-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MmY8/LOkPYKT0ZeLRxQhMEUolODjdCHydsXuKbTvPAsEes6JVv4O4KnUXuna2syX x4TK+7Q5GSjE+2URBCV/hg== 0000950137-05-001958.txt : 20050218 0000950137-05-001958.hdr.sgml : 20050218 20050218111830 ACCESSION NUMBER: 0000950137-05-001958 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 20041231 FILED AS OF DATE: 20050218 DATE AS OF CHANGE: 20050218 FILER: COMPANY DATA: COMPANY CONFORMED NAME: USG CORP CENTRAL INDEX KEY: 0000757011 STANDARD INDUSTRIAL CLASSIFICATION: CONCRETE GYPSUM PLASTER PRODUCTS [3270] IRS NUMBER: 363329400 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-08864 FILM NUMBER: 05626214 BUSINESS ADDRESS: STREET 1: 125 SOUTH FRANKLIN STREET STREET 2: DEPARTMENT 188 CITY: CHICAGO STATE: IL ZIP: 60606 BUSINESS PHONE: 312-606-4000 MAIL ADDRESS: STREET 1: DEPARTMENT #188 STREET 2: 125 SOUTH FRANKLIN STREET CITY: CHICAGO STATE: IL ZIP: 60606 10-K 1 c92112e10vk.txt ANNUAL REPORT ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------- FORM 10-K ---------- (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _______________ to _______________. Commission File Number 1-8864 USG CORPORATION (Exact name of Registrant as Specified in its Charter) DELAWARE 36-3329400 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.)
125 S. FRANKLIN STREET, CHICAGO, ILLINOIS 60606-4678 (Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (312) 606-4000 ---------- Securities Registered Pursuant to Section 12(b) of the Act:
Name of Exchange on Title of Each Class Which Registered ------------------- ------------------- Common Stock, $0.10 par value New York Stock Exchange Chicago Stock Exchange Preferred Share Purchase Rights New York Stock Exchange Chicago Stock Exchange 8.5% Senior Notes, Due 2005 New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: None (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2) Yes [X] No [ ] Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes [X] No [ ] The aggregate market value of the registrant's common stock held by non-affiliates based on the New York Stock Exchange closing price as of June 30, 2004 (the last business day of the registrant's most recently completed second fiscal quarter), was approximately $749,743,366. The number of shares outstanding of the registrant's common stock as of January 31, 2005, was 43,313,533. ================================================================================ DOCUMENTS INCORPORATED BY REFERENCE Certain sections of USG Corporation's definitive Proxy Statement for use in connection with the annual meeting of stockholders to be held on May 11, 2005, are incorporated by reference into Part III of this Form 10-K Report where indicated. TABLE OF CONTENTS
Page ---- PART I Item 1. Business.................................................................................. 3 Item 2. Properties................................................................................ 8 Item 3. Legal Proceedings......................................................................... 9 Item 4. Submission of Matters to a Vote of Security Holders....................................... 9 PART II Item 5. Market for the Registrant's Common Stock, Related Stockholder Matters and Issuer Purchases of Equity Securities................................................................... 10 Item 6. Selected Financial Data................................................................... 11 Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition..... 12 Item 7a. Quantitative and Qualitative Disclosures About Market Risks............................... 29 Item 8. Financial Statements and Supplementary Data............................................... 30 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...... 67 Item 9a. Controls and Procedures................................................................... 67 PART III Item 10. Directors and Executive Officers of the Registrant........................................ 69 Item 11. Executive Compensation.................................................................... 70 Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.................................................................... 71 Item 13. Certain Relationships and Related Transactions............................................ 71 Item 14. Principal Accounting Fees and Services.................................................... 71 PART IV Item 15. Exhibits and Financial Statement Schedules................................................ 72 Signatures........................................................................................... 76
2 PART I ITEM 1. BUSINESS GENERAL United States Gypsum Company ("U.S. Gypsum") was incorporated in 1901. USG Corporation (the "Corporation") was incorporated in Delaware on October 22, 1984. By a vote of stockholders on December 19, 1984, U.S. Gypsum became a wholly owned subsidiary of the Corporation, and the stockholders of U.S. Gypsum became the stockholders of the Corporation, all effective January 1, 1985. Through its subsidiaries, the Corporation is a leading manufacturer and distributor of building materials, producing a wide range of products for use in new residential, new nonresidential, and repair and remodel construction as well as products used in certain industrial processes. VOLUNTARY REORGANIZATION UNDER CHAPTER 11 On June 25, 2001, the Corporation and 10 of its United States subsidiaries (collectively, the "Debtors") filed voluntary petitions for reorganization (the "Filing") under chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"). The chapter 11 cases of the Debtors have been consolidated for purposes of joint administration as In re: USG Corporation et al. (Case No. 01-2094). This action was taken to resolve asbestos claims in a fair and equitable manner, to protect the long-term value of the Debtors' businesses, and to maintain the Debtors' leadership positions in their markets. The Debtors are operating their businesses as debtors-in-possession subject to the provisions of the United States Bankruptcy Code. These cases do not include any of the Corporation's non-U.S. subsidiaries. U.S. Gypsum is a defendant in asbestos lawsuits alleging both property damage and personal injury. Other subsidiaries of the Corporation also have been named as defendants in a small number of asbestos personal injury lawsuits. As a result of the Filing, all pending asbestos lawsuits against U.S. Gypsum and other subsidiaries are stayed, and no party may take any action to pursue or collect on such asbestos claims absent specific authorization of the Bankruptcy Court. Since the Filing, U.S. Gypsum has ceased making payments with respect to asbestos lawsuits, including payments pursuant to settlements of asbestos lawsuits. See Part II, Item 7, Management's Discussion and Analysis of Results of Operations and Financial Condition, and Part II, Item 8, Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements, Note 2, Voluntary Reorganization Under Chapter 11, and Note 19, Litigation, for additional information on the bankruptcy proceeding and asbestos litigation. OPERATING SEGMENTS The Corporation's operations are organized into three operating segments: North American Gypsum, Worldwide Ceilings and Building Products Distribution. Net sales for the respective segments accounted for approximately 53%, 13% and 34% of 2004 consolidated net sales. NORTH AMERICAN GYPSUM BUSINESS North American Gypsum, which manufactures and markets gypsum and related products in the United States, Canada and Mexico, includes U.S. Gypsum in the United States, the gypsum business of CGC Inc. ("CGC") in Canada, and USG Mexico, S.A. de C.V. ("USG Mexico") in Mexico. U.S. Gypsum is the largest manufacturer of gypsum wallboard in the United States and accounted for approximately one-third of total domestic gypsum wallboard sales in 2004. CGC is the largest manufacturer of gypsum wallboard in eastern Canada. USG Mexico is the largest manufacturer of gypsum wallboard in Mexico. PRODUCTS North American Gypsum's products are used in a variety of building applications to finish the interior walls, ceilings and floors in residential, commercial and institutional construction and in certain industrial applications. These products provide aesthetic as well as sound-dampening, fire-retarding, abuse-resistance and moisture-control value. The majority of these products are sold under the SHEETROCK(R) brand name. Also sold under the SHEETROCK(R) brand name is a line of joint compounds used for finishing wallboard joints. The DUROCK(R) line of cement board 3 and accessories provides water-damage-resistant and fire-resistant assemblies for both interior and exterior construction. The FIBEROCK(R) line of gypsum fiber panels includes abuse-resistant wall panels and floor underlayment as well as sheathing panels usable as a substrate for most exterior systems. The LEVELROCK(R) line of poured gypsum underlayments provides surface leveling and enhanced sound performance for residential, commercial and multi-family installations. The Corporation produces a variety of construction plaster products used to provide a custom finish for residential and commercial interiors. Like SHEETROCK(R) brand gypsum wallboard, these products provide aesthetic, sound-dampening, fire-retarding and abuse-resistance value. Construction plaster products are sold under the trade names RED TOP(R), IMPERIAL(R) and DIAMOND(R). The Corporation also produces gypsum-based products for agricultural and industrial customers to use in a number of applications, including soil conditioning, road repair, fireproofing and ceramics. MANUFACTURING North American Gypsum's products are manufactured at 44 plants located throughout the United States, Canada and Mexico. Gypsum rock is mined or quarried at 14 company-owned locations in North America. In 2004, these locations provided approximately 70% of the gypsum used by the Corporation's plants in North America. Certain plants purchase or acquire synthetic gypsum and natural gypsum rock from various outside sources. Outside purchases or acquisitions accounted for 30% of the gypsum used in the Corporation's plants. The Corporation's geologists estimate that its recoverable rock reserves are sufficient for more than 25 years of operation based on the Corporation's average annual production of crude gypsum during the past five years of 9.5 million tons. Proven reserves contain approximately 243 million tons. Additional reserves of approximately 148 million tons are found on four properties not in operation. About 26% of the gypsum used in the Corporation's plants in North America is synthetic gypsum which is a byproduct resulting from flue gas desulphurization carried out by electric generation or industrial plants burning coal as a fuel. The suppliers of this kind of gypsum are primarily power companies, which are required to operate scrubbing equipment for their coal-fired generating plants under federal environmental regulations. The Corporation has entered into a number of long-term supply agreements that provide for the acquisition of such gypsum. The Corporation generally takes possession of the gypsum at the producer's facility and transports it to its user wallboard plants by water where convenient using ships or river barges, or by railcar or truck. The supply of synthetic gypsum is continuing to increase as more power generation plants are fitted with desulphurization equipment. Synthetic gypsum is supplied fully or partially to 12 of the Corporation's gypsum wallboard plants. The Corporation owns and operates seven paper mills located across the United States. Vertical integration in paper ensures a continuous supply of high-quality paper that is tailored to the specific needs of the Corporation's wallboard production processes. The Corporation augments its paper needs through purchases from outside suppliers. About 6% of the Corporation's paper supply was purchased from such sources during 2004. MARKETING AND DISTRIBUTION Distribution is carried out through L&W Supply Corporation ("L&W Supply"), a wholly owned subsidiary of the Corporation, other specialty wallboard distributors, building materials dealers, home improvement centers and other retailers, and contractors. Sales of gypsum products are seasonal in the sense that sales are generally greater from spring through the middle of autumn than during the remaining part of the year. Based on the Corporation's estimates using publicly available data, internal surveys and gypsum wallboard shipment data from the Gypsum Association, management estimates that during 2004 about 47% of total industry volume demand for gypsum wallboard was generated by new residential construction, 39% of volume demand was generated by residential and nonresidential repair and remodel activity, 8% of volume demand was generated by new nonresidential construction, and the remaining 6% of volume demand was generated by other activities such as exports and temporary construction. COMPETITION The Corporation accounts for approximately one-third of the total gypsum wallboard sales in the United States. In 2004, U.S. Gypsum shipped 11.0 billion square feet of wallboard, the highest level in its history, out of total U.S. industry shipments (including imports) estimated 4 by the Gypsum Association at 35.1 billion square feet, the highest level on record. Competitors in the United States are: National Gypsum Company, BPB (through its subsidiaries BPB Gypsum, Inc. and BPB America Inc.), Georgia-Pacific Corporation, American Gypsum (a unit of Eagle Materials Inc.), Temple-Inland Forest Products Corporation, Lafarge North America, Inc. and PABCO Gypsum. Competitors in Canada include BPB Canada Inc., Georgia-Pacific Corporation and Lafarge North America, Inc. The major competitor in Mexico is Panel Rey, S.A. Principal methods of competition are quality of products, service, pricing and compatibility of systems. WORLDWIDE CEILINGS BUSINESS Worldwide Ceilings, which manufactures and markets interior systems products worldwide, includes USG Interiors, Inc. ("USG Interiors"), the international interior systems business managed as USG International, and the ceilings business of CGC. Worldwide Ceilings is a leading supplier of interior ceilings products used primarily in commercial applications. The Corporation estimates that it is the largest manufacturer of ceiling grid and the second-largest manufacturer/marketer of acoustical ceiling tile in the world. PRODUCTS Worldwide Ceilings manufactures ceiling tile in the United States and ceiling grid in the United States, Canada, Europe and the Asia-Pacific region. It markets both ceiling tile and ceiling grid in the United States, Canada, Mexico, Europe, Latin America and the Asia-Pacific region. Its integrated line of ceilings products provides qualities such as sound absorption, fire retardation and convenient access to the space above the ceiling for electrical and mechanical systems, air distribution and maintenance. USG Interiors' significant trade names include the AURATONE(R) and ACOUSTONE(R) brands of ceiling tile and the DONN(R), DX(R), FINELINE(R), CENTRICITEE(R), CURVATURA(R) and COMPASSO(R) brands of ceiling grid. MANUFACTURING Worldwide Ceilings' products are manufactured at 14 plants located in North America, Europe and the Asia-Pacific region. These include 9 ceiling grid plants, 3 ceiling tile plants and 2 plants that either produce other interior systems products or prepare raw materials for ceiling tile and grid. Principal raw materials used in the production of Worldwide Ceilings' products include mineral fiber, steel, perlite, starch and high-pressure laminates. Certain of these raw materials are produced internally, while others are obtained from various outside suppliers. While the Corporation expects the availability of steel generally to remain tight and steel prices to remain high, the Corporation does not anticipate a shortage of steel for use in the manufacture of its ceiling grid products in 2005. MARKETING AND DISTRIBUTION Worldwide Ceilings' products are sold primarily in markets related to the new construction and renovation of commercial buildings. Marketing and distribution are conducted through a network of distributors, installation contractors, L&W Supply and home improvement centers. COMPETITION The Corporation estimates that it is the world's largest manufacturer of ceiling grid. Principal competitors in ceiling grid include WAVE (a joint venture between Armstrong World Industries, Inc. and Worthington Industries) and Chicago Metallic Corporation. The Corporation estimates that it is the second-largest manufacturer/marketer of acoustical ceiling tile in the world. Principal global competitors include Armstrong World Industries, Inc., OWA Faserplattenwerk GmbH (Odenwald), BPB America Inc. and AMF Mineralplatten GmbH Betriebs KG. Principal methods of competition are quality of products, service, pricing, compatibility of systems and product design features. BUILDING PRODUCTS DISTRIBUTION BUSINESS Building Products Distribution consists of L&W Supply, the leading specialty building products distribution business in the United States. In 2004, L&W Supply distributed approximately 11% of all gypsum wallboard in the United States, including approximately 29% of U.S. Gypsum's wallboard production. MARKETING AND DISTRIBUTION L&W Supply was organized in 1971 by U.S. Gypsum. It is a service-oriented organization that stocks a wide 5 range of construction materials and delivers less-than-truckload quantities of construction materials to job sites and places them in areas where work is being done, thereby reducing the need for handling by contractors. L&W Supply specializes in the distribution of gypsum wallboard (which accounted for 45% of its 2004 net sales), joint compound and other gypsum products manufactured by U.S. Gypsum and others. It also distributes products manufactured by USG Interiors such as acoustical ceiling tile and grid as well as products of other manufacturers, including drywall metal, insulation, roofing products and accessories. L&W Supply leases approximately 89% of its facilities from third parties. Typical leases have terms ranging from three to 15 years and include renewal options. L&W Supply remains focused on opportunities to profitably grow its specialty business as well as optimize asset utilization. As part of its plan, L&W Supply acquired three locations, opened one location and consolidated one location during 2004, leaving a total of 186 locations in 36 states as of December 31, 2004, compared with 183 locations and 181 locations as of December 31, 2003 and 2002, respectively. COMPETITION L&W Supply has a number of competitors, including Gypsum Management Supply, an independent distributor with locations in the southern, central and western United States. There are several regional competitors such as Rinker Materials Corporation in the Southeast (primarily in Florida), KCG, Inc., which is primarily in the southwestern and central United States, and The Strober Organization, Inc. in the northeastern and mid-Atlantic states. L&W Supply's many local competitors include specialty wallboard distributors, lumber dealers, hardware stores, home improvement centers and acoustical ceiling tile distributors. Principal methods of competition are location, service, range of products and pricing. EXECUTIVE OFFICERS OF THE REGISTRANT See Part III, Item 10, Directors and Executive Officers of the Registrant - Executive Officers of the Registrant (as of February 18, 2005). OTHER INFORMATION The Corporation performs research and development at the USG Research and Technology Center in Libertyville, Ill. (the "Research Center"). The staff at the Research Center provides specialized technical services to the operating units and does product and process research and development. The Research Center is especially well-equipped for carrying out fire, acoustical, structural and environmental testing of products and building assemblies. It also has an analytical laboratory for chemical analysis and characterization of materials. Development activities can be taken to an on-site pilot-plant level before being transferred to a full-size plant. The Research Center also is responsible for an industrial design group located at the USG Solutions Center(SM) in Chicago, Ill. Research and development also was performed in 2004 at a facility in Avon, Ohio. However, in mid-2004, the Corporation announced its decision to close the Avon facility in December 2004. The Avon facility housed staff and equipment for product development in support of suspension grid for acoustical ceiling tile. As of December 31, 2004, research and development activities at the Avon facility were in the process of being transferred to the Research Center. This transfer is expected to be completed by mid-2005. Primary supplies of energy have been adequate, and no curtailment of plant operations has resulted from insufficient supplies. Supplies are likely to remain sufficient for projected requirements. Energy price swap agreements are used by the Corporation to hedge the cost of a substantial majority of purchased natural gas. None of the operating segments has any special working capital requirements. No single customer of the Corporation accounted for 10% or more of the Corporation's 2004, 2003 or 2002 consolidated net sales, except for The Home Depot, Inc., which, on a worldwide basis, accounted for approximately 11% in 2004 and 2003 and 10% in 2002. Because orders are filled upon receipt, no operating segment has any significant order backlog. Loss of one or more of the patents or licenses held by the Corporation would not have a major impact on the Corporation's business or its ability to continue operations. No material part of any of the Corporation's business is subject to renegotiation of profits or termination of contracts or subcontracts at the election 6 of the government. All of the Corporation's products regularly require improvement to remain competitive. The Corporation also develops and produces comprehensive systems employing several of its products. In order to maintain its high standards and remain a leader in the building materials industry, the Corporation performs ongoing extensive research and development activities and makes the necessary capital expenditures to maintain production facilities in good operating condition. In 2004, the average number of employees of the Corporation was 13,800. See Part II, Item 8, Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements, Note 17, Segments, for financial information pertaining to operating and geographic segments. AVAILABLE INFORMATION The Corporation maintains a website at www.usg.com and makes available at this website its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission (the "SEC"). If you wish to receive a hard copy of any exhibit to the Corporation's reports filed with or furnished to the Securities and Exchange Commission, such exhibit may be obtained, upon payment of reasonable expenses, by writing to: J. Eric Schaal, Corporate Secretary and Associate General Counsel, USG Corporation, P.O. Box 6721, Chicago, IL 60680-6721. You may read and copy any materials the Corporation files with the SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. 7 ITEM 2. PROPERTIES The Corporation's plants, mines, quarries, transport ships and other facilities are located in North America, Europe and the Asia-Pacific region. In 2004, U.S. Gypsum's SHEETROCK(R) brand gypsum wallboard plants operated at 94% of capacity. USG Interiors' AURATONE(R) brand ceiling tile plants operated at 88% of capacity. The locations of the production properties of the Corporation's subsidiaries, grouped by operating segment, are as follows (plants are owned unless otherwise indicated): NORTH AMERICAN GYPSUM GYPSUM WALLBOARD AND OTHER GYPSUM PRODUCTS Aliquippa, Pa. * Jacksonville, Fla. * Sperry, Iowa * Baltimore, Md. * New Orleans, La. * Stony Point, N.Y. Boston (Charlestown), Mass. Norfolk, Va. Sweetwater, Texas Bridgeport, Ala. * Plaster City, Calif. Hagersville, Ontario, Canada * Detroit (River Rouge), Mich. Rainier, Ore. * Montreal, Quebec, Canada * East Chicago, Ind. * Santa Fe Springs, Calif. Monterrey, Nuevo Leon, Mexico Empire, Nev. Shoals, Ind. * Puebla, Puebla, Mexico Fort Dodge, Iowa Sigurd, Utah Galena Park, Texas * Southard, Okla.
* Plants supplied fully or partially by synthetic gypsum. JOINT COMPOUND (SURFACE PREPARATION AND JOINT TREATMENT PRODUCTS) Auburn, Wash. Gypsum, Ohio Hagersville, Ontario, Canada Bridgeport, Ala. Jacksonville, Fla. Montreal, Quebec, Canada Chamblee, Ga. Phoenix (Glendale), Ariz. (leased) Surrey, British Columbia, Canada Dallas, Texas Port Reading, N.J. Monterrey, Nuevo Leon, Mexico East Chicago, Ind. Sigurd, Utah Puebla, Puebla, Mexico Fort Dodge, Iowa Torrance, Calif. Port Klang, Malaysia (leased) Galena Park, Texas Calgary, Alberta, Canada (leased)
CEMENT BOARD Baltimore, Md. New Orleans, La. Santa Fe Springs, Calif. Detroit (River Rouge), Mich.
GYPSUM ROCK (MINES AND QUARRIES) Alabaster (Tawas City), Mich. Sigurd, Utah Little Narrows, Nova Scotia, Canada Empire, Nev. Southard, Okla. Windsor, Nova Scotia, Canada Fort Dodge, Iowa Sperry, Iowa Manzanillo, Colima, Mexico Plaster City, Calif. Sweetwater, Texas Monterrey, Nuevo Leon, Mexico Shoals, Ind. Hagersville, Ontario, Canada
PAPER FOR GYPSUM WALLBOARD Clark, N.J. Jacksonville, Fla. South Gate, Calif. Galena Park, Texas North Kansas City, Mo. Gypsum, Ohio Oakfield, N.Y.
8 OTHER PRODUCTS Synthetic gypsum is processed at Belledune, New Brunswick, Canada. A mica-processing plant is located at Spruce Pine, N.C. Metal lath, plaster and drywall accessories and light gauge steel framing products are manufactured at Puebla, Puebla, Mexico, and Saltillo, Coahuila, Mexico. Gypsum fiber panel products are produced at Gypsum, Ohio. Paper-faced metal corner bead is manufactured at Auburn, Wash., and Weirton, W.Va. Sealants and finishes are produced at La Mirada, Calif. PLANT CLOSURES The lime products operation in New Orleans, La., was shut down during the first quarter of 2004. The joint compound plant at Edmonton, Alberta, Canada, was closed during the second quarter of 2004. OCEAN VESSELS Gypsum Transportation Limited, a wholly owned subsidiary of the Corporation and headquartered in Bermuda, owns and operates a fleet of three self-unloading ocean vessels. Under a contract of affreightment, these vessels transport gypsum rock from Nova Scotia to the East Coast plants of U.S. Gypsum. Excess ship time, when available, is offered for charter on the open market. WORLDWIDE CEILINGS CEILING GRID Cartersville, Ga. Auckland, New Zealand (leased) Peterlee, England (leased) Stockton, Calif. Dreux, France (leased) Shenzhen, China (leased) Westlake, Ohio Oakville, Ontario, Canada Viersen, Germany
A coil coater and slitter plant used in the production of ceiling grid also is located in Westlake, Ohio. Slitter plants are located in Stockton, Calif. (leased) and Antwerp, Belgium (leased). CEILING TILE Ceiling tile products are manufactured at Cloquet, Minn., Greenville, Miss., and Walworth, Wis. OTHER PRODUCTS Mineral fiber products are manufactured at Red Wing, Minn., and Walworth, Wis. Metal specialty systems are manufactured at Oakville, Ontario, Canada. ITEM 3. LEGAL PROCEEDINGS See Part II, Item 8, Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements, Note 2, Voluntary Reorganization Under Chapter 11, and Note 19, Litigation, for information on legal proceedings. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None during the fourth quarter of 2004. 9 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES The Corporation's common stock trades on the New York Stock Exchange (the "NYSE") and the Chicago Stock Exchange under the trading symbol USG. The NYSE is the principal market for these securities. As of January 31, 2005, there were 3,578 holders of record of the Corporation's common stock. No dividends are being paid on the Corporation's common stock. See Part III, Item 12, Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters, for information regarding common stock authorized for issuance under equity compensation plans. The high and low sales prices of the Corporation's common stock in 2004 and 2003 were as follows:
2004 2003 --------------- --------------- High Low High Low ------ ------ ------ ------ First quarter $20.17 $15.46 $ 9.04 $ 3.78 Second quarter 19.48 12.30 22.33 4.16 Third quarter 19.95 16.21 23.72 13.05 Fourth quarter 41.67 18.24 18.86 14.20
Purchases of equity securities by or on behalf of the Corporation during the fourth quarter of 2004 were as follows:
Total Number Maximum Number of Shares (or Units) (or Approximate Dollar Total Number Average Price Purchased as Part of Value) of Shares (or Units) 2004 of Shares (or Units) Paid per Share Publicly Announced That May Yet Be Purchased Period Purchased (a) (or Unit) (b) Plans or Programs (c) Under the Plans or Programs (c) - ------ -------------------- -------------- --------------------- ------------------------------- October -- -- -- -- November -- -- -- -- December 1,904 $40.57 -- -- ----- ------ --- --- Total Fourth Quarter 1,904 40.57 -- -- ===== ====== === ===
(a) Reflects shares reacquired to provide for tax withholdings on shares issued to employees under the terms of the USG Corporation 1995 Long-Term Equity Plan, 1997 Management Incentive Plan or 2000 Omnibus Management Incentive Plan. (b) The price per share is based upon the mean of the high and the low prices for a USG Corporation common share on the NYSE on the date of the tax withholding transaction. (c) The Corporation currently does not have in place a share repurchase plan or program. 10 ITEM 6. SELECTED FINANCIAL DATA USG CORPORATION FIVE-YEAR SUMMARY
Years Ended December 31, ----------------------------------------------- (dollars in millions, except per-share data) 2004 2003 2002 2001 2000 - -------------------------------------------- ------- ------- ------- ------- ------- STATEMENT OF EARNINGS DATA: Net sales $ 4,509 $ 3,666 $ 3,468 $ 3,296 $ 3,781 Cost of products sold 3,672 3,121 2,884 2,882 2,941 Gross profit 837 545 584 414 840 Selling and administrative expenses 317 324 312 279 309 Chapter 11 reorganization expenses 12 11 14 12 -- Provisions for impairment and restructuring -- -- -- 33 50 Provision for asbestos claims -- -- -- -- 850 Operating profit (loss) 508 210 258 90 (369) Interest expense (a) 5 6 8 33 52 Interest income (6) (4) (4) (5) (5) Other (income) expense, net -- (9) (2) 10 4 Income taxes (benefit) 197 79 117 36 (161) Earnings (loss) before cumulative effect of accounting change 312 138 139 16 (259) Cumulative effect of accounting change -- (16) (96) -- -- Net earnings (loss) 312 122 43 16 (259) Net Earnings (Loss) Per Common Share: Cumulative effect of accounting change -- (0.37) (2.22) -- -- Basic 7.26 2.82 1.00 0.36 (5.62) Diluted 7.26 2.82 1.00 0.36 (5.62) BALANCE SHEET DATA (as of the end of the year): Working capital 1,220 1,084 939 914 4 Current ratio 3.14 3.62 3.14 3.85 1.01 Cash, cash equivalents, restricted cash and marketable securities 1,249 947 830 493 70 Property, plant and equipment, net 1,853 1,818 1,788 1,800 1,830 Total assets 4,278 3,799 3,636 3,464 3,214 Total debt (b) 1,006 1,007 1,007 1,007 711 Liabilities subject to compromise 2,242 2,243 2,272 2,311 -- Total stockholders' equity 1,024 689 535 491 464 OTHER INFORMATION: Capital expenditures 138 111 100 109 380 Stock price per common share (c) 40.27 16.57 8.45 5.72 22.50 Cash dividends per common share -- -- -- 0.025 0.60 Average number of employees 13,800 13,900 14,100 14,300 14,900
(a) Interest expense excludes contractual interest expense which has not been accrued or recorded subsequent to June 25, 2001. See Item 7, Management's Discussion and Analysis of Results of Operations and Financial Condition - Consolidated Results of Operation - Interest Expense. (b) Total debt as of December 31, 2004, 2003, 2002 and 2001, includes $1,005 million of debt classified as liabilities subject to compromise. (c) Stock price per common share reflects the final closing price of the year. 11 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION OVERVIEW USG Corporation (the "Corporation") and 10 of its United States subsidiaries (collectively, the "Debtors") are currently operating under chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code"). The Debtors took this action to resolve asbestos claims in a fair and equitable manner, to protect the long-term value of the Debtors' businesses, and to maintain the Debtors' leadership positions in their markets. To properly understand the Corporation and its businesses, investors, creditors or other readers of this report should first understand the nature of this voluntary reorganization process under chapter 11 and the potential impacts the reorganization may have on their rights and interests in the Corporation as described in more detail below. At this point, there is great uncertainty as to the amount of the Debtors' asbestos liability and thus the value of any recovery for pre-petition creditors or stockholders under any final plan of reorganization. No plan of reorganization has thus far been proposed by the Debtors. The Corporation had $1,249 million of cash, cash equivalents, restricted cash and marketable securities as of December 31, 2004, and management believes that this liquidity plus expected operating cash flows will meet the Corporation's cash needs, including making regular capital investments to maintain and enhance its businesses, throughout the chapter 11 proceedings. The Corporation achieved record net sales in 2004, surpassing 2003 net sales by 23%. Demand for products sold by the Corporation's North American Gypsum and Building Products Distribution operating segments was strong in 2004 due to growth in the new housing and repair and remodel markets. The Corporation's Worldwide Ceilings operating segment also reported increased 2004 net sales as compared with 2003 primarily due to higher selling prices for ceiling grid and tile. Shipments of gypsum wallboard were at record levels for the Corporation and the industry in 2004 and are expected to be strong in 2005. The favorable level of activity in the aforementioned markets and industry capacity utilization rates in excess of 90% have resulted in a rise in market selling prices for gypsum wallboard. The nationwide average realized selling price for United States Gypsum Company's SHEETROCK(R) brand gypsum wallboard was up 21% from 2003. The Corporation's gross margin was 18.6% in 2004, up from 14.9% in 2003. Gross margin improved primarily as a result of higher selling prices for all major product lines. However, profit margins have been pressured by high levels of costs related to the price of natural gas (a major source of energy for the Corporation), employee benefits (pension and medical insurance for active employees and retirees), the implementation of a new enterprise-wide software system and the price of wastepaper used in the manufacture of gypsum wallboard and steel used in the manufacture of ceiling grid. Together, these cost factors added approximately $105 million to cost of products sold in 2004 as compared with 2003. VOLUNTARY REORGANIZATION UNDER CHAPTER 11 On June 25, 2001 (the "Petition Date"), the Debtors filed voluntary petitions for reorganization (the "Filing") under the Bankruptcy Code. The Debtors' bankruptcy cases (the "Chapter 11 Cases") are pending in the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"). At the time of the Filing, Debtor United States Gypsum Company ("U.S. Gypsum"), a subsidiary of the Corporation, was a defendant in more than 100,000 asbestos personal injury lawsuits. U.S. Gypsum was also a defendant in 11 asbestos lawsuits alleging property damage. In addition, two subsidiaries, Debtors L&W Supply Corporation ("L&W Supply") and Beadex Manufacturing, LLC ("Beadex"), were defendants in a small number of asbestos personal injury lawsuits. DEVELOPMENTS IN THE REORGANIZATION PROCEEDING As a consequence of the Filing, all asbestos lawsuits and other lawsuits pending against the Debtors as of the Petition Date are stayed, and no party may take any action to pursue or collect pre-petition claims except pursuant to an order of the Bankruptcy Court. The Debtors are operating their businesses without interruption as debtors-in-possession subject to the provisions of the Bankruptcy Code, and vendors are being paid for goods furnished and services provided 12 after the Filing. The Debtors' Chapter 11 Cases are assigned to Judge Judith K. Fitzgerald, a bankruptcy court judge, and Judge Joy Flowers Conti, a district court judge. Judge Conti recently entered an order stating that she will hear matters relating to estimation of the Debtors' liability for asbestos personal injury claims. Other matters will be heard by Judge Fitzgerald. Three creditors' committees, one representing asbestos personal injury claimants (the "Official Committee of Asbestos Personal Injury Claimants"), another representing asbestos property damage claimants (the "Official Committee of Asbestos Property Damage Claimants"), and a third representing unsecured creditors (the "Official Committee of Unsecured Creditors"), were appointed as official committees in the Chapter 11 Cases. The Bankruptcy Court also appointed Dean M. Trafelet as the legal representative for future asbestos claimants in the Debtors' bankruptcy proceedings. The Debtors intend to address their liability for all present and future asbestos claims, as well as all other pre-petition claims, in a plan or plans of reorganization approved by the Bankruptcy Court. The Debtors currently have the exclusive right to file a plan of reorganization until June 30, 2005. The Debtors may seek one or more additional extensions of the exclusive period depending upon developments in the Chapter 11 Cases. Any plan of reorganization ultimately approved by the Bankruptcy Court may include one or more independently administered trusts under Section 524(g) of the Bankruptcy Code, which may be funded by the Debtors to allow payment of present and future asbestos personal injury claims. Under the Bankruptcy Code, a plan of reorganization creating a Section 524(g) trust may be confirmed only if 75% of the asbestos claimants who are affected by the trust and who vote on the plan approve the plan. Section 524(g) also requires that such trust own (or have the right to acquire if specified contingencies occur) a majority of the voting stock of each relevant Debtor, its parent corporation, or a subsidiary that is also a Debtor. A plan of reorganization, including a plan creating a Section 524(g) trust, may be confirmed without the consent of non-asbestos creditors and equity security holders if certain requirements of the Bankruptcy Code are met. The Debtors also expect that the plan of reorganization will address the Debtors' liability for asbestos property damage claims, whether by including those liabilities in a Section 524(g) trust or by other means. If the confirmed plan of reorganization includes the creation and funding of a Section 524(g) trust relating to one or more of the Debtors, the Bankruptcy Court will issue a permanent injunction barring the assertion of present and future asbestos claims against the relevant Debtors, their successors, and their affiliates, and channeling those claims to the trust for payment in whole or in part. A key factor in determining whether or to what extent there will be any recovery for pre-petition creditors or stockholders under any plan of reorganization is the amount that must be provided in the plan to address the Debtors' liability for present and future asbestos claims. The amount of the Debtors' asbestos liabilities has not yet been determined and is subject to substantial uncertainty. The Debtors have stated that they believe they can pay all legitimate asbestos liabilities in full and that the Debtors are solvent. The Debtors have requested the court to estimate their asbestos personal injury liabilities taking into account the Debtors' defenses to these claims. One of the key issues in estimating the Debtors' asbestos personal injury liabilities is whether claimants who do not have objective evidence of asbestos-related disease have valid claims and whether such claimants, who significantly outnumber cancer claimants, are entitled to vote on a plan of reorganization. Other important estimation issues include the determination of the characteristics and number of present and future claimants who are likely to have had any, or sufficient, exposure to the Debtors' products, whether the particular type of asbestos present in certain of the Debtors' products during the relevant time has been shown to cause disease, and what are the appropriate claim values to apply in the estimation process. The Official Committee of Asbestos Personal Injury Claimants and the legal representative for future asbestos claimants have indicated in a court filing that they estimate that the net present value of the Debtors' liability for present and future asbestos personal injury claims is approximately $5.5 billion and that the Debtors are insolvent. The committee and the legal representative also contend that the Bankruptcy Court does not have the power to deny recovery to claimants on the grounds that they do not have 13 objective evidence of disease or do not have adequate exposure to the Debtors' products where such claimants, or claimants with similar characteristics, are compensated in the tort system outside of bankruptcy. In addition to the amount of the Debtors' asbestos liabilities, another key issue to be addressed in these Chapter 11 Cases is whether the assets of all of the Debtors should be available to pay the asbestos liabilities of U.S. Gypsum. In the fourth quarter of 2004, the Debtors other than U.S. Gypsum filed a complaint for declaratory relief in the Bankruptcy Court requesting a ruling that the assets of the Debtors other than U.S. Gypsum are not available to satisfy the asbestos liabilities of U.S. Gypsum. The Official Committee of Unsecured Creditors has joined the Debtors in this action. In opposition, the Official Committee of Asbestos Personal Injury Claimants, the legal representative for future asbestos claimants, and the Official Committee of Asbestos Property Damage Claimants filed counterclaims asserting that the assets of all Debtors should be available to satisfy the asbestos liabilities of U.S. Gypsum under various asserted legal grounds, including successor liability, piercing the corporate veil, and substantive consolidation. If the assets of all Debtors are pooled for the payment of all liabilities, including the asbestos liabilities of U.S. Gypsum, this could materially and adversely affect the recovery rights of creditors of Debtors other than U.S. Gypsum as well as the holders of the Corporation's equity. The Official Committee of Asbestos Personal Injury Claimants, the legal representative for future asbestos claimants, and the Official Committee of Asbestos Property Damage Claimants have also asserted claims seeking a declaratory judgment that L&W Supply has direct liability for asbestos personal injury claims on the asserted grounds that L&W Supply distributed asbestos-containing products and assumed the liabilities of former U.S. Gypsum subsidiaries that distributed such products. The Official Committee of Asbestos Personal Injury Claimants, the legal representative for future asbestos claimants, and the Official Committee of Asbestos Property Damage Claimants also have asserted in a court filing that the Debtors are liable for claims arising from the sale of asbestos-containing products by A.P. Green Refractories Co. ("A.P. Green"). They allege that U.S. Gypsum is liable for A.P. Green's liabilities due to U.S. Gypsum's acquisition of A.P. Green in 1967. They also allege that the other Debtors are liable for U.S. Gypsum's liabilities, including the alleged liabilities of A.P. Green, under various asserted legal grounds, including successor liability, piercing the corporate veil, and substantive consolidation. A.P. Green, which manufactured and sold products used in refractories, was acquired by merger into U.S. Gypsum in 1967 and thereafter operated as a wholly owned subsidiary of U.S. Gypsum until 1985, at which time A.P. Green became a wholly owned subsidiary of USG Corporation. In 1988, A.P. Green became a publicly traded company when its shares were distributed to the stockholders of USG Corporation. In February 2002, A.P. Green (now known as A.P. Green Industries, Inc.) as well as its parent company, Global Industrial Technologies, Inc., and other affiliates filed voluntary petitions for reorganization through which A.P. Green and its affiliates seek to resolve their asbestos liabilities. The A.P. Green reorganization proceeding is pending in the United States Bankruptcy Court for the Western District of Pennsylvania and is captioned In re: Global Industrial Technologies, Inc. (Case No. 02-21626). The draft disclosure statement filed in July 2003 by the debtors in the A.P. Green reorganization proceedings indicates that, in early 2002, there were 235,757 asbestos personal injury claims pending against A.P. Green as well as about 59,000 such claims pending against an A.P. Green affiliate, and that A.P. Green estimates that several hundred thousand additional claims will be asserted against it and/or its affiliate. The disclosure statement also indicates that, in early 2002, A.P. Green had approximately $492 million in unpaid pre-petition settlements and judgments relating to asbestos personal injury claims. The disclosure statement does not provide an estimate of the cost of resolving A.P. Green's liability for pending or future asbestos claims. The Corporation does not have sufficient information to predict whether or how any plan of reorganization in the Debtors' Chapter 11 Cases might address any liability based on sales of asbestos-containing products by A.P. Green. The Corporation also does not have sufficient information to estimate the amount, or range of amounts, of A.P. Green's asbestos liabilities. If U.S. Gypsum is determined to be liable for the sale of asbestos-containing products by A.P. Green or its affiliates, this result likely would materially increase the amount of U.S. Gypsum's present and 14 future asbestos liabilities. Such a result could materially and adversely affect the recovery of other Debtors' pre-petition creditors and the Corporation's stockholders, depending upon, among other things, the amount of A.P. Green's alleged asbestos liabilities and whether the other Debtors are determined to be liable for U.S. Gypsum's liabilities, including alleged A.P. Green liabilities. POTENTIAL FEDERAL LEGISLATION REGARDING ASBESTOS PERSONAL INJURY CLAIMS During 2004, there were developments regarding potential federal legislation. On April 7, 2004, the Fairness in Asbestos Injury Resolution Act of 2004 (Senate Bill 2290, the "FAIR Bill") was introduced in the United States Senate. The FAIR Bill has not been approved by the Senate, has not been introduced in the House of Representatives, and is not law. The FAIR Bill introduced in the Senate is intended to establish a nationally administered trust fund to compensate asbestos personal injury claimants. In the FAIR Bill's current form, companies that have made past payments for asbestos personal injury claims would be required to contribute amounts to a national trust fund on a periodic basis that would pay the claims of qualifying asbestos personal injury claimants. The nationally administered trust fund would be the exclusive remedy for asbestos personal injury claims, and such claims could not be brought in state or federal court as long as such claims are being compensated under the national trust fund. In the FAIR Bill's current form, the amounts to be paid to the national trust fund are based on an allocation methodology set forth in the FAIR Bill. The amounts that participants, including the Debtors, would be required to pay are not dischargeable in a bankruptcy proceeding. The FAIR Bill also provides, among other things, that if it is determined that the money in the trust fund is not sufficient to compensate eligible claimants, the claimants and defendants would return to the court system to resolve claims not paid by the national trust fund. The outcome of the legislative process is inherently speculative, and it cannot be known whether the FAIR Bill or similar legislation will ever be enacted or, even if enacted, what the terms of the final legislation might be. In addition to the organized plaintiffs' bar, many labor organizations, including the AFL-CIO, as well as some Senators have indicated that they oppose the FAIR Bill as introduced because, among other things, they believe that the FAIR Bill does not provide sufficient compensation to asbestos claimants. On April 22, 2004, the Senate defeated a motion to proceed with floor consideration of the FAIR Bill. It is anticipated that a revised version of the FAIR Bill will be introduced in the 109th Congress. However, it is likely that some of the opponents identified above will remain opposed to the FAIR Bill when it is reintroduced, and whether the FAIR Bill will ever be enacted cannot be predicted. It is also likely that, even if the FAIR Bill is enacted, the terms of the enacted legislation will differ from those of the FAIR Bill considered in 2004, and those differences may be material to the FAIR Bill's impact on the Corporation. Enactment of the FAIR Bill or similar legislation addressing the financial contributions of the Debtors for asbestos personal injury claims would have a material impact on the amount of the Debtors' asbestos personal injury liability and the Debtors' Chapter 11 Cases. ESTIMATED COST OF ASBESTOS LIABILITY Prior to the Filing, in the fourth quarter of 2000, U.S. Gypsum recorded a noncash, pretax provision of $850 million, increasing to $1,185 million its total accrued reserve for resolving in the tort system the asbestos claims pending as of December 31, 2000, and expected to be filed through 2003. At that time, the estimated range of U.S. Gypsum's probable liability for such claims was between $889 million and $1,281 million, including defense costs. These amounts are stated before tax benefit and are not discounted to present value. As of December 31, 2004, the Corporation's accrued reserve for asbestos claims totaled $1,061 million. Because of the uncertainties associated with estimating the Debtors' liability for present and future asbestos claims at this stage of the bankruptcy proceedings, no change has been made to the previously recorded reserve except to reflect certain minor asbestos-related costs incurred since the Filing. Because the Filing and possible federal legislation have changed the basis upon which the Debtors' asbestos liability would be estimated, there can be no assurance that the current reserve accurately reflects the Debtors' ultimate liability for pending and future asbestos claims. At the time the reserve was increased to its current level in December 2000, the reserve was an estimate of the cost of resolving in the tort system 15 U.S. Gypsum's asbestos liability for then-pending claims and those expected to be filed through 2003. Because of the Filing and the stay of pre-petition asbestos lawsuits, the Debtors have not participated in the tort system since June 2001 and thus cannot measure the recorded reserve against actual experience. However, the reserve is generally consistent with the amount the Corporation estimates that the Debtors would be required to pay to resolve all of their asbestos liability if the FAIR Bill, in its current form, is enacted. As the Chapter 11 Cases and the legislation process proceed, the Debtors likely will gain more information from which a reasonable estimate of the Debtors' probable liability for present and future asbestos claims can be determined. If such estimate differs from the existing reserve, the reserve will be adjusted, and it is possible that a charge to results of operations will be necessary at that time. In such a case, the Debtors' asbestos liability could vary significantly from the recorded estimate of liability and could be greater than the high end of the range estimated in 2000. This difference could be material to the Corporation's financial position, cash flows and results of operations in the period recorded. POTENTIAL OUTCOMES OF THE FILING While it is the Debtors' intention to seek a full recovery for their creditors, it is not possible to predict the amount that will have to be provided in the plan of reorganization to address present and future asbestos claims, how the plan of reorganization will treat other pre-petition claims, whether there will be sufficient assets to satisfy the Debtors' pre-petition liabilities, and what impact any plan may have on the value of the shares of the Corporation's common stock. The payment rights and other entitlements of pre-petition creditors and the Corporation's stockholders may be substantially altered by any plan of reorganization confirmed in the Chapter 11 Cases. Pre-petition creditors may receive under the plan of reorganization less than 100% of the face value of their claims, the pre-petition creditors of some Debtors may be treated differently from the pre-petition creditors of other Debtors, and the interests of the Corporation's stockholders are likely to be substantially diluted or cancelled in whole or in part. There can be no assurance as to the value of any distributions that might be made under any plan of reorganization with respect to such pre-petition claims or equity interests. It is also not possible to predict how the plan of reorganization will treat intercompany indebtedness, licenses, transfers of goods and services, and other intercompany arrangements, transactions and relationships that were entered into before the Petition Date. Certain of these intercompany transactions have been challenged by various parties in these Chapter 11 Cases (see Developments in the Reorganization Proceeding, above), and other arrangements, transactions and relationships may be challenged by parties to these Chapter 11 Cases. The outcome of such challenges may have an impact on the treatment of various claims under any plan of reorganization. See Part II, Item 8, Note 2, Voluntary Reorganization Under Chapter 11, and Note 19, Litigation, for additional information on the background of asbestos litigation, developments in the Corporation's reorganization proceedings and estimated cost. ACCOUNTING IMPACT The Corporation is required to follow American Institute of Certified Public Accountants ("AICPA") Statement of Position 90-7 ("SOP 90-7"), "Financial Reporting by Entities in Reorganization under the Bankruptcy Code." Pursuant to SOP 90-7, the Corporation's pre-petition liabilities that are subject to compromise are reported separately on the consolidated balance sheet. Virtually all of the Corporation's pre-petition debt is currently in default and was recorded at face value and classified within liabilities subject to compromise. U.S. Gypsum's asbestos liability also is classified within liabilities subject to compromise. See Part II, Item 8, Note 2, Voluntary Reorganization Under Chapter 11, which includes information related to financial statement presentation, the debtor-in-possession statements and detail of liabilities subject to compromise and chapter 11 reorganization expenses. CONSOLIDATED RESULTS OF OPERATIONS NET SALES Net sales were $4,509 million in 2004, $3,666 million in 2003 and $3,468 million in 2002. Net sales increased 23% in 2004 as compared with 2003 reflecting increased sales for all three operating segments. Net sales improved for North American Gypsum due to record shipments and higher selling 16 prices for SHEETROCK(R) brand gypsum wallboard, SHEETROCK(R) brand joint compounds, DUROCK(R) brand cement board and FIBEROCK(R) brand gypsum fiber panels. Net sales for the Building Products Distribution segment rose due to record shipments and higher selling prices for gypsum wallboard and increased sales of complementary products. Net sales for the Worldwide Ceilings segment increased primarily due to higher selling prices for ceiling grid and tile, while shipments of these product lines were virtually unchanged. Net sales increased 6% in 2003 as compared with 2002 primarily due to increased shipments of SHEETROCK(R) brand gypsum wallboard, SHEETROCK(R) brand joint compounds and DUROCK(R) brand cement board. Net sales for the Building Products Distribution segment rose in 2003 due to increased shipments of gypsum wallboard and increased sales of complementary products. However, net sales for the Worldwide Ceilings segment were down slightly as a result of decreased demand for ceiling products. COST OF PRODUCTS SOLD Cost of products sold totaled $3,672 million in 2004, $3,121 million in 2003 and $2,884 million in 2002. Cost of products sold increased in 2004 and 2003 from the respective prior years largely due to increased volume for gypsum wallboard and gypsum-related products. Other key factors for the increases in 2004 and 2003 were higher costs related to the price of natural gas, employee benefits (pension and medical insurance for active employees and retirees), the implementation of a new enterprise-wide software system, the price of steel used in the manufacture of ceiling grid and, for 2004 only, the price of wastepaper used in the manufacture of gypsum wallboard. These other key factors accounted for approximately $105 million, or 19%, of the total 2004 versus 2003 increase and approximately $110 million, or 46%, of the total 2003 versus 2002 increase. GROSS PROFIT Gross profit was $837 million in 2004, $545 million in 2003 and $584 million in 2002. Gross margin (gross profit as a percentage of net sales) for the respective years was 18.6%, 14.9% and 16.8%. Gross profit improved in 2004 as compared with 2003 primarily due to increased shipments of SHEETROCK(R) brand gypsum wallboard and higher selling prices for many major product lines, offset in part by the aforementioned margin pressures affecting costs of products sold. Gross profit declined in 2003 as compared with 2002 primarily due to the various margin pressures affecting cost of products sold. SELLING AND ADMINISTRATIVE EXPENSES Selling and administrative expenses totaled $317 million in 2004, $324 million in 2003 and $312 million in 2002. As a percentage of net sales, these expenses were 7.0%, 8.8% and 9.0% in 2004, 2003 and 2002, respectively. Selling and administrative expenses include the impact of a Bankruptcy Court-approved key employee retention plan ("KERP"). Expenses associated with this plan amounted to $16 million, $23 million and $20 million in 2004, 2003 and 2002, respectively. KERP expense declined in 2004 from prior-year levels primarily due to accruals in 2003 and 2002 of deferred amounts that were paid in 2004. The decrease in total 2004 selling and administrative expenses versus 2003 primarily reflected a $7 million decrease in KERP expense. Reduced expenses for advertising, the impact of a fourth-quarter 2003 salaried workforce reduction program and other expense reduction initiatives were offset by higher expenses related to employee incentive compensation associated with the attainment of profit goals and employee benefits (pension and medical insurance for active employees and retirees). The increase in total 2003 expenses versus 2002 primarily reflected (i) higher expenses related to employee benefits (pension and medical insurance for active employees and retirees), which increased $11 million year-on-year, (ii) a fourth-quarter 2003 charge of $3 million for severance related to a salaried workforce reduction of approximately 70 employees and (iii) a $3 million increase in KERP expense. These increases were partially offset by a lower level of employee incentive compensation. 17 CHAPTER 11 REORGANIZATION EXPENSES Chapter 11 reorganization expenses consisted of the following:
(millions) 2004 2003 2002 ---- ---- ---- Legal and financial advisory fees $ 24 $19 $22 Bankruptcy-related interest income (12) (8) (8) ---- --- --- Total 12 11 14 ==== === ===
INTEREST EXPENSE Interest expense was $5 million, $6 million and $8 million in 2004, 2003 and 2002, respectively. Under SOP 90-7, virtually all of the Corporation's outstanding debt is classified as liabilities subject to compromise, and interest expense on this debt has not been accrued or recorded since the Petition Date. Contractual interest expense not accrued or recorded on pre-petition debt totaled $71 million in 2004, $71 million in 2003 and $74 million in 2002. This calculation assumes that all such interest was paid when required at the applicable contractual interest rate (after giving effect to any applicable default rate). However, the calculation excludes the impact of any compounding of interest on unpaid interest that may be payable under the relevant contractual obligations, as well as any interest that may be payable under a plan of reorganization to trade or other creditors that are not otherwise entitled to interest under the express terms of their claims. The impact of compounding alone would have increased the contractual interest expense reported above by $18 million in 2004, $11 million in 2003 and $5 million in 2002. For financial reporting purposes, no post-petition accruals have been made for contractual interest expense not accrued or recorded on pre-petition debt. However, based on discussions with representatives of the Official Committee of Unsecured Creditors, the Corporation anticipates that the relevant creditors will seek to recover amounts in respect of such unaccrued interest expense (on a compounded basis) in the Chapter 11 Cases. INTEREST INCOME Non-bankruptcy-related interest income was $6 million, $4 million and $4 million in 2004, 2003 and 2002, respectively. OTHER INCOME, NET Other income, net was zero in 2004, compared with $9 million and $2 million in 2003 and 2002, respectively. The 2003 amount primarily represented net realized currency gains. INCOME TAXES Income taxes amounted to $197 million in 2004, $79 million in 2003 and $117 million in 2002. The Corporation's effective tax rate was 38.6%, 36.6% and 45.6% in 2004, 2003 and 2002, respectively. The variations in the effective tax rate over the three-year period were primarily attributable to a reduction of the Corporation's income tax payable during 2003. This reduction was determined upon completion of the Corporation's 2002 federal income tax return and resulted from an actual tax liability that was lower than the estimate of taxes payable as of December 31, 2002. CUMULATIVE EFFECT OF ACCOUNTING CHANGE FOR SFAS NO. 143 On January 1, 2003, the Corporation adopted Statement of Financial Accounting Standard ("SFAS") No. 143, "Accounting for Asset Retirement Obligations." A noncash, after-tax charge of $16 million ($27 million pretax) was reflected in the consolidated statement of earnings as a cumulative effect of a change in accounting principle as of January 1, 2003. See Part II, Item 8, Note 12, Asset Retirement Obligations, for additional information related to the adoption of SFAS No. 143. CUMULATIVE EFFECT OF ACCOUNTING CHANGE FOR SFAS NO. 142 On January 1, 2002, the Corporation adopted SFAS No. 142, "Goodwill and Other Intangible Assets." In accordance with the provisions of SFAS No. 142, the Corporation recorded a noncash, non-tax-deductible impairment charge of $96 million. See Part II, Item 8, Note 9, Goodwill and Other Intangible Assets, for additional information related to the adoption of SFAS No. 142. NET EARNINGS Net earnings amounted to $312 million in 2004, $122 million in 2003 and $43 million in 2002. Diluted earnings per share for the respective years were $7.26, $2.82 and $1.00. 18 CORE BUSINESS RESULTS OF OPERATIONS
(millions) Net Sales Operating Profit (Loss) ------------------------ ----------------------- 2004 2003 2002 2004 2003 2002 ------ ------ ------ ---- ---- ---- NORTH AMERICAN GYPSUM: United States Gypsum Company $2,474 $2,076 $1,962 $348 $157 $211 CGC Inc. (gypsum) 297 256 217 49 33 28 Other subsidiaries* 178 141 137 31 19 22 Eliminations (196) (174) (165) -- -- -- ------ ------ ------ ---- ---- ---- Total 2,753 2,299 2,151 428 209 261 ====== ====== ====== ==== ==== ==== WORLDWIDE CEILINGS: USG Interiors, Inc. 488 446 450 42 31 37 USG International 200 168 176 12 2 (13) CGC Inc. (ceilings) 51 45 40 8 6 5 Eliminations (51) (52) (56) -- -- -- ------ ------ ------ ---- ---- ---- Total 688 607 610 62 39 29 ====== ====== ====== ==== ==== ==== BUILDING PRODUCTS DISTRIBUTION: L&W Supply Corporation 1,738 1,295 1,200 103 53 51 ------ ------ ------ ---- ---- ---- Corporate -- -- -- (73) (77) (71) Chapter 11 reorganization expenses -- -- -- (12) (11) (14) Eliminations (670) (535) (493) -- (3) 2 ------ ------ ------ ---- ---- ---- TOTAL USG CORPORATION 4,509 3,666 3,468 508 210 258 ====== ====== ====== ==== ==== ====
* Includes USG Mexico, S.A. de C.V., a building products business in Mexico, Gypsum Transportation Limited, a shipping company in Bermuda, and USG Canadian Mining Ltd., a mining operation in Nova Scotia. NORTH AMERICAN GYPSUM For the North American Gypsum segment, net sales increased 20% in 2004 and 7% in 2003 as compared with the respective prior years, while operating profit more than doubled in 2004 after declining 20% in 2003. United States Gypsum Company: Net sales in 2004 increased 19%, and operating profit more than doubled compared with 2003 primarily due to record shipments and higher selling prices for its major product lines. Strong demand for U.S. Gypsum's SHEETROCK(R) brand gypsum wallboard led to record shipments of 11.0 billion square feet during 2004, a 6% increase from the previous record of 10.4 billion square feet in 2003. U.S. Gypsum's wallboard plants operated at 94% of capacity in 2004, compared with 92% in 2003. Industry shipments of gypsum wallboard in 2004 were up approximately 8% from 2003. The nationwide average realized price for SHEETROCK(R) brand gypsum wallboard was $122.37 per thousand square feet in 2004, up 21% from $101.43 in 2003. Complementary building products also contributed to the favorable results in 2004. Record shipments and higher selling prices were reported for SHEETROCK(R) brand joint compounds, DUROCK(R) brand cement board and FIBEROCK(R) brand gypsum fiber panels. Record shipments and improved pricing for all major products as well as the implementation of various cost-saving initiatives and improved production efficiencies at U.S. Gypsum's wallboard plants more than offset higher manufacturing costs. The higher costs were primarily attributable to wastepaper (a raw material used to produce the facing and backing of 19 gypsum wallboard) and natural gas. Comparing 2003 with 2002, net sales rose 6% primarily due to increased shipments of SHEETROCK(R) brand gypsum wallboard, SHEETROCK(R) brand joint compounds and DUROCK(R) brand cement board. Slightly higher selling prices for SHEETROCK(R) brand gypsum wallboard also contributed to the higher level of sales. However, operating profit fell 26% largely due to higher manufacturing costs. Shipments of SHEETROCK(R) brand gypsum wallboard rose 3% in 2003 from the prior-year level of 10.1 billion square feet. U.S. Gypsum's wallboard plants operated at 92% of capacity in 2003, compared with 93% in 2002. Industry shipments of gypsum wallboard were up approximately 6% from 2002. The nationwide average realized price for SHEETROCK(R) brand gypsum wallboard in 2003 was $101.43 per thousand square feet, up 1% from $100.43 in 2002. Manufacturing costs increased in 2003 primarily due to higher costs related to the price of natural gas and higher employee benefit costs. However, improved production efficiencies at U.S. Gypsum's wallboard plants and hedging activities offset a portion of the cost increase. CGC Inc.: The gypsum business of Canada-based CGC Inc. ("CGC") reported a 16% increase in net sales and a 48% increase in operating profit in 2004 as compared with 2003. These results were primarily attributable to increased shipments and higher selling prices for CGC's SHEETROCK(R) brand gypsum wallboard and the favorable effects of currency translation. Comparing 2003 with 2002, net sales and operating profit each increased 18% primarily due to increased shipments of SHEETROCK(R) brand gypsum wallboard and the favorable effects of currency translation. WORLDWIDE CEILINGS For the Worldwide Ceilings segment, net sales and operating profit in 2004 increased 13% and 59%, respectively, from 2003. Comparing 2003 with 2002, net sales for the segment were down slightly, while operating profit increased 34%. However, as explained below, the increase in 2003 operating profit was largely due to an $11 million charge recorded in 2002 for the downsizing of European operations. USG Interiors, Inc.: Net sales and operating profit in 2004 for the Corporation's domestic ceilings business, USG Interiors, Inc. ("USG Interiors"), rose 9% and 35%, respectively, from 2003. These increases primarily reflected higher selling prices for ceiling grid and tile, while shipments of these product lines were virtually unchanged. Steel is a major component in the production of ceiling grid, and in the first half of 2004, market concerns over a global steel shortage and rising steel costs led to a surge in demand for ceiling grid. In the second half of 2004, demand for grid dropped sharply as a result of the pre-buying in the first half of the year. In addition, the cost of steel rose throughout the year, leading to higher costs to produce grid and inventory steel. While the Corporation expects the availability of steel to generally remain tight and steel prices to remain high, the Corporation does not anticipate a shortage of steel for use in the manufacture of its ceiling grid products in 2005. Net sales for USG Interiors were down 1% in 2003 versus 2002 as lower shipments of ceiling tile and grid were offset to a large extent by improved pricing for most of its ceiling product lines. A 16% decline in operating profit primarily reflected increases in the costs of natural gas, steel and employee benefits. USG International: USG International reported a 19% increase in net sales, while operating profit rose to $12 million from $2 million in 2003 primarily due to increased demand for ceiling grid in Europe and the favorable effects of currency translation. Profitability also improved in 2003 versus 2002 following the shutdown of the Aubange, Belgium, plant and other downsizing activities in the fourth quarter of 2002. An operating loss in 2002 included an $11 million charge related to management's decision to shut down the Aubange, Belgium, ceiling tile plant and other downsizing activities that addressed the weakness of the commercial ceilings market in Europe. This charge was included in cost of products sold. BUILDING PRODUCTS DISTRIBUTION L&W Supply, the leading specialty building products distribution business in the United States, reported increases in net sales and operating profit of 34% and 94%, respectively, in 2004 as compared with 2003. These increases primarily reflected record shipments and higher selling prices for gypsum wallboard sold by 20 L&W Supply. Increased sales of complementary building products such as drywall metal, ceiling products, joint compound and roofing also contributed to the improved results. Shipments of gypsum wallboard were up 10%, while selling prices rose 16% compared with 2003. L&W Supply remains focused on opportunities to profitably grow its specialty business, as well as optimize asset utilization. As part of its plan, L&W Supply acquired three locations, opened one location and consolidated one location during 2004, leaving a total of 186 locations in the United States as of December 31, 2004, compared with 183 and 181 locations as of December 31, 2003 and 2002, respectively. Comparing 2003 with 2002, net sales and operating profit increased 8% and 4%, respectively. These increases reflected record shipments of gypsum wallboard and complementary building products. Shipments of gypsum wallboard increased 8%, while selling prices declined 1% compared with 2002. MARKET CONDITIONS AND OUTLOOK Industry shipments of gypsum wallboard in the United States were an estimated 35.1 billion square feet in 2004, an all-time record and an 8% increase from 32.5 billion square feet in 2003. The new housing market continued on a record-setting pace in 2004. Based on preliminary data issued by the U.S. Bureau of the Census, U.S. housing starts in 2004 were an estimated 1.957 million units, the highest level since 1978, compared with actual housing starts of 1.848 million units in 2003 and 1.705 million units in 2002. The repair and remodel market, which includes renovation of both residential and nonresidential buildings, accounts for the second-largest portion of the Corporation's sales, behind new housing construction. Because many buyers begin to remodel an existing home within two years of purchase, opportunity from the residential repair and remodel market in 2004 was strong, as sales of existing homes in 2004 are estimated at 6.5 million units, exceeding 2003's record-setting level of 6.1 million units. The growth in new housing and a strong level of residential remodeling resulted in the record shipments of gypsum wallboard described above. These two markets, which together account for nearly two-thirds of all demand for gypsum wallboard, and utilization rates in excess of 90% for the industry resulted in a rise of market selling prices for gypsum wallboard in 2004. Future demand for the Corporation's products from new nonresidential construction is determined by floor space for which contracts are signed. Installation of gypsum and ceilings products follows signing of construction contracts by about a year. Floor space for which contracts were signed was at historically low levels in 2003 and 2002 as commercial construction was affected by reduced corporate earnings, resulting in lower investments in office and other commercial space. However, current information indicates that the decline in floor space for which contracts were signed leveled off in 2003, and a modest 1.1% increase was experienced in 2004. The outlook for the Corporation's markets in 2005 is positive. However, a decline in housing starts and increasing interest rates could reduce the level of demand from both the new housing and residential remodeling markets. While office vacancy rates currently remain at relatively high levels, the commercial construction market, the principal market for the Corporation's ceilings products, is showing signs of improvement. In addition, the Corporation, like many other companies, faces many ongoing cost pressures such as higher prices for natural gas and raw materials and increased costs for employee benefits. In this environment, the Corporation continues to focus its management attention and investments on improving customer service, manufacturing costs and operating efficiencies, as well as investing to grow its businesses. In addition, the Corporation will diligently continue its attempt to resolve the chapter 11 proceedings, consistent with the goal of achieving a fair, comprehensive and final resolution to its asbestos liability. LIQUIDITY AND CAPITAL RESOURCES LIQUIDITY As of December 31, 2004, the Corporation had $1,249 million of cash, cash equivalents, restricted cash and marketable securities, of which $284 million was held by non-Debtor subsidiaries. The total amount of $1,249 million was up $302 million, or 32%, from $947 million as of December 31, 2003. Since the Petition Date, the Corporation's level of liquidity has increased 21 due to strong operating cash flows and the absence of cash payments related to asbestos settlements and interest on pre-petition debt. Contractual interest expense not accrued or recorded on pre-petition debt was $71 million in 2004 and $257 million since the Petition Date. See Interest Expense, above, for a full discussion of contractual interest not accrued or recorded. CASH FLOWS As shown in the consolidated statement of cash flows, cash and cash equivalents increased $56 million during 2004. The primary source of cash in 2004 was earnings from operations. Primary uses of cash were: (i) net purchases of marketable securities of $214 million, (ii) capital spending of $138 million, (iii) the designation of $36 million as restricted cash representing cash collateral primarily to support outstanding letters of credit and (iv) the use of $5 million for three business acquisitions. Comparing 2004 with 2003, net cash provided by operating activities increased to $428 million from $237 million primarily due to the increase in 2004 earnings from operations. Net cash used for investing activities rose to $387 million from $198 million primarily due to increased net purchases of marketable securities and a higher level of capital spending in 2004. Net cash provided by financing activities of $6 million in 2004 primarily reflected cash received from the issuance of common stock associated with the exercise of stock options. There were no financing activities in 2003. CAPITAL EXPENDITURES Capital spending amounted to $138 million in 2004, compared with $111 million in 2003. As of December 31, 2004, remaining capital expenditure commitments for the replacement, modernization and expansion of operations amounted to $283 million, compared with $95 million as of December 31, 2003. Capital expenditure commitments as of December 31, 2004, include a project to replace existing capacity at U.S. Gypsum's Norfolk, Va., gypsum wallboard plant with a new low-cost wallboard line that will position the company for profitable growth in the mid-Atlantic market. Capital expenditure commitments also include a mill modernization project for the Plaster City, Calif., gypsum wallboard plant. Construction on these projects will begin in 2005, and their costs will be funded by cash from operations. During the bankruptcy proceeding, the Corporation expects to have limited ability to access capital other than its own cash, marketable securities and future cash flows to fund potential future growth opportunities such as new products, acquisitions and joint ventures. Nonetheless, the Corporation expects to be able to pursue a program of capital spending aimed at maintaining and enhancing its businesses. WORKING CAPITAL Total working capital (current assets less current liabilities) as of December 31, 2004, amounted to $1,220 million, and the ratio of current assets to current liabilities was 3.14-to-1. As of December 31, 2003, working capital was $1,084 million, and the ratio of current assets to current liabilities was 3.62-to-1. Receivables increased to $413 million as of December 31, 2004, from $321 million as of December 31, 2003, primarily reflecting a 27% increase in net sales for the month of December 2004 as compared with December 2003. Inventories and payables also were up from December 31, 2003, primarily due to the increased level of business. Inventories increased to $338 million from $280 million, and accounts payable increased to $270 million from $202 million. Accrued expenses increased to $224 million from $206 million as of December 31, 2003. MARKETABLE SECURITIES As of December 31, 2004, $450 million was invested in marketable securities, up $210 million from $240 million as of December 31, 2003. Of the year-end 2004 amount, $312 million was invested in long-term marketable securities and $138 million in short-term marketable securities. The Corporation's marketable securities are classified as available-for-sale securities and reported at fair market value with unrealized gains and losses excluded from earnings and reported in accumulated other comprehensive income (loss) on the consolidated balance sheets. RESTRICTED CASH AND LETTERS OF CREDIT As of December 31, 2004, a total of $43 million was reported as restricted cash on the consolidated balance sheet. Restricted cash primarily represented collateral to support outstanding letters of credit. The Corporation has a $100 million credit agreement, which expires April 30, 2006, with LaSalle 22 Bank N.A. (the "LaSalle Facility") to be used exclusively to support the issuance of letters of credit needed to support business operations. As of December 31, 2004, $35 million of letters of credit under the LaSalle Facility, which are cash collateralized at 103%, were outstanding. DEBT As of December 31, 2004 and 2003, total debt amounted to $1,006 million and $1,007 million, respectively, of which, for each date, $1,005 million was included in liabilities subject to compromise. These amounts do not include any accruals for post-petition contractual interest expense. CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS CONTRACTUAL OBLIGATIONS The following table summarizes the Corporation's commitments to make future payments under certain contractual obligations as of December 31, 2004:
Payments Due by Period (a) -------------------------------------- 2006- 2008- There- (millions) Total 2005 2007 2009 after - ---------- ------ ---- ----- ----- ------ Debt obligations (b) $ 1 $ 1 $ -- $-- $ -- Operating leases 363 73 113 55 122 Purchase obligations (c) 367 93 230 20 24 Other long-term liabilities (d) 315 8 6 10 291 ------ ---- ---- --- ---- Total 1,046 175 349 85 437 ====== ==== ==== === ====
(a) The table excludes $2,242 million of liabilities subject to compromise because it is not certain when these liabilities will become due. See Part II, Item 8, Note 2, Voluntary Reorganization Under Chapter 11, for additional information on liabilities subject to compromise. (b) The Corporation has an additional $1,005 million of debt classified under liabilities subject to compromise. (c) Purchase obligations primarily consist of contracts to purchase energy and certain raw materials. (d) Other long-term liabilities primarily consist of asset retirement obligations which principally extend over a 50-year period. The majority of associated payments are due toward the latter part of that period. The Corporation's defined benefit pension plans have no minimum funding requirements under the Employee Retirement Income Security Act of 1974 ("ERISA"). In accordance with the Corporation's funding policy, the Corporation expects to voluntarily contribute approximately $75 million of cash to its pension plans in 2005. The above table excludes liabilities related to postretirement benefits (retiree health care and life insurance). The Corporation voluntarily provides postretirement benefits for all eligible employees and retirees. The portion of benefit claim payments made by the Corporation in 2004 was $16 million. See Part II, Item 8, Note 13, Employee Retirement Plans, for additional information on future expected cash payments. As of December 31, 2004, purchase obligations, as defined by SFAS No. 47, "Disclosure of Long-Term Obligations," were immaterial. OFF-BALANCE-SHEET ARRANGEMENTS With the exception of letters of credit, it is not the Corporation's general business practice to use off-balance-sheet arrangements, such as third-party special-purpose entities or guarantees to third parties. In addition to the outstanding letters of credit discussed above (see Restricted Cash and Letters of Credit), the Corporation also had $97 million of outstanding letters of credit under a pre-petition revolving credit facility provided by a syndicate of lenders led by JPMorgan Chase Bank (formerly The Chase Manhattan Bank). To the extent that any of these letters of credit are drawn, JPMorgan Chase Bank would assert a pre-petition claim in a corresponding amount against the Corporation in the bankruptcy proceeding. LEGAL CONTINGENCIES As a result of the Filing, all pending asbestos lawsuits against the Debtors are stayed, and no party may take any action to pursue or collect on such asbestos claims absent specific authorization of the Bankruptcy Court. U.S. Gypsum has also been named as a defendant in lawsuits claiming personal injury from exposure to silica allegedly from U.S. Gypsum products. Pre-petition claims against U.S. Gypsum in silica personal injury lawsuits are also stayed as a result of the Filing. 23 The Corporation and certain of its subsidiaries have been notified by state and federal environmental protection agencies of possible involvement as one of numerous "potentially responsible parties" in a number of so-called "Superfund" sites in the United States. The Corporation believes that neither these matters nor any other known governmental proceeding regarding environmental matters will have a material adverse effect upon its financial position, cash flows or results of operations. See Part II, Item 8, Note 19, Litigation, for additional information on (i) the background of asbestos litigation, developments in the Corporation's reorganization proceeding and estimated cost, (ii) silica litigation and (iii) environmental litigation. CRITICAL ACCOUNTING POLICIES The Corporation's consolidated financial statements are prepared in conformity with accounting policies generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses during the periods presented. The following is a summary of the accounting policies the Corporation believes are the most important to aid in understanding its financial results. VOLUNTARY REORGANIZATION UNDER CHAPTER 11 As a result of the Filing, the Corporation's consolidated financial statements reflect the provisions of SOP 90-7 and are prepared on a going-concern basis, which contemplates continuity of operations, realization of assets and liquidation of liabilities in the ordinary course of business. However, as a result of the Filing, such realization of assets and liquidation of liabilities, without substantial adjustments and/or changes of ownership, are subject to uncertainty. Given this uncertainty, there is substantial doubt about the Corporation's ability to continue as a going concern. Such doubt includes, but is not limited to, a possible change in control of the Corporation, as well as a potential change in the composition of the Corporation's business portfolio. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. While operating as debtors-in-possession under the protection of chapter 11 of the Bankruptcy Code and subject to Bankruptcy Court approval or otherwise as permitted in the ordinary course of business, one or more of the Debtors may sell or otherwise dispose of assets and liquidate or settle liabilities for amounts other than those reflected in the consolidated financial statements. Further, a plan of reorganization could materially change the amounts and classifications in the historical consolidated financial statements. One of the key provisions of SOP 90-7 requires the reporting of the Debtors' liabilities incurred prior to the commencement of the Chapter 11 Cases as liabilities subject to compromise. The various liabilities that are subject to compromise include U.S. Gypsum's asbestos reserve and the Debtors' pre-petition debt, accounts payable, accrued expenses and other long-term liabilities. The amounts for these items represent the Debtors' estimate of known or potential pre-petition claims to be resolved in connection with the Chapter 11 Cases. Such claims remain subject to future adjustments. Adjustments may result from (i) negotiations, (ii) actions of the Bankruptcy Court, (iii) further developments with respect to disputed claims, (iv) rejection of executory contracts and unexpired leases, (v) the determination as to the value of any collateral securing claims, (vi) proofs of claim, including unaccrued and unrecorded post-petition interest expense, (vii) effect of any legislation which may be enacted or (viii) other events. In particular, the amount of the asbestos reserve reflects U.S. Gypsum's pre-petition estimate of liability associated with asbestos claims expected to be filed against U.S. Gypsum in the tort system through 2003, and this liability, in addition to liability for post-2003 claims, is the subject of significant dispute in the Chapter 11 Cases. Other provisions of SOP 90-7 involve interest expense and interest income. Interest expense on debt classified as liabilities subject to compromise is not accrued or recorded. Interest income on cash accumulated during the bankruptcy process to settle claims under a plan of reorganization is netted against chapter 11 reorganization expenses. See Part II, Item 8, Note 2, Voluntary Reorganization Under Chapter 11, for additional information related to the Filing. ASBESTOS LIABILITY In 2000, prior to the Filing, an independent consultant completed an actuarial study of U.S. Gypsum's current and potential future asbestos liabilities. This study was 24 based on the assumption that U.S. Gypsum's asbestos liability would continue to be resolved in the tort system. As part of this study, the Corporation and its independent consultant considered various factors that would impact the amount of U.S. Gypsum's asbestos personal injury liability. These factors included the number, disease, age, and occupational characteristics of claimants in the Personal Injury Cases; the jurisdiction and venue in which such cases were filed; the viability of claims for conspiracy or punitive damages; the elimination of indemnity-sharing among members of the Center for Claims Resolution (the "Center"), including U.S. Gypsum, for future settlements and its negative impact on U.S. Gypsum's ability to continue to resolve claims at historical or acceptable levels; the adverse impact on U.S. Gypsum's settlement costs of recent bankruptcies of co-defendants; the possibility of additional bankruptcies of other defendants; the possibility of significant adverse verdicts due to recent changes in settlement strategies and related effects on liquidity; the inability or refusal of former Center members to fund their share of existing settlements and its effect on such settlement agreements; allegations that U.S. Gypsum and the other Center members are responsible for the share of certain settlement agreements that was to be paid by former members that have refused or are unable to pay; the continued ability to negotiate settlements or develop other mechanisms that defer or reduce claims from unimpaired claimants; the possibility that federal legislation addressing asbestos litigation would be enacted; epidemiological data concerning the incidence of past and projected future asbestos-related diseases; trends in the propensity of persons alleging asbestos-related disease to sue U.S. Gypsum; the pre-agreed settlement recommendations in, and the viability of, the long-term settlements entered into by U.S. Gypsum when it was a member of the Center; anticipated trends in recruitment of non-malignant or unimpaired claimants by plaintiffs' law firms; and future defense costs. The study attempted to weigh relevant variables and assess the impact of likely outcomes on future case filings and settlement costs. In connection with the Property Damage Cases, the Corporation considered, among other things, the extent to which claimants could identify the manufacturer of any alleged asbestos-containing products in the buildings at issue in each case; the amount of asbestos-containing products at issue; the claimed damages; the viability of statute of limitations and other defenses; the amount for which such cases can be resolved, which normally (but not uniformly) has been substantially lower than the claimed damages; and the viability of claims for punitive and other forms of multiple damages. Based upon the results of the actuarial study, the Corporation determined that, although substantial uncertainty remained, it was probable that asbestos claims then pending against U.S. Gypsum and future asbestos claims to be filed against it through 2003 (both property damage and personal injury) could be resolved in the tort system for an amount between $889 million and $1,281 million, including defense costs, and that within this range the most likely estimate was $1,185 million. Consistent with this analysis, in the fourth quarter of 2000, the Corporation recorded a noncash, pretax charge of $850 million to results of operations, which, combined with the previously existing reserve, increased U.S. Gypsum's reserve for asbestos claims to $1,185 million. These amounts are stated before tax benefit and are not discounted to present value. Less than 10% of the reserve was attributable to defense and administrative costs. At the time of recording this reserve, it was expected that the reserve amounts would be expended over a period extending several years beyond 2003, because asbestos cases in the tort system historically had been resolved an average of three years after filing. The Corporation concluded that it did not have adequate information to allow it to reasonably estimate U.S. Gypsum's liability for asbestos claims to be filed after 2003. Because of the Filing and activities relating to potential federal legislation addressing asbestos personal injury claims, the Corporation believes that there is greater uncertainty in estimating the reasonably possible range of the Debtors' liability for pending and future asbestos claims as well as the most likely estimate of liability within this range. There are significant differences in the treatment of asbestos claims in a bankruptcy proceeding as compared to the tort litigation system. The factors that impact the estimation of liability for pending and future asbestos claims in a bankruptcy proceeding and the amount that must be provided in the plan of reorganization for such liabilities include: (i) the number of present and future asbestos claims that will be addressed in the plan of reorganization; (ii) the value that will be paid to present 25 and future claims, including the impact historical settlement values for asbestos claims may have on the estimation of asbestos liability in the bankruptcy proceedings; (iii) how claims by individuals who have no objective evidence of impairment will be treated in the bankruptcy proceedings and plan of reorganization; (iv) how U.S. Gypsum's long-term settlements when it was a member of the Center will be treated in the plan of reorganization and whether those settlements will be set aside; (v) how claims for punitive damages will be treated; (vi) the results of any litigation proceedings in the Chapter 11 Cases regarding the estimated number or value of present and future asbestos personal injury claims; (vii) the treatment of asbestos property damage claims in the bankruptcy proceedings; (viii) the potential asbestos liability of L&W Supply, Beadex, A.P. Green or any other past or present affiliates of the Debtors and how any such liability will be addressed in the bankruptcy proceedings and plan of reorganization; (ix) whether the assets of all of the Debtors are determined to be available to satisfy the asbestos liabilities of U.S. Gypsum; (x) how the requirement of Section 524(g) that 75% of the voting asbestos claimants approve the plan of reorganization will impact the amount that must be provided in the plan of reorganization for pending and future asbestos claims and (xi) the impact any relevant potential federal legislation may have on the proceedings. See Part II, Item 8, Note 2, Voluntary Reorganization Under Chapter 11 - Potential Federal Legislation Regarding Asbestos Personal Injury Claims. In addition, the estimates of the Debtors' asbestos liability that would be recorded as a result of the bankruptcy proceedings or potential federal legislation are likely to include all expected future asbestos cases to be brought against the Debtors (as opposed to the cases filed over a three-year period) and are likely to be computed using the present value of the estimated liability. These factors, as well as the uncertainties discussed above in connection with the resolution of asbestos cases in the tort system, increase the uncertainty of any estimate of asbestos liability. Because of the uncertainties associated with estimating the Debtors' asbestos liability at this stage of the proceedings, no change has been made at this time to the previously recorded reserve for asbestos claims, except to reflect certain minor asbestos-related costs incurred since the Filing. The reserve as of December 31, 2004, was $1,061 million. Because the Filing and possible federal legislation have changed the basis upon which the Debtors' asbestos liability would be estimated, there can be no assurance that the current reserve accurately reflects the Debtors' ultimate liability for pending and future asbestos claims. At the time the reserve was increased to its current level in December 2000, the reserve was an estimate of the cost of resolving in the tort system U.S. Gypsum's asbestos liability for then-pending claims and those expected to be filed through 2003. Because of the Filing and the stay of pre-petition asbestos lawsuits, the Debtors have not participated in the tort system since June 2001 and thus cannot measure the recorded reserve against actual experience. However, the reserve is generally consistent with the amount the Corporation estimates that the Debtors would be required to pay to resolve all of their asbestos liability if the FAIR Bill, in its current form, is enacted. As the Chapter 11 Cases and the legislation process proceed, the Debtors likely will gain more information from which a reasonable estimate of the Debtors' probable liability for present and future asbestos claims can be determined. If the FAIR Bill or similar legislation is not enacted, the Debtors' asbestos liability, as determined through the bankruptcy proceedings, could be materially greater than the accrued reserve. The Official Committee of Asbestos Personal Injury Claimants and the legal representative for future asbestos claimants have indicated in a court filing that they estimate that the net present value of the Debtors' liability for present and future asbestos personal injury claims is approximately $5.5 billion and that the Debtors are insolvent. The Debtors have stated that they believe they are solvent if their asbestos liabilities are fairly and appropriately valued. When the Debtors determine that there is a reasonable basis for revision of the estimate of their asbestos liability, the reserve will be adjusted, and it is possible that a charge to results of operations will be necessary at that time. In such a case, the Debtors' asbestos liability could vary significantly from the recorded estimate of liability. This difference could be material to the Corporation's financial position, cash flows and results of operations in the period recorded. See Part II, Item 8, Note 19, Litigation, for additional information on the background of asbestos litigation, developments in the Corporation's reorganization proceeding and defined terms. 26 EMPLOYEE RETIREMENT PLANS The Corporation and its major subsidiaries generally have contributory defined benefit pension plans for eligible employees. Plans that provide postretirement benefits (retiree health care and life insurance) for eligible employees also are maintained by the Corporation. For accounting purposes, these plans are dependent on assumptions made by management which are used by actuaries engaged by the Corporation to calculate the projected and accumulated benefit obligations and the annual expense recognized for these plans. The assumptions used in developing the required estimates primarily include discount rates, expected return on plan assets for the funded plans, compensation increase rates, retirement rates, mortality rates and, for postretirement benefits, health-care-cost trend rates. The assumed discount rate is developed by using, as a benchmark, the yield on investment grade corporate bonds rated AA or better with terms that approximate the average duration of the Corporation's obligations. The use of a different discount rate would impact net pension and postretirement benefit costs and benefit obligations. In determining the expected return on plan assets, the Corporation uses a "building block" approach, which incorporates historical experience, its pension plan investment guidelines and expectations for long-term rates of return. The use of a different rate of return would impact net pension costs. A one-half percentage-point change in the assumed discount rate and return-on-plan-asset rate would have the following effects (dollars in millions):
Increase (Decrease) in ------------------------- 2004 2005 Projected Net Annual Benefit Assumption Change Benefit Cost Obligation - ---------- ------------- ------------ ---------- Pension Benefits: Discount rate 0.5% increase $(8) $(66) Discount rate 0.5% decrease 9 73 Asset return 0.5% increase (4) -- Asset return 0.5% decrease 4 -- Postretirement Benefits: Discount rate 0.5% increase (3) (26) Discount rate 0.5% decrease 3 28
Compensation increase rates are based on historical experience and anticipated future management actions. Retirement rates are based primarily on actual plan experience, while standard actuarial tables are used to estimate mortality rates. Health-care-cost trend rate assumptions are developed based on historical cost data and an assessment of likely long-term trends. Results that differ from these assumptions are accumulated and amortized over future periods and, therefore, generally affect the net benefit cost of future periods. The sensitivity of assumptions reflects the impact of changing one assumption at a time and is specific to conditions at the end of 2004. Economic factors and conditions could affect multiple assumptions simultaneously, and the effects of changes in assumptions are not necessarily linear. See Part II, Item 8, Note 13, Employee Retirement Plans, for additional information regarding costs, plan obligations, plan assets and assumptions. SELF-INSURANCE RESERVES The Corporation purchases insurance from third parties for workers' compensation, automobile, product and general liability claims that exceed certain levels. However, the Corporation is responsible for the payment of claims up to such levels. In estimating the obligation associated with incurred and incurred but not reported losses, the Corporation utilizes estimates prepared by actuarial consultants. These estimates utilize the Corporation's historical data to project the future development of losses and take into account the impact of the Corporation's bankruptcy proceedings. The Corporation monitors and reviews all estimates and related assumptions for reasonableness. Loss estimates are adjusted based upon actual claims settlements and reported claims. REVENUE RECOGNITION For the majority of the Corporation's sales, revenue is recognized upon the shipment of products to customers, which is when title and risk of loss are transferred to customers. However, for the Corporation's Building Products Distribution segment, revenue is recognized and title and risk of loss are transferred when customers receive products, either through delivery by company trucks or customer pickup. The Corporation believes that these revenue recognition points are appropriate, as the Corporation has no further performance obligations unless the customer notifies the Corporation of shortage of products or defective products shipped within five days after receipt of such products. With the exception of Building Products Distribution, the Corporation's 27 products are generally shipped free on board ("FOB") shipping point. Provisions for discounts to customers are recorded based on the terms of sale in the same period in which the related sales are recorded. The Corporation also records estimated reductions to revenue for shortage of products or defective products, customer programs and incentive offerings, including promotions and other volume-based incentives, based on historical information and review of major customer activity. RECENT ACCOUNTING PRONOUNCEMENTS See Part II, Item 8, Note 1, Significant Accounting Policies, for information on the impact of recent accounting pronouncements on the Corporation. FORWARD-LOOKING STATEMENTS This report contains forward-looking statements related to management's expectations about future conditions. The effects of the Filing and the conduct, outcome and costs of the Chapter 11 Cases, as well as the ultimate costs associated with the Corporation's asbestos litigation, including the possible impact of any asbestos-related legislation, may differ from management's expectations. Actual business, market or other conditions may also differ from management's expectations and accordingly affect the Corporation's sales and profitability or other results. Actual results may differ due to various other factors, including economic conditions such as the levels of construction activity, employment levels, interest rates, currency exchange rates and consumer confidence; competitive conditions such as price and product competition; shortages in raw materials; increases in raw material, energy and employee benefit costs; loss of one or more significant customers; and the unpredictable effects of acts of terrorism or war upon domestic and international economies and financial markets. The Corporation assumes no obligation to update any forward-looking information contained in this report. 28 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS The Corporation uses financial instruments, including fixed and variable rate debt, to finance its operations in the normal course of business. In addition, the Corporation uses derivative instruments from time to time to manage selected commodity price and foreign currency exposures. The Corporation does not use derivative instruments for trading purposes. INTEREST RATE RISK The Corporation has interest rate risk with respect to the fair market value of its investment portfolio. Derivative instruments are used to enhance the liquidity of the marketable securities portfolio. The Corporation's investment portfolio consists of debt instruments that generate interest income for the Corporation on excess cash balances generated during the Corporation's chapter 11 bankruptcy proceeding. A portion of these instruments contain embedded derivative features that enhance the liquidity of the portfolio by enabling the Corporation to liquidate the instrument prior to the stated maturity date, thus shortening the average duration of the portfolio to less than one year. Based on results of a sensitivity analysis, for a hypothetical change in interest rates of 100 basis points, the potential change in the fair market value of the Corporation's portfolio is $3 million. COMMODITY PRICE RISK The Corporation uses swap contracts to manage its exposure to fluctuations in commodity prices associated with anticipated purchases of natural gas. Generally, the Corporation has a substantial majority of its anticipated purchases of natural gas over the next 12 months hedged; however, the Corporation reviews its positions regularly and makes adjustments as market conditions warrant. A sensitivity analysis was prepared to estimate the potential change in the fair value of the Corporation's natural gas swap contracts assuming a hypothetical 10% change in market prices. Based on results of this analysis, which may differ from actual results, the potential change in the fair value of the Corporation's natural gas swap contracts is $27 million. This analysis does not consider the underlying exposure. FOREIGN CURRENCY EXCHANGE RISK The Corporation has operations in a number of countries and uses forward contracts from time to time to hedge selected risk of changes in cash flows resulting from forecasted intercompany and third-party sales or purchases denominated in non-U.S. currencies. As of December 31, 2004, the Corporation had no outstanding forward contracts. See Part II, Item 8, Note 1, Significant Accounting Policies, and Note 16, Derivative Instruments, for additional information on the Corporation's financial exposures. 29 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page ---- CONSOLIDATED FINANCIAL STATEMENTS: Statements of Earnings ............................................... 31 Balance Sheets ....................................................... 32 Statements of Cash Flows ............................................. 33 Statements of Stockholders' Equity ................................... 34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS: 1. Significant Accounting Policies ................................ 35 2. Voluntary Reorganization Under Chapter 11 ...................... 38 3. Exit Activities ................................................ 47 4. Stockholder Rights Plan ........................................ 47 5. Earnings Per Share ............................................. 47 6. Marketable Securities .......................................... 48 7. Inventories .................................................... 48 8. Property, Plant and Equipment .................................. 48 9. Goodwill and Other Intangible Assets ........................... 49 10. Accrued Expenses ............................................... 49 11. Accumulated Other Comprehensive Income (Loss) .................. 49 12. Asset Retirement Obligations ................................... 49 13. Employee Retirement Plans ...................................... 49 14. Stock-Based Compensation ....................................... 52 15. Income Taxes ................................................... 53 16. Derivative Instruments ......................................... 54 17. Segments ....................................................... 55 18. Commitments and Contingencies .................................. 56 19. Litigation ..................................................... 56 20. Quarterly Financial Data (unaudited) ........................... 64 Report of Independent Registered Public Accounting Firm.................. 65 Schedule II - Valuation and Qualifying Accounts.......................... 66
All other schedules have been omitted because they are not required or applicable or the information is included in the consolidated financial statements or notes thereto. 30 USG CORPORATION CONSOLIDATED STATEMENTS OF EARNINGS
(millions, except per-share data) Years Ended December 31, - --------------------------------- ------------------------ 2004 2003 2002 ------ ------ ------ Net sales $4,509 $3,666 $3,468 Cost of products sold 3,672 3,121 2,884 ------ ------ ------ Gross profit 837 545 584 Selling and administrative expenses 317 324 312 Chapter 11 reorganization expenses 12 11 14 ------ ------ ------ Operating profit 508 210 258 Interest expense 5 6 8 Interest income (6) (4) (4) Other income, net -- (9) (2) ------ ------ ------ Earnings before income taxes and cumulative effect of accounting change 509 217 256 Income taxes 197 79 117 ------ ------ ------ Earnings before cumulative effect of accounting change 312 138 139 Cumulative effect of accounting change -- (16) (96) ------ ------ ------ Net earnings 312 122 43 ====== ====== ====== Net Earnings Per Common Share: Basic and diluted before cumulative effect of accounting change 7.26 3.19 3.22 Cumulative effect of accounting change -- (0.37) (2.22) ------ ------ ------ Basic and diluted 7.26 2.82 1.00 ====== ====== ======
The notes to consolidated financial statements are an integral part of these statements. 31 USG CORPORATION CONSOLIDATED BALANCE SHEETS
As of December 31, ------------------ (millions, except share data) 2004 2003 - ----------------------------- ------ ------ ASSETS Current Assets: Cash and cash equivalents $ 756 $ 700 Short-term marketable securities 138 64 Restricted cash 43 7 Receivables (net of reserves: 2004 - $14; 2003 - $15) 413 321 Inventories 338 280 Income taxes receivable 24 26 Deferred income taxes 25 43 Other current assets 53 57 ------ ------ Total current assets 1,790 1,498 ------ ------ Long-term marketable securities 312 176 Property, plant and equipment, net 1,853 1,818 Deferred income taxes 152 178 Goodwill 43 39 Other assets 128 90 ------ ------ Total assets 4,278 3,799 ====== ====== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable 270 202 Accrued expenses 224 206 Current portion of long-term debt 1 1 Income taxes payable 75 5 ------ ------ Total current liabilities 570 414 ------ ------ Long-term debt -- 1 Deferred income taxes 25 23 Other liabilities 417 429 Liabilities subject to compromise 2,242 2,243 Commitments and contingencies Stockholders' Equity: Preferred stock - $1 par value; authorized 36,000,000 shares; $1.80 convertible preferred stock (initial series); outstanding - none -- -- Common stock - $0.10 par value; authorized 200,000,000 shares; issued: 2004 - 49,985,222 shares; 2003 - 49,985,222 shares 5 5 Treasury stock at cost: 2004 - 6,675,689 shares; 2003 - 6,935,305 shares (256) (258) Capital received in excess of par value 417 414 Accumulated other comprehensive income (loss) 17 (1) Retained earnings 841 529 ------ ------ Total stockholders' equity 1,024 689 ------ ------ Total liabilities and stockholders' equity 4,278 3,799 ====== ======
The notes to consolidated financial statements are an integral part of these statements. 32 USG CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
(millions) Years Ended December 31, - ---------- ------------------------ 2004 2003 2002 ----- ----- ----- OPERATING ACTIVITIES Net earnings $ 312 $ 122 $ 43 Adjustments to Reconcile Net Earnings to Net Cash: Cumulative effect of accounting change -- 16 96 Depreciation, depletion and amortization 120 112 106 Deferred income taxes 49 59 67 Gain on asset dispositions (1) -- -- (Increase) Decrease in Working Capital: Receivables (92) (34) (9) Income taxes receivable 2 (12) 62 Inventories (58) (5) (15) Payables 77 12 54 Accrued expenses 15 (37) 65 Increase in other assets (38) (25) (7) Increase in other liabilities 31 53 2 Change in asbestos receivable 11 19 22 Decrease in liabilities subject to compromise (1) (29) (39) Other, net 1 (14) (5) ----- ----- ----- Net cash provided by operating activities 428 237 442 ----- ----- ----- INVESTING ACTIVITIES Capital expenditures (138) (111) (100) Purchases of marketable securities (546) (256) (237) Sale or maturities of marketable securities 332 194 56 Net proceeds from asset dispositions 6 2 2 Acquisitions of businesses (5) (20) (10) Deposit of restricted cash (36) (7) -- ----- ----- ----- Net cash used for investing activities (387) (198) (289) ----- ----- ----- FINANCING ACTIVITIES Repayment of debt (1) -- -- Issuances of common stock 7 -- -- ----- ----- ----- Net cash provided by financing activities 6 -- -- ----- ----- ----- Effect of exchange rate changes on cash 9 12 3 NET INCREASE IN CASH AND CASH EQUIVALENTS 56 51 156 Cash and cash equivalents at beginning of period 700 649 493 ----- ----- ----- Cash and cash equivalents at end of period 756 700 649 ===== ===== ===== Supplemental Cash Flow Disclosures: Interest paid 2 2 2 Income taxes paid (refunded), net 126 19 (39)
The notes to consolidated financial statements are an integral part of these statements. 33 USG CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Capital Common Received Accumulated Shares Treasury in Excess Other Issued Shares Common Treasury of Par Retained Comprehensive (millions, except share data) (000) (000) Stock Stock Value Earnings Income (Loss) Total ------ -------- ------ -------- --------- -------- ------------- ------ BALANCE AT DECEMBER 31, 2001 49,985 (6,528) $5 $(255) $408 $364 $(31) $ 491 ------ ------ -- ----- ---- ---- ---- ------ Comprehensive Income: Net earnings 43 43 Foreign currency translation 8 8 Change in fair value of derivatives, net of tax of $1 2 2 Minimum pension liability, net of tax benefit of $7 (11) (11) ------ Total comprehensive income 42 Stock issuances 4 -- Other (223) (2) 4 2 ------ ------ -- ----- ---- ---- ---- ------ BALANCE AT DECEMBER 31, 2002 49,985 (6,747) 5 (257) 412 407 (32) 535 ====== ====== == ===== ==== ==== ==== ====== Comprehensive Income: Net earnings 122 122 Foreign currency translation 31 31 Change in fair value of derivatives, net of tax benefit of $5 (8) (8) Minimum pension liability, net of tax of $6 8 8 ------ Total comprehensive income 153 Stock issuances 25 -- Other (213) (1) 2 1 ------ ------ -- ----- ---- ---- ---- ------ BALANCE AT DECEMBER 31, 2003 49,985 (6,935) 5 (258) 414 529 (1) 689 ====== ====== == ===== ==== ==== ==== ====== Comprehensive Income: Net earnings 312 312 Foreign currency translation 23 23 Change in fair value of derivatives, net of tax benefit of $3 (4) (4) Loss on marketable securities, net of tax of zero (1) (1) ------ Total comprehensive income 330 Stock issuances 299 2 5 7 Other (40) (2) (2) ------ ------ -- ----- ---- ---- ---- ------ BALANCE AT DECEMBER 31, 2004 49,985 (6,676) 5 (256) 417 841 17 1,024 ====== ====== == ===== ==== ==== ==== ======
The notes to consolidated financial statements are an integral part of these statements. 34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS Through its subsidiaries, USG Corporation (the "Corporation") is a leading manufacturer and distributor of building materials, producing a wide range of products for use in new residential, new nonresidential, and repair and remodel construction as well as products used in certain industrial processes. The Corporation's operations are organized into three operating segments: North American Gypsum, which manufactures SHEETROCK(R) brand gypsum wallboard and related products in the United States, Canada and Mexico; Worldwide Ceilings, which manufactures ceiling tile in the United States and ceiling grid in the United States, Canada, Europe and the Asia-Pacific region; and Building Products Distribution, which distributes gypsum wallboard, drywall metal, ceilings products, joint compound and other building products throughout the United States. The Corporation's products also are distributed through building materials dealers, home improvement centers and other retailers, specialty wallboard distributors and contractors. As discussed in Note 2, Voluntary Reorganization Under Chapter 11, the Corporation and certain of its subsidiaries are currently operating as debtors-in-possession under chapter 11 of the United States Bankruptcy Code. BASIS OF PRESENTATION The accompanying consolidated financial statements have been prepared in accordance with American Institute of Certified Public Accountants ("AICPA") Statement of Position 90-7 ("SOP 90-7"), "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code." CONSOLIDATION The consolidated financial statements include the accounts of the Corporation and its majority-owned subsidiaries. Subsidiaries in which the Corporation has less than a 50% ownership interest are accounted for on the equity basis of accounting and are not material to consolidated operations. All significant intercompany balances and transactions are eliminated in consolidation. USE OF ESTIMATES The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses. Actual results could differ from these estimates. RECLASSIFICATIONS Certain amounts in the prior years' consolidated financial statements and notes thereto have been reclassified to conform to the 2004 presentation. These reclassifications were made to the consolidated statements of cash flows and consisted of: (i) reclassifying 2003 restricted cash deposits to investing activities from financing activities and (ii) reclassifying the 2003 and 2002 effect of exchange rate changes on cash to show such amounts as a separate line item, rather than as part of "other" operating activity cash flows. The reclassified amounts are not material to the presentation of the consolidated statements of cash flows. REVENUE RECOGNITION For the majority of the Corporation's sales, revenue is recognized upon the shipment of products to customers, which is when title and risk of loss are transferred to customers. However, for the Corporation's Building Products Distribution segment, revenue is recognized and title and risk of loss are transferred when customers receive products, either through delivery by company trucks or customer pickup. Provisions for discounts to customers are recorded based on the terms of sale in the same period in which the related sales are recorded. The Corporation records estimated reductions to revenue for customer programs and incentive offerings, including promotions and other volume-based incentives. With the exception of Building Products Distribution, the Corporation's products are generally shipped free on board ("FOB") shipping point. SHIPPING AND HANDLING COSTS Shipping and handling costs are included in cost of products sold. ADVERTISING Advertising expenses consist of media advertising and related production costs. Advertising expenses are charged to earnings as incurred and amounted to $13 million, $16 million and $14 million in the years ended December 31, 2004, 2003 and 2002, respectively. 35 RESEARCH AND DEVELOPMENT Research and development expenditures are charged to earnings as incurred and amounted to $17 million, $18 million and $17 million in the years ended December 31, 2004, 2003 and 2002, respectively. INCOME TAXES The Corporation accounts for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. Tax provisions include estimates of amounts that are currently payable, plus changes in deferred tax assets and liabilities. EARNINGS PER SHARE Basic earnings per share are based on the weighted average number of common shares outstanding. Diluted earnings per share are based on the weighted average number of common shares outstanding and the dilutive effect of the potential exercise of outstanding stock options. Diluted earnings per share exclude the potential exercise of outstanding stock options for any period in which such exercise would have an anti-dilutive effect. CASH AND CASH EQUIVALENTS Cash and cash equivalents consist of highly liquid investments with maturities of three months or less at the time of purchase. MARKETABLE SECURITIES The Corporation invests in marketable securities with maturities greater than three months. These securities are listed as either short-term or long-term marketable securities on the consolidated balance sheets based on their maturities being less than or greater than one year. The securities are classified as available-for-sale securities and reported at fair market value with unrealized gains and losses excluded from earnings and recorded to accumulated other comprehensive income (loss). Realized gains and losses were not material in 2004, 2003 and 2002. INVENTORY VALUATION All of the Corporation's inventories are stated at the lower of cost or market. Most of the Corporation's inventories in the United States are valued under the last-in, first-out ("LIFO") cost method. The remaining inventories are valued under the first-in, first-out ("FIFO") or average production cost methods. Inventories include material, labor and applicable factory overhead costs. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment are stated at cost, except for those assets that were revalued under fresh start accounting in May 1993. Provisions for depreciation of property, plant and equipment are determined principally on a straight-line basis over the expected average useful lives of composite asset groups. Estimated useful lives are determined to be 50 years for buildings and improvements, a range of 10 years to 25 years for machinery and equipment and five years for computer software and systems development costs. Depletion is computed on a basis calculated to spread the cost of gypsum and other applicable resources over the estimated quantities of material recoverable. LONG-LIVED ASSETS Long-lived assets include property, plant and equipment, goodwill (the excess of cost over the fair value of net assets acquired) and other intangible assets. The Corporation annually reviews goodwill and periodically reviews its other long-lived assets for impairment by comparing the carrying value of the assets with their estimated future undiscounted cash flows or fair value, as appropriate. If impairment is determined, the asset is written down to estimated fair value. STOCK-BASED COMPENSATION The Corporation accounts for stock-based compensation under the provisions of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." APB No. 25 prescribes the use of the intrinsic value method, which measures compensation cost as the quoted market price of the stock at the date of grant less the amount, if any, that the employee is required to pay. If the Corporation had elected to recognize compensation cost for stock-based compensation grants consistent with the fair value method prescribed by Statement of Financial Accounting Standard ("SFAS") No. 123, "Accounting for Stock-Based Compensation," net earnings and net earnings per common share would not have changed from the reported amounts for 2004 and 2003. For 2002, net earnings would have decreased by $2 million to $41 million, and net earnings per common share would have decreased by $0.06 to $0.94. 36 DERIVATIVE INSTRUMENTS The Corporation uses derivative instruments to manage selected commodity price and foreign currency exposures. The Corporation does not use derivative instruments for trading purposes. All derivative instruments must be recorded on the balance sheet at fair value. For derivatives designated as fair value hedges, the changes in the fair values of both the derivative instrument and the hedged item are recognized in earnings in the current period. For derivatives designated as cash flow hedges, the effective portion of changes in the fair value of the derivative is recorded to accumulated other comprehensive income (loss) ("OCI") and is reclassified to earnings when the underlying transaction has an impact on earnings. The ineffective portion of changes in the fair value of the derivative is reported in cost of products sold. The amount of ineffectiveness was not material for 2004, 2003 and 2002. Commodity Derivative Instruments: The Corporation uses swap contracts to hedge anticipated purchases of natural gas to be used in its manufacturing operations. Generally, the Corporation has a substantial majority of its anticipated purchases of natural gas over the next 12 months hedged; however, the Corporation reviews its positions regularly and makes adjustments as market conditions warrant. The current contracts, all of which mature by December 31, 2007, are generally designated as cash flow hedges, with changes in fair value recorded to OCI until the hedged transaction occurs, at which time it is reclassified to earnings. Foreign Exchange Derivative Instruments: The Corporation has operations in a number of countries and uses forward contracts from time to time to hedge selected risk of changes in cash flows resulting from forecasted intercompany and third-party sales or purchases denominated in non-U.S. currencies. These contracts are generally designated as cash flow hedges, for which changes in fair value are recorded to OCI until the underlying transaction has an impact on earnings. FOREIGN CURRENCY TRANSLATION Foreign-currency-denominated assets and liabilities are translated into U.S. dollars at the exchange rates existing as of the respective balance sheet dates. Translation adjustments resulting from fluctuations in exchange rates are recorded to OCI on the consolidated balance sheets. Income and expense items are translated at the average exchange rates during the respective periods. The aggregate transaction (gain) loss included in other income, net was $2 million, $(8) million and $(2) million in 2004, 2003 and 2002, respectively. RECENT ACCOUNTING PRONOUNCEMENTS SFAS No. 123-R: In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123-R "Share-Based Payment," which requires companies to recognize in the income statement the grant-date fair value of stock options and other equity-based compensation issued to employees. The standard becomes effective for reporting periods beginning after June 15, 2005. Because the Corporation is not currently issuing stock options, the adoption of SFAS No. 123-R is not expected to have an impact on the Corporation's financial position, cash flows or results of operations. FSP FAS No. 109-1: In December 2004, the FASB issued FASB Staff Position ("FSP") FAS No. 109-1 "Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004." This FSP, which became effective upon issuance, provides that the tax deduction for income with respect to qualified domestic production activities, as part of the American Jobs Creation Act of 2004 that was enacted on October 22, 2004, will be treated as a special deduction as described in SFAS No. 109. As a result, this deduction has no effect on the Corporation's deferred tax assets and liabilities existing at the date of enactment. Instead, the impact of this deduction, which is effective January 1, 2005, will be reported in the period in which the deduction is claimed on the Corporation's income tax returns. FSP FAS No. 109-2: In December 2004, the FASB issued FSP FAS No. 109-2 "Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004." This FSP, which became effective upon issuance, allows an enterprise additional time beyond the financial reporting period of enactment of the American Jobs Creation Act of 2004 to evaluate the effect of this act on its plan for reinvestment or repatriation of foreign earnings for purposes of applying SFAS No. 109. See Note 15, Income Taxes, for more information on the impact of adopting this FSP. 37 2. VOLUNTARY REORGANIZATION UNDER CHAPTER 11 On June 25, 2001 (the "Petition Date"), the Corporation and the 10 United States subsidiaries listed below (collectively, the "Debtors") filed voluntary petitions for reorganization (the "Filing") under chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"). This action was taken to resolve asbestos claims in a fair and equitable manner, to protect the long-term value of the Debtors' businesses, and to maintain the Debtors' leadership positions in their markets. The chapter 11 cases of the Debtors (collectively, the "Chapter 11 Cases") are being jointly administered as In re: USG Corporation et al. (Case No. 01-2094). The Chapter 11 Cases do not include any of the Corporation's non-U.S. subsidiaries. The following subsidiaries filed chapter 11 petitions: United States Gypsum Company ("U.S. Gypsum"); USG Interiors, Inc. ("USG Interiors"); USG Interiors International, Inc.; L&W Supply Corporation ("L&W Supply"); Beadex Manufacturing, LLC; B-R Pipeline Company; La Mirada Products Co., Inc.; Stocking Specialists, Inc.; USG Industries, Inc.; and USG Pipeline Company. The background of asbestos litigation, developments in the Corporation's reorganization proceedings and estimated cost are discussed in Note 19, Litigation. CONSEQUENCES OF THE FILING As a consequence of the Filing, all asbestos lawsuits and other lawsuits pending against the Debtors as of the Petition Date are stayed, and no party may take any action to pursue or collect pre-petition claims except pursuant to an order of the Bankruptcy Court. Since the Filing, the Debtors have ceased making both cash payments and accruals with respect to asbestos lawsuits, including cash payments and accruals pursuant to settlements of asbestos lawsuits. The Debtors are operating their businesses without interruption as debtors-in-possession subject to the provisions of the Bankruptcy Code, and vendors are being paid for goods furnished and services provided after the Filing. The Debtors' Chapter 11 Cases are assigned to Judge Judith K. Fitzgerald, a bankruptcy court judge, and Judge Joy Flowers Conti, a district court judge. Judge Conti recently entered an order stating that she will hear matters relating to estimation of the Debtors' liability for asbestos personal injury claims. Other matters will be heard by Judge Fitzgerald. Three creditors' committees, one representing asbestos personal injury claimants (the "Official Committee of Asbestos Personal Injury Claimants"), another representing asbestos property damage claimants (the "Official Committee of Asbestos Property Damage Claimants"), and a third representing unsecured creditors (the "Official Committee of Unsecured Creditors"), were appointed as official committees in the Chapter 11 Cases. The Bankruptcy Court also appointed Dean M. Trafelet as the legal representative for future asbestos claimants in the Debtors' bankruptcy proceedings. Mr. Trafelet was formerly a judge of the Circuit Court of Cook County, Illinois. The appointed committees, together with Mr. Trafelet, will play significant roles in the Chapter 11 Cases and resolution of the terms of any plan of reorganization. The Debtors intend to address their liability for all present and future asbestos claims, as well as all other pre-petition claims, in a plan or plans of reorganization approved by the Bankruptcy Court. The Debtors currently have the exclusive right to file a plan of reorganization until June 30, 2005. The Debtors may seek one or more additional extensions of the exclusive period depending upon developments in the Chapter 11 Cases. Any plan of reorganization ultimately approved by the Bankruptcy Court may include one or more independently administered trusts under Section 524(g) of the Bankruptcy Code, which may be funded by the Debtors to allow payment of present and future asbestos personal injury claims. Under the Bankruptcy Code, a plan of reorganization creating a Section 524(g) trust may be confirmed only if 75% of the asbestos claimants who are affected by the trust and who vote on the plan approve the plan. Section 524(g) also requires that such trust own (or have the right to acquire if specified contingencies occur) a majority of the voting stock of each relevant Debtor, its parent corporation, or a subsidiary that is also a Debtor. A plan of reorganization, including a plan creating a Section 524(g) trust, may be confirmed without the consent of non-asbestos creditors and equity security holders if certain requirements of the Bankruptcy Code are met. The Debtors also expect that the plan of reorganization will address the Debtors' liability for asbestos property damage claims, whether by including those liabilities in a Section 524(g) trust or by other means. If the confirmed plan of reorganization includes the creation and funding of a Section 524(g) trust relating to one or more of the Debtors, the Bankruptcy Court 38 will issue a permanent injunction barring the assertion of present and future asbestos claims against the relevant Debtors, their successors, and their affiliates, and channeling those claims to the trust for payment in whole or in part. Similar plans of reorganization containing Section 524(g) trusts have been confirmed in the chapter 11 cases of other companies with asbestos liabilities, but there is no guarantee that the Bankruptcy Court in the Debtors' Chapter 11 Cases will approve creation of a Section 524(g) trust or issue a permanent injunction channeling to the trust all asbestos claims against the Debtors and/or their successors and affiliates. A key factor in determining whether or to what extent there will be any recovery for pre-petition creditors or stockholders under any plan of reorganization is the amount that must be provided in the plan to address the Debtors' liability for present and future asbestos claims. The Official Committee of Asbestos Personal Injury Claimants and the legal representative for future asbestos claimants have indicated in a court filing that they estimate that the net present value of the Debtors' liability for present and future asbestos personal injury claims is approximately $5.5 billion and that the Debtors are insolvent. The Debtors have stated that they believe they are solvent if their asbestos liabilities are fairly and appropriately valued. In addition, if federal legislation addressing asbestos personal injury claims is passed, which is speculative at this time, such legislation likely would affect the amount that will be required to address the Debtors' asbestos personal injury liability in the Chapter 11 Cases and may affect whether the Debtors establish a trust under Section 524(g). See Potential Federal Legislation Regarding Asbestos Personal Injury Claims, below, and Note 19, Litigation, for additional information regarding Debtors' asbestos liabilities and their estimated cost. The Debtors' asbestos liabilities to be funded under a plan of reorganization have not yet been determined and are subject to substantial dispute and uncertainty. While it is the Debtors' intention to seek a full recovery for their creditors, it is not possible to predict the amount that will have to be provided in the plan of reorganization to address present and future asbestos claims, how the plan of reorganization will treat other pre-petition claims, whether there will be sufficient assets to satisfy the Debtors' pre-petition liabilities, and what impact any plan may have on the value of the shares of the Corporation's common stock. The payment rights and other entitlements of pre-petition creditors and the Corporation's stockholders may be substantially altered by any plan of reorganization confirmed in the Chapter 11 Cases. Pre-petition creditors may receive under the plan of reorganization less than 100% of the face value of their claims, the pre-petition creditors of some Debtors may be treated differently from the pre-petition creditors of other Debtors, and the interests of the Corporation's stockholders are likely to be substantially diluted or cancelled in whole or in part. There can be no assurance as to the value of any distributions that might be made under any plan of reorganization with respect to such pre-petition claims or equity interests. It is also not possible to predict how the plan of reorganization will treat intercompany indebtedness, licenses, transfers of goods and services, and other intercompany arrangements, transactions and relationships that were entered into before the Petition Date. Certain of these intercompany transactions have been challenged by various parties in these Chapter 11 Cases, and other arrangements, transactions and relationships may be challenged by parties to these Chapter 11 Cases. The outcome of such challenges may have an impact on the treatment of various claims under any plan of reorganization. In connection with the Filing, the Corporation implemented a Bankruptcy Court-approved key employee retention plan that commenced on July 1, 2001, and continued until June 30, 2004. Effective July 1, 2004, the key employee retention plan, in an amended form, was extended until December 31, 2005. Under the amended plan, participants continue to earn awards semiannually. The amendments introduce a performance feature for the last two (of four) payments to be made under the extended plan. The cost of the extended plan is projected to be approximately $19.4 million for the full year 2005 before taking into account the performance feature, which could increase the final two payments up to 25% or eliminate them altogether. Because of the performance feature, expense in 2005 could range from a low of approximately $6.9 million (assuming failure to meet the performance target, which would result in the final two payments being eliminated) to a maximum of approximately $22.4 million (assuming full attainment of the performance target). Expenses associated with this plan amounted to $16 million in 2004, $23 million in 2003 and $20 million in 2002. Expense declined in 2004 from prior-year levels primarily due to accruals in 2003 and 2002 of deferred amounts that were paid in 2004. 39 POTENTIAL FEDERAL LEGISLATION REGARDING ASBESTOS PERSONAL INJURY CLAIMS The Corporation has for many years actively supported proposals for federal legislation addressing asbestos personal injury claims. On April 7, 2004, the Fairness in Asbestos Injury Resolution Act of 2004 (Senate Bill 2290, the "FAIR Bill") was introduced in the United States Senate. The FAIR Bill has not been approved by the Senate, has not been introduced in the House of Representatives, and is not law. The FAIR Bill introduced in the Senate is intended to establish a nationally administered trust fund to compensate asbestos personal injury claimants. In the FAIR Bill's current form, companies that have made past payments for asbestos personal injury claims would be required to contribute amounts to a national trust fund on a periodic basis that would pay the claims of qualifying asbestos personal injury claimants. The nationally administered trust fund would be the exclusive remedy for asbestos personal injury claims, and such claims could not be brought in state or federal court as long as such claims are being compensated under the national trust fund. In the FAIR Bill's current form, the amounts to be paid to the national trust fund are based on an allocation methodology set forth in the FAIR Bill. The amounts that participants, including the Debtors, would be required to pay are not dischargeable in a bankruptcy proceeding. The FAIR Bill also provides, among other things, that if it is determined that the money in the trust fund is not sufficient to compensate eligible claimants, the claimants and defendants would return to the court system to resolve claims not paid by the national trust fund. The outcome of the legislative process is inherently speculative, and it cannot be known whether the FAIR Bill or similar legislation will ever be enacted or, even if enacted, what the terms of the final legislation might be. In addition to the organized plaintiffs' bar, many labor organizations, including the AFL-CIO, as well as some Senators have indicated that they oppose the FAIR Bill as introduced because, among other things, they believe that the FAIR Bill does not provide sufficient compensation to asbestos claimants. On April 22, 2004, the Senate defeated a motion to proceed with floor consideration of the FAIR Bill. It is anticipated that a revised version of the FAIR Bill will be introduced in the 109th Congress. However, it is likely that some of the opponents identified above will remain opposed to the FAIR Bill when it is reintroduced, and whether the FAIR Bill will ever be enacted cannot be predicted. It is also likely that, even if the FAIR Bill is enacted, the terms of the enacted legislation will differ from those of the FAIR Bill considered in 2004, and those differences may be material to the FAIR Bill's impact on the Corporation. Enactment of the FAIR Bill or similar legislation addressing the financial contributions of the Debtors for asbestos personal injury claims would have a material impact on the amount of the Debtors' asbestos personal injury liability and the Debtors' Chapter 11 Cases. During the legislative process, proceedings in the Chapter 11 Cases will continue. See Consequences of the Filing, above, and Note 19, Litigation. PRE-PETITION LIABILITIES OTHER THAN ASBESTOS PERSONAL INJURY CLAIMS Subsequent to the Filing, the Debtors received approval from the Bankruptcy Court to pay or otherwise honor certain of their pre-petition obligations, including employee wages, salaries, benefits and other employee obligations, and from limited available funds, pre-petition claims of certain critical vendors, real estate taxes, environmental obligations, certain customer programs and warranty claims, and certain other pre-petition claims. Pursuant to the Bankruptcy Code, schedules were filed by the Debtors with the Bankruptcy Court on October 23, 2001, and certain of the schedules were amended on May 31, 2002, December 13, 2002, and September 30, 2004, setting forth the assets and liabilities of the Debtors as of the date of the Filing. The Bankruptcy Court established a bar date of January 15, 2003, by which date proofs of claim were required to be filed against the Debtors for all claims other than asbestos-related personal injury claims as defined in the Bankruptcy Court's order. Approximately 5,000 proofs of claim for general unsecured creditors (including pre-petition debtholders and contingent claims, but excluding asbestos-related claims) totaling approximately $8.7 billion were filed by the bar date. Of this amount, $5.7 billion worth of claims have been withdrawn from the case by creditors. The Debtors have been analyzing the remaining proofs of claim and determined that many of them are duplicates of other proofs of claim or of liabilities previously scheduled by the Debtors. In addition, many claims were filed against multiple Debtors or against an incorrect Debtor, or were incorrectly claiming a priority level higher than general unsecured or an incorrect dollar amount. To date, the court has expunged 264 claims totaling $29.5 million as duplicates; expunged 434 claims totaling $198.9 million as amended or superceded; allowed the reduction of 779 claims by a 40 total of $19.8 million; and allowed the correction of the Debtors on 1,486 claims and the reclassification of 287 claims to general unsecured claims. The Debtors continue to analyze and reconcile filed claims. The deadline to bring avoidance actions in the Chapter 11 Cases was June 25, 2003. Avoidance actions could include claims to avoid alleged preferences made during the 90-day period prior to the filing (or one-year period for insiders) and other transfers made or obligations incurred which could be alleged to be constructive or actual fraudulent conveyances under applicable law. Effective prior to the avoidance action deadline, the Bankruptcy Court granted the motion of the committee representing the unsecured creditors to file a complaint seeking to avoid and recover as preferences certain pre-petition payments made by the Debtors to 206 creditors, where such payments, in most cases, exceeded $500,000. The Bankruptcy Court also granted the committee's request to extend the time by which the summons and complaint are served upon each named defendant until 90 days after confirmation of a plan of reorganization filed in connection with the Chapter 11 Cases. In addition, prior to the deadline for filing avoidance actions, certain of the Debtors entered into a Tolling Agreement pursuant to which the Debtors voluntarily agreed to extend the time during which actions could be brought to avoid certain intercompany transactions that occurred during the one-year period prior to the filing of the Chapter 11 Cases. The transactions as to which the Tolling Agreement applies are the creation of liens on certain assets of Debtor subsidiaries in favor of the Corporation in connection with intercompany loan agreements; a transfer by U.S. Gypsum to the Corporation of a 9% interest in the equity of CGC Inc., the principal Canadian subsidiary of the Corporation; and transfers made by the Corporation to USG Foreign Investments, Ltd., a non-Debtor subsidiary. The Bankruptcy Court approved the Tolling Agreement in June 2003. The Debtors expect to address claims for general unsecured creditors through liquidation, estimation or disallowance of the claims. In connection with this process, the Debtors will make adjustments to their schedules and financial statements as appropriate. Any such adjustments could be material to the Corporation's consolidated financial position, cash flows and results of operations in any given period. At this time, it is not possible to estimate the Debtors' liability for these claims. However, it is likely that the Debtors' liability for these claims will be different from the amounts now recorded by the Debtors. Proofs of claim alleging asbestos property damage claims are discussed in Note 19, Litigation, under Developments in the Reorganization Proceeding. FINANCIAL STATEMENT PRESENTATION The accompanying consolidated financial statements have been prepared on a going-concern basis, which contemplates continuity of operations, realization of assets and liquidation of liabilities in the ordinary course of business. However, as a result of the Filing, such realization of assets and liquidation of liabilities, without substantial adjustments and/or changes of ownership, are subject to uncertainty. Given this uncertainty, there is substantial doubt about the Corporation's ability to continue as a going concern. Such doubt includes, but is not limited to, a possible change in control of the Corporation, as well as a potential change in the composition of the Corporation's business portfolio. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. While operating as debtors-in-possession under the protection of chapter 11 of the Bankruptcy Code and subject to Bankruptcy Court approval or otherwise as permitted in the ordinary course of business, one or more of the Debtors may sell or otherwise dispose of assets and liquidate or settle liabilities for amounts other than those reflected in the consolidated financial statements. Further, a plan of reorganization could materially change the amounts and classifications in the historical consolidated financial statements. The Corporation's ability to continue as a going concern is dependent upon, among other things, (i) the ability of the Corporation to maintain adequate cash on hand, (ii) the ability of the Corporation to generate cash from operations, (iii) confirmation of a plan of reorganization under the Bankruptcy Code and (iv) the Corporation's ability to be profitable following such confirmation. The Corporation believes that cash and marketable securities on hand and future cash available from operations will provide sufficient liquidity to allow its businesses to operate in the normal course without interruption for the duration of the Chapter 11 Cases. This includes its ability to meet post-petition obligations of the Debtors and to meet obligations of the non-Debtor subsidiaries. 41 LIABILITIES SUBJECT TO COMPROMISE As reflected in the consolidated financial statements, liabilities subject to compromise refers to the Debtors' liabilities incurred prior to the commencement of the Chapter 11 Cases. The amounts of the various liabilities that are subject to compromise are set forth in the table below. These amounts represent the Debtors' estimate of known or potential pre-petition claims to be resolved in connection with the Chapter 11 Cases. Such claims remain subject to future adjustments. Adjustments may result from (i) negotiations, (ii) actions of the Bankruptcy Court, (iii) further developments with respect to disputed claims, (iv) rejection of executory contracts and unexpired leases, (v) the determination as to the value of any collateral securing claims, (vi) proofs of claim, including unaccrued and unrecorded post-petition interest expense, (vii) effect of any legislation which may be enacted or (viii) other events. The amount shown below for the asbestos reserve reflects the Corporation's pre-petition estimate of liability associated with asbestos claims expected to be filed against U.S. Gypsum in the tort system through 2003, and this liability, in addition to liability for post-2003 claims, is the subject of significant dispute in the Chapter 11 Cases. See Note 19, Litigation, for further discussion regarding the asbestos reserve and for additional information on the background of asbestos litigation and developments in the Corporation's reorganization proceedings. Payment terms for liabilities subject to compromise will be established as part of a plan of reorganization under the Chapter 11 Cases. Liabilities subject to compromise on the consolidated and debtor-in-possession balance sheets as of December 31 consisted of the following items:
(millions) 2004 2003 - ---------- ------ ------ Asbestos reserve $1,061 $1,061 Debt 1,005 1,005 Accounts payable 169 162 Accrued expenses 37 44 Other long-term liabilities 13 14 ------ ------ Subtotal 2,285 2,286 Elimination of intercompany accounts payable (43) (43) ------ ------ Total 2,242 2,243 ====== ======
DEBT As a result of the Filing, virtually all of the Corporation's pre-petition debt is in default and included in liabilities subject to compromise. Any such debt that was scheduled to mature since the Filing has not been repaid. Total debt included in liabilities subject to compromise as of December 31 consisted of the following:
(millions) 2004 2003 - ---------- ------ ------ Revolving credit facilities $ 469 $ 469 9.25% senior notes due 2001 131 131 8.5% senior notes due 2005 150 150 Industrial revenue bonds 255 255 ------ ------ Total 1,005 1,005 ====== ======
The fair market value of debt classified as liabilities subject to compromise was $1,121 million and $926 million as of December 31, 2004 and 2003, respectively. The fair market values were based on quoted market prices or, where quoted market prices were not available, on instruments with similar terms and maturities. However, because this debt is subject to compromise, the fair market value of such debt as of December 31, 2004, is not necessarily indicative of the ultimate settlement value that will be determined by the Bankruptcy Court. INTERCOMPANY TRANSACTIONS In the normal course of business, the Corporation (also referred to as the "Parent Company" in the following discussion of intercompany transactions) and the operating subsidiaries engage in intercompany transactions. To document the relations created by these transactions, the Parent Company and the operating subsidiaries, from the formation of the Corporation in 1985, have been parties to intercompany loan agreements that evidence their obligations as borrowers or rights as lenders arising out of intercompany cash transfers and various allocated intercompany charges (the "Intercompany Corporate Transactions"). The Corporation operates a consolidated cash management system under which the cash receipts of the domestic operating subsidiaries are ultimately concentrated in Parent Company accounts. Cash disbursements for those operating subsidiaries originate from those Parent Company concentration accounts. Allocated intercompany charges from the Parent Company to the operating subsidiaries primarily include expenses related to rent, property taxes, information technology, and research and development, while 42 allocated intercompany charges between certain operating subsidiaries primarily include expenses for shared marketing, sales, customer service, engineering and accounting services. Detailed accounting records are maintained of all cash flows and intercompany charges through the system in either direction. Net balances, receivables or payables of such cash transactions are reviewed on a regular basis with interest earned or accrued on the balances. During the first six months of 2001, the Corporation took steps to secure the obligations from each of the principal domestic operating subsidiaries under intercompany loan agreements when it became clear that the asbestos liability claims of U.S. Gypsum were becoming an increasingly greater burden on the Corporation's cash resources. As of December 31, 2004, U.S. Gypsum and USG Interiors had net pre-petition payable balances to the Parent Company for Intercompany Corporate Transactions of $295 million and $109 million, respectively. L&W Supply had a net pre-petition receivable balance from the Parent Company of $33 million. These pre-petition balances are subject to the provisions of the Tolling Agreement discussed above. See Pre-Petition Liabilities Other Than Asbestos Personal Injury Claims, above. As of December 31, 2004, U.S. Gypsum and L&W Supply had net post-petition receivable balances from the Parent Company for Intercompany Corporate Transactions of $399 million and $199 million, respectively. USG Interiors had a net post-petition payable balance to the Parent Company of $14 million. In addition to the above transactions, the operating subsidiaries engage in ordinary-course purchase and sale of products with other operating subsidiaries (the "Intercompany Trade Transactions"). Detailed accounting records are maintained of all such transactions, and settlements are made on a monthly basis. Certain Intercompany Trade Transactions between U.S. and non-U.S. operating subsidiaries are settled via wire transfer payments utilizing several payment systems. CHAPTER 11 REORGANIZATION EXPENSES Chapter 11 reorganization expenses in the consolidated and debtor-in-possession statements of earnings consisted of the following:
(millions) 2004 2003 2002 - ---------- ---- ---- ---- Legal and financial advisory fees $ 24 $19 $22 Bankruptcy-related interest income (12) (8) (8) ---- --- --- Total 12 11 14 ==== === ===
INTEREST EXPENSE Contractual interest expense not accrued or recorded on pre-petition debt totaled $71 million in 2004. From the Petition Date through December 31, 2004, contractual interest expense not accrued or recorded on pre-petition debt totaled $257 million. This calculation assumes that all such interest was paid when required at the applicable contractual interest rate (after giving effect to any applicable default rate). However, the calculation excludes the impact of any compounding of interest on unpaid interest that may be payable under the relevant contractual obligations, as well as any interest that may be payable under a plan of reorganization to trade or other creditors that are not otherwise entitled to interest under the express terms of their claims. The impact of compounding alone would have increased the contractual interest expense reported above by $18 million in 2004 and $34 million from the Petition Date through December 31, 2004 . For financial reporting purposes, no post-petition accruals have been made for contractual interest expense not accrued or recorded on pre-petition debt. However, based on discussions with representatives of the Official Committee of Unsecured Creditors, the Corporation anticipates that the relevant creditors will seek to recover amounts in respect of such unaccrued interest expense (on a compounded basis) in the Chapter 11 Cases. 43 DIP FINANCIAL STATEMENTS Under the Bankruptcy Code, the Corporation is required to file periodically with the Bankruptcy Court various documents including financial statements of the Debtors (the Debtor-In-Possession or "DIP" financial statements). The Corporation cautions that these financial statements are prepared according to requirements under the Bankruptcy Code. While these financial statements accurately provide information required under the Bankruptcy Code, they are nonetheless unconsolidated, unaudited and prepared in a format different from that used in the Corporation's consolidated financial statements filed under United States securities laws. Accordingly, the Corporation believes the substance and format do not allow meaningful comparison with the Corporation's regular publicly disclosed consolidated financial statements. The Debtors consist of the Corporation and the following wholly owned subsidiaries: U.S. Gypsum, USG Interiors, USG Interiors International, Inc.; L&W Supply, Beadex Manufacturing, LLC; B-R Pipeline Company; La Mirada Products Co., Inc.; Stocking Specialists, Inc.; USG Industries, Inc.; and USG Pipeline Company. In 2002, USG Interiors recorded a charge of $82 million to write down the investment in its Belgian subsidiary, which ceased operations in December 2002. Also in 2002, USG Funding Corporation, a non-Debtor subsidiary of the Corporation, declared a dividend in the amount of $30 million payable to the Corporation, which was paid in effect by eliminating the intercompany payable from the Corporation. The net impact of these unrelated transactions is included in other expense, net in the DIP statement of earnings for 2002. The condensed financial statements of the Debtors are presented as follows: DEBTOR-IN-POSSESSION STATEMENTS OF EARNINGS (UNAUDITED)
Years Ended December 31, ------------------------ (millions) 2004 2003 2002 - ---------- ------ ------ ------ Net sales $4,065 $3,302 $3,127 Cost of products sold 3,389 2,863 2,631 Selling and administrative expenses 267 278 266 Chapter 11 reorganization expenses 12 11 14 Interest expense 4 5 8 Interest income (2) (2) (2) Other (income) expense, net (2) (6) 51 ------ ------ ------ Earnings before income taxes and cumulative effect of accounting change 397 153 159 Income taxes 162 66 96 ------ ------ ------ Earnings before cumulative effect of accounting change 235 87 63 Cumulative effect of accounting change -- (13) (41) ------ ------ ------ Net earnings 235 74 22 ====== ====== ======
44 DEBTOR-IN-POSSESSION BALANCE SHEETS (UNAUDITED)
As of December 31, ------------------ (millions) 2004 2003 - ---------- ------ ------ ASSETS Current Assets: Cash and cash equivalents $ 516 $ 489 Short-term marketable securities 135 64 Restricted cash 38 7 Receivables (net of reserves: 2004 - $10; 2003 - $11) 373 276 Inventories 275 232 Income taxes receivable 24 21 Deferred income taxes 25 41 Other current assets 45 47 ------ ------ Total current assets 1,431 1,177 ------ ------ Long-term marketable securities 276 176 Property, plant and equipment (net of accumulated depreciation and depletion: 2004 - $728; 2003 - $645) 1,604 1,576 Deferred income taxes 152 178 Goodwill 43 39 Other assets 361 358 ------ ------ Total assets 3,867 3,504 ====== ====== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable 237 168 Accrued expenses 203 186 Income taxes payable 58 4 ------ ------ Total current liabilities 498 358 ------ ------ Other liabilities 391 403 Liabilities subject to compromise 2,242 2,243 Stockholders' Equity: Preferred stock -- -- Common stock 5 5 Treasury stock (256) (258) Capital received in excess of par value 101 101 Accumulated other comprehensive income 3 8 Retained earnings 883 644 ------ ------ Total stockholders' equity 736 500 ------ ------ Total liabilities and stockholders' equity 3,867 3,504 ====== ======
45 DEBTOR-IN-POSSESSION STATEMENTS OF CASH FLOWS (UNAUDITED)
Years Ended December 31, ------------------------ (millions) 2004 2003 2002 - ---------- ----- ----- ----- OPERATING ACTIVITIES Net earnings $ 235 $ 74 $ 22 Adjustments to Reconcile Net Earnings to Net Cash: Cumulative effect of accounting change -- 13 41 Corporate service charge (1) (1) (1) Depreciation, depletion and amortization 101 94 85 Deferred income taxes 45 54 63 Gain on asset dispositions (1) -- -- (Increase) Decrease in Working Capital: Receivables (97) (37) -- Income taxes receivable (3) (7) 63 Inventories (43) -- (11) Payables 66 10 49 Accrued expenses 14 (21) 57 Increase in pre-petition intercompany receivable (38) -- -- (Increase) decrease in post-petition intercompany receivable 70 (9) (53) (Increase) decrease in other assets (36) (9) 104 Increase in other liabilities 32 45 -- Change in asbestos receivables 11 19 22 Decrease in liabilities subject to compromise (1) (29) (39) Other, net (6) (10) (6) ----- ----- ----- Net cash provided by operating activities 348 186 396 ----- ----- ----- INVESTING ACTIVITIES Capital expenditures (118) (88) (75) Purchases of marketable securities (507) (256) (237) Sale or maturities of marketable securities 332 194 56 Net proceeds from asset dispositions 1 2 2 Acquisitions of businesses (5) (20) (10) Deposit of restricted cash (31) (7) -- ----- ----- ----- Net cash used for investing activities (328) (175) (264) ----- ----- ----- FINANCING ACTIVITIES Issuances of common stock 7 -- -- ----- ----- ----- Net cash provided by financing activities 7 -- -- ----- ----- ----- NET INCREASE IN CASH AND CASH EQUIVALENTS 27 11 132 Cash and cash equivalents at beginning of period 489 478 346 ----- ----- ----- Cash and cash equivalents at end of period 516 489 478 ===== ===== ===== Supplemental Cash Flow Disclosures: Interest paid 2 2 2 Income taxes paid (refunded), net 114 2 (52)
46 3. EXIT ACTIVITIES 2003 SALARIED WORKFORCE REDUCTION In the fourth quarter of 2003, the Corporation recorded a charge of $3 million pretax ($2 million after-tax) for severance related to a salaried workforce reduction of approximately 70 employees. An additional 56 open positions were eliminated. The charge was included in selling and administrative expenses. Payments totaling $1 million were made in the fourth quarter, and a reserve of $2 million was included in accrued expenses on the consolidated balance sheet as of December 31, 2003. The remaining payments of $2 million were made during the first quarter of 2004. 2002 DOWNSIZING PLAN In the fourth quarter of 2002, the Corporation recorded a non-tax-deductible charge of $11 million related to the shutdown of the Aubange, Belgium, ceiling tile plant and other downsizing activities in Europe that addressed the continuing weakness of the commercial ceilings market in Europe. The charge was included in cost of products sold for USG International and reflected severance of $6 million related to a workforce reduction of more than 50 positions (salaried and hourly), equipment writedowns of $3 million and other reserves of $2 million. The other reserves primarily related to lease cancellations, inventories and receivables. A total of 53 employees were terminated, completing the workforce reduction. The Aubange plant ceased operations in December 2002. The reserve for the 2002 downsizing plan was included in accrued expenses on the consolidated balance sheets. Charges against the reserve included the $3 million writedown of equipment in 2002 and payments totaling $8 million in 2003. All payments associated with the 2002 downsizing plan were funded with cash from operations. An additional $1 million writedown related to the Aubange plant was recorded in 2003. 4. STOCKHOLDER RIGHTS PLAN The Corporation's stockholder rights plan, which will expire on March 27, 2008, has four basic provisions. First, if an acquirer buys 15% or more of the Corporation's outstanding common stock, the plan allows other stockholders to buy, with each right, additional shares of the Corporation at a 50% discount. Second, if the Corporation is acquired in a merger or other business combination transaction, rights holders will be entitled to buy shares of the acquiring company at a 50% discount. Third, if an acquirer buys between 15% and 50% of the Corporation's outstanding common stock, the Corporation can exchange part or all of the rights of the other holders for shares of the Corporation's stock on a one-for-one basis or shares of a new junior preferred stock on a one-for-one-hundredth basis. Fourth, before an acquirer buys 15% or more of the Corporation's outstanding common stock, the rights are redeemable for $0.01 per right at the option of the Corporation's board of directors (the "Board"). This provision permits the Board to enter into an acquisition transaction that is determined to be in the best interests of stockholders without any of the above provisions becoming effective. The Board is authorized to reduce the 15% threshold to not less than 10%. The Board has not exercised its authority regarding these provisions as of the date of this report. In November 2004, the independent members of the Board reviewed the Corporation's stockholder rights plan in accordance with its policy, adopted in 2000, to review the rights plan every three years. The independent members of the Board considered a variety of relevant factors, including the effect of the Filing, and concluded that the rights plan continued to be in the best interests of the Corporation and should be retained in its present form. 5. EARNINGS PER SHARE The reconciliation of basic earnings per share to diluted earnings per share is shown in the following table:
Weighted Average Net Shares Per-Share (millions, except share data) Earnings (000) Amount - ----------------------------- -------- ------ --------- 2004: Basic earnings $312 43,025 $7.26 ---- ------ ----- Diluted earnings 312 43,025 7.26 ==== ====== ===== 2003: Basic earnings 122 43,075 2.82 Dilutive effect of stock options 1 ---- ------ ----- Diluted earnings 122 43,076 2.82 ==== ====== ===== 2002: Basic earnings 43 43,282 1.00 ---- ------ ----- Diluted earnings 43 43,282 1.00 ==== ====== =====
Options to purchase 1.9 million, 2.6 million and 2.7 million shares of common stock as of December 31, 47 2004, 2003 and 2002, respectively, were not included in the computation of diluted earnings per share for the respective years because the exercise price of the options was greater than the average market price of the Corporation's common stock. 6. MARKETABLE SECURITIES As of December 31, 2004 and 2003, the amortized cost and fair market value ("FMV") of the Corporation's investments in marketable securities were as follows:
2004 2003 ---------------- ---------------- Amortized Amortized (millions) Cost FMV Cost FMV - ---------- --------- ---- --------- ---- Asset-backed securities $174 $173 $101 $101 U.S. government and agency securities 121 121 83 83 Municipal securities 36 36 31 32 Corporate securities 112 112 24 24 Time deposits 8 8 -- -- ---- ---- ---- ---- Total marketable securities 451 450 239 240 ==== ==== ==== ====
Contractual maturities of marketable securities as of December 31, 2004, were as follows:
Amortized (millions) Cost FMV - ---------- --------- ---- Due in 1 year or less $135 $135 Due in 1 - 5 years 76 76 Due in 5 - 10 years 5 5 Due after 10 years 61 61 ---- ---- 277 277 Asset-backed securities 174 173 ---- ---- Total marketable securities 451 450 ==== ====
The average duration of the portfolio is less than one year because a majority of the longer-term securities have paydown or put features and liquidity facilities. Investments in marketable securities that were in an unrealized loss position for less than 12 months as of December 31 consisted of the following:
(millions) 2004 2003 - ---------- ---- ---- Asset-backed securities $149 $29 U.S. government and agency securities 83 13 Corporate securities 34 8 ---- --- Total FMV 266 50 Aggregate amount of unrealized losses 1 -- ==== ===
Investments that had been in a continuous unrealized loss position for a period greater than 12 months amounted to $2 million and zero as of December 31, 2004 and 2003, respectively. The unrealized loss for those investments was not material for 2004. 7. INVENTORIES Inventories as of December 31 consisted of the following:
(millions) 2004 2003 - ---------- ---- ---- Finished goods and work in progress $188 $179 Raw materials 133 84 Supplies 17 17 ---- ---- Total 338 280 ==== ====
The LIFO value of U.S. inventories was $258 million and $215 million as of December 31, 2004 and 2003, respectively, and would have been higher by $31 million and $2 million as of the respective dates if they were valued under the FIFO and average production cost methods. All non-U.S. inventories are valued under FIFO or average production cost methods. The LIFO value of U.S. inventories exceeded that computed for U.S. federal income tax purposes by $15 million and $13 million as of December 31, 2004 and 2003, respectively. 8. PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment as of December 31 consisted of the following:
(millions) 2004 2003 - ---------- ------ ------ Land and mineral deposits $ 102 $ 98 Buildings and improvements 772 740 Machinery and equipment 1,814 1,774 Computer software and systems development costs 43 22 ------ ------ 2,731 2,634 Reserves for depreciation and depletion (878) (816) ------ ------ Total 1,853 1,818 ====== ======
48 9. GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill as of December 31, 2004 and 2003, amounted to $43 million and $39 million, respectively. All of the Corporation's goodwill relates to the Building Products Distribution operating segment. Goodwill increased in 2004 as a result of the acquisition of three businesses during the year. Other intangible assets, excluding intangible pension assets, as of December 31, 2004, totaled $2 million, of which $1 million was subject to amortization over a five-year life. Other intangible assets are included in other assets on the consolidated balance sheets. On January 1, 2002, the Corporation adopted SFAS No. 142, "Goodwill and Other Intangible Assets." As a result of the adoption, the Corporation recorded a noncash, non-tax-deductible impairment charge of $96 million related to the North American Gypsum operating segment. This charge is reflected in the Corporation's consolidated statement of earnings as a cumulative effect of a change in accounting principle in 2002. 10. ACCRUED EXPENSES Accrued expenses as of December 31 consisted of the following:
(millions) 2004 2003 - ---------- ---- ---- Employee compensation $ 74 $ 74 Self insurance reserves 53 48 Other 97 84 ---- ---- Total 224 206 ==== ====
11. ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) OCI as of December 31 consisted of the following:
(millions) 2004 2003 - ---------- ---- ---- Gain on derivatives, net of tax $ 6 $10 Foreign currency translation 15 (8) Minimum pension liability, net of tax (3) (3) Unrealized gain (loss) on marketable securities, net of tax (1) -- --- --- Total 17 (1) === ===
During 2004, accumulated net after-tax gains of $20 million ($33 million pretax) on derivatives were reclassified from OCI to earnings. As of December 31, 2004, the estimated net after-tax gain expected to be reclassified within the next 12 months from OCI to earnings is $7 million. 12. ASSET RETIREMENT OBLIGATIONS Changes in the liability for asset retirement obligations during 2004 and 2003 consisted of the following:
(millions) 2004 2003 - ---------- ---- ---- Balance as of January 1 $35 $29 Accretion expense 3 3 Liabilities incurred 6 3 Liabilities settled (2) (1) Foreign currency translation 1 1 --- --- Balance as of December 31 43 35 === ===
On January 1, 2003, the Corporation adopted SFAS No. 143, "Accounting for Asset Retirement Obligations." This standard requires the recording of the fair value of a liability for an asset retirement obligation in the period in which it is incurred. The Corporation's asset retirement obligations include reclamation requirements as regulated by government authorities related principally to assets such as the Corporation's mines, quarries, landfills, ponds and wells. The impact to the Corporation of adopting SFAS No. 143 was an increase in assets of $14 million, which included a $12 million increase in deferred tax assets, and an increase in liabilities of $30 million, which included a $1 million increase in deferred tax liabilities. A noncash, after-tax charge of $16 million ($27 million pretax) was reflected in the consolidated statement of earnings as a cumulative effect of a change in accounting principle as of January 1, 2003. 13. EMPLOYEE RETIREMENT PLANS The Corporation and its major subsidiaries generally have contributory defined benefit pension plans for eligible employees. Benefits of the plans are generally based on employees' years of service and compensation during the final years of employment. The Corporation also maintains plans that provide postretirement benefits (retiree health care and life insurance) for eligible employees. Employees hired before January 1, 2002, generally become eligible for the postretirement benefit plans when they meet minimum retirement age and service requirements. The cost of providing most postretirement benefits is shared with retirees. In response to continuing retiree health-care cost pressure, effective January 1, 2005, the Corporation modified its retiree medical cost-sharing 49 strategy for existing retirees and eligible active employees who may qualify for retiree medical coverage in the future. The plan amendment resulted in participants paying a greater portion of their retiree healthcare costs and a reduction in the Corporation's accumulated postretirement benefit obligation. On December 8, 2003, the Medicare Act (the "Act") was signed into law. The Act introduced a prescription drug benefit under Medicare (Medicare Part D), as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. On May 19, 2004, the FASB issued FSP FAS 106-2, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003." FSP FAS 106-2 provides guidance on accounting for the effects of prescription drug provisions of the Act for employers that sponsor postretirement health care plans that provide prescription drug benefits and requires those employers to provide certain disclosures regarding the effect of the federal subsidy provided by the Act. The new disclosure requirements were effective for the first financial reporting period that began after June 15, 2004. The Corporation adopted FSP FAS 106-2 on July 1, 2004, which resulted in an approximate $40 million reduction in its accumulated postretirement benefit obligation. The components of net pension and postretirement benefits costs are summarized in the following table:
(millions) 2004 2003 2002 - ---------- ---- ---- ---- Pension Benefits: Service cost of benefits earned $ 31 $ 27 $ 21 Interest cost on projected benefit obligation 54 52 49 Expected return on plan assets (53) (52) (55) Net amortization 19 11 3 ---- ---- ---- Net pension cost 51 38 18 ==== ==== ==== Postretirement Benefits: Service cost of benefits earned 14 12 7 Interest cost on projected benefit obligation 22 21 16 Net amortization 1 -- (2) ---- ---- ---- Net postretirement cost 37 33 21 ==== ==== ====
The Corporation uses a December 31 measurement date for its plans. The accumulated benefit obligation ("ABO") for the defined benefit pension plans was $773 million and $690 million as of December 31, 2004 and 2003, respectively. The following table summarizes projected pension and accumulated postretirement benefit obligations, plan assets and funded status as of December 31:
Pension Postretirement -------------- -------------- (millions) 2004 2003 2004 2003 - ---------- ------ ----- ----- ----- Change in Benefit Obligation: Benefit obligation as of January 1 $ 907 $ 777 $ 371 $ 310 Service cost 31 27 14 12 Interest cost 54 52 22 21 Participant contributions 13 13 4 4 Benefits paid (65) (52) (16) (15) Plan amendment -- -- (76) -- Actuarial loss 54 71 29 37 Foreign currency translation 9 19 2 2 ------ ----- ----- ----- Benefit obligation as of December 31 1,003 907 350 371 ====== ===== ===== ===== Change in Plan Assets: Fair value as of January 1 704 528 -- -- Actual return on plan assets 72 117 -- -- Employer contributions 78 82 -- -- Participant contributions 13 13 -- -- Benefits paid (65) (52) -- -- Foreign currency translation 8 16 -- -- ------ ----- ----- ----- Fair value as of December 31 810 704 -- -- ====== ===== ===== ===== Funded Status: As of December 31 (193) (203) (350) (371) Unrecognized prior service cost 20 22 (78) (5) Unrecognized net loss 237 216 97 71 ------ ----- ----- ----- Net balance sheet prepaid (liability) 64 35 (331) (305) ====== ===== ===== ===== Components in the Consolidated Balance Sheets: Long-term other assets 71 44 -- -- Long-term other liabilities (13) (13) (331) (305) Intangible assets 2 -- -- -- Accumulated other comprehensive loss 4 4 -- -- ------ ----- ----- ----- Net balance sheet prepaid (liability) 64 35 (331) (305) ====== ===== ===== =====
50 ASSUMPTIONS The following tables reflect the assumptions used in the accounting for the plans:
Pension Postretirement ----------- -------------- 2004 2003 2004 2003 ---- ---- ---- ---- Weighted-average assumptions used to determine benefit obligations as of December 31: Discount rate 5.75% 6.0% 5.75% 6.0% Compensation increase rate 4.2% 4.2% -- -- Weighted-average assumptions used to determine net cost for years ended December 31: Discount rate 6.0% 6.5% 6.0% 6.5% Expected return on plan assets 7.5% 8.0% -- -- Compensation increase rate 4.2% 4.7% -- --
The assumed health-care-cost trend rate used to measure the postretirement plans' obligations as of December 31 were as follows:
2004 2003 ----- ----- Health-care-cost trend rate assumed for next year 10.0% 9.0% Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) 5.25% 5.25% Year that the rate reaches the ultimate trend rate 2011 2007
A one-percentage-point change in the assumed health-care-cost trend rate for the postretirement plans would have the following effects:
One-Percentage- One-Percentage- (millions) Point Increase Point Decrease - ---------- --------------- --------------- Effect on total service and interest cost $ 7 $ (6) Effect on postretirement benefit obligation 60 (51)
The assumption for the expected long-term rate of return on plan assets for the Corporation's pension plans was established using a "building block" approach. In this approach, ranges of long-term expected returns for the various asset classes in which the plans invest are estimated. This is done primarily based upon observations of historical asset returns and their historical volatility. Consensus estimates of certain market and economic factors that influence returns such as inflation, Gross Domestic Product growth and dividend yields are also considered in determining expected returns. An overall range of likely expected rates of return is then calculated by applying the expected returns to the plans' target asset allocation. The most likely rate of return is then determined and is adjusted for investment management fees. Following a review of the long-term expected rate of return on plan assets, the Corporation decreased its expected rate of return on pension plan assets to 7.0% effective January 1, 2005. PLAN ASSETS The pension plans' asset allocations by asset categories as of December 31 were as follows:
Asset Categories 2004 2003 - ----------------- ---- ---- Equity securities 68% 67% Debt securities 24% 26% Other 8% 7% --- --- Total 100% 100% === ===
The investment policies and strategies for the Corporation's pension plans' assets have been established with a goal of maintaining fully funded plans (on an ABO basis) and maximizing returns on the plans' assets while prudently considering the plans' tolerance for risk. Factors influencing the level of risk assumed include the demographics of the plans' participants, the liquidity requirements of the plans and the financial condition of the Corporation. Based upon these factors, it has been determined that the plans can tolerate a moderate level of risk. To maximize long-term returns, the plans' assets are invested primarily in a diversified mix of equity and debt securities. The portfolio of equity securities includes both foreign and domestic stocks representing a range of investment styles and market capitalizations. Investments in domestic and foreign equities and debt securities are actively and passively managed. Other assets are managed by investment managers utilizing strategies with returns normally expected to have a low correlation to the returns of equities. As of December 31, 2004, the plans' target asset allocation percentages were 61% for equity securities, 21% for debt securities and 18% for other. The actual allocations for equity and debt securities exceeded their targets at year end. Additional investment opportunities in the "other" category are being identified, which are expected to bring actual allocations closer to target allocations in 2005. Investment risk is monitored by the Corporation on 51 an ongoing basis, in part through the use of quarterly investment portfolio reviews, compliance reporting by investment managers, and periodic asset/liability studies and reviews of the plan's funded status. CASH FLOWS The Corporation's defined benefit pension plans have no minimum funding requirements under the Employee Retirement Income Security Act of 1974 ("ERISA"). In accordance with the Corporation's funding policy, the Corporation expects to voluntarily contribute approximately $75 million of cash to its pension plans in 2005. Total benefit payments expected to be paid to participants, which include payments funded from the Corporation's assets as well as payments from the pension plans and the Medicare subsidy expected to be received, are as follows:
Years ended December 31 --------------------------------------- Health Care Expected benefit Pension Postretirement Subsidy payments (millions) Benefits Benefits Receipts - ------------------- -------- -------------- ----------- 2005 $ 44 $ 13 $ -- 2006 46 15 (2) 2007 46 16 (2) 2008 50 17 (2) 2009 56 18 (3) 2010-2014 379 114 (15)
14. STOCK-BASED COMPENSATION There have been no stock options granted since the Filing on June 25, 2001. Prior to the Filing, the Corporation issued stock options to key employees under plans approved by stockholders. Under the plans, options were granted at an exercise price equal to the market value on the date of grant. All options granted under the plans have 10-year terms and vesting schedules of two or three years. The options expire on the 10th anniversary of the date of grant, except in the case of retirement, death or disability, in which case they expire on the earlier of the fifth anniversary of such event or the expiration of the original option term. Stock option activity was as follows:
(options in thousands) 2004 2003 2002 - ---------------------- ------ ------ ------ Options: Outstanding, January 1 2,600 2,699 2,738 Granted -- -- -- Exercised (295) (21) -- Canceled (373) (78) (39) ------ ------ ------ Outstanding, December 31 1,932 2,600 2,699 Exercisable, December 31 1,932 2,600 1,912 Available for grant, December 31 2,976 2,188 1,985 ------ ------ ------ Weighted Average Exercise Price: Outstanding, January 1 $34.89 $34.31 $34.29 Granted -- -- -- Exercised 24.04 10.31 -- Canceled 29.15 21.25 33.01 Outstanding, December 31 37.66 34.89 34.31 Exercisable, December 31 37.66 34.89 39.19
The following table summarizes information about stock options outstanding as of December 31, 2004:
Options Outstanding Options Exercisable -------------------------------- ------------------- Weighted Average Weighted Weighted Range of Remaining Average Average Exercise Options Contractual Exercise Options Exercise Prices (000) Life (yrs.) Price (000) Price - -------- ------- ----------- -------- -------- -------- $15 - 25 549 6.0 $22 549 $22 25 - 35 419 1.6 33 419 33 35 - 55 964 3.9 48 964 48 ----- --- --- ----- --- Total 1,932 4.0 38 1,932 38 ===== === === ===== ===
As of December 31, 2004, common shares totaling 1.9 million were reserved for future issuance in conjunction with existing stock option grants. In addition, 3.0 million common shares were reserved for future grants. Shares issued in option exercises may be from original issue or available treasury shares. 52 15. INCOME TAXES Earnings before income taxes and cumulative effect of accounting change consisted of the following:
(millions) 2004 2003 2002 - ---------- ---- ---- ---- U.S. $397 $161 $133 Foreign 112 56 123 ---- ---- ---- Total 509 217 256 ==== ==== ====
Income taxes consisted of the following:
(millions) 2004 2003 2002 - ---------- ---- ---- ---- Current: Federal $113 $20 $ 35 Foreign 29 14 14 State 14 3 9 ---- --- ---- 156 37 58 ==== === ==== Deferred: Federal 27 36 42 Foreign 3 (1) 8 State 11 7 9 ---- --- ---- 41 42 59 ---- --- ---- Total 197 79 117 ==== === ====
Differences between actual provisions for income taxes and provisions for income taxes at the U.S. federal statutory rate (35%) were as follows:
(millions) 2004 2003 2002 - ---------- ----- ----- ----- Taxes on income at U.S. federal statutory rate $ 178 $ 76 $ 90 Chapter 11 reorganization expenses 1 3 4 Foreign earnings subject to different tax rates 2 3 6 State income tax, net of federal benefit 17 7 11 Valuation allowance adjustment -- (1) 6 Reduction of income tax payable -- (4) -- Other, net (1) (5) -- ----- ----- ----- Provision for income taxes 197 79 117 ===== ===== ===== Effective income tax rate 38.6% 36.6% 45.6% ===== ===== =====
Significant components of deferred tax assets and liabilities as of December 31 were as follows:
(millions) 2004 2003 - ---------- ---- ---- Deferred Tax Assets: Pension and postretirement benefits $114 $112 Reserves not deductible until paid: Asbestos reserves 435 410 Other reserves 20 21 Capitalized interest 9 9 Self insurance 24 25 Net operating loss and tax credit carryforwards 22 8 Other 12 26 ---- ---- Deferred tax assets before valuation allowance 636 611 Valuation allowance (34) (8) ---- ---- Total deferred tax assets 602 603 ==== ==== Deferred Tax Liabilities: Property, plant and equipment 326 308 Post-petition interest expense 107 73 State taxes 5 11 Derivative instruments 4 8 Inventories 8 5 ---- ---- Total deferred tax liabilities 450 405 ---- ---- Net deferred tax assets 152 198 ==== ====
A valuation allowance has been established for deferred tax assets relating to certain foreign and U.S. state net operating loss and tax credit carryforwards and a portion of the Corporation's reserve for asbestos claims (U.S. state only) due to uncertainty regarding their ultimate realization. Of the total valuation allowance as of December 31, 2004, $14 million relates to the reserve for asbestos claims, $12 million relates to foreign net operating loss and tax credit carryforwards, and $8 million relates to U.S. state net operating loss and tax credit carryforwards. The Corporation has net operating loss and tax credit carryforwards in varying amounts in numerous U.S. state and foreign jurisdictions. Under applicable law, if not used prior thereto, most of these carryforwards will expire over periods ranging from five to 20 years. The income tax receivable of $24 million and $26 million recorded by the Corporation as of December 31, 2004 and 2003, respectively, relates primarily to the carryback of various federal and state net operating losses from 2001 and 2002 and the temporary overpayment of taxes in various jurisdictions. The amount recorded as of December 31, 2004, is expected to be refunded to the Corporation or utilized to satisfy a portion of its tax liabilities during 2005. The Corporation's financial statements include amounts recorded for contingent tax liabilities with 53 respect to loss contingencies that are deemed probable of occurrence. The pre-petition portion of such amounts are included in liabilities subject to compromise on the Corporation's consolidated balance sheets, while the post-petition portion is included in other liabilities as of December 31, 2003, and in income taxes payable as of December 31, 2004. These loss contingencies relate primarily to U.S. federal income tax deductions claimed by the Corporation with respect to its ceiling tile operations in Belgium (which were shut down in 2002) and costs incurred with respect to the Chapter 11 Cases. The Corporation's U.S. income tax returns for 1999 and prior years have been audited by the Internal Revenue Service and are closed. In the United States, the Corporation's income tax returns for years after 1999 are open, and the years 2000, 2001 and 2002 are currently under audit by the Internal Revenue Service. The Corporation does not provide for U.S. income taxes on the portion of undistributed earnings of foreign subsidiaries that is intended to be permanently reinvested. The cumulative amount of such undistributed earnings totaled approximately $381 million as of December 31, 2004. These earnings would become taxable in the United States upon the sale or liquidation of these foreign subsidiaries or upon the remittance of dividends. It is not practicable to estimate the amount of the deferred tax liability on such earnings. On October 22, 2004, the President signed the American Jobs Creation Act of 2004. This act creates a temporary incentive for U.S. corporations to repatriate accumulated income earned abroad by providing an 85% dividends received deduction for certain dividends from controlled foreign corporations. The deduction is subject to several limitations, and currently, uncertainty remains as to how to interpret numerous provisions in the act. As a result, the Corporation is not yet able to determine whether, and to what extent, it will repatriate foreign earnings that have not yet been remitted to the United States. Based on the Corporation's analysis to date, however, it is reasonably possible that the Corporation may repatriate between zero and $50 million of unremitted foreign earnings as a result of the repatriation provision. It is not possible at this time to estimate the range of income tax effects of any such repatriation. The Corporation expects to complete its evaluation of this matter within a reasonable period of time after the current uncertainty in the law is resolved. 16. DERIVATIVE INSTRUMENTS COMMODITY DERIVATIVE INSTRUMENTS As of December 31, 2004, the Corporation had swap contracts to exchange monthly payments on notional amounts of natural gas amounting to $258 million. These contracts mature by December 31, 2007. As of December 31, 2004, the fair value of these swap contracts, which remained in OCI, was a $7 million ($4 million after-tax) unrealized gain. Net after-tax gains or losses resulting from the termination of natural gas swap contracts are recorded to OCI and reclassified into earnings in the period in which the hedged forecasted transactions are scheduled to occur. As of December 31, 2004, $3 million ($2 million after-tax) of such gains are included in OCI. FOREIGN EXCHANGE DERIVATIVE INSTRUMENTS As of December 31, 2004 and 2003, the Corporation had no outstanding forward contracts to hedge selected risk of changes in cash flows resulting from forecasted intercompany and third-party sales or purchases denominated in non-U.S. currencies. COUNTERPARTY RISK The Corporation is exposed to credit losses in the event of nonperformance by the counterparties on its financial instruments. All counterparties have investment grade credit standing; accordingly, the Corporation anticipates that these counterparties will be able to satisfy fully their obligations under the contracts. The Corporation does not generally obtain collateral or other security to support financial instruments subject to credit risk but monitors the credit standing of all counterparties. In addition, the Corporation enters into master agreements which contain netting arrangements that minimize counterparty credit exposure. 54 17. SEGMENTS OPERATING SEGMENTS
(millions) 2004 2003 2002 - ---------- ------ ------ ------ Net Sales: North American Gypsum $2,753 $2,299 $2,151 Worldwide Ceilings 688 607 610 Building Products Distribution 1,738 1,295 1,200 Eliminations (670) (535) (493) ------ ------ ------ Total 4,509 3,666 3,468 ====== ====== ====== Operating Profit: North American Gypsum 428 209 261 Worldwide Ceilings 62 39 29 Building Products Distribution 103 53 51 Corporate (73) (77) (71) Eliminations -- (3) 2 Chapter 11 reorganization expenses (12) (11) (14) ------ ------ ------ Total 508 210 258 ====== ====== ====== Depreciation, Depletion and Amortization: North American Gypsum 94 84 79 Worldwide Ceilings 18 19 20 Building Products Distribution 3 4 4 Corporate 5 5 3 ------ ------ ------ Total 120 112 106 ====== ====== ====== Capital Expenditures: North American Gypsum 120 97 82 Worldwide Ceilings 14 12 15 Building Products Distribution 2 1 3 Corporate 2 1 -- ------ ------ ------ Total 138 111 100 ====== ====== ====== Assets: North American Gypsum 2,042 1,935 1,887 Worldwide Ceilings 438 409 404 Building Products Distribution 417 347 286 Corporate 1,513 1,226 1,148 Eliminations (132) (118) (89) ------ ------ ------ Total 4,278 3,799 3,636 ====== ====== ======
GEOGRAPHIC SEGMENTS
(millions) 2004 2003 2002 - ---------- ------ ------ ------ Net Sales: United States $4,065 $3,302 $3,127 Canada 384 330 294 Other Foreign 291 235 243 Geographic transfers (231) (201) (196) ------ ------ ------ Total 4,509 3,666 3,468 ====== ====== ====== Long-Lived Assets: United States 1,684 1,622 1,618 Canada 174 161 119 Other Foreign 123 125 127 ------ ------ ------ Total 1,981 1,908 1,864 ====== ====== ======
L&W Supply, which makes up the Building Products Distribution segment, completed three acquisitions during 2004. These acquisitions, which were conducted in relation to L&W Supply's strategy to profitably grow its specialty dealer business, consisted of three distribution locations (one each in Oregon, Texas and Wisconsin). Total cash payments for these acquisitions amounted to $5 million. As of December 31, 2004, L&W Supply operated out of 186 locations in the United States. Transactions between operating and geographic segments are accounted for at transfer prices that are approximately equal to market value. Intercompany transfers between operating segments (shown above as eliminations) largely reflect intercompany sales from U.S. Gypsum to L&W Supply. No single customer of the Corporation accounted for 10% or more of the Corporation's 2004, 2003 or 2002 consolidated net sales, except for The Home Depot, Inc., which, on a worldwide basis, accounted for approximately 11% in 2004 and 2003 and 10% in 2002. Net sales to The Home Depot, Inc. were reported by all three operating segments. Revenues are attributed to geographic areas based on the location of the assets producing the revenues. Segment operating profit includes all costs and expenses directly related to the segment involved and an allocation of expenses that benefit more than one segment. Worldwide Ceilings' operating profit in 2002 included an $11 million charge related to management's decision to shut down the Aubange, Belgium, ceiling tile plant and other downsizing activities. 55 18. COMMITMENTS AND CONTINGENCIES LEASE COMMITMENTS The Corporation leases certain of its offices, buildings, machinery and equipment, and autos under noncancelable operating leases. These leases have various terms and renewal options. Lease expense amounted to $86 million, $84 million and $77 million in the years ended December 31, 2004, 2003 and 2002, respectively. Future minimum lease payments required under operating leases with initial or remaining noncancelable terms in excess of one year as of December 31, 2004, were $73 million in 2005, $65 million in 2006, $48 million in 2007, $33 million in 2008 and $22 million in 2009. The aggregate obligation subsequent to 2009 was $122 million. LETTERS OF CREDIT AND RESTRICTED CASH The Corporation has a $100 million credit agreement, which expires April 30, 2006, with LaSalle Bank N.A. (the "LaSalle Facility") to be used exclusively to support the issuance of letters of credit needed to support business operations. As of December 31, 2004, $35 million of letters of credit under the LaSalle Facility, which are cash collateralized at 103%, were outstanding. As of December 31, 2004, a total of $43 million was reported as restricted cash on the consolidated balance sheet. Restricted cash primarily represented collateral to support outstanding letters of credit. LEGAL CONTINGENCIES See Note 19, Litigation, for information on asbestos litigation, the bankruptcy proceeding and environmental litigation. See Note 2, Voluntary Reorganization Under Chapter 11, for additional information on the bankruptcy proceeding. 19. LITIGATION ASBESTOS AND RELATED BANKRUPTCY LITIGATION One of the Corporation's subsidiaries, U.S. Gypsum, is among many defendants in more than 100,000 asbestos lawsuits alleging personal injury or property damage liability. Most of the asbestos lawsuits against U.S. Gypsum seek compensatory and, in many cases, punitive damages for personal injury allegedly resulting from exposure to asbestos-containing products (the "Personal Injury Cases"). Certain of the asbestos lawsuits seek to recover compensatory and, in many cases, punitive damages for costs associated with the maintenance or removal and replacement of asbestos-containing products in buildings (the "Property Damage Cases"). U.S. Gypsum's asbestos liability derives from its sale of certain asbestos-containing products beginning in the late 1920s. In most cases, the products were discontinued or asbestos was removed from the formula by 1972, and no asbestos-containing products were produced after 1978. In addition to the Personal Injury Cases pending against U.S. Gypsum, two other Debtors, L&W Supply and Beadex Manufacturing, LLC ("Beadex"), have been named as defendants in a small number of asbestos personal injury cases. Recently, the Official Committee of Asbestos Personal Injury Claimants, the legal representative for future asbestos claimants, and the Official Committee of Asbestos Property Damage Claimants asserted in a court filing that the Debtors are liable for the asbestos liabilities of A.P. Green Refractories Co. ("A.P. Green"), a former subsidiary of U.S. Gypsum and USG Corporation. More information regarding the Property Damage and Personal Injury Cases against U.S. Gypsum and the asbestos personal injury cases against L&W Supply, Beadex and A.P. Green is set forth below. The amount of the Debtors' present and future asbestos liabilities is the subject of significant dispute in Debtors' Chapter 11 Cases. If the amount of the Debtors' asbestos liabilities is not resolved through negotiation in the Chapter 11 Cases or addressed by federal legislation, the amount of those liabilities may be determined through litigation proceedings in the Chapter 11 Cases, the outcome of which is speculative. Developments in the Reorganization Proceeding: The Debtors' Chapter 11 Cases are assigned to Judge Judith K. Fitzgerald, a bankruptcy court judge, and Judge Joy Flowers Conti, a district court judge, who was recently assigned to the Debtors' Chapter 11 Cases. Judge Conti has entered an order stating that she will hear matters relating to estimation of the Debtors' liability for asbestos personal injury claims. Other matters will be heard by Judge Fitzgerald. In 2002, the Debtors filed a motion requesting Judge Wolin, the district court judge then assigned to Debtors' Chapter 11 Cases, to conduct hearings to substantively estimate the Debtors' liability for asbestos personal injury claims. The Debtors requested that the Court hear evidence and make rulings regarding the characteristics of valid asbestos personal injury claims against the Debtors and then estimate the Debtors' 56 liability for present and future asbestos personal injury claims based upon these rulings. One of the key liability issues is whether claimants who do not have objective evidence of asbestos-related disease have valid claims and are entitled to be compensated by the Debtors or whether such claimants are entitled to compensation only if and when they develop asbestos-related disease. Other important estimation issues include the determination of the characteristics and number of present and future claimants who are likely to have had any, or sufficient, exposure to the Debtors' products, whether the particular type of asbestos present in certain of the Debtors' products during the relevant time has been shown to cause disease, and what are the appropriate claim values to apply in the estimation process. The Official Committee of Asbestos Personal Injury Claimants and the legal representative for future asbestos claimants oppose the substantive estimation hearings proposed by the Debtors. The committee and the legal representative contend that the Debtors' liability for present and future asbestos personal injury claims should be based on extrapolation from the settlement history of such claims and not on litigating liability issues in the bankruptcy proceedings. The committee and the legal representative also contend that the Bankruptcy Court does not have the power to deny recovery to claimants on the grounds that they do not have objective evidence of disease or do not have adequate exposure to the Debtors' products where such claimants, or claimants with similar characteristics, are compensated in the tort system outside of bankruptcy. In response to the Debtors' motion seeking substantive estimation of the Debtors' asbestos personal injury liability, Judge Wolin issued a Memorandum Opinion and Order (the "Order") on February 19, 2003, setting forth a procedure for estimating the Debtors' liability for present and future asbestos personal injury claims alleging cancer. The Order provides that the court will set a bar date for the filing of asbestos personal injury claims alleging cancer and that the court will hold an estimation hearing regarding these claims under 11 U.S.C. Section 502(c), at which the "debtors will be permitted to present their defenses." No timetable was set for implementation of the Order or any hearing on estimation of the Debtors' liability for cancer claims. In 2002, the Debtors also filed a motion requesting a ruling that putative claimants who cannot satisfy objective standards of asbestos-related disease are not entitled to vote on a Section 524(g) plan. To date, there has been no ruling or hearing on the motion. In May 2004, in response to a motion by Debtors and the Official Committee of Unsecured Creditors, the Third Circuit Court of Appeals issued an opinion and order directing Judge Wolin to remove himself from presiding over Debtors' Chapter 11 Cases. In the third quarter of 2004, the parties, including the committees, engaged in non-binding mediation relating to the Debtors' asbestos personal injury liability and the potential terms of a plan of reorganization. The mediation was conducted before David Geronemus, who was appointed mediator by Judge Fitzgerald. The mediation has not resulted in an agreement regarding the Debtors' asbestos liability or the terms of a plan of reorganization. In September 2004, the Third Circuit Court of Appeals assigned Judge Conti to Debtors' Chapter 11 Cases to replace Judge Wolin. In the fourth quarter of 2004, the Debtors other than U.S. Gypsum filed a complaint for declaratory relief in the Bankruptcy Court requesting a ruling that the assets of the Debtors other than U.S. Gypsum are not available to satisfy the asbestos liabilities of U.S. Gypsum. The Official Committee of Unsecured Creditors has joined the Debtors in this action. In opposition, the Official Committee of Asbestos Personal Injury Claimants, the legal representative for future asbestos personal injury claimants, and the Official Committee of Asbestos Property Damage Claimants filed counterclaims asserting that the assets of all Debtors should be available to satisfy the asbestos liabilities of U.S. Gypsum under various asserted legal grounds, including successor liability, piercing the corporate veil, and substantive consolidation. If the assets of all Debtors are pooled for the payment of all liabilities, including the asbestos liabilities of U.S. Gypsum, this could materially and adversely affect the recovery rights of creditors of Debtors other than U.S. Gypsum as well as the holders of the Corporation's equity. The Official Committee of Asbestos Personal Injury Claimants, the legal representative for future asbestos claimants, and the Official Committee of Asbestos Property Damage Claimants have also asserted claims seeking a declaratory judgment that L&W Supply has direct liability for asbestos personal injury claims on the asserted grounds that L&W Supply distributed asbestos-containing products and assumed the liabilities of former U.S. Gypsum subsidiaries that distributed such products. The Official Committee of Asbestos Personal Injury Claimants, the legal representative for future 57 asbestos claimants, and the Official Committee of Asbestos Property Damage Claimants also have asserted in a court filing that the Debtors are liable for claims arising from the sale of asbestos-containing products by A.P. Green. They allege that U.S. Gypsum is liable for A.P. Green's liabilities due to U.S. Gypsum's acquisition of A.P. Green in 1967. They also allege that the other Debtors are liable for U.S. Gypsum's liabilities, including the alleged liabilities of A.P. Green, under various asserted legal grounds, including successor liability, piercing the corporate veil, and substantive consolidation. A.P. Green, which manufactured and sold products used in refractories, was acquired by merger into U.S. Gypsum in 1967 and thereafter operated as a wholly owned subsidiary of U.S. Gypsum until 1985, at which time A.P. Green became a wholly owned subsidiary of USG Corporation. In 1988, A.P. Green became a publicly traded company when its shares were distributed to the stockholders of USG Corporation. In February 2002, A.P. Green (now known as A.P. Green Industries, Inc.) as well as its parent company, Global Industrial Technologies, Inc., and other affiliates filed voluntary petitions for reorganization through which A.P. Green and its affiliates seek to resolve their asbestos liabilities. The A.P. Green reorganization proceeding is pending in the United States Bankruptcy Court for the Western District of Pennsylvania and is captioned In re: Global Industrial Technologies, Inc. (Case No. 02-21626). The draft disclosure statement filed in July 2003 by the debtors in the A.P. Green reorganization proceedings indicates that, in early 2002, there were 235,757 asbestos personal injury claims pending against A.P. Green as well as about 59,000 such claims pending against an A.P. Green affiliate, and that A.P. Green estimates that several hundred thousand additional claims will be asserted against it and/or its affiliate. The disclosure statement also indicates that, in early 2002, A.P. Green had approximately $492 million in unpaid pre-petition settlements and judgments relating to asbestos personal injury claims. The disclosure statement does not provide an estimate of the cost of resolving A.P. Green's liability for pending or future asbestos claims. The Corporation does not have sufficient information to predict whether or how any plan of reorganization in the Debtors' Chapter 11 Cases might address any liability based on sales of asbestos-containing products by A.P. Green. The Corporation also does not have sufficient information to estimate the amount, or range of amounts, of A.P. Green's asbestos liabilities. If U.S. Gypsum is determined to be liable for the sale of asbestos-containing products by A.P. Green or its affiliates, this result likely would materially increase the amount of U.S. Gypsum's present and future asbestos liabilities. Such a result could materially and adversely affect the recovery of other Debtors' pre-petition creditors and the Corporation's stockholders, depending upon, among other things, the amount of A.P. Green's alleged asbestos liabilities and whether the other Debtors are determined to be liable for U.S. Gypsum's liabilities, including alleged A.P. Green liabilities. After the assignment of Judge Conti to Debtors' Chapter 11 Cases, the Debtors renewed their request that the court conduct substantive estimation hearings regarding Debtors' asbestos personal injury liability and that these hearings relate to all asbestos personal injury claims, not just those alleging cancer. The Official Committee of Asbestos Personal Injury Claimants and the legal representative for future asbestos personal injury claimants renewed their request that estimation of Debtors' asbestos personal injury liability be based solely on extrapolation from U.S. Gypsum's settlement history. As a result of the recent assignment of Judge Conti to the Debtors' Chapter 11 Cases, the Corporation does not know when estimation proceedings regarding the Debtors' liability for asbestos personal injury claims will occur. The Corporation also does not know what issues Judge Conti will consider in conducting estimation proceedings or whether the Court will ultimately address the validity and voting rights of non-malignant claims where there is no objective evidence of asbestos-related disease. With regard to asbestos property damage claims, the Bankruptcy Court established a bar date requiring all such claims against the Debtors to be filed by January 15, 2003. Approximately 1,400 asbestos property damage claims were filed, representing more than 2,000 buildings. In contrast, as of the Petition Date, 11 Property Damage Cases were pending against U.S. Gypsum. Approximately 500 of the asbestos property damage claims filed by the bar date assert a specific dollar amount of damages, and the total damages alleged in those claims is approximately $1.6 billion. However, this amount reflects numerous duplicate claims filed against multiple Debtors. Approximately 900 claims do not specify a damage amount. Recently, counsel for the Official Committee of Asbestos Property Damage Claimants stated in a court hearing that the committee believes that the amount of 58 the asbestos property damage claims will reach $1 billion. Most of the asbestos property damage claims filed do not provide any evidence that the Debtors' products were ever installed in any of the buildings at issue. Certain of the proof of claim forms purport to file claims on behalf of two classes of claimants that were the subject of pre-petition class actions. One of these claim forms was filed on behalf of a class of colleges and universities that was certified for certain purposes in a pre-petition lawsuit filed in federal court in South Carolina. However, many of the putative members of this class also filed individual claim forms. Four of the claim forms were filed by a claimant allegedly on behalf of putative members of certified and uncertified classes in connection with a pre-petition lawsuit pending in South Carolina state court. The Debtors believe that they have substantial defenses to many of the property damage claims, including the lack of evidence that the Debtors' products were ever installed in the buildings at issue, the failure to file the claims within the applicable statutes of limitation, and the lack of evidence that the claimants have any damages. The Debtors intend to address many of these claims through an objection and disallowance process in the Bankruptcy Court. In 2004, the Debtors began this process by issuing written notices to claimants that failed to provide evidence that any of the Debtors' products were ever installed in the buildings at issue. To date, the Debtors have issued these deficiency notices with regard to more than 1,600 buildings. In December 2004, the Debtors filed their first objections to a group of claims that did not provide any evidence that the Debtors' products were installed in the buildings at issue. Recently, Judge Fitzgerald issued an order disallowing virtually all of the claims that were the subject of the objection. The Debtors have filed a second set of objections to certain property damage claims and expect to file additional objections to deficient asbestos property damage claims. Because of the preliminary nature of the objection process, the Corporation cannot predict the outcome of these proceedings or the impact the proceedings may have on the estimated cost of resolving asbestos property damage claims. See Estimated Cost, below. The following is a summary of the Personal Injury and Property Damage Cases pending against U.S. Gypsum and certain other Debtors as of the Petition Date. Personal Injury Cases: As reported by the Center for Claims Resolution (the "Center"), U.S. Gypsum was a defendant in more than 100,000 pending Personal Injury Cases as of the Petition Date, as well as an additional approximately 52,000 Personal Injury Cases that may be the subject of settlement agreements. In the first half of 2001, up to the Petition Date, approximately 26,200 new Personal Injury Cases were filed against U.S. Gypsum, as reported by the Center, as compared to 27,800 new filings in the first half of 2000. Prior to the Filing, U.S. Gypsum managed the handling and settlement of Personal Injury Cases through its membership in the Center. From 1988 up to February 1, 2001, the Center administered and arranged for the defense and settlement of Personal Injury Cases against U.S. Gypsum and other Center members. During that period, costs of defense and settlement of Personal Injury Cases were shared among the members of the Center pursuant to predetermined sharing formulas. Effective February 1, 2001, the Center members, including U.S. Gypsum, ended their prior settlement-sharing arrangement. Up until the Petition Date, the Center continued to administer and arrange for the defense and settlement of the Personal Injury Cases, but liability payments were not shared among the Center members. In 2000 and years prior, U.S. Gypsum and other Center members negotiated a number of settlements with plaintiffs' law firms that included agreements to resolve over time the firms' pending Personal Injury Cases as well as certain future claims (the "Long-Term Settlements"). With regard to future claims, these Long-Term Settlements typically provide that the plaintiffs' firms will recommend to their future clients that they defer filing, or accept nominal payments on, personal injury claims that do not meet established disease criteria and, with regard to those claims meeting established disease criteria, that the future clients agree to settle those claims for specified amounts. These Long-Term Settlements typically resolve claims for amounts consistent with historical per-claim settlement costs paid to the plaintiffs' firms involved. As a result of the Filing, cash payments by U.S. Gypsum under these Long-Term Settlements have ceased, and U.S. Gypsum expects that its obligations under these settlements will be determined in the bankruptcy proceedings and plan of reorganization. In 2000, U.S. Gypsum closed approximately 57,000 Personal Injury Cases. U.S. Gypsum's cash payments in 2000 to defend and resolve Personal Injury Cases totaled $162 million, of which $90 million was 59 paid or reimbursed by insurance. In 2000, the average settlement per case was approximately $2,600, exclusive of defense costs. U.S. Gypsum made cash payments of $100 million in 1999 and $61 million in 1998 to resolve Personal Injury Cases, of which $85 million and $45.5 million, respectively, were paid or reimbursed by insurance. During late 2000 and in 2001, following the bankruptcy filings of other defendants in asbestos personal injury litigation, plaintiffs substantially increased their settlement demands to U.S. Gypsum. In response to these increased settlement demands, U.S. Gypsum attempted to manage its asbestos liability by contesting, rather than settling, a greater number of cases that it believed to be non-meritorious. As a result, in the first and second quarters of 2001, U.S. Gypsum agreed to settle fewer Personal Injury Cases, but at a significantly higher cost per case. In the first half of 2001, up to the Petition Date, U.S. Gypsum closed approximately 18,900 Personal Injury Cases. In the first half of 2001, up to the Petition Date, U.S. Gypsum's total asbestos-related cash payments, including defense costs, were approximately $124 million, of which approximately $10 million was paid or reimbursed by insurance. A portion of these payments were for settlements agreed to in prior periods. As of March 31, 2001, U.S. Gypsum had estimated that cash expenditures for Personal Injury Cases in 2001 would total approximately $275 million before insurance recoveries of approximately $37 million. In addition to the Personal Injury Cases pending against U.S. Gypsum, one of the Corporation's subsidiaries and a Debtor in the bankruptcy proceedings, L&W Supply, was named as a defendant in approximately 21 pending Personal Injury Cases as of the Petition Date. L&W Supply, a distributor of building products manufactured by U.S. Gypsum and other building products manufacturers, has not made any payments in the past to resolve Personal Injury Cases. One of U.S. Gypsum's subsidiaries and a Debtor in the bankruptcy proceedings, Beadex, manufactured and sold joint compound containing asbestos from 1963 through 1978 in the northwestern United States. As of the Petition Date, Beadex was a named defendant in approximately 40 Personal Injury Cases pending primarily in the states of Washington and Oregon. Beadex has approximately $11 million in primary or umbrella insurance coverage available to pay asbestos-related costs, as well as $15 million in available excess coverage. The Corporation expects that any asbestos-related liability of L&W Supply and Beadex will be addressed in the plan of reorganization. However, because of, among other things, the small number of Personal Injury Cases pending against L&W Supply and Beadex to date, the Corporation does not have sufficient information at this time to predict how any plan of reorganization will address any asbestos-related liability of L&W Supply and Beadex. Property Damage Cases: As of the Petition Date, U.S. Gypsum was a defendant in 11 Property Damage Cases, most of which involved multiple buildings. One of the cases is a conditionally certified class action comprising all colleges and universities in the United States, which certification is presently limited to the resolution of certain allegedly "common" liability issues (Central Wesleyan College v. W.R. Grace & Co., et al., U.S.D.C. S.C.). As a result of the Filing, all Property Damage Cases are stayed against U.S. Gypsum. U.S. Gypsum's estimated cost of resolving the Property Damage Cases is discussed in Estimated Cost, below. Insurance Coverage: As of December 31, 2004, all prior receivables relating to insurance remaining to cover asbestos-related costs had been collected by U.S. Gypsum. Estimated Cost: In 2000, prior to the Filing, an independent consultant completed an actuarial study of U.S. Gypsum's current and potential future asbestos liabilities. This study was based on the assumption that U.S. Gypsum's asbestos liability would continue to be resolved in the tort system. As part of this study, the Corporation and its independent consultant considered various factors that would impact the amount of U.S. Gypsum's asbestos personal injury liability. These factors included the number, disease, age, and occupational characteristics of claimants in the Personal Injury Cases; the jurisdiction and venue in which such cases were filed; the viability of claims for conspiracy or punitive damages; the elimination of indemnity-sharing among Center members, including U.S. Gypsum, for future settlements and its negative impact on U.S. Gypsum's ability to continue to resolve claims at historical or acceptable levels; the adverse impact on U.S. Gypsum's settlement costs of recent bankruptcies of co-defendants; the possibility of additional bankruptcies of other defendants; the possibility of significant adverse 60 verdicts due to recent changes in settlement strategies and related effects on liquidity; the inability or refusal of former Center members to fund their share of existing settlements and its effect on such settlement agreements; allegations that U.S. Gypsum and the other Center members are responsible for the share of certain settlement agreements that was to be paid by former members that have refused or are unable to pay; the continued ability to negotiate settlements or develop other mechanisms that defer or reduce claims from unimpaired claimants; the possibility that federal legislation addressing asbestos litigation would be enacted; epidemiological data concerning the incidence of past and projected future asbestos-related diseases; trends in the propensity of persons alleging asbestos-related disease to sue U.S. Gypsum; the pre-agreed settlement recommendations in, and the viability of, the Long-Term Settlements; anticipated trends in recruitment of non-malignant or unimpaired claimants by plaintiffs' law firms; and future defense costs. The study attempted to weigh relevant variables and assess the impact of likely outcomes on future case filings and settlement costs. In connection with the Property Damage Cases, the Corporation considered, among other things, the extent to which claimants could identify the manufacturer of any alleged asbestos-containing products in the buildings at issue in each case; the amount of asbestos-containing products at issue; the claimed damages; the viability of statute of limitations and other defenses; the amount for which such cases can be resolved, which normally (but not uniformly) has been substantially lower than the claimed damages; and the viability of claims for punitive and other forms of multiple damages. Based upon the results of the actuarial study, the Corporation determined that, although substantial uncertainty remained, it was probable that asbestos claims then pending against U.S. Gypsum and future asbestos claims to be filed against it through 2003 (both property damage and personal injury) could be resolved in the tort system for an amount between $889 million and $1,281 million, including defense costs, and that within this range the most likely estimate was $1,185 million. Consistent with this analysis, in the fourth quarter of 2000, the Corporation recorded a noncash, pretax charge of $850 million to results of operations, which, combined with the previously existing reserve, increased U.S. Gypsum's reserve for asbestos claims to $1,185 million. These amounts are stated before tax benefit and are not discounted to present value. Less than 10% of the reserve was attributable to defense and administrative costs. At the time of recording this reserve, it was expected that the reserve amounts would be expended over a period extending several years beyond 2003, because asbestos cases in the tort system historically had been resolved an average of three years after filing. The Corporation concluded that it did not have adequate information to allow it to reasonably estimate U.S. Gypsum's liability for asbestos claims to be filed after 2003. Because of the Filing and activities relating to potential federal legislation addressing asbestos personal injury claims, the Corporation believes that there is greater uncertainty in estimating the reasonably possible range of the Debtors' liability for pending and future asbestos claims as well as the most likely estimate of liability within this range. There are significant differences in the treatment of asbestos claims in a bankruptcy proceeding as compared to the tort litigation system. The factors that impact the estimation of liability for pending and future asbestos claims in a bankruptcy proceeding and the amount that must be provided in the plan of reorganization for such liabilities include: (i) the number of present and future asbestos claims that will be addressed in the plan of reorganization; (ii) the value that will be paid to present and future claims, including the impact historical settlement values for asbestos claims may have on the estimation of asbestos liability in the bankruptcy proceedings; (iii) how claims by individuals who have no objective evidence of impairment will be treated in the bankruptcy proceedings and plan of reorganization; (iv) how the Long-Term Settlements will be treated in the plan of reorganization and whether those settlements will be set aside; (v) how claims for punitive damages will be treated; (vi) the results of any litigation proceedings in the Chapter 11 Cases regarding the estimated number or value of present and future asbestos personal injury claims; (vii) the treatment of asbestos property damage claims in the bankruptcy proceedings; (viii) the potential asbestos liability of L&W, Beadex, A.P. Green or any other past or present affiliates of the Debtors and how any such liability will be addressed in the bankruptcy proceedings and plan of reorganization; (ix) whether the assets of all of the Debtors are determined to be available to satisfy the asbestos liabilities of U.S. Gypsum; (x) how the requirement of Section 524(g) that 75% of the voting asbestos claimants approve the plan of reorganization will impact the amount that must be provided in the plan of reorganization for pending 61 and future asbestos claims and (xi) the impact any relevant potential federal legislation may have on the proceedings. See Note 2. Voluntary Reorganization Under Chapter 11 - Potential Federal Legislation Regarding Asbestos Personal Injury Claims. In addition, the estimates of the Debtors' asbestos liability that would be recorded as a result of the bankruptcy proceedings or potential federal legislation are likely to include all expected future asbestos cases to be brought against the Debtors (as opposed to the cases filed over a three-year period) and are likely to be computed using the present value of the estimated liability. These factors, as well as the uncertainties discussed above in connection with the resolution of asbestos cases in the tort system, increase the uncertainty of any estimate of asbestos liability. Because of the uncertainties associated with estimating the Debtors' asbestos liability at this stage of the proceedings, no change has been made at this time to the previously recorded reserve for asbestos claims, except to reflect certain minor asbestos-related costs incurred since the Filing. The reserve as of December 31, 2004, was $1,061 million. Because the Filing and possible federal legislation have changed the basis upon which the Debtors' asbestos liability would be estimated, there can be no assurance that the current reserve accurately reflects the Debtors' ultimate liability for pending and future asbestos claims. At the time the reserve was increased to its current level in December 2000, the reserve was an estimate of the cost of resolving in the tort system U.S. Gypsum's asbestos liability for then-pending claims and those expected to be filed through 2003. Because of the Filing and the stay of pre-petition asbestos lawsuits, the Debtors have not participated in the tort system since June 2001 and thus cannot measure the recorded reserve against actual experience. However, the reserve is generally consistent with the amount the Corporation estimates that the Debtors would be required to pay to resolve all of their asbestos liability if the FAIR Bill, in its current form, is enacted. As the Chapter 11 Cases and the legislation process proceed, the Debtors likely will gain more information from which a reasonable estimate of the Debtors' probable liability for present and future asbestos claims can be determined. If the FAIR Bill or similar legislation is not enacted, the Debtors' asbestos liability, as determined through the bankruptcy proceedings, could be materially greater than the accrued reserve. The Official Committee of Asbestos Personal Injury Claimants and the legal representative for future asbestos personal injury claimants have indicated in a court filing that they estimate that the net present value of the Debtors' liability for present and future asbestos personal injury claims is approximately $5.5 billion and that the Debtors are insolvent. The Debtors have stated that they believe they are solvent if their asbestos liabilities are fairly and appropriately valued. When the Debtors determine that there is a reasonable basis for revision of the estimate of their asbestos liability, the reserve will be adjusted, and it is possible that a charge to results of operations will be necessary at that time. In such a case, the Debtors' asbestos liability could vary significantly from the recorded estimate of liability and could be greater than the high end of the range estimated in 2000. This difference could be material to the Corporation's financial position, cash flows and results of operations in the period recorded. Bond to Secure Certain Center Obligations: In January 2001, U.S. Gypsum obtained a performance bond from Safeco Insurance Company of America ("Safeco") in the amount of $60.3 million to secure certain obligations of U.S. Gypsum for extended payout settlements of Personal Injury Cases and other obligations owed by U.S. Gypsum to the Center. The bond is secured by an irrevocable letter of credit obtained by the Corporation in the amount of $60.3 million and issued by JPMorgan Chase Bank (formerly Chase Manhattan Bank) ("JPMorgan Chase") to Safeco. After the Filing, by a letter dated November 16, 2001, the Center made a demand to Safeco for payment of $15.7 million under the bond, and, by a letter dated December 28, 2001, the Center made a demand to Safeco for payment of approximately $127 million under the bond. The amounts for which the Center made demand were for the payment of, among other things, settlements of Personal Injury Cases that were entered into pre-petition. The total amount demanded by the Center under the bond, approximately $143 million, exceeds the original penal sum of the bond, which is $60.3 million. Safeco has not made any payment under the bond. On November 30, 2001, the Corporation and U.S. Gypsum filed an Adversary Complaint in the Chapter 11 Cases to, among other things, enjoin the Center from drawing on the bond and enjoin Safeco from paying on the bond during the pendency of these bankruptcy proceedings. This Adversary Proceeding is pending in the United States Bankruptcy Court for the District of Delaware and is captioned USG Corporation and United States Gypsum Company v. Center for Claims Resolution, Inc. and Safeco Insurance Company of 62 America, No. 01-08932. Judge Wolin consolidated the Adversary Proceeding with similar adversary proceedings brought by Federal-Mogul Corp., et al., and Armstrong World Industries, Inc., et al., in their bankruptcy proceedings. The parties filed cross-motions for summary judgment in the consolidated proceedings. On March 28, 2003, in response to the cross-motions for summary judgment, Judge Wolin issued an order and memorandum opinion which granted in part and denied in part the Center's motion for summary judgment. Although the court ruled that Safeco is not required to remit any surety bond proceeds to the Center at this time, the court stated that certain settlements that were completed before U.S. Gypsum's Petition Date likely are covered by the surety bond but that the bond does not cover settlement payments that were not yet completed as of the Petition Date. The court did not rule on whether the bond covers other disputed obligations and reserved these issues to a subsequent phase of the litigation. As a result of the court's decision, it is likely that, absent a settlement of this matter, some portion of the bond may be drawn but that the amount drawn may be substantially less than the full amount of the bond. To the extent that Safeco were to pay all or any portion of the bond, it is likely that Safeco would draw down the JPMorgan Chase letter of credit to cover the bond payment and JPMorgan Chase would assert a pre-petition claim in a corresponding amount against the Corporation in the bankruptcy proceedings. It is expected that the Center bond litigation will be addressed by Judge Conti, who was recently appointed to preside over the Debtors' Chapter 11 Cases. Conclusion: There are many uncertainties associated with the resolution of the asbestos liability in the bankruptcy proceeding. The Corporation will continue to review its asbestos liability as the Chapter 11 Cases progress and as issues relating to the estimation of the Debtors' asbestos liabilities are addressed. If such review results in the Debtors' estimate of the probable liability for present and future asbestos claims being different from the existing reserve, the reserve will be adjusted, and such adjustment could be material to the Corporation's financial position, cash flows and results of operations in the period recorded. SILICA LITIGATION During the 10 years prior to the Filing, Debtor U.S. Gypsum was named as a defendant in approximately 10 lawsuits claiming personal injury from exposure to silica allegedly from U.S. Gypsum products. The claims against U.S. Gypsum in silica personal injury lawsuits pending at the time of the Filing were stayed as a result of the Filing. Only one proof of claim alleging silica personal injury liability was filed against any of the Debtors as of the bar date in the Bankruptcy Case. However, it has been estimated that tens of thousands of silica personal injury lawsuits have been filed against other defendants nationwide in recent years. In the fourth quarter of 2004, U.S. Gypsum was served with 17 complaints involving more that 400 plaintiffs alleging personal injury resulting from exposure to silica. These complaints were filed in various Mississippi state courts, and each names from 178 to 195 defendants. U.S. Gypsum expects that the claims against it in these lawsuits will be stayed as a result of the Filing. The Corporation does not have sufficient information to estimate the likely cost of resolving these claims. However, the Corporation believes that it has significant defenses to these claims if they are allowed to proceed. The Corporation has provided notice of these recent complaints to its insurance carriers. ENVIRONMENTAL LITIGATION The Corporation and certain of its subsidiaries have been notified by state and federal environmental protection agencies of possible involvement as one of numerous "potentially responsible parties" in a number of so-called "Superfund" sites in the United States. In most of these sites, the involvement of the Corporation or its subsidiaries is expected to be minimal. The Corporation believes that appropriate reserves have been established for its potential liability in connection with all Superfund sites but is continuing to review its accruals as additional information becomes available. Such reserves take into account all known or estimated undiscounted costs associated with these sites, including site investigations and feasibility costs, site cleanup and remediation, legal costs, and fines and penalties, if any. In addition, environmental costs connected with site cleanups on Corporation-owned property also are covered by reserves established in accordance with the foregoing. The Debtors have been given permission by the Bankruptcy Court to satisfy environmental obligations up to $12 million. The Corporation believes that neither these matters nor any 63 other known governmental proceedings regarding environmental matters will have a material adverse effect upon its financial position, cash flows or results of operations. 20. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarter (millions, except ------------------------------------ share data) First Second Third Fourth - ----------------- -------- ------ ------ ------- 2004: Net sales $1,020 $1,145 $1,175 $1,169 Gross profit 171 216 234 216 Operating profit 92 133 148 135 Net earnings 57 80 90 85 Per Common Share: Basic (a) 1.33 1.86 2.10 1.98 Diluted 1.33 1.86 2.10 1.97 2003: Net sales 862 914 963 927 Gross profit 117 134 147 147 Operating profit 35 50 67 58 Net earnings 6(b) 31 39 46 Per Common Share: Basic 0.13 0.73 0.89 1.07 Diluted 0.13 0.73 0.89 1.07
(a) The sum of the four quarters is not the same as the total for the year. (b) Includes a noncash, after-tax charge for asset retirement obligations of $16 million related to the adoption of SFAS No. 143. Earnings before cumulative effect of accounting change were $22 million, or $0.50 per share (basic and diluted). 64 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of USG Corporation: We have audited the accompanying consolidated balance sheets of USG Corporation (a Delaware Corporation) and subsidiaries as of December 31, 2004 and 2003 and the related consolidated statements of earnings, cash flows and stockholders' equity for each of the three years in the period ended December 31, 2004. Our audits also included the accompanying financial statement schedules, Schedule II - - Valuation and Qualifying Accounts. These financial statements and financial statement schedules are the responsibility of the Corporation's management. Our responsibility is to express an opinion on the financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of USG Corporation and subsidiaries as of December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. As discussed in Note 2 to the consolidated financial statements, USG Corporation and certain subsidiaries voluntarily filed for Chapter 11 bankruptcy protection on June 25, 2001 (the "Filing"). The accompanying financial statements do not purport to reflect or provide for the consequences of the bankruptcy proceedings. In particular, such financial statements do not purport to show (a) as to assets, their realizable value on a liquidation basis or their availability to satisfy liabilities; (b) as to pre-petition liabilities, the amounts that may be allowed for claims or contingencies, or the status and priority thereof; (c) as to stockholder accounts, the effect of any changes that may be made in the capitalization of the Corporation; or (d) as to operations, the effect of any changes that may be made in its business. The accompanying consolidated financial statements have been prepared assuming that the Corporation will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, there is significant uncertainty as to the resolution of the Corporation's asbestos litigation, which, among other things, may lead to possible changes in the composition of the Corporation's business portfolio, as well as changes in the ownership of the Corporation. This uncertainty raises substantial doubt about the Corporation's ability to continue as a going concern. Management's plans concerning this matter are also described in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. As discussed in Note 12, effective January 1, 2003, the Corporation changed its method of accounting for asset retirement obligations upon adoption of Statement of Financial Accounting Standards (SFAS) No. 143, "Accounting for Asset Retirement Obligations." As discussed in Note 9, effective January 1, 2002, the Corporation changed its method of accounting for goodwill and intangible assets upon adoption of SFAS No. 142, "Goodwill and Other Intangible Assets." We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of the Corporation's internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated February 8, 2005, expressed an unqualified opinion on management's assessment of the effectiveness of the Corporation's internal control over financial reporting and an unqualified opinion on the effectiveness of the Corporation's internal control over financial reporting. (DELOITTE & TOUCHE LLP) Chicago, Illinois February 8, 2005 65 USG CORPORATION SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Beginning Ending (millions) Balance Additions (a) Deductions (b) Balance - ---------- --------- ------------- -------------- ------- YEAR ENDED DECEMBER 31, 2004: Doubtful accounts $12 $ 5 $ (6) $11 Cash discounts 3 43 (43) 3 YEAR ENDED DECEMBER 31, 2003: Doubtful accounts 14 2 (4) 12 Cash discounts 3 50 (50) 3 YEAR ENDED DECEMBER 31, 2002: Doubtful accounts 13 5 (4) 14 Cash discounts 4 53 (54) 3
(a) Reflects provisions charged to earnings. (b) Reflects receivables written off as related to doubtful accounts and discounts allowed as related to cash discounts. 66 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9a. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Corporation's chief executive officer and chief financial officer, after evaluating the effectiveness of the Corporation's "disclosure controls and procedures" (as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934), have concluded that, as of the end of the fiscal year covered by this report on Form 10-K, the Corporation's disclosure controls and procedures were adequate and designed to ensure that material information relating to the Corporation and its consolidated subsidiaries would be made known to them by others within those entities. (a) MANAGEMENT REPORT ON INTERNAL CONTROLS OVER FINANCIAL REPORTING The management of USG Corporation and its subsidiaries (the "Corporation") is responsible for establishing and maintaining adequate internal control over financial reporting. The Corporation's internal control system was designed to provide reasonable assurance to management and the Corporation's board of directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Management assessed the effectiveness of the Corporation's internal control over financial reporting as of December 31, 2004. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") in Internal Control - Integrated Framework. Based on its assessment, management believes that, as of December 31, 2004, the Corporation's internal control over financial reporting is effective based on those criteria. The Corporation's independent auditors have issued an audit report on management's assessment of internal control over financial reporting. This report appears below. February 8, 2005 (b) REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Stockholders of USG Corporation: We have audited management's assessment, included in the accompanying Management Report on Internal Controls Over Financial Reporting, that USG Corporation and subsidiaries (the "Corporation") maintained effective internal control over financial reporting as of December 31, 2004, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). The Corporation's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management's assessment and an opinion on the effectiveness of the Corporation's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an 67 understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions. A corporation's internal control over financial reporting is a process designed by, or under the supervision of, the corporation's principal executive and principal financial officers, or persons performing similar functions, and effected by the corporation's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A corporation's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the corporation; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the corporation are being made only in accordance with authorizations of management and directors of the corporation; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the corporation's assets that could have a material effect on the financial statements. Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, management's assessment that the Corporation maintained effective internal control over financial reporting as of December 31, 2004, is fairly stated, in all material respects, based on the criteria established in COSO. Also in our opinion, the Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2004, based on the criteria established in COSO. We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the accompanying consolidated balance sheets of USG Corporation and subsidiaries as of December 31, 2004 and 2003 and the related consolidated statements of earnings, cash flows and stockholders' equity for each of the three years in the period ended December 31, 2004. Our audit also included the accompanying financial statement schedules, Schedule II - Valuation and Qualifying Accounts. Our report dated February 8, 2005 expressed an unqualified opinion on those financial statements and accompanying financial statement schedules and included an explanatory paragraph regarding (i) matters which raise substantial doubt about the Corporation's ability to continue as a going concern and (ii) changes in methods of accounting for asset retirement obligations and goodwill and other intangible assets due to the Corporation's adoption of Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset Retirement Obligations" in 2003, and SFAS No. 142, "Goodwill and Other Intangible Assets" in 2002. (DELOITTE & TOUCHE LLP) Chicago, Illinois February 8, 2005 (c) CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING. There was no change in the Corporation's "internal control over financial reporting" (as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934) identified in connection with the evaluation required by Rule 13a-15(d) of the Securities Exchange Act of 1934 that occurred during the fourth quarter of the fiscal year covered by this report on Form 10-K that has materially affected, or is reasonably likely to materially affect, the Corporation's internal control over financial reporting. 68 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT EXECUTIVE OFFICERS OF THE REGISTRANT (AS OF FEBRUARY 18, 2005):
NAME, AGE AND PRESENT POSITION PRESENT POSITION BUSINESS EXPERIENCE DURING THE LAST FIVE YEARS HELD SINCE - ---------------- ---------------------------------------------- ---------------- William C. Foote, 53 Same position. August 1999 Chairman, Chief Executive Officer and President Edward M. Bosowski, 50 President and Chief Executive Officer, United March 2004 Executive Vice President, Marketing States Gypsum Company, to November 2000; and Corporate Strategy; President, President, Growth Initiatives and USG International International, to February 2001; Senior Vice President, Marketing and Corporate Strategy; President, USG International, to February 2004. Stanley L. Ferguson, 52 Associate General Counsel to May 2000; Vice March 2004 Executive Vice President and President and General Counsel to May 2001; General Counsel Senior Vice President and General Counsel to February 2004. Richard H. Fleming, 57 Same position. February 1999 Executive Vice President and Chief Financial Officer James S. Metcalf, 47 Executive Vice President and Chief Operating March 2004 Executive Vice President; Officer, L&W Supply Corporation, to March President, Building Systems 2000; President and Chief Executive Officer, L&W Supply Corporation, to March 2002; Senior Vice President; President, Building Systems, to February 2004. Brian J. Cook, 47 Vice President, Human Resources to February February 2005 Senior Vice President, Human 2005. Resources Marcia S. Kaminsky, 46 Vice President, Communications to February February 2005 Senior Vice President, 2005. Communications Karen L. Leets, 48 Assistant Treasurer, McDonald's Corporation, March 2003 Vice President and Treasurer to March 2003. Michael C. Lorimer, 65 Vice President, Operations, L&W Supply March 2002 Vice President; President and Chief Corporation, to March 2002. Operating Officer, L&W Supply Corporation
69
NAME, AGE AND PRESENT POSITION PRESENT POSITION BUSINESS EXPERIENCE DURING THE LAST FIVE YEARS HELD SINCE - ---------------- ---------------------------------------------- ---------------- D. Rick Lowes, 50 Vice President and Treasurer, USG Corporation, October 2002 Vice President and Controller to October 2002. Peter K. Maitland, 63 Same position. February 1999 Vice President, Compensation, Benefits and Administration Donald S. Mueller, 57 Vice President of Research and Chief February 2005 Vice President, Research and Technology Officer, Ashland Specialty Chemical Development Co., to October 2003; Director, Industrial and State Relations for Environmental Science Institute, Ohio State University, to December 2004. Clarence B. Owen, 56 Senior Vice President, International, USG January 2003 Vice President and Chief Interiors, Inc., to May 2001; Vice President Technology Officer to May 2001; Vice President, International and Technology, to January 2003. John Eric Schaal, 61 Assistant General Counsel to August 2000; February 2002 Corporate Secretary and Associate General Counsel to February 2002. Associate General Counsel
COMMITTEE CHARTERS AND CODE OF BUSINESS CONDUCT The Corporation's code of business conduct and ethics (which applies to directors, officers and employees and is known as the Code of Business Conduct), its corporate governance guidelines, and the charters of committees of the board of directors, including the audit committee, governance committee, and compensation and organization committee, are available on the Corporation's website at www.usg.com. Shareholders may request a copy of this information by writing to: J. Eric Schaal, Corporate Secretary and Associate General Counsel, USG Corporation, P.O. Box 6721, Chicago, IL 60680-6721. Any waivers of, or changes to, the Corporation's Code of Business Conduct that apply to the Corporation's executive officers, directors, or persons performing similar functions, will be promptly disclosed on the Corporation's website in the "Investors" section, as required by the Securities and Exchange Commission and the New York Stock Exchange ("NYSE"). Following the annual meeting of stockholders held on May 12, 2004, the CEO of the Corporation filed a certificate with the NYSE declaring that he was not aware of any violation by the Corporation of the NYSE's Corporate Governance Listing Standards. Other information required by Item 10 is included in the Corporation's definitive Proxy Statement, which is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION Information required by Item 11 is included in the Corporation's definitive Proxy Statement, which is incorporated herein by reference. 70 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The following table sets forth information about the Corporation's common stock that may be issued upon exercise of options, and rights associated with any such option exercises, under all of the Corporation's equity compensation plans as of December 31, 2004, including the Long-Term Incentive Plan and Omnibus Management Incentive Plan. Each of the plans was approved by the Corporation's stockholders.
NUMBER OF SECURITIES REMAINING AVAILABLE FOR FUTURE ISSUANCE UNDER NUMBER OF SECURITIES TO WEIGHTED AVERAGE EQUITY COMPENSATION BE ISSUED UPON EXERCISE EXERCISE PRICE OF PLANS (EXCLUDING OF OUTSTANDING OPTIONS OUTSTANDING OPTIONS AND SECURITIES REPORTED IN PLAN CATEGORY AND RIGHTS RIGHTS COLUMN ONE) - ------------- ----------------------- ----------------------- ----------------------- Equity compensation plans approved by stockholders 1,932,100 $37.66 2,975,620 Equity compensation plans not approved by stockholders -- -- -- --------- ------ --------- Total 1,932,100 37.66 2,975,620 ========= ====== =========
Other information required by Item 12 is included in the Corporation's definitive Proxy Statement, which is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required by Item 13 is included in the Corporation's definitive Proxy Statement, which is incorporated herein by reference. ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES Information required by Item 14 is included in the Corporation's definitive Proxy Statement, which is incorporated herein by reference. 71 PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) 1. and 2. See Part II, Item 8. Financial Statements and Supplementary Data for an index of the Corporation's consolidated financial statements and supplementary data schedule.
EXHIBIT NUMBER 3. EXHIBITS (REG. S-K, ITEM 601) - ------- ---------------------------------------------------------------------- ARTICLES OF INCORPORATION AND BY-LAWS: 3.1 Restated Certificate of Incorporation of USG Corporation (incorporated by reference to Exhibit 3.1 of USG Corporation's Form 8-K, dated May 7, 1993). 3.2 Certificate of Designation of Junior Participating Preferred Stock, series D, of USG Corporation (incorporated by reference to Exhibit A of Exhibit 4 to USG Corporation's Form 8-K, dated March 27, 1998). 3.3 Amended and Restated By-Laws of USG Corporation, dated as of May 12, 2004 (incorporated by reference to Exhibit 3 (ii) of USG Corporation's Form 10-Q dated July 30, 2004). INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES: 4.1 Indenture dated as of October 1, 1986, between USG Corporation and National City Bank of Indiana, successor Trustee to Bank One, which was successor Trustee to Harris Trust and Savings Bank (incorporated by reference to Exhibit 4(a) of USG Corporation's Registration Statement No. 33-9294 on Form S-3, dated October 7, 1986). 4.2 Rights Agreement dated March 27, 1998, between USG Corporation and Harris Trust and Savings Bank, as Rights Agent (incorporated by reference to Exhibit 4 of USG Corporation's Form 8-K, dated March 27, 1998). 4.3 Form of Common Stock certificate (incorporated by reference to Exhibit 4.4 to USG Corporation's Form 8-K, dated May 7, 1993). The Corporation and certain of its consolidated subsidiaries are parties to long-term debt instruments under which the total amount of securities authorized does not exceed 10% of the total assets of the Corporation and its subsidiaries on a consolidated basis. Pursuant to paragraph (b)(4)(iii)(A) of Item 601 of Regulation S-K, the Corporation agrees to furnish a copy of such instruments to the Securities and Exchange Commission upon request. MATERIAL CONTRACTS: 10.1 Management Performance Plan of USG Corporation (incorporated by reference to Annex C of Amendment No. 8 to USG Corporation's Registration Statement No. 33-40136 on Form S-4, dated February 3, 1993). * 10.2 First Amendment to Management Performance Plan, effective November 15, 1993, and dated February 1, 1994 (incorporated by reference to Exhibit 10(aq) of Amendment No. 1 of USG Corporation's Registration Statement No. 33-51845 on Form S-1). *
72 10.3 Second Amendment to Management Performance Plan, dated June 27, 2000 (incorporated by reference to Exhibit 10(a) of USG Corporation's Form 10-Q, dated November 6, 2000). * 10.4 Amendment and Restatement of USG Corporation Supplemental Retirement Plan, effective July 1, 1997, and dated August 25, 1997 (incorporated by reference to Exhibit 10(c) of USG Corporation's Annual Report on Form 10-K, dated February 20, 1998). * 10.5 First Amendment to Supplemental Retirement Plan, effective July 1, 1997 (incorporated by reference to Exhibit 10(d) of USG Corporation's Annual Report on Form 10-K, dated February 26, 1999). * 10.6 Second Amendment to Supplemental Retirement Plan, effective November 8, 2000 (incorporated by reference to Exhibit 10(f) of USG Corporation's Annual Report on Form 10-K, dated March 5, 2001). * 10.7 Third Amendment to Supplemental Retirement Plan, effective November 8, 2000 (incorporated by reference to Exhibit 10(g) of USG Corporation's Annual Report on Form 10-K, dated March 5, 2001). * 10.8 Fourth Amendment to Supplemental Retirement Plan, effective April 11, 2001 (incorporated by reference to Exhibit 10(a) of USG Corporation's Form 10-Q, dated March 31, 2001). * 10.9 Fifth Amendment to Supplemental Retirement Plan, effective December 21, 2001 (incorporated by reference to Exhibit 10(i) of USG Corporation's Annual Report on Form 10-K, dated March 1, 2002). * 10.10 Sixth Amendment to Supplemental Retirement Plan, effective January 1, 2005 (incorporated by reference to Exhibit 10.3 of USG Corporation's Form 8-K, dated November 17, 2004). * 10.11 Form of Termination Compensation Agreement, dated January 1, 2000 (incorporated by reference to Exhibit 10(e) of USG Corporation's Annual Report on Form 10-K, dated February 29, 2000). * 10.12 Form of Indemnification Agreement (incorporated by reference to Exhibit 10(g) of Amendment No. 1 to USG Corporation's Registration Statement No. 33-51845 on Form S-1). 10.13 Form of Employment Agreement, dated January 1, 2000 (incorporated by reference to Exhibit 10(g) of USG Corporation's Annual Report on Form 10-K, dated February 29, 2000). * 10.14 Five-Year Credit Agreement, dated as of June 30, 2000, among USG Corporation and the banks listed on the signature pages thereto and The Chase Manhattan Bank, as Administrative Agent (incorporated by reference to Exhibit 10(a) of USG Corporation's Form 10-Q, dated August 7, 2000). 10.15 364-Day Credit Agreement, dated as of June 30, 2000, among USG Corporation and the banks listed on the signature pages thereto and The Chase Manhattan Bank, as Administrative Agent (incorporated by reference to Exhibit 10(b) of USG Corporation's Form 10-Q, dated August 7, 2000). 10.16 Master Letter of Credit Agreement, Rider to Master Letter of Credit Agreement, and Related Pledge Agreement, Acknowledgement Agreement if Collateral Held at LaSalle Bank National Association Trust Department, LaSalle Bank National Association Trust Department Internal, Pledge Agreement between USG Corporation and LaSalle Bank National Association, dated June 11, 2003 (incorporated by reference to Exhibit 10 of USG Corporation's Form 10-Q, dated June 30, 2003).
73 10.17 1995 Long-Term Equity Plan of USG Corporation (incorporated by reference to Annex A to USG Corporation's Proxy Statement and Proxy, dated March 31, 1995). * 10.18 First Amendment to 1995 Long-Term Equity Plan of USG Corporation, dated June 27, 2000 (incorporated by reference to Exhibit 10(b) of USG Corporation's Form 10-Q, dated November 6, 2000). * 10.19 2004 Annual Management Incentive Program - USG Corporation. * ** 10.20 2005 Annual Management Incentive Program - USG Corporation - with revisions approved on February 9, 2005 (incorporated by reference to Exhibit 10.1 of USG Corporation's Form 8-K, dated February 15, 2005). * 10.21 Omnibus Management Incentive Plan (incorporated by reference to Annex A to USG Corporation's Proxy Statement and Proxy, dated March 28, 1997). * 10.22 First Amendment to Omnibus Management Incentive Plan, dated November 11, 1997 (incorporated by reference to Exhibit 10(p) of USG Corporation's Annual Report on Form 10-K, dated February 20, 1998). * 10.23 Second Amendment to Omnibus Management Incentive Plan, dated as of June 27, 2000 (incorporated by reference to Exhibit 10(c) of USG Corporation's Form 10-Q, dated November 6, 2000). * 10.24 Third Amendment to Omnibus Management Incentive Plan, dated as of March 25, 2004. * ** 10.25 Amended and Restated Stock Compensation Program for Non-Employee Directors of USG Corporation, dated July 1, 1997 (incorporated by reference to Exhibit 10(q) of USG Corporation's Annual Report on Form 10-K, dated February 20, 1998). * 10.26 Key Employee Retention Plan, dated May 16, 2001, as amended September 20, 2001 (incorporated by reference to Exhibit 10(v) of USG Corporation's Annual Report on Form 10-K, dated March 1, 2002). * 10.27 Key Employee Retention Plan (July 1, 2004 - December 31, 2005), dated July 1, 2004, (incorporated by reference to Exhibit 10 of USG Corporation's Form 10-Q, dated July 30, 2004). * 10.28 Senior Executive Severance Plan, dated May 16, 2001, as amended September 20, 2001 (incorporated by reference to Exhibit 10(w) of USG Corporation's Annual Report on Form 10-K, dated March 1, 2002). * 10.29 Senior Executive Severance Plan, dated January 1, 2005. * ** 10.30 Revolving Credit and Guaranty Agreement, dated as of June 25, 2001, among USG Corporation and certain of its subsidiaries, as debtors, USG Foreign Investments, Ltd., as guarantor, and The Chase Manhattan Bank, as agent and lender, and the other lenders named therein (incorporated by reference to Exhibit 10(x) of USG Corporation's Annual Report on Form 10-K, dated March 1, 2002). 10.31 First Amendment to Revolving Credit and Guaranty Agreement, dated August 2, 2001 (incorporated by reference to Exhibit 10(y) of USG Corporation's Annual Report on Form 10-K, dated March 1, 2002). 10.32 Second Amendment to Revolving Credit and Guaranty Agreement, dated August 24, 2001 (incorporated by reference to Exhibit 10(z) of USG Corporation's Annual Report on Form 10-K, dated March 1, 2002).
74 10.33 Third Amendment to Revolving Credit and Guaranty Agreement, dated December 10, 2001 (incorporated by reference to Exhibit 10(aa) of USG Corporation's Annual Report on Form 10-K, dated March 1, 2002). 10.34 Fourth Amendment to Revolving Credit and Guaranty Agreement, dated August 9, 2002 (incorporated by reference to Exhibit 10.28 of USG Corporation's Annual Report on Form 10-K, dated February 27, 2003). 10.35 Security and Pledge Agreement, dated June 25, 2001, among USG Corporation and each of its direct and indirect subsidiaries party to the Credit Agreement, other than USG Foreign Investments, Ltd., and The Chase Manhattan Bank (incorporated by reference to Exhibit 10(ab) of USG Corporation's Annual Report on Form 10-K, dated March 1, 2002). 10.36 Amendment and Restatement of USG Corporation Retirement Plan, dated December 29, 1999. * ** 10.37 First Amendment of USG Corporation Retirement Plan, dated May 22, 2001. * ** 10.38 Second Amendment of USG Corporation Retirement Plan, dated December 21, 2001 (incorporated by reference to Exhibit 10(ac) of USG Corporation's Annual Report on Form 10-K, dated March 1, 2002). * 10.39 Third Amendment of USG Corporation Retirement Plan, dated August 22, 2002 (incorporated by reference to Exhibit 10.31 of USG Corporation's Annual Report on Form 10-K, dated February 27, 2003). * 10.40 Fourth Amendment of USG Corporation Retirement Plan, dated November 4, 2004 (incorporated by reference to Exhibit 10.2 to USG Corporation's Form 8-K, dated November 17, 2004). * OTHER: 21 Subsidiaries ** 23 Consents of Experts and Counsel ** 24 Power of Attorney ** 31.1 Rule 13a - 14(a) Certifications of USG Corporation's Chief Executive Officer ** 31.2 Rule 13a - 14(a) Certifications of USG Corporation's Chief Financial Officer ** 32.1 Section 1350 Certifications of USG Corporation's Chief Executive Officer ** 32.2 Section 1350 Certifications of USG Corporation's Chief Financial Officer **
- ---------- * Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 15 of Form 10-K. ** Filed or furnished herewith. 75 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. USG CORPORATION February 18, 2005 By: /s/ Richard H. Fleming ------------------------------- Richard H. Fleming Executive Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated. /s/ William C. Foote February 18, 2005 - --------------------------------------- WILLIAM C. FOOTE Chairman, Chief Executive Officer and President (Principal Executive Officer) /s/ Richard H. Fleming February 18, 2005 - --------------------------------------- RICHARD H. FLEMING Executive Vice President and Chief Financial Officer (Principal Financial Officer) /s/ D. Rick Lowes February 18, 2005 - --------------------------------------- D. RICK LOWES Vice President and Controller (Principal Accounting Officer) ROBERT L. BARNETT, KEITH A. BROWN, ) By: /s/ Richard H. Fleming JAMES C. COTTING, LAWRENCE M. CRUTCHER, ------------------------------- W. DOUGLAS FORD, DAVID W. FOX, ) Richard H. Fleming VALERIE B. JARRETT, MARVIN E. LESSER, ) Attorney-in-fact JOHN B. SCHWEMM, JUDITH A. SPRIESER ) Pursuant to Power of Attorney Directors ) (Exhibit 23 hereto) ) February 18, 2005 76 EX-10.19 2 c92112exv10w19.txt 2004 ANNUAL MANAGEMENT INCENTIVE PROGRAM EXHIBIT 10-19 YEAR 2004 ANNUAL MANAGEMENT INCENTIVE PROGRAM USG CORPORATION PURPOSE To enhance USG Corporation's ability to attract, motivate, reward and retain key employees of the Corporation and its operating subsidiaries and to align management's interests with those of the Corporation's stockholders by providing incentive award opportunities to managers who make a measurable contribution to the Corporation's business objectives. INTRODUCTION This Annual Management Incentive Program (the "Program") is in effect from January 1, 2004 through December 31, 2004. ELIGIBILITY Individuals eligible for participation in this Program are those officers and other key employees occupying management positions in Broadband 11 or higher. Employees who participate in any other annual incentive program of the Corporation or any of its subsidiaries are not eligible to participate in this Program but could be considered for special awards. GOALS For the 2004 Annual Management Incentive Program, Consolidated Net Earnings and consolidated, subsidiary and profit center Strategic Focus Targets will be determined by the Compensation and Organization Committee of the USG Board of Directors (the "Committee") after considering recommendations submitted from management of USG Corporation and the Operating Subsidiaries. 1 AWARD VALUES For the Annual Management Incentive Program, position target incentive values are based on level of accountability and are expressed as a percent of approved annualized salary. Resulting award opportunities represent a fully competitive incentive opportunity for 100% (target) achievement of goals:
POSITION TITLE OR POSITION TARGET SALARY REFERENCE POINT INCENTIVE ---------------------- --------------- - - Chairman & CEO, USG Corporation 70% - - Executive Vice President & Chief Financial Officer, USG Corporation 50% - - Senior Vice President, USG Corporation & President Building Systems - - Senior Vice President Marketing & Corporate Strategy, USG Corporation and President International - - Senior Vice President & General Counsel, USG Corporation - - Senior Vice President Financial Operations, USG Corporation - - Vice President Human Resources, USG Corporation 45% - - Vice President Communications, USG Corporation - - Vice President, USG Corporation & President & COO, L & W Supply Corp. 40% - - Vice President Research & Technology, USG Corporation - - Vice President & Controller, USG Corporation - - Vice President International & Technology, USG Corporation - - Vice President & Treasurer, USG Corporation - - Vice President Compensation, Benefits & Administration, USG Corporation - - Corporate Secretary & Associate General Counsel, USG Corporation - - Position Reference Point: $177,675 and over 35% - - Position Reference Point: $163,215 - $177,674 30% - - Position Reference Point: $148,815 - $163,214 25% - - Position Reference Point: $133,610 - $148,814 20% - - Position Reference Point: $119,025 - $133,609 15% - - Position Reference Point: $104,815 - $119,024 10%
2 AWARDS Incentive awards for all participants in the 2004 Annual Management Incentive Program will be reviewed and approved by the Committee. For all participants, the annual incentive award par opportunity is the annualized salary in effect at the beginning of the calendar year (March 1, 2004 of the calendar year for the fifteen most senior executives) multiplied by the applicable position target incentive value percent. Incentive awards for 2004 will be based on a combination of the following elements: I. CONSOLIDATED NET EARNINGS 50% OF INCENTIVE Consolidated Net Earnings will be as reported on the Corporation's year-end financial statements with adjustments for significant non-operational charges. Such adjustments have in the past been for Fresh Start Accounting, asbestos, restructuring charges, bankruptcy expenses and the cumulative impact of new accounting pronouncements (goodwill impairment). For 2004, likely adjustments would include bankruptcy expenses and FAS #143. For all participants, this portion of the award represents 50% of the incentive par. This portion of the award will be paid from a pool funded by Consolidated Net Earnings results according to the following schedule: $0 to $50 Million Net Earnings 2.50% of this tier will fund the pool $51 to $150 Million Net Earnings 2.25% of this tier will fund the pool $151 to $400 Million Net Earnings 1.75% of this tier will fund the pool $401 Million and above 1.00% of this tier will fund the pool
Each tier of earnings is calculated separately and added together to determine the total pool. This amount is then divided by the total plan par (sum of each individual participant's Net Earnings par, or 50% of each participant's total par). The factor derived from this method is then applied to each participant's Net Earnings par to determine the individual award for this segment. There is no maximum award in this segment. II. STRATEGIC FOCUS TARGETS: 50% OF INCENTIVE Strategic Focus Targets will be measurable, verifiable and derived from the formal strategic planning process. For 2004, Strategic Focus Targets will include Overhead Reduction, Working Capital Reduction, Cost Reduction, Customer Satisfaction and Business Unit Operating Profit. The award adjustment factor for this segment will range from 0.5 (after achieving a minimum threshold performance level) to 2.0 for maximum attainment. The weighting on any individual Strategic Focus Target will be in 5% increments and not be less than 10%. The weighting of all assigned Strategic Focus Targets will equal 50% of the individual's total par. 3 WEIGHTINGS OF PROGRAM ELEMENTS All participants in this Program, including the fifteen most senior executives, will have the same overall weightings, 50% on Consolidated Net Earnings and 50% on Strategic Focus Targets. SPECIAL AWARDS In addition to the incentive opportunity provided by this Program, a special award may be recommended for any participant or non-participant, other than a Corporation Officer, who has made an extraordinary contribution to the Corporation's welfare or earnings. GENERAL PROVISIONS 1. The Compensation and Organization Committee of the USG Board of Directors reserves the right to adjust award amounts either up or down based on its assessment of the Corporation's overall performance relative to market conditions. 2. The Committee shall review and approve the awards recommended for officers and other employees who are eligible participants in the 2004 Annual Management Incentive Program. The Committee shall submit to the Board of Directors, for their ratification, a report of the awards for all eligible participants including corporate officers approved by the Committee in accordance with the provisions of the Program. 3. The Committee shall have full power to make the rules and regulations with respect to the determination of achievement of goals and the distribution of awards. No awards will be made until the Committee has certified financial achievements and applicable awards in writing. 4. The judgement of the Committee in construing this Program or any provisions thereof, or in making any decision hereunder, shall be final and conclusive and binding upon all employees of the Corporation and its subsidiaries whether or not selected as beneficiaries hereunder, and their heirs, executors, personal representatives and assignees. 5. Nothing herein contained shall limit or affect in any manner or degree the normal and usual powers of management, exercised by the officers and the Board of Directors or committees thereof, to change the duties or the character of employment of any employee of the Corporation or to remove the individual from the employment of the Corporation at any time, all of which rights and powers are expressly reserved. 6. The awards made to employees shall become a liability of the Corporation or the appropriate subsidiary as of December 31, 2004 and all payments to be made hereunder will be made as soon as practicable after said awards have been approved by the Committee. 4 ADMINISTRATIVE GUIDELINES 1. Award values will be based on annualized salary in effect for each qualifying participant at the beginning of the year (March 1, 2004 for the fifteen most senior executives). Any change in duties, dimensions or responsibilities of a current position resulting in an increase or decrease in salary range reference point or market rate will result in pro-rata incentive award. Respective reference points, target incentive values or goals will be applied based on the actual number of full months of service at each position. 2. As provided by the Program, no award is to be paid to any participant who is not a regular full-time employee, (or a part time employee as approved by the Vice President Human Resources, USG Corporation) in good standing at the end of the calendar year to which the award applies. However, if an eligible participant with three (3) or more months of active service in the Program year subsequently retires, becomes disabled, dies, is discharged from the employment of the Company without cause, or is on an approved unpaid leave, the participant (or beneficiary) may be recommended for an award which would otherwise be payable based on goal achievement, prorated for the actual months of active service during the year. 3. Employees participating in any other incentive or bonus program of the Corporation or a Subsidiary who are transferred during the year to a position covered by the Annual Management Incentive Program will be eligible to receive a potential award prorated for actual full months of service in the two positions with the respective incentive program and target incentive values to apply. For example, a Marketing Manager promoted to Director, Marketing on August 1, will be eligible to receive a pro-rata award for seven months based on the Marketing Manager Plan provisions and values, and for five months under the Annual Management Incentive Program provisions and target incentive values. 4. In the event of transfer of an employee from an assignment which does not qualify for participation in any incentive or bonus plan to a position covered by the Annual Management Incentive Program, the employee is eligible to participate in the Annual Management Incentive Program with any potential award prorated for the actual months of service in the position covered by the Program during the year. A minimum of three months of service in the eligible position is required. 5. Participation during the current Program year for individuals employed from outside the Corporation is possible with any award to be prorated for actual full months of service in the eligible position. A minimum of three full months of eligible service is required for award consideration. 6. Exceptions to established administrative guidelines can only be made by the Committee. 5 EX-10.24 3 c92112exv10w24.txt THIRD AMENDMENT TO OMNIBUS INSTRUMENT EXHIBIT 10-24 THIRD AMENDMENT TO OMNIBUS MANAGEMENT INCENTIVE PLAN OF USG CORPORATION THIRD AMENDMENT (this "Third Amendment"), to the Omnibus Management Incentive Plan of USG Corporation originally approved by the stockholders of the Corporation on May 14, 1997, and last amended on June 27, 2000 (collectively, the "Plan"). WHEREAS, the Compensation and Organization Committee of the Board of Directors approved an amendment to the Plan on March 25, 2004 to remove the $1,000,000 limit on annual incentive awards under the Plan. NOW, THEREFORE, in consideration of the premises, the Plan is hereby amended as set forth below: 1. The penultimate sentence of Section 4 of the Plan is hereby amended in its entirety to read as follows: "Annual incentive awards may be in the form of cash payments, stock awards or a combination thereof, provided, however, that the aggregate value of an annual incentive award to an individual may not exceed two times such individual's base salary at the commencement of the relevant annual performance period". 2. Except as expressly amended and modified by this Third Amendment, the Plan is hereby ratified and confirmed in all respects. IN WITNESS WHEREOF, the Corporation has caused this Third Amendment to be executed by its officers thereunto duly authorized as of the 10th day of August, 2004. Attest: USG CORPORATION By - ------------------------------------- ------------------------------------- EX-10.29 4 c92112exv10w29.txt SENIOR EXECUTIVE SEVERANCE PLAN January 1, 2005 EXHIBIT 10-29 USG CORPORATION SENIOR EXECUTIVE SEVERANCE PLAN You are a key member of the senior executive team of USG Corporation (hereinafter, together with its participating subsidiaries, including in particular the business entity which pays your salary and benefits and which will be primarily responsible for the performance of the Corporation's obligations under this Plan, collectively referred to as the "Corporation"). The Corporation, accordingly has an interest in creating and preserving an environment that will permit you to give undivided attention to your duties and responsibilities. That interest would be especially strong during the potentially distracting circumstances created by the current business environment and asbestos litigation. The USG Corporation Senior Executive Severance Plan (the "Plan") addresses the above needs. It is intended to provide you with ongoing compensation and benefits or a lump sum payment in the event you are involuntarily terminated between January 1, 2005 through and including the effective date of a Plan of Reorganization. The Plan, of course, asks something of you as well, since in any agreement each party has to promise to do or to give up something. Please read the provisions of the Plan that follow. If you find them acceptable and agree to be bound by them, please so indicate by signing the enclosed Statement of Acceptance and returning it to the office indicated. You will not be covered by the Plan until you have taken these steps. You are under no obligation to participate in the Plan and should feel no pressure to do so. The Corporation believes the Plan is in both its and your best interests. Whether you participate, however, is ultimately your decision. If you do elect to receive severance benefits under this Plan, you will not be eligible to also receive severance benefits under any other USG severance plan, employment agreement or termination compensation agreement. 1. IMPORTANT DEFINITIONS Under this Plan, "employment loss" means: A. any actual termination by the Corporation of the Senior Executive's employment between January 1, 2005 through and including the effective date of a Plan of Reorganization, which is not due to voluntary resignation (except as in subsection B below), voluntary retirement, death or disability and does not constitute termination for "cause" (as defined below); or B. a resignation of employment by you due to 1) any reduction in Base Salary as in effect on January 1, 2005 or as increased thereafter; or 2) any material reduction in title, responsibilities, or authority as in effect on January 1, 2005. Page 1 of 6 January 1, 2005 "Employment loss" shall not include 1) termination based on "cause," which for this Plan shall mean continued failure by the Senior Executive to substantially perform his or her duties after a demand for substantial performance has been delivered by the Senior Executive's manager specifically identifying the manner in which it is believed the Senior Executive has not substantially performed his or her duties; or 2) willful misconduct by the Senior Executive which is materially injurious to the Corporation or any related or affiliated company. "Base Salary - Option A" means the sum of the Senior Executive's annual salary and the par award opportunity for the applicable fiscal year under the annual incentive portion of the Corporation's Management Incentive Compensation Program (or any similar annual program in which the Senior Executive then participates) at the value in effect at the time of termination or January 1, 2005, whichever is higher. Such sum shall be divided by fifty-two if a weekly figure is desired and by twelve if a monthly figure is desired. "Base Salary - Option B" means the Senior Executive's annual salary in effect at the time of termination. It does not include the par award opportunity for the applicable fiscal year under the annual incentive portion of the Corporation's Management Incentive Compensation Program (or any similar annual program in which the Senior Executive then participates). Such sum shall be divided by fifty-two if a weekly figure is desired and by twelve if a monthly figure is desired. 2. INITIAL ELIGIBILITY AND COMMITMENTS All Senior Executives (as defined herein) are eligible to participate in this Plan. A "Senior Executive" is an employee who between January 1, 2005 through and including the effective date of a Plan of Reorganization would be eligible for a two year Employment Agreement with the Corporation or one of its domestic subsidiaries. Under this Plan, the Senior Executive agrees to remain in the employ of the Corporation through and including the effective date of a Plan of Reorganization, except as may be permitted by other provisions of this Plan or any employment agreement. It is understood that nothing in this document shall be construed as limiting the Corporation's right to terminate employment at any time, subject only to providing the compensation and benefits to which the Senior Executive would be entitled under this Plan or under any employment agreement in effect at the time of termination. Payment of compensation and benefits to which the Senior Executive is entitled under this Plan or under any employment agreement shall constitute the Senior Executive's sole remedy in the event of employment loss regardless of whether compensation and benefits are payable under this Plan or under the provisions of any employment agreement. Page 2 of 6 January 1, 2005 3. COMMITMENTS OF THE CORPORATION Compensation and benefits shall become due and payable under this Plan if the Senior Executive suffers an employment loss as defined under this Plan between January 1, 2005 through and including the effective date of a Plan of Reorganization, in which case the Senior Executive may elect to receive either Option A or Option B, but not both. OPTION A The Corporation shall be obligated to pay and provide the Senior Executive for twenty-four full months of the following: - Base Salary - Option A as defined above in this Plan, plus - Participation in all benefits to which the Senior Executive would normally be entitled including, but not limited to, all retirement and investment plans, all life, health and disability insurance, and all salary continuation plans, together with bonuses and such other grants of additional compensation or supplemental benefits as may be granted from time to time (subject to periodic changes in such benefits as are applicable generally to all Senior Executives in the Plans). This participation would not include continued participation in the Key Employee Retention Plan, the retention of a company vehicle, computer and office equipment, or company paid club memberships. The Corporation also shall be obligated to pay to the Senior Executive an amount equal to all legal fees and expenses incurred by the Senior Executive to enforce any right or benefit under this Plan. The Corporation shall not have an obligation to pay such amount, however, if a court has decided that there has been no "employment loss" as defined under this Plan. Any stock option granted to the Senior Executive under any long-term equity plan of the Corporation ("Equity Plan") but not yet exercisable, any restricted stock granted to the Senior Executive under any Equity Plan and not yet freed of restrictions, and any other equity awards or incentives shall be dealt with, for time and performance vesting and all other purposes as if the Senior Executive continued as an employee of the Corporation during the period of payments under this Option A. The compensation and benefits paid under this Option A shall be subject to deductions required by law or authorized by the Senior Executive. Page 3 of 6 January 1, 2005 During the twenty four full months of payments under Option A of this Plan the Senior Executive will not engage or participate, directly or indirectly, as a partner, officer, director, employee, advisor, or otherwise, in any corporation, business, or activity which competes with the Corporation or any of its subsidiary companies in the manufacture or sale of any line of products in any state of the United States, any province of Canada and any state of Mexico where the Corporation manufactures or sells its products. Further the Senior Executive will not directly or indirectly through another entity; induce or attempt to induce any employee of the Corporation to leave the employ of the Corporation, or in any way interfere with the relationship between the Corporation and any employee thereof; hire any person who was an employee of the Corporation at any time during the Senior Executive's period of employment with the Corporation, or induce or attempt to induce any customer, supplier, licensee, licensor, franchisee or other business relation of the Corporation to cease doing business with the Corporation or in any way interfere with the relationship between any such customer, supplier, licensee, licensor, franchisee or business relation and the Corporation, including, without limitation, by making any negative statements or communications about the Corporation or its products, services or business opportunities. The Senior Executive acknowledges that the Corporation's agreement to pay the compensation and benefits set forth in this Plan is conditioned upon the Senior Executive's faithful performance of obligations under this paragraph. If the Senior Executive fails to do so, the Senior Executive agrees that the Corporation will be relieved of any obligation to make any further payments under the Plan. OPTION B The Corporation shall, within thirty days of receipt of a signed and unaltered Agreement and General Release, be obligated to pay the Senior Executive a lump sum equal to: - one and one half (1.5) weeks of Base Salary - Option B as defined above in this Plan for each full year of continuous service with the Corporation or any of its subsidiaries at the rate in effect immediately prior to such termination subject to a minimum of two months Base Salary - Option B, plus - two weeks of Base Salary - Option B at the rate in effect immediately prior to such termination date, for each full $15,000 of annualized Base Salary - Option B at the same rate, plus - a lump sum cash payment equal to the cost of continuation of the Senior Executive's current level of medical, vision and dental benefits for a period equal to the total number of whole weeks provided under the preceding service and compensation components, plus - career counseling and job search assistance selected by and fully paid for by the Corporation. Page 4 of 6 January 1, 2005 The benefit under Option B shall not exceed twenty-four months of Base Salary - Option B at the rate in effect at the date of termination and of course shall be subject to deductions required by law or authorized by the Senior Executive. The benefit under Option B shall not include the benefits under the Key Employee Retention Plan. No such payment under Option B of this Plan shall be considered as pay for purposes of the USG Corporation Retirement Plan or the USG Corporation Investment Plan. 4. NO MITIGATION The Senior Executive will not be required to mitigate the amount of the above pay-out by seeking other employment or otherwise, nor shall such amount be reduced by any compensation received from other employment. The Corporation, of course, shall also be obligated to pay full salary through the date of termination plus accrued unused vacation. 5. BINDING ON SUCCESSORS The Corporation shall be obligated to require any successor (whether direct or indirect, by purchase, merger, consolidation, or otherwise) to all or substantially all of the business and/or assets of the Corporation or the appropriate subsidiary, by a written agreement which is part of such transaction, to assume and perform in their entirety all provisions of this Plan. 6. CERTAIN TERMINATION PROCEDURES Any claims of employment loss under this Plan must be communicated in writing to the Vice President, Human Resources, USG Corporation within one hundred-eighty (180) days of the employment loss and shall indicate the specific provisions of this Plan relied on and shall set forth in reasonable detail all relevant facts and circumstances to support a claim of employment loss under this Plan. The Senior Executive's failure to assert a claim of employment loss under this Plan within one hundred eighty (180) days of the employment loss shall be deemed a waiver of such claim. 7. EFFECTIVE PERIOD OF THE PLAN This Plan will be in effect from January 1, 2005 through and including the effective date of a Plan of Reorganization, at which time it shall terminate. This Plan shall not be terminated earlier or otherwise amended without the prior written consent of both the Senior Executive and the Corporation. Page 5 of 6 January 1, 2005 8. ADMINISTRATIVE RULES AND DETERMINATIONS Administrative guidelines for the Senior Executive Severance Plan are developed and administered by the Vice President, Human Resources, USG Corporation, who shall have full power to interpret the rules and regulations and to determine and distribute awards. Nothing herein contained shall limit or affect in any manner or degree the normal and usual powers of management, exercised by the officers and the Boards of Directors or committees thereof, to change the duties or the character of employment of any employee of the Corporation or to remove the individual from the employment of the Corporation at any time, all of which rights and powers are expressly reserved. Page 6 of 6 EX-10.36 5 c92112exv10w36.txt AMENDMENT AND RESTATEMENT OF USG CORPORATION RETIREMENT PLAN EXHIBIT 10-36 AMENDMENT AND RESTATEMENT OF USG CORPORATION RETIREMENT PLAN WHEREAS, USG CORPORATION RETIREMENT PLAN (the "Plan") was established effective July 1, 1958 (and then was named "United States Gypsum Company Retirement Plan"); and WHEREAS, the Plan, as amended and restated effective as of January 1, 1984, has subsequently been amended from time to time and it now is considered desirable to further amend and restate the Plan in its entirety; NOW, THEREFORE, pursuant to the amending power reserved to USG Corporation as the "company" under subsection 14.1 of the Plan, as amended, the Plan be and hereby is further amended and restated in its entirety effective as of January 1, 1999 in the form attached hereto. * * * IN WITNESS WHEREOF, the Company has caused these presents to be signed on its behalf by an officer thereunto duly authorized this 29th day of December, 1999. USG CORPORATION By: ------------------------------------ USG CORPORATION RETIREMENT PLAN As Amended and Restated Effective January 1, 1999 McDermott, Will & Emery Chicago TABLE OF CONTENTS
PAGE ---- SECTION 1 ...................................................................... 1 Introduction ................................................................ 1 1.1 Plan, Company .................................................... 1 1.2 Purpose .......................................................... 1 1.3 Restatement Effective Date, Plan Year ............................ 1 1.4 Subsidiaries, Employers, USG Companies ........................... 2 1.5 Plan Administration, the Committee ............................... 2 1.6 Trustees, Trust Agreements, Trust Funds .......................... 2 1.7 Preservation of Benefits ......................................... 2 1.8 Predecessor Plans ................................................ 3 1.9 Supplements ...................................................... 3 1.10 Examination of Plan Documents .................................... 4 1.11 Gender and Number ................................................ 4 1.12 Notices .......................................................... 4 1.13 Combination Defined Benefit and Defined Contribution Plan ........ 4 SECTION 2 ...................................................................... 6 Eligibility for Participation and ........................................... 6 Participant Contributions ................................................... 6 2.1 Covered Employee, Participant, Eligibility Date .................. 6 2.2 Eligibility ...................................................... 7 2.3 Notice of Eligibility, Enrollment ................................ 7 2.4 Leave of Absence ................................................. 7 2.5 Participant Contributions ........................................ 8 2.6 Separate Accounts ................................................ 8 2.7 U.S. Foreign Service Employee .................................... 11 2.8 Leased Employees ................................................. 11 SECTION 3 ...................................................................... 13 Retirement Dates, Employment Termination Date ............................... 13 3.1 Normal Retirement Date ........................................... 13 3.2 Deferred Retirement Date ......................................... 13 3.3 Early Retirement Date ............................................ 13 3.4 Disability Retirement Date ....................................... 13 3.5 Retirement Date .................................................. 14
-i- PAGE ---- 3.6 Employment Termination Date ...................................... 14 3.7 Retirement or Termination While on Leave of Absence .............. 14 SECTION 4 ...................................................................... 15 Bases of Retirement Income and Other Benefits ............................... 15 4.l General .......................................................... 15 4.2 Credited Service ................................................. 15 4.3 Benefit Service .................................................. 18 4.4 Special Rules as to Credited Service and Benefit Service ......... 19 4.5 Earnings ......................................................... 21 4.6 Final Average Earnings ........................................... 22 4.7 Primary Social Security Benefit .................................. 23 4.8 Monthly Separate Account Benefit ................................. 24 4.9 Determination of Bases of Benefits ............................... 25 SECTION 5 ...................................................................... 26 Amount of Retirement Income ................................................. 26 5.1 Normal Retirement ................................................ 26 5.2 Deferred Retirement .............................................. 26 5.3 Early Retirement Benefits ........................................ 27 5.4 Election of Early Commencement of Early Retirement Benefits ...... 28 5.5 Lump Sum Payment of Early Retirement Benefits Derived from Participants' Contributions .................................. 29 5.6 Disability Retirement ............................................ 30 5.7 Total and Permanent Disability ................................... 31 5.8 Conditions as to Payment of Disability Benefits .................. 31 5.9 Accrued Monthly Benefit .......................................... 32 5.10 Increased Benefits for Certain Retired Participants .............. 32 5.11 Benefit Commencement Consent Requirements ........................ 33 SECTION 6 ...................................................................... 34 Termination Before Retirement, Death During Employment ...................... 34 6.1 Monthly Deferred Vested Benefit .................................. 34 6.2 Election of Early Commencement of Deferred Vested Benefits ....... 34 6.3 Lump Sum Payment of Deferred Vested Benefits Derived from Participants' Contributions ...................... 34 6.4 Termination Prior to Five Years of Credited Service .............. 35 6.5 Death During Employment .......................................... 36 6.6 Pre-Retirement Spouse's Benefit .................................. 38 6.7 Benefit Commencement Consent Requirements ........................ 38
-ii- PAGE ---- SECTION 7 ...................................................................... 39 Payment of Retirement Income and Other Benefits ............................. 39 7.1 Benefit Commencement Date, Combined Benefit Reference ............ 39 7.2 Eligible Spouse .................................................. 39 7.3 Normal Form of Payment of Benefits ............................... 39 7.4 Benefit Options .................................................. 41 7.5 Rules as to Election and Discontinuance of Benefit Options ............................................... 42 7.6 Applicable Election Period ....................................... 45 7.7 Relating to Qualified Joint and Survivor Annuity ................. 45 7.8 Benefit Commencement Requirements ................................ 46 7.9 Payment of Small Amounts ......................................... 49 7.10 Benefits Derived from Employer and Participant Contributions ................................................. 49 7.11 Designation of Beneficiaries ..................................... 50 7.12 Missing Participants or Beneficiaries ............................ 51 7.13 Direct Transfer of Eligible Rollover Distributions ............... 52 SECTION 8 ...................................................................... 53 Maximum and Minimum Benefit Limitations, Offset for Other Plan Benefits ..... 53 8.1 Maximum Retirement Income and Deferred Vested Benefits ........... 53 8.2 Limitation Year and Total Compensation ........................... 53 8.3 Defined Benefit Plan and Defined Contribution Plan Limitations ... 53 8.4 Combining of Plans ............................................... 54 8.5 Maximum Benefits as a Result of the Annual Compensation Limit .... 54 8.7 Maximum Retirement Income and Deferred Vested Benefit ............ 57 8.8 Minimum Retirement Income and Deferred Vested Benefit ............ 57 8.9 Minimum Death Benefits ........................................... 57 8.10 Offset for Other Plan Benefits ................................... 58 8.11 Special Rules for Benefit Transfers .............................. 58 8.12 Section 401(m) Limitations as to Participant Separate Account Contributions ......................................... 59 8.13 Special Provisions Applicable to Section 401(m) Limitations ...... 60 8.14 Highly Compensated Participant ................................... 61 SECTION 9 ...................................................................... 62 Reemployment ................................................................ 62 9.1 Rehired Employee ................................................. 62 9.2 Rehired Participant .............................................. 62 9.3 One-Year Break in Service, Extended Break in Service ............. 63
-iii- PAGE ---- 9.4 Credited and Benefit Service ..................................... 63 9.5 Prior Accrued Benefit ............................................ 66 9.6 Benefits After Reemployment Ends ................................. 68 SECTION 10 ..................................................................... 70 General Provisions .......................................................... 70 10.1 Interests Not Transferable ....................................... 70 10.2 Facility of Payment .............................................. 71 10.3 Absence of Guaranty .............................................. 71 10.4 Employment Rights ................................................ 71 10.5 Litigation by Participants or Other Persons ...................... 71 10.6 Actuarially Equivalent Benefits .................................. 72 10.7 Evidence ......................................................... 72 10.8 Waiver of Notice ................................................. 72 10.9 Controlling Law .................................................. 72 10.10 Severability ..................................................... 72 10.11 Fiduciary Responsibilities ....................................... 73 SECTION 11 ..................................................................... 74 The Committee ............................................................... 74 11.1 Membership ....................................................... 74 11.2 General Powers, Rights and Duties ................................ 74 11.3 Manner of Action ................................................. 75 11.4 Information Required by Committee ................................ 76 11.5 Committee Decision Final ......................................... 76 11.6 Review of Benefit Determinations ................................. 76 11.7 Uniform Rules .................................................... 76 11.8 Committee Member Who is a Participant ............................ 76 SECTION 12 ..................................................................... 77 Funding of Plan Benefits .................................................... 77 12.1 Employer and Participant Contributions ........................... 77 12.2 Minimum Funding Standards ........................................ 77 12.3 Application of Forfeited Benefits ................................ 77 SECTION 13 ..................................................................... 78 Relating to the Employers ................................................... 78 13.1 Action by Employers .............................................. 78 13.2 Additional Employers ............................................. 78 13.3 Successor Employers .............................................. 78 13.4 Restrictions as to Reversion of Trust Assets to Employers ........ 78
-iv- PAGE ---- SECTION 14 ..................................................................... 80 Amendment, Termination or Plan Merger ....................................... 80 14.1 Amendment ........................................................ 80 14.2 Termination ...................................................... 80 14.3 Plan Merger or Consolidation ..................................... 80 14.4 Notice of Amendment, Termination or Plan Merger .................. 80 14.5 Nonforfeitability on Termination ................................. 81 14.6 Limitations on Termination ....................................... 81 SECTION 15 ..................................................................... 82 Allocation and Distribution of Assets on Termination ........................ 82 SECTION 16 ..................................................................... 83 Annual Benefit Payment Restrictions ......................................... 83 16.1 Restrictions on Annual Payments .................................. 83 16.2 Responsibility of Committee ...................................... 83 SECTION 17 ..................................................................... 84 Special Rules for Top-heavy Plans ........................................... 84 17.1 Purpose .......................................................... 84 17.2 Top-heavy Plan ................................................... 84 17.3 Key Employee ..................................................... 85 17.4 Minimum Vesting .................................................. 86 17.5 Minimum Benefit .................................................. 86 17.6 Aggregation of Plans ............................................. 87 17.7 No Duplication of Benefits ....................................... 87 17.8 Adjustment of Combined Benefit Limitations ....................... 87 17.9 Use of Terms ..................................................... 88 SECTION 18 ..................................................................... 89 Special Restrictions and Overriding Provisions Applicable During a Restricted Period ........................................................ 89 18.1 Overriding Provisions Effective During Restricted Period ......... 89 18.2 Definitions ...................................................... 89 18.3 Restrictions on Eligibility to Participate ....................... 92 18.4 Prohibition Against Mergers and Transfers of Assets and Liabilities ............................................... 92 18.5 Timing and Method of Distribution ................................ 92 18.6 Prohibition Against Reversion of Plan Assets if Plan Terminated .. 93 18.7 Conditions and Limitations ....................................... 95 18.8 Prohibition Against Amendment .................................... 96
-v-
PAGE ---- EXHIBIT A SUPPLEMENT 1 Titles of Supplements in Effect Immediately Prior to the Restatement Effective Date
-vi- USG CORPORATION RETIREMENT PLAN (As Amended and Restated Effective as of January 1, 1999) SECTION 1 INTRODUCTION 1.1 PLAN, COMPANY USG Corporation (the "company") maintains USG Corporation Retirement Plan (the "Plan") for the benefit of its eligible employees. The plan was originally established effective as of July 1, 1958 by United States Gypsum Company and was then known as the United States Gypsum Company Retirement Plan. On January 1, 1985 United States Gypsum Company became a wholly-owned subsidiary of USG Corporation and the subsidiaries of United States Gypsum Company became direct or indirect subsidiaries of USG Corporation. By agreement made as of December 20, 1984 the plan was amended effective January 1, 1985 to substitute USG Corporation for United States Gypsum Company as the "company" under the plan, to provide for United States Gypsum Company continuing as an employer under the plan, and to change the name of the plan to USG Corporation Retirement Plan. The provisions of this subsection and the following provisions constitute an amendment and restatement of the plan (as previously amended) effective as of January 1, 1999, subject to any subsequent amendments. The term "company" as used in the plan means USG Corporation. 1.2 PURPOSE The purpose of the plan is to provide retirement and other benefits for eligible employees of the company and of its subsidiaries that are employers under the plan. 1.3 RESTATEMENT EFFECTIVE DATE, PLAN YEAR The term "restatement effective date" as used in the plan means January 1, 1999. The plan is administered on the basis of a plan year (the "plan year") beginning on the applicable January 1 and ending on the next following December 31. 1.4 SUBSIDIARIES, EMPLOYERS, USG COMPANIES Certain subsidiaries of the company adopted the plan prior to the restatement effective date for the benefit of their employees. Any other subsidiary of the company may adopt the plan on or after the restatement effective date in accordance with the provisions of subsection 13.2 with the consent of the pension committee described in subsection 1.5. For purposes of the plan, a "subsidiary" of the company is any corporation 80 percent or more of the voting stock of which is owned, directly or indirectly, by the company. The company and its subsidiaries which adopt the plan are referred to below collectively as the "employers" and individually as an "employer". The term "USG Companies" means the employers and all subsidiaries that have not adopted the plan and each such corporation is referred to as a "USG Company". Any corporation that is not an employer and does not qualify as a subsidiary but is a member of a controlled group of corporations (within the meaning of Section 1563(a) of the Internal Revenue Code, determined without regard to Sections 1563(a)(4) and 1563(e)(3)(C) thereof) which contains an employer and each trade or business (whether or not incorporated) which, along with an employer, is considered to be under common control pursuant to Section 414(c) of the Internal Revenue Code shall, for purposes of the plan, be considered as a subsidiary that has not adopted the plan. 1.5 PLAN ADMINISTRATION, THE COMMITTEE The plan is administered by the Pension and Investment Committee (the "committee") consisting of three or more members appointed by the company, as provided in Section 11. 1.6 TRUSTEES, TRUST AGREEMENTS, TRUST FUNDS Funds contributed by the employers and employees participating in the plan are held and invested in one or more trust funds, until distributed, by one or more corporate trustees appointed by the committee. The trustee of each such trust fund acts under a trust agreement between the employers and that trustee. Unless indicated otherwise by the context, the terms "trustee", "trust fund" and "trust agreement" shall mean, respectively, all trustees, trust funds and trust agreements described above. 1.7 PRESERVATION OF BENEFITS The benefits provided under the plan on and after the restatement effective date for or with respect to any participant who retired or whose employment with the USG Companies otherwise terminated prior to the restatement effective date will, except as otherwise specifically provided herein or required by law, continue to be governed by the -2- terms of the plan as in effect as of the date of the participant's retirement or other termination of employment. As to employees participating in the plan on the restatement effective date, it is intended that the benefits they earned under the plan prior to that date shall be preserved unless limited by Section 8. If the committee determines that any such benefits have not been provided for under the terms and provisions of the plan as in effect on and after the restatement effective date, the committee shall direct the payment of such benefits from the plan to the participant or other person entitled to them. The benefits provided under the plan for or with respect to any participant who retired or whose employment with the USG Companies otherwise terminated prior to the date an amendment to the plan became effective or a provision of the plan was deleted pursuant to an amendment will, except as otherwise specifically provided herein or required by law, continue to be governed by the terms of the plan as in effect on the date of the participant's retirement or other termination of employment. 1.8 PREDECESSOR PLANS Certain pension plans maintained by subsidiaries of the company were merged into this plan prior to the restatement effective date and special provisions relating to persons covered under those plans were or are attached to this plan as a part thereof. Any such pension plan merged into this plan before the restatement effective date and any pension or profit sharing plan merged into this plan on or after the restatement effective date is referred to below as a "predecessor plan". Any other pension plan or any profit sharing plan maintained by the company or any subsidiary which adopts this plan may be merged into this plan with the consent of the company. Special provisions relating to employees or other persons covered under any such pension or profit sharing plan when it is merged into this plan may be set forth in one or more supplements which, by amendment, will be attached to and form a part of this plan. 1.9 SUPPLEMENTS In addition to supplements described in subsection 1.8, from time to time, by amendment, supplements have been and may continue to be attached to this plan, which supplements shall form a part of this plan for the purpose of modifying provisions of the plan to the extent such provisions apply to any particular group of employees or other persons entitled to benefits under the plan. If it is deemed necessary or desirable to set forth additional, substitute or retroactive terms and provisions of the plan as applied to such group of employees or other persons, including provisions to preserve benefits attributable to an employee's participation in any other pension plan maintained by an employer or predecessor of an employer, such supplement will specify the group of employees or other persons to which it applies and will supersede the provisions of this plan to the extent necessary to eliminate any inconsistencies between the plan and such -3- supplement. Prior to the restatement effective date, the plan had eleven Supplements (the titles of which are listed in Supplement 1). The provisions of such supplements as in effect immediately prior to the restatement effective date are incorporated herein by reference. 1.10 EXAMINATION OF PLAN DOCUMENTS Copies of the plan and trust agreement, and any amendments thereto, will be on file at the principal office of each employer where they may be examined by any participant. The provisions of and benefits under the plan are subject to the terms and provisions of the trust agreement. 1.11 GENDER AND NUMBER Where the context admits, words in the masculine gender shall include the feminine and neuter genders, the plural shall include the singular, and the singular shall include the plural. 1.12 NOTICES Any notice or document required to be given to or filed with the committee shall be considered as given or filed if delivered or mailed by registered mail, postage prepaid, to the corporate secretary of the company, 125 South Franklin Street, Chicago, Illinois 60606. 1.13 COMBINATION DEFINED BENEFIT AND DEFINED CONTRIBUTION PLAN Since its establishment, the plan has been designed to meet the requirements of a qualified defined benefit plan under Section 401(a) of the Internal Revenue Code. As described in subsection 2.5 and pursuant to Section 414(k) of the Internal Revenue Code, each participant's contributions made for periods beginning on or after January 1, 1991 have been or shall be credited to a separate account maintained under the plan in the participant's name. Participant contributions credited to separate accounts shall be invested under the trust fund, and the separate accounts shall be adjusted to reflect investment gain or losses and unrealized appreciation or depreciation in the value of the trust fund, all as provided for in subsection 2.6. As a result of the establishment of separate accounts, Section 414(k) of the Internal Revenue Code requires that the plan be treated as a defined contribution plan for purposes of Section 410 of the Internal Revenue Code (relating to minimum participation standards) and that for purposes of Internal Revenue Code Sections 72(d) (relating to treatment of employee -4- contributions as a separate contract), 411(a)(7)(A) (relating to minimum vesting standards), 415 (relating to limitations on benefits and contributions under qualified plans), and 401(m) (relating to nondiscrimination tests for employee after-tax contributions) the plan be treated as a defined contribution plan to the extent benefits are based on the separate accounts of participants and as a defined benefit plan with respect to the remaining portion of benefits provided under the plan. -5- SECTION 2 ELIGIBILITY FOR PARTICIPATION AND PARTICIPANT CONTRIBUTIONS 2.1 COVERED EMPLOYEE, PARTICIPANT, ELIGIBILITY DATE The term "covered employee" means an employee who is a member of a group of employees of an employer to which the plan has been and continues to be extended by the company or by agreement, and who, effective January 1, 2000, is not classified by the employer as a temporary employee. The term "participant" means an employee of a USG Company who, after becoming eligible for participation in the plan, is enrolled in the plan pursuant to this Section 2 and also means a former employee of the USG Companies who either is receiving benefits under the plan or is entitled to receive benefits under the plan commencing on a future date. The term "eligibility date" means for any employee the first day of the calendar month that is determined, in accordance with uniform and consistent rules established by the committee, by reference to (and not later than the 90 days after) the date on which the employee first performs an hour of service as a covered employee. In the case of an employee who declines to make contributions under subsection 2.5 when the employee is first eligible to do so, the term "eligibility date" means the first day of a subsequent calendar month. In the case of a former employee who is reemployed by an employer, the term "eligibility date" also includes any other date described in subparagraphs 9.1(a) and 9.2(b) on which such employee is entitled to become enrolled in the plan. If an employee of a USG Company becomes a covered employee more than six months after the date the employee completes twelve months of employment with the USG Companies, the date the employee so becomes a covered employee also shall be an "eligibility date." For purposes of determining eligibility to become a participant in the plan, the term "employee" for any plan year means any individual who is treated and/or classified by the employer for such plan year as an employee for purposes of employment taxes and wage withholding for Federal income tax. Except as specifically provided in subparagraph 2.8(c), individuals who perform services for an employer as independent contractors, leased employees, or through agencies are not employees of the employer and therefore are not eligible for benefits under this plan. If an individual is not considered to be an employee of an employer for purposes of employment taxes and wage withholding, a subsequent determination by the employer, any governmental agency or court that the individual is a common law employee of the employer, even if such determination is applicable to prior years, will not have a retroactive effect for purposes of eligibility to participate in the plan for any plan year. A temporary employee is an employee who is classified as such by the employer and is employed usually for less than 90 days with a specified date beyond which employment will not continue; interns (i.e. students who are employed during -6- summer and other vacations) and co-op students (i.e. students who receive school credit for employment with the employer) are considered temporary employees. 2.2 ELIGIBILITY Subject to the conditions and limitations of the plan, each employee of an employer who is a participant in the plan immediately before the restatement effective date will continue as such on and after that date so long as the employee remains a covered employee. Each other employee of an employer will be eligible to become enrolled in the plan and become a participant on any eligibility date occurring on or after that date if the employee then is a covered employee. 2.3 NOTICE OF ELIGIBILITY, ENROLLMENT Each employee will be notified of the date the employee is eligible to become enrolled in the plan and become a participant and will be furnished with appropriate enrollment materials pursuant to procedures established by the committee in regard to enrollment. An eligible employee will be deemed to have elected to make the contributions described in subsection 2.5 unless the employee elects not to become a participant in accordance with such procedures. By becoming enrolled in the plan, the participant authorizes the employer to deduct from the compensation otherwise payable to the employee by such employer the contributions the employee is required to make under subsection 2.5 in order to become a participant in the plan. 2.4 LEAVE OF ABSENCE A "leave of absence" as used in the plan means: (a) A leave of absence required by law or granted by a USG Company on account of service in military or governmental branches described in any applicable statute granting reemployment rights to employees who entered such branches, or any other military or governmental branch designated by the company. (b) Any other absence from active employment with a USG Company under conditions which are not treated by it as a termination of employment. A participant shall be considered on a paid leave of absence for the period over which the participant receives payment from an employer as a "continuing employee" in accordance with the terms of a -7- written employment or other agreement between the participant and the employer. Leaves of absence granted by a USG Company will be governed by rules uniformly applied to all employees similarly situated. An employee on a leave of absence will be considered an employee of an employer for all purposes of the plan, and a participant on a paid leave of absence will continue to be eligible to participate in the plan. 2.5 PARTICIPANT CONTRIBUTIONS Prior to January 1, 1999, an employee elected to enroll in the plan by affirmatively electing to make contributions to the plan through payroll deduction in such amount as provided in the plan as amended from time to time. Effective January 1, 1999, an employee who is eligible to participate in the plan under subsection 2.2 shall be deemed to have elected to make contributions to the plan by payroll deduction in an amount equal to 2 percent of the employee's earnings unless the employee affirmatively elects not to make such contributions, any such election to be made at such time and in such manner as the committee may determine. A participant's earnings shall be subject to the limitation imposed by Section 401(a)(17) of the Internal Revenue Code for the purpose of determining the amount of the participant's contributions, as well as for other purposes, as described in subsection 8.5. However, if a participant should discontinue making contributions, the period of discontinuance shall not be included in the participant's number of years of credited service and benefit service (as defined in subsections 4.2 and 4.3). If a participant discontinues making contributions under the plan, at any time thereafter the participant may elect to resume making contributions (provided the participant is a covered employee) by electing, in such form and at such time as the committee may determine to authorize the employer to deduct contributions from the participant's earnings. The committee shall maintain a separate account under the plan in the name of each participant ("separate account") pursuant to Section 414(k) of the Internal Revenue Code and all participant contributions for periods commencing on or after January 1, 1999 shall be credited to participant separate accounts as provided in subsection 2.6, (along with any such contributions made for the period commencing January 1, 1991 and ending December 31, 1998). 2.6 SEPARATE ACCOUNTS Pursuant to Section 414(k) of the Internal Revenue Code, the committee shall maintain separate accounts in the name of each participant, and the following shall apply: -8- (a) No participant contributions may be made to the plan other than participant contributions in amounts determined under subsection 2.5 that are allocated and credited to participants' separate accounts. Such contributions shall be invested in one or more investment funds (the "investment funds") maintained within the trust funds that are selected by the committee, as provided in the trust agreement. Participant contributions made and credited to their separate accounts shall be subject to the nondiscrimination requirements of Section 401(m) of the Internal Revenue Code, as described in subsections 8.12 and 8.13. Prior to January 1, 1991, participants made contributions to the plan but such contributions were not allocated to separate accounts in the participant's name; participant contributions for periods on or after January 1, 1991 have been or will be allocated to the separate accounts described in this subsection. (b) At the end of each plan year participants' separate accounts shall be adjusted to reflect actual investment gains or losses and unrealized appreciation or depreciation in the value of the assets of the investment funds; provided, however, that the separate account of a participant whose retirement date or employment termination date occurs during a plan year shall be adjusted as of the end of the calendar month in which the participant's retirement or employment termination occurs to reflect the account's pro rata share of investment experience of the investment funds since the end of the next preceding plan year. (c) A participant always shall have a fully vested and nonforfeitable interest in the participant's separate account as adjusted from time to time as described in subparagraph (b) next above and in the participant's monthly separate account benefit in the event the participant's separate account balance is converted into such a benefit. (d) If upon a participant's retirement date or employment termination date the participant becomes entitled to a monthly retirement income or a deferred vested benefit in addition to a monthly benefit provided by the balance in the participant's separate account, the amount of such monthly retirement income or deferred vested benefit shall be -9- determined in accordance with the applicable provisions of Section 5 or Section 6, but with the resulting amount reduced on an actuarially equivalent basis by the amount of monthly benefit that could be provided with the participant's separate account balance. Unless within the 90-day period next following the participant's retirement date or employment termination date the participant is eligible to and elects that the participant's separate account balance be distributed in a lump sum pursuant to subsection 5.5 or 6.3, or unless the participant's entire plan benefits are to be distributed either pursuant to the participant's election, if eligible therefor, of the lump sum option provided under subparagraph 7.4(d) or because of the provisions of subsection 7.9, the participant's separate account balance shall be converted to a monthly separate account benefit which shall be combined with the monthly retirement income or deferred vested benefits the participant is entitled to receive under the plan and distributed pursuant to the provisions of Section 7. (e) If a participant's employment with the USG Companies terminates for a reason other than retirement under the plan or death, and prior to completion of five years of credited service, then, subject to the consent requirements set forth in subparagraph 7.8(a), the balance in the participant's separate account as adjusted as of the end of the calendar month in which the participant's employment termination occurred shall be distributed to the participant in a lump sum as provided in subsection 6.4 along with benefits attributable to the participant's pre-1991 participant contributions. (f) If a participant's death occurs during employment, death benefits attributable to the participant's separate account as well as the participant's pre-1991 participant contributions shall be payable as provided in subsection 6.5. (g) The entire benefits a participant becomes entitled to under the plan, including the accrued benefits derived from the participant's separate account (as defined in subparagraph 7.10(d)), shall be subject to the provisions of Section 7 relating to the normal and optional forms of benefit payments, including qualified joint and survivor annuity requirements. -10- 2.7 U.S. FOREIGN SERVICE EMPLOYEE It is intended that a U.S. foreign service employee (as defined below) may become eligible to become a participant in the plan and share in the benefits provided under the plan to the same extent as if the employee were employed by the company. A "U.S. foreign service employee" means a person who is a citizen of the United States and is employed: (a) By a subsidiary incorporated outside the United States that qualifies as a "foreign affiliate", as defined in Section 406 of the Internal Revenue Code, and as to which the company has entered into an agreement under Section 3121(1) of the Internal Revenue Code; or (b) By a subsidiary that qualifies as a "domestic subsidiary" of an employer that qualifies as a "domestic parent corporation", both as defined in Section 407 of the Internal Revenue Code, and for whom contributions under a funded plan of deferred compensation (whether or not a plan described in Section 401(a) or 403(a) of the Internal Revenue Code) are not provided by any other person with respect to remuneration paid to such individual by that foreign affiliate or domestic subsidiary. 2.8 LEASED EMPLOYEES Leased employees shall be treated under the plan as follows: (a) Leased employees shall be considered employees of the USG Companies for purposes of determining whether the plan satisfies the requirements for plan qualification set forth in Section 414(n)(3) of the Internal Revenue Code. In making this determination, contributions and benefits provided by the leasing organization that are attributable to services performed for the USG Companies shall be treated as provided by the USG Companies. (b) If leased employees do not constitute more than 20 percent of the USG Companies' nonhighly compensated workforce, subparagraph (a) next above shall not apply to a leased employee who is covered by a plan described in Section 414(n)(5)(B) of the Internal Revenue Code. -11- (c) Leased employees shall be eligible to participate in this plan only if and to the extent necessary to satisfy the applicable requirements set forth in Section 414(n)(3) of the Internal Revenue Code. With respect to any leased employee (including a leased employee who becomes a participant in this plan through operation of this subsection 2.9 or otherwise), the requirements of Section 414(n)(4)(B) of the Internal Revenue Code relating to "years of service" shall be taken into account for purposes of subsection 9.3. (d) A "leased employee" means any person who is not otherwise an employee of a USG Company and who, pursuant to an agreement between USG Corporation and any other person, has performed services for USG Corporation, or for USG Corporation and related persons (determined in accordance with Section 414(n)(6) of the Internal Revenue Code), on a substantially full-time basis for a period of at least one year, and effective January 1, 1997 such services are performed under the primary direction or control of USG Corporation. -12- SECTION 3 RETIREMENT DATES, EMPLOYMENT TERMINATION DATE 3.1 NORMAL RETIREMENT DATE A participant's "normal retirement date" will be the first day of the calendar month next following the calendar month in which the participant attains age 65 years ("normal retirement age"). 3.2 DEFERRED RETIREMENT DATE A participant's "deferred retirement date" will be the first day of the calendar month next following the calendar month in which the participant retires or is retired from the employ of the USG Companies after the participant's normal retirement date. 3.3 EARLY RETIREMENT DATE A participant's "early retirement date" will be the first day of the calendar month next following the calendar month in which the participant retires or is retired from the employ of the USG Companies before the participant attains normal retirement age but after the participant has: (a) both attained age 55 years and completed ten years of credited service; or (b) both attained age 50 years and completed fifteen years of credited service. 3.4 DISABILITY RETIREMENT DATE A participant's "disability retirement date" will be the first day of the calendar month next following the calendar month in which the participant is retired from the employ of the USG Companies before the participant's normal retirement date because of total and permanent disability (as described in subsection 5.7), but after the participant has completed ten years of credited service. -13- 3.5 RETIREMENT DATE Reference to the "retirement date" of a participant who retires or is retired under the plan means the participant's normal retirement date if the participant's retirement date occurs on that date, but otherwise means the participant's deferred retirement date, early retirement date or disability retirement date, whichever applies in the participant's case. 3.6 EMPLOYMENT TERMINATION DATE A participant's "employment termination date" will be the date on which the participant's employment with the USG Companies terminates before the participant qualifies for retirement on a retirement date. 3.7 RETIREMENT OR TERMINATION WHILE ON LEAVE OF ABSENCE A participant otherwise eligible to retire or terminate employment and become entitled to retirement income or deferred vested benefits under the plan may do so without returning to active employment with the USG Companies if the participant is absent from work because of a leave of absence (as defined in subsection 2.4). -14- SECTION 4 BASES OF RETIREMENT INCOME AND OTHER BENEFITS 4.1 GENERAL A participant's eligibility for benefits under the plan will be based on the participant's credited service, as well as the participant's age, and the amount of the benefits payable to a participant will be based on the participant's age and on the participant's benefit service, final average earnings and primary social security benefit, as defined in, or determined in accordance with, the following provisions of this Section 4. To the extent the records of the USG Companies are not sufficient to provide all required data and information in making such determinations, reasonable estimates shall be used. 4.2 CREDITED SERVICE Subject to the provisions of subsections 2.2 and 4.4, and Section 9, a participant's "credited service" means the total of the period or periods of credited service granted to the participant in accordance with the following: (a) Pre-1976 Service. The participant shall be granted credited service attributable to the participant's last continuous period of employment with the USG Companies, if any, up to January 1, 1976, as determined in accordance with the provisions of the plan as in effect prior to that date. (b) Post-1976 Service. (i) If the participant had joined the plan before January 1, 1976 the participant shall be granted a month of credited service for each calendar month beginning on or after that date in which the participant is a participant in the plan and makes the contributions required of the participant under subsection 2.5. (ii) If the participant joins the plan on or after January 1, 1976 and on the first eligibility date the participant is eligible to do so: (A) The participant shall be granted a year of credited service for -15- each plan year beginning on or after January 1, 1976 in which the participant has been employed by one or more of the USG Companies for at least 90 days, and a month of credited service for each calendar month within each plan year beginning on or after January 1, 1985 in which the participant works for the USG Companies less than 90 days, provided each such plan year occurs prior to the plan year in which the participant becomes a participant; and (B) The participant shall be granted a month of credited service for each calendar month in which the participant is a participant in the plan and makes the contributions required of the participant under subsection 2.5 and, if the eligibility date on which the participant was first eligible to join and on which the participant joined the plan occurred on July 1, the participant will be granted a month of credited service for each calendar month occurring during the six month period ending immediately before that eligibility date. (iii) If the participant joins the plan after January 1, 1976 and after the first eligibility date the participant is eligible to do so: (A) The participant shall be granted a year of credited service for each plan year beginning on or -16- after January 1, 1976 in which the participant has been employed by one or more of the USG Companies for at least 90 days, and a month of credited service for each calendar month within each plan year beginning on or after January 1, 1985 in which the participant works for the USG Companies less than 90 days, provided each such plan year occurs prior to the plan year in which the participant is first eligible to join the plan; and (B) The participant shall be granted a month of credited service for each calendar month occurring prior to the first eligibility date on which the participant could have joined the plan but in the plan year in which that date occurs and a month of credited service for each subsequent calendar month in which the participant is a participant in the plan and makes the contributions required of the participant under subsection 2.5, but the period beginning on the first eligibility date on which the participant could have joined the plan and ending immediately before the eligibility date on which the participant did join the plan shall not be considered as credited service. -17- 4.3 BENEFIT SERVICE Subject to the provisions of subsections 2.2, 4.4, and Section 9, a participant's "benefit service" means the total of the period or periods of benefit service granted to the participant in accordance with the following: (a) Pre-1976 Service. The participant, if eligible therefor pursuant to subsection 4.4, shall be granted benefit service equal to the period of credited service granted to the participant, if any, under subparagraph 4.2(a) based upon the participant's last continuous period of employment with the USG Companies up to January 1, 1976; except that the participant shall not be granted benefit service for any portion of such credited service which extends beyond the participant's normal retirement date. (b) Post-1976 Service. (i) If the participant had joined the plan before January 1, 1976 the participant shall be granted a month of benefit service for each calendar month beginning on or after that date in which the participant is a participant in the plan and makes the contributions required of the participant under subsection 2.5. (ii) If the participant joins the plan on or after January 1, 1976 and on the first eligibility date the participant is eligible to do so, the participant shall be granted a month of benefit service for each calendar month beginning on or after January 1, 1976 in which the participant is employed by one or more of the USG Companies as a covered employee and which ends prior to the date the participant became a participant, unless the committee determines otherwise or unless the participant is granted additional benefit service based on employment with a predecessor company pursuant to subparagraph 4.4(d), and the participant also will be granted a month of benefit service for each calendar month in which the participant is a participant in the -18- plan and makes the contributions required of the participant under subsection 2.5. (iii) If the participant joins the plan after January 1, 1976 and after the first eligibility date the participant is eligible to do so, the participant shall be granted a month of benefit service for each calendar month in which the participant is a participant in the plan and makes the contributions required of the participant under subsection 2.5, but any period of service beginning after January 1, 1976 and ending prior to the eligibility date on which the participant joined the plan shall not be considered as benefit service. 4.4 SPECIAL RULES AS TO CREDITED SERVICE AND BENEFIT SERVICE (a) The period a participant is on an unpaid leave of absence described in subsection 2.4 shall be disregarded in determining the participant's credited service and benefit service for purposes of the plan except that the portion of a leave of absence described in subparagraph 2.4(a) due to active military service not in excess of five years shall be considered as credited service and benefit service for all purposes of the plan if: (i) In the case of a leave of absence that ended on or prior to December 4, 1994, the leave satisfied the requirements of the Plan as in effect on the date such leave ended. (ii) In the case of any such leave that ends on or after December 4, 1994, credited service and benefit service shall be granted in accordance with Section 414(u) of the Internal Revenue Code, provided within a period of time not in excess of three times the period of military service (but not in excess of five years), the participant contributes to the plan an amount equal to the contributions the participant would have been required to make had the participant -19- not been on such leave of absence (assuming that the participant received compensation during the entire period of such leave of absence at the same level or rate of the participant's compensation immediately prior to the commencement of such leave). (b) If a participant in another pension plan maintained by an employer or by a USG Company that has not adopted this plan is transferred to a group of employees of an employer to which this plan has been extended, if the committee determines that the provisions of this subparagraph (b) apply with respect to such transfer, and if the participant enrolls in the plan and becomes a participant when first eligible to do so and makes all contributions required of the participant under this plan prior to the participant's retirement date or employment termination date, then, in addition to the credited service and benefit service the participant is granted under this plan as a result of the participant's employment with the USG Companies, the participant shall be granted credited service and benefit service for purposes of the plan equal to the service the participant had been granted under such other pension plan for the same purposes, but any benefits the participant is entitled to receive under this plan shall be offset by any benefits the participant is entitled to receive under such other pension plan to the extent provided in subsection 8.10 of this plan. (c) A period of concurrent employment with two or more employers will be considered as employment with only one employer during that period. (d) Unless otherwise provided in the plan, or unless otherwise specified by the committee or required by law: (i) an employee's service with a predecessor company will not be considered as service with a USG Company if the employee is transferred to employment with a USG Company; and (ii) if a predecessor company becomes a subsidiary of the company, service with the predecessor -20- company before it becomes a subsidiary will not be considered as service with a USG Company. For the purpose of determining a participant's eligibility to receive a retirement income or deferred vested benefit, or for the purpose of computing the amount of a participant's retirement income or deferred vested benefit, the participant's "number of years of credited service" or "number of years of benefit service" means the total of the participant's years and months of such service determined in accordance with the foregoing provisions of this subsection for that purpose. 4.5 EARNINGS Subject to the annual compensation limit (as defined in subsection 8.5), a participant's "earnings" means the total compensation payable to the participant for services rendered to the employers as an employee that is subject to withholding for United States federal income tax purposes (before taking into account any withholding exemptions), or would be subject to such withholding if the participant were employed by a United States employer, and also means the participant's before-tax contributions made under USG Corporation Investment Plan and before-tax contributions, if any, made under an employer's cafeteria plan described in Section 125 of the Internal Revenue Code, and any qualified transportation fringe payable by an employer that is not includible in income by reason of Section 132 (f)(4) of the Internal Revenue Code, exclusive of: (a) any compensation paid in a form other than cash (except that awards granted in the form of travel paid for by the company shall be included), or paid for a period the participant either has discontinued contributions the participant otherwise is required to make or has ceased to be a covered employee, and any compensation paid, or deemed to have been paid for tax purposes, under a nonqualified deferred compensation plan or program that had been earned but deferred in the current or a prior taxable year; (b) any transfer or relocation bonus; (c) any amounts paid to the participant pursuant to a Termination Compensation Agreement and any other severance payments made as a result of the participant's termination of employment; -21- (d) any income realized as a result of the exercise of an option or options to acquire employer stock, the receipt of a cash appreciation payment in lieu of the exercise of such an option or options, the disposition of stock acquired as a result of the exercise of such an option or options, or the transfer of restricted employer stock or property; and (e) any SELECTBENEFITS credits realized as a result of the exchange of vacation time or medical plan coverage for compensation under USG SelectBenefits. Compensation paid to a participant by a USG Company or a predecessor company for a period of service before the participant became a participant that is designated as benefit service pursuant to subparagraph 4.4(b) or (d) shall be considered as compensation paid by the employers in determining the participant's "earnings". Except as otherwise provided in the next preceding sentence, any compensation paid to an employee or participant by a USG Company that is not an employer under the plan or by a predecessor company (or that would have been paid but for the employee's or participant's salary reduction authorization in effect under a defined contribution plan or cafeteria plan by any such corporation) shall not be considered as "earnings" for purposes of the plan. Any lump sum payment payable to a participant as a "hiring bonus" or cash incentive to become employed by a USG Company (even if such payment is contingent on the participant remaining employed by a USG Company for a specified period of time) shall be considered earnings for purposes of the plan. 4.6 FINAL AVERAGE EARNINGS The "final average earnings" of a participant means the monthly average of the earnings paid to the participant (or, because of a salary reduction authorization, deemed to have been paid) during the period of 36 consecutive calendar months in which the participant received the participant's highest earnings within the period of 180 consecutive calendar months ending with the calendar month next preceding the calendar month in which the participant's employment with all of the USG Companies terminates by retirement or otherwise. Such average shall be computed by dividing the total of the participant's earnings for such period of 36 consecutive calendar months by 36, or by the number of calendar months within that period for which the participant received earnings, if less than 36. A participant's earnings shall be subject to the annual compensation limit in determining the amount of the participant's final average earnings, as described in subsection 8.5. -22- 4.7 PRIMARY SOCIAL SECURITY BENEFIT The term "primary social security benefit" means: (a) With respect to a participant who retires: (i) on a normal retirement date or who retires on a deferred retirement date but did not accrue any benefits after the participant's normal retirement date, the Primary Insurance Amount payable to the participant under the Social Security Act as in effect as of the date the participant attains normal retirement age; or (ii) on a deferred retirement date and had accrued benefits after the participant's normal retirement date, the Primary Insurance Amount payable to the participant under the Social Security Act as in effect as of the participant's deferred retirement date. (b) With respect to a participant who retires on an early retirement date, or becomes entitled to receive a deferred vested benefit under Section 6, the Primary Insurance Amount payable to the participant at the participant's normal retirement date under the Social Security Act as in effect on the date the participant's employment with all of the USG Companies terminates because of retirement or otherwise, based upon the assumptions that (i) the participant's annual compensation in the calendar years prior to the year of the participant's retirement or earlier termination of employment (annualized, where the participant worked for less than a full year) had increased at the same rate as the actual change in average national wages as determined by the Social Security Administration, (ii) the participant would have continued in covered employment for purposes of the Act until the participant would have attained normal retirement age under the Act, and (iii) the participant would have continued to receive earnings from a USG Company until the participant attained normal retirement age at a rate equal to the rate in effect immediately prior to the participant's early retirement date or employment termination date, but multiplied by a fraction, the numerator of which is the participant's years of -23- benefit service at the participant's retirement or earlier termination of employment and the denominator of which is the years of benefit service the participant would have had in the event the participant had continued in the employ of the USG Companies until the participant's normal retirement date. Notwithstanding the foregoing, within a reasonable period of time following the participant's early retirement date or employment termination date and the time the participant is notified of the benefit to which the participant is entitled under the plan, a participant may provide the committee with a record prepared by the Social Security Administration of the participant's covered compensation for prior years, which record of prior compensation will be used in determining the participant's estimated Primary Insurance Amount payable to the participant at the participant's normal retirement date. (c) With respect to a participant who is retired on a disability retirement date, the Disability Insurance Benefit payable to the participant at or after the participant's disability retirement date under the Social Security Act as in effect on that date. The applicable portion of a participant's primary social security benefit will be deducted in accordance with the provisions of Section 5 or 6, as the case may be, in determining the amount of benefits payable to the participant under the plan even though the participant may not be receiving or may not be eligible to receive social security benefits because of failure to apply for them, entry into covered or restricted employment, or otherwise. 4.8 MONTHLY SEPARATE ACCOUNT BENEFIT For purposes of the plan, a participant's "monthly separate account benefit" means the amount of monthly benefit that could be provided to the participant for life commencing on the participant's normal retirement date (or on the participant's deferred retirement date if the participant's normal retirement date has occurred) with the balance in the participant's separate account as adjusted as described in subparagraph 2.6(b) as at the end of the calendar month in which the participant's retirement or other termination of employment occurs, determined on the basis of the actuarial factors and assumptions set forth in paragraphs A-4 and A-6 of Exhibit A. -24- 4.9 DETERMINATION OF BASES OF BENEFITS A participant's credited service, benefit service, final average earnings, primary social security benefit and any other factors relating to benefits payable to the participant under the plan shall be determined by the committee pursuant to the foregoing provisions of this Section 4 on the basis of the employers' records and on the basis of reasonable estimates where such records are not sufficient to provide all required data and information. -25- SECTION 5 AMOUNT OF RETIREMENT INCOME 5.1 NORMAL RETIREMENT Subject to the conditions and limitations of the plan, if on or after the restatement effective date, a participant retires during the calendar month in which the participant attains normal retirement age, the participant will be entitled to a monthly retirement income for life commencing on the participant's normal retirement date in an amount equal to the greater of: (a) 1 percent of the participant's final average earnings multiplied by the participant's number of years of benefit service; or (b) 1.6 percent of the participant's final average earnings multiplied by the participant's number of years of benefit service, reduced by an amount equal to 50 percent of the participant's primary social security benefit, but reduced by the participant's monthly separate account benefit, and the participant also shall be entitled to a monthly benefit for life commencing on the participant's normal retirement date equal to the participant's monthly separate account benefit. 5.2 DEFERRED RETIREMENT Subject to the conditions and limitations of the plan, if a participant retires after the calendar month in which the participant attains normal retirement age the participant will be entitled to the participant's monthly separate account benefit plus a monthly retirement income for life commencing on the participant's deferred retirement date, determined as follows: (a) If the participant did not make participant contributions after the participant's normal retirement date pursuant to subsection 2.5, the participant's monthly retirement income will equal the monthly amount that would have been payable in accordance with subsection 5.1 if the participant had retired during the calendar month in which the participant attained normal retirement age, but the portion of the participant's monthly retirement income equal to the accrued benefits derived from the participant's pre-1991 contributions -26- (as defined in subparagraph 7.10(c)) shall be increased on an actuarially equivalent basis to reflect the commencement of the participant's monthly retirement income on the participant's deferred retirement date rather than on the participant's normal retirement date, determined on the basis of the actuarial factors and assumptions set forth in paragraphs A-5 and A-6 of Exhibit A. (b) If the participant made participant contributions after the participant's normal retirement date pursuant to subsection 2.5, the participant's monthly retirement income will be determined in accordance with subsection 5.1 but based on the participant's final average earnings, number of years of benefit service, primary social security benefit, and monthly separate account benefit as at the participant's deferred retirement date. (c) If during any calendar month within the period beginning on the participant's normal retirement date and ending immediately prior to the participant's deferred retirement date the participant received compensation from the employers for hours of service (as defined in United States Department of Labor Regulations 2530.200(b)-2(a)(1) and (2)) performed in fewer than eight days or separate work shifts, the portion of the participant's monthly retirement income equal to the accrued benefits derived from employer contributions (as defined in subparagraph 7.10(e)) shall be increased on an actuarially equivalent basis to reflect such calendar month as required by United States Department of Labor Regulation 2530.203-3, but, if subparagraph (b) next above applies to the participant, only to the extent such increased amount would exceed the monthly benefit the participant accrues for the same calendar month. 5.3 EARLY RETIREMENT BENEFITS The provisions of this subsection and of subsections 5.4 and 5.5 and any other provisions of the plan relating to the payment of early retirement benefits shall not apply to participants who terminate employment with the USG Companies after having completed ten or more years of credited service but before their early retirement date (as defined in subsection 3.3) nor to participants who are retired because of total and permanent disability after having completed ten or more years of credited service, -27- irrespective of their age. Subject to the conditions and limitations of the plan, if a participant retires or is retired on an early retirement date the participant will be entitled to a monthly retirement income for life commencing on the participant's normal retirement date plus the participant's monthly separate account benefit. The amount of the participant's monthly retirement income shall be in an amount equal to the participant's accrued monthly benefit (as defined in subsection 5.9) as at the participant's early retirement date. 5.4 ELECTION OF EARLY COMMENCEMENT OF EARLY RETIREMENT BENEFITS Subject to the conditions and limitations of the plan, a participant who because of the participant's retirement on an early retirement date is entitled to the participant's monthly separate account benefit and a monthly retirement income under subsection 5.3 commencing on the participant's normal retirement date may elect to receive in lieu thereof a reduced monthly separate account benefit and reduced monthly retirement income commencing on the participant's early retirement date or on the first day of any subsequent calendar month that occurs before the participant's normal retirement date by filing a written election with the committee prior to the date on which payment of such benefits is to commence. If such a participant elects early commencement of the participant's monthly separate account benefit and monthly retirement income, the amount of monthly separate account benefit and monthly retirement income that otherwise would have been payable to the participant at the participant's normal retirement date but for the participant's election shall be reduced by 5/12 of 1 percent for each full calendar month that the commencement date of such monthly separate account benefit and monthly retirement income precedes the participant's normal retirement date, except that: (a) If the participant had attained age 62 years and the participant's attained age and number of years of benefit service at the participant's early retirement date equaled 82 or more but less than 90, the reduction shall be at the rate of 1/4 of 1 percent rather than 5/12 of 1 percent. (b) If the participant had attained age 62 years and the participant's attained age and number of years of benefit service at the participant's early retirement date equaled 90 or more, there shall be no reduction. (c) If the participant had not attained age 62 years but the participant's attained age and number of years of benefit service at the participant's early retirement date equaled 90 or more, the reduction shall be the percentage set forth below -28- which corresponds to the age the participant had attained on the participant's early retirement date, but adjusted on a pro rata basis to reflect the fractional period, if any, in excess of the full years of the participant's attained age at the participant's early retirement date:
Age Percentage --- ---------- 61 3% 60 6% 59 9% 58 12% 57 15% 56 18% 55 21%
5.5 LUMP SUM PAYMENT OF EARLY RETIREMENT BENEFITS DERIVED FROM PARTICIPANTS' CONTRIBUTIONS Subject to the consent requirements set forth in subparagraph 7.8(a), a participant who retires or is retired on an early retirement date may file a written election with the committee within the 90-day period next following the participant's early retirement date for a lump sum payment equal to the participant's pre-1991 participant contributions with interest thereon computed in accordance with paragraph A-2 of Exhibit A up to the date such lump sum payment is made plus an amount equal to the participant's separate account balance as adjusted as of the end of the calendar month immediately prior to the date such lump sum payment is made. Such lump sum payment shall be made to the participant as soon as practicable thereafter; provided, however, that: (a) If the lump sum actuarially equivalent value of the participant's accrued benefits derived from employer contributions does not exceed $5,000 (but subject to the consent requirements set forth in subparagraph 7.8(a) if the lump sum actuarially equivalent value of the participant's total accrued benefits exceeds $5,000), the lump sum payment will be an amount equal to the lump sum actuarially equivalent value of the participant's total accrued benefits. Unless the participant subsequently is reemployed by an employer and again becomes an active participant and makes the required contributions, no other benefits shall be payable under the plan to, or with respect to, the participant. -29- (b) If the lump sum actuarially equivalent value of the participant's total accrued benefits is not paid to the participant pursuant to subparagraph (a) next above, the monthly retirement income otherwise payable to the participant commencing at the participant's normal retirement date (or any earlier date permitted above) shall be based on the participant's total accrued benefits reduced on an actuarially equivalent basis to reflect the lump sum payment made under this subsection, unless the participant subsequently is reemployed by an employer and again becomes an active participant and makes required contributions. 5.6 DISABILITY RETIREMENT The provisions of this subsection and subsections 5.7 and 5.8, and any other provisions of the plan, relating to the payment of disability benefits shall not apply to a participant who terminates employment with the USG Companies for a reason other than retirement under the plan (including retirement because of total and permanent disability) and for a reason other than the participant's death but after having completed ten or more years of credited service, irrespective of whether the participant may later become totally and permanently disabled. Subject to the conditions and limitations of the plan, if a participant is retired on a disability retirement date because of total and permanent disability, then, commencing on the participant's disability retirement date, the participant will be entitled to a monthly retirement income equal to the participant's accrued monthly benefit (as defined in subsection 5.9) plus an amount that is actuarially equivalent as at that date to the participant's monthly separate account benefit. However, the portion of the participant's monthly retirement income derived from employer contributions shall be reduced by any benefits payable from time to time under Workers Compensation or Occupational Disease laws for which the participant's employer is liable (except fixed statutory payments for the loss of, or 100 percent loss of use of, any bodily member). The offset required under subsection 5.1 with respect to a participant's primary social security benefit shall assume the participant is entitled to receive primary disability insurance benefits under the Social Security Act. Any lump sum payment on account of Workers' Compensation or Occupational Disease laws that is deductible pursuant to this subsection shall be prorated on a monthly basis from the date of payment and no monthly retirement income shall be due under the plan until such lump sum (as prorated) is exhausted. -30- 5.7 TOTAL AND PERMANENT DISABILITY A participant will be considered to be totally and permanently disabled for the purposes of the plan if the participant is unable to engage in any substantially gainful activity by reason of a medically determinable physical or mental disability which has existed for six continuous months and which can be reasonably expected to continue for at least 60 additional months or result in death, exclusive of disability resulting from service in the armed forces of any country or resulting from an intentional self-inflicted injury, or participation in a felonious criminal act. The committee shall have the responsibility for determining whether a participant has incurred a total and permanent disability and, before approving payment of any disability retirement income, may require reasonable proof of such disability. 5.8 CONDITIONS AS TO PAYMENT OF DISABILITY BENEFITS For purposes of this subsection, reference to a participant's "disability retirement income" means the sum of the monthly retirement income the participant becomes entitled to receive under subsection 5.6 commencing on the participant's disability retirement date and an amount that as of that date is actuarially equivalent to the participant's monthly separate account benefit. A participant's disability retirement income will be payable to the participant pursuant to the applicable provisions of Section 7, subject to the following: (a) If prior to the participant's normal retirement date the committee determines that the participant no longer is totally and permanently disabled (applying the description of total and permanent disability set forth in subsection 5.7, but irrespective of the period that has elapsed since the participant first became totally and permanently disabled), or if the participant refuses to submit to a medical examination at any reasonable time prior to the participant's normal retirement date (but not more frequently than semiannually) for the purpose of verifying the continuance of the participant's disability, payment of the participant's disability retirement income shall cease and the participant shall be treated as if the participant had terminated employment with the USG Companies on the participant's disability retirement date for a reason other than retirement because of disability. However, no disability retirement income payments previously made to the participant shall be deducted from any deferred vested benefit payments or monthly retirement income payments to which the participant is entitled -31- thereafter; no lump sum payment shall be made to the participant pursuant to subsection 6.3; and, in applying the provisions of the plan relating to minimum benefits payable thereunder to a participant, the disability retirement income payments previously made to the participant shall be considered to have been deferred vested benefit payments or monthly retirement income payments. (b) If the participant's disability retirement income is not discontinued prior to the participant's normal retirement date pursuant to the provisions of subparagraph (a) next above, the participant shall continue to be entitled to the same disability retirement income on and after the participant's normal retirement date, subject to the provisions of Section 7. 5.9 ACCRUED MONTHLY BENEFIT For purposes of subsections 5.3, 5.6 and 6.1, a participant's "accrued monthly benefit" as at any date means an amount equal to the greater of: (a) 1 percent of the participant's final average earnings multiplied by the participant's number of years of benefit service; or (b) 1.6 percent of the participant's final average earnings multiplied by the participant's number of years of benefit service, reduced by an amount equal to 50 percent of the participant's primary social security benefit, but reduced by an amount that is actuarially equivalent to the participant's monthly separate account benefit. 5.10 INCREASED BENEFITS FOR CERTAIN RETIRED PARTICIPANTS Prior to the restatement effective date, the plan provided for an increase in benefits payable for certain retirees effective prior to the restatement effective date, and such increases shall continue after the restatement effective date to those eligible under the terms of the plan as in effect prior to such date. In addition, the monthly benefits otherwise payable under the plan for the month of January 1999 (or such later calendar month specified below), and for each subsequent calendar month, to the persons described below shall be increased by 10 percent; provided, however, that such monthly increase -32- shall not be less than thirty dollars nor more than fifty dollars. Such increase shall be made with respect to each participant who retired under the plan on or before January 1, 1988 on the participant's normal retirement date or on an early, disability or deferred retirement date and whose entire benefits were not distributed to the participant in a lump sum or, if such participant's death occurred before January 1, 1988, the person, if any, to whom survivor benefits are payable under the plan because of the participant's death; provided such increase shall only be paid to a person who immediately prior to the increase is receiving a payment from the plan of $500 or less. 5.11 BENEFIT COMMENCEMENT CONSENT REQUIREMENTS If the lump sum actuarially equivalent value of a participant's nonforfeitable accrued benefits is greater than $5,000, written consent of the participant and, if the participant has an eligible spouse at the time of the commencement of the distribution of such benefits, the participant's eligible spouse (or, if either the participant or the participant's eligible spouse has died, the survivor), may be required before the commencement of the distribution of any part of the participant's accrued benefits as described in subparagraph 7.8(a). -33- SECTION 6 TERMINATION BEFORE RETIREMENT, DEATH DURING EMPLOYMENT 6.1 MONTHLY DEFERRED VESTED BENEFIT Subject to the conditions and limitations of the plan, if a participant's employment with the USG Companies terminates for a reason other than retirement under the plan or the participant's death, but after the participant has completed five years of credited service, the participant shall be eligible to receive a monthly deferred vested benefit commencing at the participant's normal retirement date and continuing for the balance of the participant's life. The participant's monthly deferred vested benefit commencing at the participant's normal retirement date shall equal the sum of the participant's accrued monthly benefit (as defined in subsection 5.9) as at the participant's employment termination date and the participant's monthly separate account benefit as at that date. 6.2 ELECTION OF EARLY COMMENCEMENT OF DEFERRED VESTED BENEFITS Subject to the conditions and limitations of the plan, a participant who is entitled to a monthly deferred vested benefit under subsection 6.1 commencing on the participant's normal retirement date in addition to the participant's monthly separate account benefit may elect to receive, in lieu thereof, a reduced monthly deferred vested benefit and monthly separate account benefit commencing on the first day of the calendar month next following the month in which the participant attains age 50 years or on the first day of any calendar month thereafter that occurs prior to the participant's normal retirement date by filing a written election with the committee prior to the date on which payment of such benefits is to commence. If a participant elects early commencement of the participant's monthly deferred vested benefit and monthly separate account benefit, the total amount of such benefits otherwise payable to the participant at the participant's normal retirement date shall be reduced by 5/12 of 1 percent for each full calendar month that the commencement date of payment of such benefits precedes the participant's normal retirement date. 6.3 LUMP SUM PAYMENT OF DEFERRED VESTED BENEFITS DERIVED FROM PARTICIPANTS' CONTRIBUTIONS Subject to the consent requirements set forth in subparagraph 7.8(a), a participant who is entitled to monthly deferred vested benefits may elect by writing filed with the committee within the 90-day period next following the participant's employment -34- termination date to receive a lump sum payment equal to the participant's undistributed pre-1991 participant contributions with interest thereon computed in accordance with paragraph A-2 of Exhibit A up to the date such lump sum payment is made plus an amount equal to the participant's separate account balance as adjusted as at the end of the calendar month immediately prior to the date such lump sum payment is made. Such lump sum payment shall be made to the participant as soon as practicable thereafter; provided, however, that: (a) If the lump sum actuarially equivalent value of the participant's accrued benefits derived from employer contributions does not exceed $5,000 (but subject to the consent requirements set forth in subparagraph 7.8(a) if the lump sum actuarially equivalent value of the participant's total accrued benefits exceeds $5,000), the lump sum payment will be an amount equal to the lump sum actuarially equivalent value of the participant's total accrued benefits. Unless the participant subsequently is reemployed by an employer and again becomes an active participant and makes the required contributions, no other benefits shall be payable under the plan to, or with respect to, the participant. (b) If the lump sum actuarially equivalent value of the participant's total accrued benefits is not paid to the participant pursuant to subparagraph (a) next above, the monthly deferred vested benefit and monthly separate account benefit otherwise payable to the participant commencing at the participant's normal retirement date (or any earlier date permitted above) shall be based on the participant's total accrued benefits reduced on an actuarially equivalent basis to reflect the lump sum payment made under this subsection, unless the participant subsequently is reemployed by an employer, again becomes an active participant and makes the required contributions. 6.4 TERMINATION PRIOR TO FIVE YEARS OF CREDITED SERVICE If a participant's employment with the USG Companies terminates for a reason other than retirement under the plan or the participant's death, and prior to the participant's completion of five years of credited service, no benefits shall be payable to the participant under the plan attributable to the participant's employment with the employers except that as soon as practicable after the participant's employment termination date there shall be paid to the participant in a lump sum an amount equal to: -35- (a) The greater of: (i) the participant's undistributed pre-1991 participant contributions made under the plan with interest thereon computed up to the date such lump sum payment is made in accordance with paragraph A-3 of Exhibit A; or (ii) the lump sum actuarially equivalent value of the accrued benefits derived from the participant's pre-1991 participant contributions (as defined in subparagraph 7.10(c)); plus (b) The balance in the participant's separate account as adjusted as of the end of the calendar month in which the participant's employment termination occurred. 6.5 DEATH DURING EMPLOYMENT If a participant's death occurs prior to the participant's termination of employment with the USG Companies, the only benefits attributable to the participant's employment with the employers payable under the plan shall be those described below (but subject to the minimum death benefits provided for in subsection 8.9): (a) If at the time of the participant's death the participant had not attained normal retirement age and had completed less than five years of credited service (irrespective of whether the participant then had an eligible spouse), as soon as practicable after the participant's death a lump sum payment shall be made to the participant's beneficiary (as defined in subsection 7.11) equal to the sum of the participant's undistributed pre-1991 participant contributions with interest thereon as determined under paragraph A-3 of Exhibit A and the balance in the participant's separate account as adjusted as of the end of the calendar month in which the participant's death occurred. (b) If at the time of the participant's death the participant had not attained normal retirement age but was eligible to retire on an early retirement date or had completed five or more years of credited service, the participant's eligible spouse at the time of the participant's death, if any, shall be entitled to a pre- -36- retirement spouse's benefit in accordance with subsection 6.6. If such participant did not have an eligible spouse at the time of the participant's death, as soon as practicable thereafter a lump sum payment shall be made to the participant's beneficiary equal to the sum of the participant's undistributed pre-1991 participant contributions with interest thereon as determined under paragraph A-3 of Exhibit A and the balance in the participant's separate account as adjusted as of the end of the calendar month in which the participant's death occurred. (c) If at the time of the participant's death the participant had attained normal retirement age and had an eligible spouse, the participant's eligible spouse shall be entitled to a pre-retirement spouse's benefit in accordance with subsection 6.6. Notwithstanding the next preceding sentence, if the participant had elected the life and period certain option or the joint and survivor option under subsection 7.4, and that option was in effect at the time of the participant's death, benefits shall be payable under the option as if the participant's retirement date had occurred immediately prior to the participant's death; provided, however, that a portion of the benefit shall be paid to the surviving spouse sufficient to provide the pre-retirement's spouse's benefit in accordance with the last paragraph of subsection 7.3. (d) If at the time of the participant's death the participant had attained normal retirement age but did not have an eligible spouse, then, unless the participant had elected the life and period certain option or joint and survivor option under subsection 7.4 and the option was in effect at the time of the participant's death, as soon as practicable thereafter a lump sum payment shall be made to the participant's beneficiary equal to the sum of the participant's undistributed pre-1991 participant contributions with interest thereon as determined under paragraph A-3 of Exhibit A and the balance in the participant's separate account as adjusted as of the end of the calendar month in which the participant's death occurred. If the participant had elected either option, the benefits payable under the plan attributable to the participant's employment shall be paid under the option as if the participant's -37- retirement date had occurred immediately prior to the participant's death. 6.6 PRE-RETIREMENT SPOUSE'S BENEFIT If a participant's eligible spouse qualifies for a pre-retirement spouse's benefit as described in subparagraph 6.5(b) or (c), a monthly benefit shall be payable to the participant's eligible spouse for life in an amount equal to 50 percent of the sum of the monthly retirement income and monthly separate account benefit that would have been payable to the participant under subsection 5.1 as a life annuity if the participant had retired on the last day of the calendar month in which the participant's death occurred and died thereafter and if the participant had attained normal retirement age prior to the participant's retirement but with such sum determined on the basis of the participant's benefit service, final average earnings, primary social security benefit and separate account balance as at the end of the calendar month in which the participant's death occurs. The first payment to a participant's eligible spouse under this subsection shall be made as of the beginning of the calendar month next following the calendar month during which the participant's death occurs and the final payment shall be made as of the beginning of the calendar month during which the eligible spouse's death occurs. 6.7 BENEFIT COMMENCEMENT CONSENT REQUIREMENTS If the lump sum actuarially equivalent value of a participant's nonforfeitable accrued benefits is greater than $5,000, written consent of the participant and, if the participant has an eligible spouse at the time of the commencement of the distribution of such benefits, the participant's eligible spouse (or, if either the participant or the participant's eligible spouse has died, the survivor), may be required before the commencement of the distribution of any part of the participant's accrued benefits as described in subparagraph 7.8(a). -38- SECTION 7 PAYMENT OF RETIREMENT INCOME AND OTHER BENEFITS 7.1 BENEFIT COMMENCEMENT DATE, COMBINED BENEFIT REFERENCE For purposes of this Section 7, except where the context provides otherwise, reference to a participant's monthly retirement income or deferred vested benefit shall mean the monthly retirement income or deferred vested benefit the participant becomes entitled to plus the participant's monthly separate account benefit. A participant's "benefit commencement date" means the date on which payment of the participant's monthly retirement income or deferred vested benefit commences or the lump sum actuarially equivalent value of such monthly benefit is distributed to the participant. If a lump sum payment is made to a participant pursuant to subsection 5.5 or 6.3 equal to the sum of the participant's pre-1991 participant contributions and interest thereon and the participant's separate account balance before the participant receives or commences to receive additional benefits to which the participant is entitled under the plan, the participant's benefit commencement date will not be deemed to have occurred until the date the participant receives or commences to receive such additional benefits. 7.2 ELIGIBLE SPOUSE For purposes of the plan, the spouse of a participant will be considered as an "eligible spouse" as of any date only if at least six months prior thereto the participant and spouse were lawfully married under the laws of the state where the marriage was contracted and the marriage remains legally effective. 7.3 NORMAL FORM OF PAYMENT OF BENEFITS Except as otherwise specifically provided, payment of a participant's monthly retirement income or deferred vested benefits shall be made to the participant, and payment of monthly benefits shall be made to the participant's spouse, if eligible for such benefits, as follows: (a) Life Annuity. A participant whose retirement date or employment termination date has occurred shall receive payment of the participant's monthly retirement income or deferred vested benefit on a life annuity basis if the participant either is not eligible for a qualified joint and survivor annuity under subparagraph (b) next below and the participant's monthly benefit is not payable under a benefit -39- option described in subsection 7.4 or during the applicable election period the participant had elected not to receive payment in the form of a qualified joint and survivor annuity under subparagraph (b) next below (and the participant's eligible spouse, if any, had consented to such election). (b) Qualified Joint and Survivor Annuity. A participant whose retirement date or employment termination date has occurred and who has an eligible spouse immediately preceding the participant's benefit commencement date shall receive payment of the participant's monthly benefit in the form of a "qualified joint and survivor annuity" unless in lieu thereof and during the applicable election period (as defined in subsection 7.6) the participant had elected to receive payment either in the form of a life annuity under subparagraph (a) next above or under a benefit option described in subsection 7.4 that was in effect on the participant's benefit commencement date (and the participant's eligible spouse had consented to such election). Such qualified joint and survivor annuity, which shall be the actuarial equivalent of a single annuity for the life of the participant, shall consist of a reduced monthly benefit continuing during the participant's lifetime and, if the participant's eligible spouse is living at the time of the participant's death, payment of one-half of such reduced monthly benefit shall be made to the participant's eligible spouse until the spouse's death occurs. If a participant who otherwise is entitled to receive payment of the participant's monthly retirement income in the form of a life annuity or qualified joint and survivor annuity dies before the participant's benefit commencement date, or if a participant who has an hour of service or an hour of paid leave after August 22, 1984 and who otherwise is entitled to receive payment of the participant's deferred vested benefit in the form of a life annuity or a qualified joint and survivor annuity dies before the participant's benefit commencement date, the participant's eligible spouse shall be entitled to receive a monthly benefit for life equal to 50 percent of the amount of monthly benefit that would have been payable to the participant as a life annuity commencing on the later to occur of the participant's normal retirement date or the date of the participant's death if such date had been the participant's benefit commencement date. The first payment to the participant's eligible spouse shall be made as of the beginning of the calendar month next following the later to occur of the date of the participant's death or the date the participant would have attained age 55 years or, if the participant terminated employment on or after December 1, 1994, age 50 years -40- and the final payment shall be made as of the beginning of the calendar month during which the eligible spouse's death occurs. 7.4 BENEFIT OPTIONS In lieu of the normal forms and amounts of retirement income or deferred vested benefits specified in subsection 7.3, but subject to the provisions of subsection 7.5 (including rules as to benefit options established by the committee pursuant to that subsection), a participant may elect a retirement income or deferred vested benefit of actuarially equivalent value in one or more of the following forms: (a) Life and Period Certain Option. A smaller retirement income or deferred vested benefit terminating at the participant's death and, if the participant dies before the tenth anniversary of the participant's benefit commencement date, a continuing payment of the same amount to a person or persons designated by the participant for the balance of such ten-year period. (b) Joint and Survivor Option. A smaller retirement income or deferred vested benefit payable to the participant during the participant's lifetime and, if another person the participant had designated is living at the time of the participant's death, payment of the same amount or 75 percent or 50 percent of that amount to such other person as long as such other person lives; provided, however, that if the participant designates someone other than the participant's spouse, the lump sum actuarially equivalent value of the monthly retirement income or deferred vested benefit payable to the participant under the option over the participant's life expectancy shall be greater than 50 percent of the lump sum actuarially equivalent value of the monthly retirement income or deferred vested benefit that otherwise would be payable to the participant on a life annuity basis. (c) Level Payment Option. If a participant retires on an early retirement date and payment of the participant's monthly retirement income begins before the earlier of the date the participant is eligible to receive, or the date the participant commences receiving, Old Age Insurance Benefits under the Social Security Act, or if a participant terminates employment before retirement under the plan but after -41- becoming entitled to receive a monthly deferred vested benefit and payment of the participant's monthly deferred vested benefit begins before the participant commences receiving Old Age Insurance Benefits under the Social Security Act, a larger monthly retirement income or deferred vested benefit payable to the participant until the first to occur of the date of the participant's death or the earliest date on which the participant becomes eligible to apply for and receive Old Age Insurance Benefits under the Social Security Act (either reduced or unreduced, as specified in the election), and, where the full actuarial equivalent of the normal form and amount of the participant's retirement income or deferred vested benefit has not been provided under the option, with a continuance of a smaller amount of retirement income or deferred vested benefit after the latter date and until the participant's death. (d) Lump Sum Option. If a participant retires on the participant's normal retirement date, a deferred retirement date, or an early retirement date after having attained age 55 years, a lump sum payment as soon as practicable after the participant's retirement date of an amount equal to the lump sum actuarially equivalent value at the participant's retirement date of the monthly retirement income otherwise payable to the participant in accordance with the plan. 7.5 RULES AS TO ELECTION AND DISCONTINUANCE OF BENEFIT OPTIONS A participant's election of an optional form of retirement income or deferred vested benefit specified in subsection 7.4 shall be subject to the following: (a) A participant's election of a benefit option shall be subject to the provisions of the plan as in effect at the time of such election and its approval by the committee. A participant may elect a benefit option under subsection 7.4 at any time prior to the participant's retirement date or earlier termination of employment date. The election must be in writing and signed by the participant. If the participant has an eligible spouse, the written consent of the eligible spouse to the benefit option election must be provided to the extent required by the Retirement Equity Act of 1984, as it may be amended from time to time. -42- (b) If a participant is retired on a disability retirement date within twelve months of the date the participant elects the life and period certain option, joint and survivor option or level payment option under subsection 7.4, or if a participant who had elected the lump sum option under subsection 7.4 is retired on a disability retirement date or terminates employment and becomes entitled to a monthly deferred vested benefit, such option election then shall be automatically cancelled. (c) If payment of a participant's retirement income or deferred vested benefit otherwise would be required in the form of a qualified joint and survivor annuity, the participant's option election also must contain the participant's election that payment not be made in that form, and the participant's eligible spouse must consent to that election pursuant to subparagraph 7.7(c). (d) A participant who has elected a benefit option may revoke it at any time prior to the participant's retirement date or earlier termination of employment date by writing filed with the committee. A participant who has elected an option may change it at any time prior to the participant's retirement date or earlier retirement or termination of employment date. If and to the extent required by the Retirement Equity Act of 1984, as it may be amended from time to time, a revocation of a benefit option election made by a participant shall constitute a revocation of the participant's election that payment of the participant's benefits not be made in the form of a qualified joint and survivor annuity and a change in an option elected by a participant shall be treated as a new election of a benefit option by that participant for purposes of the spousal consent requirements described in subparagraph (a) next above. (e) Except as otherwise provided below, if a participant who had elected a benefit option under subsection 7.4 dies before the participant's retirement date or earlier termination of employment date, or if a participant who had elected a benefit option under subsection 7.4 dies after the participant's retirement date or earlier termination of employment date but before the participant's benefit commencement date, the -43- option elected automatically will be cancelled and no benefits will be paid to any person under the option. If the participant had elected the life and period certain or joint and survivor option under subsection 7.4 and had continued in the employ of the USG Companies after attaining normal retirement age, then survivorship benefits will be paid in accordance with the option elected in the same manner and amount as would have been payable if the participant had retired on the last day of the calendar month in which the participant's death occurred and died on that day immediately after the participant's retirement, except that if the participant had elected the life and period certain option all payments under the option shall be made within five years of the date of the participant's death; provided, however, that a portion of the benefit shall be paid to the surviving spouse sufficient to provide the pre-retirement spouse's benefit in accordance with the last paragraph of subsection 7.3. (f) If a participant elects the life and period certain option under subparagraph 7.4(a) and the person or persons designated by the participant under the option predecease the participant, the option shall remain in effect. Unless the participant designates another person or persons to receive any benefits payable under the option after the participant's death, such benefits shall be payable to the participant's beneficiary. If the participant wishes to designate another person or persons to receive any benefits payable under the option after the participant's death, such designation shall be treated as a new benefit option election for purposes of the spousal consent requirements described in subparagraph (a) next above. (g) If the participant elects the joint and survivor option under subparagraph 7.4(b) and the person the participant had designated to receive payment under the option after the participant's death dies before the participant's retirement date or earlier termination of employment date, the option elected automatically will be cancelled. The participant's retirement income or deferred vested benefit will be paid to the participant in the normal form and amount unless a new election can be and is made by the participant. -44- (h) If a participant does not have an eligible spouse when the participant elects a benefit option under subsection 7.4 but the participant does have an eligible spouse after such election but on or prior to the participant's benefit commencement date, the option automatically will be cancelled. Whether the participant again may elect a benefit option under subsection 7.4 shall be determined under the provisions thereof as well as the provisions of this subsection, and any such election shall be subject to the requirements described in subparagraph (c) next above that the participant elect that payment of the participant's benefits not be made in the form of a qualified joint and survivor annuity and, if the participant's benefit commencement date will occur after December 31, 1984, the participant's eligible spouse consent to such election, as well as the provisions of subparagraph (e) next above. 7.6 APPLICABLE ELECTION PERIOD The term "applicable election period" means, with respect to an election by a participant pursuant to subparagraph 7.3(b) to waive the qualified joint and survivor annuity, the 90-day period ending on the participant's benefit commencement date. 7.7 RELATING TO QUALIFIED JOINT AND SURVIVOR ANNUITY The foregoing provisions of the plan which relate to qualified joint and survivor annuities shall be subject to the following: (a) The committee will provide each participant with a general explanation of the qualified joint and survivor annuity form of payment, the circumstances under which it will be provided, and the availability of the election that distribution not be made in that form. The committee also will provide a general explanation of the relative financial effect upon the participant's plan benefits of an election that distribution not be made in the form of a qualified joint and survivor annuity, the right of the participant's eligible spouse to consent to such an election and the right of a participant to revoke (and the effect of a revocation) of such an election. -45- (b) Subject to such regulations as the Secretary of the Treasury issues for this purpose, the explanation described in subparagraph (a) next above as to the qualified joint and survivor annuity will be provided within a reasonable period of time before the participant's benefit commencement date. (c) An election out of the qualified joint and survivor annuity must be in writing and filed with the committee during the applicable election period. Such election will not be effective unless the participant's spouse consents to and acknowledges the effect of the election. Such consent and acknowledgment must be in writing, filed with the committee, and witnessed by the committee, an authorized representative of the committee or a notary public. Consent shall not be required if the committee establishes to its satisfaction that consent cannot be obtained because the spouse cannot be located, or because of such other reason as may be specified by regulations issued by the Secretary of the Treasury. (d) An election out of the qualified joint and survivor annuity may be revoked by a participant at any time prior to the participant's benefit commencement date by writing filed with the committee. Subsequent elections (and revocations) may be made by the participant in accordance with subparagraph (c) next above during the applicable election period. The committee may establish rules from time to time as to whether consents given by eligible spouses to participants' elections out of the qualified joint and survivor annuity may be revoked or shall be irrevocable, which rules shall meet the requirements of applicable law and shall be applied on a uniform and nondiscriminatory basis. 7.8 BENEFIT COMMENCEMENT REQUIREMENTS The distribution of benefits under the plan shall be subject to the following requirements: (a) Consent to the Commencement of Benefits Prior to Normal Retirement Age. Irrespective of the manner in which benefits are to be distributed under the plan to a participant or to the participant's eligible spouse, if the lump sum -46- actuarially equivalent value of the participant's accrued benefits exceeds $5,000: (i) Distributions to the participant may not be made or commence before the participant attains normal retirement age without the written consent of the participant and the participant's eligible spouse, if any. (ii) Distributions to the participant's eligible spouse may not be made or commence before the date the participant would have attained normal retirement age but for the participant's death without the written consent of the participant's eligible spouse. Written consent as to any distribution must be obtained not more than 90 days before the commencement of the distribution of any part of the participant's accrued benefits. For purposes of this subparagraph, the lump sum actuarially equivalent value of a participant's accrued benefits shall be treated as greater than $5,000 at all times after the commencement of a distribution of all or part of the participant's accrued benefits that was subject to the foregoing consent requirement. The committee may establish rules from time to time as to whether consents required by the foregoing provisions of this subparagraph may be revoked or shall be irrevocable, which rules shall meet the requirements of applicable law and shall be applied on a uniform and nondiscriminatory basis. The foregoing provisions of this subparagraph shall be applied by the committee only to the extent required by the Retirement Equity Act of 1984, as it may be amended from time to time. (b) Latest Benefit Commencement Date. Unless an election by a participant to defer payment is made in accordance with rules established by the committee, payment of benefits under the plan to a participant shall commence not later than the 60th day after the latest of the end of the calendar year in which: (i) The participant attains normal retirement age; -47- (ii) The tenth anniversary of the year in which the participant commenced participation in the plan occurs; or (iii) The participant terminates the participant's employment with the USG Companies. Payment of a participant's benefits must commence by the participant's required commencement date. A participant's "required commencement date" means: (A) Except as provided in Paragraph (B) below, April 1 of the calendar year following the later to occur of the calendar year in which the participant attained age 70-1/2 years or the calendar year in which the participant's retirement date occurred; (B) In the case of a participant who is a five percent owner (as defined in Section 416 of the Internal Revenue Code) with respect to the plan year ending in the calendar year in which the participant attains age 70-1/2, April 1 of the calendar year next following the calendar year in which the participant attains age 70-1/2. Notwithstanding the foregoing provisions of this subparagraph, (I) the required commencement date of a participant who attained age 70-1/2 prior to January 1, 2000, shall be April 1 of the calendar year following the calendar year in which the participant attained age 70-1/2; and (II) the required commencement date of a participant who filed a written election with the committee before January 1, 1984 to have payment of the participant's benefits commence on a date permitted under the terms of the plan as in effect on December 31, 1983 shall be the date specified in the election. -48- In the event payment of a participant's benefits begins after April 1 of the calendar year following the calendar year in which the participant attains age 70-1/2 years, the participant's accrued benefit under the plan shall be actuarially increased (net of any additional benefit accrual) to take into account the period after such April 1 during which the participant was not receiving benefit payments under the plan. 7.9 PAYMENT OF SMALL AMOUNTS If the lump sum actuarially equivalent value of a participant's accrued benefits (as defined in subparagraph 7.10(a)) does not exceed $5,000, or if the participant's accrued benefits are payable to a participant's eligible spouse or any other person because of the death of the participant before the participant's benefit commencement date and the lump sum actuarially equivalent value of such benefits does not exceed $5,000, a lump sum payment equal to the lump sum actuarially equivalent value of such benefits shall be paid to the participant, the participant's eligible spouse or such other person, as the case may be. For purposes of this subsection, the lump sum actuarially equivalent value shall be determined in accordance with paragraph A-4 of Exhibit A. If a participant's accrued benefits derived from employer contributions are zero, the participant shall be deemed to have received a distribution of such benefits. 7.10 BENEFITS DERIVED FROM EMPLOYER AND PARTICIPANT CONTRIBUTIONS For purposes of the plan, the terms "accrued benefits", "accumulated pre-1991 contributions", "accrued benefits derived from pre-1991 participant contributions", "accrued benefits derived from the participant's separate account" and "accrued benefits derived from employer contributions" shall have the following meanings as of any applicable date: (a) "Accrued benefits" means a participant's monthly separate account benefit plus the amount of monthly retirement income or deferred vested benefit payable to the participant on a life annuity basis, commencing on the participant's normal retirement date (or deferred retirement date if the participant's normal retirement date has occurred) as determined in accordance with the plan as of the applicable date. -49- (b) "Accumulated pre-1991 contributions" as of the applicable date means a participant's undistributed pre-1991 participant contributions with interest thereon as determined under paragraph A-3 of Exhibit A to the date the participant would attain normal retirement age. (c) "Accrued benefits derived from pre-1991 participant contributions" means an amount equal to a participant's accumulated pre-1991 contributions as of the applicable date expressed as a monthly benefit commencing on the participant's normal retirement date, determined on the basis of actuarial factors and assumptions set forth in paragraphs A-4 and A-6 of Exhibit A as of that date. (d) "Accrued benefits derived from the participant's separate account" as of the applicable date means the amount that then is actuarially equivalent to the participant's monthly separate account benefit, calculated by applying the actuarial factors and assumptions set forth in paragraphs A-4 and A-6 of Exhibit A as of that date. (e) "Accrued benefits derived from employer contributions" means the excess of a participant's accrued benefits as of the applicable date over the sum of the accrued benefits derived from the participant's pre-1991 participant contributions and the accrued benefits derived from the participant's separate account as of that date. 7.11 DESIGNATION OF BENEFICIARIES Each participant may, from time to time, designate any person or persons (who may be designated concurrently, contingently or successively) to whom any death benefits payable on behalf of such participant are to be distributed (other than any death benefits required to be paid to the participant's eligible spouse pursuant to subsection 6.6 or 7.3 or any death benefits payable to the participant's eligible spouse or any other person pursuant to an option in effect at the time of the participant's death pursuant to subsection 7.4). A beneficiary designation will be effective only when it is signed and filed with the committee while the participant is still alive and will cancel all beneficiary forms previously signed and filed by the participant. Except as otherwise provided in the next sentence, if a participant fails to designate a beneficiary as provided above, or if the beneficiary designated by a deceased participant dies before the participant or before -50- complete payment of the benefits payable on account of the participant's death, the committee in its discretion may direct payment of such benefits as follows: (a) To or for the benefit of any one or more of the participant's relatives by blood, marriage or adoption, in such proportions as the committee determines; or (b) To the legal representative or representatives of the estate of the last to die of the participant and the designated beneficiary. If permitted by law, a participant's beneficiary designation in effect under a predecessor plan immediately before its merger into this plan shall be deemed to be a valid beneficiary designation filed with the committee under this plan unless and until the participant revokes such beneficiary designation or makes a new beneficiary designation under this plan. The term "designated beneficiary" as used in the plan means the person or persons designated by a participant as the participant's beneficiary in the last effective form filed with the committee under this subsection and to whom a deceased participant's benefits are payable under the plan. The term "beneficiary" as used in the plan means the person or persons to whom a deceased participant's benefits are payable under this subsection. 7.12 MISSING PARTICIPANTS OR BENEFICIARIES Each participant and each designated beneficiary must file with the committee from time to time in writing the participant's or the beneficiary's, as the case may be, post office address and each change of post office address. Any communication, statement or notice addressed to a participant or beneficiary at the last post office address filed with the committee, or if no address is filed with the committee then at the last post office address as shown on the records of the USG Companies, will be binding on the participant and the participant's beneficiary for all purposes of the plan. None of the committee, the trustee and the USG Companies shall be required to search for or locate a participant or beneficiary. If the committee notifies a participant or beneficiary that the participant or beneficiary is entitled to a distribution and also notifies the participant or beneficiary of the provisions of this subsection, and the participant or beneficiary fails to claim benefits under the plan or make the participant's or beneficiary's whereabouts known to the committee within five years after the notification, the benefits under the plan of the participant or beneficiary will be disposed of as follows: (a) If the whereabouts of the participant is unknown but the whereabouts of the participant's designated beneficiary then is known to the committee, distribution will be made to the beneficiary. -51- (b) If the whereabouts of the participant and the participant's designated beneficiary then is unknown to the committee, but the whereabouts of one or more relatives by blood or marriage of the participant is known to the committee, the committee may direct the trustee to distribute such benefits to any one or more of such relatives and in such proportions as the committee determines. (c) If the whereabouts of the participant, the participant's designated beneficiary and any relatives by blood or marriage of the participant then is unknown to the committee, such benefits shall be forfeited to the extent permitted by federal law. 7.13 DIRECT TRANSFER OF ELIGIBLE ROLLOVER DISTRIBUTIONS If a participant's distribution constitutes an eligible rollover distribution under Section 402(c)(4) of the Internal Revenue Code, then the participant may elect to have such distribution paid directly to an eligible retirement plan described in Section 402(c)(8)(B) of the Internal Revenue Code. Each election by a participant under this subsection 7.13 shall be made at such time and in such manner as the committee shall determine, and shall be effective only in accordance with such rules as shall be established from time to time by the committee. -52- SECTION 8 MAXIMUM AND MINIMUM BENEFIT LIMITATIONS, OFFSET FOR OTHER PLAN BENEFITS 8.1 MAXIMUM RETIREMENT INCOME AND DEFERRED VESTED BENEFITS Section 415 of the Internal Revenue Code imposes certain limitations on the amount of benefits that may be provided for a participant in a defined benefit plan (as defined in Section 414(j) of the Internal Revenue Code) and in a defined contribution plan (as defined in Section 414(i) of the Internal Revenue Code). This plan is a defined benefit plan but for certain purposes, including the application of Section 415, the plan is required to be treated as a defined contribution plan to the extent it provides benefits based on pre-1991 participant contributions and participants' separate accounts. For purposes of this Section 8, references to a participant's monthly retirement income or monthly deferred vested benefit shall be deemed to include the participant's monthly separate account benefit or, where appropriate, an amount that is actuarially equivalent to such benefit. 8.2 LIMITATION YEAR AND TOTAL COMPENSATION For purposes of this Section 8: (a) A "limitation year" means the twelve-month period ending on December 31 of each year; and (b) A participant's "total compensation" means, with respect to any limitation year, the total amount of compensation (as defined in Internal Revenue Code Section 415(c)(3)) paid to the participant during that year for services rendered to the USG Companies as an employee. 8.3 DEFINED BENEFIT PLAN AND DEFINED CONTRIBUTION PLAN LIMITATIONS With respect to each participant whose retirement date (as defined in subsection 3.5) or employment termination date occurs on or before December 31, 1999, there will be determined with respect to the participant a defined benefit plan fraction and a defined contribution plan fraction in accordance with Section 415 of the Internal Revenue Code, but taking into account adjustments to defined benefit or defined contribution plan limitations, or combined limitations, permitted under public laws that modify Section 415 where a participant's accrued benefits immediately prior to the effective date of any such law exceed the maximum accrued benefits permitted by such -53- law; the benefits provided for any such participant under this plan will be adjusted to the extent necessary so that the sum of such fractions determined with respect to the participant does not exceed 1.0. The provisions of this subsection 8.3 shall not apply to a participant who retires or otherwise terminates employment on or after January 1, 2000. 8.4 COMBINING OF PLANS In applying the limitations set forth in subsections 8.2 and 8.3, reference to the plan shall mean the plan and all other defined benefit plans (whether or not terminated) maintained by the USG Companies, reference to a defined contribution plan maintained by the USG Companies shall mean that plan and all other defined contribution plans (whether or not terminated) maintained by the USG Companies, and reference to the USG Companies shall include any subsidiary of the company more than 50 percent of the voting stock of which is owned, directly or indirectly, by the company. 8.5 MAXIMUM BENEFITS AS A RESULT OF THE ANNUAL COMPENSATION LIMIT A participant's earnings as defined in subsection 4.5 are subject to the annual compensation limit (as defined below) for purposes of determining the amount of the participant's contributions required under subsection 2.5 and determining the amount of the retirement income or deferred vested benefit (exclusive of the participant's separate account benefit) the participant may become entitled to receive under the plan. The "annual compensation limit" means the limitation on compensation imposed by Section 401(a)(17) of the Internal Revenue Code, applied as follows: (a) For purposes of determining the amount of a participant's contributions required under subsection 2.5, the annual compensation limit is $160,000 for the plan year commencing on January 1, 1999 and for each subsequent plan year shall be $160,000 (or such greater amount as permitted as a result of an adjustment under Section 401(a)(17)(B)(II) of the Internal Revenue Code effective for that plan year). (b) For the purpose of determining a participant's final average earnings, the annual compensation limit for any 12 month period commencing in a plan year shall be $160,000 (or such greater amount as permitted as a result of an adjustment under Section 401(a)(17)(B) of the Internal Revenue Code effective for the plan year in which such 12 month period begins). -54- As a result of the annual compensation limit the retirement income or deferred vested benefit (exclusive of the participant's separate account benefit) of a participant in the plan on January 1, 1994 who then was employed by a USG Company shall be the greater of: (i) the participant's December 31, 1993 accrued benefit (as defined below), if any, plus the participant's post-1993 accrued benefit (as defined below); or (ii) the participant's final accrued benefit (as defined below). For purposes of this subsection: (A) A participant's "December 31, 1993 accrued benefit" means the participant's accrued retirement income or deferred vested benefit as of December 31, 1993 as determined under the terms and provisions of the plan as then in effect. The terms of the plan as in effect on December 31, 1993 shall be construed (both in determining the December 31, 1993 accrued benefit and the accrued benefit of a participant who retired or otherwise terminated employment on or before that date) so as to apply the limitations of Section 401(a)(17) of the Internal Revenue Code in the manner most favorable to the participant as permitted by the Internal Revenue Service. (B) A participant's "post-1993 accrued benefit" means the retirement income or deferred -55- vested benefit the participant accrues after December 31, 1993 on the basis of the portion of the participant's benefit service attributable to employment with the employers after that date and the participant's final average earnings as determined as of the end of the calendar month next preceding the calendar month in which the participant's retirement or other termination of employment with the USG Companies occurs, calculated by applying the annual compensation limit to all of the participant's earnings. (C) The social security offset under subparagraph 5.1(b) or subparagraph 5.9(b) shall be applied to the aggregate of the December 31, 1993 accrued benefit and the post-1993 accrued benefit, as determined under subparagraph 5.1(b) or subparagraph 5.9(b), whichever is applicable. (D) A participant's "final accrued benefit" means the participant's retirement income or deferred vested benefit as determined at the time of the participant's actual retirement or other termination of employment on the basis of the participant's total period of benefit service and the participant's final average earnings as determined as of the end of the calendar month next preceding the calendar month in -56- which the participant's retirement or other termination of employment with the USG Companies occurs, calculated by applying the applicable annual compensation limit to all of the participant's earnings. 8.7 MAXIMUM RETIREMENT INCOME AND DEFERRED VESTED BENEFIT The amount of retirement income or deferred vested benefit payable under the plan to a participant for any month shall not exceed an amount which would cause the sum of such monthly benefit, the benefits payable to the participant for that month under Workers' Compensation or Occupational Disease laws for which an employer is liable (except fixed statutory payments for the loss of any bodily member) and the participant's primary social security benefit to exceed an amount equal to 1/12 of 100 percent of the participant's final average earnings. 8.8 MINIMUM RETIREMENT INCOME AND DEFERRED VESTED BENEFIT Notwithstanding the provisions of Sections 5 and 6, but subject to the foregoing provisions of this Section 8, the monthly retirement income or deferred vested benefit payable to a participant who qualifies for such monthly benefit shall not be less than an amount that is actuarially equivalent to the participant's accrued benefits derived from pre-1991 participant contributions and the accrued benefits derived from the participant's separate account, determined on the basis of the actuarial factors and assumptions set forth in paragraphs A-4 and A-6 of Exhibit A. The monthly retirement income payable on a life annuity basis to a participant who retires on or after the participant's normal retirement date but had qualified for retirement on an early retirement date shall not be less than the largest monthly retirement income the participant would have been entitled to receive on a life annuity basis, without regard to any payment option, if the participant had retired on an early retirement date. 8.9 MINIMUM DEATH BENEFITS Notwithstanding any other provisions of the plan, in no event shall the aggregate benefits payable under the plan to a participant and to any other person entitled to receive benefits thereunder as a result of the participant's employment with the employers and participation in the plan be less than an amount equal to the sum of the participant's pre-1991 participant contributions, with interest thereon as determined under -57- paragraph A-3 of Exhibit A to the date payment commences to the participant or such other person or to the date of the participant's death, if earlier, plus an amount equal to what the balance in the participant's separate account would have been as of the end of the calendar month in which the participant's termination of employment occurs or the date of the participant's death, if earlier, if such separate account had continued to be maintained and adjusted through the end of that calendar month. If the aggregate benefits paid under the plan to the participant and such other person up to the death of the participant or such other person, whichever occurs later, should be less than the amount described in the next preceding sentence, an amount equal to the difference shall be payable to the participant's beneficiary. 8.10 OFFSET FOR OTHER PLAN BENEFITS Notwithstanding any other provisions of the plan, the amount of any monthly retirement income or deferred vested benefit a participant otherwise is entitled to under the plan will be reduced by the actuarial equivalent of any pension benefits that the participant becomes entitled to (or previously received) under any other pension plan qualified under Section 401(a) of the Internal Revenue Code that a USG Company (or by a former USG Company) maintains or contributes to, to the extent that the pension benefits paid or payable to the participant under such other pension plan are attributable to the same period of employment for which benefits are otherwise payable to the participant under this plan. The committee shall apply the provisions of this subparagraph in a uniform manner to participants similarly situated for the purpose of avoiding duplication of benefits. 8.11 SPECIAL RULES FOR BENEFIT TRANSFERS From time to time, an employee will be transferred to an employer from employment with a USG Company in Canada or from an employer to employment with a USG Company in Canada. Except as otherwise required by law, in any such case, the employee's pension benefit, if any, will be paid from the pension plan in which the employee participates at the time of the participant's retirement or other termination of employment with all USG Companies, taking into account the participant's credited service and benefit service with all USG Companies, as determined under the terms of the plan that pays the participant's benefits, provided, however, that the benefit shall never be less than the benefit payable under the terms of this plan calculated as of the date the participant last participates in this plan; provided further that benefit payments from one plan shall be offset to take into account any payments made from the other plan. -58- 8.12 SECTION 401(M) LIMITATIONS AS TO PARTICIPANT SEPARATE ACCOUNT CONTRIBUTIONS Participants' contributions made to their separate accounts shall be subject to the nondiscrimination requirements of Section 401(m) of the Internal Revenue Code, as follows: (a) Section 401(m) of the Internal Revenue Code requires that such participant contributions be tested each plan year and, where required, be limited in order to meet the actual contribution percentage test set forth in Section 401(m) of the Internal Revenue Code (the "ACP test"). The ACP test shall be met by this plan using the "current year testing method" (as defined in Internal Revenue Service Notice 98-1), and for this purpose the provisions of Section 401(m) of the Internal Revenue Code, the regulations thereunder and any Internal Revenue Service guidance issued subsequent to the effective date are incorporated in this plan by reference. (b) If any such participant contributions are made under the plan for any plan year with respect to one or more highly compensated participants (as defined in subsection 8.14) that otherwise would result in the plan's failure to meet the ACP test, such contributions will be reduced to the extent necessary to meet the ACP test, in descending order, beginning with participant contributions made with respect to highly compensated participants who prior to such reduction have made the largest contributions. The portion of participant contributions that are so reduced are referred to as "excess participant separate account contributions". (c) The committee shall direct that excess participant separate account contributions (and income allocable to such contributions as determined under subsection 8.13) for any plan year be distributed to the highly compensated participants who made them not later than 12 months after the end of that plan year. (d) If an excess participant separate account contribution has been distributed to a participant pursuant to subparagraph (c) next above then, notwithstanding any other provisions of the plan, only for the purpose of reducing the amount of monthly retirement income or monthly deferred vested benefit that -59- otherwise would be payable to the participant under subsection 5.1, 5.2, 5.3 or 6.1 by the participant's monthly separate account benefit or by an amount that is actuarially equivalent to such benefit, the participant's separate account balance shall be increased to equal what the balance in such account would be if no excess participant separate account contributions had been distributed to the participant. 8.13 SPECIAL PROVISIONS APPLICABLE TO SECTION 401(m) LIMITATIONS The following provisions shall apply to subsection 8.12: (a) Multiple Use of Alternative Limitation. In accordance with Treasury Regulation Section 1.401(m)-(2)(c), multiple use of the alternative limitation that occurs as a result of testing under this plan in accordance with subsection 8.12 and under qualified plans maintained by USG Companies as required by Section 401(k) and 401(m) of the Internal Revenue Code will be corrected in the manner described in Treasury Regulation Section 1.401(m)-1(e). The term "alternative limitation" as used above means the alternative methods of compliance with Sections 401(k) and 401(m) of the Internal Revenue Code contained in Sections 401(k)(3)(A) (ii)(II) and 401(m)(2)(A)(ii) thereof, respectively. (b) Income Allocable for Plan Year. The income allocable to an excess participant separate account contribution for the plan year in which such excess amount arose shall be determined by multiplying the income for that plan year allocable to the participant contributions for that plan year to which such excess amount pertains by a fraction. The numerator of the fraction is the excess amount and the denominator is the total balance in the participant's separate account to which such excess amount was credited as determined as of the end of that plan year, reduced by the gain allocable to such account balance for that plan year and increased by the loss allocable to such account balance for that plan year. -60- 8.14 HIGHLY COMPENSATED PARTICIPANT For purposes of subsection 8.12, effective as of January 1, 1997, a "highly compensated participant" means any participant (and any employee who would have been a participant but for the participant's failure to enroll in the plan) who: (a) was a five percent or greater owner of a USG Company during the year or the preceding year; or; (b) for the preceding plan year received annual compensation from the USG Companies of more than $80,000 (or such greater amount as may be determined by the Commissioner of Internal Revenue for the applicable year) and, if elected by the employer for such preceding year, was in the top-paid group, as defined below. The term "annual compensation" as used above with respect to any participant means as to any plan year the total amount of the participant's compensation within the meaning of Section 415(c)(3) of the Internal Revenue Code for that year for services rendered to the USG Companies as an employee plus amounts deferred by the participant for that year through compensation reductions pursuant to Sections 125 and 401(k) of the Internal Revenue Code under any plans maintained by the USG Companies, including this plan. For purposes of subparagraph (b) next above, the term "top-paid group" means the top-paid 20 percent of the employees of the USG Companies, exclusive of (i) employees who have not completed six months of service, (ii) employees who normally work less than 17-1/2 hours per week, (iii) employees who normally work not more than six months during any year, (iv) employees who have not attained age 21, (v) except to the extent provided in regulations, employees who are included in a unit of employees covered by an agreement which the Secretary of Labor finds to be a collective bargaining agreement between employee representatives and the employer, and (vi) employees who are nonresident aliens and who receive no earned income (within the meaning of Section 911(d)(2) of the Internal Revenue Code) from the employer which constitutes income from sources within the United States (within the meaning of Section 861(a)(3) of the Internal Revenue Code). A former employee shall be treated as a highly compensated participant if such employee was a highly compensated participant when such employee separated from service with the USG Companies or such employee was a highly compensated participant at any time after attaining age 55 years. -61- SECTION 9 REEMPLOYMENT 9.1 REHIRED EMPLOYEE If a former employee of the USG Companies who had not previously become a participant in the plan is reemployed by a USG Company and becomes a covered employee (a "rehired employee"), the following provisions shall apply, subject to subsection 2.2 of the plan: (a) Participation. The rehired employee shall become eligible to be enrolled in the plan and become a participant on the later to occur of the date the employee so becomes a covered employee and the employee's initial eligibility date, or on any subsequent eligibility date on which the employee is a covered employee. (b) Service. The rehired employee's credited service and benefit service shall be determined in accordance with the applicable provisions of Section 4 and subsection 9.4 as if the employee were a rehired participant (as defined in subsection 9.2). 9.2 REHIRED PARTICIPANT If a participant or former participant is reemployed by a USG Company (a "rehired participant"), the following provisions shall apply, subject to subsection 2.2 of the plan: (a) Suspension of Benefits. No benefits shall be payable under the plan to the rehired participant during the participant's period of reemployment. (b) Participation. The rehired participant shall be eligible to reenroll in the plan and resume active participation on the date the participant again becomes a covered employee, or on any subsequent eligibility date on which the participant is a covered employee. (c) Benefits. The benefits a rehired participant becomes entitled to after the participant's period of reemployment ends shall be -62- determined in accordance with the following provisions of this Section 9. 9.3 ONE-YEAR BREAK IN SERVICE, EXTENDED BREAK IN SERVICE A rehired employee or rehired participant will have incurred a "one-year break in service" if the participant is not reemployed by a USG Company until after the first anniversary of the date the participant's prior period of employment with all of the USG Companies terminated. A rehired employee or rehired participant will have incurred an "extended break in service" if the number of the participant's consecutive one-year breaks in service occurring after the participant's prior period of employment and before the participant's reemployment equals or exceeds the greater of: (a) Five; or (b) The aggregate number of the participant's years of credited service before the participant's reemployment. Notwithstanding the foregoing provisions of this subsection, if an employee commences a maternity or paternity absence (as defined below) on or after January 1, 1985 and the participant's termination of employment with the USG Companies occurs during such absence and the participant is not reemployed by a USG Company on or before the first anniversary of the participant's termination of employment, the employee shall not incur a one-year break in service until the later to occur of the third anniversary of the date such maternity or paternity absence began or the first anniversary of the date of the participant's termination of employment with the USG Companies. "Maternity or paternity absence" means an employee's absence from work because of the pregnancy of the employee or the birth of a child of the employee, the placement of a child with the employee in connection with the adoption of such child by the employee, or for purposes of caring for the child immediately following such birth or placement. The committee may require an employee to furnish such information as the committee considers necessary to establish that the employee's absence would constitute a maternity or paternity absence as defined above. 9.4 CREDITED AND BENEFIT SERVICE Before January 1, 1984, the term "credited service" was used to denote service counted for the purpose of determining eligibility to receive a benefit under the plan as well as for the purpose of determining the amount of such benefit. On and after January 1, 1984, the term "credited service" is used for the purpose of determining eligibility to receive a benefit under the plan, but the term "benefit service" is used for the purpose of determining the amount of such benefit. References below to "benefit service" -63- with respect to any period of employment before January 1, 1984 means credited service as applied under the plan before that date for the purpose of determining eligibility to receive benefits. If a rehired participant reenrolls in the plan as provided in subsection 9.2, determination of the participant's credited and benefit service under Section 4 shall be subject to the following: (a) Credited Service - Eligibility for Benefits. The credited service to which the participant was entitled at the time of the participant's prior termination of employment for the purpose of determining the participant's eligibility to receive a monthly retirement income or deferred vested benefit shall be added to the participant's credited service earned after the participant's reemployment, irrespective of whether the participant had incurred an extended break in service. If the participant had not incurred a one-year break in service, the period elapsed between the date of the participant's prior termination of employment and the date of the participant's reemployment also shall be considered as credited service to the extent such period would not otherwise be considered as credited service. (b) Benefit Service - Reemployment Before One-year Break in Service. (i) Prior Vested Benefits. If the rehired participant had become entitled to a monthly retirement income or deferred vested benefit at the time of the participant's prior termination of employment and if the participant was reemployed before the participant had incurred a one-year break in service, the benefit service to which the participant was entitled at the time of the participant's prior termination of employment shall be added to the participant's benefit service earned after the participant's reemployment unless the participant had previously received a lump sum payment equal to the lump sum actuarially equivalent value of the participant's entire accrued benefits at the time of the participant's prior termination of employment. -64- (ii) No Prior Vested Benefits. If the rehired participant had not become entitled to a monthly retirement income or deferred vested benefit at the time of the participant's prior termination of employment and if the participant was reemployed before the participant had incurred a one-year break in service, the benefit service to which the participant was entitled at the time of the participant's prior termination of employment shall be added to the participant's benefit service earned after the participant's reemployment. (c) Benefit Service - Reemployment After One-year Break in Service. (i) Prior Vested Benefits. If the rehired participant had become entitled to a monthly retirement income or deferred vested benefit at the time of the participant's prior termination of employment and if the participant was reemployed after the participant had incurred a one-year break in service, the benefit service to which the participant was entitled at the time of the participant's prior termination of employment will be retained and reflected in the participant's prior accrued benefit (as defined in subsection 9.5). (ii) No Prior Vested Benefits. If the rehired participant had not become entitled to a monthly retirement income or deferred vested benefit at the time of the participant's prior termination of employment and if the participant was reemployed after the participant had incurred a one-year break in service, the benefit service to which the participant was entitled at the time of the participant's prior termination of employment will not be added to the participant's benefit service earned after the participant's -65- reemployment. However, if the participant was reemployed without having incurred an extended break in service, the benefit service to which the participant was entitled at the time of the participant's prior termination of employment will be retained and reflected in the participant's prior accrued benefit. 9.5 PRIOR ACCRUED BENEFIT For purposes of this Section 9, the "tentative amount of the participant's prior accrued benefit" means with respect to a rehired participant: (a) If the participant was rehired before attaining normal retirement age and was receiving an actuarially reduced monthly benefit at the time of the participant's reemployment, the amount of monthly benefit that would have been payable to the participant commencing on the participant's normal retirement date (assuming earlier commencement had not occurred) based on the participant's period of employment and participation in the plan up to the participant's prior termination of employment, but reduced by the actuarial equivalent of all monthly and lump sum benefits previously paid to the participant under the plan (other than disability retirement income benefits); or (b) If subparagraph (a) next above does not apply in the participant's case, the amount of monthly benefit that would have been payable to the participant commencing on the participant's normal retirement date (or on the participant's initial retirement date, if later) based on the participant's period of employment and participation in the plan up to the participant's prior termination of employment, irrespective of whether the participant had become eligible for such benefit at the time of the participant's prior termination of employment, but reduced by the actuarial equivalent of all monthly and lump sum benefits, if any, previously paid to the participant under the plan (other than disability retirement income benefits); but with such amount reduced or increased if and to the extent provided below. If the rehired participant's period of reemployment ends before the participant's normal -66- retirement date, and the participant elects commencement of payment of the participant's plan benefits prior to that date, the tentative amount of the participant's prior accrued benefit as determined above shall be actuarially reduced on the same basis as the participant's other plan benefits and the resulting amount shall be the rehired participant's "prior accrued benefit." If the rehired participant's period of reemployment or any portion thereof occurs after the participant attains normal retirement age, the tentative amount of the participant's prior accrued benefit as determined above shall be increased as follows: (i) The portion of such tentative amount equal to the participant's accrued benefits derived from pre-1991 participant contributions (as defined in subparagraph 7.10(b)), computed only with respect to the rehired participant's prior employment, shall be increased on an actuarially equivalent basis to reflect the period of the participant's reemployment occurring after the participant's normal retirement date (other than any portion thereof for which the participant makes participant contributions and accrues monthly benefits) and the commencement of the participant's prior accrued benefit only after the participant's period of reemployment ends; and (ii) The portion of such tentative amount equal to the accrued benefits derived from employer contributions (as defined in subparagraph 7.10(e)), computed only with respect to the rehired participant's prior employment, shall be increased on an actuarially equivalent basis to reflect any calendar month during the portion, if any, of the participant's period of reemployment that occurs after the participant's normal retirement date in which the participant received compensation from the employers for hours of service (as defined in United States Department of Labor Regulations 2530.200(b)-2(a)(1) and (2)) performed in fewer than eight days or separate work shifts) but did not make participant contributions and accrue benefits; -67- and the resulting amount shall be the rehired participant's "prior accrued benefit." 9.6 BENEFITS AFTER REEMPLOYMENT ENDS No benefits shall be payable to a rehired participant under the plan during the period of the participant's reemployment and the following shall apply when the participant's period of reemployment ends: (a) If Reemployed Before One-year Break in Service. If the rehired participant was reemployed before the participant had incurred a one-year break in service and if the participant's benefit service at the time of the participant's prior termination of employment was reinstated pursuant to subparagraph 9.4(b)(i) or (ii), benefits payable to the participant after the participant's period of reemployment ends shall be determined in accordance with the provisions of the plan as in effect as of the end of that period, but such benefits shall be reduced by the actuarial equivalent of any benefits previously paid to the participant under the plan (other than disability retirement income benefits). In determining such rehired participant's earnings and final average earnings when the participant's period of reemployment ends for the purpose of computing the amount of any benefits payable to the participant, the participant's prior period of employment and the participant's period of reemployment shall be considered as a single period of employment with the USG Companies. If the rehired participant's benefit service was not reinstated pursuant to subparagraph 9.4(b)(i) because the participant previously had received a lump sum payment, benefits payable to the participant after the participant's period of reemployment ends shall be determined in accordance with the provisions of the plan as in effect as of the end of that period and shall be based only upon the participant's benefit service and earnings attributable to the participant's period of reemployment. (b) If Reemployed After One-year Break in Service. If a rehired participant was reemployed after the participant had incurred a one-year break in service (and, therefore, the participant's benefit service at the time of the participant's prior termination of employment was not added to the participant's benefit service earned after the participant's reemployment -68- for the purpose of computing any benefits payable to the participant under the plan), the benefits payable to the participant after the participant's period of reemployment ends, if the participant then is entitled to a monthly retirement income or deferred vested benefit, shall be equal to the participant's prior accrued benefit, if any, plus the amount of the benefits the participant has accrued and become eligible to receive under the plan with respect to the participant's period of reemployment. -69- SECTION 10 GENERAL PROVISIONS 10.1 INTERESTS NOT TRANSFERABLE Except as may be required by the tax withholding provisions of the Internal Revenue Code or any state or local income tax act or pursuant to a qualified domestic relations order as defined in Section 414(p) of the Internal Revenue Code, or for an offset described in Section 401(a)(13)(C) of the Internal Revenue Code, the interests of participants and their beneficiaries under the plan are not in any way subject to their debts or other obligations and may not be voluntarily or involuntarily sold, transferred, alienated or assigned. Pursuant to regulations under Section 401(a)-(13) of the Internal Revenue Code, a retired or terminated participant, or the eligible spouse or beneficiary of a deceased participant, only for the purpose of payment of any amounts such person owes to a USG Company or is required to contribute to a third party (that is, a USG Company, a trust established by a USG Company or an insurance company) for medical benefit, hospitalization, life insurance or other available welfare benefit coverage: (a) may make a voluntary and revocable assignment to a third party of not more than 10 percent of any payment due that person under the plan; or (b) may direct the committee that all or any portion of a benefit payment to which such person is entitled under the plan be paid to a third party, provided that such direction is revocable at any time by such participant, spouse or beneficiary and the third party files a written acknowledgment with the committee within the time period required by such regulations that the third party has no enforceable right in or to any part or all of a benefit payment to which such person becomes entitled to under the plan (exclusive of payments actually received pursuant to such person's direction prior to its revocation). In no event may an assignment or direction made pursuant to the provisions of the next preceding sentence be for the purpose, or have the effect, of defraying plan administration costs. -70- 10.2 FACILITY OF PAYMENT When a participant or other person entitled to benefits under the plan is under a legal disability or, in the committee's opinion, is in any way incapacitated so as to be unable to manage the participant's financial affairs, the committee may direct the trustee to make payments or distributions to which the participant otherwise is entitled to the participant's legal representative or to a relative or friend of such person for the participant's benefit, or the committee may direct the trustee to apply the payment or distribution for the benefit of such person in any manner that the committee may select which is consistent with the plan. If the committee receives proper authorization by a participant or any other person entitled to benefits under the plan, and unless and until the committee is notified or becomes aware that such authorization no longer is in effect, the committee will direct the trustee to make periodic deposits of the benefits which otherwise would be payable directly to the participant into a savings or checking account established in the participant's name at a bank or other financial institution. Any payments made in accordance with the foregoing provisions of this subsection shall be a full and complete discharge of any liability for such payments. 10.3 ABSENCE OF GUARANTY Neither the committee nor any USG Company in any way guarantees the trust fund from loss or depreciation. Subject to subsection 14.5, the USG Companies do not guarantee any payment to any person. The liability of the trustee or the committee to make any payment or distribution under the plan is limited to the available assets of the trust fund. 10.4 EMPLOYMENT RIGHTS The plan does not constitute a contract of employment, and participation in the plan will not give any employee the right to be retained in the employ of the USG Companies, nor any right or claim to any benefit under the plan, unless such right or claim has specifically accrued under the terms of the plan. 10.5 LITIGATION BY PARTICIPANTS OR OTHER PERSONS To the extent permitted by law, if a legal action begun against a USG Company, the committee (or any member thereof), or the trustee by or on behalf of any person with respect to benefits under the plan results adversely to that person, or if a legal action arises because of conflicting claims to a participant's or beneficiary's benefits, the cost to any USG Company, the committee (or any member thereof), or the trustee of -71- defending the action will be charged to the extent possible to the sums, if any, that were involved in the action or were payable to the participant or beneficiary concerned. 10.6 ACTUARIALLY EQUIVALENT BENEFITS Except as otherwise provided by law, a benefit shall be actuarially equivalent to any other benefit if the actuarial reserve required to provide the same is equal to the actuarial reserve required to provide such other benefit, computed on the basis of the actuarial rates, tables and procedures specified in Exhibit A or set forth elsewhere in the plan. No adjustment in a determination of an actuarially equivalent value or amount shall be made if such rates, tables and procedures are changed subsequent to such determination. 10.7 EVIDENCE Evidence required of anyone under the plan may be by certificate, affidavit, document or other information which the person acting on it considers pertinent and reliable, and signed, made or presented by the proper party or parties. 10.8 WAIVER OF NOTICE Any notice required under the plan may be waived by the person entitled to notice. 10.9 CONTROLLING LAW To the extent not superseded by federal law, the laws of Illinois shall be controlling in all matters relating to the plan. 10.10 SEVERABILITY In case any provisions of the plan shall be held illegal or invalid for any reason, such illegality or invalidity shall not affect the remaining provisions of the plan, and the plan shall be construed and enforced as if such illegal and invalid provisions had never been set forth in the plan. -72- 10.11 FIDUCIARY RESPONSIBILITIES It is specifically intended that all provisions of the plan shall be applied so that all fiduciaries with respect to the plan shall be required to meet the prudence and other requirements and responsibilities imposed by applicable law to the extent such requirements or responsibilities apply to them, but that, subject to applicable law, each such fiduciary shall be responsible only for the carrying out of the responsibilities, obligations and duties placed upon the fiduciary by the provisions of the plan to the extent not allocated or delegated to other persons. In general, a fiduciary shall discharge the fiduciary's duties with respect to the plan and trust solely in the interests of plan participants and beneficiaries and with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent man acting in a like capacity and familiar with such matters would use in the conduct of an enterprise of like character and with like aims. -73- SECTION 11 THE COMMITTEE 11.1 MEMBERSHIP The plan is administered by the Pension and Investment Committee (the "committee") consisting of three or more members appointed by the company. The appointment of a committee member pursuant to the provisions of this subsection shall be effective not earlier than receipt by such person of written notice of the member's appointment from the company and the member's written acceptance of such appointment. A committee member may resign at any time by giving thirty days' advance written notice to the company and the other committee members. The company may remove a committee member by giving advance written notice to the member, the other committee members, and the other employers. The company may fill any vacancy in the membership of the committee, or may appoint an additional member or members of the committee, and shall give prompt written notice thereof to the other committee members and the other employers. While there is a vacancy in the membership of the committee, the remaining committee members shall have the same powers as the full committee until the vacancy is filled. 11.2 GENERAL POWERS, RIGHTS AND DUTIES The committee has the following powers, rights and duties in addition to those given it elsewhere in the plan and the trust agreement: (a) To select a chairman and secretary, if it believes it advisable, who may, but need not be, committee members. (b) To determine in its discretion all questions arising under the plan, including the power to determine the rights or eligibility of employees or participants and their beneficiaries, and the amount of their respective benefits under the plan, and to remedy ambiguities, inconsistencies or omissions. (c) To adopt such rules of procedure and regulations as in its opinion may be necessary for the proper and efficient administration of the plan and as are consistent with the plan. (d) To enforce the plan and the rules and regulations, if any, adopted by the committee as above. -74- (e) To direct the trustee as respects benefit payments or other distributions from the trust fund pursuant to the provisions of the plan. (f) To furnish the employers with such information as may be required by them for tax or other purposes as respects the plan. (g) To employ agents, attorneys, accountants, actuaries or other persons (who also may be employed by any employer or the trustee), and to allocate or delegate to them such powers, rights and duties as the committee may consider necessary or advisable to properly carry out the administration of the plan, provided that such allocation or delegation and the acceptance thereof by such agents, attorneys, accountants, actuaries or other persons, shall be in writing. 11.3 MANNER OF ACTION During a period in which two or more committee members are acting, the following provisions apply where the context admits: (a) A committee member by writing may delegate any or all of the member's rights, powers, duties and discretions to any other committee member, with the consent of the latter. (b) The committee members may act by meeting, or by writing signed without meeting, and may sign any document by signing one document or concurrent documents. (c) An action or decision of a majority of the committee members as to a matter shall be as effective as if taken or made by all pension committee members. (d) If, because of the number qualified to act, there is an even division of opinion among the committee members as to a matter, the company shall decide the matter. (e) The certificate of the secretary of the committee or of a majority of the committee members that the committee has taken or authorized any action shall be conclusive in favor of any person relying on the certificate. -75- 11.4 INFORMATION REQUIRED BY COMMITTEE The USG Companies shall furnish the committee with such data and information as the committee may deem necessary or desirable in order to administer the plan. The records of a USG Company as to an employee's or participant's period or periods of employment, termination of employment and the reason therefor, leave of absence, reemployment and earnings will be conclusive on all persons unless determined to the committee's satisfaction to be incorrect. Participants and other persons entitled to benefits under the plan also shall furnish the committee with such evidence, data or information as the committee considers necessary or desirable to administer the plan. 11.5 COMMITTEE DECISION FINAL Subject to applicable law and the provisions of subsection 11.6, any interpretations of the provisions of the plan and any decision on any matter within the discretion of the committee made by the committee in good faith shall be binding on all persons. A misstatement or other mistake of fact shall be corrected when it becomes known and the committee shall make such adjustment on account thereof as it considers equitable and practicable. 11.6 REVIEW OF BENEFIT DETERMINATIONS The committee will provide notice in writing to any participant, beneficiary or other person whose claim for benefits under the plan is denied and the committee shall afford such participant, beneficiary or other person a full and fair review of its decision, if so requested. 11.7 UNIFORM RULES The committee shall administer the plan on a reasonable and nondiscriminatory basis and shall apply uniform rules to all participants similarly situated. 11.8 COMMITTEE MEMBER WHO IS A PARTICIPANT If a member of the committee is a participant in the plan, the member may not decide or determine any matter or question concerning the member's benefits or as to how they are to be paid to the member that the member would not have the right to decide or determine if the member were not a member of the committee. -76- SECTION 12 FUNDING OF PLAN BENEFITS 12.1 EMPLOYER AND PARTICIPANT CONTRIBUTIONS Subject to the provisions of Section 15, the employers expect and intend to contribute to the plan from time to time, after taking into account participants' contributions made pursuant to subsection 2.5, such amounts as shall be required under accepted actuarial principles to maintain the plan in a sound condition and to meet all applicable funding requirements imposed by federal law. 12.2 MINIMUM FUNDING STANDARDS The employers maintain a funding standard account which is credited with contributions and gains and charged with costs and losses for each plan year in accordance with Section 412 of the Internal Revenue Code. Contributions to the plan for each plan year shall be made at such times and in such amounts as are required by Section 412 of the Internal Revenue Code. 12.3 APPLICATION OF FORFEITED BENEFITS Benefits that would have been payable to a participant if the participant's employment with the USG Companies had not terminated before the participant was eligible to receive a monthly retirement income or deferred vested benefit and benefits that would have been payable to the participant or any other person but for the participant's death shall not be applied to increase the benefits of any other participants or any other persons entitled to benefits under the plan. However, the limitation contained in the next preceding sentence shall not in any way limit the right reserved to the company under subsection 14.1 to amend the plan to provide for increases or decreases in the amount of benefits or to modify the form of any benefits payable under the plan. -77- SECTION 13 RELATING TO THE EMPLOYERS 13.1 ACTION BY EMPLOYERS Any action required or permitted of an employer under the plan shall be by resolution of its Board of Directors or by a duly authorized committee of its Board of Directors, or by a person or persons authorized by resolution of its Board of Directors or such committee. 13.2 ADDITIONAL EMPLOYERS Any subsidiary that is not an employer may adopt the plan and become an employer and a party to the trust agreement: (a) By filing with the committee and the trustee a certified copy of a resolution of the Board of Directors of the subsidiary providing for its adoption of the plan; and (b) By filing with the trustee a written certification signed by a majority of the members of the committee or the secretary of the committee that the committee has consented to such adoption. 13.3 SUCCESSOR EMPLOYERS In the event of the dissolution, merger, consolidation or reorganization of an employer, or the sale by that employer of all or substantially all of its assets, with the consent of the company the successor to that employer or the purchaser of all or substantially all of its assets may be substituted for that employer under the plan and the trust agreement. 13.4 RESTRICTIONS AS TO REVERSION OF TRUST ASSETS TO EMPLOYERS The employers shall have no right, title or interest in the assets of the trust fund, nor will any part of the assets of the trust fund at any time revert or be repaid to an employer, directly or indirectly, except as follows: (a) If the Internal Revenue Service initially determines that the plan, as applied to any employer that adopts the plan after the -78- effective date, does not meet the requirements of a "qualified plan" under Section 401(a) of the Internal Revenue Code, that portion of the assets of the trust fund attributable to contributions made by that employer under the plan shall be returned to that employer within one year of the date of denial of qualification of the plan as applied to that employer. (b) If a contribution or a portion of a contribution is made by an employer as a result of a mistake of fact, such contribution or portion of a contribution shall not be considered to have been contributed under the plan by that employer and, after having been reduced by any losses of the trust fund allocable thereto, shall be returned to that employer from the trust fund within one year of the date the amount is contributed under the plan. (c) Each contribution made by an employer is conditioned upon the continued qualification of the plan and the deductibility of such contribution as an expense for federal income tax purposes and, therefore, to the extent that a contribution is made by an employer under the plan for a period for which the plan is not a qualified plan or the deduction for a contribution made by the employer is disallowed, then such contribution or portion of a contribution, after having been reduced by any losses of the trust fund allocable thereto, shall be returned to that employer within one year of the date of determination of the nonqualified status of the plan or the date of disallowance of the deduction. (d) If after all fixed and contingent liabilities or obligations to persons entitled to benefits under the plan shall have been paid or provided for in full any assets remain in the trust fund because of an erroneous actuarial computation, such assets shall be returned to the employers. -79- SECTION 14 AMENDMENT, TERMINATION OR PLAN MERGER 14.1 AMENDMENT While the employers expect and intend to continue the plan, the company reserves the right to amend the plan (in accordance with the procedures set forth in subsection 13.1) from time to time, except as follows: (a) The duties and liabilities of the committee under the plan cannot be changed substantially without its consent; and (b) Except as provided in subsection 13.4, under no condition shall any amendment result in the return or repayment to any employer of any part of the trust fund or the income therefrom, or result in the distribution of the trust fund for the benefit of anyone other than employees and former employees of the employers and any other persons entitled to benefits under the plan. 14.2 TERMINATION The plan will terminate as to all employers on any date specified by the company (in accordance with the procedures set forth in subsection 13.1) if 30 days advance written notice of the termination is given to the trustee, the committee and the other employers. 14.3 PLAN MERGER OR CONSOLIDATION In no event shall there be any merger or consolidation of the plan with, or transfer of assets or liabilities to, any other plan unless each participant in the plan would (if the plan then terminated) receive a benefit immediately after the merger, consolidation, or transfer which is equal to or greater than the benefit the participant would have been entitled to receive immediately before the merger, consolidation, or transfer (if the plan had then terminated). 14.4 NOTICE OF AMENDMENT, TERMINATION OR PLAN MERGER Participants affected thereby will be notified of an amendment, termination, plan merger or consolidation within a reasonable time. -80- 14.5 NONFORFEITABILITY ON TERMINATION On termination or partial termination of the plan as respects any employer, the rights of all affected participants to benefits accrued to the date of such termination or partial termination shall be non- forfeitable; provided that in such event each affected participant shall not have any recourse towards satisfaction of the participant's nonforfeitable benefits from other than the assets of the plan allocable to the participant under Section 15 or the Pension Benefit Guaranty Corporation. 14.6 LIMITATIONS ON TERMINATION Notwithstanding any other provisions of the plan, in the event of termination of the plan, the benefits of any highly compensated employee or highly compensated former employee (as defined in Section 414(q) of the Internal Revenue Code) shall be limited to benefits that are nondiscriminatory under Section 401(a)(4) of the Internal Revenue Code. -81- SECTION 15 ALLOCATION AND DISTRIBUTION OF ASSETS ON TERMINATION On termination of the plan, the committee will direct the allocation and distribution of the assets of the trust fund to participants and other persons entitled to benefits under the plan. After payment of any expenses of administration and liquidation, the assets remaining in the trust fund shall be allocated and distributed to such participants and other persons, to the extent of the sufficiency of such assets, in accordance with the provisions of Section 4044 of the Employee Retirement Income Security Act of 1974, as it may be amended from time to time, and the regulations thereunder. Any assets remaining after such allocation and distribution shall be subject to the provisions of subsection 13.4. Distribution may be made in cash or property or partly in each, provided property is distributed at its fair market value as of the date of distribution as determined by the trustee. If the committee so determines, the benefits distributable to any participant under this Section 15 who is employed by a USG Company may be retained in the trust fund until the participant's employment with the USG Companies is terminated. -82- SECTION 16 ANNUAL BENEFIT PAYMENT RESTRICTIONS 16.1 RESTRICTIONS ON ANNUAL PAYMENTS Notwithstanding any other provisions of the plan or the trust agreement, for any plan year the benefits paid to a participant who was among the 25 highly compensated employees and highly compensated former employees (as defined in Section 414(q) of the Internal Revenue Code) receiving the greatest compensation from the employers for that plan year shall be restricted to an amount equal to the payments that would be made on behalf of the participant for that year under a single life annuity that is the actuarial equivalent of the participant's accrued benefits under the plan. The foregoing restriction shall not apply for any plan year if: (a) After payment of all benefits payable under the plan for that year to such highly compensated employee or highly compensated former employee, the value of plan assets equals or exceeds 110 percent of the value of current liabilities to participants and beneficiaries under the plan; or (b) The value of all current and contingent benefits payable under the plan to or with respect to such highly compensated employee or highly compensated former employee is less than one percent of the value of current liabilities to participants and beneficiaries under the plan. 16.2 RESPONSIBILITY OF COMMITTEE The committee shall have sole responsibility to see that the restrictions of this Section 16 are applied. -83- SECTION 17 SPECIAL RULES FOR TOP-HEAVY PLANS 17.1 PURPOSE The purpose of this Section 17 is to comply with the requirements of Section 416 of the Internal Revenue Code. The provisions of this Section 17 shall be effective for each plan year beginning after December 31, 1983 in which the plan is a "top-heavy plan" within the meaning of Section 416(g) of the Internal Revenue Code. 17.2 TOP-HEAVY PLAN In general, the plan will be a top-heavy plan for any plan year if, as of the last day of the preceding plan year (the "determination date"), the present value of the cumulative accrued benefits and account balances of participants who are key employees (as defined in Section 416(i)(l) of the Internal Revenue Code) who are covered by this plan and any other defined benefit plans and any defined contribution plans that are aggregated as required or permitted by subsection 17.7 exceed 60 percent of the present value of the cumulative accrued benefits and account balances of all employees who are covered by such plans. In making the foregoing determination, the following special rules shall apply: (a) The present value of a participant's accrued benefits or account balances shall be determined in accordance with Section 416(g) of the Internal Revenue Code and any regulations issued and in effect thereunder, as applied to the terms of the plans involved. The present value of a participant's accrued benefits or account balances shall be determined as of the most recent valuation date occurring within the 12-month period ending on the applicable determination date, subject to adjustments required by Section 416 of the Internal Revenue Code and any regulations issued and in effect thereunder. The "valuation date" in determining (i) the present value of accrued benefits shall be the same date used for computing plan costs for minimum funding, regardless of whether a valuation is performed in the applicable year, and (ii) the present value of account balances shall be the most recent accounting date within the applicable 12-month period as of which -84- participants' accounts are adjusted to reflect the value of plan assets. (b) The present value of a participant's accrued benefits or account balances shall be increased by the aggregate distributions if any, made with respect to the participant during the five-year period ending on the determination date. (c) The accrued benefits or account balances of a participant who previously was a key employee, but who no longer is a key employee, shall be disregarded. (d) The accrued benefits or account balances of a beneficiary of a participant shall be considered as accrued benefits or account balances of the participant. (e) The accrued benefits or accrued balances of a participant who was not credited with an hour of service by an employer at any time during the five year period ending on the determination date shall be disregarded. 17.3 KEY EMPLOYEE In general, a "key employee" is an employee or former employee who, at any time during the five-year period ending on the determination date, is or was: (a) An officer of a USG Company receiving annual compensation greater than 150 percent of the limitation in effect under Section 415(b)(1)(A) of the Internal Revenue Code for the calendar years in which such plan years end; provided, that for purposes of this subparagraph (a), no more than 50 employees of the USG Companies (or if lesser, the greater of 3 employees or 10 percent of the employees) shall be treated as officers; (b) One of the ten employees of the USG Companies receiving annual compensation of more than the limitation in effect under Section 415(c)(l)(A) of the Internal Revenue Code for the calendar years in which such plan years end and owning both more than a one-half percent interest and the largest interests in the USG Companies; -85- (c) A 5 percent owner (as defined in Section 416(i)(l)(B)(i) of the Internal Revenue Code) of a USG Company; or (d) A 1 percent owner (as defined in Section 416(i)(l)(B)(ii) of the Internal Revenue Code) of a USG Company receiving annual compensation from the USG Companies of more than $150,000. 17.4 MINIMUM VESTING For any plan year in which the plan is a top-heavy plan, a participant's vested percentage in the participant's accrued benefit shall not be less than the percentage determined under the following table:
Years of Credited Service Vested (as defined in subsection 4.2) Percentage - ------------------------------ ---------- Less than 2 0% 2 20% 3 40% 4 60% 5 or more 100%
If the foregoing provisions of this subsection 17.4 become effective, and the plan subsequently ceases to be a top-heavy plan, each participant who has then completed three or more years of credited service may elect to continue to have the vested percentage of the participant's accrued benefit determined under the provisions of this subsection. If the foregoing provisions of this subsection 17.4 become effective, and the plan subsequently ceases to be a top-heavy plan, each participant who has then completed three or more years of employment service may elect to continue to have the vested percentage of the participant's accrued benefit determined under the provisions of this subsection 17.4. Such election shall be made no later than 60 days after the later of (i) the first day of the plan year in which the plan ceases to be a top-heavy plan; or (ii) the date participants are notified in writing of the change in the plan's status and their right to make such election. Any benefit that was nonforfeitable before the plan ceased to be top-heavy shall remain nonforfeitable. 17.5 MINIMUM BENEFIT A participant's monthly retirement income or monthly deferred vested benefit, commencing on the participant's normal retirement date and payable as a life annuity, shall not be less than an amount equal to 2 percent of the participant's average compensation (as defined below) multiplied by the number of years (not to exceed ten) of -86- the participant's top-heavy service (as defined below). A participant's "average compensation" means the monthly average of the participant's total compensation for the five consecutive years for which the participant's total compensation was highest, disregarding any compensation paid after the last year in which the plan is a top-heavy plan. A participant shall be entitled to a year of "top-heavy service" for each year of the participant's credited service ending after December 31, 1983 during which the plan is a top-heavy plan and the participant is a participant thereunder, regardless of whether the participant is a participant at the end of that year or had ceased making participant contributions under subsection 2.5 because of the participant's election to do so, the participant's transfer to a group of employees to which the plan has not been extended, or otherwise. 17.6 AGGREGATION OF PLANS In accordance with Section 416(g)(2) of the Internal Revenue Code, each other defined benefit plan and defined contribution plan maintained by the USG Companies which cover a key employee as a participant, or which is maintained by the USG companies in order for a plan covering a key employee to be qualified, shall be aggregated with this plan in determining whether this plan is top-heavy. In addition, any other defined benefit or defined contribution plan of the USG Companies may be included if all such plans which are included, when aggregated, will not discriminate in favor of officers, shareholders or highly compensated employees. The plans referred to above also shall include qualified plans that had been maintained by the USG Companies within the five year period ending on the determination date that have been terminated. 17.7 NO DUPLICATION OF BENEFITS If a participant in this plan also participates in another qualified plan maintained by the USG Companies the minimum benefit otherwise required under subsection 17.5 above may be adjusted in accordance with Section 416(f) of the Internal Revenue Code and regulations issued thereunder by the Secretary of the Treasury to prevent inappropriate omissions or require duplication of minimum benefits or contributions. 17.8 ADJUSTMENT OF COMBINED BENEFIT LIMITATIONS With respect to each participant whose retirement date or employment termination date occurs on or before December 31, 1999, the determination of the defined benefit plan fraction and defined contribution plan fraction pursuant to subsection 8.3 shall be adjusted in accordance with Section 416(h) of the Internal Revenue Code. -87- 17.9 USE OF TERMS All terms and provisions of the plan shall apply to this Section 17, except that where the terms and provisions of the plan and this Section 17 conflict, the terms and provisions of this Section 17 shall govern. -88- SECTION 18 SPECIAL RESTRICTIONS AND OVERRIDING PROVISIONS APPLICABLE DURING A RESTRICTED PERIOD 18.1 OVERRIDING PROVISIONS EFFECTIVE DURING RESTRICTED PERIOD The following provisions of this Section 18 shall become effective on a Restricted Date as the result of a Change in Control and shall remain in effect during the Restricted Period beginning on that date until the following related Unrestricted Date. During the Restricted Period the provisions of this Section 18 shall supersede any other provisions of the plan to the extent necessary to eliminate any inconsistencies between the provisions of this Section 18 and any other provisions of the plan, including any exhibits and supplements thereto. 18.2 DEFINITIONS For purposes of this Section 18, the definitions set forth in subparagraphs (a) through (n) below shall apply. Definitions set forth elsewhere in the plan also shall apply to the provisions of this Section 18, except that where a definition set forth elsewhere in the plan and a definition set forth in this subsection conflict, the definition set forth in this subsection shall govern. (a) "Acquiring Person" shall mean any Person who or which, together with all Affiliates and Associates of such Person, is the Beneficial Owner of shares of Common Stock of the Company constituting more than 20 percent of the Common Stock then outstanding, but such term does not include USG Corporation, any subsidiary of USG Corporation, any employee benefit plan of USG Corporation or any subsidiary of USG Corporation or any entity holding Common Stock for or pursuant to the terms of any such plan. (b) "Affiliate" and "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Exchange Act. (c) A Person shall be deemed the "Beneficial Owner" of any securities; -89- (i) which such Person or any of such Person's Affiliates or Associates beneficially owns, directly or indirectly; (ii) which such Person or any of such Person's Affiliates or Associates has either (A) the right to acquire (whether such right is exercisable immediately or only after the passage of time) pursuant to any agreement, arrangement or understanding (whether or not in writing), or upon the exercise of conversion rights, exchange rights, rights (other than "stock purchase rights" granted by the Company to its stockholders which by their terms become exercisable upon a Person acquiring a stated percentage of stock of the Company or a Person announcing a tender or exchange offer for a stated portion of stock of the Company), warrants or options, or otherwise; provided, however, that a Person shall not be deemed the Beneficial Owner of, or to beneficially own, securities tendered pursuant to a tender or exchange offer made by or on behalf of such Person or any of such Person's Affiliates or Associates until such tendered securities are accepted for purchase or exchange; or (B) the right to vote pursuant to any agreement, arrangement or understanding (whether or not in writing); provided, however, that a Person shall not be deemed the Beneficial Owner of, or to beneficially own, any security pursuant to this clause (B) if the agreement, arrangement or understanding to vote such security (l) arises solely from a revocable proxy given in response to a public proxy or consent solicitation made pursuant to, and in accordance with, the applicable rules and regulations of the Exchange Act and (2) is not then reportable under Item 5 of Schedule 13D under the Exchange Act (or any comparable or successor report); and -90- (iii) which are beneficially owned, directly or indirectly, by any other Person (or any Affiliate or Associate thereof) with which such Person or any of such Person's Affiliates or Associates has any agreement, arrangement or understanding (whether or not in writing) for the purpose of acquiring, holding, voting (except pursuant to a revocable proxy as described in clause (B) of subparagraph (ii) of this paragraph (c)) or disposing of any securities of the Company. (d) A "Change in Control" shall be deemed to occur upon any Person becoming an Acquiring Person. (e) "Common Stock" shall mean the Common Stock, par value $.10 per share, of the Company (as the same may be changed by reason of any combination, subdivision or reclassification of the Common Stock). (f) "Company" shall mean USG Corporation and any successor thereto because of merger, consolidation or other reason. (g) "Exchange Act" shall mean the Securities Exchange Act of 1934, as it may be amended from time to time. (h) "Person" shall mean any individual, firm, corporation or other entity, and shall include any "group" as that term is used in Rule 13d-5(b) under the Exchange Act. (i) "Post-Retirement Medical Fund" shall mean the portion of the trust fund that contains assets to be applied pursuant to Section 401(h) of the Internal Revenue Code to provide medical benefits described in USG Retiree Medical Plan. (j) "Restricted Date" shall mean the date on which a Change in Control occurs. (k) "Restricted Period" shall mean the period beginning on a Restricted Date and ending on the fifth anniversary of such Restricted Date. -91- (l) "Unrestricted Date" shall mean the last day of a Restricted Period. (m) "USG Retiree Medical Plan" means the Retiree Medical Plan maintained by the Company and the other employers under the plan for participants therein who at the time of their retirement are entitled to retirement income benefits under the plan. (n) "USG Retiree Life Insurance Plan" means the group life insurance program maintained by the Company and the other employers under the plan with respect to participants therein who at the time of their retirement are entitled to retirement income benefits under the plan. 18.3 RESTRICTIONS ON ELIGIBILITY TO PARTICIPATE During the Restricted Period, no employee of a USG Company or any other corporation, partnership or sole proprietorship may become eligible to participate in the plan unless the employee is a member of a group of employees that immediately prior to the Restricted Date was covered under the plan at a facility or location of an employer under the plan immediately prior to the Restricted Date. 18.4 PROHIBITION AGAINST MERGERS AND TRANSFERS OF ASSETS AND LIABILITIES During the Restricted Period, the plan may not be merged into any other defined benefit plan or defined contribution plan maintained by any USG Company or other corporation, partnership or sole proprietorship, nor may any other defined benefit plan or defined contribution plan be merged into the plan, and no portion of the assets and benefit liabilities of the plan may be transferred to any other defined benefit plan or defined contribution plan, nor may any assets and benefit liabilities of any other defined benefit plan or defined contribution plan be transferred to the plan. 18.5 TIMING AND METHOD OF DISTRIBUTION During the Restricted Period, the timing and methods of distributions of participants' retirement income and deferred vested benefits and death benefits payable under the plan and the determination of actuarially equivalent values shall be governed by the applicable provisions of the plan as in effect on the date immediately preceding the Restricted Date. Notwithstanding the next preceding sentence, any such participant whose retirement income or deferred vested benefit is not required to be distributed in the -92- form of a qualified joint and survivor annuity or in the form of a pre-retirement spouse's benefit (either because such participant has no spouse at the time payment of such retirement income or deferred vested benefit commences or, in the case of the qualified joint and survivor annuity or pre-retirement spouse's benefit, because the participant waived such form of payment with the participant's spouse's consent where permitted) may select, in the participant's sole discretion, the method of distribution of the participant's retirement income or deferred vested benefit (including, if applicable, distribution to the participant's beneficiary, where any portion of such retirement income or deferred vested benefit is to be distributed under the terms of the plan to the participant's beneficiary) from among the optional methods of distribution available to such participant with respect to the participant's retirement income or deferred vested benefit under the provisions of the plan as in effect on the date immediately preceding the Restricted Date. 18.6 PROHIBITION AGAINST REVERSION OF PLAN ASSETS IF PLAN TERMINATED The plan may not be terminated during the Restricted Period in a manner that would result in a reversion or diversion of any portion of the assets of the trust fund to any USG Company or other Person. If the plan is terminated during the Restricted Period: (a) Concurrent with and after the termination of the plan all former employees who previously had retired under the plan and at the time of their retirement were entitled to receive retirement income benefits under the plan and all employees who at the time of the termination of the plan are participants in the plan and either previously satisfied the eligibility requirements for retirement under the plan in effect immediately prior to such termination or will satisfy such requirements prior to the end of the Restricted Period shall have a nonforfeitable right for the balance of their lives to the postretirement medical benefits provided under the USG Retiree Medical Plan as in effect immediately prior to the date of the termination of the plan and also shall have a nonforfeitable right for the balance of their lives to the basic life insurance coverage provided by the USG Retiree Life Insurance Plan as in effect immediately prior to the date of the termination of the plan. (b) All assets of the trust fund, after payment of expenses of administration and liquidation, shall be allocated and distributed to participants and other persons entitled to benefits under the plan in accordance with the provisions of -93- Section 4044 of the Employee Retirement Income Security Act of 1974, as it may be amended from time to time, and the regulations thereunder, to the extent necessary to satisfy all liabilities for retirement income, deferred vested and death benefits payable under the plan. If any assets remain in the trust fund after all such liabilities have been paid or provided for in full: (i) Subject to the conditions and limitations set forth in subsection 18.7 and the sufficiency of such assets, such remaining assets shall be transferred to the Post-Retirement Medical Fund to the extent required to provide benefits payable pursuant to the USG Retiree Medical Plan with respect to retired employees and employees described in subparagraph (a) next above, their spouses and dependents. (ii) Subject to the conditions and limitations set forth in subsection 18.7 and the sufficiency of such assets, such remaining assets, to the extent not transferred to the Post-Retirement Medical Fund pursuant to subparagraph (i) next above, shall be applied to purchase individual or group paid-up life insurance contracts issued on the lives of retired employees and employees described in subparagraph (a) next above to the extent required to provide the life insurance coverage described in USG Retiree Life Insurance Plan other than life insurance coverage that otherwise would be provided by employee contributions. (iii) Such remaining assets, to the extent not transferred to the Post-Retirement Medical Fund pursuant to subparagraph (i) next above nor applied to provide individual or group paid-up life insurance contracts pursuant to subparagraph (ii) next above, shall be applied to provide from the trust fund additional retirement income, deferred vested and death -94- benefits to employees participating in the plan immediately prior to its termination, former employees who immediately prior to the termination of the plan were receiving retirement income or deferred vested benefits, or were entitled to receive such benefits commencing on a future date, and spouses or other persons who immediately prior to the termination of the plan were receiving death benefits thereunder, or were entitled to receive death benefits commencing on a future date. Such additional benefits shall be those which can be provided (payable in the same form and at the same times as the benefits to which they are added) with the remaining assets described above in this subparagraph after allocating such remaining assets on the basis of the respective lump sum actuarially equivalent values of the benefits payable to such persons under the plan from the trust fund (computed on the basis of the applicable actuarial factors and assumptions set forth in Exhibit A to the plan, assuming, in the case of a participant who then is eligible to retire under the plan but has not done so, that the participant will immediately retire and, in the case of a participant who is not yet eligible to retire under the plan, that the participant will retire when the participant otherwise would have first become eligible to do so). 18.7 CONDITIONS AND LIMITATIONS The provisions of subsection 18.6 shall be subject to the following conditions and limitations: (a) Medical Benefit Limitations. Assets may be transferred to the Post-Retirement Medical Fund to provide medical benefits pursuant to subparagraph 18.6(b)(i) only on a basis and in amounts which would not result in discrimination in favor of employees of the employers who are officers, -95- shareholders or highly compensated and only to the extent permitted by Section 401(h) of the Internal Revenue Code and the regulations thereunder and no medical benefits may be funded under or provided by the Post-Retirement Medical Fund for a participant who is a 5 percent owner as defined in Section 416(i)(l)(B)(i) of the Internal Revenue Code during the plan year in which the plan is terminated or any prior plan year. (b) Life Insurance Limitations. Assets may be applied to provide individual or group paid-up life insurance contracts pursuant to subparagraph 18.6(b)(ii) only on a basis and in amounts which would not result in discrimination in favor of employees of the employers who are officers, shareholders or highly compensated and assets may not be so applied which would provide life insurance benefits with respect to any retired participant that would exceed 50 percent of the participant's earnings (as defined in subsection 4.5) during the last 12 months of the participant's employment by the USG Companies. (c) Post-Retirement Medical Fund Non-Diversion and Reversion Requirements. Prior to the satisfaction of all liabilities for benefits payable from the Post-Retirement Medical Fund pursuant to the USG Retiree Medical Plan, no portion of the assets of the Post-Retirement Medical Fund may be used for, or diverted to, any purpose other than the providing of such benefits. Assets of the Post-Retirement Medical Fund may be applied to pay any necessary or appropriate expenses attributable to the administration of the Post-Retirement Medical Fund. If the USG Retiree Medical Plan is terminated, any assets remaining in the Post-Retirement Medical Fund after all liabilities for benefits payable from that fund shall be returned to the employers. 18.8 PROHIBITION AGAINST AMENDMENT During the Restricted Period, the provisions of this Section 18 may not be amended or deleted and may not be superseded by any other provision of the plan (including the provisions of any exhibit or supplement thereto). -96- EXHIBIT A TO USG CORPORATION RETIREMENT PLAN Actuarial Factors and Assumptions A-1. Purpose. The purpose of this Exhibit A is to set forth all actuarial factors and assumptions used in USG Corporation Retirement Plan. A-2. Plan Interest Rate. Interest compounded annually for the applicable period at the following rates: (a) 2-1/2 percent per annum through May 31, 1965; (b) 3 percent per annum from June 1, 1965 through December 31, 1975; (c) 5 percent per annum from January 1, 1976 through December 31, 1983; (d) 8 percent per annum from January 1, 1984 through December 31, 1984; (e) 9 percent per annum from January 1, 1985 through December 31, 1985; (f) 7 percent per annum from January 1, 1986 through December 31, 1986; (g) 6 percent per annum from January 1, 1987 through December 31, 1989; (h) 8 percent per annum from January 1, 1990 through December 31, 1991; and (i) 8 percent per annum after December 31, 1991 or such higher or lower rate equal to the nearest whole percentage point below the average rate then available for 90-day U.S. Government Treasury Bills, as may be specified for a designated period by the committee at its discretion by writing filed with the plan's actuary. A-3. Statutory Interest Rate. Interest compounded annually for the applicable period at the following rates: A-1 (a) 2-1/2 percent per annum through May 31, 1965; (b) 3 percent per annum from June 1, 1965 through December 31, 1975; (c) 5 percent per annum from January 1, 1976 through December 31, 1983; (d) 8 percent per annum from January 1, 1984 through December 31, 1984; (e) 9 percent per annum from January 1, 1985 through December 31, 1985; (f) 7 percent per annum from January 1, 1986 through December 31, 1986; (g) 6 percent per annum from January 1, 1987 through December 31, 1987. (h) 120 percent of the Federal mid-term rate (as in effect for the first month of a plan year) for the period beginning January 1, 1988 and ending on the date on which the amount of a participant's accumulated pre-1991 contributions is being determined (the "determination date"); and (i) At the interest rate that would be used as of the determination date under paragraph A-4 of this Exhibit A for the period beginning with the determination date and ending on the date on which the participant would attain normal retirement age. A-4. Lump Sum Rate. The "lump sum rate" is used to calculate the lump sum actuarially equivalent value of a participant's benefits under the plan and, effective for participants whose retirement date or employment termination date occurs on or after January 1, 1999, shall be the lesser of (a) the "GATT rate" (as defined below) in effect for the month that is two months prior to the month in which occurs the participant's last day of employment (i.e., for retirees the rate in effect for the month that is three months prior to the participant's retirement date), or (b) the average of the GATT rates in effect for the month described in subparagraph (a) and the prior five months. The GATT rate for any month shall be the average for the month of the annual rates of interest on 30-year Treasury securities, as announced by The Treasury Department pursuant to Section 417(e)(3)(A)(ii)(II) of the Internal Revenue Code. Notwithstanding the above, the lump sum actuarially equivalent value of the benefit of a participant whose retirement date A-2 occurs on or after January 1, 1999 and on or prior to January 1, 2000, or whose employment termination date occurs on or after January 1, 1999 and prior to January 1, 2000, shall not be less than such value determined under Paragraphs A-4 and A-6 of Exhibit A of the plan as in effect on December 31, 1998. A-5. Other Forms. For purposes of determining actuarial equivalence between forms of benefit payment under the plan (other than calculation of lump sum actuarially equivalent values in accordance with paragraph A-4), the interest rate used under the plan is 7 percent. A-6. Mortality. The mortality factors under the plan shall be taken from the 1983 Group Annuity Table with weighted annuity factors assuming a population of 90 percent males and 10 percent females. Notwithstanding the above, for purposes of determining the lump sum actuarially equivalent value of a participant's benefit, the mortality factors shall be those set forth in the table described in Section 417(e)(3)(A)(ii)(I) of the Internal Revenue Code. A-7. Amendment of Actuarial Factors and Assumptions. If the actuarial factors and assumptions in this Exhibit A are amended, the actuarial equivalent of a participant's accrued benefits shall be determined in accordance with the factors and assumptions as amended; provided, however, the actuarial equivalent of a participant's accrued benefits on and after the date of such amendment shall not be less than the actuarial equivalent of the participant's accrued benefits determined as of the date immediately before such amendment in accordance with the actuarial factors and assumptions then in use. A-3 SUPPLEMENT 1 TITLES OF SUPPLEMENTS IN EFFECT IMMEDIATELY PRIOR TO THE RESTATEMENT EFFECTIVE DATE SUPPLEMENT A - January 1, 1976 merger of the Kinkead and Durabond plans. SUPPLEMENT B - January 1, 1977 merger of the Kewanee plan. SUPPLEMENT C - Special deferred vested rights for Fiberesin Plastics Division. SUPPLEMENT D - January 1, 1978 merger of Trenton plan. SUPPLEMENT E - April 26, 1985 sale of Hollytex. Full vesting for all terminating Hollytex employees. SUPPLEMENT F - Asset/Liability Transfers. USG Industries and AP Green Refractories, Wood Fiber Industries and Masonite, USG Commercial Architectural Products, Inc. and Integrated Ceilings, Inc. SUPPLEMENT G - January 1, 1988 merger of the Donn Incorporated Retirement Income Plan No. 2 (salaried plan). SUPPLEMENT H - January 1, 1989 merger o the DAP, Inc. plan. SUPPLEMENT I - January 1, 1992 merger of the USG Interiors, Inc. Hourly Employees' Pension Plan (former Donn hourly plan). Termination of the two money purchase pension plans at Cartersville and Stockton. SUPPLEMENT J - DAP, Inc. spinoff into Wassall Plan (assets transferred). Special provisions for three former DAP employees hired by USG, Sam Constan, Phillip Kohut, Joanne Twomey. SUPPLEMENT K - Benefit transfers between this plan and Retirement Income Plan for Salaried Employees of Masonite Corporation. Special provisions for Randall Catt, Richard Fleming and Vincent Flood. EX-10.37 6 c92112exv10w37.txt FIRST AMENDMENT OF USG CORPORATION RETIREMENT PLAN EXHIBIT 10-37 FIRST AMENDMENT OF USG CORPORATION RETIREMENT PLAN (As Amended and Restated Effective as of January 1, 1999) WHEREAS, USG Corporation Retirement Plan (the "plan") is maintained by USG Corporation (the "company"), which plan was amended and restated on December 29, 1999, effective as of January 1, 1999; and WHEREAS, it now is deemed desirable and in the best interests of the employers under the plan and their employees to further amend the plan; NOW, THEREFORE, pursuant to the amending power reserved to the company under subsection 14.1 of the plan, the plan is further amended as follows: 1. By adding the following at the end of subsection 7.8 of the Plan, effective January 1, 1999: "The actuarial increase described in the preceding sentence shall apply to periods during which a participant is in suspendible service under Section 203(a)(3)(B) of ERISA." 2. By adding the following at the end of subsection 8.6 of the plan, effective January 1, 1999: "The accrued benefit of a 'Section 401(a)(17) employee' (as defined in Treasury Regulation 1.401(a)(17)-1(e)(2)(i)) shall be determined in accordance with Treasury Regulation 1.401(a)(17)-1(e)." 3. By adding the following new subsection 8.15 to the Plan, effective January 1, 1999: "8.15 Contribution Limitations For each plan year, the annual addition (as defined below) to a participant's accounts under all defined contribution plans maintained by the company shall not exceed the lesser of $30,000 (or such greater amount as may be determined by the Commissioner of Internal Revenue for the calendar year which begins with or within that plan year) or 25 percent of the participant's Section 415 compensation (as defined below) during that plan year. The term 'annual addition' for any plan year means the sum of the company contributions, participant contributions and remainders credited to a participant's accounts for that year. Any participant contributions which cannot be allocated to a participant because of the foregoing limitations (and any gains attributable thereto) shall be returned to him. If, as a result of the allocation of forfeitures or a reasonable error in estimating a participant's compensation, company contributions cannot be allocated to a participant because of the foregoing limitations, such amounts shall be applied to reduce company contributions in succeeding plan years, in order of time. A participant's 'Section 415 compensation' means his total cash compensation for services rendered to the company as an employee, determined in accordance with Section 415(c)(3) of the Internal Revenue Code and the regulations thereunder, including any elective deferral (as defined in Section 402(g)(3) of the Internal Revenue Code) and any amount contributed or deferred by the company at the participant's election which is excludable from income under Section 125 or 457 of the Internal Revenue Code." 4. By adding the following news subsection 8.16 to the Plan, effective January 1, 1999: "8.16 Benefit Limitations Notwithstanding any other provisions of the plan, a participant's monthly retirement income or monthly deferred vested benefit as of the end of any plan year may not exceed an amount which is equivalent to a monthly retirement income or deferred vested benefit payable for life only (not taking into account that portion of any joint and survivor annuity which constitutes a qualified joint and survivor annuity under the Internal Revenue Code), equal to $7,500 (or such greater amount as may be determined by the Commissioner of Internal Revenue for calendar years which begin with or within that plan year). If payment of a participant's monthly retirement -2- income or deferred vested benefit begins before he attains the Social Security Retirement Age, such limitation shall be reduced so that it is equivalent to a monthly benefit of $7,500 commencing at the Social Security Retirement Age. If payment of a participant's monthly retirement income begins after he attains the Social Security Retirement Age, such limitation shall be increased so that it is equivalent to a monthly benefit of $7,500 commencing at the Social Security Retirement Age. For purposes of adjusting amounts under this subsection 8.16, the interest rate assumption and mortality shall be determined in accordance with Paragraph A-8 of Exhibit A. In the case of a participant with less than 10 years of participation in the plan, the foregoing limitation shall be multiplied by a fraction, the numerator of which shall be the participant's number of full and fractional years of participation in the plan (but not less than 1) and the denominator of which shall be 10. In no event shall a participant's monthly retirement income as of the end of any plan year exceed 100% of his average compensation for his high three years. A participant's 'average compensation for his high three years' means his average monthly compensation during the period of three consecutive calendar years of his service with the employers (or during his actual number of years of service if less than three such years) in which his aggregate compensation from the employers was the greatest. For purposes of this subsection 8.16, a participant's 'compensation' means his total cash compensation for services rendered to the employers as an employee, determined in accordance with Section 415(c)(3) of the Internal Revenue Code and the regulations thereunder. The provisions of this subsection 8.16 shall not reduce the monthly retirement income or deferred vested benefit of any participant below such participant's accrued benefit as of December 31, 1986 (determined under the terms of the plan as in effect on May 5, 1986 as though the participant had terminated employment on December 31, 1986). The accrued benefit of any participant that exceeds the benefit limitations under Section 415 of the Internal Revenue Code as amended by the Tax Reform Act of 1986 (including the 'current accrued benefit,' as described in Q&A 12 of IRS Notice 87-21) shall be reduced, as of the first day of the first limitation year beginning after December 31, 1986, to the level permitted under the Tax Reform Act of 1986. 5. By adding the following at the end of subsection 18.7 of the Plan, effective January 1, 1999: "The aggregate actual contributions for retiree medical benefits, when added to the actual contributions for life insurance under the plan, are limited to 25 percent of the total actual contributions made to the plan -3- (other than contributions to fund past service credits) after the later of the adoption or effective date of the Post-Retirement Medical Fund." 6. By adding the following Paragraph at the end of the Supplement A of the Plan, effective January 1, 1999: "A-8. Special Provisions Effective Under The Small Business Job Protection Act of 1996: (1) In General: As provided in the Small Business Job Protection Act of 1996, a Participant's projected annual benefit, 'annual benefit,' and compliance with Code Section 415's benefit limitations shall be determined in accordance with Revenue Ruling 98-1, and specifically Q&A-7 and Q&A-8. (2) For purposes of applying Code Section 415(b) to a benefit that is not payable in the form of an annual straight life annuity within the meaning of Code Section 415(b)(2)(A) and that is not subject to Code Section 417(e)(3), the determination as to whether such a benefit satisfies the Code Section 415(b) limitations is made by comparing the equivalent annual benefit determined in Step 1 below with the lesser of the age-adjusted dollar limit determined in Step 2 below and the Code Section 415(b) compensation limitation described in Step 3 below: Step 1: Under Code Section 415(b)(2)(B), determine the annual benefit in the form of a straight life annuity commencing at the same age that is actuarially equivalent to the plan benefit. In general, Code Section 415(b)(2)(E)(i) and (v) require that the equivalent annual benefit be the greater of the equivalent annual benefit computed using the interest rate and mortality table, or tabular factor, specified in the plan for actuarial equivalence for the particular form of benefit payable (plan rate and plan mortality table, or plan tabular factor, respectively) and the equivalent annual benefit computed using a 5 percent interest rate assumption and the applicable mortality table. This step does not apply to a benefit that is not required to be converted to a straight life annuity pursuant to Code Section 415(b)(2)(B) (for example, a qualified joint and survivor annuity). Step 2: Under Code section 415(b)(2)(C) or (D), determine the Code Section 415(b) dollar limitation that applies at the age the benefit is payable (age-adjusted dollar limit). The age-adjusted dollar limit is the annual benefit that is actuarially equivalent to an -4- annual benefit equal to Code Section 415(b) dollar limitation payable at the participant's Social Security Retirement Age. If the age at which the benefit is payable is 62 or greater, and less than the participant's Social Security Retirement Age, the age-adjusted dollar limit is determined by reducing the Code Section 415(b) dollar limitation at the participant's Social Security Retirement Age using adjustment factors that are consistent with the factors used to reduce old-age insurance benefits under Social Security Act. Pursuant to Q&A 5 of IRS Notice 87-21, the Code section 415(b) dollar limitation at the participant's Social Security Retirement Age is reduced by 5/9 of 1 percent for each of the first 36 months by which benefits commence before the month in which the participant's Social Security Retirement Age is attained and by 5/12 of 1 percent for each additional month. If the age at which the benefit is payable is less than 62, the age-adjusted dollar limit is determined by reducing the age-adjusted dollar limit at age 62 on an actuarially equivalent basis. In general, Code Section 415(b)(2)(E)(ii) and (v) require that the reduced age-adjusted dollar limit be the lesser of the equivalent amount computed using the plan rate and plan mortality table (or plan tabular factor) used for actuarial equivalence for early retirement benefits under the plan and the amount computed using 5 percent interest and the applicable mortality table prescribed under Revenue Ruling 95-6 (used to the extent described in A&A-6 of Revenue Ruling 98-1 which provides that for purposes of adjusting any limitation under Code Section 415(b)(2)(C) or (D) that, to the extent a forfeiture does not occur upon death, the mortality decrement may be ignored prior to age 62 and must be ignored after Social Security Retirement Age). If the age at which the benefit is payable is greater than the participant's Social Security Retirement Age, the age-adjusted dollar limit is determined by increasing the Code Section 415(b) dollar limitation of the participant's Social Security Retirement Age on an actuarially equivalent basis. In general, Code Section 415(b)(2)(E)(i) and (v) require that the increased age-adjusted dollar limit be the lesser of the equivalent amount computed using the plan rate and plan mortality table (or plan tabular factor) used for actuarial equivalence for late retirement benefits under the plan and equivalent amount computed using 5 percent interest and applicable mortality table (used to the extent described in Q&A-6, as described in the prior paragraph). -5- Step 3: Determine the participant's Code Section 415(b) compensation limitation. This limitation is equal to the participant's compensation averaged over the consecutive three-year period producing the highest average, as provided in Code section 415(b)(3). The equivalent annual benefit determined in Step 1 shall be no greater than the lesser of the age-adjusted dollar limit determined in Step 2 and the Code Section 415(b) compensation limitation determined in Step 3. (3) For purposes of applying Code Section 415(b)(2)(B) to a benefit that is payable in a form subject to Code 417(e)(3), the determination of the equivalent annual benefit is the same as in Step 1 of subsection (2) above, except that under Code Section 415(b)(2)(E)(ii), the applicable interest rate under Q&A-5 of Revenue Ruling 98-1 (i.e. 'GATT interest rates') is substituted for the 5 percent interest rate under Code Section 415(b)(E)(i). Thus, the equivalent annual benefit must be the greater of the equivalent annual benefit computed using the plan rate and plan mortality table (or plan tabular factor) and the equivalent annual benefit computed using the applicable interest rate and mortality table. (4) The changes made to Code Section 415(b)(2)(E) apply to all Plan benefits, including benefits accrued before the first limitation year beginning after December 31, 1994. (5) The limitations of this Paragraph A-8 shall be applied to 'old-law benefits' (as defined in Revenue Ruling 98-1) using Method 3 of Q&A 1 of such Revenue Ruling." IN WITNESS WHEREOF, the company has caused these presents to be signed by its officer thereunto duly authorized this 22nd day of May, 2001. USG CORPORATION By: ------------------------------------ -6- EX-21 7 c92112exv21.txt SUBSIDIARIES EXHIBIT 21 SUBSIDIARIES The companies listed below are the primary subsidiaries of the Corporation. The financial data for these subsidiaries, as well as for other subsidiaries which are not considered to be significant and are therefore excluded from this exhibit, comprised the Corporation's consolidated financial statements.
ORGANIZED UNDER NAME OF COMPANY LAWS OF - --------------- ------------------- Domestic: United States Gypsum Company (a).......................... Delaware USG Interiors, Inc. (a)................................... Delaware L&W Supply Corporation (a)(b)............................. Delaware USG Foreign Investments, Ltd. (a)......................... Delaware USG Interiors International, Inc. ........................ Ohio La Mirada Products Co., Inc. ............................. Ohio USG Foreign Sales Corporation............................. U.S. Virgin Islands Gypsum Engineering Company................................ Delaware Alabaster Assurance Company, Ltd. ........................ Vermont USG Latin America Inc. ................................... Delaware Beadex Manufacturing LLC.................................. Delaware B-R Pipeline Company...................................... Delaware Stocking Specialists, Inc. ............................... Delaware USG Pipeline Company...................................... Delaware International: CGC Inc. (a).............................................. New Brunswick USG Canadian Mining Ltd. ................................. New Brunswick Gypsum Transportation Limited............................. Bermuda USG Mexico, S.A. de C.V. ................................. Mexico USG Holding de Mexico, S.A. de C.V. ...................... Mexico Exploracion de Yeso, S.A. de C.V. ........................ Mexico USG Manufacturing Worldwide, Ltd. ........................ Cayman Islands USG Cayman Holdings Ltd. ................................. Cayman Islands USG Interiors East Innenausbauvertriebsgesellschaft mbH... Germany USG Deutschland GmbH...................................... Germany USG Ventures - Europe GmbH................................ Germany USG (U.K.) Ltd. .......................................... United Kingdom USG France S.A. .......................................... France USG Belgium Manufacturing S.A. ........................... Belgium USG Europe Services S.A. ................................. Belgium USG Asia Pacific Holdings Pty. Ltd. ...................... Singapore USG Interiors Pacific Ltd. ............................... New Zealand USG Interiors (Far East) SDN BHD.......................... Malaysia Shenzhen USG Zhongbei Building Materials Co., Ltd . ...... China USG (Netherlands) B.V. ................................... Netherlands Alabaster Engineering (Nederland) B.V. ................... Netherlands Red Top Technology (Nederland) B.V. ...................... Netherlands
(a) Accounts for material revenues. (b) As of December 31, 2004, L&W Supply Corporation conducted its business out of 186 locations in the United States using various names registered under applicable assumed business name statutes. EX-23 8 c92112exv23.txt CONSENTS OF EXPERTS OF COUNSEL EXHIBIT 23 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in Registration Statements Nos. 33-40136, 33-64217, and 33-60563 (as amended) on Form S-3, Registration Statement Nos. 33-22581 (as amended), 33-22930, 33-36303, 33-63554, 33-65383, 333-34147, and 333-50388 on Form S-8, and Registration Statement No. 33-52573 on Form S-1 of USG Corporation and subsidiaries (the "Corporation") of our reports dated February 8, 2005, relating to the consolidated financial statements and financial statement schedules of the Corporation (which report expresses an unqualified opinion and includes explanatory paragraphs referring to (i) matters which raise substantial doubt about the Corporation's ability to continue as a going concern; and (ii) changes in methods of accounting for asset retirement obligations and goodwill and other intangible assets due to the Corporation's adoption of Statement of Financial Accounting Standards (SFAS) No. 143, "Accounting for Asset Retirement Obligations" in 2003 and SFAS No. 142, "Goodwill and Other Intangible Assets" in 2002) and management's report on the effectiveness of internal control over financial reporting included in this Form 10-K for the year ended December 31, 2004. (DELOITTE & TOUCHE LLP) Chicago, Illinois February 18, 2005 EX-24 9 c92112exv24.txt POWER OF ATTORNEY EXHIBIT 24 POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS, that each person whose name appears below constitutes and appoints Richard H. Fleming, D. Rick Lowes, and J. Eric Schaal and each of them, his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for and in his or her name, place and stead, in any and all capacities, to sign the Annual Report on Form 10-K for the year ending December 31, 2004, of USG Corporation and any or all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his substitutes, may lawfully do or cause to be done by virtue hereof. This power of attorney has been signed as of the 9th day of February, 2005, by the following persons: /s/ William C. Foote /s/ David W. Fox - ---------------------------------------- ------------------------------------- William C. Foote, David W. Fox, Director, Chairman of the Board, Director Chief Executive Officer and President /s/ Robert L. Barnett /s/ Valerie B. Jarrett - ---------------------------------------- ------------------------------------- Robert L. Barnett, Valerie B. Jarrett, Director Director /s/ Keith A. Brown /s/ Marvin E. Lesser - ---------------------------------------- ------------------------------------- Keith A. Brown, Marvin E. Lesser, Director Director /s/ James C. Cotting /s/ John B. Schwemm - ---------------------------------------- ------------------------------------- James C. Cotting, John B. Schwemm, Director Director /s/ Lawrence M. Crutcher /s/ Judith A. Sprieser - ---------------------------------------- ------------------------------------- Lawrence M. Crutcher, Judith A. Sprieser, Director Director /s/ W. Douglas Ford - ---------------------------------------- W. Douglas Ford, Director EX-31.1 10 c92112exv31w1.txt CERTIFICATION EXHIBIT 31.1 CERTIFICATIONS I, William C. Foote, certify that: 1. I have reviewed this annual report on Form 10-K of USG Corporation (the "Corporation"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Corporation as of, and for, the periods presented in this report; 4. The Corporation's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act rules 13a-15(f) and 15(d)-15(f)) for the Corporation and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Corporation, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; (c) Evaluated the effectiveness of the Corporation's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the Corporation's internal control over financial reporting that occurred during the Corporation's most recent fiscal quarter (the Corporation's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Corporation's internal control over financial reporting; and 5. The Corporation's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Corporation's auditors and the audit committee of the Corporation's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Corporation's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Corporation's internal controls over financial reporting. February 18, 2005 /s/ William C. Foote ---------------------------------------- William C. Foote Chairman, Chief Executive Officer and President EX-31.2 11 c92112exv31w2.txt CERTIFICATION EXHIBIT 31.2 CERTIFICATIONS I, Richard H. Fleming, certify that: 1. I have reviewed this annual report on Form 10-K of USG Corporation (the "Corporation"); 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Corporation as of, and for, the periods presented in this report; 4. The Corporation's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act rules 13a-15(f) and 15(d)-15(f)) for the Corporation and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Corporation, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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; (c) Evaluated the effectiveness of the Corporation's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) Disclosed in this report any change in the Corporation's internal control over financial reporting that occurred during the Corporation's most recent fiscal quarter (the Corporation's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Corporation's internal control over financial reporting; and 5. The Corporation's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Corporation's auditors and the audit committee of the Corporation's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Corporation's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Corporation's internal controls over financial reporting. February 18, 2005 /s/ Richard H. Fleming ---------------------------------------- Richard H. Fleming Executive Vice President and Chief Financial Officer EX-32.1 12 c92112exv32w1.txt CERTIFICATION EXHIBIT 32.1 SECTION 1350 CERTIFICATIONS In connection with the Annual Report of USG Corporation (the "Corporation") on Form 10-K, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, William C. Foote, Chairman, Chief Executive Officer and President of the Corporation, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation. February 18, 2005 /s/ William C. Foote ---------------------------------------- William C. Foote Chairman, Chief Executive Officer and President EX-32.2 13 c92112exv32w2.txt CERTIFICATION EXHIBIT 32.2 SECTION 1350 CERTIFICATIONS In connection with the Annual Report of USG Corporation (the "Corporation") on Form 10-K, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Richard H. Fleming, Executive Vice President and Chief Financial Officer of the Corporation, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Corporation. February 18, 2005 /s/ Richard H. Fleming ---------------------------------------- Richard H. Fleming Executive Vice President and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----