short-term failures and disaster recovery capability, a prolonged
disruption of systems or other failure to meet customers' expectations regarding
the capabilities and reliability of our systems may materially and adversely
affect our operating results particularly during any prolonged period of
disruption.
We intend to continue making investments in research and development to
develop new and improved products and more efficient production methods. We need
to continue to develop new products and improve our existing products and
production efficiency in order to maintain our market leadership position. Our
failure to continue making these investments could depress our revenues and
adversely affect our operating results and market share. In addition, there can
be no assurance that revenue from new products or enhancements will be
sufficient to recover the research and development expenses associated with
their development.
WE INTEND TO PURSUE ACQUISITIONS, JOINT VENTURES AND OTHER TRANSACTIONS THAT
COMPLEMENT OR EXPAND OUR BUSINESSES. WE MAY NOT BE ABLE TO COMPLETE PROPOSED
TRANSACTIONS, AND EVEN IF COMPLETED, THE TRANSACTIONS MAY INVOLVE A NUMBER OF
RISKS THAT MAY RESULT IN A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL
CONDITION AND OPERATING RESULTS.
We have recently completed a number of acquisitions of businesses that we
believe will contribute to our future success. We intend to continue to pursue
opportunities to buy other businesses or technologies that could complement,
enhance or expand our current businesses or product lines or that might
otherwise offer us growth opportunities. We may have difficulty identifying
appropriate opportunities or, if we do identify opportunities, we may not be
successful in completing transactions for a number of reasons. Any transactions
that we are able to identify and complete may involve a number of risks,
including:
- - the diversion of management's attention from our existing businesses to
integrate the operations and personnel of the acquired or combined business
or joint venture;
- - possible adverse effects on our operating results during the integration
process;
- - failure of the acquired business to achieve expected operational
objectives; and
- - our possible inability to achieve the intended objectives of the
transaction.
In addition, we may not be able to successfully or profitably integrate,
operate, maintain and manage our newly acquired operations or their employees.
We may not be able to maintain uniform standards, controls, procedures and
policies, which may lead to operational inefficiencies. In addition, future
acquisitions may result in dilutive issuances of equity securities or the
incurrence of additional indebtedness.
IF COSTS OF KEY RAW MATERIALS, ENERGY OR EMPLOYEE BENEFITS INCREASE, OR THE
AVAILABILITY OF KEY RAW MATERIALS AND ENERGY DECREASES, OUR COST OF PRODUCTS
SOLD WILL INCREASE, AND OUR OPERATING RESULTS MAY BE MATERIALLY AND ADVERSELY
AFFECTED.
The cost and availability of raw materials and energy are critical to our
operations. For example, we use substantial quantities of gypsum, wastepaper,
mineral fiber, steel, perlite, starch and high pressure laminates. The cost of
these items has been volatile, and availability has sometimes been limited. We
obtain some of these materials from a limited number of suppliers, which
increases the risk of unavailability. Furthermore, we may not be able to pass
increased raw materials prices on to our customers if the market or existing
agreements with our customers do not allow us to raise the prices of our
finished products. If price adjustments
9
<PAGE>
significantly trail the increase in raw materials prices or if we cannot
effectively hedge against price increases, our operating results may be
materially and adversely affected.
Wastepaper prices are affected by market conditions, principally supply. We
buy various grades of wastepaper, and shortages occur periodically in one or
more grades and may vary among geographic regions. As a result, we have
experienced, and expect in the future to experience, volatility in wastepaper
availability and its cost, affecting the mix of products manufactured at
particular locations or the cost of producing them.
Approximately one quarter of the gypsum used in our plants is synthetic
gypsum, which is a byproduct resulting primarily from flue gas desulphurization
carried out by electric generation or industrial plants burning coal as a fuel.
The suppliers of synthetic gypsum are primarily power companies, which are
required under federal environmental regulations to operate scrubbing equipment
for their coal-fired generating plants. Environmental regulatory changes or
changes in methods used to comply with environmental regulations could have an
impact on the price and availability of synthetic gypsum.
Energy costs also are affected by various market factors, including the
availability of supplies of particular forms of energy, energy prices and local
and national regulatory decisions. Prices for natural gas and electrical power,
which are significant components of the costs associated with our gypsum and
interior systems products, have both increased significantly and become more
volatile in recent years. There may be substantial increases in the price, or a
decline in the availability, of energy in the future, especially in light of
recent instability in some energy markets. As is the case with raw materials, we
may not be able to pass on increased costs through increases in the prices of
our products.
Transportation costs associated with our gypsum and interior systems
products are a significant portion of the variable cost of each of our operating
segments. Significant increases in the cost of fuel can result in material
increases in the cost of transportation, which could materially and adversely
affect our operating profits.
In addition, our profit margins are affected by costs related to
maintaining our employee benefit plans (pension and medical insurance for active
employees and retirees). The recognition of costs and liabilities associated
with these plans for financial reporting purposes is affected by assumptions
made by management and used by actuaries engaged by us 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. Economic factors and
conditions could affect any of these assumptions and may affect our estimated
and actual employee benefit plan costs and our business, financial condition and
operating results.
IF THE MARKET PRICE OF NATURAL GAS DECLINES, IT MAY HAVE A MATERIAL ADVERSE
EFFECT ON OUR BUSINESS, FINANCIAL CONDITION AND OPERATING RESULTS AS A RESULT OF
OUR HEDGING TRANSACTIONS AND FIXED-PRICE SUPPLY AGREEMENTS FOR NATURAL GAS.
We use natural gas extensively in the production of gypsum and interior systems
products. As a result, our revenues, profitability, operating cash flows and
future rate of growth are highly dependent on the price of natural gas, which
has been historically very volatile and is affected by numerous factors beyond
our control. We are not always able to pass on increases in energy costs to our
customers through increases in product prices. In an attempt to reduce our price
risk related to fluctuations in natural gas prices, we periodically enter into
hedging transactions and fixed-price supply agreements. Although we benefit from
those agreements when spot prices exceed contractually specified prices, if the
market price for natural gas declines, we may not be able to take advantage of
decreasing market prices while our competitors may be able to do so. Any
substantial or extended decline in prices of or demand for natural gas could
cause our production costs to be greater than that of our competitors. As a
result, a decline in prices may have a material adverse effect on our business,
financial condition and operating results.
In addition, the results of our hedging transactions could be positive,
neutral or negative in any period depending on price changes in the hedged
exposures. Further, changes to the price of natural gas could result in changes
to the value of our hedging contracts, which could impact our results of
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<PAGE>
operations for a particular period. Our hedging activities are not designed to
mitigate long-term natural gas price fluctuations and, therefore, will not
protect us from long-term natural gas price increases.
THE LOSS OF SALES TO ONE OR MORE OF OUR MAJOR CUSTOMERS MAY HAVE A MATERIAL
ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL CONDITION AND OPERATING RESULTS.
We face strong competition for our major customers. If one or more of our major
customers reduces, delays or cancels substantial orders, our business, financial
condition and operating results may be materially and adversely affected,
particularly for the quarter in which the reduction, delay or cancellation
occurs.
CERTAIN OF OUR CUSTOMERS HAVE BEEN EXPANDING AND MAY CONTINUE TO EXPAND THROUGH
CONSOLIDATION AND INTERNAL GROWTH, THEREBY POSSIBLY DEVELOPING INCREASED BUYING
POWER OVER US, WHICH MAY MATERIALLY AND ADVERSELY AFFECT OUR REVENUES AND
RESULTS OF OPERATIONS.
Certain of our important customers are large companies with significant buying
power over suppliers. In addition, potential further consolidation in the
distribution channels could enhance the ability of certain of our customers to
seek more favorable terms, including pricing, for the products that they
purchase from us. Accordingly, our ability to maintain or raise prices in the
future may be limited, including during periods of raw material and other cost
increases. If we are forced to reduce prices or to maintain prices during
periods of increased costs, or if we lose customers because of pricing or other
methods of competition, our revenues and operating results may be materially and
adversely affected.
OUR SUBSTANTIAL INDEBTEDNESS MAY ADVERSELY AFFECT OUR BUSINESS, FINANCIAL
CONDITION AND OPERATING RESULTS.
Our substantial indebtedness may have material adverse effects on our business,
including to:
- - make it more difficult for us to satisfy our debt service obligations;
- - limit our ability to obtain additional financing to fund our working
capital requirements, capital expenditures, acquisitions, investments, debt
service obligations and other general corporate requirements;
- - require us to dedicate a substantial portion of our cash flows from
operations to payments on our indebtedness, thereby reducing the
availability of our cash flows to fund working capital, capital
expenditures and other general operating requirements;
- - restrict us from making strategic acquisitions or taking advantage of
favorable business opportunities;
- - place us at a relative competitive disadvantage compared to our competitors
that have proportionately less debt;
- - limit our flexibility to plan for, or react to, changes in our business and
the industries in which we operate, which may adversely affect our
operating results and ability to meet our debt service obligations with
respect to our outstanding indebtedness;
- - increase our vulnerability to adverse general economic and industry
conditions, including recessions; and
- - limit our ability or increase the cost to refinance indebtedness.
If we do incur additional indebtedness, the risks related to our substantial
indebtedness may intensify.
WE REQUIRE A SIGNIFICANT AMOUNT OF LIQUIDITY TO SERVICE OUR INDEBTEDNESS AND
FUND OPERATIONS, CAPITAL EXPENDITURES, RESEARCH AND DEVELOPMENT EFFORTS,
ACQUISITIONS AND OTHER CORPORATE EXPENSES.
Our ability to fund operations, capital expenditures, research and development
efforts, acquisitions and other corporate expenses, including repayment of our
indebtedness, depends on our ability to generate cash through future operating
performance, which is subject to economic, financial, competitive, legislative,
regulatory and other factors. Many of these factors are beyond our control. We
cannot
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assure you that our business will generate sufficient cash flow from operations
or that future borrowings will be available to us in an amount sufficient to
fund our needs.
If we are unable to generate sufficient cash flow to fund our needs, we may
need to pursue one or more alternatives, such as to:
- - curtail operations;
- - reduce or delay planned capital expenditures, research and development or
acquisitions;
- - obtain additional financing or restructure or refinance all or a portion of
our indebtedness on or before maturity;
- - sell assets or businesses; and
- - sell additional equity.
Any curtailment of operations, reduction or delay in planned capital
expenditures, research and development or acquisitions or sale of assets or
businesses may materially and adversely affect our future revenue prospects. In
addition, we cannot assure you that we will be able to raise additional equity
capital, restructure or refinance any of our indebtedness or obtain additional
financing on commercially reasonable terms or at all.
COVENANT RESTRICTIONS UNDER OUR CREDIT AGREEMENT AND THE INDENTURE GOVERNING OUR
SENIOR NOTES MAY LIMIT OUR ABILITY TO PURSUE BUSINESS ACTIVITIES OR OTHERWISE
OPERATE OUR BUSINESS.
Our credit agreement and the indenture governing our senior notes contain, among
other things, covenants that limit our ability to finance future operations or
capital needs or to engage in other business activities, including our ability
to:
- - incur additional indebtedness;
- - make guarantees;
- - sell assets or make other fundamental changes;
- - engage in mergers and acquisitions;
- - make investments;
- - enter into transactions with our affiliates;
- - change our business purposes; and
- - enter into sale and lease-back transactions.
In addition, we are subject to agreements that require us to meet and maintain
certain financial ratios and tests, which may require that we take action to
reduce our debt or to act in a manner contrary to our business objectives.
Events beyond our control, including changes in general business and economic
conditions, may affect our ability to comply with these covenants or meet those
financial ratios and tests. We may not meet those ratios and tests. A breach of
any of these covenants or failure to maintain the required ratios and meet the
required tests may result in an event of default under those agreements. This
may allow the counterparties to those agreements to declare all amounts
outstanding thereunder, together with accrued interest, to be immediately due
and payable. If this occurs, we may not be able to refinance the accelerated
indebtedness on favorable terms, or at all, or repay the accelerated
indebtedness.
WE ARE SUBJECT TO ENVIRONMENTAL AND SAFETY REGULATIONS THAT MAY CHANGE AND COULD
CAUSE US TO MAKE MODIFICATIONS TO HOW WE MANUFACTURE AND PRICE OUR PRODUCTS.
We are subject to federal, state, local and foreign laws and regulations
governing the protection of the environment and occupational health and safety,
including laws regulating air emissions, wastewater discharges, the management
and disposal of hazardous materials and wastes, and the health and safety of our
employees. We are also required to obtain permits from governmental authorities
for certain operations. If we were to violate or fail to comply with these laws,
regulations or permits, we could incur fines, penalties or other sanctions. In
addition, we could be held responsible for costs and damages arising from any
contamination at our past or present facilities or at third-party waste disposal
sites. We cannot completely eliminate the risk of contamination or injury
resulting from hazardous materials.
Environmental laws tend to become more
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stringent over time, and we could incur material expenses relating to compliance
with future environmental laws. In addition, the price and availability of
certain of the raw materials that we use, including synthetic gypsum, may vary
in the future as a result of environmental laws and regulations affecting our
suppliers. An increase in the price of our raw materials, a decline in their
availability or future costs relating to our compliance with environmental laws
may materially and adversely affect our operating margins or result in reduced
demand for our products.
WE DEPEND ON OUR SENIOR MANAGEMENT TEAM FOR THEIR EXPERTISE AND LEADERSHIP, AND
THE LOSS OF ANY MEMBER COULD ADVERSELY AFFECT OUR OPERATIONS.
Our success depends on the management and leadership skills of our senior
management team. The loss of any of these individuals or an inability to attract
and retain additional personnel could prevent us from implementing our business
strategy. Although we have incentives for management to stay with us, we cannot
assure you that we will be able to retain all of our existing senior management
personnel or attract additional qualified personnel when needed.
WE DO NOT EXPECT TO PAY CASH DIVIDENDS ON OUR COMMON STOCK FOR THE FORESEEABLE
FUTURE.
We have not paid a dividend on our common stock since the first quarter of 2001
and have no plans to do so in the foreseeable future. Further, our credit
facilities prohibit us from paying a dividend on, or repurchasing, our stock if
a default exists under the credit facilities. Because we do not expect to pay
dividends on our common stock in the foreseeable future, investors will have to
rely on stock appreciation for a return on their investment.
A SMALL NUMBER OF OUR STOCKHOLDERS COULD BE ABLE TO SIGNIFICANTLY INFLUENCE OUR
BUSINESS AND AFFAIRS.
Based on filings made with the SEC and other information available to us, as of
January 31, 2007, we believe that fewer than 10 organizations or individuals
collectively controlled over 50% of our common stock, including Berkshire
Hathaway Inc., which beneficially owned approximately 19% of our common stock as
of that date. Accordingly, a small number of our stockholders could affect
matters requiring approval by stockholders, including the election of directors
and the approval of mergers or other business combination transactions.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
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ITEM 2. PROPERTIES
We operate plants, mines, quarries, transport ships and other facilities in
North America, Europe and the Asia-Pacific region. In 2006, U.S. Gypsum's
SHEETROCK(R) brand gypsum wallboard plants operated at 92% of capacity. USG
Interiors' AURATONE(R) brand ceiling tile plants operated at 65% of capacity.
The locations of our production properties, grouped by operating segment, are as
follows (plants are owned unless otherwise indicated):
NORTH AMERICAN GYPSUM
GYPSUM WALLBOARD AND OTHER GYPSUM PRODUCTS *
Aliquippa, Pa.**
Baltimore, Md.**
Boston (Charlestown), Mass.
Bridgeport, Ala.**
Detroit (River Rouge), Mich.
East Chicago, Ind.**
Empire, Nev.
Fort Dodge, Iowa
Galena Park, Texas**
Jacksonville, Fla.**
New Orleans, La.**
Norfolk, Va.
Plaster City, Calif.
Rainier, Ore.
Shoals, Ind.**
Sigurd, Utah
Southard, Okla.
Sperry, Iowa**
Stony Point, N.Y.
Sweetwater, Texas
Hagersville, Ontario, Canada**
Montreal, Quebec, Canada **
Monterrey, Nuevo Leon, Mexico
Puebla, Puebla, Mexico
* The gypsum wallboard line at Santa Fe Springs, Calif., was permanently
closed in January 2007.
** Plants supplied fully or partially by synthetic gypsum
JOINT COMPOUND (SURFACE PREPARATION AND JOINT TREATMENT PRODUCTS)
Auburn, Wash.
Bridgeport, Ala.
Chamblee, Ga.
Dallas, Texas
East Chicago, Ind.
Fort Dodge, Iowa
Galena Park, Texas
Gypsum, Ohio
Jacksonville, Fla.
Phoenix (Glendale), Ariz. (leased)
Port Reading, N.J.
Sigurd, Utah
Torrance, Calif.
Calgary, Alberta, Canada (leased)
Hagersville, Ontario, Canada
Montreal, Quebec, Canada
Surrey, British Columbia, Canada
Monterrey, Nuevo Leon, Mexico
Puebla, Puebla, Mexico
CEMENT BOARD
Baltimore, Md.
Detroit (River Rouge), Mich.
New Orleans, La.
Santa Fe Springs, Calif.
Monterrey, Nuevo Leon, Mexico
GYPSUM ROCK (MINES AND QUARRIES)
Alabaster (Tawas City), Mich.
Empire, Nev.
Fort Dodge, Iowa
Plaster City, Calif.
Shoals, Ind.
Sigurd, Utah
Southard, Okla.
Sperry, Iowa
Sweetwater, Texas
Hagersville, Ontario, Canada
Little Narrows, Nova Scotia, Canada
Windsor, Nova Scotia, Canada
Tecoman, Colima, Mexico
Monterrey, Nuevo Leon, Mexico
PAPER FOR GYPSUM WALLBOARD
Clark, N.J.
Galena Park, Texas
Gypsum, Ohio
Jacksonville, Fla.
North Kansas City, Mo.
Oakfield, N.Y.
South Gate, Calif.
OTHER PRODUCTS
We operate a mica-processing plant at Spruce Pine, N.C. We manufacture metal
lath, plaster and drywall accessories and light gauge steel framing products at
Puebla, Puebla, Mexico and Monterrey, Nuevo Leon, Mexico. We produce plaster
products at Saltillo, Coahuila, Mexico. We manufacture gypsum fiber panel
products at Gypsum, Ohio, paper-faced metal corner bead at Auburn, Wash., and
Weirton, W.Va., structural cementitious panels at Delavan,
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Wis. (leased), light gauge steel framing products at Tuscaloosa, Ala. (leased),
and sealants and finishes at La Mirada, Calif.
NEW FACILITIES
Under our capital expenditures program, we are building new gypsum wallboard
plants in Washingtonville, Pa., which we expect to complete in 2008, and
Tecoman, Colima, Mexico, which we expect to complete in 2007. We are also
replacing existing capacity at U.S. Gypsum's Norfolk, Va., gypsum wallboard
plant with a new low-cost wallboard line. We expect to complete the Norfolk
project in 2007. In 2006, we acquired a paper mill in Otsego, Mich., and are
converting it to manufacture high-quality, low-cost wallboard paper. We expect
it to become operational in 2008.
OCEAN VESSELS
Gypsum Transportation Limited, our wholly owned subsidiary 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 our East Coast plants. We offer excess ship time, when available, for
charter on the open market to back haul cargo such as coal. We have placed an
order for a new 40,000-ton self-unloading ship that is intended to lower the
delivered cost of gypsum rock to East Coast wallboard plants. The new ship is
expected to become operational in 2008.
WORLDWIDE CEILINGS
CEILING GRID
Cartersville, Ga.
Stockton, Calif.
Westlake, Ohio
Auckland, New Zealand (leased)
Dreux, France
Oakville, Ontario, Canada
Peterlee, England (leased)
Shenzhen, China (leased)
St. Petersburg, Russia (leased)
Viersen, Germany
A coil coater and slitter plant used in the production of ceiling grid is
located in Westlake, Ohio. Slitter plants are located in Stockton, Calif.
(leased), and Antwerp, Belgium (leased).
CEILING TILE
Cloquet, Minn.
Greenville, Miss.
Walworth, Wis.
OTHER PRODUCTS
We manufacture mineral fiber products at Red Wing, Minn., and Walworth, Wis.,
metal specialty systems at Oakville, Ontario, Canada, joint compound at
Peterlee, England, St. Petersburg, Russia, Viersen, Germany, and Port Klang,
Malaysia (leased), gypsum wallboard and joint compound at Lima, Peru, and bead
and trim products at Stockton, Calif.
ITEM 3. LEGAL PROCEEDINGS
See Part II, Item 8, Financial Statements and Supplementary Data - Notes to
Consolidated Financial Statements, Note 2, Resolution of USG's Reorganization
Proceedings, and Note 19, Litigation, for information on legal proceedings,
which information is incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock trades on the New York Stock Exchange, or NYSE, and the Chicago
Stock Exchange under the symbol USG. The NYSE is the principal market for our
common stock. As of January 31, 2007, there were 2,916 record holders of our
common stock. We currently do not pay dividends on our 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.
We did not purchase any of our equity securities during the fourth quarter of
2006.
The high and low sales prices of our common stock in 2006 and 2005 were as
follows:
<TABLE>
<CAPTION>
2006 2005
---------------- ---------------
High Low High Low
------- ------ ------ ------
<S> <C> <C> <C> <C>
First quarter $ 99.30 $64.05 $40.95 $26.80
Second quarter 121.70 65.33 50.00 30.07
Third quarter* 57.45 43.68 71.25 40.57
Fourth quarter 58.50 46.00 69.47 56.40
</TABLE>
* During the third quarter of 2006, we completed the Rights Offering pursuant
to which our stockholders of record on June 30, 2006 were issued
transferable rights to purchase, at $40 per share, one new share of our
common stock for each share owned. In connection with the Rights Offering
we issued 44.92 million new shares of our common stock. The historical
common stock prices shown above have not been adjusted to reflect the
Rights Offering.
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ITEM 6. SELECTED FINANCIAL DATA
USG CORPORATION
FIVE-YEAR SUMMARY
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------
2006 2005 2004 2003 2002
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
(dollars in millions, except per-share data)
STATEMENT OF OPERATIONS DATA:
Net sales $ 5,810 $ 5,139 $ 4,509 $ 3,666 $ 3,468
Cost of products sold 4,440 4,037 3,672 3,121 2,884
Gross profit 1,370 1,102 837 545 584
Selling and administrative expenses 419 352 317 324 312
Asbestos claims provision (reversal) (44) 3,100 -- -- --
Chapter 11 reorganization expenses 10 4 12 11 14
Operating profit (loss) 985 (2,354) 508 210 258
Interest expense (a) 555 5 5 6 8
Interest income (43) (10) (6) (4) (4)
Other income, net (3) -- -- (9) (2)
Income taxes (benefit) 188 (924) 197 79 117
Earnings (loss) before cumulative effect of accounting change 288 (1,425) 312 138 139
Cumulative effect of accounting change -- (11) -- (16) (96)
Net earnings (loss) 288 (1,436) 312 122 43
Net Earnings (Loss) Per Common Share (b):
Cumulative effect of accounting change -- (0.20) -- (0.29) (1.72)
Basic 4.34 (25.49) 5.62 2.18 .77
Diluted 4.33 (25.49) 5.62 2.18 .77
------- ------- ------- ------- -------
BALANCE SHEET DATA (as of the end of the year):
Working capital 943 1,579 1,220 1,084 939
Current ratio 1.53 3.63 3.14 3.62 3.14
Cash and cash equivalents (c) 565 936 756 700 649
Property, plant and equipment, net 2,210 1,946 1,853 1,818 1,788
Total assets 5,365 6,142 4,278 3,799 3,636
Long-term debt (d) (e) 1,439 -- 1 2 2
Liabilities subject to compromise (e) -- 5,340 2,242 2,243 2,272
Total stockholders' equity (deficit) 1,534 (302) 1,024 689 535
------- ------- ------- ------- -------
OTHER INFORMATION:
Capital expenditures 393 198 138 111 100
Stock price per common share (f) 54.80 65.00 40.27 16.57 8.45
Cash dividends declared per common share -- -- -- -- --
Average number of employees 14,700 14,100 13,800 13,900 14,100
</TABLE>
(a) Interest expense for 2006 included post-petition interest and fees of $528
million related to pre-petition obligations. In accordance with bankruptcy
accounting rules, interest expense on pre-petition debt and other
obligations had not been accrued or recorded from June 25, 2001, the date
on which we filed our Chapter 11 petition for reorganization, through
December 31, 2005.
(b) Net earnings (loss) per common share reflect the effect of the Rights
Offering described in Note 4 to the Consolidated Financial Statements.
(c) Cash, cash equivalents and restricted cash totaled $571 million as of
December 31, 2006. Cash, cash equivalents, restricted cash and marketable
securities totaled $1.577 billion as of December 31, 2005, $1.249 billion
as of December 31, 2004, $947 million as of December 31, 2003 and $830
million as of December 31, 2002.
(d) Total debt as of December 31, 2006 was $2.504 billion. See Note 3 to the
Consolidated Financial Statements.
(e) Debt of $1.005 billion was included in liabilities subject to compromise
for 2002 through 2005.
(f) Stock price per common share reflects the final closing price of the year.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
OVERVIEW
RESOLUTION OF USG'S REORGANIZATION PROCEEDINGS
On June 25, 2001, USG Corporation and 10 of its United States subsidiaries,
collectively referred to as the debtors, filed voluntary petitions for
reorganization under Chapter 11 of the United States Bankruptcy Code in the
United States Bankruptcy Court for the District of Delaware. The Chapter 11
cases were consolidated as In re: USG Corporation et al. (Case No. 01-2094).
These cases did not include any of our non-U.S. subsidiaries or companies that
our subsidiary L&W Supply Corporation acquired after we filed the bankruptcy
petitions.
In the second quarter of 2006, the debtors emerged from their Chapter 11
reorganization proceedings as a result of a plan of reorganization that was
confirmed by the bankruptcy court and the United States District Court for the
District of Delaware. The plan became effective on June 20, 2006, which is
referred to in this report as the Effective Date. The plan achieved our goals of
resolving asbestos claims in a fair and equitable manner, protecting the
long-term value of our businesses and maintaining our leadership positions in
markets in which we compete.
As part of the plan, the following important events have occurred:
- - We created and funded a trust under Section 524(g) of the Bankruptcy Code
for the payment of asbestos personal injury claims against the debtors.
This trust is also referred to as the Asbestos Trust or the Trust.
- - On the Effective Date, we paid $890 million to the Asbestos Trust and
issued to the Trust an interest-bearing note in the amount of $10 million,
which we paid on December 21, 2006.
- - On December 21, 2006, we also paid $3.05 billion to the Asbestos Trust.
This additional $3.05 billion payment was due because the plan of
reorganization required that we pay this amount if the 109th Congress did
not pass the Fairness in Asbestos Injury Resolution Act of 2005 or
substantially similar legislation before Congress adjourned. Because the
109th Congress adjourned in December 2006 without passing this legislation,
we made the $3.05 billion payment to the Trust. As a result of this
payment, we have fully funded the Trust and have no further payment
obligations to the Trust.
- - The bankruptcy court entered a channeling injunction which provides that
all present and future asbestos personal injury claims against the debtors
must be brought against the Trust and no one may bring such a claim against
the debtor companies.
- - Asbestos property damage claims against the debtors are not part of the
channeling injunction or the Asbestos Trust, which deal only with asbestos
personal injury or related claims. We have reached agreements to settle all
remaining asbestos property damage claims asserted against the debtors,
with the exception of one small claim brought by a homeowner. In 2006, we
paid approximately $99 million for asbestos property damage claim
settlements. The estimated cost of the unpaid settlements of the remaining
asbestos property damage claims, including associated legal fees, is
approximately $48 million and is included in accrued expenses.
- - Pursuant to the plan of reorganization, allowed claims of all other
creditors have been, or will be, paid in full, with interest where agreed
or required.
- - In connection with the plan of reorganization, we conducted an offering in
which we issued to stockholders as of June 30, 2006 the right to purchase,
at $40.00 per share, one new share of our common stock for each share
owned. This offering is referred to as the Rights Offering. In connection
with the Rights Offering, Berkshire Hathaway Inc. agreed to purchase at
that price all shares underlying any unexercised rights. We received net
proceeds of approximately $1.7 billion and issued 44.92 million new shares
of
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our common stock in connection with completion of the Rights Offering in
the third quarter of 2006.
The following subsidiaries were debtors in the Chapter 11 proceedings: United
States Gypsum Company, or U.S. Gypsum; USG Interiors, Inc.; USG Interiors
International, Inc.; L&W Supply Corporation, or 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.
Additional information about funding the plan of reorganization is included
under "Liquidity and Capital Resources" below and in Note 3 to the Consolidated
Financial Statements. Additional information about the Rights Offering is
included in Note 4 to the Consolidated Financial Statements. Asbestos property
damage claims are discussed in Note 19 to the Consolidated Financial Statements.
FINANCIAL INFORMATION
Net sales in 2006 were a record $5.810 billion, surpassing the previous record
set in 2005 by 13%. Operating profit of $985 million was also a record. Net
earnings were $288 million, or $4.33 per diluted share.
These results were primarily driven by higher selling prices for our
products and a strong level of new housing construction in the early part of
2006. However, housing starts fell considerably during the second half of the
year causing demand for building products to decrease.
Shipments of gypsum wallboard in 2006 were the second highest in history
for the industry. Capacity utilization rates in excess of 90% for the industry
resulted in higher market selling prices for gypsum wallboard in 2006. The
nationwide average realized selling price for our SHEETROCK(R) brand gypsum
wallboard rose 25% from 2005. However, as demand fell in the second half of the
year, capacity utilization rates and selling prices also began to drop.
As of December 31, 2006, we had $565 million of cash and cash equivalents
compared with $1.6 billion of cash, cash equivalents, restricted cash and
marketable securities as of December 31, 2005. The decline primarily reflects
our funding of payments due under our plan of reorganization.
MARKET TRENDS
Our businesses are cyclical in nature and sensitive to changes in general
economic conditions, including, in particular, conditions in the housing and
construction-based markets. Housing starts, a major source of demand for our
products and services, experienced a rapid decline in the second half of 2006.
According to data issued by the U.S. Bureau of the Census, starts fell from an
annualized rate of more than 2 million units at the beginning of 2006 to about
1.6 million at the end of the year, representing a drop of over 20%.
The downturn that began in 2006 has been rapid as both homebuilders and
drywall dealers reduced activity to keep inventories from expanding. For us,
that meant a rapid contraction in wallboard demand. Industry wallboard
shipments, which were up about 6% in the first seven months of 2006 compared
with the first seven months of 2005, were down 15% in the last five months of
2006 compared with the same period in 2005. As a result, industry capacity
utilization rates went from about 100% at mid-year 2006 to less than 80% at the
end of the year, and wallboard pricing began declining as capacity utilization
rates fell below 90%, the level at which prices historically have begun to
erode. U.S. Gypsum's wallboard capacity utilization rate was about 79% for the
fourth quarter of 2006.
During 2007, we expect USG and industry wallboard volumes to be below 2006
levels, and we expect a further decline in selling prices. This combination is
expected to have a significant negative impact on North American Gypsum profits
compared with the record-setting performance of recent years.
We are responding to the changing market conditions with a goal of matching
our gypsum wallboard operations more closely to current demand levels. As of
January 31, 2007, we had temporarily curtailed annual gypsum wallboard
production by more than 2 billion square feet by reducing shifts and days of
operation at higher-cost plants. In addition, in January 2007, we permanently
closed two older, high-cost production lines, one at our Jacksonville, Fla.,
plant and one at our Santa Fe Springs, Calif., plant, eliminating an additional
400 million square feet of annual capacity.
Currently, there is significant excess wallboard production capacity
industry-wide. We expect approximately 1 billion square feet of additional
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capacity, net of recent closures, to become operational in the industry in 2007,
with more new capacity expected in 2008. We expect to see continued downward
pressure on industry utilization rates and selling prices during 2007.
See Part I, Item 1A, Risk Factors, for additional information on the
cyclicality of our businesses and other risks and uncertainties that affect our
businesses.
STRATEGIC ACTIONS
In addition to the steps we have taken to match our gypsum wallboard operations
more closely to current demand levels, we intend to continue to seek
opportunities to grow our business and improve operating results by:
- - making selective acquisitions to grow our Building Products Distribution
business;
- - continuing to invest in new, low-cost gypsum wallboard manufacturing
capacity to improve operating margins and maintain our commitment to
customer service;
- - introducing new products that complement our current product lines and
leverage our customer relationships; and
- - reducing costs by improving production efficiencies and completing
information technology initiatives to enhance operations, including a
supply chain optimization project.
CONSOLIDATED RESULTS OF OPERATIONS
NET SALES
Net sales were $5.810 billion in 2006, $5.139 billion in 2005 and $4.509 billion
in 2004.
Net sales for 2006 reached an all-time high and represented a 13% increase
over 2005 primarily due to higher realized selling prices for all major product
lines. For the third consecutive year, net sales increased for all three
operating segments. Net sales were up for the North American Gypsum and Building
Products Distribution operating segments primarily due to higher selling prices,
partially offset by lower volume, for gypsum wallboard. Net sales for the
Worldwide Ceilings operating segment increased primarily due to higher selling
prices and volume for ceiling grid and higher selling prices, partially offset
by lower volume, for ceiling tile.
Net sales for 2005 were up 14% over 2004. Net sales increased for North
American Gypsum primarily due to higher selling prices and record shipments for
SHEETROCK(R) brand gypsum wallboard. Net sales for the Building Products
Distribution segment improved primarily due to record shipments and higher
selling prices for gypsum wallboard. 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 down.
COST OF PRODUCTS SOLD
Cost of products sold totaled $4.440 billion in 2006, $4.037 billion in 2005 and
$3.672 billion in 2004.
Cost of products sold increased in 2006 compared with 2005 primarily due to
the effect of higher costs for natural gas and raw materials for all major
product lines.
Cost of products sold increased in 2005 compared with 2004 primarily
reflecting increased volume for SHEETROCK(R) brand gypsum wallboard and
gypsum-related products as well as higher costs for natural gas, freight and raw
materials.
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<PAGE>
GROSS PROFIT
Gross profit was $1.370 billion in 2006, $1.102 billion in 2005 and $837 million
in 2004. Gross margin (gross profit as a percentage of net sales) was 23.6% in
2006, 21.4% in 2005 and 18.6% in 2004.
Gross profit increased in 2006 compared with 2005 primarily due to higher
selling prices for SHEETROCK(R) brand gypsum wallboard and for all other major
product lines, partially offset by higher costs for natural gas and raw
materials.
Gross profit improved in 2005 versus 2004 primarily due to increased
shipments of SHEETROCK(R) brand gypsum wallboard and higher selling prices for
many major product lines, offset in part by higher costs for natural gas,
freight and raw materials.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses totaled $419 million in 2006, $352 million
in 2005 and $317 million in 2004. As a percentage of net sales, these expenses
were 7.2% in 2006, 6.8% in 2005 and 7.0% in 2004.
The increase in 2006 selling and administrative expenses versus 2005
primarily reflected increased expenses for compensation and benefits, including
incentive compensation, costs associated with the move to our new corporate
offices scheduled for March 2007 and funding for marketing and growth
initiatives.
The increase in 2005 selling and administrative expenses compared with 2004
primarily reflected compensation and benefits expenses, including retention and
incentive compensation, and higher funding for marketing and growth initiatives.
ASBESTOS CLAIMS PROVISION (REVERSAL)
In connection with our evaluation of the cost of resolving our asbestos-related
liabilities, in the fourth quarter of 2005 we recorded a pretax charge of $3.1
billion ($1.935 billion, or $34.34 per share, after-tax), increasing our reserve
for all asbestos claims to $4.161 billion. In increasing our reserve, we
included the anticipated cost of funding the Asbestos Trust. We also included
the estimated cost of resolving asbestos property damage claims, other
asbestos-related claims and associated legal expenses.
In 2006, we reversed $44 million pretax ($27 million, or $0.41 per diluted
share, after-tax) of our reserve for asbestos-related liabilities. This included
pretax reversals of $27 million in the second quarter and an additional $17
million in the third quarter. These reversals, which are reflected as income in
the consolidated statement of operations, were based on our evaluation in each
quarter of the settlements of asbestos property damage claims.
CHAPTER 11 REORGANIZATION EXPENSES
Chapter 11 reorganization expenses consisted of the following:
<TABLE>
<CAPTION>
2006 2005 2004
----- ---- ----
<S> <C> <C> <C>
(millions)
Legal and financial advisory fees $ 34 $ 36 $ 24
Bankruptcy-related interest income (24) (32) (12)
----- ---- ----
Total 10 4 12
===== ==== ====
</TABLE>
INTEREST EXPENSE
Interest expense was $555 million in 2006, $5 million in 2005 and $5 million in
2004. Interest expense for 2006 included a charge for post-petition interest and
fees related to pre-petition obligations totaling $528 million ($325 million, or
$4.88 per diluted share, after-tax). In accordance with American Institute of
Certified Public Accountants Statement of Position 90-7, "Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code," virtually all of our
outstanding debt had been classified as liabilities subject to compromise in
prior periods, and from the date on which we filed our Chapter 11 petition for
reorganization through December 31, 2005, interest expense on this debt and
other pre-petition obligations had not been accrued or recorded. Contractual
interest expense not accrued or recorded on pre-petition debt totaled $80
million in 2005 and $71 million in 2004.
INTEREST INCOME
Non-bankruptcy-related interest income was $43 million in 2006, $10 million in
2005 and $6 million in 2004. This interest income was generated primarily from
our investments in marketable securities that we held during the bankruptcy
period. As of December 31, 2006, we had no investments in marketable securities.
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<PAGE>
OTHER INCOME, NET
Other income, net was $3 million in 2006 and zero in 2005 and 2004.
INCOME TAXES (BENEFIT)
Income tax expense of $188 million was recorded in 2006. An income tax benefit
of $924 million was recorded in 2005 as a result of the provision for asbestos
claims. Income tax expense was $197 million in 2004. Our effective tax rates
were 39.5% for 2006, 39.3% for 2005 and 38.6% for 2004.
The effective tax rate for 2005 reflected a $25 million reduction in our
third quarter 2005 income tax provision in connection with the Internal Revenue
Service's completion of its audit of our federal income tax returns for the
years 2000 through 2002. Due to the results of the audit, a portion of our
recorded income tax contingency reserves became unnecessary and were eliminated.
In the fourth quarter of 2005, this reduction was offset by an increase of $41
million ($28 million net of federal benefit) in the valuation allowance relating
to our reserve for asbestos claims.
CUMULATIVE EFFECT OF ACCOUNTING CHANGE
In December 2005, we adopted Financial Accounting Standards Board Interpretation
No. 47, or FIN 47. A noncash, after-tax charge of $11 million ($18 million
pretax) was reflected in the consolidated statement of operations as a
cumulative effect of a change in accounting principle as of December 31, 2005.
See Note 12 to the Consolidated Financial Statements for additional
information related to the adoption of FIN 47.
NET EARNINGS (LOSS)
Net earnings in 2006 were $288 million, or $4.33 per diluted share. These
amounts included an after-tax charge of $325 million, or $4.88 per diluted
share, for post-petition interest and fees related to pre-petition obligations
as described above. Net earnings and diluted earnings per share for 2006
included after-tax income of $27 million, or $0.41 per diluted share, as a
result of the reversal of the reserve for asbestos-related claims described
above.
We incurred a net loss of $1.436 billion, or $25.49 per diluted share, in
2005. This loss included the after-tax provision of $1.935 billion, or $34.34
per share, for asbestos claims and an after-tax charge of $11 million, or $0.20
per share, for the cumulative effect of an accounting change related to the
adoption of FIN 47.
Net earnings in 2004 were $312 million, or $5.62 per diluted share.
Earnings per share data for 2006 reflect the issuance of 44.92 million
shares of common stock in the third quarter of 2006 in connection with the
Rights Offering. We have adjusted earnings per share data for 2005 and 2004 to
reflect the effect of the issuance of shares of common stock in connection with
the Rights Offering.
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<PAGE>
CORE BUSINESS RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
Net Sales Operating Profit (Loss)
------------------------- -----------------------
2006 2005 2004 2006 2005 2004
------- ------ ------ ----- ------- -----
<S> <C> <C> <C> <C> <C> <C>
(millions)
NORTH AMERICAN GYPSUM:
United States Gypsum Company $ 3,215 $2,881 $2,474 $ 742 $(2,557) $348
CGC Inc. (gypsum) 341 323 297 46 53 49
Other subsidiaries* 266 224 178 48 38 31
Eliminations (201) (206) (196) -- -- --
------- ------ ------ ----- ------- ----
Total 3,621 3,222 2,753 836 (2,466) 428
------- ------ ------ ----- ------- ----
WORLDWIDE CEILINGS:
USG Interiors, Inc. 507 489 488 53 43 42
USG International 235 210 200 13 9 12
CGC Inc. (ceilings) 57 55 51 11 10 8
Eliminations (43) (47) (51) -- -- --
------- ------ ------ ----- ------- ----
Total 756 707 688 77 62 62
------- ------ ------ ----- ------- ----
BUILDING PRODUCTS DISTRIBUTION:
L&W Supply Corporation 2,477 2,048 1,738 203 149 103
------- ------ ------ ----- ------- ----
Corporate -- -- -- (117) (90) (73)
Chapter 11 reorganization expenses -- -- -- (10) (4) (12)
Eliminations (1,044) (838) (670) (4) (5) --
------- ------ ------ ----- ------- ----
TOTAL USG CORPORATION 5,810 5,139 4,509 985 (2,354) 508
======= ====== ====== ===== ======= ====
</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
Net sales for the North American Gypsum segment increased 12% in 2006 and 17% in
2005 compared with the respective prior years. Operating profit of $836 million
in 2006 included the reversal of $44 million of our reserve for asbestos-related
liabilities. An operating loss of $2.466 billion in 2005 resulted primarily from
a $3.1 billion charge for asbestos-related claims recorded in the fourth quarter
of 2005 that was associated with our then-proposed plan of reorganization.
Operating profit in 2004 amounted to $428 million.
United States Gypsum Company - 2006 Compared With 2005: Net sales in 2006
increased $334 million, or 12%, from 2005. Operating profit in 2006 was $742
million and included the above-mentioned reversal of $44 million of our reserve
for asbestos-related liabilities. An operating loss of $2.557 billion in 2005
included the above-mentioned $3.1 billion charge for asbestos claims. Operating
results benefited in 2006 primarily from higher average selling prices for
SHEETROCK(R) brand gypsum wallboard, SHEETROCK(R) brand joint treatment products
and FIBEROCK(R) brand gypsum fiber panels. However, the higher levels of average
selling prices were partially offset by lower shipments of gypsum wallboard and
higher manufacturing costs.
New housing construction was strong in the first half of 2006 resulting in
strong demand for gypsum wallboard. However, housing starts fell considerably
during the second half of the year causing demand for gypsum wallboard to
decrease. As a result, industry shipments of gypsum wallboard in 2006 were down
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<PAGE>
approximately 3% from 2005. U.S. Gypsum shipped 10.8 billion square feet of
SHEETROCK(R) brand gypsum wallboard in 2006, a 4% decrease from the previous
record of 11.3 billion square feet in 2005. For the fourth quarter of 2006, our
shipments of SHEETROCK(R) brand gypsum wallboard were 2.3 billion square feet,
down 18% from 2.8 billion square feet in the fourth quarter of 2005.
In an effort to balance production levels more closely with market demand,
as of January 31, 2007, we had temporarily curtailed annual gypsum wallboard
production by more than 2 billion square feet by reducing shifts and days of
operation at higher-cost plants. In addition, in January 2007, we permanently
closed two older, high-cost production lines, one at our Jacksonville, Fla.,
plant and one at our Santa Fe Springs, Calif., plant, eliminating an additional
400 million square feet of annual capacity. U.S. Gypsum's capacity utilization
for gypsum wallboard averaged 92% in 2006, down from 96% in 2005. Capacity
utilization was 79% in the fourth quarter of 2006 compared with 98% in the
fourth quarter of 2005.
In 2006, our nationwide average realized selling price for SHEETROCK(R)
brand gypsum wallboard was $180.59 per thousand square feet, up 25% from $143.93
in 2005. However, as residential market conditions weakened in the second half
of 2006, industry wallboard prices began a decline that continued through the
end of the year and into 2007. U.S. Gypsum's average realized selling price for
SHEETROCK(R) brand gypsum wallboard was $181.75 per thousand square feet during
the fourth quarter of 2006, down 4% from the third quarter of 2006, but 17%
higher compared with the fourth quarter of 2005.
Manufacturing costs for U.S. Gypsum increased in 2006 primarily due to
higher costs for energy and raw materials.
United States Gypsum Company - 2005 Compared With 2004: Net sales increased 16%
in 2005 compared with 2004. An operating loss of $2.557 billion was recorded in
2005 as discussed above, while operating profit was $348 million in 2004.
Strong demand for SHEETROCK(R) brand gypsum wallboard led to record
shipments of 11.3 billion square feet during 2005, a 3% increase from 11.0
billion square feet in 2004. U.S. Gypsum's wallboard plants operated at 96% of
capacity in 2005, compared with 94% in 2004. Industry shipments of gypsum
wallboard in 2005 were up approximately 6% from 2004.
While U.S. Gypsum realized stronger demand in 2005, it also experienced
significant cost pressures, as energy, freight and raw material prices increased
significantly. These cost increases were offset by increased industry pricing,
which reflected the strong demand and high industry capacity utilization rates.
The nationwide average realized price for SHEETROCK(R) brand gypsum
wallboard was $143.93 per thousand square feet in 2005, up 18% from $122.37 in
2004.
Increased shipments and higher selling prices were also realized for
SHEETROCK(R) brand joint treatment products and FIBEROCK(R) brand gypsum fiber
panels in 2005 as compared with 2004.
CGC Inc.: Net sales increased 6%, while operating profit decreased 13% in 2006
versus 2005. The decline in operating profit was primarily due to lower volume
and higher manufacturing costs, partially offset by higher selling prices for
CGC's SHEETROCK(R) brand gypsum wallboard and the favorable effects of currency
translation.
Comparing 2005 with 2004, net sales increased 9%, and operating profit rose
8%. These results were primarily attributable to the favorable effects of
currency translation. Higher selling prices for CGC's SHEETROCK(R) brand gypsum
wallboard, partially offset by lower volume and higher manufacturing costs, also
contributed to the improved level of operating profit.
WORLDWIDE CEILINGS
Net sales and operating profit increased 7% and 24%, respectively, in 2006
versus 2005. Net sales in 2005 increased 3% compared with 2004, while operating
profit was unchanged.
USG Interiors, Inc.: Net sales in 2006 for our domestic ceilings business were
$507 million, an $18 million increase compared with 2005. Operating profit of
$53 million increased 23% compared with 2005. Results for ceiling grid improved
in 2006 due to increased shipments and higher selling prices, partially offset
by higher manufacturing costs. Results for ceiling tile improved due to higher
selling prices,
24
<PAGE>
partially offset by lower shipments and higher manufacturing costs.
Net sales in 2005 were $489 million, a $1 million increase compared with
2004, as higher selling prices for ceiling grid and tile were partially offset
by lower shipments of these products. Operating profit of $43 million, which
also represented a slight increase from 2004, was favorably affected by a
variation in last-in, first-out (LIFO) reserve adjustments for ceiling tile and
grid inventory. These adjustments accounted for a $19 million year-on-year
increase in operating profit, which was offset to a large extent by higher
energy, freight and raw material costs for ceiling grid and tile.
USG International: Net sales for USG International were up 12%, and operating
profit increased 44% from 2005. These increases primarily reflected increased
demand for USG ceiling grid in Europe and increased exports to Latin America.
Comparing 2005 with 2004, net sales increased 5%, while operating profit
declined to $9 million from $12 million, primarily due to higher prices for
steel used in manufacturing ceiling grid in Europe.
CGC Inc.: CGC reported increases of $2 million in net sales and $1 million in
operating profit as compared with 2005. These results primarily reflected the
favorable effects of currency translation and improved pricing for ceiling tile.
Comparing 2005 with 2004, net sales increased $4 million, and operating
profit increased $2 million.
BUILDING PRODUCTS DISTRIBUTION
Net sales and operating profit in 2006 for L&W Supply were the highest for any
year in its history. Net sales of $2.477 billion represented a 21% increase
compared with 2005, while operating profit rose 36% to $203 million. These
results were primarily attributable to a 26% increase in selling prices for
gypsum wallboard and record shipments of gypsum wallboard, which were up 3% from
2005. Record sales of complementary building products such as drywall metal,
ceiling products and joint compound also contributed to the improved results in
2006. L&W Supply's gypsum wallboard price and volume trends in the fourth
quarter of 2006 were similar to those for our North American Gypsum segment due
to the weakened conditions in residential markets during the second half of the
year.
Comparing 2005 with 2004, L&W Supply reported increases in net sales of 18%
and operating profit of 45%. These results primarily reflected increased
shipments and higher selling prices for gypsum wallboard. Increased sales of
complementary building products also contributed to the improved results.
Shipments of gypsum wallboard were up 12%, while selling prices rose 18%
compared with 2004.
L&W Supply remains focused on opportunities to profitably grow its
specialty business as well as optimize asset utilization. As part of its growth
plan, L&W Supply increased the number of its locations, largely through
acquisitions, to 220 in 36 states as of December 31, 2006, compared with 192
locations as of December 31, 2005 and 186 locations as of December 31, 2004. On
a same-location basis, net sales increased 15% in 2006 compared with 2005.
MARKET CONDITIONS AND OUTLOOK
Housing starts are a major source of demand for our products and services. Based
on preliminary data issued by the U.S. Bureau of the Census, U.S. housing starts
in 2006 were an estimated 1.801 million units, compared with actual housing
starts of 2.068 million units in 2005 and 1.956 million units in 2004. While new
housing construction was strong early in the year, housing starts fell
considerably during the second half of 2006. The downturn that began in 2006 has
been rapid as both homebuilders and drywall dealers reduced activity to keep
inventories from expanding. For us, that meant a rapid contraction in wallboard
demand.
Industry shipments of gypsum wallboard in the United States were an
estimated 36.2 billion square feet in 2006, the second highest level in history
and a 3% decrease from the previous record level of 37.2 billion square feet in
2005. However, industry wallboard shipments, which were up about 6% in the first
seven months of 2006 compared with the first seven months of 2005, were down 15%
in the last five months of 2006 compared with the same period in 2005. As a
result, industry capacity utilization rates dropped from about 100% at mid-year
2006 to less than 80% at the end of the year, and wallboard pricing began
declining as capacity utilization rates
25
<PAGE>
fell below 90%, the level at which prices historically have begun to erode. U.S.
Gypsum's wallboard capacity utilization rate was about 79% for the fourth
quarter of 2006.
The repair and remodel market, which includes renovation of both
residential and nonresidential buildings, accounts for the second-largest
portion of our 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 2006 remained strong, as sales of
existing homes in 2006 are estimated at 6.5 million units, following 2005's
record level of 7.1 million units.
Demand for our 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.
After a moderate increase in 2005, total floor space for which contracts were
signed increased 4% in 2006, with increased investments in the hotel, education
and office construction segments.
During 2007, we expect a continued decline in new residential construction.
Consequently, we expect USG and industry wallboard volumes to be below 2006
levels, resulting in a further decline in selling prices. This combination is
expected to have a significant negative impact on our profits compared with the
record-setting performance of recent years. We expect that the fundamentals for
nonresidential building and repair and remodel activity will remain solid.
In this environment, we remain focused on balancing production levels with
market demand and maintaining high levels of quality, service, safety and
operational efficiency.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
As of December 31, 2006, we had $565 million of cash and cash equivalents. We
believe that cash on hand, future cash available from operations and the other
sources of liquidity described below will provide sufficient liquidity to allow
our businesses to carry on normal operations. Normal-course cash requirements
include, among other things, capital expenditures, working capital needs and
contractual obligations. Additionally, from time to time we consider selective
strategic transactions to create value and improve performance, including
acquisitions, joint ventures, partnerships, restructurings and dispositions.
Transactions of these types may result in material cash expenditures or
proceeds.
During the third quarter of 2006, we entered into a credit agreement with a
syndicate of banks that includes a $650 million revolving credit facility with a
$250 million sublimit for letters of credit. As of December 31, 2006, we had not
drawn upon the revolving credit facility except for approximately $86 million of
outstanding letters of credit.
The credit agreement also includes a $1.0 billion term loan facility and a
$1.15 billion tax bridge facility, each available to us in a single drawing of
up to these respective amounts. As explained below, we used a portion of the
amounts available under these facilities to fund part of our payments to the
Trust on December 21, 2006. Additional amounts cannot be drawn on these
facilities.
REORGANIZATION TRANSACTIONS
On the Effective Date, we paid $890 million to the Asbestos Trust and issued to
the Trust an interest-bearing note in the amount of $10 million, which we paid
on December 21, 2006. Because the 109th Congress adjourned without passing the
Fairness in Asbestos Injury Resolution Act of 2005 or substantially similar
legislation, we also paid our $3.05 billion obligation to the Asbestos Trust on
December 21, 2006. In addition to the payments to the Trust, from the Effective
Date through December 31, 2006, we paid $1.4 billion to unsecured creditors,
approximately $99 million for asbestos property damage settlements and $19
million for the settlement of other asbestos-related claims.
GROWTH INITIATIVES
During 2006, L&W Supply, which makes up the Building Products Distribution
operating segment, purchased the outstanding stock of several companies for
approximately $128 million, net of cash acquired. Certain of our North American
subsidiaries are currently in various stages of discussions with respect to the
potential acquisition of a number of distribution and manufacturing businesses.
A number of these
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<PAGE>
potential acquisitions may be announced and/or consummated during 2007. These
potential acquisitions would require investment in a total amount that we
estimate to be approximately $300 million to $400 million. There can, of course,
be no assurance that any of these acquisitions will be consummated or, if
consummated, what the required investment or timing of their consummation would
be.
FUNDING OF REORGANIZATION TRANSACTIONS AND GROWTH INITIATIVES
In 2006, we funded the reorganization transactions and our growth initiatives
using cash on hand, cash generated from the sale of our marketable securities,
net proceeds of approximately $1.7 billion in connection with the Rights
Offering, one-time borrowings of $1.065 billion under the tax bridge facility
and $700 million under the term loan facility, and the net proceeds from our
$500 million senior unsecured notes offering in the fourth quarter of 2006.
We expect to receive a federal tax refund of approximately $1.1 billion in
2007 associated with our funding of the Trust. This refund will be used to repay
the outstanding borrowing under the tax bridge facility.
We plan to fund future growth projects from cash on hand, future cash
available from operations and, if determined to be appropriate, borrowings under
our revolving credit facility. We may from time to time consider other debt or
equity financing alternatives to supplement, or as an alternative to, financing
under the revolving credit facility.
CASH FLOWS
The following table presents a summary of our cash flows:
<TABLE>
<CAPTION>
2006 2005 2004
------- ----- -----
<S> <C> <C> <C>
(millions)
Net cash provided by (used for):
Operating activities $(3,703) $ 506 $ 428
Investing activities 119 (372) (387)
Financing activities 3,212 44 6
Effect of exchange rate changes on cash 1 2 9
------- ----- -----
Net (decrease) increase in cash and
cash equivalents (371) 180 56
======= ===== =====
</TABLE>
Operating Activities: The variation between 2006 and 2005 primarily reflected
our payments in 2006 to fund our obligations under the plan of reorganization,
which included payments of $3.95 billion to the Trust, $499 million for interest
on pre-petition debt and $166 million for pre-petition trade claims and related
interest. We also made payments of approximately $99 million for asbestos
property damage settlements and $19 million for the settlement of other
asbestos-related claims.
Investing Activities: The variation between 2006 and 2005 primarily reflected
the following transactions. In 2006, we received net cash of $565 million from
the sale of our marketable securities. This cash was used to fund a portion of
our obligations under the plan of reorganization. In 2005, we had net purchases
of $115 million of marketable securities. Restricted cash of $72 million was
returned to us in 2006 primarily due to the termination of a credit agreement
with LaSalle Bank National Association, while in 2005 we deposited $35 million
in restricted cash. Partially offsetting these sources of cash in 2006, we
increased our spending on capital projects by $195 million and increased our
spending to acquire businesses by $99 million.
Financing Activities: The variation between 2006 and 2005 primarily reflected
the following 2006 transactions: We borrowed $1.065 billion under the tax bridge
facility and $700 million under the term loan facility. We issued $500 million
of 6.3% senior unsecured notes. We received net proceeds of approximately $1.7
billion in connection with the Rights Offering. These cash inflows, which were
used to fund a portion of our obligations under the plan of reorganization, were
partially offset by the payment of $766 million related to pre-petition debt
principal.
27
<PAGE>
CAPITAL EXPENDITURES
Capital spending amounted to $393 million in 2006 compared with $198 million in
2005. As of December 31, 2006, capital expenditure commitments for the
replacement, modernization and expansion of operations amounted to $494 million,
compared with $587 million as of December 31, 2005. We expect to fund our
capital expenditures program with cash from operations and, if determined to be
appropriate, borrowings under the revolving credit facility or other alternative
financings. Capital projects commenced as of December 31, 2006 include the
following projects with the total estimated costs indicated:
- - approximately $180 million for a new low-cost gypsum wallboard plant in
Washingtonville, Pa., that will serve the Northeast markets. Construction
of this plant began in late 2006 and is expected to be completed in 2008.
- - approximately $130 million to replace existing capacity at U.S. Gypsum's
Norfolk, Va., gypsum wallboard plant with a new low-cost wallboard line
designed to position the company for profitable growth in the mid-Atlantic
market. Construction on this project began in 2005 and is expected to be
completed in 2007.
- - approximately $109 million for the acquisition of a paper mill in Otsego,
Mich., in 2006 and to subsequently convert it to manufacture high-quality,
low-cost paper for U.S. Gypsum's wallboard plants. The plant is expected to
begin production in 2008.
- - approximately $75 million for a new 40,000-ton self-unloading ship intended
to lower the delivered cost of gypsum rock to East Coast wallboard plants.
The new ship is expected to become operational in 2008.
- - approximately $70 million for a new gypsum wallboard plant in Tecoman,
Colima, Mexico. This facility will serve markets in western Mexico and
export gypsum wallboard to Latin America. Construction of this plant began
in 2006 and is expected to be completed in 2007.
In addition, our Board of Directors has approved capital expenditures totaling
approximately $250 million for additional projects to expand wallboard
manufacturing and other operations. No spending commitments have yet been made
on these additional projects.
WORKING CAPITAL
As of December 31, 2006, working capital (current assets less current
liabilities) amounted to $943 million, and the ratio of current assets to
current liabilities was 1.53-to-1. As of December 31, 2005, working capital
amounted to $1.579 billion, and the ratio of current assets to current
liabilities was 3.63-to-1. The decrease in working capital was primarily due to
the use of cash, cash equivalents and marketable securities to fund a portion of
our obligations under the plan of reorganization.
Receivables decreased slightly to $448 million as of December 31, 2006 from
$453 million as of December 31, 2005. Inventories increased to $348 million from
$315 million primarily due to slower business conditions and additional
inventories from businesses acquired in 2006. Accounts payable as of December
31, 2006 increased to $303 million from $281 million as of December 31, 2005,
while accrued expenses increased to $358 million from $275 million. The increase
in accrued expenses largely reflected the reclassification of liabilities
subject to compromise and accrued interest on debt in 2006.
28
<PAGE>
DEBT
As of December 31, 2006, total debt amounted to $2.504 billion. During the third
quarter of 2006, we entered into the credit facilities as described in Note 3 to
the Consolidated Financial Statements. During the fourth quarter of 2006, we
borrowed $1.065 billion under the tax bridge facility and $700 million under the
term loan facility and issued $500 million of 6.3% senior notes that mature in
November 2016. We used these borrowings to pay a portion of our obligations to
the Trust. Because we expect to repay the $1.065 billion borrowing on the tax
bridge facility in 2007, we classified it as short-term debt on the consolidated
balance sheet as of December 31, 2006.
Total debt as of December 31, 2005, which was included in liabilities
subject to compromise, amounted to $1.005 billion. During 2006, we repaid $766
million and reinstated $239 million of this debt in accordance with the plan of
reorganization and reclassified the reinstated amount to long-term debt.
REALIZATION OF DEFERRED TAX ASSET
Our consolidated balance sheet as of December 31, 2006 includes a net current
deferred tax asset of $169 million and a net long-term deferred tax asset of
$187 million. Included in these amounts is a deferred tax asset of $112 million
and $302 million, respectively, relating to the U.S. federal and state income
tax benefits expected to be realized in future periods with respect to various
federal and state net operating loss and tax credit carryforwards arising in
2006 and prior years as a result of the amounts paid to the Asbestos Trust in
2006. We have concluded, based on the weight of available evidence, that all but
$51 million of these tax benefits are more likely than not to be realized in the
future. This amount represents a decrease of $4 million from the valuation
allowance of $55 million previously recorded with respect to these tax benefits
as of December 31, 2005.
In arriving at this conclusion, we considered the federal taxable income we
reported for the 1996 through 2005 taxable years, as well as future reversals of
existing taxable temporary differences and projections of future taxable income.
The federal income tax deduction resulting from the amounts paid to the Asbestos
Trust created a net operating loss in 2006. Under the Internal Revenue Code, a
net operating loss resulting from the payment of asbestos claims, including
payments to the Trust, can be carried back and offset against our federal
taxable income in the 10 preceding years, generating a refund of taxes paid in
those years. Since we have reported federal taxable income of $3.2 billion, in
the aggregate, for the years 1996 through 2005, the carryback of this loss is
expected to produce a refund of federal income taxes paid in those years of
approximately $1.1 billion, which we expect to receive in 2007. Further, as a
result of federal taxable income projected to be realized in future years, we
expect to utilize the remaining $217 million of federal income tax benefits
relating to our federal net operating loss and tax credit carryforwards in full.
If certain specified changes in our ownership should occur, there could be an
annual limitation on the amount of the carryforwards that can be utilized;
however, based on our current equity value, we do not believe that this
limitation (if it occurs) would impair our ability to fully utilize these
carryforwards. As a result, it is more likely than not that we will realize the
federal deferred tax asset relating to these carryforwards.
In contrast to the results under the Internal Revenue Code, most U.S.
states do not allow the carryback of a net operating loss in any significant
amount. As a result, most of the state tax benefits resulting from the amounts
paid to the Asbestos Trust will be realized through a reduction of future state
income tax liabilities by offsetting the net operating losses resulting from our
payments to the Trust against future state taxable income. Based on projections
of future taxable income (consistent with historical results and anticipated
future trends) in the U.S. states in which we conduct business operations and
the loss carryforward periods allowed by current state laws (generally five to
20 years), we have concluded that all but $51 million of the $197 million of
state income tax benefits relating to our state net operating loss carryforwards
is more likely than not to be realized.
29
<PAGE>
CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS
CONTRACTUAL OBLIGATIONS
As of December 31, 2006, our contractual obligations and commitments were as
follows:
<TABLE>
<CAPTION>
Payments Due by Period
-----------------------------------------
2008- 2010- There-
Total 2007 2009 2011 after
------ ------ ----- ------ ------
<S> <C> <C> <C> <C> <C>
(millions)
Debt obligations $2,504 $1,065 $ -- $ 700 $ 739
Other long-term
liabilities (a) 496 10 11 11 464
Interest payments (b) 951 154 177 177 443
Purchase obligations (c) 496 164 201 42 89
Commitments for capital
expenditures (d) 494 395 99 -- --
Operating leases 438 82 130 77 149
------ ------ ---- ------ ------
Total 5,379 1,870 618 1,007 1,884
====== ====== ==== ====== ======
</TABLE>
(a) Other long-term liabilities primarily consist of asset retirement
obligations that principally extend over a 50-year period. The majority of
associated payments are due toward the latter part of that period.
(b) Reflects estimated interest payments on debt obligations as of December 31,
2006. Assumes principal amounts on five-year term loan are held constant;
floating interest rates on term loans are held constant; and tax bridge
loan to be outstanding until December 31, 2007 upon receipt of federal tax
refund.
(c) Purchase obligations primarily consist of contracts to purchase energy and
certain raw materials.
(d) Amounts shown are estimates of future spending on capital projects that
were committed to prior to December 31, 2006 but were not completed by that
date.
Our defined benefit pension plans have no minimum funding requirements under the
Employee Retirement Income Security Act of 1974. In accordance with our funding
policy, we currently plan to voluntarily contribute approximately $70 million of
cash to our pension plans in 2007.
The above table excludes liabilities related to postretirement benefits
(retiree health care and life insurance). We voluntarily provide postretirement
benefits for eligible employees and retirees. The portion of benefit claim
payments we made in 2006 was $16 million. See Note 13 to the Consolidated
Financial Statements for additional information on future expected cash payments
for pension and other postretirement benefits.
As of December 31, 2006, purchase obligations, as defined by Statement of
Financial Accounting Standards, or SFAS, No. 47, "Disclosure of Long-Term
Obligations," were immaterial.
OFF-BALANCE-SHEET ARRANGEMENTS
With the exception of letters of credit, it is not our general business practice
to use off-balance-sheet arrangements, such as third-party special-purpose
entities or guarantees of third-party obligations.
LEGAL CONTINGENCIES
Our plan of reorganization resolved the debtors' liability for all present and
future asbestos personal injury and related claims by channeling those
liabilities to the Asbestos Trust, which we have fully funded. The plan of
reorganization resolving the debtors' asbestos personal injury liabilities and
the injunction channeling those liabilities to the Trust do not include any of
our non-U.S. subsidiaries, any companies that L&W Supply acquired after we filed
the bankruptcy petitions or any companies that we may acquire in the future.
Asbestos property damage claims are not part of the Asbestos Trust or the
channeling injunction. The plan of reorganization provides that all settled
asbestos property damage claims will be paid. The debtors have resolved all
asbestos property damage claims filed in the reorganization proceedings, with
the exception of one small claim brought by a homeowner.
USG 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. We believe that neither these matters nor any other known
governmental proceeding regarding environmental matters will have a material
adverse effect upon our financial position, cash flows or results of operations.
See Note 19 to the Consolidated Financial Statements for additional
information on asbestos and environmental litigation.
30
<PAGE>
CRITICAL ACCOUNTING POLICIES
Our 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 we believe are the most important to aid in understanding
our financial results.
SHARE-BASED COMPENSATION
Effective January 1, 2006, we adopted SFAS No. 123(R), "Share Based Payment."
This is a new critical accounting policy that we believe is important to aid in
understanding our financial results for 2006. Under SFAS No. 123(R), we use the
Black-Scholes option valuation model to determine the fair value of USG stock
options and stock appreciation rights. The Black-Scholes option valuation model
incorporates certain assumptions, such as the expected volatility, risk-free
interest rate, expected dividend yield and expected life of options, in order to
arrive at a fair value estimate. As a result, share-based compensation expense,
as calculated and recorded under SFAS No. 123(R), could have been impacted if
other assumptions were used. Furthermore, if we use different assumptions in
future periods, stock-based compensation expense could be impacted in future
periods. We use an independent third party to assist in determining these
assumptions. See Note 14 to the Consolidated Financial Statements for additional
information.
EMPLOYEE RETIREMENT PLANS
We maintain defined benefit pension plans for most of our employees. Most of
these plans require employee contributions in order to accrue benefits. We also
maintain plans that provide postretirement benefits (retiree health care and
life insurance) for eligible employees. For accounting purposes, these plans
depend on assumptions made by management, which are used by actuaries we engage
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.
We determined the assumed discount rate based on the Hewitt Yield Curve, or
HYC, which was designed by Hewitt Associates to provide a means for plan
sponsors to value the liabilities of their defined benefit pension and
postretirement benefit plans. The HYC is a hypothetical AA yield curve
represented by a series of annualized individual discount rates. Each bond issue
underlying the HYC is required to have a credit rating of Aa or better by
Moody's Investor Service, Inc. or a credit rating of AA or better by Standard &
Poor's. 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, we use a "building block" approach, which
incorporates historical experience, our 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
-------------------------
2006
2007 Projected
Percentage Net Annual Benefit
Assumption Change Benefit Cost Obligation
- ---------- ------------- ------------ ----------
<S> <C> <C> <C>
Pension Benefits:
Discount rate 0.5% increase $(9) $(71)
Discount rate 0.5% decrease 9 79
Asset return 0.5% increase (5) --
Asset return 0.5% decrease 5 --
Postretirement Benefits:
Discount rate 0.5% increase (4) (31)
Discount rate 0.5% decrease 4 32
</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. We developed health-care-cost trend rate assumptions based on historical
cost data and an assessment of likely long-term trends.
31
<PAGE>
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 2006.
Economic factors and conditions could affect multiple assumptions
simultaneously, and the effects of changes in assumptions are not necessarily
linear.
See Note 13 to the Consolidated Financial Statements for additional
information regarding costs, plan obligations, plan assets and assumptions
including the health-care-cost trend rate.
SELF-INSURANCE RESERVES
We purchase insurance from third parties for workers' compensation, automobile,
product and general liability claims that exceed certain levels. However, we are
responsible for the payment of claims up to those levels. In estimating the
obligation associated with incurred and incurred-but-not-reported losses, we use
estimates prepared by actuarial consultants. These estimates use our historical
data to project the future development of losses and take into account the
impact of claims that were stayed during our bankruptcy proceedings. These
claims will impact the actuarial analysis until all pre-petition claims are
closed. We monitor and review all estimates and related assumptions for
reasonableness. Loss estimates are adjusted based upon actual claims settlements
and reported claims.
INCOME TAXES
We record valuation allowances to reduce our deferred tax assets if it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. As of December 31, 2006, we have recorded valuation allowances
totaling $73 million for various U.S. state and foreign net operating loss and
tax credit carryforwards, the substantial majority of which arose from the
funding of the Asbestos Trust in 2006. Under "Realization of Deferred Tax Asset"
above, we describe the amount and nature of the net operating loss and tax
credit carryforwards that result from funding the Asbestos Trust and our
conclusion on the need for valuation allowances on the related deferred tax
assets. While we have considered future taxable income in assessing the need for
the valuation allowances based on our best available projections, if these
estimates and assumptions change in the future or actual results differ from our
projections, we may be required to adjust our valuation allowances. This could
result in a charge to, or an increase in, income in the period such
determination is made.
In addition, USG operates within multiple taxing jurisdictions and is
subject to audit in these jurisdictions. We record accruals for the estimated
outcomes of these audits, and these accruals may change in the future due to new
developments in each matter. In each of the past two years, we have experienced
adjustments to our accruals for the settlement of tax audits as described in
Note 15 to the Consolidated Financial Statements. Such adjustments could result
in a charge to, or an increase in, income in the period the determination is
made.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2006, the Financial Accounting Standards Board, or FASB, issued
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
Interpretation of Financial Accounting Standards Board Statement No. 109." This
interpretation clarifies the accounting and disclosure for uncertain income tax
positions relating to the uncertainty about whether a tax return position will
ultimately be sustained by the respective tax authorities. This interpretation
is effective for fiscal years beginning after December 15, 2006. The adoption of
this interpretation is expected to have an impact of between zero and $15
million on our reported amounts of income tax liabilities and retained earnings
when recorded.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements."
This statement defines fair value in generally accepted accounting principles
and expands disclosures about fair value measurements that are required or
permitted under other accounting pronouncements. This statement is effective for
financial statements issued for fiscal years beginning after November 15, 2007
and interim periods within those fiscal years. We are currently reviewing this
pronouncement to determine the impact, if any, that it may have on our financial
statements.
In October 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit
32
<PAGE>
Pension and Other Postretirement Plans." This statement amends certain
requirements of SFAS Nos. 87, 88, 106 and 132(R). Under SFAS No. 158, companies
are required to report the plan's funded status on their balance sheets. The
difference between the plan's funded status and its current balance sheet
position is recognized, net of tax, as a component of accumulated other
comprehensive income, or AOCI. This statement is effective for fiscal years
ending after December 15, 2006. We adopted SFAS No. 158 effective December 31,
2006. See Note 1 to the Consolidated Financial Statements for the incremental
effect of applying SFAS No. 158 on individual line items on our consolidated
balance sheet as of December 31, 2006.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995 related to management's
expectations about future conditions. Actual business, market or other
conditions may differ from management's expectations and accordingly may affect
our sales and profitability or other results and liquidity. Actual results may
differ due to various other factors, including:
- - economic conditions, such as the levels of new home and other construction
activity, employment levels, mortgage interest rates, housing
affordability, currency exchange rates and consumer confidence;
- - competitive conditions, such as price and product competition;
- - shortages in raw materials;
- - increases in raw material, energy, transportation and employee benefit
costs;
- - loss of one or more major customers;
- - capacity constraints;
- - capital markets conditions and the availability of borrowings under our
credit agreement;
- - the amount and timing of the tax refund we expect to receive;
- - changes in laws or regulations, including environmental and safety
regulations;
- - the effects of acts of terrorism or war upon domestic and international
economies and financial markets; and
- - acts of God.
We assume no obligation to update any forward-looking information contained in
this report.
33
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
We use derivative instruments from time to time to manage selected commodity
price and foreign currency exposures. We do not use derivative instruments for
speculative trading purposes. In addition, we use financial instruments,
including fixed and variable rate debt, to finance our operations in the normal
course of business.
COMMODITY PRICE RISK
We use swap contracts to manage our exposure to fluctuations in commodity prices
associated with anticipated purchases of natural gas. Generally, we have a
substantial majority of our anticipated purchases of natural gas over the next
12 months hedged; however, we review our positions regularly and make
adjustments as market and business conditions warrant. A sensitivity analysis
was prepared to estimate the potential change in the fair value of our 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 our natural gas swap contracts is $23 million. This
analysis does not consider the underlying exposure.
FOREIGN CURRENCY EXCHANGE RISK
We have operations in a number of countries and use 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, or to hedge selected risk of changes in our net investment
in foreign subsidiaries. As of December 31, 2006, we had no outstanding foreign
currency contracts.
INTEREST RATE RISK
We have interest rate risk as a result of the amount of our floating-rate debt
outstanding. Based on the results of a sensitivity analysis, for a hypothetical
change in interest rates of 25 basis points, the potential change in annual
interest expense is $4 million.
See Notes 1 and 16 to the Consolidated Financial Statements for additional
information on our financial exposures.
34
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
Page
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS:
Statements of Operations.............................................. 36
Balance Sheets........................................................ 37
Statements of Cash Flows.............................................. 38
Statements of Stockholders' Equity (Deficit).......................... 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS:
1. Significant Accounting Policies................................... 40
2. Resolution of USG's Reorganization Proceedings.................... 43
3. Debt.............................................................. 45
4. Rights Offering................................................... 46
5. Stockholders Rights Plan.......................................... 47
6. Earnings Per Share................................................ 48
7. Inventories....................................................... 48
8. Property, Plant and Equipment..................................... 48
9. Goodwill and Other Intangible Assets.............................. 48
10. Accrued Expenses.................................................. 49
11. Accumulated Other Comprehensive Income............................ 49
12. Asset Retirement Obligations...................................... 49
13. Employee Retirement Plans......................................... 50
14. Share-Based Compensation.......................................... 52
15. Income Taxes...................................................... 54
16. Derivative Instruments............................................ 56
17. Segments and Acquisitions......................................... 56
18. Commitments and Contingencies..................................... 57
19. Litigation........................................................ 58
20. Quarterly Financial Data (unaudited).............................. 60
Report of Independent Registered Public Accounting Firm.................. 61
Schedule II - Valuation and Qualifying Accounts.......................... 62
</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.
35
<PAGE>
USG CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------
2006 2005 2004
------ ------- ------
<S> <C> <C> <C>
(millions, except per-share data)
Net sales $5,810 $ 5,139 $4,509
Cost of products sold 4,440 4,037 3,672
------ ------- ------
Gross profit 1,370 1,102 837
Selling and administrative expenses 419 352 317
Asbestos claims provision (reversal) (44) 3,100 --
Chapter 11 reorganization expenses 10 4 12
------ ------- ------
Operating profit (loss) 985 (2,354) 508
Interest expense 555 5 5
Interest income (43) (10) (6)
Other income, net (3) -- --
------ ------- ------
Earnings (loss) before income taxes and cumulative
effect of accounting change 476 (2,349) 509
Income taxes (benefit) 188 (924) 197
------ ------- ------
Earnings (loss) before cumulative effect of accounting change 288 (1,425) 312
Cumulative effect of accounting change -- (11) --
------ ------- ------
Net earnings (loss) 288 (1,436) 312
====== ======= ======
Basic Earnings (Loss) Per Common Share:
Before cumulative effect of accounting change 4.34 (25.29) 5.62
Cumulative effect of accounting change -- (0.20) --
------ ------- ------
Basic earnings (loss) per common share 4.34 (25.49) 5.62
====== ======= ======
Diluted Earnings (Loss) Per Common Share:
Before cumulative effect of accounting change 4.33 (25.29) 5.62
Cumulative effect of accounting change -- (0.20) --
------ ------- ------
Diluted earnings (loss) per common share 4.33 (25.49) 5.62
====== ======= ======
</TABLE>
The notes to consolidated financial statements are an integral part of these
statements.
36
<PAGE>
USG CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As of
December 31,
---------------
2006 2005
------ ------
<S> <C> <C>
(millions, except share data)
ASSETS
Current Assets:
Cash and cash equivalents $ 565 $ 936
Short-term marketable securities -- 234
Restricted cash 6 78
Receivables (net of reserves: 2006 - $16; 2005 - $14) 448 453
Inventories 348 315
Income taxes receivable 1,102 6
Deferred income taxes 169 2
Other current assets 69 155
------ ------
Total current assets 2,707 2,179
------ ------
Long-term marketable securities -- 329
Property, plant and equipment, net 2,210 1,946
Deferred income taxes 187 1,423
Goodwill 154 64
Other assets 107 201
------ ------
Total assets 5,365 6,142
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable 303 281
Accrued expenses 358 275
Short-term debt 1,065 --
Deferred income taxes -- 6
Income taxes payable 38 38
------ ------
Total current liabilities 1,764 600
------ ------
Long-term debt 1,439 --
Deferred income taxes 11 28
Other liabilities 617 476
Liabilities subject to compromise -- 5,340
Commitments and contingencies
Stockholders' Equity (Deficit):
Preferred stock (000) - $1 par value, $1.80 convertible
preferred stock (initial series); authorized 36,000
shares; outstanding - none -- --
Common stock (000) - $0.10 par value; authorized 200,000
shares; issued: 2006 - 94,908 shares; 2005 - 49,985 shares 9 5
Treasury stock at cost (000) - 2006 - 5,043 shares;
2005 - 5,348 shares (208) (219)
Capital received in excess of par value 2,176 435
Accumulated other comprehensive (loss) income (136) 72
Retained earnings (deficit) (307) (595)
------ ------
Total stockholders' equity (deficit) 1,534 (302)
------ ------
Total liabilities and stockholders' equity (deficit) 5,365 6,142
====== ======
</TABLE>
The notes to consolidated financial statements are an integral part of these
statements.
37
<PAGE>
USG CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------
2006 2005 2004
------- ------- -----
<S> <C> <C> <C>
(millions)
OPERATING ACTIVITIES
Net earnings (loss) $ 288 $(1,436) $ 312
Adjustments to Reconcile Net Earnings (Loss) to Net Cash:
Asbestos claims provision (reversal) (44) 3,100 --
Share-based compensation expense 17 -- --
Cumulative effect of accounting change -- 11 --
Depreciation, depletion and amortization 138 125 120
Deferred income taxes 1,198 (1,261) 49
Gain on asset dispositions -- (5) (1)
(Increase) Decrease in Working Capital (net of acquisitions):
Receivables (12) (31) (92)
Income taxes receivable (1,096) 19 2
Inventories (18) 27 (58)
Payables 38 (30) 77
Accrued expenses (24) 41 15
Increase in other assets (33) (43) (38)
Increase in other liabilities 40 20 31
Payment to Section 524(g) asbestos trust (3,950) -- --
Reorganization distribution - other (783) -- --
Change in asbestos receivable -- -- 11
Increase (decrease) in liabilities subject to compromise 521 (2) (1)
Other, net 17 (29) 1
------- ------- -----
Net cash (used for) provided by operating activities (3,703) 506 428
------- ------- -----
INVESTING ACTIVITIES
Capital expenditures (393) (198) (138)
Purchases of marketable securities (112) (648) (546)
Sales or maturities of marketable securities 677 533 332
Acquisitions of businesses (128) (29) (5)
Net proceeds from asset dispositions 3 5 6
Return (deposit) of restricted cash 72 (35) (36)
------- ------- -----
Net cash provided by (used for) investing activities 119 (372) (387)
------- ------- -----
FINANCING ACTIVITIES
Issuance of debt 2,265 -- --
Proceeds from Rights Offering, net of expenses 1,720 -- --
Reorganization distribution - debt principal (766) -- --
Payment of debt issuance fees (26) -- --
Repayment of debt -- (1) (1)
Proceeds from stock options exercised 14 45 7
Tax benefit of share-based payments 5 -- --
------- ------- -----
Net cash provided by financing activities 3,212 44 6
------- ------- -----
Effect of exchange rate changes on cash 1 2 9
Net (decrease) increase in cash and cash equivalents (371) 180 56
Cash and cash equivalents at beginning of period 936 756 700
------- ------- -----
Cash and cash equivalents at end of period 565 936 756
======= ======= =====
Supplemental Cash Flow Disclosures:
Interest paid 548 2 2
Income taxes paid, net 108 341 126
</TABLE>
The notes to consolidated financial statements are an integral part of these
statements.
38
<PAGE>
USG CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Common Capital Accumulated
Shares Treasury Received in Retained Other
Issued Shares Common Treasury Excess of Earnings Comprehensive
(000) (000) Stock Stock Par Value (Deficit) Income (Loss) Total
------ -------- ------ -------- ----------- --------- ------------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(millions, except share data)
BALANCE AT JANUARY 1, 2004 49,985 (6,935) $5 $(258) $ 414 $ 529 $ (1) $ 689
------ ------ --- ----- ------ ------- ----- -------
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
------ ------ --- ----- ------ ------- ----- -------
Net loss (1,436) (1,436)
Foreign currency translation 6 6
Change in fair value of
derivatives, net of tax of $34 54 54
Minimum pension liability,
net of tax benefit of $3 (5) (5)
-------
Total comprehensive loss (1,381)
Stock issuances 1,330 37 8 45
Other (2) 10 10
------ ------ --- ----- ------ ------- ----- -------
BALANCE AT DECEMBER 31, 2005 49,985 (5,348) 5 (219) 435 (595) 72 (302)
====== ====== === ===== ====== ======= ===== =======
Net earnings 288 288
Foreign currency translation 3 3
Change in fair value of
derivatives, net of tax
benefit of $56 (86) (86)
Gain on marketable securities,
net of tax of $1
1 1
Minimum pension liability,
net of tax benefit of $10 (5) (5)
-------
Total comprehensive income 201
Adjustment to initially apply
SFAS No. 158, net of tax
benefit of $97 (121) (121)
Proceeds from stock options
exercised 309 11 3 14
Rights Offering 44,923 4 1,716 1,720
Share-based compensation 17 17
Other (4) 5 5
------ ------ --- ----- ------ ------- ----- -------
BALANCE AT DECEMBER 31, 2006 94,908 (5,043) 9 (208) 2,176 (307) (136) 1,534
====== ====== === ===== ====== ======= ===== =======
</TABLE>
The notes to consolidated financial statements are an integral part of these
statements.
39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In the following Notes to Consolidated Financial Statements, "USG," "we," "our"
and "us" refer to USG Corporation, a Delaware corporation, and its subsidiaries
included in the consolidated financial statements, except as otherwise indicated
or as the context otherwise requires.
1. SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
USG Corporation, through its subsidiaries, 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. Our 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. Our products also are
distributed through building materials dealers, home improvement centers and
other retailers, specialty wallboard distributors, and contractors.
CONSOLIDATION
Our consolidated financial statements include the accounts of USG Corporation
and its majority-owned subsidiaries. Our subsidiaries in which we have more than
a 20% but not more than 50% ownership interest are accounted for on the equity
basis of accounting and are not material to consolidated operations. All
intercompany balances and transactions are eliminated in consolidation.
USE OF ESTIMATES
The preparation of our 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.
REVENUE RECOGNITION
With the exception of our Building Products Distribution operating segment, we
recognize revenue upon the shipment of products to customers, which is when
title and risk of loss are transferred to customers. For Building Products
Distribution, revenue is recognized and title and risk of loss are transferred
when customers receive products, either through delivery by company trucks or
customer pickup. We record provisions for discounts to customers based on the
terms of sale in the same period in which the related sales are recorded. We
record estimated reductions to revenue for customer programs and incentive
offerings, including promotions and other volume-based incentives. With the
exception of Building Products Distribution, our products are generally shipped
free on board, commonly called 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
and sponsorships. We charge advertising expenses to earnings as incurred. These
expenses amounted to $20 million in 2006, $16 million in 2005 and $13 million in
2004.
RESEARCH AND DEVELOPMENT
We charge research and development expenditures to earnings as incurred. These
expenditures amounted to $20 million in 2006, $17 million in 2005 and $17
million in 2004.
INCOME TAXES
We account 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
40
<PAGE>
average number of common shares outstanding and the dilutive effect of
restricted stock units, or RSUs, and the potential exercise of outstanding stock
options. Diluted earnings per share for the year ended December 31, 2006 exclude
RSUs and the potential exercise of stock options issued in 2006 because they
were anti-dilutive. Average common shares and average diluted common shares
outstanding are calculated in accordance with Statement of Financial Accounting
Standards, or SFAS, No. 128, "Earnings Per Share," and reflect the effect of the
Rights Offering described in Note 4.
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.
INVENTORY VALUATION
All of our inventories are stated at the lower of cost or market. Most of our
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
we revalued under fresh start accounting in May 1993. We determine provisions
for depreciation of property, plant and equipment on a straight-line basis over
the expected average useful lives of composite asset groups. We determine
estimated useful lives 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. We compute depletion 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. We
review goodwill annually for impairment or when indicators of a potential
impairment are present. We periodically review our 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 we determine an
impairment exists, the asset is written down to estimated fair value.
SHARE-BASED COMPENSATION
Effective January 1, 2006, we adopted 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. See Note 14 for information regarding the impact of our adopting this
standard. Prior to January 1, 2006, we accounted for share-based compensation
under 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.
In 2005 and 2004, if we had elected to recognize compensation cost for
share-based compensation grants consistent with the fair value method prescribed
by SFAS No. 123(R), "Accounting for Stock-Based Compensation," net earnings and
net earnings per common share would not have changed from the reported amounts.
DERIVATIVE INSTRUMENTS
We use derivative instruments to manage selected commodity price and foreign
currency exposures. We do not use derivative instruments for speculative trading
purposes. All derivative instruments must be recorded on the balance sheets 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, or AOCI, 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. For derivatives designated as net investment hedges,
we record changes in value to AOCI.
Commodity Derivative Instruments: Currently, we are using swap contracts to
hedge a major portion of our anticipated purchases of natural gas to be used in
our manufacturing operations. Generally, we have a substantial majority of our
anticipated purchases of
41
<PAGE>
natural gas over the next 12 months hedged; however, we review our positions
regularly and make adjustments as market conditions warrant. The current
contracts, all of which mature by December 31, 2009, are generally designated as
cash flow hedges.
Foreign Exchange Derivative Instruments: We have operations in a number of
countries and use 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, or to hedge selected risk
of changes in our net investment in foreign subsidiaries. These contracts are
generally designated as either cash flow hedges or hedges of net investment.
FOREIGN CURRENCY TRANSLATION
We translate foreign-currency-denominated assets and liabilities into U.S.
dollars at the exchange rates existing as of the respective balance sheet dates.
We record translation adjustments resulting from fluctuations in exchange rates
to AOCI on our consolidated balance sheets. We translate income and expense
items at the average exchange rates during the respective periods. The total
transaction (gain) loss was $(2) million in 2006, $3 million in 2005 and $2
million in 2004.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2006, the Financial Accounting Standards Board, or FASB, issued
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes - an
Interpretation of Financial Accounting Standards Board Statement No. 109." This
interpretation clarifies the accounting and disclosure for uncertain income tax
positions, relating to the uncertainty about whether a tax return position will
ultimately be sustained by the respective tax authorities. This interpretation
is effective for fiscal years beginning after December 15, 2006. The adoption of
this interpretation is expected to have an impact of between zero and $15
million on our reported amounts of income tax liabilities and retained earnings
when recorded.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements."
This statement defines fair value in generally accepted accounting principles
and expands disclosures about fair value measurements that are required or
permitted under other accounting pronouncements. This statement is effective for
financial statements issued for fiscal years beginning after November 15, 2007
and interim periods within those fiscal years. We are currently reviewing this
pronouncement to determine the impact that it may have on our financial
statements.
In October 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans." This statement amends
certain requirements of SFAS Nos. 87, 88, 106 and 132(R). Under SFAS No. 158,
companies are required to report the plan's funded status on their balance
sheets. The difference between the plan's funded status and its current balance
sheet position is recognized, net of tax, as a component of AOCI. This statement
is effective for fiscal years ending after December 15, 2006. We adopted SFAS
No. 158 effective December 31, 2006, and the incremental effect of applying it
on individual line items on our consolidated balance sheet as of December 31,
2006 is as follows:
<TABLE>
<CAPTION>
Before After
Application Application
of SFAS of SFAS
No. 158 Adjustments No. 158
----------- ----------- -----------
<S> <C> <C> <C>
(millions)
Other assets $ 213 $(106) $ 107
Long-term deferred
income tax asset 101 86 187
Total assets 5,385 (20) 5,365
Accrued expenses 344 14 358
Long-term deferred
income tax liability 22 (11) 11
Other liabilities 518 99 617
Total liabilities 3,729 102 3,831
AOCI (15) (121) (136)
Total stockholders' equity 1,655 (121) 1,534
</TABLE>
42
<PAGE>
2. RESOLUTION OF USG'S REORGANIZATION PROCEEDINGS
On June 25, 2001, USG Corporation and 10 of its United States subsidiaries,
collectively referred to as the debtors, filed voluntary petitions for
reorganization under Chapter 11 of the United States Bankruptcy Code in the
United States Bankruptcy Court for the District of Delaware. The Chapter 11
cases were consolidated as In re: USG Corporation et al. (Case No. 01-2094).
These cases did not include any of our non-U.S. subsidiaries or companies that
our subsidiary L&W Supply Corporation acquired after we filed the bankruptcy
petitions.
In the second quarter of 2006, the debtors emerged from their Chapter 11
reorganization proceedings as a result of a plan of reorganization that was
confirmed by the bankruptcy court and the United States District Court for the
District of Delaware. The plan became effective on June 20, 2006, which is
referred to in this report as the Effective Date. The plan achieved our goals of
resolving asbestos claims in a fair and equitable manner, protecting the
long-term value of our businesses and maintaining our leadership positions in
markets in which we compete.
As part of the plan, the following important events have occurred:
- - We created and funded a trust under Section 524(g) of the Bankruptcy Code
for the payment of asbestos personal injury claims against the debtors.
This trust is also referred to as the Asbestos Trust or the Trust.
- - On the Effective Date, we paid $890 million to the Asbestos Trust and
issued to the Trust an interest-bearing note in the amount of $10 million,
which we paid on December 21, 2006.
- - On December 21, 2006, we also paid $3.05 billion to the Asbestos Trust.
This additional $3.05 billion payment was due because the plan of
reorganization required that we pay this amount if the 109th Congress did
not pass the Fairness in Asbestos Injury Resolution Act of 2005 or
substantially similar legislation before Congress adjourned. Because the
109th Congress adjourned in December 2006 without passing this legislation,
we made the $3.05 billion payment to the Trust. As a result of this
payment, we have fully funded the Trust and have no further payment
obligations to the Trust.
- - The bankruptcy court entered a channeling injunction which provides that
all present and future asbestos personal injury claims against the debtors
must be brought against the Trust and no one may bring such a claim against
the debtor companies.
- - Asbestos property damage claims against the debtors are not part of the
channeling injunction or the Asbestos Trust, which deal only with asbestos
personal injury or related claims. We have reached agreements to settle all
remaining asbestos property damage claims asserted against the debtors,
with the exception of one small claim brought by a homeowner. In 2006, we
paid approximately $99 million for asbestos property damage claim
settlements. The estimated cost of the unpaid settlements of the remaining
asbestos property damage claims, including associated legal fees, is
approximately $48 million and is included in accrued expenses.
- - Pursuant to the plan of reorganization, allowed claims of all other
creditors have been, or will be, paid in full, with interest where agreed
or required.
- - In connection with the plan of reorganization, we conducted an offering in
which we issued to stockholders as of June 30, 2006 the right to purchase,
at $40.00 per share, one new share of our common stock for each share
owned. This offering is referred to as the Rights Offering. In connection
with the Rights Offering, Berkshire Hathaway Inc. agreed to purchase at
that price all shares underlying any unexercised rights. We received net
proceeds of approximately $1.7 billion and issued 44.92 million new shares
of our common stock in connection with completion of the Rights Offering in
the third quarter of 2006.
The following subsidiaries were debtors in the Chapter 11 proceedings: United
States Gypsum Company, or U.S. Gypsum; USG Interiors, Inc.; USG Interiors
International, Inc.; L&W Supply Corporation, or L&W Supply; Beadex
Manufacturing, LLC, or Beadex; B-R Pipeline
43
<PAGE>
Company; La Mirada Products Co., Inc.; Stocking Specialists, Inc.; USG
Industries, Inc.; and USG Pipeline Company. The plan of reorganization resolving
the debtors' asbestos personal injury liabilities and the injunction channeling
those liabilities to the Trust do not include any of our non-U.S. subsidiaries,
any companies that L&W Supply acquired after we filed the bankruptcy petitions
or any companies that we may acquire in the future.
Additional information about funding the plan of reorganization is included
in Note 3. Additional information about the Rights Offering is included in Note
4. Asbestos property damage claims are discussed in Note 19.
CORPORATE PERFORMANCE PLAN
On January 10, 2006, the bankruptcy court approved the USG Corporation 2006
Corporate Performance Plan, or CPP. The terms of the CPP provided that it was to
be effective for eligible participants from January 1, 2006 through December 31,
2006, or through and including the effective date of a plan of reorganization in
the debtors' Chapter 11 proceedings, whichever came first. The CPP provided
participants who held key positions identified as eligible with two cash
payments equal to a specified percentage of their annual base salary. The second
payment will include a performance adjustment based on our 2006 results.
Because the plan of reorganization became effective on June 20, 2006,
awards earned under the CPP were prorated through that date. The total expense
associated with the CPP, as adjusted for 2006 results, amounted to $13 million.
Expenses associated with a comparable predecessor plan amounted to $23 million
in 2005.
FINANCIAL STATEMENT PRESENTATION
While the debtors were operating under the protection of Chapter 11 of the
United States Bankruptcy Code, our consolidated financial statements were
prepared in accordance with American Institute of Certified Public Accountants
Statement of Position, or SOP, 90-7 and on a going-concern basis, which
contemplated continuity of operations, realization of assets and liquidation of
liabilities in the ordinary course of business. During this period, subject to
bankruptcy court approval or otherwise as permitted in the ordinary course of
business, the debtors, or any of them, had the ability to sell or otherwise
dispose of assets and liquidate or settle liabilities for amounts other than
those reflected in the consolidated financial statements.
LIABILITIES SUBJECT TO COMPROMISE
While the debtors were operating under the protection of Chapter 11 of the
United States Bankruptcy Code, the debtors' estimates of known or potential
pre-petition claims and related post-petition amounts to be resolved in
connection with the Chapter 11 proceedings were reflected in the consolidated
financial statements as liabilities subject to compromise. As of June 30, 2006,
these liabilities were reclassified on the consolidated balance sheet.
CHAPTER 11 REORGANIZATION EXPENSES
Chapter 11 reorganization expenses in the consolidated statements of operations
consisted of the following:
<TABLE>
<CAPTION>
2006 2005 2004
---- ---- ----
<S> <C> <C> <C>
(millions)
Legal and financial advisory fees $ 34 $ 36 $ 24
Bankruptcy-related interest income (24) (32) (12)
---- ---- ----
Total 10 4 12
==== ==== ====
</TABLE>
INTEREST EXPENSE
Interest expense for 2006 included charges for post-petition interest and fees
related to pre-petition obligations. For 2006, post-petition interest and fees
totaled $528 million ($325 million after-tax). In accordance with SOP 90-7,
virtually all of our outstanding debt had been classified as liabilities subject
to compromise in prior periods, and from the date on which we filed our Chapter
11 petition for reorganization through December 31, 2005, interest expense on
this debt and other pre-petition obligations had not been accrued or recorded.
44
<PAGE>
3. DEBT
Total debt as of December 31 consisted of the following:
<TABLE>
<CAPTION>
2006 2005*
------ -----
<S> <C> <C>
(millions)
Tax bridge term loan $1,065 --
Term loan 700 --
6.3% senior notes 500 --
Industrial revenue bonds 239 --
------ ---
Total 2,504 --
====== ===
</TABLE>
* As of December 31, 2005, total debt of $1.005 billion was included in
liabilities subject to compromise.
CREDIT FACILITIES
On August 2, 2006, we entered into a $2.8 billion credit agreement with a
syndicate of banks. JPMorgan Chase Bank, N.A. serves as administrative agent
under the agreement. The credit agreement consists of (i) a $650 million
revolving credit facility with a $250 million sublimit for letters of credit,
(ii) a $1.0 billion term loan facility and (iii) a $1.15 billion tax bridge term
loan facility.
These credit facilities have been assigned credit ratings of Baa3 by
Moody's Investor Service Inc. and BB+ by Standard & Poor's Ratings Services.
The revolving credit facility is available to fund working capital needs
and for other general corporate purposes. Borrowings under the revolving credit
facility bear interest, at our option, at either an alternative base rate or at
LIBOR plus a margin, to be determined based on the credit facilities' credit
rating. Based on current credit ratings, the margin for LIBOR borrowings is
0.60%. We are also required to pay facility fees on the entire revolving credit
facility, whether drawn or undrawn, and fees on outstanding letters of credit.
These fees are also dependent on the credit facilities' credit rating. The
revolving credit facility matures on August 2, 2011, unless terminated earlier
in accordance with its terms. As of December 31, 2006, the revolving credit
facility had not been drawn upon except for approximately $86 million of
outstanding letters of credit.
The term loan facility was available to us in a single drawing of up to
$1.0 billion, and the tax bridge facility was available to us in a single
drawing of up to $1.15 billion, in each case to be made on or before January 31,
2007. In December 2006, we borrowed $700 million under the term loan and $1.065
billion under the tax bridge facility. These borrowings, along with cash on hand
and proceeds from the $500 million senior note offering described below, were
used to fund the $3.05 billion payment to the Asbestos Trust in December 2006.
The term loan and tax bridge facilities bear interest, at our option, at
either an alternative base rate or LIBOR, plus, in either case, a margin to be
determined based on the credit facilities' credit rating. Based on current
credit ratings, the margin is 0.75% for LIBOR borrowings and 0.00% for alternate
base-rate borrowings. As of December 31, 2006, the actual borrowing rate on
these facilities was 6.125%. The term loan facility matures on August 2, 2011.
The tax bridge facility matures on February 2, 2009.
We are required to repay the tax bridge facility upon receipt of federal
tax refunds that we expect to receive as a result of tax deductions generated by
the payments made to the Trust. We expect to receive the federal tax refund of
approximately $1.1 billion in 2007. Because we expect to repay the $1.065
billion borrowing on the tax bridge facility in 2007, we classified it as
short-term debt on the consolidated balance sheet as of December 31, 2006.
We have the ability under the terms of the credit facilities to repay
amounts outstanding under the revolving credit, term loan and tax bridge
facilities at any time prior to their maturities without paying any prepayment
premium or penalty. Paydowns under the term loan and tax bridge facilities would
be permanent reductions of those facilities. Our obligations under the credit
facilities are guaranteed by all of our material domestic subsidiaries.
The credit agreement requires that we meet and maintain certain financial
ratios and tests, including a maximum leverage ratio (as defined in the credit
agreement) of no more than 4.50-to-1.00 and a minimum interest coverage ratio
(as defined in the credit agreement) of not less than 2.00-to-1.00. The credit
agreement contains events of default and covenants that are customary for
similar transactions and may limit our ability to take various actions.
6.3% SENIOR NOTES
On November 17, 2006, we issued $500 million of 6.3% senior unsecured notes that
mature in November 2016. In accordance with a registration rights agreement, we
are required to file with the Securities and Exchange Commission, or SEC, a
registration statement relating to a registered exchange offer for the notes by
no later than April 16, 2007. If we fail to file the registration statement by
45
<PAGE>
that date, or the registration statement does not become effective by June 15,
2007, the interest rate on the notes will increase until the specified event
occurs. These notes have been assigned credit ratings of Baa3 by Moody's
Investor Service Inc. and BB+ by Standard & Poor's Ratings Services. The
indenture under which these notes were issued contains events of default and
covenants that are customary for similar transactions and may limit our ability
to take specified actions. The notes also contain a provision requiring us to
offer to repurchase the notes at 101% of their principal amount (plus accrued
and unpaid interest) in the event of a change in control and a rating of the
notes at below investment grade by both Moody's Investor Service Inc. and
Standard & Poor's Ratings Services.
INDUSTRIAL REVENUE BONDS
Our industrial revenue bonds have fixed interest rates ranging from 5.5% to
6.4%. The weighted average rate of interest on our industrial revenue bonds is
5.875%. The average maturity of these bonds is 24 years.
PRE-PETITION DEBT
Pre-petition debt previously included in liabilities subject to compromise
amounted to $1.005 billion as of the date on which we filed our Chapter 11
petition for reorganization. During 2006, we repaid $766 million of this debt
and reinstated $239 million of industrial revenue bonds in accordance with the
plan of reorganization and reclassified the reinstated amount to long-term debt.
OTHER INFORMATION
The fair market value of our debt was $2.529 billion as of December 31, 2006 and
$1.268 billion as of December 31, 2005. 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 debt as of
December 31, 2005 was subject to compromise, the fair market value of that debt
was not necessarily the ultimate settlement value that was determined by the
bankruptcy court.
The amounts of total debt outstanding as of December 31, 2006 maturing
during the next five years and beyond are:
<TABLE>
<S> <C>
(millions)
2007 $1,065
2008 --
2009 --
2010 --
2011 700
Thereafter 739
</TABLE>
4. RIGHTS OFFERING
In the Rights Offering, we issued to our stockholders as of June 30, 2006 one
transferable right for each common share owned on that date, entitling the
holder to purchase one share of common stock for $40.00 in cash for each right.
The rights expired on July 27, 2006. In connection with the Rights Offering,
Berkshire Hathaway agreed through a backstop commitment to purchase from us, at
$40.00 per share, all of the shares of common stock offered pursuant to the
Rights Offering that were not issued pursuant to the exercise of rights. In the
first quarter of 2006, we paid Berkshire Hathaway a fee of $67 million for its
backstop commitment. On August 2, 2006, we issued 6.97 million shares of common
stock to Berkshire Hathaway in accordance with the backstop agreement. These
shares include 6.5 million shares underlying rights distributed to Berkshire
Hathaway in connection with the shares it beneficially owned as of June 30, 2006
and 0.47 million shares underlying rights distributed to other stockholders that
were not exercised in the Rights Offering. A total of 44.92 million shares of
our common stock were distributed in connection with the Rights Offering,
including the 6.97 million shares issued to Berkshire Hathaway. We received net
proceeds of approximately $1.7 billion in connection with the Rights Offering.
We used the net proceeds from the Rights Offering, together with other available
funds, to make payments required by the plan of reorganization and for general
corporate purposes.
In connection with the backstop commitment, we and Berkshire Hathaway
entered into a shareholder's agreement whereby Berkshire Hathaway agreed, among
other things, that for a period of seven years following completion of the
Rights Offering, except in limited circumstances, Berkshire Hathaway will not
acquire beneficial ownership of our voting securities if, after giving effect to
the acquisition, Berkshire Hathaway would own more than 40% of our voting
securities on a fully diluted basis. Berkshire Hathaway further agreed that,
during the
46
<PAGE>
seven-year period, it will not solicit proxies with respect to USG's securities
or submit a proposal or offer involving a merger, acquisition or other
extraordinary transaction unless the proposal or offer (i) is requested by our
Board of Directors or (ii) is made to our Board of Directors confidentially, is
conditioned on approval by a majority of USG's voting securities not owned by
Berkshire Hathaway and a determination by our Board of Directors as to its
fairness to stockholders and, if the proposed transaction is not a tender offer
for all shares of our common stock or an offer for the entire company, is
accompanied by an undertaking to offer to acquire all shares of our common stock
outstanding after completion of the transaction at the same price per share as
was paid in the transaction. The shareholder's agreement also provides that,
with certain exceptions, any new shares of common stock acquired by Berkshire
Hathaway in excess of those owned on the date of the agreement (and shares
distributed on those shares, including in the Rights Offering) will be voted
proportionally with all voting shares.
Under the shareholder's agreement, for the same seven-year period, we
agreed to exempt Berkshire Hathaway from our existing or future stockholder
rights plans to the extent that Berkshire Hathaway complies with the terms and
conditions of the shareholder's agreement. If there is a stockholder vote on a
stockholder rights plan that does not contain this agreed exemption, Berkshire
Hathaway may vote without restriction all the shares it holds in a stockholder
vote to approve or disapprove the proposed stockholder rights plan. We also
agreed that, after the seven-year standstill period ends, during the time that
Berkshire Hathaway owns USG equity securities, Berkshire Hathaway will be
exempted from any stockholder rights plan, except that our Board of Directors
may adopt a stockholder rights plan that restricts Berkshire Hathaway from
acquiring (although it may continue to hold) beneficial ownership of more than
50% of USG's voting securities, on a fully diluted basis, other than pursuant to
an offer to acquire all shares of our common stock that is open for at least 60
calendar days.
The parties also entered into a registration rights agreement whereby we
granted Berkshire Hathaway registration rights with respect to its shares of our
common stock.
5. STOCKHOLDERS RIGHTS PLAN
On December 21, 2006, our Board of Directors approved the adoption of a new
stockholders rights plan to replace the reorganization rights plan that expired
on December 31, 2006. Under the new plan, if any person or group acquires
beneficial ownership of 15% or more of our then-outstanding voting stock,
stockholders other than the 15% triggering stockholder will have the right to
purchase additional shares of our common stock at half the market price, thereby
diluting the triggering stockholder. Stockholders who owned 15% or more of our
common stock as of December 21, 2006 will not trigger these rights so long as
they do not become the beneficial owner of an additional 1% or more of our
voting stock while the plan is in effect. The new plan also provides that,
during the seven-year standstill period under the shareholder's agreement
described in Note 4 above, Berkshire Hathaway Inc. (and certain of its
affiliates) will not trigger the rights so long as Berkshire Hathaway complies
with the terms of the shareholder's agreement and, following that seven-year
standstill period, the term "Acquiring Person" will not include Berkshire
Hathaway (and certain of its affiliates) unless Berkshire Hathaway and its
affiliates acquire beneficial ownership of more than 50% of our voting stock on
a fully diluted basis.
The rights issued pursuant to the new rights plan will expire on January 2,
2017. However, our Board of Directors has the power to accelerate or extend the
expiration date of the rights. In addition, a Board committee composed solely of
independent directors will review the rights plan at least once every three
years to determine whether to modify the plan in light of all relevant factors.
47
<PAGE>
6. EARNINGS PER SHARE
The reconciliation of basic earnings per share to diluted earnings per share is
shown in the following table:
<TABLE>
<CAPTION>
Weighted
Net Average
Earnings Shares Per-Share
(Loss) (000) Amount
-------- ------ ---------
<S> <C> <C> <C>
(millions, except share data)
2006:
Basic earnings $ 288 66,476 $ 4.34
Dilutive effect of stock options 87
------- ------ -------
Diluted earnings 288 66,563 4.33
======= ====== =======
2005:
Basic loss (1,436) 56,342 (25.49)
------- ------ -------
Diluted loss (1,436) 56,342 (25.49)
======= ====== =======
2004:
Basic earnings 312 55,570 5.62
------- ------ -------
Diluted earnings 312 55,570 5.62
======= ====== =======
</TABLE>
Restricted stock units with respect to 0.5 million common shares and options to
purchase 1.0 million common shares as of December 31, 2006 were not included in
the computation of diluted earnings per share because they were anti-dilutive.
Options to purchase 0.2 million common shares as of December 31, 2005 and 2.6
million common shares as of December 31, 2004 were not included in the
computation of diluted earnings per share because the exercise price was greater
than the average market price of our common stock.
7. INVENTORIES
Inventories as of December 31 consisted of the following:
<TABLE>
<CAPTION>
2006 2005
---- ----
<S> <C> <C>
(millions)
Finished goods and work in progress $231 $195
Raw materials 94 99
Supplies 23 21
---- ----
Total 348 315
==== ====
</TABLE>
The LIFO value of our inventories in the United States was $256 million as of
December 31, 2006 and $240 million as of December 31, 2005. Inventories would
have been higher by $52 million as of December 31, 2006 and $38 million as of
December 31, 2005 if they were valued under the FIFO and average production cost
methods. The LIFO value of our inventories in the United States exceeded that
computed for United States federal income tax purposes by $15 million as of
December 31, 2006 and $17 million as of December 31, 2005. All of our
inventories outside the United States are valued under FIFO or average
production cost methods.
8. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of December 31 consisted of the following:
<TABLE>
<CAPTION>
2006 2005
------- ------
<S> <C> <C>
(millions)
Land and mineral deposits $ 142 $ 107
Buildings and improvements 905 835
Machinery and equipment 2,198 1,919
Computer software and systems
development costs 73 67
------- ------
3,318 2,928
Reserves for depreciation and depletion (1,108) (982)
------- ------
Total 2,210 1,946
======= ======
</TABLE>
9. GOODWILL AND OTHER INTANGIBLE ASSETS
All of our goodwill relates to the Building Products Distribution operating
segment. Goodwill increased in 2006 and 2005 as a result of acquisitions by L&W
Supply, which makes up the Building Products Distribution operating segment.
Goodwill as of December 31 was as follows:
<TABLE>
<CAPTION>
2006 2005
---- ----
<S> <C> <C>
(millions)
Balance as of January 1 $ 64 $43
Acquisitions 90 21
---- ----
Balance as of December 31 154 64
==== ====
</TABLE>
Other intangible assets, which are principally trade names, totaled $9 million
as of December 31, 2006 and $3 million as of December 31, 2005. As of each date,
$1 million of these other intangible assets was subject to amortization over a
five-year life concluding in 2009. Other intangible assets are included in other
assets on the consolidated balance sheets.
Based on identified other intangible assets recorded as of December 31,
2006, and assuming no subsequent impairment of the underlying assets, the amount
of annual amortization expense for each of the remaining three years is
immaterial.
48
<PAGE>
10. ACCRUED EXPENSES
Accrued expenses as of December 31 consisted of the following:
<TABLE>
<CAPTION>
2006 2005
---- ----
<S> <C> <C>
(millions)
Employee compensation $112 $102
Self-insurance reserves 62 57
Other 184 116
---- ----
Total 358 275
==== ====
</TABLE>
11. ACCUMULATED OTHER COMPREHENSIVE (LOSS) INCOME
AOCI as of December 31 consisted of the following:
<TABLE>
<CAPTION>
2006 2005
----- -----
<S> <C> <C>
(millions)
(Loss) gain on derivatives, net of tax $ (26) $ 60
Foreign currency translation 24 21
Minimum pension liability, net of tax * -- (8)
Unrecognized pension and postretirement
benefit costs, net of tax * (134) --
Unrealized loss on marketable
securities, net of tax -- (1)
----- ----
Total (136) 72
===== ====
</TABLE>
* Upon the adoption of SFAS No. 158, the concept of minimum pension liability
no longer exists. Accordingly, the minimum pension liability, net of tax,
as of December 31, 2005 of $(8) million plus the change in that amount that
occurred during 2006 of $(5) million is included in unrecognized pension
and postretirement benefit costs, net of tax, as of December 31, 2006.
During 2006, we reclassified accumulated net after-tax losses on derivatives of
$17 million ($28 million pretax) from AOCI to earnings. As of December 31, 2006,
we estimate the net after-tax loss that we will reclassify from AOCI to earnings
within the next 12 months to be $24 million.
12. ASSET RETIREMENT OBLIGATIONS
Changes in our liability for asset retirement obligations during 2006 and 2005
consisted of the following:
<TABLE>
<CAPTION>
2006 2005
---- ----
<S> <C> <C>
(millions)
Balance as of January 1 $71 $43
Accretion expense 4 3
Liabilities incurred 4 7
Adoption of FIN 47 -- 18
Liabilities settled (1) --
--- ---
Balance as of December 31 78 71
=== ===
</TABLE>
Our asset retirement obligations include reclamation requirements as regulated
by government authorities related principally to assets such as our mines,
quarries, landfills, ponds and wells. The accounting for asset retirement
obligations requires estimates by management about the timing of asset
retirements, the cost of retirement obligations, discount and inflation rates
used in determining fair values and the methods of remediation associated with
our asset retirement obligations. We generally use assumptions and estimates
that reflect the most likely remediation method on a site-by-site basis.
We adopted FASB Interpretation No. 47, or FIN 47, "Accounting for
Conditional Asset Retirements," effective December 31, 2005. This interpretation
clarifies that uncertainty about the timing and/or method of settlement of a
conditional asset retirement obligation should be factored into the measurement
of the liability when there is sufficient information to make a reasonable
estimate of the fair value of the obligation. In connection with the adoption of
this interpretation, a noncash, after-tax charge of $11 million ($18 million
pretax) was reflected in the consolidated statement of operations as a
cumulative effect of a change in accounting principle as of December 31, 2005.
If FIN 47 had been adopted effective January 1, 2004, net earnings and earnings
per share for 2004 would not be materially different, and the liability for
asset retirement obligations would have been approximately $51 million as of
January 1, 2004 and approximately $60 million as of December 31, 2004. Asset
retirement obligations are included in other liabilities on the consolidated
balance sheets.
49
<PAGE>
13. EMPLOYEE RETIREMENT PLANS
We maintain defined benefit pension plans for most of our employees. Most of
these plans require employee contributions in order to accrue benefits. Benefits
payable under the plans are based on employees' years of service and
compensation during specified years of employment.
We also maintain 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, we modified our
retiree medical cost-sharing 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
health-care costs and a reduction in our accumulated postretirement benefit
obligation.
The components of net pension and postretirement benefits costs are
summarized in the following table:
<TABLE>
<CAPTION>
2006 2005 2004
---- ---- ----
<S> <C> <C> <C>
(millions)
Pension Benefits:
Service cost of benefits earned $ 39 $ 34 $ 31
Interest cost on projected
benefit obligation 62 56 54
Expected return on plan assets (63) (56) (53)
Net amortization 18 20 19
---- ---- ----
Net pension cost 56 54 51
==== ==== ====
Postretirement Benefits:
Service cost of benefits earned 15 13 14
Interest cost on projected
benefit obligation 21 19 22
Net amortization (2) (4) 1
---- ---- ----
Net postretirement cost 34 28 37
==== ==== ====
</TABLE>
We use a December 31 measurement date for our plans. The accumulated benefit
obligation, or ABO, for the defined benefit pension plans was $901 million as of
December 31, 2006 and $858 million as of December 31, 2005. The following table
summarizes projected pension and accumulated postretirement benefit obligations,
plan assets and funded status as of December 31:
<TABLE>
<CAPTION>
Pension Postretirement
--------------- --------------
2006 2005 2006 2005
------ ------ ----- ------
<S> <C> <C> <C> <C>
(millions)
Change in Benefit Obligation:
Benefit obligation as of January 1 $1,077 $1,003 $ 354 $ 350
Service cost 39 34 15 13
Interest cost 62 56 21 19
Participant contributions 14 13 4 5
Benefits paid (63) (55) (16) (15)
Plan amendment (1) -- (1) 2
Actuarial (gain) loss 12 22 39 (21)
Foreign currency translation 2 4 -- 1
------ ------ ----- -----
Benefit obligation as of December 31 1,142 1,077 416 354
------ ------ ----- -----
Change in Plan Assets:
Fair value as of January 1 906 810 -- --
Actual return on plan assets 117 64 -- --
Employer contributions 81 71 12 10
Participant contributions 14 13 4 5
Benefits paid (63) (55) (16) (15)
Foreign currency translation 2 3 -- --
------ ------ ----- -----
Fair value as of December 31 1,057 906 -- --
------ ------ ----- -----
Funded status (85) (171) (416) (354)
====== ====== ===== =====
Components on the Consolidated Balance Sheets *:
Noncurrent assets 8 -- -- --
Current liabilities (1) -- (13) --
Noncurrent liabilities (92) -- (403) --
------ ------ ----- -----
Net liability as of December 31 (85) -- (416) --
====== ====== ===== =====
Pretax Components in AOCI *:
Net actuarial loss 176 -- 107 --
Prior service cost (credit) 16 -- (63) --
Net transition obligation 1 -- -- --
------ ------ ----- -----
Total as of December 31 193 -- 44 --
====== ====== ===== =====
</TABLE>
* In accordance with SFAS No. 158, retrospective application is not required.
For the defined benefit pension plan, we estimate that during the 2007 fiscal
year we will amortize from AOCI into net pension cost a net actuarial loss of $7
million and prior service cost of $2 million. For the postretirement benefit
plan, we estimate that during the 2007 fiscal year we will amortize from AOCI
into net postretirement cost a net actuarial loss of $5 million and prior
service cost of $(7) million.
50
<PAGE>
ASSUMPTIONS
The following tables reflect the assumptions used in the accounting for our
plans:
<TABLE>
<CAPTION>
Pension Postretirement
----------- --------------
2006 2005 2006 2005
---- ---- ------ -----
<S> <C> <C> <C> <C>
Weighted-average assumptions used to
determine benefit obligations as of
December 31:
Discount rate 5.9% 5.75% 5.95% 5.8%
Compensation increase rate 4.0% 4.0% -- --
Weighted-average assumptions used to
determine net cost for years ended
December 31:
Discount rate 5.75% 5.75% 5.8% 5.75%
Expected return on plan assets 7.0% 7.0% -- --
Compensation increase rate 4.0% 4.2% -- --
</TABLE>
The assumed health-care-cost trend rate used to measure the postretirement
plans' obligations as of December 31 were as follows:
<TABLE>
<CAPTION>
2006 2005
---- ----
<S> <C> <C>
Health-care-cost trend rate assumed for next
year 9.25% 9.25%
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 2013 2011
</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-
Point Increase Point Decrease
--------------- ---------------
<S> <C> <C>
(millions)
Effect on total service and
interest cost $ 7 $ (6)
Effect on postretirement
benefit obligation 64 (53)
</TABLE>
We established our assumption for the expected long-term rate of return on plan
assets for our pension plans by using a "building block" approach. In this
approach, we estimate ranges of long-term expected returns for the various asset
classes in which the plans invest. Our estimated ranges are primarily based upon
observations of historical asset returns and their historical volatility. In
determining expected returns, we also consider consensus estimates of certain
market and economic factors that influence returns such as inflation, gross
domestic product growth and dividend yields. We then calculate an overall range
of likely expected rates of return by applying the expected returns to the
plans' target asset allocation. We then determine the most likely rate of return
and adjust it for investment management fees.
PLAN ASSETS
Our pension plans' asset allocations by asset categories as of December 31 were
as follows:
<TABLE>
<CAPTION>
Asset Categories 2006 2005
- ---------------- ---- ----
<S> <C> <C>
Equity securities 68% 69%
Debt securities 21% 22%
Other 11% 9%
--- ---
Total 100% 100%
=== ===
</TABLE>
We established our investment policies and strategies for the pension plans'
assets 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 our financial condition. Based upon these factors, we determined that our
plans can tolerate a moderate level of risk.
To maximize long-term returns, we invest our plans' assets 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 using strategies with returns normally
expected to have a low correlation to the returns of equities. As of December
31, 2006, the plans' target asset allocation percentages were 61% for equity
securities, 22% for debt securities and 17% for other. The actual allocations
for equity and debt securities exceeded their targets at year end. We are
identifying additional investment opportunities in the "other" category, which
are expected to bring actual allocations closer to target allocations in 2007.
We monitor investment risk on 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.
51
<PAGE>
CASH FLOWS
Our defined benefit pension plans have no minimum funding requirements under the
Employee Retirement Income Security Act of 1974, commonly called ERISA. In
accordance with our funding policy, we expect to voluntarily contribute
approximately $70 million of cash to our pension plans in 2007. Total benefit
payments we expect to pay to participants, which include payments funded from
USG's assets as well as payments from our pension plans and the Medicare subsidy
we expect to receive, 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>
2007 $ 65 $ 13 $ (1)
2008 69 14 (2)
2009 76 16 (2)
2010 81 18 (2)
2011 88 19 (2)
2012 - 2016 568 126 (11)
</TABLE>
14. SHARE-BASED COMPENSATION
Effective January 1, 2006, we adopted SFAS No. 123(R), "Share-Based Payment."
Under SFAS No. 123(R), a fair-value method is used to account for share-based
compensation. Our cost for share-based compensation was $17 million in 2006. The
total income tax benefit recognized for share-based compensation arrangements in
the consolidated statements of earnings was $6 million for 2006.
There were no stock options or other forms of share-based compensation
granted during our recent Chapter 11 proceedings. Prior to our Chapter 11
proceedings, we issued stock options to key employees under plans approved by
stockholders. All of those options became exercisable two years after the grant
date and generally expire 10 years from the date of grant, or earlier in the
event of death, disability or retirement. All stock options issued before our
Chapter 11 proceedings were fully vested prior to the adoption of SFAS No.
123(R). There are no common shares reserved for future grants under plans
approved prior to the Chapter 11 proceedings. In our consolidated statements of
cash flows, we presented tax benefits associated with the exercise of stock
options as operating cash flows prior to the adoption of SFAS No. 123(R) and as
financing cash flows following adoption.
During the second quarter of 2006, we adjusted the number of shares
underlying the then-outstanding stock options and the related exercise prices
pursuant to the terms of the options to account for the Rights Offering. We made
the adjustments in a way designed to preserve the value of the outstanding stock
options without triggering adverse tax consequences. In accordance with the
provisions of SFAS No.123(R), we accounted for the adjustments as a
modification. The adjustments did not have a material impact on our financial
position, cash flows or results of operations.
2006 LONG-TERM INCENTIVE PLAN
The USG Corporation Long-Term Incentive Plan, or LTIP, was approved by our Board
of Directors in March 2006 and by our stockholders at their annual meeting in
May 2006. There are 8.2 million shares of common stock authorized for grants
under the LTIP. The LTIP authorizes the Board, or the Board's Compensation and
Organization Committee, to provide equity-based compensation in the form of
stock options, stock appreciation rights, or SARs, restricted stock, restricted
stock units, or RSUs, performance shares and units, and other cash and
stock-based awards for the purpose of providing our officers and employees
incentives and rewards for performance.
During the third quarter of 2006, grants of stock options, SARs and RSUs
were made under the LTIP, as discussed below. We will recognize the cost of
these awards on a straight-line attribution basis over their respective vesting
periods, net of estimated forfeitures. As of December 31, 2006, a total of
6,692,400 common shares were reserved for future grants under the LTIP. We may
issue common shares upon option exercises and upon the vesting of RSUs from our
authorized but unissued shares or from treasury shares.
STOCK OPTIONS
We granted options to purchase 962,500 shares of common stock under the LTIP
during the third quarter of 2006 with an exercise price of $46.17 per share,
which was the closing price of USG common stock on the date of grant. The
options generally become exercisable in five equal annual installments,
beginning one year from the date of grant or earlier in the event of death,
disability or a change in control. The options generally expire 10 years from
the date of grant, or earlier in the event of death, disability or retirement.
52
<PAGE>
We estimated the fair value of each stock option granted under the LTIP on
the date of grant using a Black-Scholes option valuation model that uses the
assumptions noted in the following table. We based expected volatility on a 50%
weighting of peer volatilities and 50% weighting of implied volatilities. We did
not consider historical volatility of our common stock price to be an
appropriate measure of future volatility because of the impact of our Chapter 11
proceedings on our historical stock price. The risk-free rate was based on zero
coupon U.S. government issues at the time of grant. The expected term was
developed using the simplified method, as permitted by the SEC's Staff
Accounting Bulletin No. 107.
<TABLE>
<S> <C>
Assumptions:
Fair value of options granted $23.36
Expected volatility 42.6%
Risk-free rate 4.87%
Expected term (in years) 6.5
Expected annual forfeitures 2.5%
Expected dividends --
</TABLE>
A summary of stock option activity under the LTIP and our prior stock option
plans as of December 31, 2006 and during the fiscal year then ended, adjusted
for the Rights Offering where applicable, is presented below:
<TABLE>
<CAPTION>
Weighted
Weighted Average Aggregate
Number of Average Remaining Intrinsic
Options Exercise Contractual Value
(thousands) Price Term (years) (millions)
----------- ---------- ------------ ----------
<S> <C> <C> <C> <C>
Outstanding at
January 1, 2006 808 $33.37
Granted * 980 46.17
Exercised (403) 33.60
Cancelled (155) 32.38
----- ------
Outstanding at
December 31, 2006 1,230 43.62 8.16 $14
----- ------ ---- ---
Exercisable at
December 31, 2006 252 33.70 2.28 5
----- ------ ---- ---
</TABLE>
* Includes 17,900 SARs that are payable in cash upon vesting and, therefore,
are accounted for as a liability on the consolidated balance sheets.
Intrinsic value for stock options is defined as the difference between the
current market value of our common stock and the exercise price of the stock
option. The total intrinsic value of options exercised was $15 million in 2006,
$26 million in 2005 and $3 million in 2004.
As of December 31, 2006, there was $14 million of total unrecognized
compensation cost related to nonvested share-based compensation awards granted
under the LTIP. We expect that cost to be recognized over a weighted average
period of 4.6 years. No options vested during 2006 and 2005.
RESTRICTED STOCK UNITS
We granted RSUs with respect to 530,100 shares of common stock under the LTIP
during the third quarter of 2006. The RSUs generally vest in four equal annual
installments, beginning one year from the date of grant, except that they may
vest earlier in the case of death, disability or a change in control. The fair
value of each RSU granted is equal to the closing market price of our common
stock at the date of grant and is expensed using the straight-line method over
the vesting period of the award. The following is a summary of RSU activity
during 2006:
<TABLE>
<CAPTION>
Number
of Shares Grant Date
(thousands) Fair Value
----------- ----------
<S> <C> <C>
Nonvested at January 1, 2006 -- $ --
Granted * 530 46.17
Vested -- --
Forfeited (1) 46.17
--- ------
Nonvested at December 31, 2006 * 529 46.17
=== ======
</TABLE>
* Includes 9,600 RSUs that are payable in cash upon vesting and, therefore,
are accounted for as a liability on the consolidated balance sheets.
As of December 31, 2006, there was $15 million of total unrecognized
compensation cost related to nonvested share-based compensation awards
represented by RSUs granted under the LTIP. We expect that cost to be recognized
over a weighted average period of 3.6 years.
NON-EMPLOYEE DIRECTOR DEFERRED STOCK UNITS
Our non-employee directors may elect to take a portion of their compensation as
deferred stock units which increase or decrease in value in direct relation to
the market price of our common stock and are paid in cash upon termination of
board service. As of December 31, 2006, there were approximately 18,035 deferred
stock units held by non-employee directors. Amounts related to these units
recorded to expenses
53
<PAGE>
in 2006 and 2005 were immaterial.
To account for the Rights Offering, we adjusted the deferred stock units
held by members of the board of directors. These adjustments, which were made in
a way that was designed to preserve the value of the deferred stock units
without triggering adverse tax consequences, had no impact on our financial
position, cash flows or results of operations.
Pursuant to our Stock Compensation Program for Non-Employee Directors, on
July 1, 2006, our non-employee directors were entitled to receive a $30,000
annual grant, payable at their election in cash or common stock with an
equivalent value. Pursuant to this provision, a total of 2,645 shares of common
stock were issued to five non-employee directors based on the closing market
price of a share of common stock on July 3, 2006.
15. INCOME TAXES
Earnings before income taxes and cumulative effect of accounting change
consisted of the following:
<TABLE>
<CAPTION>
2006 2005 2004
---- ------- ----
<S> <C> <C> <C>
(millions)
U.S. $368 $(2,457) $397
Foreign 108 108 112
---- ------- ----
Total 476 (2,349) 509
==== ======= ====
</TABLE>
Income taxes consisted of the following:
<TABLE>
<CAPTION>
2006 2005 2004
------- ------- ----
<S> <C> <C> <C>
(millions)
Current:
Federal $(1,049) $ 189 $113
Foreign 29 33 29
State (16) 40 14
------- ------- ----
(1,036) 262 156
------- ------- ----
Deferred:
Federal 1,091 (1,033) 27
Foreign (3) -- 3
State 136 (153) 11
------- ------- ----
1,224 (1,186) 41
------- ------- ----
Total 188 (924) 197
======= ======= ====
</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>
2006 2005 2004
----- ----- -----
<S> <C> <C> <C>
(millions)
Taxes on income
at U.S. federal statutory rate $ 167 $(822) $ 178
Chapter 11 reorganization
expenses 4 2 1
Foreign earnings subject
to different tax rates (8) -- 2
State income tax, net of
federal benefit 20 (74) 17
Change in valuation allowance 7 -- --
Reduction of tax reserves (3) (34) --
Other, net 1 4 (1)
----- ----- -----
Provision for income
taxes 188 (924) 197
----- ----- -----
Effective income tax rate 39.5% 39.3% 38.6%
===== ===== =====
</TABLE>
Significant components of deferred tax assets and liabilities as of December 31
were as follows:
<TABLE>
<CAPTION>
2006 2005
---- ------
<S> <C> <C>
(millions)
Deferred Tax Assets:
Net operating loss and tax credit
carryforwards $438 $ 27
Pension and postretirement benefits 224 119
Reserves not deductible until paid:
Asbestos reserves 20 1,698
Other reserves 12 21
Self insurance 18 21
Capitalized interest 13 6
Derivative instruments 10 --
Share-based compensation 7 --
Other 15 9
---- ------
Deferred tax assets before valuation
allowance 757 1,901
Valuation allowance (73) (79)
---- ------
Total deferred tax assets 684 1,822
---- ------
Deferred Tax Liabilities:
Property, plant and equipment 280 310
State taxes 52 62
Derivative instruments -- 51
Inventories 7 8
---- ------
Total deferred tax liabilities 339 431
---- ------
Net deferred tax assets 345 1,391
==== ======
</TABLE>
54
<PAGE>
We have established a valuation allowance for deferred tax assets relating to
certain foreign and U.S. state net operating loss and tax credit carryforwards
because of uncertainty regarding their ultimate realization. Of the total
valuation allowance as of December 31, 2006, $61 million relates to U.S. state
net operating loss and tax credit carryforwards and $12 million relates to
foreign net operating loss and tax credit carryforwards.
As a result of the federal income tax deduction for amounts paid to the
Asbestos Trust in 2006, we incurred a federal and state net operating loss, or
NOL, in 2006. While most of the federal NOL will be carried back and offset
against the federal taxable income we reported in the 10 preceding taxable
years, approximately $400 million of the NOL will be carried forward and offset
against federal taxable income arising in future years. In addition, the
carryback of the 2006 federal NOL will result in the carryforward of
approximately $77 million of federal tax credits (primarily alternative minimum
tax and foreign tax credits) that can be offset against federal income tax in
future years. The federal NOL can be carried forward for 20 years, beginning in
2007; the alternative minimum tax credits can be carried forward indefinitely;
and the foreign tax credits can be carried forward for 10 years from the date of
origin. At the state level, most of the 2006 state NOL will be carried forward
since most states do not allow the carryback of a NOL in any significant amount.
The 2006 state NOL, as well as other NOL and tax credit carryforwards arising in
prior years in various state and foreign jurisdictions, will expire over periods
ranging from five to 20 years from the date of origin.
During the fourth quarter of 2006, the Internal Revenue Service finalized
its audit of our federal income tax returns for the years 2003 and 2004. As a
result of the audit, our federal income tax liability for the years 2003 and
2004 was increased by $33 million in the aggregate, most of which resulted in an
increase in the amount of our deferred tax assets as of December 31, 2006.
During the third quarter of 2005, the Internal Revenue Service finalized
its audit of our federal income tax returns for the years 2000 through 2002. As
a result of the audit, our federal income tax liability for the years 2000
through 2002 was increased by $60 million in the aggregate, which was covered by
liabilities previously recorded on our financial statements. In addition, due to
the results of the audit, a portion of our recorded income tax contingency
reserves became unnecessary. Consequently, our income tax provision was reduced
(and consolidated net earnings increased) in 2005 by $25 million.
Our financial statements include amounts recorded for contingent tax
liabilities with respect to loss contingencies that are deemed probable of
occurrence. These loss contingencies relate primarily to tax disputes with
various state tax authorities, costs incurred with respect to the Chapter 11
proceedings and the taxable status of certain foreign income in the U.S. Our
U.S. income tax returns for 2004 and prior years have been audited by the IRS.
We do 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 $423
million as of December 31, 2006. 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 created 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. During the
fourth quarter of 2005, we decided to take advantage of the one-time opportunity
under the act to reduce future taxes by repatriating $91 million of foreign
earnings. This resulted in $4 million of tax expense that was recognized in the
fourth quarter of 2005.
Our income tax receivable of $1.102 billion as of December 31, 2006 relates
primarily to refunds of federal and state income taxes paid in prior years that
we expect to receive as a result of the carryback of our 2006 net operating loss
due to amounts paid to the Asbestos Trust in 2006 and the temporary overpayment
of taxes in various jurisdictions. We expect the amount recorded as income taxes
receivable as of December 31, 2006 to be refunded to us in 2007.
55
<PAGE>
16. DERIVATIVE INSTRUMENTS
COMMODITY DERIVATIVE INSTRUMENTS
As of December 31, 2006, we had swap contracts to exchange monthly payments on
notional amounts of natural gas amounting to $225 million. These contracts
mature by December 31, 2009. As of December 31, 2006, the fair value of these
swap contracts, which remained in AOCI, was a $43 million ($26 million
after-tax) unrealized loss.
FOREIGN EXCHANGE DERIVATIVE INSTRUMENTS
As of December 31, 2006 and 2005, we 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, or to hedge selected risk of changes in our net investment in
foreign subsidiaries.
COUNTERPARTY RISK
We are exposed to credit losses in the event of nonperformance by the
counterparties on our financial instruments. All counterparties have investment
grade credit standing; accordingly, we anticipate that these counterparties will
be able to fully satisfy their obligations under the contracts. We receive
collateral from our counterparties based on the provisions in certain credit
support agreements. Similarly, we may be required to post collateral if
aggregate payables exceed certain limits. Currently, we have no collateral
requirement. We enter into master agreements which contain netting arrangements
that minimize counterparty credit exposure.
17. SEGMENTS AND ACQUISITIONS
OPERATING SEGMENTS
<TABLE>
<CAPTION>
2006 2005 2004
------- ------- ------
<S> <C> <C> <C>
(millions)
Net Sales:
North American Gypsum $ 3,621 $ 3,222 $2,753
Worldwide Ceilings 756 707 688
Building Products Distribution 2,477 2,048 1,738
Eliminations (1,044) (838) (670)
------- ------- ------
Total 5,810 5,139 4,509
======= ======= ======
</TABLE>
<TABLE>
<CAPTION>
2006 2005 2004
------ ------- ------
<S> <C> <C> <C>
(millions)
Operating Profit (Loss):
North American Gypsum $ 836 $(2,466) $ 428
Worldwide Ceilings 77 62 62
Building Products Distribution 203 149 103
Corporate (117) (90) (73)
Chapter 11 reorganization
expenses (10) (4) (12)
Eliminations (4) (5) --
------ ------- ------
Total 985 (2,354) 508
====== ======= ======
Depreciation, Depletion
and Amortization:
North American Gypsum 111 100 94
Worldwide Ceilings 18 19 18
Building Products Distribution 4 3 3
Corporate 5 3 5
------ ------- ------
Total 138 125 120
====== ======= ======
Capital Expenditures:
North American Gypsum 336 174 120
Worldwide Ceilings 18 19 14
Building Products Distribution 2 3 2
Corporate 37 2 2
------ ------- ------
Total 393 198 138
====== ======= ======
Assets:
North American Gypsum 2,348 3,664 2,042
Worldwide Ceilings 416 415 438
Building Products Distribution 590 487 417
Corporate 2,124 1,748 1,513
Eliminations (113) (172) (132)
------ ------- ------
Total 5,365 6,142 4,278
====== ======= ======
</TABLE>
GEOGRAPHIC SEGMENTS
<TABLE>
<CAPTION>
2006 2005 2004
------ ------- ------
<S> <C> <C> <C>
(millions)
Net Sales:
United States $5,227 $ 4,626 $4,065
Canada 442 420 384
Other Foreign 386 333 291
Geographic transfers (245) (240) (231)
------ ------- ------
Total 5,810 5,139 4,509
====== ======= ======
</TABLE>
<TABLE>
<S> <C> <C> <C>
Long-Lived Assets:
United States 1,939 1,812 1,684
Canada 169 187 174
Other Foreign 209 148 123
------ ------- ------
Total 2,317 2,147 1,981
====== ======= ======
</TABLE>
56
<PAGE>
OTHER SEGMENT INFORMATION
Segment operating profit (loss) includes all costs and expenses directly related
to the segment involved and an allocation of expenses that benefit more than one
segment. An operating loss of $2.466 billion in 2005 for the North American
Gypsum segment resulted from a $3.1 billion charge for asbestos claims recorded
in the fourth quarter of 2005. Operating profit of $836 million in 2006 for
North American Gypsum included the reversal of $44 million of our reserve for
asbestos-related liabilities.
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.
On a worldwide basis, The Home Depot, Inc. accounted for approximately 11%
of our consolidated net sales in each of 2006, 2005 and 2004. 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.
ACQUISITIONS
During 2006, L&W Supply, which makes up the Building Products Distribution
operating segment, purchased the outstanding stock of several companies
principally located in the midwestern and southeastern United States and minor
operations in South America for approximately $128 million, net of cash
acquired. These acquisitions were part of L&W Supply's strategy to profitably
grow its specialty dealer business. We accounted for these acquisitions under
the purchase method of accounting and, accordingly, included their results of
operations in our accompanying consolidated results of operations from the dates
of acquisition. Pro forma combined results of operations for 2005 and 2006 would
not be materially different as a result of these acquisitions and therefore are
not presented.
The allocation of the purchase price of the acquisitions is still
preliminary because final purchase price adjustments are subject to final
closing balance sheet audit and review procedures which are still in progress as
of the date of this report. L&W Supply has preliminarily recorded the total
purchase price of the acquisitions, based on their estimated fair values, as
follows:
<TABLE>
<S> <C>
(millions)
Accounts receivable $ 26
Inventories 14
Goodwill 90
Other assets acquired 13
----
Total assets acquired 143
----
Total liabilities assumed 15
----
Total net assets acquired 128
----
</TABLE>
The amounts recorded to goodwill and intangible assets are not subject to
amortization.
L&W Supply paid $29 million for two acquisitions in 2005 and $5 million for
three acquisitions in 2004.
As of December 31, 2006, L&W Supply operated 220 locations in 36 states,
compared with 192 locations as of December 31, 2005 and 186 locations as of
December 31, 2004.
18. COMMITMENTS AND CONTINGENCIES
We lease some of our offices, buildings, machinery and equipment, and autos
under noncancelable operating leases. These leases have various terms and
renewal options. Lease expense amounted to $112 million in 2006, $93 million in
2005 and $86 million in 2004. Future minimum lease payments required under
operating leases with initial or remaining noncancelable terms in excess of one
year as of December 31, 2006 were $82 million in 2007, $73 million in 2008, $57
million in 2009, $45 million in 2010 and $32 million in 2011. The aggregate
obligation after 2011 was $149 million.
As of December 31, 2006, capital expenditure commitments were $494 million.
As of December 31, 2006, restricted cash totaled $6 million. Restricted
cash primarily represents collateral to support outstanding letters of credit.
LEGAL CONTINGENCIES
See Note 19 below for information on asbestos and environmental litigation.
57
<PAGE>
19. LITIGATION
ASBESTOS LITIGATION
Asbestos Personal Injury Litigation: Our plan of reorganization resolves the
debtors' liability for all present and future asbestos personal injury and
related claims. At the time we filed for reorganization in June 2001, U.S.
Gypsum was a defendant in more than 100,000 pending asbestos personal injury
claims. In addition, L&W Supply and Beadex had been named as defendants in a
small number of asbestos personal injury claims.
As part of our plan of reorganization, we created and funded a trust under
Section 524(g) of the Bankruptcy Code for the payment of all of the present and
future asbestos personal injury liabilities of the debtors. The Trust is
administered by independent trustees appointed under the plan. The Trust will
pay qualifying asbestos personal injury and related claims against the debtors
pursuant to trust distribution procedures that are part of the confirmed plan.
As of the end of the fourth quarter of 2006, our obligations to fund the Trust
have been met, and we have no further payment obligations to the Trust.
Our plan of reorganization also contains a channeling injunction which
provides that all present and future asbestos personal injury claims against the
debtors must be brought against the Trust and no one may bring such a claim
against the debtor companies. This channeling injunction applies to all present
and future asbestos personal injury claims for which any debtor is alleged to be
liable, including any asbestos personal injury claims against U.S. Gypsum, L&W
Supply or Beadex, as well as any asbestos personal injury claims against the
debtors relating to A.P. Green Refractories Co., which was formerly one of our
subsidiaries.
Asbestos Property Damage Litigation: Asbestos property damage claims against the
debtors are not part of the Trust or the channeling injunction. Our plan of
reorganization provides that all settled or otherwise resolved asbestos property
damage claims that were timely filed in our reorganization proceedings will be
paid in full. During our reorganization proceedings, the court entered an order
requiring that asbestos property damage claims against the debtors be filed by
January 15, 2003. In response to that deadline, approximately 1,400 asbestos
property damage claims were timely filed in the debtors' Chapter 11 proceedings
with an additional 70 claims being filed after the deadline. During our
reorganization proceedings, more than 950 claims were disallowed or withdrawn,
leaving approximately 520 claims pending.
We have now reached agreements to settle all of the remaining asbestos
property damage claims, with the exception of one small claim brought by a
homeowner. The estimated cost of resolving the asbestos property damage claims,
as well as the cost of funding the asbestos personal injury trust, is discussed
below.
Cost and Payments Relating to Our Asbestos Claims: In the fourth quarter of
2005, we recorded a pretax charge of $3.1 billion for all asbestos-related
claims. This pretax charge increased U.S. Gypsum's reserve for all
asbestos-related claims, both personal injury and property damage, to $4.161
billion. This reserve included our obligations to fund the Trust established
under our plan of reorganization. The reserve also included our estimate of the
cost of resolving asbestos property damage claims filed in our reorganization
proceedings, including estimated legal fees associated with those claims, as
well as our estimate of resolving other additional asbestos-related claims.
In 2006, we made payments totaling $3.95 billion to the Trust as required
by our plan of reorganization. These payments included the $890 million payment
to the Trust on the Effective Date, a $10 million payment in December on the
interest-bearing note we issued to the Trust on the Effective Date and a $3.05
billion payment in December. This additional $3.05 billion payment was due in
accordance with the plan of reorganization because the 109th Congress adjourned
in December 2006 without passing the Fairness in Asbestos Injury Resolution Act
of 2005 or substantially similar legislation. We have fully funded the Trust and
have no further payment obligations to the Trust.
During the second quarter of 2006, we also paid $19 million for the
settlement of other asbestos-related claims included within the asbestos
reserve.
With regard to asbestos property damage claims, we have reached agreements
to resolve all of the asbestos property damage claims filed in our
reorganization proceedings that have not been disallowed or withdrawn, with the
exception of one small claim brought by a homeowner. Based on our evaluation of
these settlements, we reversed $44 million of our reserve for asbestos-related
claims in 2006. This reversal was reflected as income in our
58
<PAGE>
consolidated statement of operations for 2006. In the fourth quarter of 2006, we
made total payments of approximately $99 million for asbestos property damage
settlements. Our estimate of the cost of asbestos property damage settlements
that have not been paid, and associated legal fees, is approximately $48 million
and is included in accrued expenses.
In summary, in 2006, we made total payments of approximately $4.07 billion
for asbestos-related claims, including the payments to fund the Trust and the
payments for settlements of asbestos property damage claims and other
asbestos-related claims.
ENVIRONMENTAL LITIGATION
We 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, our involvement is expected to be minimal. We believe that appropriate
reserves have been established for our potential liability in connection with
all Superfund sites, but we continue to review our accruals as additional
information becomes available. Our 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 property we own are covered by reserves we establish based on
these same considerations. We believe that none of these matters or any other
known governmental proceedings regarding environmental matters will have a
material adverse effect upon our financial position, cash flows or results of
operations.
59
<PAGE>
20. QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
Quarter
-----------------------------------------
First Second Third Fourth
------ ------ ------ -------
<S> <C> <C> <C> <C>
(millions, except share data)
2006:
Net sales $1,465 $1,573 $1,478 $ 1,294
Gross profit 357 400 346 267
Operating profit 256 318(c) 258(d) 153
Net earnings (loss) (141)(b) 176(c) 153(d) 100
Per Common Share:
Basic (a) (2.44)(b) 3.03(c) 1.71(d) 1.11
Diluted (a) (2.44)(b) 3.03(c) 1.71(d) 1.11
2005:
Net sales 1,173 1,287 1,344 1,335
Gross profit 214 267 301 320
Operating profit (loss) 124 181 211 (2,870)(e)
Net earnings (loss) 77 110 158 (1,781)(e)
Per Common Share:
Basic (a) 1.37 1.97 2.77 (30.92)(e)
Diluted (a) 1.37 1.96 2.77 (30.92)(e)
</TABLE>
(a) Earnings per common share for the third and fourth quarters of 2006 reflect
the issuance of 44.92 million shares of common stock in the third quarter
of 2006 in connection with the Rights Offering. Earnings per common share
for the first and second quarters of 2006 and all four quarters of 2005
have been adjusted to reflect the effect of the Rights Offering. The sum of
the four quarters is not necessarily the same as the total for the year.
(b) First quarter 2006 net loss and loss per common share include an after-tax
charge of $300 million, or $5.19 per common share, for post-petition
interest and fees related to pre-petition obligations.
(c) Second quarter 2006 operating profit, net earnings and earnings per common
share include income of $27 million pretax ($17 million after-tax, or $0.29
per common share) for the reversal of a reserve for asbestos-related
claims. Net earnings and earnings per common share also include an
after-tax charge of $21 million, or $0.36 per common share, for
post-petition interest and fees related to pre-petition obligations.
(d) Third quarter 2006 operating profit, net earnings and earnings per common
share include income of $17 million pretax ($10 million after-tax, or $0.11
per common share) for the reversal of a reserve for asbestos-related
claims. Net earnings and earnings per common share also include an
after-tax charge of $5 million, or $0.06 per common share, for
post-petition interest and fees related to pre-petition obligations.
(e) Fourth quarter 2005 operating loss, net loss and loss per common share
include a provision of $3.1 billion pretax ($1.935 billion after-tax, or
$33.59 per share) for asbestos claims. Net loss and loss per common share
also include an after-tax charge of $11 million, or $0.19 per share, for
the cumulative effect of an accounting change.
Fourth quarter 2005 operating loss, net loss and loss per common share also
include a $37 million pretax ($23 million after-tax) noncash adjustment
that should have been recorded in the third quarter 2005. The adjustment
relates to certain of our natural gas derivative instruments, which no
longer qualified for hedge accounting in the third quarter 2005. If we had
recorded the adjustment in the third quarter of 2005, consolidated net
earnings for that quarter would have been $181 million.
60
<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, 2006 and 2005 and
the related consolidated statements of operations, cash flows and stockholders'
equity (deficit) for each of the three years in the period ended December 31,
2006. Our audits also included the accompanying financial statement schedule,
Schedule II - Valuation and Qualifying Accounts. These financial statements and
financial statement schedule are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on the financial
statements and financial statement schedule 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, 2006 and 2005, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2006, in conformity with accounting principles generally accepted
in the United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in Note 12, effective December 31, 2005, the Corporation
adopted Financial Accounting Standards Board Interpretation No. 47, "Accounting
for Conditional Asset Retirements," and as discussed in Note 1, the Corporation
adopted Statement of Financial Accounting Standards No. 123(R), "Share-Based
Payment" effective January 1, 2006 and Statement of Financial Accounting
Standards No. 158, "Employers' Accounting for Defined Benefit Pension and Other
Postretirement Plans" effective December 31, 2006.
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, 2006,
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 13, 2007, 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 13, 2007
61
<PAGE>
USG CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Beginning Ending
Balance Additions (a) Deductions (b) Balance
--------- ------------- -------------- -------
<S> <C> <C> <C> <C>
(millions)
YEAR ENDED DECEMBER 31, 2006:
Doubtful accounts $10 $ 6 $ (5) $11
Cash discounts 4 57 (56) 5
YEAR ENDED DECEMBER 31, 2005:
Doubtful accounts 11 3 (4) 10
Cash discounts 3 49 (48) 4
YEAR ENDED DECEMBER 31, 2004:
Doubtful accounts 12 5 (6) 11
Cash discounts 3 43 (43) 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
62
<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
Our Chief Executive Officer and Chief Financial Officer, after evaluating the
effectiveness of our "disclosure controls and procedures" (as defined in Rule
13a-15(e) promulgated under the Securities Exchange Act of 1934, or the Act),
have concluded that, as of the end of the fiscal year covered by this report,
our disclosure controls and procedures were effective to provide reasonable
assurance that information required to be disclosed by us in the reports that we
file or submit under the Act is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission's
rules and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed by an issuer in the reports that it files or submits under the Act is
accumulated and communicated to the issuer's management, including its principal
executive officer or officers and principal financial officer or officers, or
persons performing similar functions, as appropriate to allow timely decisions
regarding required disclosure.
(A) MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting. Our internal control system was designed to
provide reasonable assurance to management and our 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 our internal control over
financial reporting as of December 31, 2006. In making this assessment,
management used the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission, or COSO, in Internal Control -
Integrated Framework. Based on its assessment, management believes that, as of
December 31, 2006, our internal control over financial reporting is effective
based on those criteria.
Our independent auditors have issued an audit report on management's
assessment of internal control over financial reporting. This report appears
below.
February 13, 2007
(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 Control Over Financial Reporting, that USG Corporation and
subsidiaries (the "Corporation") maintained effective internal control over
financial reporting as of December 31, 2006, 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
63
<PAGE>
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 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, 2006, 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, 2006,
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 financial statements and financial statement schedule of USG
Corporation and subsidiaries as of December 31, 2006 and our report dated
February 13, 2007 expressed an unqualified opinion and included an explanatory
paragraph regarding the Corporation's adoption of Statement of Financial
Accounting Standards No. 123(R), "Share-Based Payment" and Statement of
Financial Accounting Standards No. 158, "Employers' Accounting for Defined
Benefit Pension and Other Postretirement Plans."
DELOITTE & TOUCHE LLP
Chicago, Illinois
February 13, 2007
64
<PAGE>
(C) CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
On October 1, 2005, we began to roll out a new enterprise resource planning
system in the United States and Canada. The rollout is being undertaken in
phases and is currently planned to be substantially completed in 2007.
Management expects that the new system will enhance operational efficiencies and
help us better serve our customers. The changes related to the new system
represented the only change in our "internal control over financial reporting"
(as defined in Rule 13a-15(f) promulgated under the Act) identified in
connection with the evaluation required by Rule 13a-15(d) promulgated under the
Act that occurred during the fiscal quarter ended December 31, 2006 that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
ITEM 9B. OTHER INFORMATION
Not applicable
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
EXECUTIVE OFFICERS OF THE REGISTRANT (AS OF FEBRUARY 16, 2007):
<TABLE>
<CAPTION>
NAME, AGE AND PRESENT POSITION
PRESENT POSITION BUSINESS EXPERIENCE DURING THE LAST FIVE YEARS HELD SINCE
---------------- ---------------------------------------------- ----------------
<S> <C> <C>
William C. Foote, 55 Chairman, Chief Executive Officer and January 2006
Chairman and Chief Executive President to January 2006.
Officer
James S. Metcalf, 49 President and Chief Executive Officer, L&W January 2006
President and Chief Operating Supply Corporation, to March 2002; Senior Vice
Officer President; President, Building Systems, to
February 2004; Executive Vice President;
President, Building Systems, to January 2006.
Edward M. Bosowski, 52 Senior Vice President, Marketing and Corporate January 2006
Executive Vice President and Chief Strategy; President, USG International, to
Strategy Officer; President, USG February 2004; Executive Vice President,
International Marketing and Corporate Strategy; President,
USG International, to January 2006.
Stanley L. Ferguson, 54 Senior Vice President and General Counsel to March 2004
Executive Vice President and February 2004.
General Counsel
Richard H. Fleming, 59 Same position. February 1999
Executive Vice President and
Chief Financial Officer
Brian J. Cook, 49 Vice President, Human Resources, to February February 2005
Senior Vice President, Human 2005.
Resources
</TABLE>
65
<PAGE>
<TABLE>
<CAPTION>
NAME, AGE AND PRESENT POSITION
PRESENT POSITION BUSINESS EXPERIENCE DURING THE LAST FIVE YEARS HELD SINCE
---------------- ---------------------------------------------- ----------------
<S> <C> <C>
Marcia S. Kaminsky, 48 Vice President, Communications, to February February 2005
Senior Vice President, 2005.
Communications
Dominic A. Dannessa, 50 Senior Vice President, CRM and Global Supply January 2006
Vice President; Executive Vice Chain, U.S. Gypsum Company, to August 2003;
President, Manufacturing, Building Senior Vice President, Manufacturing, U.S.
Systems Gypsum Company, to January 2006.
Brendan J. Deely, 41 Vice President, Operations, L&W Supply June 2005
Vice President; President and Chief Corporation, to April 2004; Senior Vice
Operating Officer, L&W Supply President and Chief Operating Officer, L&W
Corporation Supply Corporation, to June 2005.
Fareed A. Khan, 41 Vice President, Marketing & Business January 2006
Vice President; Executive Development, L&W Supply Corporation, to May
Vice President, Sales and 2002; Vice President, Marketing, U.S. Gypsum
Marketing, Building Systems Company, to October 2003; Senior Vice
President, Supply Chain & CRM and IT, U.S.
Gypsum Company, to January 2006.
Karen L. Leets, 50 Assistant Treasurer, McDonald's Corporation, March 2003
Vice President and Treasurer to March 2003.
D. Rick Lowes, 52 Vice President and Treasurer to October 2002. October 2002
Vice President and Controller
Peter K. Maitland, 65 Same position. February 1999
Vice President, Compensation,
Benefits and Administration
Donald S. Mueller, 59 Vice President of Research and Chief May 2006
Vice President, Research and Technology Officer, Ashland Specialty Chemical
Technology Innovation Co., to October 2003; Director, Industrial and
State Relations for Environmental Science
Institute, Ohio State University, to
December 2004; Vice President, Research
and Technology, to May 2006.
Clarence B. Owen, 58 Vice President, International and Technology, January 2003
Vice President and Chief to January 2003
Technology Officer
Ellis A. Regenbogen, 60 Chairman, Corporate and Securities Section, October 2006
Corporate Secretary and Godwin, Gruber L.P., law firm, to September
Associate General Counsel 2002; Law Offices of Ellis A. Regenbogen to
March 2004; Assistant General Counsel -
Corporate and Securities, Sears, Roebuck and
Co., to April 2005; Associate General Counsel
- Securities and Governance, Sears Holdings
Corporation, to April 2006; Associate General
Counsel and Assistant Secretary to
October 2006.
</TABLE>
66
<PAGE>
COMMITTEE CHARTERS AND CODE OF BUSINESS CONDUCT
Our Code of Business Conduct (applicable to directors, officers and employees),
our Corporate Governance Guidelines and the charters of the committees of our
Board of Directors, including the Audit Committee, Governance Committee and
Compensation and Organization Committee, are available in the "Investor
Information" section on our website at www.usg.com. Stockholders may request a
copy of these documents by writing to: Corporate Secretary, USG Corporation,
P.O. Box 6721, Chicago, IL 60680-6721. Any waivers of, or changes to, our Code
of Business Conduct applicable to executive officers, directors or persons
performing similar functions will be promptly disclosed in the "Investor
Information" section of our website.
Following the annual meeting of stockholders held on May 10, 2006, our
Chief Executive Officer filed a certificate with the NYSE certifying that he was
not aware of any violation by us of the NYSE's Corporate Governance Listing
Standards.
Other information required by this Item 10 is included under the headings
"Director Nominees and Directors Continuing in Office," "Committees of the Board
of Directors," "Audit Committee" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in the definitive Proxy Statement for our annual meeting
of stockholders scheduled to be held on May 9, 2007, which information is
incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Information required by this Item 11 is included under the heading "Compensation
of Executive Officers and Directors" in the definitive Proxy Statement for our
annual meeting of stockholders scheduled to be held on May 9, 2007, which
information is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth information about our common stock that may be
issued upon exercise of options under all of our equity compensation plans as of
December 31, 2006, including the Long-Term Incentive and Omnibus Management
Incentive Plans, both of which were approved by our 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 SECURITIES REPORTED
PLAN CATEGORY AND RIGHTS AND RIGHTS IN COLUMN ONE)
------------- ----------------------- ------------------- -----------------------
<S> <C> <C> <C>
Equity compensation plans
approved by stockholders 1,212,144 $43.62 6,692,400
Equity compensation
plans not approved by
stockholders -- -- --
--------- ------ ---------
Total 1,212,144 $43.62 6,692,400
========= ====== =========
</TABLE>
Other information required by this Item 12 is included under the headings
"Principal Stockholders" and "Security
67
<PAGE>
Ownership of Directors and Executive Officers" in the definitive Proxy Statement
for our annual meeting of stockholders scheduled to be held on May 9, 2007,
which information is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
Information required by this Item 13 is included under the heading "Certain
Relationships and Related Transactions" in the definitive Proxy Statement for
our annual meeting of stockholders scheduled to be held on May 9, 2007, which
information is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Information required by this Item 14 is included under the heading "Fees Paid to
the Independent Registered Public Accountant" in the definitive Proxy Statement
for our annual meeting of stockholders to be held on May 9, 2007, which
information is incorporated herein by reference.
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 our consolidated financial statements and supplementary
data schedule.
3. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- ------- ----------------------------------------------------------------------
<S> <C>
ARTICLES OF INCORPORATION AND BY-LAWS:
2.1 First Amended Joint Plan of Reorganization of USG Corporation and its
Debtor Subsidiaries (incorporated by reference to Exhibit 2.01 to USG
Corporation's Current Report on Form 8-K filed June 21, 2006, or the
June Form 8-K)
2.2 Order Confirming First Amended Joint Plan of Reorganization
(incorporated by reference to Exhibit 2.02 to the June Form 8-K)
3.1 Restated Certificate of Incorporation of USG Corporation (incorporated
by reference to Exhibit 3.0 to the June Form 8-K)
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 Current Report on Form 8-K
dated March 27, 1998)
3.3 Amended and Restated By-Laws of USG Corporation, dated as of January
1, 2007 **
</TABLE>
68
<PAGE>
<TABLE>
<S> <C>
INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES:
4.1 Form of Common Stock certificate **
4.2 Rights Agreement, dated as of December 21, 2006, between USG
Corporation and Computershare Investor Services, LLC, as Rights Agent
(incorporated by reference to Exhibit 4.1 to USG Corporation's
Registration Statement on Form 8-K, dated December 21, 2006)
4.3 Indenture, dated as of November 1, 2006, by and between USG
Corporation and Wells Fargo Bank, National Association, as trustee
(incorporated by reference to Exhibit 4.01 to USG Corporation's
Current Report on Form 8-K, dated November 20, 2006)
4.4 Supplemental Indenture No. 1, dated as of November 17, 2006, by and
between USG Corporation and Wells Fargo Bank, National Association, as
trustee (incorporated by reference to Exhibit 4.02 to USG
Corporation's Current Report on Form 8-K, dated November 20, 2006)
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) to Amendment No. 1 of USG Corporation's Registration Statement
No. 33-51845 on Form S-1) *
10.3 Second Amendment to Management Performance Plan, dated June 27, 2000
(incorporated by reference to Exhibit 10(a) to 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) to 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) to 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) to 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) to 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) to USG Corporation's
Quarterly Report on Form 10-Q, dated March 31, 2001) *
</TABLE>
69
<PAGE>
<TABLE>
<S> <C>
10.9 Fifth Amendment to Supplemental Retirement Plan, effective December
21, 2001 (incorporated by reference to Exhibit 10(i) to 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 to USG Corporation's
Current Report on Form 8-K, dated November 17, 2004) *
10.11 Form of Employment Agreement * **
10.12 Form of Change in Control Severance Agreement (Tier 1 Benefits) * **
10.13 Form of Change in Control Severance Agreement (Tier 2 Benefits) * **
10.14 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) *
10.15 Stock Compensation Program for Non-Employee Directors (as Amended and
Restated Effective as of January 1, 2005) of USG Corporation
(incorporated by reference to Exhibit 10.2 to USG Corporation's
Current Report on Form 8-K, dated November 14, 2005) *
10.16 Amendment No. 1 to the USG Corporation Stock Compensation Program for
Non-Employee Directors (as Amended and Restated as of January 1, 2005)
(incorporated by reference to Exhibit 10.1 to USG Corporation's
Quarterly Report on Form 10-Q for the quarter ended June 30, 2006, or
the second quarter 10-Q) *
10.17 Contingent Non-Negotiable Promissory Note of USG Corporation and its
Debtor Subsidiaries payable to the Asbestos Personal Injury Trust
dated June 20, 2006 in the principal amount of $3,050,000,000
(incorporated by reference to Exhibit 10.2 to the second quarter 10-Q)
10.18 Non-Negotiable Promissory Note of USG Corporation and its Debtor
Subsidiaries payable to the Asbestos Personal Injury Trust dated June
20, 2006 in the principal amount of $10,000,000 (incorporated by
reference to Exhibit 10.3 to the second quarter 10-Q)
10.19 Pledge Agreement Regarding Contingent Payment Note dated as of June
20, 2006 by and among USG Corporation and certain individuals in their
capacities as the Asbestos Personal Injury Trustees (the "Trustees")
(incorporated by reference to Exhibit 10.4 to the second quarter 10-Q)
10.20 Pledge Agreement Regarding Non-Contingent Note dated as of June 20,
2006 by and between USG Corporation and the Trustees (incorporated by
reference to Exhibit 10.5 to the second quarter 10-Q)
10.21 Credit Agreement, dated as of August 2, 2006 among USG Corporation,
the Lenders Party thereto, JPMorgan Chase Bank, N.A., as
Administrative Agent, and Goldman Sachs Credit Partners L.P., as
Syndication Agent, or the Credit Agreement (incorporated by reference
to Exhibit 10.6 to the second quarter 10-Q)
10.22 Guarantee Agreement dated as of August 2, 2006 among the Subsidiaries
of USG Corporation identified therein and JPMorgan Chase Bank, N.A.,
as Administrative Agent (incorporated by reference to Exhibit 10.7 to
the second quarter 10-Q)
10.23 Amendment No. 1 to the Credit Agreement, dated as of November 10,
2006 **
</TABLE>
70
<PAGE>
<TABLE>
<S> <C>
10.24 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) *
10.25 First Amendment to 1995 Long-Term Equity Plan of USG Corporation,
dated June 27, 2000 (incorporated by reference to Exhibit 10(b) to USG
Corporation's Quarterly Report on Form 10-Q, dated November 6, 2000) *
10.26 2006 Annual Management Incentive Program of USG Corporation, as
amended (incorporated by reference to Exhibit 10.1 to USG
Corporation's Current Report on Form 8-K, dated February 13, 2006) *
10.27 Omnibus Management Incentive Plan (incorporated by reference to Annex
A to USG Corporation's Proxy Statement and Proxy, dated March 28,
1997) *
10.28 First Amendment to Omnibus Management Incentive Plan, dated November
11, 1997 (incorporated by reference to Exhibit 10(p) to USG
Corporation's Annual Report on Form 10-K, dated February 20, 1998) *
10.29 Second Amendment to Omnibus Management Incentive Plan, dated as of
June 27, 2000 (incorporated by reference to Exhibit 10(c) to USG
Corporation's Quarterly Report on Form 10-Q, dated November 6, 2000) *
10.30 Third Amendment to Omnibus Management Incentive Plan, dated as of
March 25, 2004 (incorporated by reference to Exhibit 10.24 to USG
Corporation's Annual Report on Form 10-K, dated February 18, 2005) *
10.31 USG Corporation Deferred Compensation Plan * **
10.32 Key Employee Retention Plan (July 1, 2004 - December 31, 2005), dated
July 1, 2004 (incorporated by reference to Exhibit 10 to USG
Corporation's Quarterly Report on Form 10-Q, dated July 30, 2004) *
10.33 USG Corporation Long-Term Incentive Plan (incorporated by reference to
Annex C to the Proxy Statement for the Annual Meeting of Stockholders
of USG Corporation held on May 10, 2006, or the 2006 Proxy
Statement) *
10.34 Amendment No. 1 to the USG Corporation Long-Term Incentive Plan
(incorporated by reference to Exhibit 10.8 to the second quarter
10-Q) *
10.35 Form of USG Corporation Nonqualified Stock Option Agreement
(incorporated by reference to Exhibit 10.9 to the second quarter
10-Q) *
10.36 Form of USG Corporation Restricted Stock Units Agreement (incorporated
by reference to Exhibit 10.10 to the second quarter 10-Q) *
10.37 USG Corporation Management Incentive Plan (incorporated by reference
to Annex B to the 2006 Proxy Statement) *
10.38 USG Corporation 2006 Corporate Performance Plan, dated January 25,
2006 (incorporated by reference to Exhibit 10 to USG Corporation's
Current Report on Form 8-K, dated January 25, 2006) *
</TABLE>
71
<PAGE>
<TABLE>
<S> <C>
10.39 Equity Commitment Agreement, dated January 30, 2006, by and between
USG Corporation and Berkshire Hathaway Inc. (incorporated herein by
reference to USG Corporation's Current Report on Form 8-K, dated
January 30, 2006)
10.40 Shareholder's Agreement, dated January 30, 2006, by and between USG
Corporation and Berkshire Hathaway Inc. (incorporated herein by
reference to USG Corporation's Current Report on Form 8-K, dated
January 30, 2006)
10.41 Registration Rights Agreement, dated January 30, 2006, by and between
USG Corporation and Berkshire Hathaway Inc. (incorporated herein by
reference to USG Corporation's Current Report on Form 8-K, dated on
January 30, 2006)
10.42 Registration Rights Agreement, dated as of November 17, 2006, by and
among USG Corporation and Banc of America Securities LLC and Citigroup
Global Markets, as representatives for the initial purchasers
(incorporated herein by reference to Exhibit 10.01 to USG
Corporation's Current Report on Form 8-K, dated November 20, 2006)
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
** Filed or furnished herewith
72
<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 16, 2007
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 16, 2007
- -------------------------------------
WILLIAM C. FOOTE
Director, Chairman and Chief
Executive Officer
(Principal Executive Officer)
/s/ Richard H. Fleming February 16, 2007
- -------------------------------------
RICHARD H. FLEMING
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
/s/ D. Rick Lowes February 16, 2007
- -------------------------------------
D. RICK LOWES
Vice President and Controller
(Principal Accounting Officer)
JOSE ARMARIO, ROBERT L. BARNETT, ) By: /s/ Richard H. Fleming
KEITH A. BROWN, JAMES C. COTTING, ) ---------------------------------
LAWRENCE M. CRUTCHER, W. DOUGLAS FORD, ) Richard H. Fleming
DAVID W. FOX, VALERIE B. JARRETT, ) Attorney-in-fact
STEVEN F. LEER, MARVIN E. LESSER, ) February 16, 2007
JOHN B. SCHWEMM, JUDITH A. SPRIESER )
Directors )
73
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-3.3
<SEQUENCE>2
<FILENAME>c12346exv3w3.txt
<DESCRIPTION>AMENDED AND RESTATED BY-LAWS
<TEXT>
<PAGE>
EXHIBIT 3.3
BY-LAWS
OF
USG CORPORATION
(DELAWARE)
AS OF JANUARY 1, 2007
<PAGE>
BY-LAWS
OF
USG CORPORATION
ARTICLE I
OFFICES
The registered office of the corporation in the State of Delaware shall be
in the City of Wilmington, County of New Castle. The corporation may have such
other offices, either within or without the State of Delaware, as the business
of the corporation may require from time to time.
ARTICLE II
STOCKHOLDERS
ANNUAL MEETING
Section 1. The dates and times of the annual meetings of stockholders shall
be determined by or under the authority of the board of directors as permitted
by law for the purpose of electing directors and the transaction of such other
business as may properly come before the meeting. If the election of directors
shall not be held on the date designated for any such annual meeting or at any
adjournment thereof, the board of directors shall cause the election to be held
at a special meeting of the stockholders as soon thereafter as the board of
directors determines to be reasonably practicable.
SPECIAL MEETINGS
Section 2. Special meetings of the stockholders may be called at any time
by the chair of the board of directors or, if there shall be none then in
office, the chief executive officer of the corporation or by the corporate
secretary upon a request in writing of a majority of the number of directors as
determined from time to time by the board of directors under Section 2(b) of
Article III of these by-laws (the "whole board"). Any such request shall state
the purpose or purposes of the proposed meeting.
PLACE AND TIME OF MEETINGS
Section 3. Meetings of the stockholders for any purpose may be held at such
time and place, within or without the State of Delaware, as shall be determined
by the board of directors. Notwithstanding the foregoing, the board of directors
may, in its sole discretion, determine that meetings of stockholders will not be
held at any place, but will instead be held by means of remote communication,
subject to such guidelines and procedures as the board of directors may adopt
from time to time. The board of directors may postpone and reschedule any
previously scheduled annual or special meeting of stockholders.
<PAGE>
NOTICE OF MEETINGS
Section 4. Written notice stating the place, day and hour of the meeting,
the means of remote communication, if any, by which stockholders and proxies may
be deemed to be present in person and vote at such meeting and in the case of a
special meeting the purpose or purposes for which the meeting is called, shall
be given by mail or electronically to each stockholder entitled to vote thereat
not less than ten days nor more than 60 days before the date of the meeting.
Such notice, when mailed, shall be deemed to be delivered when deposited in the
United States mail in a sealed envelope addressed to the stockholder at such
stockholder's address as it appears in the records of the corporation, with
postage prepaid; if sent electronically, such notice shall be deemed given when
dispatched electronically to the email address of such stockholder it provided
to the corporation.
QUORUM, VOTE AND PROCEDURES
Section 5. (a) Except as may be otherwise provided in resolutions of the
board of directors providing for the issuance of any class or series of
preferred stock (a "preferred stock designation"), the holders of a majority of
the stock issued and outstanding and entitled to vote thereat, present in person
or represented by proxy, shall constitute a quorum at all meetings of the
stockholders for the transaction of business. If, however, such quorum shall not
be present or represented at any meeting of the stockholders, the stockholders
entitled to vote thereat, present in person or represented by proxy, shall have
power to adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present or represented. At
such adjourned meeting at which a quorum shall be present or represented, any
business may be transacted which might have been transacted at the meeting as
originally scheduled.
(b) When a quorum is present at any meeting, the vote of the holders
of a majority of the stock having voting power present in person or represented
by proxy and entitled to vote on the subject matter and which is actually so
voted shall decide any question brought before such meeting, unless the question
is one upon which by express provision of the certificate of incorporation, a
preferred stock designation, these by-laws, law or stock exchange requirements a
different vote is required, in which case such express provision shall govern
and control the decision of such question.
ORGANIZATION OF MEETING
Section 6. The chair of the board of directors, or such other officer of
the corporation designated by a majority of the whole board, shall call meetings
of the stockholders to order and shall act as presiding officer thereof. Unless
otherwise determined prior to the meeting by a majority of the whole board, the
presiding officer of the meeting of stockholders shall have the right and the
authority to determine and maintain the rules, regulations and procedures for
what the presiding officer determines to be the proper conduct of the meeting,
including without limitation restricting entry to the meeting after it has
commenced, maintaining order and the safety of those in attendance, opening and
closing the polls for voting, dismissing business or proposals not properly
submitted, limiting the time allowed for discussion of the business of the
meeting, restricting the persons (other than stockholders of the corporation or
their duly
2
<PAGE>
appointed proxies) that may attend the meeting and ascertaining whether any
stockholder or proxy may be excluded from the meeting based upon any
determination by the presiding officer, in his or her sole discretion, that the
stockholder or proxy has disrupted or is likely to disrupt the meeting. The
corporate secretary or such other officer designated by the presiding officer of
the meeting shall act as secretary of the meeting of stockholders.
VOTING OF STOCK
Section 7. Except as otherwise provided by a preferred stock designation,
on each matter submitted to a vote at a meeting of the stockholders, each holder
of voting stock shall be entitled to one vote in person or by proxy for each
share of common stock held by the stockholder on the record date for the meeting
and such votes may be cast either in person or by proxy. Every proxy must be
authorized in a manner permitted by Section 212 of the Delaware General
Corporation Law or any successor provision. In all elections for directors each
stockholder shall have the right to vote, in person or by proxy, the number of
shares owned by such stockholder for as many persons as there are directors to
be elected, but no stockholder may cumulate votes in the election of directors
or otherwise.
STOCKHOLDER LISTS
Section 8. The officer or agent having charge of the stock ledger for the
shares of the corporation shall prepare and make at least ten days before each
meeting of stockholders a complete list of the stockholders entitled to vote at
such meeting, arranged in alphabetical order with the post office mailing
address of and the number of shares registered in the name of each stockholder
(such list, the "stockholder list"). In no event, however, will the corporation
be required to include electronic mail addresses or other electronic contact
information on the stockholder list. The stockholder list shall be open to the
examination of any stockholder for any purpose germane to the meeting for a
period of at least ten days prior to the meeting (1) on a reasonably accessible
electronic network, if the information required to gain access to such list is
furnished with the notice of the meeting, or (2) during ordinary business hours,
at the principal place of business of the corporation. In the event that the
corporation determines, as evidenced by a determination of the presiding officer
for the meeting, to make the stockholder list available on an electronic
network, the corporation may take reasonable steps to ensure that such
information is available only to stockholders of the corporation. If the meeting
is to be held at a place, such list shall be produced and kept at the time and
place of the meeting during the whole time thereof and shall be subject to the
inspection of any stockholder who may be present. If the meeting is to be held
solely by means of remote communication, then the stockholder list will also be
open to the examination of any stockholder during the whole time of the meeting
on an electronic network approved by the presiding officer of the meeting, and
the information required to access such list shall be provided with the notice
of the meeting.
RECORD DATES
Section 9. (a) In order that the corporation may determine the stockholders
entitled to notice of or to vote at any meeting of stockholders or any
adjournment thereof, the board of directors may fix a record date, which will
not be more than 60 or less than ten calendar days before the date of such
meeting. If no record date is fixed by the board of directors, the record
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date for determining stockholders entitled to notice of or to vote at a meeting
of stockholders shall be at the close of business on the calendar day next
preceding the day on which notice is given, or, if notice is waived, at the
close of business on the calendar day next preceding the day on which the
meeting is held. A determination of stockholders of record entitled to notice of
or to vote at a meeting of the stockholders shall apply to any adjournment of
the meeting, although the board of directors may fix a new record date for the
adjourned meeting.
(b) In order that the corporation may determine the stockholders
entitled to receive payment of any dividend or other distribution or allotment
of any rights or the stockholders entitled to exercise any rights in respect of
any change, conversion or exchange of stock, or for the purpose of any other
lawful action, the board of directors may fix a record date, which record date
will not be more than 60 calendar days prior to such action. If no record date
is fixed, the record date for determining stockholders for any such purpose will
be at the close of business on the calendar day on which the board of directors
adopts the resolution relating thereto.
NOMINATIONS OF DIRECTORS
Section 10. (a) Subject to such rights of the holders of any class or
series of preferred stock as shall be prescribed in a preferred stock
designation, only persons who are nominated in accordance with the procedures
set forth in this Section 10 shall be eligible for election as directors.
(b) Nominations of persons for election as directors may be made only
at an annual meeting of stockholders (i) by or at the direction of the board of
directors, based on the recommendation of the Governance Committee (or, if
applicable, a subcommittee thereof), or (ii) by any stockholder of the
corporation that (A) is a stockholder of record at the time of giving of notice
provided for in this Section 10, (B) is entitled to vote at such meeting in the
election of directors, (C) is not a party to any agreement with the corporation
already providing for, or restricting or otherwise relating to, representation
on the board of directors or the voting or disposition of shares owned by it,
and (D) complies with the requirements of this Section 10. If a stockholder, or
a beneficial owner on whose behalf any such nomination is made, has provided the
corporation with a nomination solicitation notice, as that term is defined in
this Section 10, such stockholder or beneficial owner must have delivered to the
stockholders of the corporation a proxy statement and form of proxy and included
in such materials the nomination solicitation notice. All nominations made by
stockholders must be made pursuant to timely notice in proper written form to
the corporate secretary.
(c) To be timely, a stockholder's notice must be addressed to the
corporate secretary and delivered or mailed and in all events received at the
principal executive offices of the corporation not less than 60 nor more than 90
calendar days prior to the first anniversary of the date on which the
corporation first mailed its proxy materials for the preceding year's annual
meeting of stockholders, except that if the date of the annual meeting is
advanced more than 30 calendar days prior to or delayed by more than 30 calendar
days after the anniversary of the preceding year's annual meeting, notice by the
stockholder to be timely must be so received not later than the close of
business on the later of the 90th calendar day prior to such annual meeting and
the tenth calendar day following the day on which public disclosure of the date
of such
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meeting is first made. In no event will the public announcement of an
adjournment of an annual meeting commence a new time period for the giving of a
stockholder's notice as described above.
(d) To be in proper written form, such stockholder's notice must set
forth or include (i) the name and address, as they appear on the corporation's
books, of the stockholder giving the notice and of the beneficial owner, if any,
on whose behalf the nomination is made; (ii) a representation that the
stockholder giving the notice is a holder of record of stock of the corporation
entitled to vote at such annual meeting and intends to appear in person or by
proxy at the annual meeting to nominate the person or persons specified in the
notice; (iii) the class and number of shares of stock of the corporation owned
beneficially and of record by the stockholder giving the notice and by the
beneficial owner, if any, on whose behalf the nomination is made; (iv) a
description of all arrangements or understandings between or among any of (A)
the stockholder giving the notice, (B) the beneficial owner on whose behalf the
notice is given, (C) each nominee, and (D) any other person or persons (naming
such person or persons) pursuant to which the nomination or nominations are to
be made by the stockholder giving the notice; (v) such other information
regarding each nominee proposed by the stockholder giving the notice as would be
required to be included in a proxy statement filed pursuant to the proxy rules
of the Securities and Exchange Commission had the nominee been nominated, or
intended to be nominated, by the board of directors; (vi) the signed consent of
each nominee to serve as a director if so elected; (vii) whether either such
stockholder or beneficial owner intends to deliver a proxy statement and form of
proxy to the stockholders of the corporation (an affirmative statement of such
intent, a "nomination solicitation notice"); (viii) a representation that such
stockholder intends to appear in person or by proxy at the meeting to nominate
each person named in the stockholder's notice for election as a director; and
(ix) evidence reasonably satisfactory to the presiding officer of the meeting
that the stockholder is acting on its own behalf and not on behalf of or in
concert with any other person, unless such other person is eligible to submit
such nomination and does so in accordance with this Section 10. At the request
of the board of directors or its chair, any person nominated for election as a
director must furnish to the corporate secretary that information required to be
set forth in a stockholder's notice of nomination that pertains to the nominee.
For purposes of these by-laws, "public disclosure" means disclosure in a press
release reported by the Dow Jones News Service, Associated Press or comparable
national news service or in a document filed by the corporation with the
Securities and Exchange Commission pursuant to the Exchange Act of 1934 and the
rules and regulations thereunder (the "Exchange Act") or furnished by the
corporation to its stockholders.
(e) The presiding officer of the annual meeting of stockholders shall
determine whether the requirements of this Section 10 have been met with respect
to any nomination or intended nomination. If the presiding officer determines
that any nomination was not made in accordance with the requirements of this
Section 10, he or she shall advise the stockholder making the nomination and the
nominee will not be presented at the meeting of stockholders. In all events,
copies of the materials provided hereunder shall be furnished to the Governance
Committee by the corporate secretary or another officer of the corporation.
(f) Notwithstanding any other provision of these by-laws or applicable
law absent this provision, (i) a stockholder making a nomination under this
Section 10 must also comply with all applicable requirements of the Exchange Act
with respect to the matters set forth in this
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Section 10 and (ii) any nomination for election of directors to the board of
directors will be invalid if and to the extent that, giving effect thereto and
to the election of the nominees so designated, together with the nominees
approved by the Governance Committee, the composition of the board of directors
would not meet the criteria for the composition of the board of directors
hereinafter set forth. In the event that corporate secretary or in his or her
absence or failure to act any other officer of the corporation determines that a
nomination was made in accordance with these by-laws and applicable law except
for compliance with such board composition requirements, the corporate secretary
or such other officer shall so inform the stockholder making the nomination and
the nominee will not be presented at the meeting of stockholders.
BUSINESS TO BE CONDUCTED OR CONSIDERED AT STOCKHOLDERS MEETINGS
Section 11. (a) At an annual meeting of stockholders, only such business
may be conducted or considered, and only such proposals may be acted upon, as
are properly brought before the annual meeting. To be properly brought before an
annual meeting, the business or proposal must be (i) specified in the notice of
the annual meeting (or any supplement thereto) given in accordance with Section
4 of Article II of these by-laws, (ii) otherwise properly brought before the
annual meeting by the presiding officer or by or at the direction of a majority
of the whole board, or (iii) otherwise properly requested to be brought before
the annual meeting by a stockholder of the corporation in accordance with this
Section 11.
(b) For business to be properly requested by a stockholder to be
brought before an annual meeting of stockholders, (i) the stockholder must be a
stockholder of the corporation of record at the time of the giving of the notice
for such annual meeting provided for in these by-laws, (ii) the stockholder must
be entitled to vote at such meeting, (iii) the stockholder must have given
timely notice thereof in proper written form to the corporate secretary, and
(iv) if the stockholder, or the beneficial owner on whose behalf any business is
brought before the meeting, has provided the corporation with a proposal
solicitation notice, as that term is defined in this Section 11, such
stockholder or beneficial owner must have delivered to the stockholders a proxy
statement and form of proxy and included in such materials the proposal
solicitation notice.
(c) To be timely, a stockholder's notice must be addressed to the
corporate secretary and delivered to or mailed and in all events received at the
principal executive offices of the corporation not less than 60 nor more than 90
calendar days prior to the first anniversary of the date on which the
corporation first mailed its proxy materials for the preceding year's annual
meeting of stockholders, except that if the date of the annual meeting is
advanced more than 30 calendar days prior to or delayed by more than 30 calendar
days after the anniversary of the preceding year's annual meeting, notice by the
stockholder to be timely must be so received not later than the close of
business on the later of the 90th calendar day prior to such annual meeting or
the tenth calendar day following the day on which public disclosure of the date
of such meeting is first made. In no event will the public announcement of an
adjournment of an annual meeting commence a new time period for the giving of a
stockholder's notice as described above.
(d) To be in proper written form, a stockholder's notice to the
corporate secretary must set forth as to each matter the stockholder proposes to
bring before the annual meeting (i) a
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description in reasonable detail of the business desired to brought before the
annual meeting and the reasons for conducting such business at the annual
meeting; (ii) the name and address, as they appear on the corporation's books,
of the stockholder proposing such business and the beneficial owner, if any, on
whose behalf the proposal is made; (iii) the class and series and number of
shares of capital stock of the corporation that are owned beneficially and of
record by the stockholder proposing such business and by the beneficial owner,
if any, on whose behalf the proposal is made; (iv) a description of all
arrangements or understandings among such stockholder and any other person or
persons (including their names) in connection with the proposal of such business
by such stockholder and any material interest of such stockholder in such
business; (v) whether either such stockholder or beneficial owner intends to
deliver a proxy statement and form of proxy to the stockholders of the
corporation (an affirmative statement of such intent, a "proposal solicitation
notice"); and (vi) a representation that such stockholder intends to appear in
person or by proxy at the annual meeting to bring such business before the
annual meeting. Notwithstanding the foregoing provisions of this Section 11, a
stockholder must also comply with all applicable requirements of the Exchange
Act with respect to matters set forth in this Section 11. Nothing in this
Section 11 shall be deemed to affect any rights of stockholders to request
inclusion of proposals in the corporation's proxy statement pursuant to Rule
14a-8 under the Exchange Act.
(e) At a special meeting of stockholders, only such business may be
conducted or considered as is properly brought before the meeting. To be
properly brought before a special meeting of stockholders, business must be (i)
specified in the notice of the meeting (or any supplement thereto) given by or
at the direction of the chair of the board of directors, the president or a
majority of the whole board in accordance with Section 4 of Article II of these
by-laws or (ii) otherwise properly brought before the meeting by the presiding
officer or by or at the direction of a majority of the whole board.
(f) The presiding officer of the meeting shall determine whether the
requirements of this Section 11 have been met with respect to any business or
proposal sought to be brought before the meeting. If the presiding officer of
the meeting determines that any business or proposal is not properly brought
before the meeting, he or she shall so inform the stockholder proposing the
business or proposal and any such business shall not be conducted or considered
or any such proposal shall not be acted upon at the meeting. In all events,
copies of the materials provided hereunder shall be furnished to the Governance
Committee by the corporate secretary or another officer of the Company.
(g) The recommendation of the Governance Committee (or, if applicable,
a subcommittee thereof) as to how stockholders should vote in the matter
referred to herein or in the preceding Section 10, or, if applicable, its
decision not to make such a recommendation, shall be communicated to
stockholders or, if determined to be impracticable by the chair of the
Governance Committee, publicly disclosed by the corporation. Nothing herein or
in the preceding Section 10 shall require that proxies be solicited by or on
behalf of the corporation or the board of directors in respect of any matters
proposed under Sections 10 or 11, whether or not the Governance Committee (or,
if applicable, a subcommittee thereof) makes a recommendation in respect
thereof.
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ARTICLE III
DIRECTORS
GENERAL POWERS
Section 1. The business and affairs of the corporation shall be managed
under the direction of the board of directors.
NUMBER, CLASSES, AND QUALIFICATIONS
Section 2. (a) The number of directors which shall constitute the whole
board shall be not less than nine or more than 13 and shall be divided into
three classes, as nearly equal in number as practicable.
(b) Subject to Section 2(a) of this Article III, the number and
classes of directors shall be determined from time to time by resolution of the
board of directors.
(c) At each annual meeting of stockholders, directors shall be elected
to fill all seats in the class whose term expires at such annual meeting and
each director so elected shall hold office for a term expiring at the third
annual meeting of stockholders after election as a director and until a
successor shall be duly elected and qualified.
(d) No non-employee director shall serve as such beyond the first
annual meeting of stockholders following that director's 70th birthday, unless a
majority of the board of directors shall determine to suspend application of
this limitation with respect to one or more individual directors, nor while such
person is an owner, member or employee of or affiliated or associated with a
firm that since January 1st of the last full calendar year has provided or is
providing legal, accounting or auditing services to the corporation or any of
its subsidiaries. A non-employee director shall report to the chair of the
Governance Committee any significant change in such director's principal
business, occupation or position and shall consult with the chair of the
Governance Committee concerning the possible effect of such change on continued
service as a director. No officer director shall serve as a director beyond the
date such person ceases to be an officer.
(e) A majority of the whole board shall be comprised of independent
directors. In the event that a majority of the whole board is not comprised of
independent directors by reason of a resignation, retirement, removal, change in
the composition of the board or other event, then as promptly as practicable
thereafter the remaining independent directors, whether or not a majority of the
whole board or the directors then in office, shall elect another independent
director or directors to assure that a majority of the whole board is comprised
of independent directors. No action requiring approval by a majority of the
independent directors or of any board committee a majority of the members of
which are required to be independent directors may be taken by the board or any
such committee, unless either (i) the chair of the board of directors determines
that so doing is necessary to avoid or mitigate material damage or risk of
damage to the corporation or (ii) a majority of the whole board shall determine
to suspend application of this limitation with respect to one or more individual
directors.
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(f) For purposes of these by-laws, (i) "non-employee director" means
any director who is not also a full-time employee of the corporation or any of
its subsidiaries, (ii) "officer director" means a director who is also an
elected officer of the corporation or any of its subsidiaries, and (iii)
"independent director" means any director who has been nominated for election by
the Governance Committee and who is not (1) an officer or employee of the
corporation or an officer, employee or director of any subsidiary of the
corporation, (2) an owner, member or employee of a law or accounting firm
referred to in Section 2(d) of this Article III, (3) elected, nominated or
proposed (A) pursuant to a stockholder or other agreement to which the
corporation is a party or a preferred stock designation or (B) by a beneficial
owner of more than 15% of the corporation's then-outstanding common stock,
unless the number of shares beneficially owned by such person was increased to
an amount in excess of 15% of the then-outstanding common stock solely as a
result of share purchases by the corporation that reduced the number of shares
then-outstanding, or (4) a person who does not, or is presumed not to, meet the
requirements of an "independent director" under the then-applicable requirements
of the principal national securities exchange on which the corporation's common
stock is admitted for trading. The terms "person" and "beneficial owner" are
defined in Section 10 (b) of this Article.
(g) A majority of the whole board may, following review by the
Governance Committee, from time to time adopt policies or protocols on various
corporate governance matters, including procedures applicable in the event of
corporate emergencies. Subject to applicable legal and stock exchange
requirements, such policies or protocols may impose requirements that are more
stringent in purpose or effect than those imposed by these by-laws or authorize
notices to be given, meetings to be convened or other actions to be taken
between regularly scheduled meetings of the board of directors by officers or
directors other then those specified in the by-laws if the officer or director
otherwise authorized herein is unavailable to act because of death, disability
or other similar circumstances. Except as aforesaid, such policies and protocols
will in all events be subject to these by-laws and in the event of an
inconsistency between them and these by-laws, the by-laws will prevail with
regard to questions of whether an action by the board of directors is authorized
as a matter of law.
VACANCIES
Section 3. Newly created directorships resulting from any increase in the
authorized number of directors and any vacancy on the board of directors from
death, resignation, retirement, disqualification, removal from office or other
cause shall be filled by a majority vote of the directors then in office, based
upon the recommendation of the Governance Committee (or, if applicable, a
subcommittee thereof). Each director so chosen shall hold office for a term
expiring at the annual meeting of stockholders at which the term of the class to
which he or she shall have been elected expires, and until his or her successor
shall be duly elected and qualified.
REGULAR MEETINGS
Section 4. Regular meetings of the board of directors shall be held each
year immediately after the annual meeting of stockholders and on such other
dates as the board of directors may from time to time determine. If the day
fixed for any such regular meeting shall be a legal holiday, the meeting
scheduled for that day shall be held on the next succeeding business
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day which is not a legal holiday. The date and time of any such regular meeting
may be changed as the board of directors may from time to time determine by
resolution.
SPECIAL MEETINGS
Section 5. Special meetings of the board of directors may be called at any
time by the chair of the board of directors or, if there be none then in office,
the chief executive officer or by the corporate secretary upon the request of
not less than a majority of the whole board.
PLACE OF MEETINGS
Section 6. All meetings of the board of directors, whether regular or
special, shall be held at the principal executive offices of the corporation in
Chicago, Illinois, except that any meeting, whether regular or special, may be
held at such other place as a majority of the whole board may from time to time
determine by resolution or as may be fixed in a notice of the meeting.
NOTICE OF MEETINGS
Section 7. No notice of the holding of any regular meeting of the board of
directors is required. Written notice of any special meeting shall be given by
telephone facsimile or electronic mail not less than two days before the date of
the meeting, or by telephone not less than 24 hours before the time of the
meeting, with confirmation of notice by telephone facsimile or electronic mail
to be sent promptly. If such notice is given by telephone facsimile or
electronic mail, the same shall be deemed to be delivered when placed on
telephone lines for facsimile transmittal or electronic mail to the director at
the number or e-mail address therefor last shown in the corporation's records.
Notice may also be given by a nationally recognized overnight courier service,
which shall be deemed effective on the date of service specified therein, or may
be given by first-class postage prepaid mail so long as the meeting date is at
least ten business days after the date of posting. Attendance of any director at
any special meeting shall constitute a waiver of notice of such meeting except
where a director attends a meeting for the express purpose of objecting to the
transaction of any business on the ground that the meeting is not lawfully
called or convened. Neither the business to be transacted at nor the purpose of
any special meeting of the board of directors need be stated in the notice or
waiver of notice of such meeting.
QUORUM
Section 8. A majority of the whole board shall constitute a quorum for the
transaction of business, but if at any meeting of the board there shall be less
than a quorum present, a majority of those present may adjourn the meeting from
time to time.
ORGANIZATION OF MEETINGS
Section 9. (a) At meetings of the board of directors, the chair of the
board of directors, or in his or her absence the director so designated by a
majority of the directors participating in the meeting, shall preside as chair
of the meeting. The corporate secretary of the corporation, or in his or her
absence an assistant corporate secretary, shall act as secretary of all meetings
of the
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board of directors and, in the absence of all such persons, the chair of the
meeting shall appoint some other person to act as secretary of the meeting.
(b) From time to time as they deem appropriate and in all events not
less frequently than annually, the independent directors shall meet in executive
session to discuss such matters as they may deem appropriate. The chairs of
these sessions shall be selected by the independent directors on such basis as
they may deem appropriate.
ACTIONS OF THE BOARD
Section 10. (a) Except as provided elsewhere in these by-laws, any action
approved by plurality vote of the directors present at any meeting of the
directors at which a quorum is present will be an action of the board of
directors. When action is contemplated herein to be taken by the whole board, it
shall be deemed to be properly authorized if approved by a majority of the
number of directors constituting the whole board.
(b) In addition to other approvals required hereby, the following
matters may be approved only by the vote or consent of the board of directors
which includes the vote or consent of directors constituting a majority of the
independent directors then members of the board:
(i) the election of the chair of the board of directors and the
chief executive officer (who may, but are not required to, be the same
person);
(ii) the designation of any director as an independent director;
(iii) the appointment of members of the Audit, Compensation and
Organization and Governance Committees;
(iv) the approval of any amendment to these by-laws by the board
of directors; and
(v) the approval of any change in the remuneration of directors.
(c) For purposes hereof, the terms "person" and "beneficial ownership"
shall have the meanings given to these terms under Section 13(d) of the Exchange
Act, provided, however, that (A) to assure that the independence requirements
herein do not have the unintended effect of inhibiting lawful proxy contests, a
person shall not be deemed to "beneficially own" any voting stock solely by
reason of a revocable proxy obtained in accordance with applicable legal
requirements and (B) to assure that the provisions herein do not have the effect
of expanding the antitakeover effects of the classified term provisions of the
corporation's certificate of incorporation in certain circumstances, paragraph
(c) of Section 2 of this Article and this Section 10 shall cease to apply,
without further action, immediately after the second annual meeting of
stockholders after the date, if applicable, on which any person acquires more
than 15% of the outstanding voting stock of the corporation pursuant to a tender
offer made in accordance with Sections 14(d) of the Exchange Act.
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COMPENSATION OF DIRECTORS
Section 11. Each director not otherwise employed by the corporation or an
affiliated corporation shall be entitled to be paid expenses, if any, of
attendance at such meetings of the board of directors or any board committee and
remuneration for service as a director as determined from time to time by the
board of directors (subject to Section 10(b)(v) of this Article), including fees
for attendance at meetings of the board or board committees as the board of
directors may from time to time determine.
ARTICLE IV
COMMITTEES OF DIRECTORS
DESIGNATION OF STANDING COMMITTEES
Section 1. The corporation shall have the following standing committees: a
Compensation and Organization Committee (the charter for which is set forth in
Annex 1), an Audit Committee (the charter for which is set forth in Annex 2), a
Governance Committee (the charter for which is set forth in Annex 3), a Finance
Committee (the charter for which is set forth in Annex 4) and a Corporate
Affairs Committee (the charter for which is set forth in Annex 5). Each board
committee shall have the authority set forth in its charter, as from time to
time approved by the whole board following review by the Governance Committee
and the particular Committee affected thereby and as provided by applicable law
or stock exchange requirements. Requirements for committee composition, if
applicable, shall be set forth in the applicable charter, subject to applicable
legal and stock exchange requirements. Subject to any applicable legal and stock
exchange requirements, each board committee may from time to time appoint such
subcommittees as it deems appropriate from among its members.
OTHER COMMITTEES OF DIRECTORS
Section 2. The board of directors may, by resolution passed by a majority
of the whole board, designate from time to time other committees of the board of
directors of such number of directors and with such powers as the board of
directors may by resolution determine, except that any authority or power given
to any of the Audit Committee, the Compensation and Organization Committee, the
Finance Committee or the Governance Committee in these by-laws, including any
Annex hereto, by resolution of the board of directors or by law or stock
exchange requirements may be exercised only by that committee, and no other
committee or the board or directors itself may take any action to the extent
inconsistent therewith.
APPOINTMENT OF COMMITTEE MEMBERS
Section 3. The board of directors at its meeting following the annual
meeting of stockholders shall, upon approval of a majority of the whole board
and based on the recommendation of the Governance Committee, designate the
directors to constitute the membership of each standing committee and such
directors shall serve until the directors meeting following the next annual
meeting of stockholders, except that (a) vacancies during the year on any
standing committee shall be filled by the board of directors based upon the
recommendation of the Governance Committee (or, if applicable, a subcommittee
thereof) so
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that the membership of each committee shall be filled at all times and (b) in
the absence or disqualification of any member of a committee, the members of
that committee present at any meeting and not disqualified from voting, whether
or not constituting a quorum, may unanimously appoint another member of the
board of directors to act at the meeting in the place of the absent or
disqualified member. The chair of each committee shall be designated by action
of a majority of the whole board based on the recommendation of the Governance
Committee (or, if applicable, a subcommittee thereof).
MEETINGS -- QUORUM
Section 4. Meetings of each board committee may be called by its chair or
by any two members of the committee or by the chief executive officer of the
corporation or by resolution of the whole board. Each such committee shall fix
its own rules of procedure consistent with these by-laws and, as applicable, the
applicable charters annexed hereto. The presence of a majority of the members of
a committee shall be necessary to constitute a quorum for the transaction of
business, and the affirmative vote of a majority of all the members of the
committee present at a duly convened committee meeting shall be necessary for
the adoption of any resolution or the taking of any action. Each committee shall
report to the board of directors all actions of the committee at the next
directors meeting following any meeting of any such committee. Regular minutes
of the proceedings of each committee shall be kept in a book provided for that
purpose.
ARTICLE V
OFFICERS
GENERAL PROVISIONS
Section 1. The officers of the corporation shall be elected by the board of
directors (subject to Section 10 of Article III), and shall consist of a chair
of the board of directors, who, unless the board of directors specifies
otherwise, shall also be the chief executive officer, a president, who may also
be the chair of the board of directors or the chief executive officer, a
corporate secretary and a treasurer. The board of directors may also elect one
or more vice or deputy chairs, one or more vice presidents (who may be given
particular designations with respect to authority, function or seniority) and
such other officers as the board of directors may from time to time determine.
Notwithstanding the foregoing, by specific action, the board of directors may
authorize the chair of the board of directors to appoint any person to any
office other than chair of the board of directors, president, corporate
secretary or treasurer. Any number of offices may be held by the same person.
Any of the offices may be left vacant from time to time as the board of
directors may determine or by reason of a vacancy. In the case of the absence or
disability of any officer of the corporation or for any other reason deemed
sufficient by a majority of the board of directors, the board of directors may
delegate the absent or disabled officer's powers or duties to any other officer
or to any director.
COMPENSATION
Section 2. The compensation of the chief executive officer of the
corporation shall be fixed by the board of directors (by vote of the independent
directors only) upon the
13
<PAGE>
recommendation of the Compensation and Organization Committee. The board of
directors shall fix, or delegate the power to fix, the compensation of other
officers of the corporation.
SUCCESSION
Section 3. The officers of the corporation shall hold office, unless
removed by the board of directors, until their successors are elected and
qualified. Any officer may be removed at any time by the affirmative vote of a
majority of the whole board. Any vacancy occurring in any office of the
corporation may be filled by the board of directors or by the chair of the board
of directors as provided in Section 1 of this Article.
AUTHORITY
Section 4. Each of the officers of the corporation shall have such
authority and shall perform such duties as are customarily incident to their
respective offices or as may be specified from time to time by the board of
directors.
ARTICLE VI
CERTIFICATES OF STOCK - DIVIDENDS
Section 1. (a) Unless otherwise directed by the board of directors or its
chair, every holder of stock in the corporation shall be entitled to have a
certificate signed in the name of the corporation by the chair of the board of
directors or the president and the corporate secretary or an assistant corporate
secretary, certifying the number of shares owned by him in the corporation. If
such certificate is countersigned (i) by a transfer agent other than the
corporation or its employee or (ii) by a registrar other than the corporation or
its employee, any other signature on the certificate may be a facsimile. In case
any officer, transfer agent, or registrar who has signed or whose facsimile
signature has been placed upon a certificate shall have ceased to be such
officer, transfer agent or registrar before such certificate is issued, the
certificate may be issued by the corporation with the same effect as if he were
such officer, transfer agent or registrar at the date of issue.
(b) All certificates surrendered to the corporation for transfer shall
be canceled and no new certificate shall be issued until the former certificate
for a like number of shares of the same class has been surrendered and canceled
or properly accounted for in the case of a lost certificate.
TRANSFER OF SHARES
Section 2. Upon surrender to the corporation or transfer agent of the
corporation of a certificate of shares duly endorsed and accompanied by proper
evidence of succession, assignment or authority to transfer, it shall be the
duty of the corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books.
The board of directors may appoint one or more transfer agents and registrars of
transfer, and may require all stock certificates to bear the signature of a
transfer agent and of a registrar of transfers.
14
<PAGE>
REGISTERED STOCKHOLDERS
Section 3. The corporation shall be entitled to recognize the exclusive
right of a person registered on its books as the owner of shares to receive
dividends and to vote as such owner, and to hold liable for calls and
assessments a person registered on its books as the owner of shares, and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of any other person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware or elsewhere in these by-laws.
DIVIDENDS
Section 4. Dividends upon the capital stock of the corporation, subject to
the provisions, if any, of the certificate of incorporation, may be declared by
the board of directors at any regular or special meeting pursuant to law.
Dividends may be paid in cash, in property or in shares of capital stock,
subject to the provisions of the certificate of incorporation.
ARTICLE VII
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The corporation (i) shall indemnify every person who is or was a director
or officer of the corporation or is or was serving at the corporation's request
as a director or officer of another corporation, partnership, joint venture,
trust or other enterprise and (ii) shall, if the board of directors so directs,
indemnify any person who is or was an employee or agent of the corporation or is
or was serving at the corporation's request as an employee or agent of another
corporation, partnership, joint venture, trust or other enterprise to the
extent, in the manner, and subject to compliance with the applicable standards
of conduct, provided by Section 145 of the General Corporation Law of the State
of Delaware as the same (or any substitute provision therefor) may be in effect
from time to time. Without limiting the foregoing, the corporation shall
indemnify, and (subject to the receipt of any required undertaking to repay
expenses) advance expenses to, every person who is or was a director or officer
of the corporation to the fullest extent permitted by law.
Such indemnification (i) shall not be deemed exclusive of any other rights
to which any person seeking indemnification under or apart from this Article VII
may be entitled under any by-law, agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in his or her official
capacity and as to action in another capacity while holding such office, and
(ii) shall continue as to a person who has ceased to be a director, officer,
employee or agent and shall inure to the benefit of the heirs, executors and
administrators of such a person.
15
<PAGE>
ARTICLE VIII
GENERAL PROVISIONS
CHECKS
Section 1. All checks or demands for money and notes of the corporation
shall be signed by such officer or officers, or such other person or persons, as
the board of directors may from time to time designate.
FISCAL YEAR
Section 2. The fiscal year of the corporation shall begin on the first day
of January of each year and end at the close of the last day of December in the
same year.
SEAL
Section 3. The corporate seal shall have inscribed thereon the name of the
corporation, the year of its organization and the words "Corporate Seal,
Delaware". The seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise.
WAIVER OF NOTICE
Section 4. Whenever any notice whatever is required to be given under the
provisions of the statutes or of the certificate of incorporation or of these
by-laws, a waiver thereof in writing, signed by the person or persons entitled
to said notice, whether before or after the time stated therein, shall be deemed
equivalent thereto.
ARTICLE IX
AMENDMENTS
These by-laws may be amended or repealed (i) subject to Article TWELFTH of
the corporation's certificate of incorporation and Section 10 of Article III of
these by-laws, by the affirmative vote of a majority of the whole board or (ii)
by the affirmative vote of the holders of 80% of the voting power of the
corporation's stock outstanding and entitled to vote thereon.
16
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-4.1
<SEQUENCE>3
<FILENAME>c12346exv4w1.txt
<DESCRIPTION>FORM OF COMMON STOCK CERTIFICATE
<TEXT>
<PAGE>
EXHIBIT 4.1
COMMON STOCK COMMON STOCK
PAR VALUE $.10 PER SHARE THIS CERTIFICATE IS
TRANSFERABLE IN
CANTON MA AND JERSEY
CITY NJ
Certificate
Number Shares
**600620******
WWWW 00000000 ***600620*****
****600620****
*****600620***
******600620**
USG Corporation
INCORPORATED UNDER THE LAWS OF THE STATE
OF DELAWARE
THIS CERTIFIES THAT MR. SAMPLE & MRS. SAMPLE & CUSIP 903293 40 5
MR. SAMPLE & MRS. SAMPLE
SEE REVERSE FOR CERTAIN
DEFINITIONS
is the owner of ***SIX HUNDRED THOUSAND SIX HUNDRED AND TWENTY SIX***
FULLY-PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK OF
USG Corporation (hereinafter called the "Corporation"), transferable on the
books of the Corporation by the owner in person or by duly authorized attorney
upon surrender of this Certificate properly endorsed. This Certificate and the
shares represented hereby are issued and shall be held subject to all of the
provisions of the Certificate of Incorporation of the Corporation and all
amendments thereto (copies of which are on file with the Transfer Agent), to all
of which each holder, by acceptance hereof, assents. This Certificate is not
valid unless countersigned by the Transfer Agent and registered by the
Registrar.
In Witness Whereof, the Corporation has caused this Certificate to be signed by
its duly authorized officers, and its corporate seal to be hereunto affixed.
Chairman of the Board and Chief Executive Officer
DATED (Month Day, Year)
COUNTERSIGNED AND REGISTERED:
COMPUTERSHARE INVESTOR SERVICES,
LLC.
(CHICAGO)
TRANSFER AGENT AND REGISTRAR
Corporate Secretary
Corporate Secretary
<PAGE>
USG Corporation
This Certificate also evidences and entitles the holder hereof to certain Rights
as set forth in a Rights Agreement, dated as of December 21, 2006 (the "Rights
Agreement"), adopted by USG Corporation, the terms of which are hereby
incorporated herein by reference and a copy of which is on file at the principal
executive offices of USG Corporation. The Rights are not exercisable prior to
the occurrence of certain events specified in the Rights Agreement. Under
certain circumstances, as set forth in the Rights Agreement, such Rights may be
redeemed, may be exchanged, may expire, may be amended, or may be evidenced by
separate certificates and no longer be evidenced by this Certificate. USG
Corporation will mail to the holder of this Certificate a copy of the Rights
Agreement, as in effect on the date of mailing, without charge promptly after
receipt of a written request therefore. Under certain circumstances as set forth
in the Rights Agreement, Rights that are or were beneficially owned by an
Acquiring Person or any Affiliate or Associate of an Acquiring Person (as such
terms are defined in the Rights Agreement) may become null and void.
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT- ___________ Custodian
TEN ENT - as tenants by the entireties under Uniform Gifts to Minors Act
JT TEN - as joint tenants with right UNIF TRF MIN ACT Custodian (until age ___)
of survivorship
and not as tenants in common (Cust)
(Minor) under Uniform Transfers to Minors Act ____
(State)
</TaBLE>
Additional abbreviations may also be used though not in the above list.
The Corporation will furnish without charge to each stockholder who so requests
the designations, preferences and relative, participating, optional or other
special rights of each class of stock or series of the Corporation and the
qualifications, limitations or restrictions of such preferences and rights. Such
request may be made to the corporation, at its headquarters, Chicago,
Illinois.
keep this certificate in a safe place. if it is lost, stolen or destroyed the
corporation may require a bond of indemnity as a condition to the issuance of a
replacement certificate.
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
For value received, ____________ hereby sell, assign and transfer unto
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint Shares
to transfer the said stock on the books of the within-named Corporation with
full power of substitution in the premises.
Attorney Signature(s) Guaranteed: Medallion
Guarantee Stamp THE SIGNATURE(S) SHOULD
BE GUARANTEED BY AN ELIGIBLE GUARANTOR
Dated: __________ 20__ INSTITUTION (Banks, Stockbrokers,
Savings and Loan Associations and Credit
Unions) WITH MEMBERSHIP IN AN APPROVED
SIGNATURE GUARANTEE MEDALLION PROGRAM,
Signature: PURSUANT TO S.E.C. RULE 17Ad-15.
--------------------------
Signature:
--------------------------
Notice: The signature to this assignment
must correspond with the name as written
upon the face of the certificate, in
every particular, without alteration or
enlargement, or any change whatever.
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.11
<SEQUENCE>4
<FILENAME>c12346exv10w11.txt
<DESCRIPTION>FORM OF EMPLOYMENT AGREEMENT
<TEXT>
<PAGE>
EXHIBIT 10.11
USG CORPORATION
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT (this "Agreement") is effective as of January 1,
2007 (the "Effective Date") between USG Corporation, a Delaware corporation (the
"Company"), and ___________________ (the "Executive").
RECITALS:
WHEREAS, the Company desires to employ the Executive and the Executive
desires to accept such employment with the Company;
WHEREAS, as of the Effective Date, the Company shall employ the Executive
on the terms and conditions set forth in this Agreement, and the Executive shall
be retained and employed by the Company to perform services under the terms and
conditions of this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants contained herein
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto agree as follows:
1. Certain Definitions. Certain words or phrases with initial capital letters
not otherwise defined herein shall have the meanings set forth in Section 9
hereof.
2. Employment. The Company shall employ the Executive, and the Executive
accepts employment with the Company, as of the Effective Date, upon the
terms and conditions set forth in this Agreement for the period beginning
on the Effective Date and ending as provided in Section 5 hereof (the
"Employment Period").
3. Position and Duties. During the Employment Period, the Executive shall
serve as the [TITLE] of the Company and shall have the normal duties,
responsibilities and authority of an executive serving in such position,
subject to the power of the Chief Executive Officer to expand or limit such
duties, responsibilities and authority, either generally or in specific
instances. The Executive shall perform the Executive's duties and
responsibilities to the best of the Executive's abilities in a diligent,
trustworthy, businesslike and efficient manner.
4. Compensation and Benefits.
(a) Salary. The Company agrees to pay the Executive a salary ("Base
Salary") during the Employment Period in installments based on the
Company's practices as may be in effect from time to time. The
Executive's initial Base Salary shall be at the rate of
$___________________ per year. The Executive's Base Salary shall be
reviewed annually and may be increased from time to time.
<PAGE>
(b) Incentive Plans. The Executive shall be eligible to participate in the
Company's annual and long-term incentive plans, on a basis comparable
to other similarly situated executives of the Company.
(c) Expense Reimbursement. The Company shall reimburse the Executive for
all reasonable expenses incurred by the Executive during the
Employment Period in the course of performing the Executive's duties
under this Agreement that are consistent with the Company's policies
in effect from time to time with respect to travel, entertainment and
other business expenses, subject to the Company's requirements
applicable generally with respect to reporting and documentation of
such expenses.
(d) Standard Executive Benefits. The Executive shall be entitled during
the Employment Period to participate (on the same basis as other
similarly situated executives of the Company) in the Company's benefit
plans (including health and life insurance, retirement and investment
plans (including supplements thereto), vacation, perquisites and other
benefits, but excluding, except as hereinafter provided in Section 6,
any severance pay program or policy of the Company) for which
substantially all other similarly situated executives of the Company
are from time to time generally eligible, as determined from time to
time by the Board or a committee of the Board.
(e) Indemnification. The Executive shall be eligible to enter into the
Company's standard Indemnification Agreement that is entered into with
other similarly situated senior executives of the Company.
5. Employment Period.
(a) Except as hereinafter provided, the Employment Period shall begin on
the Effective Date and shall extend until the second anniversary of
the Effective Date, with automatic one-year renewals thereafter unless
either party notifies the other at least 90 days before the scheduled
expiration date that the Employment Period is not to renew.
(b) Notwithstanding (a) above, the Employment Period shall end early upon
the first to occur of any of the following events:
(i) the Executive's death;
(ii) the Company's termination of the Executive's employment on
account of Disability;
(iii) a Termination for Cause;
(iv) a Termination without Cause; or
(v) a Voluntary Termination.
2
<PAGE>
6. Post-Employment Period Payments.
(a) At the end of the Employment Period for any reason, the Executive
shall cease to have any rights to salary, bonus, expense
reimbursements or other benefits, except that the Executive shall be
entitled to receive: (i) as soon as practicable following the end of
the Employment Period, any Base Salary which has accrued but is
unpaid, any reimbursable expenses which have been incurred but are
unpaid, and payment for any unexpired vacation days which have accrued
under the Company's or a Subsidiary's vacation policy but are unused,
as of the end of the Employment Period, (ii) any plan benefits which
by their terms extend beyond termination of the Executive's employment
(but only to the extent provided in any such benefit plan in which the
Executive has participated as an employee of the Company or a
Subsidiary and excluding, except as hereinafter provided in Section 6,
any severance pay program or policy of the Company or a Subsidiary),
(iii) payments or benefits payable pursuant to the terms of any annual
and/or long-term incentive plan of the Company or a Subsidiary in
accordance with the terms thereof, and (iv) any benefits to which the
Executive is entitled under Part 6 of Subtitle B of Title I of the
Employee Retirement Income Security Act of 1974, as amended ("COBRA").
In addition, the Executive shall be entitled to the additional
benefits and amounts described in the succeeding subsections of this
Section 6, in the circumstances described in such subsections.
(b) If the Employment Period ends pursuant to Section 5 hereof on account
of death, a Voluntary Termination, a Termination for Cause or a
termination on account of the Executive's Disability, the Company
shall make no further payments to the Executive except as contemplated
in Section 6(a) above.
(c) If the Employment Period ends early pursuant to Section 5 on account
of a Termination without Cause, the Executive shall be entitled to the
payments contemplated in Section 6(a) above and as set forth below:
(i) Within ten (10) business days after the expiration of any
revocation period relating to the Release Agreement described in
Section 11 below, the Executive shall be entitled to a lump sum
payment in an amount equal to two (2) times the sum of (A) Base
Salary (at the highest rate in effect for any period within two
years prior to the Termination Date), plus (B) annual bonus (in
an amount equal to target annual bonus for the year in which the
Termination Date occurs).
(ii) Within ten (10) business days after the expiration of any
revocation period relating to the Release Agreement described in
Section 11 below, the Executive shall be entitled to a lump sum
payment equal to the total cost (including both the Executive's
and the Company's portion of such costs as paid while the
Executive was employed) of continuing the medical, dental,
vision, long-term disability and life insurance benefits
(excluding benefits under the executive death benefit plan)
substantially similar to those that the Executive was receiving
or entitled to receive immediately
3
<PAGE>
prior to the Termination Date for a period of eighteen (18)
months; provided, however, if any benefit described in this
Section 6(c)(ii) is subject to tax, the Company will pay to the
Executive an additional amount such that after payment by the
Executive or the Executive's dependents or beneficiaries, as the
case may be, of all taxes so imposed, the recipient retains an
amount equal to such taxes.
(iii) In addition to the retirement and other benefits to which the
Executive is entitled under the Company's defined benefit
retirement plans (including any supplemental plans) with respect
to the Executive's employment through the Termination Date, the
Executive shall be entitled to a lump sum payment, within ten
(10) business days after the expiration of any revocation period
relating to the Release Agreement described in Section 11 below,
in an amount equal to the present value (calculated in accordance
with the terms of the Company's defined benefit plans or
supplemental plans, based on the age of the Executive at the date
entitlement to benefits under this Section 6(c)(iii) arises) of
the excess of (A) the retirement income and other benefits that
would be payable to the Executive under the defined benefit plans
(including any supplemental plans) of the Company if the
Executive was credited with an additional two years of age and
two years of benefit and credited service in addition to the age
and total number of years of benefit and credited service the
Executive has accrued under such plans over (B) the retirement
income and other benefits the Executive is entitled to receive
(either immediately or on a deferred basis) under the defined
benefit plans (including any supplemental plans) of the Company.
In the event that the Executive, after credit for the additional
two years, has a total of less than five years of credited
service, the Executive nonetheless shall be treated as fully
vested under the defined benefit retirement plans and any
supplemental retirement plans, but with benefits computed solely
on the basis of total benefit service.
(iv) The Executive shall be entitled to outplacement services for a
time period (not less than six (6) months) established by the
Company, by a firm selected by the Company in its sole
discretion, and at the expense of the Company; provided, however,
that all such outplacement services must be completed by December
31 of the second calendar year following the calendar year in
which the Termination Date occurs and the Company will be
required to make all payments to the Executive for such
outplacement services by December 31 of the second calendar year
following the calendar year in which the Termination Date occurs.
(v) Notwithstanding anything to the contrary contained in this
Section 6(c), if payment to the Executive of any amount paid
pursuant to this Section 6(c) would constitute a "deferral of
compensation" under Section 409A of the Code (such compensation
does not, for example, qualify for the "short-term deferral
exception" under Section 409A of the Code) and the
4
<PAGE>
Executive is a "specified employee" (as such phrase is defined in
Section 409A of the Code), the Executive (or the Executive's
beneficiary) will receive payment of such amounts described in
this Section 6(c) upon the earlier of (i) six (6) months
following the Executive's "separation from service" with the
Company (as such phrase is defined in Section 409A of the Code)
or (ii) the Executive's death.
(d) It is expressly understood that the Company's payment obligations
under Section 6(c) shall cease in the event the Executive breaches any
of his or her agreements in Section 7 hereof and, in the event of any
such breach, the Executive shall repay in cash immediately to the
Company any amounts previously paid to the Executive under Section
6(c) of this Agreement.
(e) The Executive shall not be required to mitigate the amount of any
payment or benefit provided for in this Agreement by seeking other
employment or otherwise.
7. Competitive Activity; Confidentiality; Nonsolicitation.
(a) Acknowledgements and Agreements. The Executive hereby acknowledges and
agrees that in the performance of the Executive's duties for the
Company during the Employment Period, the Executive will be brought
into frequent contact, either in person, by telephone or through the
mails, with existing and potential customers of the Company throughout
the United States. The Executive also agrees that trade secrets and
confidential information of the Company, more fully described in
Section 7(i) of this Agreement, gained by the Executive during the
Executive's association with the Company, have been developed by the
Company through substantial expenditures of time, effort and money and
constitute valuable and unique property of the Company. The Executive
further understands and agrees that the foregoing makes it necessary
for the protection of the business of the Company that the Executive
not compete with the Company during the Employment Period and not
compete with the Company for a reasonable period thereafter, as
further provided in the following subsections.
(b) Covenants During the Employment Period. During the Employment Period,
the Executive will not compete with the Company anywhere that the
Company conducts its business. In accordance with this restriction,
but without limiting its terms, during the Employment Period, the
Executive will not:
(i) enter into or engage in any business which competes with the
business of the Company;
(ii) solicit customers, business, patronage or orders for, or sell,
any products and services in competition with, or for any
business that competes with, the business of the Company;
(iii) divert, entice or otherwise take away any customers, business,
patronage or orders of the Company or attempt to do so; or
5
<PAGE>
(iv) promote or assist, financially or otherwise, any person, firm,
association, partnership, corporation or other entity engaged in
any business which competes with the business of the Company.
(c) Covenants Following Termination. For a period of two (2) years
following the termination of the Executive's employment for any
reason, unless the Executive is entitled to severance benefits under a
severance agreement between the Executive and the Company providing
for payment of benefits upon a termination of employment following a
change in control of the Company and containing covenants made by the
Executive with respect to the subject matter of this Section 7(c) (a
"Severance Agreement"), in which case those covenants contained in
such Severance Agreement shall apply to the Executive in lieu of the
application of this Section 7, the Executive will not:
(i) enter into or engage in any business which competes with the
Company's business within the United States;
(ii) solicit customers, business, patronage or orders for, or sell,
any products and services in competition with, or for any
business, wherever located, that competes with, the Company's
business within the United States;
(iii) divert, entice or otherwise take away any customers, business,
patronage or orders of the Company within the United States, or
attempt to do so; or
(iv) promote or assist, financially or otherwise, any person, firm,
association, partnership, corporation or other entity engaged in
any business which competes with the Company's business within
the United States.
(d) Indirect Competition. For the purposes of Sections 7(b) and 7(c), but
without limitation thereof, the Executive will be in violation thereof
if the Executive engages in any or all of the activities set forth
therein directly as an individual on the Executive's own account, or
indirectly as a general partner, joint venturer, employee, agent,
salesperson, consultant, officer and/or director of any firm,
association, partnership, corporation or other entity, or as a limited
partner, member or stockholder of any limited partnership, limited
liability company, or corporation in which the Executive or the
Executive's spouse, child or parent owns, directly or indirectly,
individually or in the aggregate, more than five percent (5%) of the
limited partnership interests, limited liability company interests or
outstanding stock, as the case may be.
(e) The Company. For purposes of this Section 7, the Company shall include
any and all Subsidiaries of the Company.
(f) The Company's Business. For the purposes of Sections 7(b), 7(c), 7(j)
and 7(k), the Company's business is defined to be the manufacture and
distribution of gypsum wallboard, joint compound and related gypsum
products, cement board, gypsum fiber panels, ceiling panels and grid,
the distribution of building products and any future businesses the
Company may enter, as further described in any and
6
<PAGE>
all manufacturing, marketing and sales manuals and materials of the
Company as the same may be altered, amended, supplemented or otherwise
changed from time to time, or of any other products or services
substantially similar to or readily substitutable for any such
described products and services.
(g) Extension. If it shall be judicially determined that the Executive has
violated any of the Executive's obligations under Section 7(c), then
the period applicable to each obligation that the Executive shall have
been determined to have violated shall automatically be extended by a
period of time equal in length to the period during which such
violation(s) occurred.
(h) Non-Solicitation. Until the expiration of three (3) years following
the Termination Date, the Executive will not directly or indirectly at
any time solicit or induce or attempt to solicit or induce any
employee(s), sales representative(s), agent(s) or consultant(s) of the
Company and/or of its Subsidiaries to terminate their employment,
representation or other association with the Company and/or its
Subsidiaries.
(i) Further Covenants.
(i) The Executive will keep in strict confidence, and will not,
without the prior written consent of the Company or as may
otherwise be required by law or legal process, directly or
indirectly, at any time during or after the Executive's
employment with the Company, disclose, furnish, disseminate, make
available or, except in the course of performing the Executive's
duties of employment, use any trade secrets or non-public
confidential business and technical information of the Company or
its customers or vendors, including without limitation as to when
or how the Executive may have acquired such information before or
during employment. Such confidential information shall include,
without limitation, the Company's unique non-public confidential
selling, manufacturing and servicing methods and business
techniques, training, service and business manuals, promotional
materials, training courses and other training and instructional
materials, vendor and product information, customer and
prospective customer lists, other customer and prospective
customer information and other business information. The
Executive specifically acknowledges that all such non-public
confidential information, whether reduced to writing, maintained
on any form of electronic media, or maintained in the Executive's
mind or memory and whether compiled by the Company and/or the
Executive, derives independent economic value from not being
readily known to or ascertainable by proper means by others who
can obtain economic value from its disclosure or use, that
reasonable efforts have been made by the Company to maintain the
secrecy of such information, that such information is the sole
property of the Company and that any retention and use of such
information by the Executive during the Executive's employment
with the Company (except in the course of performing the
7
<PAGE>
Executive's duties and obligations to the Company) or after the
termination of the Executive's employment shall constitute a
misappropriation of the Company's trade secrets.
(ii) The Executive agrees that upon termination of the Executive's
employment with the Company, for any reason, the Executive shall
return to the Company, in good condition, all property of the
Company, including without limitation, the originals and all
copies of any materials which contain, reflect, summarize,
describe, analyze or refer or relate to any items of information
listed in Section 7(i)(i) of this Agreement. In the event that
such items are not so returned, the Company will have the right
to charge the Executive for all reasonable damages, costs,
attorneys' fees and other expenses incurred in searching for,
taking, removing and/or recovering such property.
(j) Discoveries and Inventions; Work Made for Hire.
(i) The Executive hereby assigns and agrees to assign to the Company,
its successors, assigns or nominees, all of the Executive's
rights to any discoveries, inventions and improvements, whether
patentable or not, made, conceived or suggested, either solely or
jointly with others, by the Executive while in the Company's
employ with the use of the Company's time, material or facilities
or in any way within or related to the existing or contemplated
scope of the Company's business. Any discovery, invention or
improvement relating to any subject matter with which the Company
was concerned during the Executive's employment and made,
conceived or suggested by the Executive, either solely or jointly
with others, within one (1) year following termination of the
Executive's employment under this Agreement or any successor
agreements shall be irrebuttably presumed to have been so made,
conceived or suggested in the course of such employment with the
use of the Company's time, materials or facilities. Upon request
by the Company with respect to any such discoveries, inventions
or improvements, the Executive will execute and deliver to the
Company, at any time during or after the Executive's employment,
all appropriate documents for use in applying for, obtaining and
maintaining such domestic and foreign patents as the Company may
desire, and all proper assignments therefor, when so requested,
at the expense of the Company, but without further or additional
consideration.
(ii) The Executive acknowledges that, to the extent permitted by law,
all work papers, reports, documentation, drawings, photographs,
negatives, tapes and masters therefor, prototypes and other
materials (hereinafter, "items"), including without limitation,
any and all such items generated and maintained on any form of
electronic media, generated by the Executive during the
Executive's employment with the Company shall be considered a
"work made for hire" and that ownership of any and all copyrights
in any and all such items shall belong to the Company. The item
will
8
<PAGE>
recognize the Company as the copyright owner, will contain all
proper copyright notices, e.g., "(creation date) [Company Name],
All Rights Reserved," and will be in condition to be registered
or otherwise placed in compliance with registration or other
statutory requirements throughout the world.
(k) Communication of Contents of Agreement. During the Executive's
employment and for two (2) years thereafter, the Executive will
communicate the contents of this Agreement to any person, firm,
association, partnership, corporation or other entity which the
Executive intends to be employed by, associated with, or represent and
which is engaged in a business that is competitive to the business of
the Company.
(l) Non-Disparagement. The Executive and his immediate family agree to
refrain from criticizing or making disparaging or derogatory comments
about the Company or any Subsidiary and any of their respective
officers, directors, employees and agents or any products or services
of the Company or any Subsidiary.
(m) Relief. The Executive acknowledges and agrees that the remedy at law
available to the Company for breach of any of the Executive's
obligations under this Agreement would be inadequate. The Executive
therefore agrees that, in addition to any other rights or remedies
that the Company may have at law or in equity, temporary and permanent
injunctive relief may be granted in any proceeding which may be
brought to enforce any provision contained in Sections 7(b), 7(c),
7(h), 7(i), 7(j) 7(k) and 7(l) of this Agreement, without the
necessity of proof of actual damage.
(n) Reasonableness. The Executive acknowledges that the Executive's
obligations under this Section 7 are reasonable in the context of the
nature of the Company's business and the competitive injuries likely
to be sustained by the Company if the Executive was to violate such
obligations. The Executive further acknowledges that this Agreement is
made in consideration of, and is adequately supported by, the
agreement of the Company to perform its obligations under this
Agreement and by other consideration, which the Executive acknowledges
constitutes good, valuable and sufficient consideration.
8. Golden Parachute Excise Tax. The amounts payable to the Executive under
Section 6 shall be adjusted as set forth in this Section 8 if the sum (the
"combined amount") of the amounts payable under Section 6 and all other
payments or benefits which the Executive has received or has the right to
receive from the Company which are defined in Section 280G(b)(2)(A)(i) of
the Code, would constitute a "parachute payment" (as defined in Section
280G(b)(2) of the Code). In such event, the combined amount shall, unless
the following sentence applies, be decreased by the smallest amount that
will eliminate any parachute payment. If the decrease referred to in the
preceding sentence is 10% or more of the combined amount, the combined
amount shall not be decreased, but rather shall be increased by an amount
(the "Gross Up Payment") sufficient to provide the Executive,
9
<PAGE>
after tax, a net amount equal to the Code Section 4999 excise tax imposed
on such combined amount, as increased pursuant to this section. For this
purpose, "after tax" means the amount retained by the Executive after
satisfaction (whether through withholding, direct payment or otherwise) of
all applicable federal, state, provincial and local income taxes at the
highest marginal tax rate, and the employee share of any applicable FICA
taxes. To the extent a Gross-Up Payment is due to the Executive pursuant to
this Section 8, the Gross-Up Payment shall be made on the date the lump sum
payments provided in Section 6 are made and shall include all Gross-Up
Payments due in respect of payments made before, payments made at the same
time as, and payments projected to be made after such payment date;
provided, however, that in accordance with Section 280G, such Gross-Up
Payment shall not include taxes imposed by Section 4999 for health
insurance benefits, which shall be paid and withheld by the Company at the
same date that income taxes are withheld from such health insurance
benefits. If at a time subsequent to any payment under Section 6, an
additional amount of Code Section 4999 excise tax is definitively
determined to be due by either the Internal Revenue Service or a court of
competent jurisdiction, the Company shall pay to the Executive an
additional amount which, net of Federal, state, provincial and local
income, FICA and Code Section 4999 excise taxes, will satisfy such
additional Code Section 4999 excise tax, including applicable interest and
penalties. The parties acknowledge that, if the decrease referred to in the
second sentence of this Section 8 is 10% or more of the combined amount,
the intention of the preceding sentences in this Section 8 is to place the
Executive in the position in which the Executive would be if the Code
Section 4999 excise tax did not exist. Notwithstanding the foregoing
provisions of this Section 8, Gross-Up Payments, including any additional
payment made subsequent to any payment under Section 6, will be made only
in a manner and to the extent (and at the earliest date(s)) such that
Section 409A of the Code will not be violated.
9. Definitions.
(a) "Board" means the Board of Directors of the Company.
(b) "Cause" means that, prior to the termination of the Employment Period,
the Executive shall have:
(i) committed a felony or a fraud;
(ii) engaged in conduct that brings the Company or any of its
Subsidiaries into substantial public disgrace or disrepute;
(iii) committed gross negligence or gross misconduct with respect to
the Company or any of its Subsidiaries;
(iv) repudiated this Agreement or abandoned employment with the
Company;
(v) failed to follow the directives of the Board or the Chief
Executive Officer and such failure is not cured within five (5)
business days after written notice thereof to the Executive from
the Company;
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<PAGE>
(vi) breached any of the agreements in Section 7 hereof;
(vii) breached a material employment policy of the Company which is
not cured within five (5) business days after written notice
thereof to the Executive from the Company; or
(viii) committed any other breach of this Agreement which is material
and which is not cured within thirty (30) days after written
notice thereof to the Executive from the Company.
(c) "Code" means the Internal Revenue Code of 1986, as amended.
(d) "Disability" means the Executive's having become unable (as determined
in good faith by the Chief Executive Officer), with reasonable
accommodations, to regularly perform the Executive's duties hereunder
by reason of illness or incapacity.
(e) "Release Agreement" means an agreement, in substantially the form
customarily used by the Company for similarly situated executives of
the Company in similar instances, pursuant to which the Executive
releases, to the extent permitted by law, all current or future
claims, known or unknown, arising on or before the date of the release
against the Company, its subsidiaries and its officers.
(f) "Subsidiary" means a corporation, company or other entity (i) at least
50 percent of whose outstanding shares or securities (representing the
right to vote for the election of directors or other managing
authority) are, or (ii) which does not have outstanding shares or
securities (as may be the case in a partnership, joint venture or
unincorporated association), but at least 50 percent of whose
ownership interest representing the right generally to make decisions
for such other entity is, now or hereafter, owned or controlled,
directly or indirectly, by the Company.
(g) "Termination Date" means the date on which the Executive's employment
is terminated.
(h) "Termination for Cause" means the Company's termination of the
Executive's employment for Cause.
(i) "Termination without Cause" means the Company's termination of the
Executive's employment other than a Termination for Cause.
(j) "Voluntary Termination" means Executive's termination of the
Executive's employment for any reason, including retirement.
10. Representations.
(a) Executive Representations. The Executive represents and warrants to
the Company that (i) the execution, delivery and performance of this
Agreement by the Executive does not and will not conflict with,
breach, violate or cause a
11
<PAGE>
default under any contract, agreement, instrument, order, judgment or
decree to which the Executive is a party or by which the Executive is
bound, (ii) the Executive is not a party to or bound by any employment
agreement, noncompete agreement or confidentiality agreement with any
other person or entity and (iii) upon the execution and delivery of
this Agreement by the Company, this Agreement shall be the valid and
binding obligation of the Executive, enforceable in accordance with
its terms.
(b) Company Representation. The Company represents and warrants to the
Executive that upon the execution and delivery of this Agreement by
the Executive, this Agreement shall be the valid and binding
obligation of the Company, enforceable in accordance with its terms.
11. Release Agreement. No payments shall be made under Section 6(c) hereof if
the Executive declines to sign and return a Release Agreement or revokes
such Release Agreement within the time provided therein. If the Executive
becomes entitled to payments under Section 6(c) hereof, the Company shall
deliver to the Executive a copy of the Company's standard form of Release
Agreement within ten (10) business days of the Executive's Termination
Date.
12. Survival. Subject to any limits on applicability contained therein, Section
7 hereof shall survive and continue in full force in accordance with its
terms notwithstanding any termination of the Employment Period.
13. Withholding of Taxes. The Company may withhold from any amounts payable
under this Agreement all federal, state, city or other taxes as the Company
is required to withhold pursuant to any applicable law, regulation or
ruling.
14. Notices. For all purposes of this Agreement, all communications, including
without limitation notices, consents, requests or approvals, required or
permitted to be given hereunder will be in writing and will be deemed to
have been duly given when hand delivered or dispatched by electronic
facsimile transmission (with receipt thereof orally confirmed), or five
business days after having been mailed by United States registered or
certified mail, return receipt requested, postage prepaid, or three
business days after having been sent by a nationally recognized overnight
courier service such as FedEx or UPS, addressed to the Company (to the
attention of the Secretary of the Company) at its principal executive
office and to the Executive at the Executive's principal residence, or to
such other address as any party may have furnished to the other in writing
and in accordance herewith, except that notices of changes of address will
be effective only upon receipt.
12
<PAGE>
15. Severability. Whenever possible, each provision of this Agreement shall be
interpreted in such manner as to be effective and valid under applicable
law, but if any provision of this Agreement is held to be invalid or
unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity or unenforceability shall not affect any
other provision of this Agreement, but this Agreement shall be reformed,
construed and enforced in such jurisdiction as if such invalid or
unenforceable provision had never been contained herein.
16. Complete Agreement. This Agreement embodies the complete agreement and
understanding between the parties with respect to the employment of the
Executive and the subject matter hereof and effective as of its date
supersedes and preempts any prior understandings, agreements or
representations by or between the parties, written or oral, which may have
related to the subject matter hereof in any way, including any prior
Employment Agreements between the Company and the Executive. The severance
benefits provided in Section 6(c) hereof shall be in lieu of any severance
benefits under any plans, programs, policies or practices of the Company;
provided, however, that if the Executive is entitled to benefits under this
Agreement and a Severance Agreement, the Executive will be entitled to
severance benefits under either this Agreement or such Severance Agreement,
whichever agreement provides for greater benefits, but will not be entitled
to benefits under both agreements.
17. Counterparts. This Agreement may be executed in separate counterparts, each
of which shall be deemed to be an original and both of which taken together
shall constitute one and the same agreement.
18. Successors and Assigns. This Agreement shall bind and inure to the benefit
of and be enforceable by the Executive, the Company and their respective
heirs, executors, personal representatives, successors and assigns, except
that neither party may assign any rights or delegate any obligations
hereunder without the prior written consent of the other party. The
Executive hereby consents to the assignment by the Company of all of its
rights and obligations hereunder to any successor to the Company by merger
or consolidation or purchase of all or substantially all of the Company's
assets, provided such transferee or successor assumes the liabilities of
the Company hereunder.
19. Governing Law. The validity, interpretation, construction and performance
of this Agreement will be governed by and construed in accordance with the
substantive laws of the State of Delaware and federal law, without giving
effect to the principles of conflict of laws of such State, except as
expressly provided herein.
20. Amendment and Waiver. The provisions of this Agreement may be amended or
waived only with the prior written consent of the Company and the
Executive, and no course of conduct or failure or delay in enforcing the
provisions of this Agreement shall affect the validity, binding effect or
enforceability of this Agreement.
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<PAGE>
21. Section 409A of the Code. To the extent applicable, it is intended that
this Agreement comply with the provisions of Section 409A of the Code. This
Agreement shall be administered in a manner consistent with this intent,
and any provision that would cause the Agreement to fail to satisfy Section
409A of the Code shall have no force and effect until amended to comply
with Section 409A of the Code (which amendment may be retroactive to the
extent permitted by Section 409A of the Code and may be made by the Company
without the consent of the Executive).
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
USG CORPORATION
By:
------------------------------------
Name: Brian J. Cook
Title: Senior Vice President,
Human Resources
----------------------------------------
Executive
14
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.12
<SEQUENCE>5
<FILENAME>c12346exv10w12.txt
<DESCRIPTION>FORM OF CHANGE IN CONTROL SEVERANCE AGREEMENT (TIER 1)
<TEXT>
<PAGE>
EXHIBIT 10.12
USG CORPORATION
CHANGE IN CONTROL SEVERANCE AGREEMENT
THIS CHANGE IN CONTROL SEVERANCE AGREEMENT (this "Agreement"), dated as of
January 1, 2007, is made and entered into by and between USG Corporation, a
Delaware corporation (the "Company"), and ___________________ (the "Executive").
RECITALS:
I. The Executive is a senior executive of the Company or a Subsidiary and
has made and is expected to continue to make major contributions to the growth
and financial strength of the Company;
II. The Company recognizes that the possibility of a Change in Control (as
defined below) exists and that such possibility, and the uncertainty it may
create among management, may result in the distraction or departure of
management personnel, to the detriment of the Company and its stockholders;
III. The Company desires to assure itself of the continuity of management
and desires to establish certain minimum severance benefits for certain of its
senior executives, including the Executive, applicable in the event of a Change
in Control;
IV. The Company wishes to ensure that its senior executives are not unduly
distracted by the circumstances attendant to the possibility of a Change in
Control and to encourage the continued attention and dedication of such
executives, including the Executive, to their assigned duties with the Company;
and
V. The Company desires to provide additional inducement for the Executive
to continue to remain in the employ of the Company.
NOW, THEREFORE, the Company and the Executive agree as follows:
1. Certain Defined Terms. In addition to terms defined elsewhere herein, the
following terms have the following meanings when used in this Agreement
with initial capital letters:
(a) "Base Pay" means the Executive's annual base salary rate as in effect
from time to time.
(b) "Board" means the Board of Directors of the Company.
(c) "Cause" means that, prior to any termination pursuant to Section 3(b),
the Executive shall have:
<PAGE>
(i) been convicted of a criminal violation involving fraud,
embezzlement or theft in connection with the Executive's duties
or in the course of the Executive's employment with the Company
or any Subsidiary;
(ii) committed intentional wrongful damage to tangible or intangible
property of the Company or any Subsidiary; or
(iii) committed intentional wrongful disclosure of secret processes or
confidential information of the Company or any Subsidiary.
For purposes of this Agreement, no act or failure to act on the part
of the Executive will be deemed "intentional" if it was due primarily
to an error in judgment or negligence, but will be deemed
"intentional" only if done or omitted to be done by the Executive not
in good faith and without reasonable belief that the Executive's
action or omission was in the best interest of the Company.
Notwithstanding the foregoing, the Executive will not be deemed to
have been terminated for "Cause" hereunder unless and until there
shall have been delivered to the Executive a copy of a resolution duly
adopted by the affirmative vote of not less than a majority of the
Board then in office (excluding the Executive if the Executive is then
a member of the Board) at a meeting of the Board called and held for
such purpose, after reasonable notice to the Executive and an
opportunity for the Executive, together with the Executive's counsel
(if the Executive chooses to have counsel present at such meeting), to
be heard before the Board, finding that, in the good faith opinion of
the Board, the Executive had committed an act constituting "Cause" as
herein defined and specifying the particulars thereof in reasonable
detail. Nothing herein will limit the right of the Executive or the
Executive's beneficiaries to contest the validity or propriety of any
such determination.
(d) "Change in Control" means the occurrence during the Term of any of the
following events:
(i) any individual, entity or group (within the meaning of Section
13(d)(3) or 14(d)(2) of the Exchange Act) (a "Person") is or
becomes the beneficial owner (within the meaning of Rule 13d-3
promulgated under the Exchange Act) of 20% or more of the
combined voting power of the then-outstanding Voting Stock of the
Company; provided, however, that:
(1) for purposes of this Section 1(d), the following
acquisitions shall not constitute a Change in Control: (A)
any acquisition of Voting Stock of the Company directly from
the Company that is approved by a majority of the Incumbent
Directors, (B) any acquisition of Voting Stock of the
Company by the Company or any Subsidiary, (C) any
acquisition of Voting Stock of the Company by the trustee or
other fiduciary holding securities under any employee
benefit plan (or related trust) sponsored or maintained by
the Company or any Subsidiary, and (D) any acquisition of
Voting Stock of the
2
<PAGE>
Company by any Person pursuant to a Business Transaction
that complies with clauses (A), (B) and (C) of Section
1(d)(iii) below;
(2) if any Person is or becomes the beneficial owner of 20% or
more of combined voting power of the then-outstanding Voting
Stock of the Company as a result of a transaction described
in clause (A) of Section 1(d)(i)(1) above and such Person
thereafter becomes the beneficial owner of any additional
shares of Voting Stock of the Company representing 1% or
more of the then-outstanding Voting Stock of the Company,
other than in an acquisition directly from the Company that
is approved by a majority of the Incumbent Directors or
other than as a result of a stock dividend, stock split or
similar transaction effected by the Company in which all
holders of Voting Stock are treated equally, such subsequent
acquisition shall be treated as a Change in Control;
(3) a Change in Control will not be deemed to have occurred if a
Person is or becomes the beneficial owner of 20% or more of
the Voting Stock of the Company as a result of a reduction
in the number of shares of Voting Stock of the Company
outstanding pursuant to a transaction or series of
transactions that is approved by a majority of the Incumbent
Directors unless and until such Person thereafter becomes
the beneficial owner of any additional shares of Voting
Stock of the Company representing 1% or more of the
then-outstanding Voting Stock of the Company, other than as
a result of a stock dividend, stock split or similar
transaction effected by the Company in which all holders of
Voting Stock are treated equally; and
(4) if at least a majority of the Incumbent Directors determine
in good faith that a Person has acquired beneficial
ownership of 20% or more of the Voting Stock of the Company
inadvertently, and such Person divests as promptly as
practicable but no later than the date, if any, set by the
Incumbent Board a sufficient number of shares so that such
Person beneficially owns less than 20% of the Voting Stock
of the Company, then no Change in Control shall have
occurred as a result of such Person's acquisition; or
(ii) a majority of the Board ceases to be comprised of Incumbent
Directors; or
(iii) the consummation of a reorganization, merger or consolidation,
or sale or other disposition of all or substantially all of the
assets of the Company or the acquisition of the stock or assets
of another corporation, or other transaction (each, a "Business
Transaction"), unless, in each case, immediately following such
Business Transaction (A) the Voting Stock of the Company
outstanding immediately prior to such Business Transaction
continues to represent (either by remaining outstanding or by
being
3
<PAGE>
converted into Voting Stock of the surviving entity or any parent
thereof), more than 60% of the combined voting power of the then
outstanding shares of Voting Stock of the entity resulting from
such Business Transaction (including, without limitation, an
entity which as a result of such transaction owns the Company or
all or substantially all of the Company's assets either directly
or through one or more subsidiaries), (B) no Person (other than
the Company, such entity resulting from such Business
Transaction, or any employee benefit plan (or related trust)
sponsored or maintained by the Company, any Subsidiary or such
entity resulting from such Business Transaction) beneficially
owns, directly or indirectly, 20% or more of the combined voting
power of the then outstanding shares of Voting Stock of the
entity resulting from such Business Transaction, and (C) at least
a majority of the members of the Board of Directors of the entity
resulting from such Business Transaction were Incumbent Directors
at the time of the execution of the initial agreement or of the
action of the Board providing for such Business Transaction; or
(iv) approval by the stockholders of the Company of a complete
liquidation or dissolution of the Company, except pursuant to a
Business Transaction that complies with clauses (A), (B) and (C)
of Section 1(d)(iii).
Notwithstanding anything in this Agreement to the contrary, a Change in
Control shall not be deemed to have occurred as a result of an acquisition
or the holding of Voting Stock of the Company permitted by Section 2(a) of
the Shareholder's Agreement entered into as of January 30, 2006, by and
between the Company and Berkshire Hathaway, Inc.
(e) "Code" means the Internal Revenue Code of 1986, as amended.
(f) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
(g) "Good Reason" means the failure of the Company to remedy any of the
following within 10 calendar days after receipt by the Company of
written notice thereof from the Executive:
(i) a material diminution in the Executive's normal duties and
responsibilities, including, but not limited to, the assignment
without the Executive's written consent of any diminished duties
and responsibilities which are inconsistent with the Executive's
positions, duties and responsibilities with the Company
immediately prior to a Change in Control, or a materially adverse
change in the Executive's reporting responsibilities or titles as
in effect immediately prior to the Change in Control, whether or
not resulting from an act of the Company or otherwise, or any
removal of the Executive from or any failure to re-elect the
Executive to any of such positions, except in connection with the
termination of the Executive's employment for disability,
retirement, or
4
<PAGE>
Cause or as a result of the Executive's death or by the Executive
other than for Good Reason;
(ii) if the Executive was serving as a member of the Board immediately
prior to the Change in Control, either (A) the failure to elect
or the removal of the Executive as a member of the Board of the
Company (or any successor thereto) or (B) if the Executive
continues to serve as a member of the Board of the Company (or
any successor thereto) following the Change in Control, the
Company's securities are no longer publicly traded; provided,
however,that Good Reason shall not exist if the Executive becomes
a member of the board of directors of a publicly-traded entity
that as a result of the Change in Control owns the Company or
substantially all of the Company's assets either directly or
through one or more subsidiaries;
(iii) a reduction by the Company in the Executive's Base Pay as in
effect on the date hereof or as the same may be increased from
time to time;
(iv) a change in the Executive's Target Direct Annual Compensation
that results in an aggregate decrease in such Target Direct
Annual Compensation in excess of ten percent (10%);
(v) the Company's requiring the Executive, without the Executive's
written consent, to be based anywhere other than within fifty
(50) miles of the Executive's office location immediately prior
to the Change in Control, except for required travel on the
Company's business to an extent substantially consistent with
business travel obligations immediately prior to the Change in
Control;
(vi) the failure by the Company to continue in effect any investment
plan, retirement plan, savings plan, supplemental retirement
plan, deferred compensation plan, supplemental investment plan,
life insurance plan, health and accident plan, disability plan or
other welfare benefit plan in which the Executive was
participating at the time of the Change in Control (or plans
providing the Executive with substantially similar benefits), the
taking of any action by the Company which would adversely affect
the Executive's participation or materially reduce the
Executive's benefits or value under any of such plans or deprive
the Executive of any material fringe benefit enjoyed by the
Executive at the time of the Change in Control, or the failure by
the Company to provide the Executive with the number of paid
vacation days to which the Executive was then entitled in
accordance with the Company's normal vacation policy in effect on
the date of the Change in Control; or
(vii) the failure by the Company to obtain the assumption of the
obligation to perform this Agreement by any successor as
contemplated in Section 11 hereof.
5
<PAGE>
(h) "Incumbent Directors" means the individuals who, as of the date of
this Agreement, are Directors of the Company and any individual
becoming a Director subsequent to the date of this Agreement whose
election, nomination for election by the Company's stockholders, or
appointment, was approved by a vote of at least two-thirds of the then
Incumbent Directors (either by a specific vote or by approval of the
proxy statement of the Company in which such person is named as a
nominee for director, without objection to such nomination); provided,
however, that an individual shall not be an Incumbent Director if such
individual's election or appointment to the Board occurs as a result
of an actual or threatened election contest (as described in Rule
14a-12(c) of the Exchange Act) with respect to the election or removal
of Directors or other actual or threatened solicitation of proxies or
consents by or on behalf of a Person other than the Board.
(i) "Release Agreement" means an agreement, in substantially the form
customarily used by the Company for similarly situated executives of
the Company in similar instances, pursuant to which the Executive
releases, to the extent permitted by law, all current or future
claims, known or unknown, arising on or before the date of the release
against the Company, its subsidiaries and its officers.
(j) "Severance Period" means the period of time commencing on the date of
the first occurrence of a Change in Control and continuing until the
earlier of (i) the second anniversary of the occurrence of the Change
in Control, or (ii) the Executive's death.
(k) "Subsidiary" means a corporation, company or other entity (i) at least
50 percent of whose outstanding shares or securities (representing the
right to vote for the election of directors or other managing
authority) are, or (ii) which does not have outstanding shares or
securities (as may be the case in a partnership, joint venture or
unincorporated association), but at least 50 percent of whose
ownership interest representing the right generally to make decisions
for such other entity is, now or hereafter, owned or controlled,
directly or indirectly, by the Company.
(l) "Target Annual Direct Compensation" means the sum of the Executive's
Base Pay, target annual incentive opportunity, and the annualized
value of the most recent long-term incentive award approved by the
Compensation and Organization Committee of the Board. For purposes of
measuring annualized long-term incentives, the awards shall be
measured on their date of grant using reasonable assumptions,
including, but not limited to, fair value principles such as those
identified in Statement of Financial Accounting Standards No. 123,
Share-Based Payment; the value of such awards shall be annualized over
the frequency of their grant. Notwithstanding the foregoing, if, for
purposes of calculating "Target Annual Direct Compensation," the most
recent long-term incentive award would be the long-term incentive
award granted in August 2006 (the "2006 Award"), the calculation of
"Target Annual Direct Compensation" will include only 50% of the value
of such 2006 Award.
6
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(m) "Term" means the period commencing as of the date hereof and expiring
on the second anniversary of the date of this Agreement, with
automatic one-year renewals thereafter unless either party notifies
the other at least 90 days before the scheduled expiration date that
the Term is not to renew; provided, however, that (i) if a Change in
Control occurs during the Term, the Term will expire on, and no sooner
than, the last day of the Severance Period; and (ii) subject to
Section 3(c), if, prior to a Change in Control, the Executive ceases
for any reason to be an officer of the Company or an employee of the
Company or any Subsidiary, thereupon without further action the Term
shall be deemed to have expired and this Agreement will immediately
terminate and be of no further effect. For purposes of this Section
1(m), the Executive shall not be deemed to have ceased to be an
employee of the Company and any Subsidiary by reason of the transfer
of the Executive's employment between the Company and any Subsidiary,
or among Subsidiaries.
(n) "Termination Date" means the date on which the Executive's employment
is terminated (the effective date of which will be the date of
termination, or such other date that may be specified by the Executive
if the termination is pursuant to Section 3(b)).
(o) "Voting Stock" means at any time, the then-outstanding securities
entitled to vote generally in the election of directors of the
Company.
2. Operation of Agreement. This Agreement will be effective and binding
immediately upon its execution, but, anything in this Agreement to the
contrary notwithstanding, except as provided in Section 3(c), the payments
and benefits provided under this Agreement will not be payable unless and
until a Change in Control occurs. Upon the occurrence of a Change in
Control at any time during the Term, without further action, this Agreement
will become immediately operative.
3. Termination Following a Change in Control.
(a) If a Change in Control occurs and the Executive's employment is
terminated by the Company or a Subsidiary during the Severance Period
(or pursuant to Section 3(c)), the Executive will be entitled to the
benefits provided by Section 4 unless such termination is the result
of the occurrence of one or more of the following events:
(i) The Executive's death;
(ii) The Executive's having become unable (as determined by the Board
in good faith), with or without reasonable accommodations, to
regularly perform the Executive's duties by reason of illness or
incapacity; or
(iii) Cause.
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(b) In the event of the occurrence of a Change in Control, the Executive
may terminate employment with the Company and any Subsidiary during
the Severance Period for Good Reason with the right to severance
compensation as provided in Section 4 regardless of whether any other
reason, other than Cause, for such termination exists or has occurred,
including without limitation other employment.
(c) Anything in this Agreement to the contrary notwithstanding, if a
Change in Control occurs and not more than 90 days prior to the date
on which the Change in Control occurs, the Executive's employment with
the Company is terminated by the Company, such termination of
employment will be deemed to be a termination of employment after a
Change in Control for purposes of this Agreement and, in addition, the
Company will be required to pay to the Executive in a lump sum in
cash, the sum of: (1) the difference between the fair market value of
a common share of the Company and the exercise price of each
outstanding stock option held by the Executive that was forfeited as a
result of the Executive's termination of employment multiplied by the
number of shares underlying each stock option held by the Executive
that was forfeited as a result of the Executive's termination of
employment and (2) the fair market value of a common share of the
Company multiplied by the number of shares underlying each share of
restricted stock and each performance share and other equity award
held by the Executive that was forfeited as a result of the
Executive's termination of employment. For this purpose, the "fair
market value of a common share of the Company" shall be deemed to be
the price per share paid in connection with the Change in Control.
(d) A termination of employment pursuant to Section 3(a), 3(b) or 3(c)
will not affect any rights that the Executive may have pursuant to any
agreement, policy, plan, program or arrangement of the Company or any
Subsidiary providing employee benefits, which rights will be governed
by the terms thereof; provided, however, that if upon termination of
employment, the Executive is entitled to severance compensation or
benefits under this Agreement and pursuant to any employment or
severance agreement or employee plan (an "Employment Agreement"), the
Executive will be entitled to severance benefits under either this
Agreement or such Employment Agreement, whichever agreement provides
for greater benefits, but will not be entitled to benefits under both
agreements.
4. Severance Compensation.
(a) If, following the occurrence of a Change in Control, the Company or a
Subsidiary of the Company terminates the Executive's employment during
the Severance Period other than pursuant to Section 3(a)(i), 3(a)(ii)
or 3(a)(iii), or if the Executive terminates the Executive's
employment pursuant to Section 3(b), the Company will be obligated to
make the following payments and provide the following benefits to the
Executive.
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(i) The Executive will be entitled to receive: (i) as soon as
practicable following the end of the Employment Period, any Base
Pay which has accrued but is unpaid, any reimbursable expenses
which have been incurred but are unpaid, and payment for any
unexpired vacation days which have accrued under the Company's or
a Subsidiary's vacation policy but are unused, as of the date of
termination of the Executive's employment, (ii) any plan benefits
which by their terms extend beyond termination of the Executive's
employment (but only to the extent provided in any such benefit
plan in which the Executive has participated as an employee of
the Company or a Subsidiary and excluding, except as hereinafter
provided in this Section 4, any severance pay program or policy
of the Company or a Subsidiary), and (iii) subject to Section
4(a)(ii) below, payments or benefits payable pursuant to the
terms of any annual and/or long-term incentive plan of the
Company or a Subsidiary in accordance with the terms thereof. In
addition, the Executive shall be entitled to the additional
benefits and amounts described in the succeeding subsections of
this Section 4, in the circumstances described in such
subsections.
(ii) Within ten (10) business days after the expiration of any
revocation period relating to the Release Agreement described in
Section 20 below and in lieu of payments under the terms of the
Company's annual bonus plan applicable to the Executive, the
Executive will be entitled to receive a lump sum cash payment in
an amount equal to the greater of (A) the Executive's target or
par annual bonus for the fiscal year in which the Termination
Date occurs or (B) the Executive's target or par annual bonus for
the fiscal year in which the Change in Control occurs, pro-rated
for the number of full months that the Executive was employed
during such fiscal year (i.e., the annual bonus shall be
multiplied by a fraction, the numerator of which is the number of
full months during which the Executive was actively employed by
the Company in the relevant fiscal year and the denominator of
which is 12).
(iii) Within ten (10) business days after the expiration of any
revocation period relating to the Release Agreement described in
Section 20 below, the Executive will be entitled to receive a
lump sum cash payment in an amount equal to three (3) times the
sum of (A) Base Pay (at the highest rate in effect for any period
within three years prior to the Termination Date), plus (B)
annual bonus (in an amount equal to the greater of the
Executive's target or par annual bonus for the year in which the
Termination Date occurs or for the year in which the Change in
Control occurs, whichever is greater).
(iv) For a period of eighteen (18) months following the Termination
Date (the "Continuation Period"), the Executive will be entitled
to continued participation in the Company's medical, dental,
vision, long-term disability and life insurance plans (excluding
benefits under the executive
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death benefit plan) (the "Benefit Plans"), subject to the terms
and conditions of the Benefit Plans, including, but not limited
to, timely payment of any employee contributions necessary to
maintain participation; provided, however,that (A) such coverage
shall be provided only to the extent that such coverage would not
be considered "deferred compensation" subject to the requirements
of Section 409A of the Code; and (B) the Executive's continued
participation in the Benefit Plans during the Continuation Period
shall satisfy the Benefit Plans' obligation, if any, to provide
the Executive the right to continuation coverage under the
Benefit Plans pursuant to the Consolidated Omnibus Budget
Reconciliation Act of 1986, as amended. If any benefit described
in this Section 4(a)(iv) is subject to tax, the Company will pay
to the Executive an additional amount such that after payment by
the Executive or the Executive's dependents or beneficiaries, as
the case may be, of all taxes (including any income or social
security tax) imposed on the benefits described in this Section
4(a)(iv) and any such additional payment by the Company, the
recipient retains an amount equal to such taxes. Notwithstanding
the foregoing, if the Company determines that the provision of
benefits under this Section 4(a)(iv) would be likely to result in
negative tax consequences to the Executive, the Company will use
its reasonable best efforts to make other arrangements to provide
a substantially similar benefit to the Executive that does not
have such negative tax consequences, which may include, making a
lump sum payment at the earliest time permitted under Section
409A of the Code, in an amount equal to the Company's reasonable
determination of the present value of any such benefits that, if
provided, would result in negative tax consequences to the
Executive and/or providing such benefit through insurance
coverage on the Executive's behalf.
(v) Within ten (10) business days after the expiration of any
revocation period relating to the Release Agreement described in
Section 20 below, the Executive will be entitled to receive a
lump sum cash payment in an amount equal to the present value of
continued participation in the Benefit Plans for an additional 18
months. If any benefit described in this Section 4(a)(v) is
subject to tax, the Company will pay to the Executive an
additional amount such that after payment by the Executive or the
Executive's dependents or beneficiaries, as the case may be, of
all taxes (including any income or social security tax) imposed
on the benefits described in this Section 4(a)(v) and any such
additional payment by the Company, the recipient retains an
amount equal to such taxes.
(vi) In addition to the retirement and other benefits to which the
Executive is entitled under the Company's defined benefit
retirement plans (including any supplemental plans) with respect
to the Executive's employment through the Termination Date, the
Executive shall be entitled to a lump sum cash payment, within
five (5) business days after the expiration of any revocation
period relating to the Release Agreement described in
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Section 20 below, in an amount equal to the present value
(calculated in accordance with the terms of the Company's defined
benefit plans or supplemental plans, based on the age of the
Executive at the date entitlement to benefits under this Section
4(a)(vi) arises) of the excess of (A) the retirement income and
other benefits that would be payable to the Executive under the
defined benefit plans (including any supplemental plans) of the
Company if the Executive was credited with an additional three
years of age and three years of benefit and credited service in
addition to the age and total number of years of benefit and
credited service the Executive has accrued under such plans over
(B) the retirement income and other benefits the Executive is
entitled to receive (either immediately or on a deferred basis)
under the defined benefit plans (including any supplemental
plans) of the Company. In the event that the Executive, after
credit for the additional three years, has a total of less than
five years of credited service, the Executive nonetheless shall
be treated as fully vested under the defined benefit retirement
plans and any supplemental retirement plans, but with benefits
computed solely on the basis of total benefit service.
(vii) The Executive shall be entitled to outplacement services for a
time period (not less than six (6) months) established by the
Company, by a firm selected by the Company in its sole
discretion, and at the expense of the Company; provided, however,
that all such outplacement services must be completed by December
31 of the second calendar year following the calendar year in
which the Termination Date occurs and the Company will be
required to make all payments to the Executive for such
outplacement services by December 31 of the second calendar year
following the calendar year in which the Termination Date occurs.
(b) Notwithstanding anything to the contrary contained in this Section 4,
if any payment to the Executive under this Section 4 would constitute
a "deferral of compensation" under Section 409A of the Code (such
compensation does not, for example, qualify for the "short-term
deferral exception" under Section 409A of the Code) and the Executive
is a "specified employee" (as such phrase is defined in Section 409A
of the Code), the Executive (or the Executive's beneficiary) will
receive payment of such amounts described in this Section 4 upon the
earlier of (i) six (6) months following the Executive's "separation
from service" with the Company (as such phrase is defined in Section
409A of the Code) or (ii) the Executive's death.
(c) Without limiting the rights of the Executive at law or in equity, if
the Company fails to make any payment or provide any benefit required
to be made or provided hereunder on a timely basis, the Company will
pay interest on the amount or value thereof at an annualized rate of
interest equal to the "prime rate" as set forth from time to time
during the relevant period in The Wall Street Journal "Money Rates"
column. Such interest will be payable as it accrues on demand. Any
change in such prime rate will be effective on and as of the date of
such change.
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5. Golden Parachute Excise Tax. The amounts payable to the Executive under
Section 4 shall be adjusted as set forth in this Section 5 if the sum (the
"combined amount") of the amounts payable under Section 4 and all other
payments or benefits which the Executive has received or has the right to
receive from the Company which are defined in Section 280G(b)(2)(A)(i) of
the Code, would constitute a "parachute payment" (as defined in Section
280G(b)(2) of the Code). In such event, the combined amount shall, unless
the following sentence applies, be decreased by the smallest amount that
will eliminate any parachute payment. If the decrease referred to in the
preceding sentence is 10% or more of the combined amount, the combined
amount shall not be decreased, but rather shall be increased by an amount
(the "Gross Up Payment") sufficient to provide the Executive, after tax, a
net amount equal to the Code Section 4999 excise tax imposed on such
combined amount, as increased pursuant to this section. For this purpose,
"after tax" means the amount retained by the Executive after satisfaction
(whether through withholding, direct payment or otherwise) of all
applicable federal, state, provincial and local income taxes at the highest
marginal tax rate, and the employee share of any applicable FICA taxes. To
the extent a Gross-Up Payment is due to the Executive pursuant to this
Section 5, the Gross-Up Payment shall be made on the date the lump sum
payments provided in Section 4 are made and shall include all Gross-Up
Payments due in respect of payments made before, payments made at the same
time as, and payments projected to be made after such payment date;
provided, however, that in accordance with Section 280G, -------- -------
such Gross-Up Payment shall not include taxes imposed by Section 4999 for
health insurance benefits, which shall be paid and withheld by the Company
at the same date that income taxes are withheld from such health insurance
benefits. If at a time subsequent to any payment under Section 4, an
additional amount of Code Section 4999 excise tax is definitively
determined to be due by either the Internal Revenue Service or a court of
competent jurisdiction, the Company shall pay to the Executive an
additional amount which, net of Federal, state, provincial and local
income, FICA and Code Section 4999 excise taxes, will satisfy such
additional Code Section 4999 excise tax, including applicable interest and
penalties. The parties acknowledge that, if the decrease referred to in the
second sentence of this Section 5 is 10% or more of the combined amount,
the intention of the preceding sentences in this Section 5 is to place the
Executive in the position in which the Executive would be if the Code
Section 4999 excise tax did not exist. Notwithstanding the foregoing
provisions of this Section 5, Gross-Up Payments, including any additional
payment made subsequent to any payment under Section 4, will be made only
in a manner and to the extent (and at the earliest date(s)) such that
Section 409A of the Code will not be violated.
6. No Mitigation Obligation. The Company hereby acknowledges that it will be
difficult and may be impossible for the Executive to find reasonably
comparable employment following the Termination Date. Accordingly, the
payment of the severance compensation by the Company to the Executive in
accordance with the terms of this Agreement is hereby acknowledged by the
Company to be reasonable, and the Executive will not be required to
mitigate the amount of any payment provided for in this Agreement by
seeking other employment or otherwise, nor will any profits, income,
earnings or other benefits from any source whatsoever create any
mitigation, offset, reduction or any other obligation on the part of the
Executive hereunder or otherwise.
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7. Legal Fees and Expenses.
(a) If it should appear to the Executive that the Company has failed to
comply with any of its obligations under this Agreement or in the
event that the Company or any other person takes or threatens to take
any action to declare this Agreement void or unenforceable, or
institutes any proceeding designed to deny, or to recover from, the
Executive the benefits provided or intended to be provided to the
Executive hereunder, the Company irrevocably authorizes the Executive
from time to time to retain counsel of the Executive's choice, at the
expense of the Company as hereafter provided, to advise and represent
the Executive in connection with any such dispute or proceeding.
Without respect to whether the Executive prevails, in whole or in
part, in connection with any of the foregoing, the Company will pay
and be financially responsible for reasonable attorneys' and related
fees and expenses incurred by the Executive in connection with claims
made in good faith but only if, and to the extent and at the earliest
date(s) that, such actions are determined to be permitted without
violating Section 409A of the Code. Such payments will be made after
delivery of the Executive's written requests for payment, accompanied
by such evidence of fees and expenses incurred as the Company may
reasonably require.
(b) Without limiting the obligations of the Company pursuant to Section
7(a), in the event that (i) the Executive is entitled to benefits
hereunder and (ii) payments to the Executive would be required to be
delayed by more than 20 business days due to Section 409A of the Code
or otherwise, the performance of the Company's obligations under
Section 4 and this Section 7 will be secured by amounts deposited or
to be deposited in a grantor trust pursuant to certain trust
agreements to which the Company will be a party providing that the
benefits to be paid pursuant to Section 4 and the reasonable fees and
expenses of counsel selected from time to time by the Executive
pursuant to Section 7(a) will be paid, or reimbursed to the Executive
if paid by the Executive, either in accordance with the terms of such
trust agreements, or, if not so provided, on a regular, periodic basis
upon presentation by the Executive to the trustee of a statement or
statements prepared by such counsel in accordance with its customary
practices. Any failure by the Company to satisfy any of its
obligations under this Section 7(b) will not limit the rights of the
Executive hereunder. Subject to the foregoing, the Executive will have
the status of a general unsecured creditor of the Company and will
have no right to, or security interest in, any assets of the Company
or any Subsidiary.
8. Competitive Activity; Confidentiality; Nonsolicitation.
(a) Acknowledgements and Agreements. The Executive hereby acknowledges and
agrees that in the performance of the Executive's duties for the
Company during the Executive's employment, the Executive will be
brought into frequent contact, either in person, by telephone or
through the mails, with existing and potential customers of the
Company throughout the United States. The Executive also agrees that
trade secrets and confidential information of the Company, more fully
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described in Section 8(i) of this Agreement, gained by the Executive
during the Executive's association with the Company, have been
developed by the Company through substantial expenditures of time,
effort and money and constitute valuable and unique property of the
Company. The Executive further understands and agrees that the
foregoing makes it necessary for the protection of the business of the
Company that the Executive not compete with the Company during the
Executive's employment and not compete with the Company for a
reasonable period thereafter, as further provided in the following
subsections.
(b) Covenants During Employment. During the Executive's employment, the
Executive will not compete with the Company anywhere that the Company
conducts its business. In accordance with this restriction, but
without limiting its terms, during the Executive's employment, the
Executive will not:
(i) enter into or engage in any business which competes with the
business of the Company;
(ii) solicit customers, business, patronage or orders for, or sell,
any products and services in competition with, or for any
business that competes with, the business of the Company;
(iii) divert, entice or otherwise take away any customers, business,
patronage or orders of the Company or attempt to do so; or
(iv) promote or assist, financially or otherwise, any person, firm,
association, partnership, corporation or other entity engaged in
any business which competes with the business of the Company.
(c) Covenants Following Termination. If, during the Severance Period, the
Executive's employment is terminated entitling the Executive to
payments and benefits under Section 4 of this Agreement, for a period
of one (1) year following the termination of the Executive's
employment, the Executive will not:
(i) enter into or engage in any business which competes with the
Company's business within the United States;
(ii) solicit customers, business, patronage or orders for, or sell,
any products and services in competition with, or for any
business, wherever located, that competes with, the Company's
business within the United States;
(iii) divert, entice or otherwise take away any customers, business,
patronage or orders of the Company within the United States, or
attempt to do so; or
(iv) promote or assist, financially or otherwise, any person, firm,
association, partnership, corporation or other entity engaged in
any business which competes with the Company's business within
the United States.
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(d) Indirect Competition. For the purposes of Sections 8(b) and 8(c), but
without limitation thereof, the Executive will be in violation thereof
if the Executive engages in any or all of the activities set forth
therein directly as an individual on the Executive's own account, or
indirectly as a general partner, joint venturer, employee, agent,
salesperson, consultant, officer and/or director of any firm,
association, partnership, corporation or other entity, or as a limited
partner, member or stockholder of any limited partnership, limited
liability company, or corporation in which the Executive or the
Executive's spouse, child or parent owns, directly or indirectly,
individually or in the aggregate, more than five percent (5%) of the
limited partnership interests, limited liability company interests or
outstanding stock, as the case may be.
(e) The Company. For purposes of this Section 8, the Company shall include
any and all Subsidiaries.
(f) The Company's Business. For the purposes of Sections 8(b), 8(c), 8(j)
and 8(k), the Company's business is defined to be the manufacture and
distribution of gypsum wallboard, joint compound and related gypsum
products, cement board, gypsum fiber panels, ceiling panels and grid,
the distribution of building products and any future businesses that
the Company may enter, as further described in any and all
manufacturing, marketing and sales manuals and materials of the
Company as the same may be altered, amended, supplemented or otherwise
changed from time to time, or of any other products or services
substantially similar to or readily substitutable for any such
described products and services.
(g) Extension. If it shall be judicially determined that the Executive has
violated any of the Executive's obligations under Section 8(c), then
the period applicable to each obligation that the Executive shall have
been determined to have violated shall automatically be extended by a
period of time equal in length to the period during which such
violation(s) occurred.
(h) Non-Solicitation. Until the expiration of three (3) years following
the Termination Date, the Executive will not directly or indirectly at
any time solicit or induce or attempt to solicit or induce any
employee(s), sales representative(s), agent(s) or consultant(s) of the
Company and/or of its Subsidiaries to terminate their employment,
representation or other association with the Company and/or its
Subsidiaries.
(i) Further Covenants.
(i) The Executive will keep in strict confidence, and will not,
without the prior written consent of the Company or as may
otherwise be required by law or legal process, directly or
indirectly, at any time during or after the Executive's
employment with the Company, disclose, furnish, disseminate, make
available or, except in the course of performing the Executive's
duties of employment, use any trade secrets or non-public
confidential business and technical information of the Company or
its
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customers or vendors, including without limitation as to when or
how the Executive may have acquired such information before or
during employment. Such confidential information shall include,
without limitation, the Company's unique non-public confidential
selling, manufacturing and servicing methods and business
techniques, training, service and business manuals, promotional
materials, training courses and other training and instructional
materials, vendor and product information, customer and
prospective customer lists, other customer and prospective
customer information and other business information. The
Executive specifically acknowledges that all such non-public
confidential information, whether reduced to writing, maintained
on any form of electronic media, or maintained in the Executive's
mind or memory and whether compiled by the Company and/or the
Executive, derives independent economic value from not being
readily known to or ascertainable by proper means by others who
can obtain economic value from its disclosure or use, that
reasonable efforts have been made by the Company to maintain the
secrecy of such information, that such information is the sole
property of the Company and that any retention and use of such
information by the Executive during the Executive's employment
with the Company (except in the course of performing the
Executive's duties and obligations to the Company) or after the
termination of the Executive's employment shall constitute a
misappropriation of the Company's trade secrets.
(ii) The Executive agrees that upon termination of the Executive's
employment with the Company, for any reason, the Executive shall
return to the Company, in good condition, all property of the
Company, including without limitation, the originals and all
copies of any materials which contain, reflect, summarize,
describe, analyze or refer or relate to any items of information
listed in Section 8(i)(i) of this Agreement. In the event that
such items are not so returned, the Company will have the right
to charge the Executive for all reasonable damages, costs,
attorneys' fees and other expenses incurred in searching for,
taking, removing and/or recovering such property.
(j) Discoveries and Inventions; Work Made for Hire.
(i) The Executive hereby assigns and agrees to assign to the Company,
its successors, assigns or nominees, all of the Executive's
rights to any discoveries, inventions and improvements, whether
patentable or not, made, conceived or suggested, either solely or
jointly with others, by the Executive while in the Company's
employ with the use of the Company's time, material or facilities
or in any way within or related to the existing or contemplated
scope of the Company's business. Any discovery, invention or
improvement relating to any subject matter with which the Company
was concerned during the Executive's employment and made,
conceived or suggested by the Executive, either solely or jointly
with others, within
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one (1) year following termination of the Executive's employment
under this Agreement or any successor agreements shall be
irrebuttably presumed to have been so made, conceived or
suggested in the course of such employment with the use of the
Company's time, materials or facilities. Upon request by the
Company with respect to any such discoveries, inventions or
improvements, the Executive will execute and deliver to the
Company, at any time during or after the Executive's employment,
all appropriate documents for use in applying for, obtaining and
maintaining such domestic and foreign patents as the Company may
desire, and all proper assignments therefor, when so requested,
at the expense of the Company, but without further or additional
consideration.
(ii) Executive acknowledges that, to the extent permitted by law, all
work papers, reports, documentation, drawings, photographs,
negatives, tapes and masters therefor, prototypes and other
materials (hereinafter, "items"), including without limitation,
any and all such items generated and maintained on any form of
electronic media, generated by the Executive during the
Executive's employment with the Company shall be considered a
"work made for hire" and that ownership of any and all copyrights
in any and all such items shall belong to the Company. The item
will recognize the Company as the copyright owner, will contain
all proper copyright notices, e.g., "(creation date) USG
Corporation, All Rights Reserved," and will be in condition to be
registered or otherwise placed in compliance with registration or
other statutory requirements throughout the world.
(k) Communication of Contents of Agreement. During the Executive's
employment and for one (1) year thereafter, the Executive will
communicate the contents of this Agreement to any person, firm,
association, partnership, corporation or other entity which the
Executive intends to be employed by, associated with, or represent and
which is engaged in a business that is competitive to the business of
the Company.
(l) Relief. The Executive acknowledges and agrees that the remedy at law
available to the Company for breach of any of the Executive's
obligations under this Agreement would be inadequate. The Executive
therefore agrees that, in addition to any other rights or remedies
that the Company may have at law or in equity, temporary and permanent
injunctive relief may be granted in any proceeding which may be
brought to enforce any provision contained in Sections 8(b), 8(c),
8(h), 8(i), 8(j) and 8(k) of this Agreement, without the necessity of
proof of actual damage.
(m) Reasonableness. The Executive acknowledges that the Executive's
obligations under this Section 8 are reasonable in the context of the
nature of the Company's business and the competitive injuries likely
to be sustained by the Company if the Executive was to violate such
obligations. The Executive further acknowledges that this Agreement is
made in consideration of, and is adequately supported by,
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the agreement of the Company to perform its obligations under this
Agreement and by other consideration, which the Executive acknowledges
constitutes good, valuable and sufficient consideration.
9. Employment Rights. Nothing expressed or implied in this Agreement will
create any right or duty on the part of the Company or the Executive to
have the Executive remain in the employment of the Company or any
Subsidiary prior to or following any Change in Control.
10. Withholding of Taxes. The Company may withhold from any amounts payable
under this Agreement all federal, state, city or other taxes as the Company
is required to withhold pursuant to any applicable law, regulation or
ruling.
11. Successors and Binding Agreement.
(a) The Company will require any successor (whether direct or indirect, by
purchase, merger, consolidation, reorganization or otherwise) to all
or substantially all of the business or assets of the Company, by
agreement in form and substance reasonably satisfactory to the
Executive, expressly to assume and agree to perform this Agreement in
the same manner and to the same extent the Company would be required
to perform if no such succession had taken place. This Agreement will
be binding upon and inure to the benefit of the Company and any
successor to the Company, including without limitation any persons
acquiring directly or indirectly all or substantially all of the
business or assets of the Company whether by purchase, merger,
consolidation, reorganization or otherwise (and such successor will
thereafter be deemed the "Company" for the purposes of this
Agreement), but will not otherwise be assignable, transferable or
delegable by the Company.
(b) This Agreement will inure to the benefit of and be enforceable by the
Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees and legatees.
(c) This Agreement is personal in nature and neither of the parties hereto
will, without the consent of the other, assign, transfer or delegate
this Agreement or any rights or obligations hereunder except as
expressly provided in Sections 11(a) and 11(b). Without limiting the
generality or effect of the foregoing, the Executive's right to
receive payments hereunder will not be assignable, transferable or
delegable, whether by pledge, creation of a security interest, or
otherwise, other than by a transfer by the Executive's will or by the
laws of descent and distribution and, in the event of any attempted
assignment or transfer contrary to this Section 11(c), the Company
will have no liability to pay any amount so attempted to be assigned,
transferred or delegated.
18
<PAGE>
12. Notices. For all purposes of this Agreement, all communications, including
without limitation notices, consents, requests or approvals, required or
permitted to be given hereunder will be in writing and will be deemed to
have been duly given when hand delivered or dispatched by electronic
facsimile transmission (with receipt thereof orally confirmed), or five
business days after having been mailed by United States registered or
certified mail, return receipt requested, postage prepaid, or three
business days after having been sent by a nationally recognized overnight
courier service such as FedEx or UPS, addressed to the Company (to the
attention of the Secretary of the Company) at its principal executive
office and to the Executive at the Executive's principal residence, or to
such other address as any party may have furnished to the other in writing
and in accordance herewith, except that notices of changes of address will
be effective only upon receipt.
13. Governing Law. The validity, interpretation, construction and performance
of this Agreement will be governed by and construed in accordance with the
substantive laws of the State of Delaware and federal law, without giving
effect to the principles of conflict of laws of such State, except as
expressly provided herein.
14. Validity. If any provision of this Agreement or the application of any
provision hereof to any person or circumstance is held invalid or otherwise
unenforceable, the remainder of this Agreement and the application of such
provision to any other person or circumstance will not be affected, and the
provision so held to be invalid or otherwise unenforceable will be reformed
to the extent (and only to the extent) necessary to make it enforceable or
valid.
15. Miscellaneous.
(a) No provision of this Agreement may be modified, waived or discharged
unless such waiver, modification or discharge is agreed to in writing
signed by the Executive and the Company. No waiver by either party
hereto at any time of any breach by the other party hereto or
compliance with any condition or provision of this Agreement to be
performed by such other party will be deemed a waiver of similar or
dissimilar provisions or conditions at the same or at any prior or
subsequent time. No agreements or representations, oral or otherwise,
expressed or implied with respect to the subject matter hereof have
been made by either party that are not set forth expressly in this
Agreement.
(b) Subject to Section 3(d), this Agreement supersedes, as of the date
first above written, any prior agreements providing for severance
payments and benefits following a Change in Control, including the
Termination Compensation Agreement, between the Executive and the
Company (the "Prior Agreements"). The Executive agrees that he or she
has no further rights under the Prior Agreements.
(c) The headings used in this Agreement are intended for convenience or
reference only and will not in any manner amplify, limit, modify or
otherwise be used in the construction or interpretation of any
provision of this Agreement. References to
19
<PAGE>
Sections are to Sections of this Agreement. Any reference in this
Agreement to a provision of a statute, rule or regulation will also
include any successor provision thereto.
16. Severability. Whenever possible, each provision of this Agreement shall be
interpreted in such manner as to be effective and valid under applicable
law, but if any provision of this Agreement is held to be invalid or
unenforceable in any respect under any applicable law or rule in any
jurisdiction, such invalidity or unenforceability shall not affect any
other provision of this Agreement, but this Agreement shall be reformed,
construed and enforced in such jurisdiction as if such invalid or
unenforceable provision had never been contained herein.
17. Survival. Notwithstanding any provision of this Agreement to the contrary,
the parties' respective rights and obligations under Sections 3(d), 4, 5,
7, 8, 10, 11(b), 16 and 17 will survive any termination or expiration of
this Agreement or the termination of the Executive's employment following a
Change in Control for any reason whatsoever.
18. Beneficiaries. The Executive will be entitled to select (and change, to the
extent permitted under any applicable law) a beneficiary or beneficiaries
to receive any compensation or benefit payable hereunder following the
Executive's death, and may change such election, in either case by giving
the Company written notice thereof in accordance with Section 12. In the
event of the Executive's death or a judicial determination of the
Executive's incompetence, reference in this Agreement to the "Executive"
will be deemed, where appropriate, to the Executive's beneficiary, estate
or other legal representative.
19. Counterparts. This Agreement may be executed in one or more counterparts,
each of which will be deemed to be an original but all of which together
will constitute one and the same agreement.
20. Release Agreement. No payments shall be made under Section 4 hereof if the
Executive declines to sign and return a Release Agreement or revokes such
Release Agreement within the time provided therein. If the Executive
becomes entitled to payments under Section 4 hereof, the Company shall
deliver to the Executive a copy of the Company's standard form of Release
Agreement within ten (10) business days of the Executive's Termination
Date.
21. Representations. The Executive represents and warrants to the Company that
upon the execution and delivery of this Agreement by the Company, this
Agreement shall be the valid and binding obligation of the Executive,
enforceable in accordance with its terms. The Company represents and
warrants to the Executive that upon the execution and delivery of this
Agreement by the Executive, this Agreement shall be the valid and binding
obligation of the Company, enforceable in accordance with its terms.
20
<PAGE>
22. Section 409A of the Code. To the extent applicable, it is intended that
this Agreement comply with the provisions of Section 409A of the Code. This
Agreement shall be administered in a manner consistent with this intent,
and any provision that would cause the Agreement to fail to satisfy Section
409A of the Code shall have no force and effect until amended to comply
with Section 409A of the Code (which amendment may be retroactive to the
extent permitted by Section 409A of the Code and may be made by the Company
without the consent of the Executive).
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
USG CORPORATION
By:
------------------------------------
Name: Brian J. Cook
Title: Senior Vice President,
Human Resources
----------------------------------------
Executive
21
</TEXT>
</DOCUMENT>
<DOCUMENT>
<TYPE>EX-10.13
<SEQUENCE>6
<FILENAME>c12346exv10w13.txt
<DESCRIPTION>FORM OF CHANGE IN CONTROL SEVERANCE AGREEMENT (TIER 2)
<TEXT>
<PAGE>
EXHIBIT 10.13
USG CORPORATION
CHANGE IN CONTROL SEVERANCE AGREEMENT
THIS CHANGE IN CONTROL SEVERANCE AGREEMENT (this "Agreement"), dated as of
January 1, 2007, is made and entered into by and between USG Corporation, a
Delaware corporation (the "Company"), and ____________________ (the
"Executive").
RECITALS:
I. The Executive is a senior executive of the Company or a Subsidiary and
has made and is expected to continue to make major contributions to the growth
and financial strength of the Company;
II. The Company recognizes that the possibility of a Change in Control (as
defined below) exists and that such possibility, and the uncertainty it may
create among management, may result in the distraction or departure of
management personnel, to the detriment of the Company and its stockholders;
III. The Company desires to assure itself of the continuity of management
and desires to establish certain minimum severance benefits for certain of its
senior executives, including the Executive, applicable in the event of a Change
in Control;
IV. The Company wishes to ensure that its senior executives are not unduly
distracted by the circumstances attendant to the possibility of a Change in
Control and to encourage the continued attention and dedication of such
executives, including the Executive, to their assigned duties with the Company;
and
V. The Company desires to provide additional inducement for the Executive
to continue to remain in the employ of the Company.
NOW, THEREFORE, the Company and the Executive agree as follows:
1. Certain Defined Terms. In addition to terms defined elsewhere herein, the
following terms have the following meanings when used in this Agreement
with initial capital letters:
(a) "Base Pay" means the Executive's annual base salary rate as in effect
from time to time.
(b) "Board" means the Board of Directors of the Company.
(c) "Cause" means that, prior to any termination pursuant to Section 3(b),
the Executive shall have:
<PAGE>
(i) been convicted of a criminal violation involving fraud,
embezzlement or theft in connection with the Executive's duties
or in the course of the Executive's employment with the Company
or any Subsidiary;
(ii) committed intentional wrongful damage to tangible or intangible
property of the Company or any Subsidiary; or
(iii) committed intentional wrongful disclosure of secret processes or
confidential information of the Company or any Subsidiary.
For purposes of this Agreement, no act or failure to act on the part
of the Executive will be deemed "intentional" if it was due primarily
to an error in judgment or negligence, but will be deemed
"intentional" only if done or omitted to be done by the Executive not
in good faith and without reasonable belief that the Executive's
action or omission was in the best interest of the Company.
Notwithstanding the foregoing, the Executive will not be deemed to
have been terminated for "Cause" hereunder unless and until there
shall have been delivered to the Executive a copy of a resolution duly
adopted by the affirmative vote of not less than a majority of the
Board then in office (excluding the Executive if the Executive is then
a member of the Board) at a meeting of the Board called and held for
such purpose, after reasonable notice to the Executive and an
opportunity for the Executive, together with the Executive's counsel
(if the Executive chooses to have counsel present at such meeting), to
be heard before the Board, finding that, in the good faith opinion of
the Board, the Executive had committed an act constituting "Cause" as
herein defined and specifying the particulars thereof in reasonable
detail. Nothing herein will limit the right of the Executive or the
Executive's beneficiaries to contest the validity or propriety of any
such determination.
(d) "Change in Control" means the occurrence during the Term of any of the
following events:
(i) any individual, entity or group (within the meaning of Section
13(d)(3) or 14(d)(2) of the Exchange Act) (a "Person") is or
becomes the beneficial owner (within the meaning of Rule 13d-3
promulgated under the Exchange Act) of 20% or more of the
combined voting power of the then-outstanding Voting Stock of the
Company; provided, however, that:
(1) for purposes of this Section 1(d), the following
acquisitions shall not constitute a Change in Control: (A)
any acquisition of Voting Stock of the Company directly from
the Company that is approved by a majority of the Incumbent
Directors, (B) any acquisition of Voting Stock of the
Company by the Company or any Subsidiary, (C) any
acquisition of Voting Stock of the Company by the trustee or
other fiduciary holding securities under any employee
benefit plan (or related trust) sponsored or maintained by
the Company or any Subsidiary, and (D) any acquisition of
Voting Stock of the
2
<PAGE>
Company by any Person pursuant to a Business Transaction
that complies with clauses (A), (B) and (C) of Section
1(d)(iii) below;
(2) if any Person is or becomes the beneficial owner of 20% or
more of combined voting power of the then-outstanding Voting
Stock of the Company as a result of a transaction described
in clause (A) of Section 1(d)(i)(1) above and such Person
thereafter becomes the beneficial owner of any additional
shares of Voting Stock of the Company representing 1% or
more of the then-outstanding Voting Stock of the Company,
other than in an acquisition directly from the Company that
is approved by a majority of the Incumbent Directors or
other than as a result of a stock dividend, stock split or
similar transaction effected by the Company in which all
holders of Voting Stock are treated equally, such subsequent
acquisition shall be treated as a Change in Control;
(3) a Change in Control will not be deemed to have occurred if a
Person is or becomes the beneficial owner of 20% or more of
the Voting Stock of the Company as a result of a reduction
in the number of shares of Voting Stock of the Company
outstanding pursuant to a transaction or series of
transactions that is approved by a majority of the Incumbent
Directors unless and until such Person thereafter becomes
the beneficial owner of any additional shares of Voting
Stock of the Company representing 1% or more of the
then-outstanding Voting Stock of the Company, other than as
a result of a stock dividend, stock split or similar
transaction effected by the Company in which all holders of
Voting Stock are treated equally; and
(4) if at least a majority of the Incumbent Directors determine
in good faith that a Person has acquired beneficial
ownership of 20% or more of the Voting Stock of the Company
inadvertently, and such Person divests as promptly as
practicable but no later than the date, if any, set by the
Incumbent Board a sufficient number of shares so that such
Person beneficially owns less than 20% of the Voting Stock
of the Company, then no Change in Control shall have
occurred as a result of such Person's acquisition; or
(ii) a majority of the Board ceases to be comprised of Incumbent
Directors; or
(iii) the consummation of a reorganization, merger or consolidation,
or sale or other disposition of all or substantially all of the
assets of the Company or the acquisition of the stock or assets
of another corporation, or other transaction (each, a "Business
Transaction"), unless, in each case, immediately following such
Business Transaction (A) the Voting Stock of the Company
outstanding immediately prior to such Business Transaction
continues to represent (either by remaining outstanding or by
being
3
<PAGE>
converted into Voting Stock of the surviving entity or any parent
thereof), more than 60% of the combined voting power of the then
outstanding shares of Voting Stock of the entity resulting from
such Business Transaction (including, without limitation, an
entity which as a result of such transaction owns the Company or
all or substantially all of the Company's assets either directly
or through one or more subsidiaries), (B) no Person (other than
the Company, such entity resulting from such Business
Transaction, or any employee benefit plan (or related trust)
sponsored or maintained by the Company, any Subsidiary or such
entity resulting from such Business Transaction) beneficially
owns, directly or indirectly, 20% or more of the combined voting
power of the then outstanding shares of Voting Stock of the
entity resulting from such Business Transaction, and (C) at least
a majority of the members of the Board of Directors of the entity
resulting from such Business Transaction were Incumbent Directors
at the time of the execution of the initial agreement or of the
action of the Board providing for such Business Transaction; or
(iv) approval by the stockholders of the Company of a complete
liquidation or dissolution of the Company, except pursuant to a
Business Transaction that complies with clauses (A), (B) and (C)
of Section 1(d)(iii).
Notwithstanding anything in this Agreement to the contrary, a Change in
Control shall not be deemed to have occurred as a result of an acquisition
or the holding of Voting Stock of the Company permitted by Section 2(a) of
the Shareholder's Agreement entered into as of January 30, 2006, by and
between the Company and Berkshire Hathaway, Inc.
(e) "Code" means the Internal Revenue Code of 1986, as amended.
(f) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
(g) "Good Reason" means the failure of the Company to remedy any of the
following within 10 calendar days after receipt by the Company of
written notice thereof from the Executive:
(i) a material diminution in the Executive's normal duties and
responsibilities, including, but not limited to, the assignment
without the Executive's written consent of any diminished duties
and responsibilities which are inconsistent with the Executive's
positions, duties and responsibilities with the Company
immediately prior to a Change in Control, or a materially adverse
change in the Executive's reporting responsibilities or titles as
in effect immediately prior to the Change in Control, whether or
not resulting from an act of the Company or otherwise, or any
removal of the Executive from or any failure to re-elect the
Executive to any of such positions, except in connection with the
termination of the Executive's employment for disability,
retirement, or
4
<PAGE>
Cause or as a result of the Executive's death or by the Executive
other than for Good Reason;
(ii) a reduction by the Company in the Executive's Base Pay as in
effect on the date hereof or as the same may be increased from
time to time;
(iii) a change in the Executive's Target Direct Annual Compensation
that results in an aggregate decrease in such Target Direct
Annual Compensation in excess of ten percent (10%);
(iv) the Company's requiring the Executive, without the Executive's
written consent, to be based anywhere other than within fifty
(50) miles of the Executive's office location immediately prior
to the Change in Control, except for required travel on the
Company's business to an extent substantially consistent with
business travel obligations immediately prior to the Change in
Control;
(v) the failure by the Company to continue in effect any investment
plan, retirement plan, savings plan, supplemental retirement
plan, deferred compensation plan, supplemental investment plan,
life insurance plan, health and accident plan, disability plan or
other welfare benefit plan in which the Executive was
participating at the time of the Change in Control (or plans
providing the Executive with substantially similar benefits), the
taking of any action by the Company which would adversely affect
the Executive's participation or materially reduce the
Executive's benefits or value under any of such plans or deprive
the Executive of any material fringe benefit enjoyed by the
Executive at the time of the Change in Control, or the failure by
the Company to provide the Executive with the number of paid
vacation days to which the Executive was then entitled in
accordance with the Company's normal vacation policy in effect on
the date of the Change in Control; or
(vi) the failure by the Company to obtain the assumption of the
obligation to perform this Agreement by any successor as
contemplated in Section 11 hereof.
(h) "Incumbent Directors" means the individuals who, as of the date of
this Agreement, are Directors of the Company and any individual
becoming a Director subsequent to the date of this Agreement whose
election, nomination for election by the Company's stockholders, or
appointment, was approved by a vote of at least two-thirds of the then
Incumbent Directors (either by a specific vote or by approval of the
proxy statement of the Company in which such person is named as a
nominee for director, without objection to such nomination); provided,
however, that an individual shall not be an Incumbent Director if such
individual's election or appointment to the Board occurs as a result
of an actual or threatened election contest (as described in Rule
14a-12(c) of the Exchange Act) with respect to the election or removal
of Directors or other actual or threatened
5
<PAGE>
solicitation of proxies or consents by or on behalf of a Person other
than the Board.
(i) "Release Agreement" means an agreement, in substantially the form
customarily used by the Company for similarly situated executives of
the Company in similar instances, pursuant to which the Executive
releases, to the extent permitted by law, all current or future
claims, known or unknown, arising on or before the date of the release
against the Company, its subsidiaries and its officers.
(j) "Severance Period" means the period of time commencing on the date of
the first occurrence of a Change in Control and continuing until the
earlier of (i) the second anniversary of the occurrence of the Change
in Control, or (ii) the Executive's death.
(k) "Subsidiary" means a corporation, company or other entity (i) at least
50 percent of whose outstanding shares or securities (representing the
right to vote for the election of directors or other managing
authority) are, or (ii) which does not have outstanding shares or
securities (as may be the case in a partnership, joint venture or
unincorporated association), but at least 50 percent of whose
ownership interest representing the right generally to make decisions
for such other entity is, now or hereafter, owned or controlled,
directly or indirectly, by the Company.
(l) "Target Annual Direct Compensation" means the sum of the Executive's
Base Pay, target annual incentive opportunity, and the annualized
value of the most recent long-term incentive award approved by the
Compensation and Organization Committee of the Board. For purposes of
measuring annualized long-term incentives, the awards shall be
measured on their date of grant using reasonable assumptions,
including, but not limited to, fair value principles such as those
identified in Statement of Financial Accounting Standards No. 123,
Share-Based Payment; the value of such awards shall be annualized over
the frequency of their grant. Notwithstanding the foregoing, if, for
purposes of calculating "Target Annual Direct Compensation," the most
recent long-term incentive award would be the long-term incentive
award granted in August 2006 (the "2006 Award"), the calculation of
"Target Annual Direct Compensation" will include only 50% of the value
of such 2006 Award.
(m) "Term" means the period commencing as of the date hereof and expiring
on the second anniversary of the date of this Agreement, with
automatic one-year renewals thereafter unless either party notifies
the other at least 90 days before the scheduled expiration date that
the Term is not to renew; provided, however, that (i) if a Change in
Control occurs during the Term, the Term will expire on, and no sooner
than, the last day of the Severance Period; and (ii) subject to
Section 3(c), if, prior to a Change in Control, the Executive ceases
for any reason to be an officer of the Company or an employee of the
Company or any Subsidiary, thereupon without further action the Term
shall be deemed to have expired and this Agreement will immediately
terminate and be of no further effect. For purposes of this Section
1(m), the Executive shall not be deemed to have ceased
6
<PAGE>
to be an employee of the Company and any Subsidiary by reason of the
transfer of the Executive's employment between the Company and any
Subsidiary, or among Subsidiaries.
(n) "Termination Date" means the date on which the Executive's employment
is terminated (the effective date of which will be the date of
termination, or such other date that may be specified by the Executive
if the termination is pursuant to Section 3(b)).
(o) "Voting Stock" means at any time, the then-outstanding securities
entitled to vote generally in the election of directors of the
Company.
2. Operation of Agreement. This Agreement will be effective and binding
immediately upon its execution, but, anything in this Agreement to the
contrary notwithstanding, except as provided in Section 3(c), the payments
and benefits provided under this Agreement will not be payable unless and
until a Change in Control occurs. Upon the occurrence of a Change in
Control at any time during the Term, without further action, this Agreement
will become immediately operative.
3. Termination Following a Change in Control.
(a) If a Change in Control occurs and the Executive's employment is
terminated by the Company or a Subsidiary during the Severance Period
(or pursuant to Section 3(c)), the Executive will be entitled to the
benefits provided by Section 4 unless such termination is the result
of the occurrence of one or more of the following events:
(i) The Executive's death;
(ii) The Executive's having become unable (as determined by the Board
in good faith), with or without reasonable accommodations, to
regularly perform the Executive's duties by reason of illness or
incapacity; or
(iii) Cause.
(b) In the event of the occurrence of a Change in Control, the Executive
may terminate employment with the Company and any Subsidiary during
the Severance Period for Good Reason with the right to severance
compensation as provided in Section 4 regardless of whether any other
reason, other than Cause, for such termination exists or has occurred,
including without limitation other employment.
(c) Anything in this Agreement to the contrary notwithstanding, if a
Change in Control occurs and not more than 90 days prior to the date
on which the Change in Control occurs, the Executive's employment with
the Company is terminated by the Company, such termination of
employment will be deemed to be a termination of employment after a
Change in Control for purposes of this Agreement and, in addition, the
Company will be required to pay to the Executive
7
<PAGE>
in a lump sum in cash, the sum of: (1) the difference between the fair
market value of a common share of the Company and the exercise price
of each outstanding stock option held by the Executive that was
forfeited as a result of the Executive's termination of employment
multiplied by the number of shares underlying each stock option held
by the Executive that was forfeited as a result of the Executive's
termination of employment and (2) the fair market value of a common
share of the Company multiplied by the number of shares underlying
each share of restricted stock and each performance share and other
equity award held by the Executive that was forfeited as a result of
the Executive's termination of employment. For this purpose, the "fair
market value of a common share of the Company" shall be deemed to be
the price per share paid in connection with the Change in Control.
(d) A termination of employment pursuant to Section 3(a), 3(b) or 3(c)
will not affect any rights that the Executive may have pursuant to any
agreement, policy, plan, program or arrangement of the Company or any
Subsidiary providing employee benefits, which rights will be governed
by the terms thereof; provided, however, that if upon termination of
employment, the Executive is entitled to severance compensation or
benefits under this Agreement and pursuant to any employment or
severance agreement or employee plan (an "Employment Agreement"), the
Executive will be entitled to severance benefits under either this
Agreement or such Employment Agreement, whichever agreement provides
for greater benefits, but will not be entitled to benefits under both
agreements.
4. Severance Compensation.
(a) If, following the occurrence of a Change in Control, the Company or a
Subsidiary of the Company terminates the Executive's employment during
the Severance Period other than pursuant to Section 3(a)(i), 3(a)(ii)
or 3(a)(iii), or if the Executive terminates the Executive's
employment pursuant to Section 3(b), the Company will be obligated to
make the following payments and provide the following benefits to the
Executive.
(i) The Executive will be entitled to receive: (i) as soon as
practicable following the end of the Employment Period, any Base
Pay which has accrued but is unpaid, any reimbursable expenses
which have been incurred but are unpaid, and payment for any
unexpired vacation days which have accrued under the Company's or
a Subsidiary's vacation policy but are unused, as of the date of
termination of the Executive's employment, (ii) any plan benefits
which by their terms extend beyond termination of the Executive's
employment (but only to the extent provided in any such benefit
plan in which the Executive has participated as an employee of
the Company or a Subsidiary and excluding, except as hereinafter
provided in this Section 4, any severance pay program or policy
of the Company or a Subsidiary), and (iii) subject to Section
4(a)(ii) below, payments or benefits payable pursuant to the
terms of any annual and/or long-term incentive plan of the
Company or a Subsidiary in
8
<PAGE>
accordance with the terms thereof. In addition, the Executive
shall be entitled to the additional benefits and amounts
described in the succeeding subsections of this Section 4, in the
circumstances described in such subsections.
(ii) Within ten (10) business days after the expiration of any
revocation period relating to the Release Agreement described in
Section 20 below and in lieu of payments under the terms of the
Company's annual bonus plan applicable to the Executive, the
Executive will be entitled to receive a lump sum cash payment in
an amount equal to the greater of (A) the Executive's target or
par annual bonus for the fiscal year in which the Termination
Date occurs or (B) the Executive's target or par annual bonus for
the fiscal year in which the Change in Control occurs, pro-rated
for the number of full months that the Executive was employed
during such fiscal year (i.e., the annual bonus shall be
multiplied by a fraction, the numerator of which is the number of
full months during which the Executive was actively employed by
the Company in the relevant fiscal year and the denominator of
which is 12).
(iii) Within ten (10) business days after the expiration of any
revocation period relating to the Release Agreement described in
Section 20 below, the Executive will be entitled to receive a
lump sum cash payment in an amount equal to two (2) times the sum
of (A) Base Pay (at the highest rate in effect for any period
within three years prior to the Termination Date), plus (B)
annual bonus (in an amount equal to the greater of the
Executive's target or par annual bonus for the year in which the
Termination Date occurs or for the year in which the Change in
Control occurs, whichever is greater).
(iv) For a period of eighteen (18) months following the Termination
Date (the "Continuation Period"), the Executive will be entitled
to continued participation in the Company's medical, dental,
vision, long-term disability and life insurance plans (excluding
benefits under the executive death benefit plan) (the "Benefit
Plans"), subject to the terms and conditions of the Benefit
Plans, including, but not limited to, timely payment of any
employee contributions necessary to maintain participation;
provided, however, that (A) such coverage shall be provided only
to the extent that such coverage would not be considered
"deferred compensation" subject to the requirements of Section
409A of the Code; and (B) the Executive's continued participation
in the Benefit Plans during the Continuation Period shall satisfy
the Benefit Plans' obligation, if any, to provide the Executive
the right to continuation coverage under the Benefit Plans
pursuant to the Consolidated Omnibus Budget Reconciliation Act of
1986, as amended. If any benefit described in this Section
4(a)(iv) is subject to tax, the Company will pay to the Executive
an additional amount such that after payment by the Executive or
the Executive's dependents or beneficiaries, as the case may be,
of all taxes
9
<PAGE>
(including any income or social security tax) imposed on the
benefits described in this Section 4(a)(iv) and any such
additional payment by the Company, the recipient retains an
amount equal to such taxes. Notwithstanding the foregoing, if the
Company determines that the provision of benefits under this
Section 4(a)(iv) would be likely to result in negative tax
consequences to the Executive, the Company will use its
reasonable best efforts to make other arrangements to provide a
substantially similar benefit to the Executive that does not have
such negative tax consequences, which may include, making a lump
sum payment at the earliest time permitted under Section 409A of
the Code, in an amount equal to the Company's reasonable
determination of the present value of any such benefits that, if
provided, would result in negative tax consequences to the
Executive and/or providing such benefit through insurance
coverage on the Executive's behalf.
(v) Within ten (10) business days after the expiration of any
revocation period relating to the Release Agreement described in
Section 20 below, the Executive will be entitled to receive a
lump sum cash payment in an amount equal to the present value of
continued participation in the Benefit Plans for an additional
six (6) months. If any benefit described in this Section 4(a)(v)
is subject to tax, the Company will pay to the Executive an
additional amount such that after payment by the Executive or the
Executive's dependents or beneficiaries, as the case may be, of
all taxes (including any income or social security tax) imposed
on the benefits described in this Section 4(a)(v) and any such
additional payment by the Company, the recipient retains an
amount equal to such taxes.
(vi) In addition to the retirement and other benefits to which the
Executive is entitled under the Company's defined benefit
retirement plans (including any supplemental plans) with respect
to the Executive's employment through the Termination Date, the
Executive shall be entitled to a lump sum cash payment, within
five (5) business days after the expiration of any revocation
period relating to the Release Agreement described in Section 20
below, in an amount equal to the present value (calculated in
accordance with the terms of the Company's defined benefit plans
or supplemental plans, based on the age of the Executive at the
date entitlement to benefits under this Section 4(a)(vi) arises)
of the excess of (A) the retirement income and other benefits
that would be payable to the Executive under the defined benefit
plans (including any supplemental plans) of the Company if the
Executive was credited with an additional two years of age and
two years of benefit and credited service in addition to the age
and total number of years of benefit and credited service the
Executive has accrued under such plans over (B) the retirement
income and other benefits the Executive is entitled to receive
(either immediately or on a deferred basis) under the defined
benefit plans (including any supplemental plans) of the Company.
In the event that the Executive, after credit for the additional
two years, has a total of less than five years of
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credited service, the Executive nonetheless shall be treated as
fully vested under the defined benefit retirement plans and any
supplemental retirement plans, but with benefits computed solely
on the basis of total benefit service.
(vii) The Executive shall be entitled to outplacement services for a
time period (not less than six (6) months) established by the
Company, by a firm selected by the Company in its sole
discretion, and at the expense of the Company; provided, however,
that all such outplacement services must be completed by December
31 of the second calendar year following the calendar year in
which the Termination Date occurs and the Company will be
required to make all payments to the Executive for such
outplacement services by December 31 of the second calendar year
following the calendar year in which the Termination Date occurs.
(b) Notwithstanding anything to the contrary contained in this Section 4,
if any payment to the Executive under this Section 4 would constitute
a "deferral of compensation" under Section 409A of the Code (such
compensation does not, for example, qualify for the "short-term
deferral exception" under Section 409A of the Code) and the Executive
is a "specified employee" (as such phrase is defined in Section 409A
of the Code), the Executive (or the Executive's beneficiary) will
receive payment of such amounts described in this Section 4 upon the
earlier of (i) six (6) months following the Executive's "separation
from service" with the Company (as such phrase is defined in Section
409A of the Code) or (ii) the Executive's death.
(c) Without limiting the rights of the Executive at law or in equity, if
the Company fails to make any payment or provide any benefit required
to be made or provided hereunder on a timely basis, the Company will
pay interest on the amount or value thereof at an annualized rate of
interest equal to the "prime rate" as set forth from time to time
during the relevant period in The Wall Street Journal "Money Rates"
column. Such interest will be payable as it accrues on demand. Any
change in such prime rate will be effective on and as of the date of
such change.
5. Golden Parachute Excise Tax. The amounts payable to the Executive under
Section 4 shall be adjusted as set forth in this Section 5 if the sum (the
"combined amount") of the amounts payable under Section 4 and all other
payments or benefits which the Executive has received or has the right to
receive from the Company which are defined in Section 280G(b)(2)(A)(i) of
the Code, would constitute a "parachute payment" (as defined in Section
280G(b)(2) of the Code). In such event, the combined amount shall, unless
the following sentence applies, be decreased by the smallest amount that
will eliminate any parachute payment. If the decrease referred to in the
preceding sentence is 10% or more of the combined amount, the combined
amount shall not be decreased, but rather shall be increased by an amount
(the "Gross Up Payment") sufficient to provide the Executive, after tax, a
net amount equal to the Code Section 4999 excise tax imposed on such
combined amount, as increased pursuant to this section. For this purpose,
"after tax" means the amount retained by the Executive after satisfaction
(whether through
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withholding, direct payment or otherwise) of all applicable federal, state,
provincial and local income taxes at the highest marginal tax rate, and the
employee share of any applicable FICA taxes. To the extent a Gross-Up
Payment is due to the Executive pursuant to this Section 5, the Gross-Up
Payment shall be made on the date the lump sum payments provided in Section
4 are made and shall include all Gross-Up Payments due in respect of
payments made before, payments made at the same time as, and payments
projected to be made after such payment date; provided, however, that in
accordance with Section 280G, such Gross-Up Payment shall not include taxes
imposed by Section 4999 for health insurance benefits, which shall be paid
and withheld by the Company at the same date that income taxes are withheld
from such health insurance benefits. If at a time subsequent to any payment
under Section 4, an additional amount of Code Section 4999 excise tax is
definitively determined to be due by either the Internal Revenue Service or
a court of competent jurisdiction, the Company shall pay to the Executive
an additional amount which, net of Federal, state, provincial and local
income, FICA and Code Section 4999 excise taxes, will satisfy such
additional Code Section 4999 excise tax, including applicable interest and
penalties. The parties acknowledge that, if the decrease referred to in the
second sentence of this Section 5 is 10% or more of the combined amount,
the intention of the preceding sentences in this Section 5 is to place the
Executive in the position in which the Executive would be if the Code
Section 4999 excise tax did not exist. Notwithstanding the foregoing
provisions of this Section 5, Gross-Up Payments, including any additional
payment made subsequent to any payment under Section 4, will be made only
in a manner and to the extent (and at the earliest date(s)) such that
Section 409A of the Code will not be violated.
6. No Mitigation Obligation. The Company hereby acknowledges that it will be
difficult and may be impossible for the Executive to find reasonably
comparable employment following the Termination Date. Accordingly, the
payment of the severance compensation by the Company to the Executive in
accordance with the terms of this Agreement is hereby acknowledged by the
Company to be reasonable, and the Executive will not be required to
mitigate the amount of any payment provided for in this Agreement by
seeking other employment or otherwise, nor will any profits, income,
earnings or other benefits from any source whatsoever create any
mitigation, offset, reduction or any other obligation on the part of the
Executive hereunder or otherwise.
7. Legal Fees and Expenses.
(a) If it should appear to the Executive that the Company has failed to
comply with any of its obligations under this Agreement or in the
event that the Company or any other person takes or threatens to take
any action to declare this Agreement void or unenforceable, or
institutes any proceeding designed to deny, or to recover from, the
Executive the benefits provided or intended to be provided to the
Executive hereunder, the Company irrevocably authorizes the Executive
from time to time to retain counsel of the Executive's choice, at the
expense of the Company as hereafter provided, to advise and represent
the Executive in connection with any such dispute or proceeding.
Without respect to whether the Executive prevails, in whole or in
part, in connection with any of the foregoing, the Company will pay
and be financially responsible for reasonable attorneys' and
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related fees and expenses incurred by the Executive in connection with
claims made in good faith but only if, and to the extent and at the
earliest date(s) that, such actions are determined to be permitted
without violating Section 409A of the Code. Such payments will be made
after delivery of the Executive's written requests for payment,
accompanied by such evidence of fees and expenses incurred as the
Company may reasonably require.
(b) Without limiting the obligations of the Company pursuant to Section
7(a), in the event that (i) the Executive is entitled to benefits
hereunder and (ii) payments to the Executive would be required to be
delayed by more than 20 business days due to Section 409A of the Code
or otherwise, the performance of the Company's obligations under
Section 4 and this Section 7 will be secured by amounts deposited or
to be deposited in a grantor trust pursuant to certain trust
agreements to which the Company will be a party providing that the
benefits to be paid pursuant to Section 4 and the reasonable fees and
expenses of counsel selected from time to time by the Executive
pursuant to Section 7(a) will be paid, or reimbursed to the Executive
if paid by the Executive, either in accordance with the terms of such
trust agreements, or, if not so provided, on a regular, periodic basis
upon presentation by the Executive to the trustee of a statement or
statements prepared by such counsel in accordance with its customary
practices. Any failure by the Company to satisfy any of its
obligations under this Section 7(b) will not limit the rights of the
Executive hereunder. Subject to the foregoing, the Executive will have
the status of a general unsecured creditor of the Company and will
have no right to, or security interest in, any assets of the Company
or any Subsidiary.
8. Competitive Activity; Confidentiality; Nonsolicitation.
(a) Acknowledgements and Agreements. The Executive hereby acknowledges and
agrees that in the performance of the Executive's duties for the
Company during the Executive's employment, the Executive will be
brought into frequent contact, either in person, by telephone or
through the mails, with existing and potential customers of the
Company throughout the United States. The Executive also agrees that
trade secrets and confidential information of the Company, more fully
described in Section 8(i) of this Agreement, gained by the Executive
during the Executive's association with the Company, have been
developed by the Company through substantial expenditures of time,
effort and money and constitute valuable and unique property of the
Company. The Executive further understands and agrees that the
foregoing makes it necessary for the protection of the business of the
Company that the Executive not compete with the Company during the
Executive's employment and not compete with the Company for a
reasonable period thereafter, as further provided in the following
subsections.
(b) Covenants During Employment. During the Executive's employment, the
Executive will not compete with the Company anywhere that the Company
conducts its business. In accordance with this restriction, but
without limiting its terms, during the Executive's employment, the
Executive will not:
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(i) enter into or engage in any business which competes with the
business of the Company;
(ii) solicit customers, business, patronage or orders for, or sell,
any products and services in competition with, or for any
business that competes with, the business of the Company;
(iii) divert, entice or otherwise take away any customers, business,
patronage or orders of the Company or attempt to do so; or
(iv) promote or assist, financially or otherwise, any person, firm,
association, partnership, corporation or other entity engaged in
any business which competes with the business of the Company.
(c) Covenants Following Termination. If, during the Severance Period, the
Executive's employment is terminated entitling the Executive to
payments and benefits under Section 4 of this Agreement, for a period
of one (1) year following the termination of the Executive's
employment, the Executive will not:
(i) enter into or engage in any business which competes with the
Company's business within the United States;
(ii) solicit customers, business, patronage or orders for, or sell,
any products and services in competition with, or for any
business, wherever located, that competes with, the Company's
business within the United States;
(iii) divert, entice or otherwise take away any customers, business,
patronage or orders of the Company within the United States, or
attempt to do so; or
(iv) promote or assist, financially or otherwise, any person, firm,
association, partnership, corporation or other entity engaged in
any business which competes with the Company's business within
the United States.
(d) Indirect Competition. For the purposes of Sections 8(b) and 8(c), but
without limitation thereof, the Executive will be in violation thereof
if the Executive engages in any or all of the activities set forth
therein directly as an individual on the Executive's own account, or
indirectly as a general partner, joint venturer, employee, agent,
salesperson, consultant, officer and/or director of any firm,
association, partnership, corporation or other entity, or as a limited
partner, member or stockholder of any limited partnership, limited
liability company, or corporation in which the Executive or the
Executive's spouse, child or parent owns, directly or indirectly,
individually or in the aggregate, more than five percent (5%) of the
limited partnership interests, limited liability company interests or
outstanding stock, as the case may be.
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(e) The Company. For purposes of this Section 8, the Company shall include
any and all Subsidiaries.
(f) The Company's Business. For the purposes of Sections 8(b), 8(c), 8(j)
and 8(k), the Company's business is defined to be the manufacture and
distribution of gypsum wallboard, joint compound and related gypsum
products, cement board, gypsum fiber panels, ceiling panels and grid,
the distribution of building products and any future businesses that
the Company may enter, as further described in any and all
manufacturing, marketing and sales manuals and materials of the
Company as the same may be altered, amended, supplemented or otherwise
changed from time to time, or of any other products or services
substantially similar to or readily substitutable for any such
described products and services.
(g) Extension. If it shall be judicially determined that the Executive has
violated any of the Executive's obligations under Section 8(c), then
the period applicable to each obligation that the Executive shall have
been determined to have violated shall automatically be extended by a
period of time equal in length to the period during which such
violation(s) occurred.
(h) Non-Solicitation. Until the expiration of two (2) years following the
Termination Date, the Executive will not directly or indirectly at any
time solicit or induce or attempt to solicit or induce any
employee(s), sales representative(s), agent(s) or consultant(s) of the
Company and/or of its Subsidiaries to terminate their employment,
representation or other association with the Company and/or its
Subsidiaries.
(i) Further Covenants.
(i) The Exec