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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 2005
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
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New York Stock Exchange
Common Stock, $0.10 par value Chicago Stock Exchange
Preferred Share Purchase Rights (subject to New York Stock Exchange
Rights Agreement dated March 27, 1998, as amended) Chicago Stock Exchange
Preferred Stock Purchase Rights (subject to New York Stock Exchange
Reorganization Rights Plan, dated January 30, 2006) Chicago Stock Exchange
8.5% Senior Notes, Due 2005 New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: None
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(Title of Class)
Indicate by check mark whether the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or 15(d) of the Exchange Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, or a non-accelerated filer. See definition of
"accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange
Act.
Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as
defined in Exchange Act Rule 12b-2) Yes [ ] No [X]
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [X] No [ ]
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,
2005 (the last business day of the registrant's most recently completed second
fiscal quarter), was approximately $1,834,759,765.
The number of shares outstanding of the registrant's common stock as of
January 31, 2006, was 44,683,671.
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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 10, 2006,
are incorporated by reference into Part III of this Form 10-K Report where
indicated.
TABLE OF CONTENTS
PART I Page
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Item 1. Business............................................... 3
Item 1a. Risk Factors........................................... 8
Item 1b. Unresolved Staff Comments.............................. 13
Item 2. Properties............................................. 14
Item 3. Legal Proceedings...................................... 15
Item 4. Submission of Matters to a Vote of Security Holders.... 15
PART II
Item 5. Market for the Registrant's Common Stock, Related
Stockholder Matters and Issuer Purchases of Equity
Securities........................................... 16
Item 6. Selected Financial Data................................ 17
Item 7. Management's Discussion and Analysis of Results of
Operations and Financial Condition................... 18
Item 7a. Quantitative and Qualitative Disclosures About
Market Risks......................................... 40
Item 8. Financial Statements and Supplementary Data............ 41
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure.................. 81
Item 9a. Controls and Procedures................................ 81
PART III
Item 10. Directors and Executive Officers of the Registrant..... 83
Item 11. Executive Compensation................................. 85
Item 12. Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters........... 85
Item 13. Certain Relationships and Related Transactions......... 85
Item 14. Principal Accounting Fees and Services................. 85
PART IV
Item 15. Exhibits and Financial Statement Schedules............. 86
Signatures ......................................................... 90
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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 (the "Bankruptcy
Code") in the United States Bankruptcy Court for the District of Delaware (the
"Bankruptcy Court"). The Chapter 11 cases of the Debtors (the "Chapter 11
Cases") have been consolidated for purposes of joint administration as In re:
USG Corporation et al. (Case No. 01-2094). These cases do not include any of the
Corporation's non-U.S. subsidiaries or companies that were acquired
post-petition by Debtor L&W Supply Corporation. The Debtors initiated Chapter 11
proceedings 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 Bankruptcy
Code.
U.S. Gypsum is a defendant in asbestos lawsuits alleging both property
damage and personal injury. Other Debtors 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 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. Since the Filing, the
Debtors have ceased making payments with respect to asbestos lawsuits.
In late January 2006, the Debtors, the committee representing asbestos
personal injury claimants (the "Official Committee of Asbestos Personal Injury
Claimants" or "ACC"), and the legal representative for future asbestos personal
injury claimants (the "Futures Representative") reached an agreement to resolve
Debtors' present and future asbestos personal injury liabilities and to
cooperate in the confirmation of a plan of reorganization consistent with that
resolution (the "Asbestos Agreement"). The Asbestos Agreement was approved by
USG's Board of Directors on January 29, 2006, and was executed by the Futures
Representative and each law firm representing a member of the ACC. The Asbestos
Agreement also is supported by the committee representing unsecured creditors
(the "Official Committee of Unsecured Creditors") and the committee representing
the Corporation's shareholders (the "Official Committee of Equity Security
Holders"). The Asbestos Agreement does not include asbestos property damage
claims, and the committee representing asbestos property damage claimants (the
"Official Committee of Asbestos Property Damage Claimants") has not taken a
position on the Asbestos Agreement.
As contemplated by the Asbestos Agreement, the Debtors expect to file a
proposed plan of reorganization (the "Proposed Plan") and a Disclosure Statement
with the Bankruptcy Court in February 2006 incorporating the terms of the
Asbestos Agreement and addressing the treatment of other claims and interests.
Pursuant to the Proposed Plan, a trust would be created and funded by Debtors
pursuant to Section 524(g) of the Bankruptcy Code, and this trust would
compensate all qualifying present and future asbestos personal injury claims
against the Debtors. If confirmed by the courts, the Proposed Plan would contain
an injunction channeling all asbestos personal injury claims against the Debtors
to the Section 524(g) trust for payment and precluding any individual or entity
from bringing an asbestos personal injury claim against Debtors. This channeling
injunction would include any asbestos personal injury claims against Debtors
relating to A.P. Green Refractories Co., a former subsidiary of U.S. Gypsum and
the
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Corporation. The amount that the Debtors would be required to pay to the Section
524(g) asbestos personal injury trust would depend upon whether national
legislation creating a trust for payment of asbestos personal injury claims is
enacted by the 10th day after final adjournment of the 109th Congress. If the
Proposed Plan is confirmed and the legislation is enacted by that date, the
Debtors' funding obligation to the Section 524(g) trust would be $900 million.
If the Proposed Plan is confirmed and such legislation is not enacted before
that date, or such legislation is enacted but held unconstitutional, the
Debtors' funding obligation to the Section 524(g) trust would total $3.95
billion.
Under the Proposed Plan, allowed claims of all other creditors, including
allowed claims of general unsecured creditors, would be paid in full, with
interest where required. Disputed claims, including disputed asbestos property
damage claims, would be resolved in the bankruptcy proceedings or other forum,
where appropriate. Upon resolution of those disputed claims, the allowed amount
of any such claims would also be paid in full, with interest where required.
Shareholders of the Corporation as of the effective date of the Proposed Plan
would retain their shares, and pursuant to a proposed shareholder rights
offering, would have the right to purchase, at $40.00 per share, one new common
share of the Corporation for each share owned as of the effective date of the
rights offering.
There are important conditions to the Asbestos Agreement and conditions to
confirmation and effectiveness of the Proposed Plan. One of the conditions of
the Asbestos Agreement is that the Proposed Plan must be confirmed and have an
effective date on or before August 1, 2006, absent written agreement among all
parties to the Asbestos Agreement to extend that time. There can be no assurance
that the Proposed Plan will be confirmed or, if confirmed, become effective by
August 1, 2006.
Additional information about the Proposed Plan, the Section 524(g)
asbestos personal injury trust contemplated by the Proposed Plan, funding
relating to the Proposed Plan, conditions and other factors relating to the
effectiveness of the Proposed Plan, and asbestos litigation involving the
Debtors is set forth in 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 18, 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 54%, 12% and 34%
of 2005 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 2005. 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 and accessories provides water-damage-resistant
and fire-resistant assemblies for both interior and exterior construction. The
FIBEROCK(R) line of gypsum fiber panels includes abuse-resistant wall panels and
floor underlayment as well as sheathing panels usable as a substrate for most
exterior systems and as roof cover board sold under the SECUROCK(R) brand name.
The LEVELROCK(R) line of poured gypsum underlayments provides surface leveling
and enhanced sound performance for residential, commercial and multi-family
installations. The Corporation produces a variety of construction plaster
products used to provide a custom finish for residential and commercial
interiors.
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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 42 plants located
throughout the United States, Canada and Mexico.
Gypsum rock is mined or quarried at 14 company-owned locations in North
America. In 2005, 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 24 years of operation based on the
Corporation's average annual production of crude gypsum during the past five
years of 9.7 million tons. Proven reserves contain approximately 240 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 by-product 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. Of the
Corporation's gypsum wallboard plants, 48% use some or all synthetic gypsum in
their operations.
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 7% of the Corporation's paper supply was
purchased from such sources during 2005.
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 2005 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 more than 30% of the total gypsum wallboard sales
in the United States. In 2005, U.S. Gypsum shipped 11.3 billion square feet of
wallboard, the highest level in its history. U.S. industry shipments (including
imports) estimated by the Gypsum Association were a record 37.2 billion square
feet. 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, compatibility of systems
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and product design features.
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 15 plants located in North
America, Europe and the Asia-Pacific region. 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.
MARKETING AND DISTRIBUTION
Worldwide Ceilings' products are sold primarily in markets related to the
construction and renovation of commercial buildings. Marketing and distribution
are conducted through a network of distributors, installation contractors, L&W
Supply locations 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 (owned by
Gebr. Knauf Verwaltungsgellschaft KG). Principal methods of competition are
quality of products, service, pricing, compatibility of systems and product
design features.
BUILDING PRODUCTS DISTRIBUTION
BUSINESS
Building Products Distribution consists of L&W Supply, the leading specialty
building products distribution business in the United States. In 2005, L&W
Supply distributed approximately 11% of all gypsum wallboard in the United
States, including approximately 32% of U.S. Gypsum's wallboard production.
MARKETING AND DISTRIBUTION
L&W Supply was organized in 1971. It is a service-oriented organization that
stocks a wide 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
50% of its 2005 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 90% of its facilities
from third parties. Typical leases are five years and include renewal options.
L&W Supply remains focused on opportunities to profitably grow its
specialty business as well as optimize asset utilization. As part of its plan,
L&W Supply acquired eight locations in 2005. As of December 31, 2005, L&W Supply
operated 192
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locations in 36 states, compared with 186 locations and 183 locations as of
December 31, 2004 and 2003, respectively.
COMPETITION
L&W Supply competes with a number of specialty wallboard distributors, lumber
dealers, hardware stores, home improvement centers and acoustical ceiling tile
distributors. Competitors include Gypsum Management Supply with locations in the
southern, central and western United States, Rinker Materials Corporation in the
southeastern United States (primarily in Florida), KCG, Inc. in the southwestern
and central United States, The Strober Organization, Inc. in the northeastern
and mid-Atlantic states, and Allied Building Products Corporation in the
northeastern, central and western United States. Principal methods of
competition are location, service, range of products and pricing.
EXECUTIVE OFFICERS OF THE REGISTRANT
See Part III, Item 10, Directors and Executive Officers of the Registrant -
Executive Officers of the Registrant (as of February 14, 2006).
OTHER INFORMATION
RESEARCH AND DEVELOPMENT
The Corporation performs research and development at the USG Research and
Technology Innovation Center (the "Research Center") in Libertyville, Ill.
Research team members provide product support and new product development for
the operating units of the Corporation. With unique fire, acoustical, structural
and environmental testing capabilities, the Research Center can evaluate
products and systems. Chemical analysis and materials characterization support
product development and safety/quality assessment programs. Development
activities can be taken to an on-site pilot-plant level before being transferred
to a full-size plant. Research is also conducted at two satellite locations
where industrial designers and fabricators work on new ceiling grid concepts and
prototypes.
In 2006, a new lab will be formed to give special focus to innovation,
further enhancing the research team's commitment to the Corporation's growth
initiative.
Research and development expenditures are charged to earnings as incurred
and amounted to $17 million, $17 million and $18 million in the years ended
December 31, 2005, 2004 and 2003, respectively.
ENERGY
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. Currently, energy price swap
agreements are used by the Corporation to hedge the cost of a substantial
majority of purchased natural gas.
SIGNIFICANT CUSTOMER
On a worldwide basis, The Home Depot, Inc. accounted for approximately 11% of
the Corporation's consolidated net sales in 2005, 2004 and 2003.
OTHER
Because orders are filled upon receipt, no operating segment has any significant
order backlog.
None of the operating segments has any special working capital
requirements.
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 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. 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 2005, the average number of employees of the Corporation was 14,100.
See Part II, Item 8, Financial Statements and Supplementary Data - Notes
to Consolidated Financial Statements, Note 16, Segments, for financial
information pertaining to operating and geographic segments.
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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 paper
copy of any exhibit to the Corporation's reports filed with or furnished to the
SEC, such exhibit may be obtained, upon payment of reasonable expenses, by
writing to: J. Eric Schaal, Corporate Secretary, 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 100 F Street, N.E.,
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.
ITEM 1A. RISK FACTORS
Our business, operations and financial condition are subject to various risks
and uncertainties. You should carefully consider the risks and uncertainties
described below, together with all of the other information in this annual
report on Form 10-K and in other documents that we file with the SEC, before
making any investment decision with respect to our securities. If any of the
following risks or uncertainties actually occur or develop, our business,
financial condition, results of operations and future growth prospects could
change. Under these circumstances, the trading prices of our securities could
decline, and you could lose all or part of your investment in our securities.
THE DEBTORS EXPECT TO FILE A PROPOSED PLAN TO RESOLVE THEIR PRESENT AND FUTURE
ASBESTOS PERSONAL INJURY LIABILITIES PURSUANT TO AN AGREEMENT WITH THE OFFICIAL
COMMITTEE OF ASBESTOS PERSONAL INJURY CLAIMANTS (OR ACC) AND THE FUTURES
REPRESENTATIVE. HOWEVER, THERE IS NO GUARANTEE THAT THE PROPOSED PLAN WILL BE
CONFIRMED. IF THE PROPOSED PLAN, OR A SUBSTANTIALLY SIMILAR PLAN, IS NOT
CONFIRMED, THE INTERESTS OF THE DEBTORS' CREDITORS AND STOCKHOLDERS MAY BE
SIGNIFICANTLY AND ADVERSELY AFFECTED BY ANY PLAN OF REORGANIZATION ULTIMATELY
CONFIRMED, AND THE INTERESTS OF THE CORPORATION'S STOCKHOLDERS MAY BE
SUBSTANTIALLY DILUTED OR CANCELLED IN WHOLE OR IN PART. EVEN IF THE PROPOSED
PLAN IS CONFIRMED, THE CORPORATION'S PAYMENTS TO THE ASBESTOS PERSONAL INJURY
TRUST WILL VARY SUBSTANTIALLY DEPENDING UPON WHETHER FEDERAL ASBESTOS TRUST FUND
LEGISLATION IS ENACTED, OR IS ENACTED BUT FOUND UNCONSTITUTIONAL. PASSAGE OF
SUCH LEGISLATION IS EXTREMELY SPECULATIVE AND NOT WITHIN THE CONTROL OF THE
CORPORATION.
Pursuant to the Asbestos Agreement with the ACC and the Futures Representative,
the Debtors expect to file a Proposed Plan in February 2006 pursuant to which
the Debtors propose to resolve their present and future asbestos personal injury
liabilities through the creation and funding of an asbestos personal injury
trust under Section 524(g) of the Bankruptcy Code. If the Proposed Plan is
confirmed, all present and future asbestos personal injury claims against the
Debtors would be channeled to the trust, and no individual or entity may
thereafter bring an asbestos personal injury claim against Debtors. The amount
that the Debtors must pay to the Section 524(g) asbestos personal injury trust
would depend upon whether national legislation creating a trust for payment of
asbestos personal injury claims is enacted into law by the 10th day after final
adjournment of the 109th Congress. If the legislation is enacted by that date,
the Debtors' funding obligation to the Section 524(g) trust would be $900
million. If such legislation is not enacted before that date, or is enacted but
held unconstitutional, the Debtors' funding obligation to the Section 524(g)
trust would total $3.95 billion.
The Asbestos Agreement is subject to numerous conditions. One of the
conditions of the Asbestos Agreement is that the Proposed Plan be confirmed and
effective no later than August 1, 2006. There is no guarantee that the Proposed
Plan will be confirmed or become effective. If the Proposed Plan is not
confirmed, the Debtors will remain in chapter 11, the amount of Debtors' present
and future asbestos personal injury liabilities will be unresolved, and the
terms and timing of any plan of reorganization
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ultimately confirmed in the Debtors' Chapter 11 Cases are unknown. In such a
situation, it cannot be known what amount will be necessary to resolve Debtors'
present and future asbestos personal injury liabilities, how the plan of
reorganization ultimately approved will treat other pre-petition claims, whether
there will be sufficient assets to satisfy Debtors' pre-petition liabilities,
and what impact any plan of reorganization ultimately confirmed may have on the
value of the shares of the Corporation's common stock or other securities. The
interests of the Corporation's stockholders may be substantially diluted or
cancelled in whole or in part.
The Asbestos Agreement does not resolve asbestos property damage claims.
Currently, approximately 900 proofs of claim alleging asbestos property damage
are pending. Under the Proposed Plan, asbestos property damage claims would be
separately resolved in the bankruptcy proceedings or other forum, where
appropriate.
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 18, Litigation, for
additional information on the bankruptcy proceeding, including the potential
impacts of asbestos litigation on those proceedings.
AS A RESULT OF THE CHAPTER 11 CASES, OUR HISTORICAL FINANCIAL INFORMATION WILL
NOT BE INDICATIVE OF OUR FUTURE FINANCIAL PERFORMANCE.
As a result of the Chapter 11 Cases, our capital structure may be significantly
changed by any plan of reorganization. Under fresh start accounting rules that
may, or may not, apply to us upon the effective date of any plan of
reorganization, our assets and liabilities would be adjusted to fair values and
retained earnings would be restated to zero. Accordingly, if fresh start
accounting rules apply, our financial condition and results of operations
following our emergence from Chapter 11 would not be comparable to the financial
condition or results of operations reflected in our historical financial
statements.
The accompanying consolidated financial statements have been prepared
assuming that the Corporation will continue as a going concern. As discussed in
Part II, Item 8, Financial Statements and Supplementary Data - Notes to
Consolidated Financial Statements, Note 2, Voluntary Reorganization Under
Chapter 11, there is significant uncertainty as to the resolution of our
asbestos litigation, which, among other things, may lead to possible changes in
the composition of our 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. Our plans concerning this
matter also are described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
Our historical financial information will not be indicative of our
financial performance following approval of any plan of reorganization by the
Bankruptcy Court. Under American Institute of Certified Public Accountants
Statement of Position 90-7, "Financial Reporting by Entities in Reorganization
under the Bankruptcy Code," all of our outstanding debt is classified as
liabilities subject to compromise, and interest expense on this debt has not
been accrued or recorded since June 25, 2001 (the "Petition Date"). From the
Petition Date through December 31, 2005, contractual interest expense not
accrued or recorded on pre-petition debt totaled $337 million. This 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.
In connection with the Chapter 11 Cases and the development of any plan of
reorganization, it is also possible that additional restructuring and similar
charges may be identified and recorded in future periods. Such charges could be
material to the consolidated financial position and results of operations of the
Corporation in any given period.
DEBTOR U.S. GYPSUM HAS SIGNIFICANT ASBESTOS PERSONAL INJURY LIABILITIES, AND THE
ACC AND FUTURES REPRESENTATIVE CLAIM THAT OTHER DEBTORS HAVE SIGNIFICANT
ASBESTOS PERSONAL INJURY LIABILITIES AS WELL. THE PROPOSED PLAN WILL ESTABLISH
THE POSSIBLE AMOUNT THAT DEBTORS WOULD BE REQUIRED TO PAY INTO A SECTION 524(g)
ASBESTOS PERSONAL INJURY TRUST TO SATISFY ALL LIABILITIES FOR PRESENT AND FUTURE
ASBESTOS PERSONAL INJURY CLAIMS AGAINST DEBTORS, INCLUDING CLAIMS AGAINST
DEBTORS RELATING TO A.P. GREEN REFRACTORIES, INC., A FORMER SUBSIDIARY OF U.S.
GYPSUM AND THE CORPORATION. HOWEVER, IF THE PROPOSED PLAN IS NOT CONFIRMED, THE
AMOUNT OF THE DEBTORS' ASBESTOS PERSONAL INJURY LIABILITIES WILL NOT BE RESOLVED
AND WILL BE SUBJECT TO SUBSTANTIAL DISPUTE AND UNCERTAINTY.
9
As a result of the Asbestos Agreement and Proposed Plan, in the fourth quarter
of 2005, the Corporation recorded a pretax charge of $3.1 billion ($1.935
billion, or $44.36 per share, after tax) for all asbestos-related claims,
increasing the reserve for all asbestos-related claims to $4.161 billion. This
reserve includes the Debtors' obligations to fund asbestos personal injury
claims as will be set forth in the Proposed Plan (recorded at $3.95 billion on
the assumption that the Proposed Plan is confirmed but that the FAIR Act or
substantially similar legislation is not enacted as set forth in the Proposed
Plan). This reserve also includes the Debtors' estimate of the cost of resolving
asbestos property damage claims filed in its chapter 11 proceedings, including
estimated legal fees associated with those claims; and the Debtors' estimate of
resolving other asbestos-related claims and legal expenses associated with those
claims.
If the Proposed Plan is not confirmed, the amount of Debtors' asbestos
personal injury liabilities will not be resolved and will likely be subject to
substantial dispute and uncertainty. In that event, if the amount of such
liabilities is not resolved through negotiation or through federal asbestos
legislation, such liabilities likely will be determined by the Court through an
estimation proceeding in the Chapter 11 Cases. The ACC and the Futures
Representative have stated in a court filing that they estimate that the net
present value of the Debtors' liability for present and future asbestos personal
injury liabilities 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. If the Proposed Plan
is not confirmed, the amount of Debtors' asbestos personal injury liabilities
could ultimately be determined to be significantly different from the currently
accrued reserve. 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 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 18, Litigation, for
additional information on the bankruptcy proceeding and litigation matters.
OUR FUTURE INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION.
The optimum level of future indebtedness will be contingent on the capital
structure of the Corporation under a plan of reorganization or in connection
with developments thereafter. Our indebtedness could have significant adverse
effects on our business. Such adverse effects could include, but are not limited
to, the following:
- make it more difficult for us to satisfy our debt service
obligations;
- increase our vulnerability to adverse economic and industry
conditions;
- require us to dedicate a substantial portion of our cash flows from
operations to payments on our indebtedness, thereby reducing the
availability of our cash flows to fund working capital, capital
expenditures and other general operating requirements;
- limit our flexibility in planning for, or reacting to, changes in
our business and industry, which may place us at a disadvantage
compared to our competitors with stronger liquidity positions,
thereby hurting our results of operations and ability to meet our
debt service obligations with respect to our outstanding
indebtedness; and
- limit, along with the financial and other restrictive covenants in
our outstanding indebtedness, our ability to borrow additional
funds.
OUR BUSINESSES ARE CYCLICAL IN NATURE, AND PROLONGED PERIODS OF WEAK DEMAND OR
EXCESS SUPPLY MAY HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, FINANCIAL
CONDITION AND OPERATING RESULTS.
Our businesses are cyclical in nature and sensitive to changes in general
economic conditions, including, in particular, conditions in the housing and
construction-based markets. Prices for our products and services are affected by
overall supply and demand in the market for our products and for our
competitors' products. In particular, market prices of building
10
products historically have been volatile and cyclical, and we, like other
producers, may have limited ability to control the timing and amount of pricing
changes for our products. Prolonged periods of weak demand or excess supply in
any of our businesses could negatively affect our revenues and margins and harm
our liquidity, financial condition and operating results.
The markets that we serve, including, in particular, the housing and
construction-based markets, are significantly affected by the movement of
interest rates. Significantly higher interest rates could have a material
adverse effect on our business and results of operations. Our business is also
affected by a variety of other factors beyond our control, including, but not
limited to, employment levels, foreign currency exchange rates, office vacancy
rates, unforeseen inflationary pressures and consumer confidence. Since our
operations occur in a variety of geographic markets, our businesses are subject
to the economic conditions in each such geographic market. General economic
downturns or localized downturns in the regions where we have operations could
have a material adverse effect on our business, financial condition and
operating results.
THE SEASONAL NATURE OF OUR BUSINESSES MAY ADVERSELY AFFECT OUR QUARTERLY
FINANCIAL RESULTS.
A majority of our business is seasonal with peak sales typically occurring from
spring through the middle of autumn. Quarterly results have varied significantly
in the past and are likely to vary significantly from quarter to quarter in the
future. Such variations could have a negative impact on our financial
performance and the trading prices of our common stock or our other securities.
WE FACE COMPETITION IN EACH OF OUR BUSINESSES. IF WE CANNOT SUCCESSFULLY COMPETE
IN THE MARKETPLACE, OUR BUSINESS, FINANCIAL CONDITION AND OPERATING RESULTS MAY
BE MATERIALLY AND ADVERSELY AFFECTED.
We face competition in each of our operating segments. Principal methods of
competition include quality of products, service, location, pricing,
compatibility of systems, range of products and product design features.
Aggressive actions by our competitors could lead to lower pricing by us in order
to compete. To achieve and/or maintain leadership positions in key product
categories, we must continue to develop brand recognition and loyalty, enhance
product quality and performance, and develop our manufacturing and distribution
capabilities.
We also compete through our use of information technology and expect to
continue to improve our systems. We need to provide customers with timely,
accurate, easy-to-access information about product availability, orders and
delivery status using state-of-the-art systems in order to maintain our market
share. While we may use manual processes for short-term failures and disaster
recovery capability, a prolonged disruption of systems or other failure to meet
customers' expectations for the capabilities and reliability of these systems
could adversely affect our results of operations, particularly during any
prolonged period of disruption.
We intend to continue making investments in research and development to
develop new and improved products and more-efficient production methods. We
believe we need to continue to develop new products and improve our existing
products and production efficiency in order to maintain our market leadership
position. A failure to continue making such investments could restrain our
revenue growth and harm our operating results and market share. In addition,
even if we are able to invest sufficient resources in research and development,
these investments may not generate net sales that exceed our expenses, generate
any net sales at all or result in any commercially acceptable products.
IF COSTS OF KEY RAW MATERIALS OR EMPLOYEE BENEFITS INCREASE, OR THE AVAILABILITY
OF KEY RAW MATERIALS DECREASES, OUR COST OF PRODUCTS SOLD WILL INCREASE, AND OUR
OPERATING RESULTS MAY BE MATERIALLY AND ADVERSELY AFFECTED.
The cost and availability of raw materials and energy are critical to our
operations. For example, we use substantial quantities of gypsum, wastepaper,
mineral fiber, steel, perlite, starch and high pressure laminates. The cost of
these items has been volatile, and availability has sometimes been limited. We
source some of these materials from a limited number of suppliers, which
increases the risk of unavailability. Furthermore, we may not be able to pass
increased raw materials prices on to our customers if the market or existing
agreements with our clients do not allow us to raise the prices of our finished
products. If price adjustments significantly trail the increase in raw materials
prices or if we cannot effectively hedge
11
against price increases, our operating results may be materially and adversely
affected.
Wastepaper prices are affected by market conditions, principally supply.
We buy various grades of wastepaper, and shortages occur periodically in one or
more grades and may vary among geographic regions. As a result, we have
experienced, and expect in the future to experience, volatility in wastepaper
availability and its cost, affecting the mix of products manufactured at
particular locations or the cost of producing them.
Energy costs also are affected by various market factors, including the
availability of supplies of particular forms of energy, energy prices, and local
and national regulatory decisions. Prices for natural gas and electrical power,
which are significant components of the costs associated with our gypsum and
interior systems products, have increased significantly in recent years.
Transportation costs associated with our gypsum and interior systems
products are a significant portion of the variable cost of the North American
Gypsum, Worldwide Ceilings and Building Products Distribution segments.
Significant increases in the cost of fuel or energy can result in material
increases in the cost of transportation, which could materially and adversely
affect our operating profits. There can be no assurance that there will not be
substantial increases in the price or a decline in the availability of energy in
the future, especially in light of recent instability in some energy markets,
or, as is the case with raw materials, that we can pass on any such increases
through increases in the price of our products.
About 26% of the gypsum used in our plants is synthetic gypsum, which is a
byproduct resulting primarily from flue gas desulphurization carried out by
electric generation or industrial plants burning coal as a fuel. The suppliers
of 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. Environmental regulatory changes or other factors
affecting the operations of the plants could have an impact on the price and
availability of synthetic gypsum.
In addition, our profit margins are affected by costs related to
maintaining our employee benefit plans (pension and medical insurance for active
employees and retirees). The recognition of costs and liabilities associated
with these plans for financial reporting purposes is affected by assumptions
made by management and used by actuaries engaged by us to calculate the
projected and accumulated benefit obligations and the annual expense recognized
for these plans. The assumptions used in developing the required estimates
primarily include discount rates, expected return on plan assets for the funded
plans, compensation increase rates, retirement rates, mortality rates and, for
postretirement benefits, health-care-cost trend rates. Economic factors and
conditions could affect multiple assumptions and may affect our estimated and
actual employee benefit plan costs and our business, financial condition and
operating results.
WE ARE SUBJECT TO PRICE RISK FROM FIXED-PRICE SUPPLY AGREEMENTS FOR NATURAL GAS
IF THE MARKET PRICE DROPS, PUTTING US AT A COMPETITIVE DISADVANTAGE.
We seek to reduce the impact of fluctuations in natural gas prices through use
of hedging instruments or fixed-price contracts. The principal risk is that we
might pay more than market price if the market price drops below the hedged
price and our costs might increase relative to our competitors. We may determine
at any time to discontinue fixed-price arrangements if necessary. Alternatively,
if the market increases, this is a benefit. Over time, our costs could be
greater than or less than the prevailing market price.
THE LOSS OF SALES TO ONE OR MORE OF OUR MAJOR CUSTOMERS MAY HAVE A MATERIAL
ADVERSE IMPACT ON OUR BUSINESS, FINANCIAL CONDITION AND OPERATING RESULTS.
We face strong competition for our major customers. If one or more of our major
customers reduces, delays or cancels substantial orders for any reason, our
business, financial condition and operating results could be negatively
affected, particularly for the quarter in which the delay or cancellation
occurs.
CERTAIN OF OUR CUSTOMERS HAVE BEEN EXPANDING AND MAY CONTINUE TO EXPAND THROUGH
CONSOLIDATION AND INTERNAL GROWTH, THEREBY POSSIBLY DEVELOPING INCREASED BUYING
POWER OVER US, WHICH COULD NEGATIVELY AFFECT OUR REVENUES AND RESULTS OF
OPERATIONS.
Certain of our important customers are large companies with significant buying
power over suppliers. In addition, potential further consolidation in the
distribution channels could enhance the ability of
12
certain of our customers to seek more favorable terms, including pricing, for
the products that they purchase from us. Accordingly, our ability to maintain or
raise prices in the future may be limited, including during periods of raw
material and other costs increases. If we are forced to reduce prices or to
maintain prices during periods of increased costs, or if we lose customers
because of pricing or other methods of competition, our revenues and results of
operations could be negatively affected.
WE ARE SUBJECT TO ENVIRONMENTAL AND SAFETY REGULATIONS THAT ARE SUBJECT TO
CHANGE AND COULD CAUSE US TO MAKE MODIFICATIONS TO HOW WE MANUFACTURE AND PRICE
OUR PRODUCTS.
We are subject to federal, state, local and foreign laws and regulations
governing the protection of the environment and occupational health and safety,
including laws regulating air emissions, wastewater discharges, the management
and disposal of hazardous materials and wastes, and the health and safety of our
employees. We are also required to obtain permits from governmental authorities
for certain operations. If we were to violate or fail to comply with these laws,
regulations or permits, we could incur fines, penalties or other sanctions. In
addition, we could be held responsible for costs and damages arising from any
contamination at our past or present facilities or at third-party waste disposal
sites. We cannot completely eliminate the risk of contamination or injury
resulting from hazardous materials.
Environmental laws tend to become more stringent over time, and we could
incur material expenses in the future relating to compliance with future
environmental laws. In addition, the price and availability of certain of the
raw materials that we use, including synthetic gypsum, may vary in the future as
a result of environmental laws and regulations affecting certain of our
suppliers. An increase in the price of our raw materials, a decline in their
availability or future costs relating to our compliance with environmental laws
could negatively affect our operating margins or result in reduced demand for
our products.
WE DEPEND ON OUR SENIOR MANAGEMENT TEAM FOR THEIR EXPERTISE AND LEADERSHIP, AND
THE LOSS OF ANY MEMBER COULD ADVERSELY AFFECT OUR OPERATIONS.
Our success is dependent on the management and leadership skills of our senior
management team. The loss of any of these individuals or an inability to
attract, retain and maintain additional personnel could prevent us from
implementing our business strategy. Although the Corporation has a retention
program as an incentive for management to stay with the Corporation during its
Chapter 11 proceedings, we cannot assure you that we will be able to retain all
our existing senior management personnel or to attract additional qualified
personnel when needed.
WE DO NOT EXPECT TO PAY CASH DIVIDENDS ON OUR COMMON STOCK FOR THE FORESEEABLE
FUTURE.
No dividends are being paid on the common stock of the Corporation during the
pendency of our bankruptcy proceedings. Further, our ability to pay cash
dividends on the common stock may be restricted under our financing arrangements
following our emergence from bankruptcy.
NATURAL OR MAN-MADE DISASTERS COULD NEGATIVELY AFFECT OUR BUSINESS.
Future disasters caused by earthquakes, hurricanes, floods, terrorist attacks or
other events, and any potential response by the U.S. government or military,
could have a significant adverse effect on the general economic, market and
political conditions, which in turn could have a material adverse effect on our
business.
ITEM 1b. UNRESOLVED STAFF COMMENTS
None.
13
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 2005, U.S.
Gypsum's SHEETROCK(R) brand gypsum wallboard plants operated at 96% of capacity.
USG Interiors' AURATONE(R) brand ceiling tile plants operated at 79% 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.
Galena Park, Texas Calgary, Alberta, Canada (leased)
CEMENT BOARD
Baltimore, Md. New Orleans, La. Monterrey, Nuevo Leon, Mexico
Detroit (River Rouge), Mich. Santa Fe Springs, Calif.
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.
14
OTHER PRODUCTS
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; Monterrey, Nuevo Leon, Mexico; and Saltillo, Coahuila,
Mexico. Gypsum fiber panel products are manufactured at Gypsum, Ohio.
Paper-faced metal corner bead is manufactured at Auburn, Wash., and Weirton,
W.Va. Sealants and finishes are manufactured at La Mirada, Calif.
NEW FACILITIES
The Corporation's capital expenditures program includes new gypsum wallboard
plants to be built in Washingtonville, Pa., and Tecoman, Mexico. Existing
capacity at U.S. Gypsum's Norfolk, Va., gypsum wallboard plant is being replaced
with a new low-cost wallboard line. A new joint compound line will be built at
the Baltimore plant, and the joint compound line at the Jacksonville, Fla.,
plant is being rebuilt.
PLANT CLOSURE
The synthetic gypsum processing plant at Belledune, New Brunswick, Canada, was
closed in the second quarter of 2005.
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 to back haul cargo
such as coal.
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
Cloquet, Minn. Greenville, Miss. 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. Joint
compound is manufactured at Peterlee, England (leased), Viersen, Germany, and
Port Klang, Malaysia (leased). Bead and trim products are manufactured at
Stockton, Calif.
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 18, Litigation, for information on legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None during the fourth quarter of 2005.
15
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, 2006, there were
3,612 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 2005
and 2004 were as follows:
2005 2004
------------ ------------
High Low High Low
- ----------------------------------------------
First quarter $40.95 $26.80 $20.17 $15.46
Second quarter 50.00 30.07 19.48 12.30
Third quarter 71.25 40.57 19.95 16.21
Fourth quarter 69.47 56.40 41.67 18.24
- ----------------------------------------------
Purchases of equity securities by or on behalf of the Corporation during
the fourth quarter of 2005 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)
2005 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 1,973 $58.535 - -
November - - - -
December - - - -
- -----------------------------------------------------------------------------------------------------
Total Fourth Quarter 1,973 $58.535 - -
- -----------------------------------------------------------------------------------------------------
- ----------
(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.
16
ITEM 6. SELECTED FINANCIAL DATA
USG CORPORATION
FIVE-YEAR SUMMARY
(dollars in millions, except per-share data) Years Ended December 31,
- ---------------------------------------------------------------------------------------------------------------------
2005 2004 2003 2002 2001
- ---------------------------------------------------------------------------------------------------------------------
STATEMENT OF OPERATIONS DATA:
Net sales $ 5,139 $ 4,509 $ 3,666 $ 3,468 $ 3,296
Cost of products sold 4,037 3,672 3,121 2,884 2,882
Gross profit 1,102 837 545 584 414
Selling and administrative expenses 352 317 324 312 279
Provision for asbestos claims 3,100 - - - -
Chapter 11 reorganization expenses 4 12 11 14 12
Provisions for impairment and restructuring - - - - 33
Operating profit (loss) (2,354) 508 210 258 90
Interest expense (a) 5 5 6 8 33
Interest income (10) (6) (4) (4) (5)
Other expense (income), net - - (9) (2) 10
Income taxes (benefit) (924) 197 79 117 36
Earnings (loss) before cumulative effect of accounting change (1,425) 312 138 139 16
Cumulative effect of accounting change (11) - (16) (96) -
Net earnings (loss) (1,436) 312 122 43 16
Net Earnings (Loss) Per Common Share:
Cumulative effect of accounting change (0.26) - (0.37) (2.22) -
Basic (32.92) 7.26 2.82 1.00 0.36
Diluted (32.92) 7.26 2.82 1.00 0.36
- ------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA (as of the end of the year):
Working capital 1,579 1,220 1,084 939 914
Current ratio 3.63 3.14 3.62 3.14 3.85
Cash, cash equivalents, restricted cash and marketable securities 1,577 1,249 947 830 493
Property, plant and equipment, net 1,946 1,853 1,818 1,788 1,800
Total assets 6,142 4,278 3,799 3,636 3,464
Total debt (b) 1,005 1,006 1,007 1,007 1,007
Liabilities subject to compromise 5,340 2,242 2,243 2,272 2,311
Total stockholders' equity (deficit) (302) 1,024 689 535 491
- ------------------------------------------------------------------------------------------------------------------------
OTHER INFORMATION:
Capital expenditures 198 138 111 100 109
Stock price per common share (c) 65.00 40.27 16.57 8.45 5.72
Cash dividends per common share - - - - 0.025
Average number of employees 14,100 13,800 13,900 14,100 14,300
- ------------------------------------------------------------------------------------------------------------------------
(a) Interest expense excludes contractual interest expense that 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 for each year presented above includes $1.005 billion of debt
classified as liabilities subject to compromise.
(c) Stock price per common share reflects the final closing price of the year.
17
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.
In late January 2006, the Debtors, the committee representing asbestos
personal injury claimants (the "Official Committee of Asbestos Personal Injury
Claimants" or "ACC"), and the legal representative for future asbestos personal
injury claimants (the "Futures Representative") reached an agreement to resolve
Debtors' present and future asbestos personal injury liabilities and to
cooperate in the confirmation of a plan of reorganization consistent with that
resolution (the "Asbestos Agreement"). The Asbestos Agreement was approved by
USG's Board of Directors on January 29, 2006, and was executed by the Futures
Representative and each law firm representing a member of the ACC. The Asbestos
Agreement also is supported by the committee representing unsecured creditors
(the "Official Committee of Unsecured Creditors") and the committee representing
the Corporation's shareholders (the "Official Committee of Equity Security
Holders"). The Asbestos Agreement does not include asbestos property damage
claims, and the committee representing asbestos property damage claimants (the
"Official Committee of Asbestos Property Damage Claimants") has not taken a
position on the Asbestos Agreement.
As contemplated by the Asbestos Agreement, the Debtors expect to file a
proposed plan of reorganization (the "Proposed Plan") and Disclosure Statement
with the United States Bankruptcy Court for the District of Delaware (the
"Bankruptcy Court") in February 2006 incorporating the terms of the Asbestos
Agreement and addressing the treatment of all other claims and interests.
Pursuant to the Proposed Plan, a trust would be created and funded by Debtors
pursuant to Section 524(g) of the Bankruptcy Code, and this trust would
compensate all qualifying present and future asbestos personal injury claims
against Debtors. If confirmed by the courts, the Proposed Plan would contain an
injunction channeling all asbestos personal injury claims against the Debtors to
the Section 524(g) trust for payment and precluding any individual or entity
from bringing an asbestos personal injury claim against Debtors. This channeling
injunction would include any asbestos personal injury claims against Debtors
relating to A.P. Green Refractories Co. ("A.P. Green"), a former subsidiary of
U.S. Gypsum and the Corporation. The amount that the Debtors would be required
to pay to the Section 524(g) asbestos personal injury trust would depend upon
whether national legislation creating a trust for payment of asbestos personal
injury claims is enacted by the 10th day after final adjournment of the 109th
Congress. If the Proposed Plan is confirmed and the legislation is enacted by
that date, the Debtors' funding obligation to the Section 524(g) trust would be
$900 million. If the Proposed Plan is confirmed and such legislation is not
enacted before that date or is enacted but held unconstitutional, the Debtors'
funding obligation to the Section 524(g) trust would total $3.95 billion.
Under the Proposed Plan, allowed claims of all other creditors, including
allowed claims of general unsecured creditors, would be paid in full, with
interest where required. Disputed claims, including disputed asbestos property
damage claims, would be resolved in the bankruptcy proceedings or other forum,
where appropriate. Upon resolution of those disputed claims, the allowed amount
of any such claims would also be paid in full, with interest where required.
Shareholders of the Corporation as of the effective date of the Proposed Plan
would retain their shares, and pursuant to a proposed shareholder rights
offering, would have the right to purchase, at $40.00 per share, one new common
share of the Corporation for each share owned as of the effective date of the
rights offering.
There are important conditions to the Asbestos Agreement and conditions to
confirmation and effectiveness of the Proposed Plan. One of the conditions of
the Asbestos Agreement is that the Proposed Plan must be confirmed and have an
effective date on or before August 1, 2006, absent written agreement among all
parties to the Asbestos Agreement to extend that time. There can be no assurance
that the Proposed Plan will be confirmed or, if confirmed,
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become effective by August 1, 2006.
Additional information about the Proposed Plan, the Section 524(g)
asbestos personal injury trust contemplated by the Proposed Plan, funding
relating to the Proposed Plan, and conditions and other factors relating to the
effectiveness of the Proposed Plan is set forth in Voluntary Reorganization
under Chapter 11, below.
The Corporation had $1.577 billion of cash, cash equivalents, restricted
cash and marketable securities as of December 31, 2005. Management believes that
this liquidity plus expected operating cash flows and available sources of
outside financing will meet the Corporation's cash needs, including making
regular capital investments to maintain and enhance its businesses, throughout
the chapter 11 proceedings, and including the substantial cash payments that
will be required (in addition to the other sources of cash under the Proposed
Plan) if the Proposed Plan is confirmed.
The Corporation achieved record net sales in 2005, surpassing the previous
record set in 2004 by 14%. Demand for products sold by the Corporation's North
American Gypsum and Building Products Distribution operating segments increased
in 2005 due to growth in new housing construction and a strong level of
residential remodeling. The Corporation's Worldwide Ceilings operating segment
also reported increased net sales for 2005 as compared with 2004 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 2005 and
are expected to be strong in 2006. The favorable level of activity in the new
housing and repair and remodel 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 rose 18% from 2004.
The Corporation's gross margin was 21.4% in 2005, up from 18.6% in 2004.
Gross margin improved primarily as a result of higher selling prices for all
major product lines and increased shipments of SHEETROCK(R) brand gypsum
wallboard.
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 Bankruptcy Court
and are jointly administered as In re: USG Corporation et al. (Case No.
01-2094). The Debtors include USG Corporation and the following subsidiaries:
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 ("Beadex"); B-R Pipeline Company; La Mirada
Products Co., Inc; Stocking Specialists, Inc.; USG Industries, Inc.; and USG
Pipeline Company. The Chapter 11 Cases do not include any of the Corporation's
non-U.S. subsidiaries or companies that were acquired post-petition by L&W
Supply.
At the time of the Filing, U.S. Gypsum 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 and Beadex, were defendants in a small number of asbestos
personal injury lawsuits.
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. 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.
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 federal district court
judge. Judge Conti hears matters relating to estimation of the Debtors'
liability for asbestos personal injury claims. Other matters are heard by Judge
Fitzgerald. Four official committees were appointed in the Chapter 11
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Cases - the Official Committee of Personal Injury Claimants (or ACC), the
Official Committee of Asbestos Property Damage Claimants, the Official Committee
of Unsecured Creditors and the Official Committee of Equity Security Holders. In
addition, the Bankruptcy Court appointed Dean M. Trafelet as the Futures
Representative. The appointed committees together with Mr. Trafelet play
significant roles in the Chapter 11 Cases and the resolution of the Chapter 11
Cases.
The Debtors currently have the exclusive right to file a plan of
reorganization, and pursuant to the Asbestos Agreement, the Debtors expect to
file a Proposed Plan in February 2006. Pursuant to the Proposed Plan, a trust
would be created and funded by Debtors pursuant to Section 524(g) of the
Bankruptcy Code, and this trust would compensate all qualifying present and
future asbestos personal injury claims against the Debtors. If confirmed by the
courts, the Proposed Plan would contain an injunction channeling all asbestos
personal injury claims against the Debtors to the Section 524(g) trust for
payment and precluding any individual or entity from bringing an asbestos
personal injury claim against the Debtors. This channeling injunction would
include any asbestos personal injury claims against the Debtors relating to A.P.
Green and its affiliates.
The Section 524(g) asbestos personal injury trust would be funded by the
Debtors on the effective date of the Proposed Plan by payment of $890 million in
cash; issuance of an interest-bearing promissory note in the principal amount of
$10 million payable on December 31, 2006; and issuance of a contingent payment
note in the amount of $3.05 billion.
The contingent payment note of $3.05 billion would be payable to the
Section 524(g) trust depending upon whether the Fairness in Asbestos Injury
Resolution Act of 2005 or substantially similar legislation creating a national
asbestos personal injury trust (collectively, the "FAIR Act") is enacted and
made law by the 10th day after final adjournment of the 109th Congress (the
"Trigger Date"). With certain exceptions, outlined below, the Debtors'
obligations under the $3.05 billion contingent payment note would be cancelled
if the FAIR Act is enacted and made law by the Trigger Date. If the FAIR Act is
not enacted and made law by the Trigger Date, or is enacted but held
unconstitutional, the Debtors would be obligated to make payments under the
$3.05 billion contingent payment note to the Section 524(g) trust as follows:
$1.9 billion of the contingent payment note would be payable within 30 days
after the Trigger Date, and the remaining $1.15 billion of the contingent
payment note would be payable within 180 days after the Trigger Date. Interest
would accrue on the $1.15 billion payment beginning 30 days after the Trigger
Date.
Each of the Debtors would be co-obligors and jointly and severally liable
under both the $10 million note and the $3.05 billion contingent payment note.
The $10 million note would be secured by 51 percent of the voting stock of U.S.
Gypsum. The Debtors would also grant to the Section 524(g) trust a right to own
51 percent of the voting stock of one of the reorganized Debtors, exercisable
upon the occurrence of specified contingencies, to secure payment of the first
$1.9 billion of the contingent payment note.
Pursuant to the Asbestos Agreement, the Proposed Plan will also address
the Debtors' obligations under the $3.05 billion contingent payment note if the
FAIR Act is enacted by the Trigger Date but is subject to a constitutional
challenge to its validity. If there is a constitutional challenge within 60 days
of enactment, the Debtors would be obligated to pay the $3.05 billion note if
the constitutional challenge results in a final, non-appealable order that the
FAIR Act is (i) unconstitutional in its entirety; or (ii) unconstitutional
insofar as it applies to debtors in chapter 11 cases whose plans of
reorganization had not yet been confirmed and become substantially consummated
as defined in the Asbestos Agreement. If the constitutional challenge is
resolved by a final, non-appealable order in any manner other than as described
in the preceding sentence, then the $3.05 billion contingent payment, including
the right of the trust to own stock of one of the Debtors, would be cancelled.
The Asbestos Agreement also requires that the Debtors use their reasonable
best efforts to have the Proposed Plan confirmed by the courts and effective
July 1, 2006. The Asbestos Agreement provides further that if the Proposed Plan
is not confirmed and effective by August 1, 2006, the Asbestos Agreement will be
terminated unless extended by written agreement of the parties to the Asbestos
Agreement, and the Proposed Plan might not be confirmed.
The Debtors' financial obligations under the Proposed Plan, if confirmed,
would depend upon, among other things, whether the $3.05 billion
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contingent payment note becomes due. The Debtors propose to fund their
obligations under the Proposed Plan through accumulated cash; new debt
financing; tax refunds; and a rights offering to the Corporation's stockholders.
The Debtors' accumulated cash and marketable securities totaled $1.577 billion
as of December 31, 2005. The Corporation expects to raise $1.8 billion in new
equity funding through a rights offering pursuant to which each stockholder as
of the record date of the rights offering will receive a right to purchase, for
each USG Corporation common share held on that date, one new USG Corporation
common share at a price of $40.00. If all stockholders were to exercise their
right to purchase these additional shares, the percentage ownership of each
stockholder in the Corporation would remain unchanged by the rights offering.
These rights are expected to be freely tradeable during the offering period in
which they are outstanding. The date for the rights offering has not been
established but the rights offering is not expected to commence prior to
confirmation of the Proposed Plan. Subject to the approval of the Bankruptcy
Court, the rights offering will be supported by a backstop equity commitment
from Berkshire Hathaway Inc., a current stockholder of the Corporation. Under
the terms of the agreement, Berkshire Hathaway Inc. has agreed to exercise all
rights distributed to it in the rights offering and purchase from the
Corporation, at the same purchase price, all or substantially all of the shares
that are not otherwise issued pursuant to the exercise of rights by other
stockholders. Subject to approval of the Bankruptcy Court, the Corporation would
pay Berkshire Hathaway Inc. a fee of $100 million as consideration for its
commitment. The Bankruptcy Court has scheduled a hearing regarding approval of
the Berkshire Hathaway Inc. backstop equity commitment on February 23, 2006. It
is possible that another entity may offer an alternative to the Berkshire
Hathaway Inc. backstop commitment prior to the hearing. The Berkshire Hathaway
Inc. backstop equity commitment will expire on September 30, 2006, subject to
extension to November 14, 2006, in certain circumstances, including the payment
of an additional $20 million fee.
In connection with the backstop equity commitment, the Corporation and
Berkshire Hathaway Inc. entered into a shareholder's agreement whereby Berkshire
Hathaway Inc. agreed, among other things, that for a period of seven years
following completion of the rights offering, except in limited circumstances, it
would not acquire beneficial ownership of the Corporation's voting securities
if, after giving effect to the acquisition, Berkshire Hathaway Inc. would own
more than 40% of the Corporation's voting securities (or such higher percentage
of voting securities that Berkshire Hathaway Inc. would own after making any
purchases required under the backstop equity commitment described above).
Berkshire Hathaway Inc. further agreed that, during such seven-year period, it
would not solicit proxies with respect to securities of the Corporation or
submit a proposal or offer involving a merger, acquisition or other
extraordinary transaction unless such proposal or offer is (i) requested by the
Corporation's Board of Directors, or (ii) made to the Board of Directors
confidentially, is approved by a majority of the voting power of the Corporation
not owned by Berkshire Hathaway Inc. and is determined by the independent
members of the Board of Directors to be fair to the stockholders. The
shareholder's agreement also provides that, with certain exceptions, any new
shares of common stock acquired by Berkshire Hathaway Inc. in excess of those
owned on the date of the agreement (and shares distributed on those shares,
including in the rights offering) will be voted proportionally with all voting
shares.
The parties also entered into a registration rights agreement whereby the
Corporation granted Berkshire Hathaway Inc. registration rights with respect to
its shares of the Corporation's common stock.
In addition to accumulated cash and the rights offering, the Corporation
also expects to fund its obligations under the Proposed Plan, if confirmed,
through about $1 billion of financing in the second half of 2006 if the $3.05
billion contingent payment note becomes due. Further, the Corporation's cash
contributions to the Section 524(g) asbestos trust would be tax deductible and
would be expected to generate a cash tax refund based upon a net operating loss
that would be created. Assuming that the $3.05 billion contingent payment note
becomes due and is payable to the Section 524(g) asbestos trust, the Corporation
would expect to receive a cash tax refund of about $1.1 billion. If this tax
refund has not been received by the Corporation when the final payment is due to
the trust, the Corporation would likely require additional debt financing to
make such payment.
There are numerous factors and conditions that will affect confirmation of
the Proposed Plan. These include, among others, the following requirements: the
class or classes of claimants whose claims are to be addressed by the Section
524(g) asbestos personal injury trust must be established and vote in favor of
the
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Proposed Plan by at least 75% of those voting; the Bankruptcy Court or the
United States District Court for the District of Delaware (the "District Court")
must issue various findings of fact and conclusions of law required to create a
Section 524(g) asbestos personal injury trust and issue an injunction channeling
all asbestos personal injury claims against Debtors to the Section 524(g) trust,
including the findings that the asbestos trust is designed to pay present claims
and future demands that involve similar claims in substantially the same manner
and that the trust own, or have the right to acquire if specified contingencies
occur, a majority of the voting stock of a relevant Debtor, its parent
corporation, or a subsidiary that is also a Debtor; the Bankruptcy Court or the
District Court must issue various findings that the Proposed Plan complies with
all other applicable requirements of the Bankruptcy Code; the Bankruptcy Court
or the District Court must enter a confirmation order (and, if the Bankruptcy
Court enters the confirmation order, the District Court must affirm it); and the
Bankruptcy Court and the District Court, as required, must enter the Section
524(g) injunction set forth in the Proposed Plan. The Asbestos Agreement also
requires that the Proposed Plan must be confirmed and become effective no later
than August 1, 2006 (unless otherwise agreed to by the parties to the Asbestos
Agreement). The failure to resolve disputes with any objectors to the Proposed
Plan could materially hinder satisfaction of the requirement in the Asbestos
Agreement that the Proposed Plan be effective by August 1, 2006.
If the Proposed Plan, or a substantially similar plan, is not confirmed,
the amount of Debtors' present and future asbestos personal injury liabilities
will be unresolved. In such a situation, the amount of those liabilities may be
resolved through litigation which was pending at the time the Asbestos Agreement
was reached. Proceedings relating to estimation of the Debtors' asbestos
personal injury liabilities were pending before Judge Conti at that time. The
parties to the Asbestos Agreement have agreed to seek a stay of the estimation
proceedings. Proceedings relating to whether Debtors other than U.S. Gypsum are
responsible for U.S. Gypsum's asbestos liabilities and whether the Debtors are
responsible for the asbestos liabilities of A.P. Green were pending before Judge
Fitzgerald.
At the time the Asbestos Agreement was reached, there were key, contested
issues among the parties relevant to estimation of Debtors' asbestos personal
injury liabilities that were being addressed in the estimation litigation
proceeding before Judge Conti. Those key issues included: whether claimants who
do not have objective evidence of asbestos-related disease are entitled to be
compensated by Debtors and whether such claimants are entitled to vote on any
plan of reorganization; the characteristics and number of present and future
claimants who are likely to have had exposure to the Debtors'
asbestos-containing products sufficient to cause disease; whether the particular
type of asbestos present in certain of the Debtors' products during the relevant
time has been shown to cause cancer; and the appropriate claim values to apply
to legitimate present and future asbestos personal injury claims.
At the time the Asbestos Agreement was reached, there were also litigation
proceedings before Judge Fitzgerald relating to whether Debtors other than U.S.
Gypsum have responsibility for U.S. Gypsum's asbestos liabilities and whether
the Debtors have responsibility for the asbestos liabilities of A.P. Green. In
2004, the Debtors other than U.S. Gypsum filed a complaint 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 ACC and the Futures Representative opposed the Debtors in these
proceedings. The ACC and the Futures Representative have alleged that the
asbestos personal injury liabilities of U.S. Gypsum exceed its value, and, in
opposition to the Debtors' complaint, the ACC and the Futures Representative
filed counterclaims seeking a ruling that the assets of all Debtors are
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.
The ACC and the Futures Representative also have alleged 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 responsible for A.P. Green's
asbestos liabilities due to U.S. Gypsum's acquisition by merger of A.P. Green in
1967 and that, pursuant to the merger documents, U.S. Gypsum assumed A.P.
Green's liabilities. They further allege that because the Debtors other than
U.S. Gypsum are liable for U.S. Gypsum's liabilities, the other Debtors are
therefore liable for A.P. Green's liabilities. The Official Committee of
Asbestos Property Damage Claimants asserted similar counterclaims.
22
The Proposed Plan, if confirmed, would resolve the issue of Debtors'
liability for present and future asbestos personal injury claims relating to
A.P. Green by channeling those claims to the Section 524(g) trust created
pursuant to the Proposed Plan. A.P. Green, which manufactured and sold
refractory products, was acquired through a merger of A.P. Green into U.S.
Gypsum on December 29, 1967. On the next business day after the merger, January
2, 1968, U.S. Gypsum conveyed A.P. Green's assets and liabilities to a newly
formed Delaware corporation and wholly owned subsidiary of U.S. Gypsum, also
called A.P. Green Refractories Co. This newly formed corporation is also
referred to herein as "A.P. Green." A.P. Green was operated as a wholly owned
subsidiary of U.S. Gypsum until 1985, at which time A.P. Green became a wholly
owned subsidiary of the Corporation. In 1988, A.P. Green became a publicly
traded company when its shares were distributed to the stockholders of the
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 through creation
and funding of a Section 524(g) trust. 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).
In September 2005, the debtors in the A.P. Green reorganization proceeding
filed a proposed plan of reorganization which, if approved, would resolve the
asbestos liabilities of the debtors in that proceeding by channeling those
asbestos liabilities to a trust created under Section 524(g) of the Bankruptcy
Code. The plan documents specifically exclude U.S. Gypsum from the protection of
the proposed channeling injunction. The proposed plan of reorganization in the
A.P. Green proceedings has not been confirmed. A confirmation hearing is
scheduled for June 5, 2006. The A.P. Green plan documents state that the trust
that will address asbestos claims against A.P. Green will be funded with
approximately $334 million in insurance proceeds and 21% of the stock of a
corporate affiliate of A.P. Green. The plan documents state that, as of A.P.
Green's petition date, about 235,757 asbestos-related claims were pending
against it and about 58,899 such claims were pending against an affiliate. Prior
to its petition date, A.P. Green had resolved about 203,000 asbestos-related
claims for about $448 million in indemnity costs. In addition, A.P. Green had
resolved approximately 49,500 asbestos-related claims in the aggregate amount of
$491 million, which were unpaid as of the petition date. (These 49,500 claims
are included in the 235,757 pending claims referenced above.)
The Proposed Plan to be filed by the Debtors in their Chapter 11 Cases
contemplates that all asbestos personal injury claims against the Debtors
relating to A.P. Green will be channeled to the Debtors' Section 524(g) trust.
However, the Proposed Plan is subject to numerous conditions. There is no
guarantee that the Proposed Plan will be confirmed. If the Proposed Plan is not
confirmed, the Debtors will remain in chapter 11, the amount of Debtors' present
and future asbestos personal injury liabilities will be unresolved, and the
terms and timing of any plan of reorganization ultimately confirmed in Debtors'
Chapter 11 Cases are unknown. In such a situation, it cannot be known what
amount will be necessary to resolve Debtors' present and future asbestos
personal injury liabilities, including alleged liabilities relating to A.P.
Green; how the plan of reorganization ultimately approved will treat other
pre-petition claims; whether there will be sufficient assets to satisfy Debtors'
pre-petition liabilities; and what impact any plan of reorganization ultimately
confirmed may have on the value of the shares of the Corporation's common stock
or other securities. The interests of the Corporation's stockholders may be
substantially diluted or cancelled in whole or in part.
POTENTIAL FEDERAL LEGISLATION REGARDING ASBESTOS PERSONAL INJURY CLAIMS
On April 19, 2005, Senator Arlen Specter, R-Pa., introduced in the United States
Senate legislation addressing compensation and administration of asbestos
personal injury claims. The legislation is titled the Fairness in Asbestos
Injury Resolution Act of 2005 (Senate Bill 852, the "FAIR Act of 2005" or the
"Act"). The FAIR Act of 2005 is co-sponsored by 17 Republican Senators and three
Democratic Senators. The Act was referred to the Senate Committee on the
Judiciary and was approved by the committee on May 27, 2005, with 13 senators
voting in favor of the bill and five voting against it. However, several
senators on the committee who voted in favor of the bill stated that
23
additional changes must be made to the Act in order for them to vote in favor of
passage of the bill by the full Senate. The FAIR Act of 2005 has not been
approved by the full Senate, has not been considered by the House of
Representatives, is not law and may not become law.
The FAIR Act of 2005 approved by the Senate Judiciary Committee is
intended to establish a nationally administered trust fund to compensate
asbestos personal injury claimants. In the Act's current form, companies that
have made past payments for asbestos personal injury claims would be required to
contribute amounts on a periodic basis to a national trust fund 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. A copy
of the FAIR Act of 2005 as introduced is available at http://thomas.loc.gov
(type in "S. 852" in the search field).
In the Act's current form, the amounts to be paid to the national trust
fund are based on an allocation methodology set forth in the Act. In addition to
the annual payments required under the allocation methodology, defendant
participants may be subject to surcharges under certain circumstances, including
but not limited to a failure of the scheduled contributions to meet the
defendant participants' guaranteed annual funding requirements under the Act.
The amounts that participants, including the Debtors, would be required to pay
are not dischargeable in a bankruptcy proceeding. In addition, the Act, in its
current form, requires affected companies currently in chapter 11, including the
Debtors, to make their first payment to the national trust fund not later than
60 days after enactment of the FAIR Act of 2005, notwithstanding the fact that
the companies are still in chapter 11 proceedings. The Act 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
(including current chapter 11 debtors) would return to the court system to
resolve claims not paid by the national trust fund.
As stated above, pursuant to the Proposed Plan to be filed by Debtors, the
amount that Debtors would be required to pay into the Section 524(g) asbestos
personal injury trust would be contingent upon whether the FAIR Act of 2005 or
substantially similar legislation (collectively, the "FAIR Act") is enacted by
Congress by a date specified in the Proposed Plan.
The outcome of the legislative process is inherently speculative, and it
cannot be known whether the FAIR Act will ever be enacted or, if enacted, what
the terms of the final legislation might be. Previously, in April 2004, a
similar, but not identical, bill (the Fairness in Asbestos Injury Resolution Act
of 2004) was introduced in the Senate and was approved by the Senate Committee
on the Judiciary, but the full Senate defeated a motion to proceed with floor
consideration of the bill. Enactment of the FAIR Act addressing the financial
contributions of the Debtors for asbestos personal injury claims would have a
material impact on the amount the Debtors would be required to pay into its
Section 524(g) trust if the Proposed Plan is confirmed, and, even if the
Proposed Plan is not confirmed, enactment of such legislation would materially
impact the amount of the Debtors' asbestos personal injury liability.
See Consequences of the Filing, above, and Part II, Item 8, Note 18,
Litigation.
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 billion its
total accrued reserve for resolving in the tort system the asbestos personal
injury and property damage claims pending as of December 31, 2000, and asbestos
personal injury claims 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 billion, including defense costs. These amounts are
stated before tax benefit and are not discounted to present value. As of
September 30, 2005, the Corporation's accrued reserve for asbestos claims
totaled $1.061 billion.
As a result of the Asbestos Agreement and Proposed Plan, in the fourth
quarter of 2005, the Corporation recorded a pretax charge of $3.1 billion
($1.935 billion, or $44.36 per share, after tax) for all asbestos-related
claims, increasing the reserve for all asbestos-related claims to $4.161 billion
as of December 31, 2005. This reserve includes the Debtors' obligations to fund
asbestos personal injury claims as will be set forth in the Proposed Plan
(recorded at $3.95 billion on the assumption that the Proposed Plan is
24
confirmed but that the FAIR Act is not enacted as set forth in the Proposed
Plan). This reserve also includes the Debtors' estimate of the cost of resolving
asbestos property damage claims filed in their Chapter 11 Cases, including
estimated legal fees associated with those claims; and the Debtors' estimate of
resolving other asbestos-related claims and legal expenses associated with those
claims.
If the Proposed Plan is not confirmed, the amount of Debtors' asbestos
personal injury liabilities will not be resolved and will likely be subject to
substantial dispute and uncertainty. In that event, if the amount of such
liabilities is not resolved through negotiation or through federal asbestos
legislation, such liabilities likely will be determined by the court in an
estimation proceeding in the bankruptcy. The amount of Debtors' liabilities for
asbestos personal injury liabilities could be determined to be significantly
different than the currently accrued reserve. 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
If the Proposed Plan is confirmed, all present and future asbestos personal
injury claims against the Debtors would be channeled to a Section 524(g) trust,
and no individual or entity may thereafter bring an asbestos personal injury
claim against Debtors. Under the Proposed Plan, allowed claims of other
creditors, including allowed claims of general unsecured creditors, would be
paid in full, with interest where required. Shareholders of the Corporation as
of the effective date of the Proposed Plan would retain their shares and,
pursuant to a proposed shareholder rights offering, would have the right to
purchase, at $40.00 per share, one new common share of the Corporation for each
share owned as of the date of the rights offering. The amount that the Debtors
would pay to the Section 524(g) asbestos personal injury trust depends upon
whether national legislation creating a trust for payment of asbestos personal
injury claims is enacted before the date specified in the Proposed Plan. If such
legislation is enacted before the specified date, the Debtors' funding
obligation to the Section 524(g) trust would be $900 million. If such
legislation is not enacted before the specified date, or is enacted but held
unconstitutional, the Debtors' funding obligation to the Section 524(g) trust
would total $3.95 billion.
The Asbestos Agreement is subject to numerous conditions, including the
requirement in the Asbestos Agreement that the Proposed Plan be confirmed and
effective no later than August 1, 2006. There is no guarantee that the Proposed
Plan will be confirmed. If the Proposed Plan is not confirmed, the Debtors will
remain in chapter 11, the amount of Debtors' present and future asbestos
personal injury liabilities will be unresolved, and the terms and timing of any
plan of reorganization ultimately confirmed in Debtors' Chapter 11 Cases are
unknown. In such a situation, it cannot be known what amount will be necessary
to resolve Debtors' present and future asbestos personal injury liabilities, how
the plan of reorganization ultimately approved will treat other pre-petition
claims, whether there will be sufficient assets to satisfy Debtors' pre-petition
liabilities, and what impact any plan of reorganization ultimately confirmed may
have on the value of the shares of the Corporation's common stock. The interests
of the Corporation's stockholders may be substantially diluted or cancelled in
whole or in part.
See Part II, Item 8, Note 2, Voluntary Reorganization Under Chapter 11,
and Note 18, 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 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. 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.
25
RECONCILIATION OF NON-GAAP FINANCIAL MATTERS
References to consolidated net earnings excluding the provision for asbestos
claims and cumulative effect of accounting change related to the adoption of
Financial Accounting Standards Board Interpretation No. 47 ("FIN 47"),
"Accounting for Conditional Asset Retirements," and references to operating
profit for both the North American Gypsum operating segment and U.S. Gypsum are
non-GAAP measures. Management believes this information provides investors with
a more useful comparison of the Corporation's ongoing business performance.
The following table provides a reconciliation of reported consolidated net
loss and loss per share to net earnings and earnings per share excluding the
impact of the after-tax asbestos charge and change in accounting principle.
(millions, except share data) 2005
- ---------------------------------------------------------
Reported net loss $ (1,436)
Provision for asbestos claims, net of tax 1,935
Accounting change for FIN 47, net of tax 11
- ---------------------------------------------------------
Net earnings excluding asbestos charge and
accounting change 510
=========================================================
Earnings (Loss) Per Common Share:
Reported net loss $ (32.92)
Provision for asbestos claims, net of tax 44.36
Accounting change for FIN 47, net of tax 0.26
- ---------------------------------------------------------
Net earnings excluding asbestos charge and
accounting change 11.70
=========================================================
The following table provides a reconciliation of reported operating loss
to operating profit excluding the impact of the pretax asbestos charge for the
North American Gypsum segment and U.S. Gypsum.
(millions) 2005
- ---------------------------------------------------------
North American Gypsum:
Reported operating loss $ (2,466)
Provision for asbestos claims 3,100
- ---------------------------------------------------------
Operating profit excluding asbestos charge 634
=========================================================
U.S. Gypsum:
Reported operating loss $ (2,557)
Provision for asbestos claims 3,100
- ---------------------------------------------------------
Operating profit excluding asbestos charge 543
=========================================================
CONSOLIDATED RESULTS OF OPERATIONS
NET SALES
Net sales were $5.139 billion in 2005, $4.509 billion in 2004 and $3.666 billion
in 2003.
Net sales for 2005 reached an all-time high and represented a 14% increase
over 2004. For the second consecutive year, net sales increased for all three
operating segments. Net sales were up for North American Gypsum primarily due to
higher selling prices and record shipments for SHEETROCK(R) brand gypsum
wallboard. Net sales for the Building Products Distribution segment improved
primarily due to record shipments and higher selling prices for gypsum
wallboard. Net sales for the Worldwide Ceilings segment increased primarily due
to higher selling prices for ceiling grid and tile, while shipments of these
product lines were down.
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 higher selling prices and increased shipments 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.
COST OF PRODUCTS SOLD
Cost of products sold totaled $4.037 billion in 2005, $3.672 billion in 2004 and
$3.121 billion in 2003.
Cost of products sold increased in 2005 compared with 2004 primarily
reflecting increased volume for SHEETROCK(R) brand gypsum wallboard and
gypsum-related products as well as higher prices for natural gas, freight and
raw materials.
Cost of products sold increased in 2004 from 2003 largely due to increased
volume for SHEETROCK(R) brand gypsum wallboard and gypsum-related products.
Other key factors for the increase in 2004 versus 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
26
new enterprise-wide software system, the price of steel used in the manufacture
of ceiling grid, and 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 increase from 2003 to 2004.
GROSS PROFIT
Gross profit was $1.102 billion in 2005, $837 million in 2004 and $545 million
in 2003. Gross margin (gross profit as a percentage of net sales) for the
respective years was 21.4%, 18.6% and 14.9%.
The gross profit improvements in 2005 and 2004 primarily reflected
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 cost of products sold.
SELLING AND ADMINISTRATIVE EXPENSES
Selling and administrative expenses totaled $352 million in 2005, $317 million
in 2004 and $324 million in 2003. As a percentage of net sales, these expenses
were 6.8%, 7.0% and 8.8% in 2005, 2004 and 2003, respectively.
The increase in 2005 selling and administrative expenses versus 2004
primarily reflected compensation and benefits, including retention and incentive
compensation, and higher funding for marketing and growth initiatives.
The decrease in 2004 selling and administrative expenses versus 2003
primarily reflected a $7 million decrease in retention 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).
PROVISION FOR ASBESTOS CLAIMS
As a result of the Asbestos Agreement and Proposed Plan, in the fourth quarter
of 2005, the Corporation recorded a pretax charge of $3.1 billion ($1.935
billion, or $44.36 per share, after tax). This charge is related to an increase
in the reserve for the estimated cost of resolving asbestos-related liabilities,
including asbestos personal injury claims, asbestos property damage claims,
other asbestos-related claims, and associated legal expenses. The provision of
$3.1 billion, combined with the existing asbestos-related reserve of $1.061
billion, resulted in a total reserve as of December 31, 2005, of $4.161 billion.
CHAPTER 11 REORGANIZATION EXPENSES
Chapter 11 reorganization expenses consisted of the following:
(millions) 2005 2004 2003
- ---------------------------------------------------------------------
Legal and financial advisory fees $ 36 $ 24 $ 19
Bankruptcy-related interest income (32) (12) (8)
- ---------------------------------------------------------------------
Total 4 12 11
=====================================================================
INTEREST EXPENSE
Interest expense was $5 million, $5 million and $6 million in 2005, 2004 and
2003, respectively. Under SOP 90-7, 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 $80
million in 2005, $71 million in 2004 and $71 million in 2003. 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 $27 million in
2005, $18 million in 2004 and $11 million in 2003. For financial reporting
purposes, no post-petition accruals have been made for contractual interest
expense not accrued or recorded on pre-petition debt.
INTEREST INCOME
Non-bankruptcy-related interest income was $10 million, $6 million and $4
million in 2005, 2004 and 2003, respectively.
27
OTHER INCOME, NET
Other income, net was zero in 2005 and 2004 and $9 million in 2003. The 2003
amount primarily represented net realized currency gains.
INCOME TAXES
An income tax benefit of $924 million was recorded in 2005 due to the provision
for asbestos claims. Income tax expense was $197 million in 2004 and $79 million
in 2003. The Corporation's effective tax rate was 39.3%, 38.6% and 36.6% in
2005, 2004 and 2003, respectively.
During the third quarter of 2005, the Corporation's income tax provision
was reduced (and consolidated net earnings increased) by $25 million due to the
completion by the Internal Revenue Service of its audit of the Corporation's
federal income tax returns for the years 2000 through 2002. As a result of the
audit, the Corporation's federal income tax liability for the years 2000 through
2002 was increased by $60 million in the aggregate, which was covered by
liabilities previously recorded on the Corporation's financial statements. In
addition, due to the results of the audit, a portion of the Corporation's
recorded income tax contingency reserves became unnecessary and were eliminated.
This reduction was offset by an increase of $41 million ($28 million net of
federal benefit) in the valuation allowance relating to the Corporation's
reserve for asbestos claims in the fourth quarter of 2005.
The increase in the 2004 effective tax rate versus 2003 was 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
In December 2005, the Corporation adopted FIN 47. A noncash, after-tax charge of
$11 million ($18 million pretax) was reflected in the consolidated statement of
operations as a cumulative effect of a change in accounting principle as of
December 31, 2005.
In January 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 operations as a cumulative effect of a change in
accounting principle as of January 1, 2003.
See Part II, Item 8, Note 11, Asset Retirement Obligations, for additional
information related to the adoptions of FIN 47 and SFAS No. 143.
NET EARNINGS
A net loss of $1.436 billion, or $32.92 per share, was recorded in 2005. This
loss included the after-tax provision of $1.935 billion, or $44.36 per share,
for asbestos claims and an after-tax charge of $11 million, or $0.26 per share,
for the cumulative effect of an accounting change related to the adoption of FIN
47. Excluding these charges, 2005 net earnings were $510 million, or $11.70 per
share.
Net earnings were $312 million in 2004 and $122 million in 2003. Diluted
earnings per share for the respective years were $7.26 and $2.82.
28
CORE BUSINESS RESULTS OF OPERATIONS
(millions) Net Sales Operating Profit (Loss)
--------------------------------- -----------------------------------
2005 2004 2003 2005 2004 2003
------- ------- ------- --------- ------- -------
NORTH AMERICAN GYPSUM:
United States Gypsum Company $ 2,881 $ 2,474 $ 2,076 $ (2,557) $ 348 $ 157
CGC Inc. (gypsum) 323 297 256 53 49 33
Other subsidiaries* 224 178 141 38 31 19
Eliminations
(206) (196) (174) - - -
------- ------- ------- --------- ------- -------
Total 3,222 2,753 2,299 (2,466) 428 209
------- ------- ------- --------- ------- -------
WORLDWIDE CEILINGS:
USG Interiors, Inc. 489 488 446 43 42 31
USG International 210 200 168 9 12 2
CGC Inc. (ceilings) 55 51 45 10 8 6
Eliminations (47) (51) (52) - - -
------- ------- ------- --------- ------- -------
Total 707 688 607 62 62 39
------- ------- ------- --------- ------- -------
BUILDING PRODUCTS DISTRIBUTION:
L&W Supply Corporation 2,048 1,738 1,295 149 103 53
------- ------- ------- --------- ------- -------
Corporate - - - (90) (73) (77)
Chapter 11 reorganization expenses - - - (4) (12) (11)
Eliminations (838) (670) (535) (5) - (3)
------- ------- ------- --------- ------- -------
TOTAL USG CORPORATION 5,139 4,509 3,666 (2,354) 508 210
======= ======= ======= ========= ======= =======
* Includes USG Mexico, S.A. de C.V., a building products business in Mexico;
Gypsum Transportation Limited, a shipping company in Bermuda; and USG
Canadian Mining Ltd., a mining operation in Nova Scotia
NORTH AMERICAN GYPSUM
Net sales for the North American Gypsum segment increased 17% in 2005 and 20% in
2004 as compared with the respective prior years. An operating loss of $2.466
billion in 2005 resulted from the $3.1 billion provision for asbestos claims
associated with the Asbestos Agreement and Proposed Plan. Excluding this charge,
operating profit in 2005 was $634 million, up 48% from 2004. Operating profit
more than doubled in 2004 compared with 2003.
United States Gypsum Company: Net sales in 2005 increased $407 million, or 16%,
from 2004. An operating loss of $2.557 billion in 2005 included the
aforementioned $3.1 billion charge for asbestos claims. Excluding this charge,
operating profit was $543 million, an increase of $195 million, or 56%, versus
2004. The improved operating results primarily reflected higher selling prices
and record shipments for SHEETROCK(R) brand gypsum wallboard. In addition,
record shipments and selling prices were realized for SHEETROCK(R) brand joint
compound and FIBEROCK(R) brand gypsum fiber panels.
Shipments of SHEETROCK(R) brand gypsum wallboard totaled 11.3 billion
square feet in 2005, up 3% from the previous record of 11.0 billion square feet
in 2004. U.S. Gypsum's wallboard plants operated at 96% of capacity in 2005
compared with 94% in 2004. Industry shipments of gypsum wallboard increased by
approximately 6% from 2004.
While U.S. Gypsum has realized stronger demand, it also has experienced
significant cost pressures, as energy, freight and raw material prices have
increased significantly. These cost increases have been offset by
29
increased industry pricing, which reflects the strong demand and high industry
capacity utilization rates.
In 2005, U.S. Gypsum's nationwide average realized selling price for
SHEETROCK(R) brand gypsum wallboard was $143.93 per thousand square feet, up 18%
from $122.37 in 2004. In the fourth quarter of 2005, U.S. Gypsum's nationwide
average realized selling price reached $155.38, also up 18% from the prior-year
period.
Comparing 2004 with 2003, net sales increased 19%, and operating profit
more than doubled primarily due to increased 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
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 contributed to the favorable results in
2004. Increased 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.
The increased 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 in 2004. The higher costs were primarily for
wastepaper (a raw material used to produce the facing and backing of gypsum
wallboard) and natural gas.
CGC Inc.: Net sales and operating profit in 2005 for the gypsum business of
Canada-based CGC Inc. ("CGC") increased 9% and 8%, respectively, versus 2004
primarily due to the favorable effects of currency translation. Higher selling
prices for CGC's SHEETROCK(R) brand gypsum wallboard, partially offset by lower
volume and higher manufacturing costs, also contributed to the improved level of
operating profit.
Comparing 2004 with 2003, net sales increased 16%, and operating profit
rose 48%. These results were primarily attributable to increased shipments and
higher selling prices for gypsum wallboard and the favorable effects of currency
translation.
WORLDWIDE CEILINGS
Net sales in 2005 increased 3% versus 2004, while operating profit was
unchanged. Net sales and operating profit in 2004 increased 13% and 59%,
respectively, from 2003.
USG Interiors, Inc.: Net sales in 2005 for the Corporation's domestic ceilings
business were $489 million, a $1 million increase from 2004, as higher selling
prices for ceiling grid and tile were partially offset by lower shipments of
these products. Operating profit of $43 million, which also represented a slight
increase from 2004, was favorably affected by a variation in last-in, first-out
(LIFO) reserve adjustments for ceiling tile and grid inventory. These
adjustments accounted for a $19 million year-on-year increase in operating
profit, which was offset to a large extent by higher energy, freight and raw
material costs for ceiling grid and tile.
Comparing 2004 with 2003, net sales and operating profit rose 9% and 35%,
respectively. 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.
USG International: Net sales for USG International were up 5% from 2004
primarily due to increased demand in Latin America and the Pacific region.
However, operating profit declined to $9 million from $12 million primarily due
to higher prices for steel used in manufacturing ceiling grid in Europe.
Comparing 2004 with 2003, net sales increased 19%, while operating profit
rose to $12 million from $2 million. These increases primarily reflected
improved demand for ceiling grid in Europe and the favorable effects of currency
translation.
30
CGC Inc.: The ceilings business of CGC reported increases of $4 million and $2
million for net sales and operating profit, respectively, as compared with 2004.
These results primarily reflected the favorable effects of currency translation
and improved pricing.
Comparing 2004 with 2003, net sales increased $6 million, or 13%, and
operating profit increased by $2 million.
BUILDING PRODUCTS DISTRIBUTION
Net sales and operating profit in 2005 for L&W Supply, the leading specialty
building products distribution business in the United States, were the highest
for any year in its history. Net sales of $2.048 billion represented an 18%
increase versus 2004, while operating profit rose 45% to $149 million. These
results were primarily attributable to record shipments of gypsum wallboard,
which were up 12% versus 2004. Results in 2005 also benefited from improved
selling prices for gypsum wallboard, which increased 18%. Record sales of
complementary building products such as drywall metal, ceiling products, joint
compound and roofing also contributed to the improved results.
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 eight locations in 2005. As of December 31, 2005, L&W Supply
operated 192 locations in 36 states, compared with 186 locations and 183
locations as of December 31, 2004 and 2003, respectively.
Comparing 2004 with 2003, L&W Supply reported increases in net sales and
operating profit of 34% and 94%, respectively. These increases primarily
reflected record shipments and higher selling prices for gypsum wallboard sold
by L&W Supply. Increased sales of complementary building products also
contributed to the improved results. Shipments of gypsum wallboard were up 10%,
while selling prices rose 16% compared with 2003.
MARKET CONDITIONS AND OUTLOOK
Industry shipments of gypsum wallboard in the United States were an
estimated 37.2 billion square feet in 2005, an all-time record and a 6% increase
from the previous record level of 35.1 billion square feet in 2004. New housing
construction continued on a strong pace in 2005. Based on preliminary data
issued by the U.S. Bureau of the Census, U.S. housing starts in 2005 were an
estimated 2.065 million units, the highest level since 1972, compared with
actual housing starts of 1.956 million units in 2004 and 1.848 million units in
2003.
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 2005 was strong,
as sales of existing homes in 2005 are estimated at 6.2 million units, exceeding
2004's level of 5.9 million units.
The growth in new housing construction and strong 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 2005.
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. After a moderate increase in 2004, total floor space
for which contracts were signed was relatively unchanged in 2005. Segment
results were mixed as investment in office space declined while education
construction increased slightly.
The outlook for the Corporation's markets in 2006 remains positive.
However, signs of moderation in demand indicators, such as housing starts, and
rising mortgage interest rates could reduce the level of demand from both the
new housing and residential remodeling markets in the coming year. The
fundamentals for nonresidential building remain solid, and modest growth is
expected in this market in 2006. In addition, the Corporation, like many other
companies, faces many ongoing cost pressures in the areas of energy and raw
materials.
In this environment, the Corporation continues to focus its attention and
investments on improving customer service, manufacturing costs and operating
efficiencies, as well as investing to grow its businesses. In addition, the
Corporation is dedicated to completing
31
the transactions announced for emerging from the Chapter 11 proceedings during
2006.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
As of December 31, 2005, the Corporation had $1.577 billion of cash, cash
equivalents, restricted cash and marketable securities, up $328 million, or 26%,
from $1.249 billion as of December 31, 2004. Of the total December 31, 2005,
amount, $317 million was held by non-Debtor subsidiaries. Since the Petition
Date, the Corporation's level of liquidity has increased due to strong operating
cash flows and the absence of cash payments related to asbestos settlements and
interest on pre-petition debt. 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 maintain a program of capital
spending aimed at maintaining and enhancing its businesses.
Under the Proposed Plan, the Section 524(g) asbestos personal injury trust
would be funded by the Debtors on the effective date of the Proposed Plan by
payment of $890 million in cash; issuance of an interest-bearing promissory note
in the principal amount of $10 million payable on December 31, 2006; and
issuance of a contingent payment note in the amount of $3.05 billion.
The contingent payment note of $3.05 billion would be payable to the
Section 524(g) trust depending upon whether the FAIR Act is enacted and
made law by the Trigger Date. With certain exceptions, outlined above, the
Debtors' obligations under the $3.05 billion contingent payment note would be
cancelled if the FAIR Act is enacted and made law by the Trigger Date. If the
FAIR Act is not enacted and made law by the Trigger Date, or is enacted but held
unconstitutional, the Debtors would be obligated to make payments under the
$3.05 billion contingent payment note to the Section 524(g) trust as follows:
$1.9 billion of the contingent payment note would be payable within 30 days
after the Trigger Date, and the remaining $1.15 billion of the contingent
payment note would be payable within 180 days after the Trigger Date. Interest
would accrue on the $1.15 billion payment beginning 30 days after the Trigger
Date.
The Debtors propose to fund their obligations through the $1.577 billion
of accumulated cash; a rights offering to the Corporation's stockholders that is
expected to raise $1.8 billion in new equity funding; new debt financing of
about $1 billion; and tax refunds of about $1.1 billion generated from the
Debtors' contributions to the Section 524(g) trust.
See Voluntary Reorganization Under Chapter 11, above, and Part II, Item 8,
Note 2, Voluntary Reorganization Under Chapter 11, and Note 18, Litigation, for
additional information on the Debtors' obligations and the funding of those
obligations under the Proposed Plan.
CASH FLOWS
As shown on the consolidated statement of cash flows, cash and cash equivalents
increased $180 million during 2005. The primary source of cash during this
period was earnings from operations adjusted for noncash items. Primary uses of
cash were: (i) capital spending of $198 million, (ii) net purchases of
marketable securities of $115 million, (iii) pension funding of $71 million,
(iv) acquisitions of businesses of $29 million and (v) deposit of restricted
cash of $35 million.
Comparing 2005 with 2004, net cash from operating activities was $506
million in 2005 compared with $428 million a year ago. This variation was
primarily attributable to increased earnings from operations adjusted for
noncash items. Net cash used for investing activities decreased to $372 million
from $387 million primarily due to a $99 million decrease in net purchases of
marketable securities, partially offset by a $60 million increase in capital
spending and a $24 million increase related to the acquisitions of businesses.
Net cash provided by financing activities of $44 million during 2005 primarily
reflected the exercise of stock options.
CAPITAL EXPENDITURES
Capital spending amounted to $198 million in 2005, compared with $138 million in
2004. As of December 31, 2005, remaining capital expenditure commitments for the
replacement, modernization and expansion of operations amounted to $587 million,
compared with $283 million as of December 31, 2004. The Corporation's capital
expenditures program, which is funded by cash from operations, includes:
32
- - approximately $180 million for a new gypsum wallboard plant in
Washingtonville, Pa., that will serve the Northeast markets. Construction
of this plant will begin in late 2006 and is expected to be completed in
the second quarter of 2008.
- - approximately $130 million to replace existing capacity at U.S. Gypsum's
Norfolk, Va., gypsum wallboard plant with a new low-cost wallboard line
that will position the company for profitable growth in the mid-Atlantic
market. Construction on this project began in 2005 and is expected to be
completed in the second quarter of 2007.
- - approximately $75 million for a new 40,000 ton self-unloading ship that
will lower the delivered cost of gypsum rock to East Coast wallboard
plants. The new ship is expected to become operational in late 2007.
- - approximately $70 million for a new gypsum wallboard plant in Tecoman,
Mexico. This facility will serve markets in western Mexico and export
gypsum wallboard to Central and Latin America. Construction of this plant
will begin in the third quarter of 2006 and is expected to be completed in
the second quarter of 2007.
- - approximately $30 million for a mill modernization at U.S. Gypsum's
Plaster City, Calif., gypsum wallboard plant. Construction on this project
will begin in early 2006 and is expected to be completed in mid-2007.
- - approximately $16 million to build a ready-mixed joint compound line at
U.S. Gypsum's Baltimore plant. Construction on this project will begin in
mid-2006 and is expected to be completed in mid-2007.
- - approximately $13 million to rebuild the ready-mixed joint compound line
at U.S. Gypsum's Jacksonville, Fla., plant. Construction on this project
will begin in early 2006 and is expected to be completed in mid-2007.
WORKING CAPITAL
Working capital (current assets less current liabilities) as of December 31,
2005, amounted to $1.579 billion, and the ratio of current assets to current
liabilities was 3.63-to-1. As of December 31, 2004, working capital was $1.220
billion, and the ratio of current assets to current liabilities was 3.14-to-1.
The increase in working capital was primarily attributable to higher levels of
cash and cash equivalents, short-term marketable securities and restricted cash.
In addition, receivables increased to $453 million as of December 31, 2005, from
$413 million as of December 31, 2004, primarily reflecting a 13% increase in net
sales for the month of December 2005 as compared with December 2004. Inventories
declined to $315 million from $338 million. Accounts payable increased to $281
million from $270 million. Accrued expenses increased to $275 million from $224
million as of December 31, 2004. The majority of the increase in accrued
expenses related to employee compensation.
MARKETABLE SECURITIES
As of December 31, 2005, $563 million was invested in marketable securities, up
$113 million from $450 million as of December 31, 2004. Of the year-end 2005
amount, $329 million was invested in long-term marketable securities and $234
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.
LETTERS OF CREDIT AND RESTRICTED CASH
The Corporation has a $175 million credit agreement, which expires April 30,
2008, with LaSalle Bank N.A. (the "LaSalle Facility") to provide letters of
credit needed to support business operations. As of December 31, 2005, there
were outstanding $72 million of letters of credit under the LaSalle Facility,
which are cash collateralized at 103%.
As of December 31, 2005, a total of $78 million was reported as restricted
cash on the consolidated balance sheet. Restricted cash primarily represented
collateral to support outstanding letters of credit.
DEBT
As of December 31, 2005, total debt amounted to $1.005 billion, all of which was
included in liabilities subject to compromise. As of December 31, 2004, total
debt amounted to $1.006 billion, of which $1.005 billion was included in
liabilities subject to
33
compromise. These amounts do not include any accruals for post-petition
contractual interest expense.
REALIZATION OF DEFERRED TAX ASSET
The Corporation's consolidated balance sheet as of December 31, 2005, includes a
net long-term deferred tax asset of $1.423 billion. Included in this amount is a
deferred tax asset of $1.698 billion relating to the U.S. federal and state
income tax benefits expected to be realized in future years with respect to the
$4.161 billion of asbestos reserves recorded by the Corporation as of December
31, 2005. Management has concluded, based on the weight of available evidence,
that all but $55 million of these tax benefits are more likely than not to be
realized in the future; consequently, a valuation allowance of $55 million has
been established with respect to this deferred tax asset as of December 31,
2005.
In arriving at its conclusion, management has considered both the federal
taxable income reported by the Corporation for the 1996 through 2005 taxable
years as well as future reversals of existing taxable temporary differences and
projections of future taxable income. In the taxable year(s) in which the
Corporation's asbestos reserves are satisfied, the related federal income tax
deduction will create a net operating loss. Under the Internal Revenue Code, a
net operating loss resulting from the payment of asbestos claims (including cash
contributions to a Section 524(g) trust) can be carried back and offset against
the Corporation's federal taxable income in the 10 preceding years, generating a
refund of taxes paid in those years. Since the Corporation has reported (or
expects to report) federal taxable income of $3.2 billion, in the aggregate, for
the years 1996 through 2005, it is more likely than not that it will realize the
federal deferred tax asset relating to the Corporation's asbestos reserves.
In contrast to the results under the Internal Revenue Code, most U.S.
states do not allow the carryback of a net operating loss in any significant
amount. As a result, most all of the state tax benefits relating to the
Corporation's payment of asbestos claims will be realized through a reduction of
future state income tax liabilities by offsetting a net operating loss resulting
from the payment of asbestos claims against future state taxable income. Based
on projections of future taxable income (consistent with historical results and
anticipated future trends) in the U.S. states in which the Corporation conducts
business operations and the loss carryforward periods allowed by current state
laws, management has concluded that all but $55 million of the deferred tax
asset relating to the Corporation's asbestos reserves is more likely than not to
be realized.
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, 2005:
Payments Due by Period (a)
- ----------------------------------------------------------------------
2007- 2009- There-
(millions) Total 2006 2008 2010 after
- ----------------------------------------------------------------------
Operating leases $ 407 $ 85 $ 121 $ 66 $ 135
Purchase obligations (b) 404 137 157 31 79
Debt obligations (c) - - - - -
Other long-term
liabilities (d) 432 9 11 9 403
- ----------------------------------------------------------------------
Total 1,243 231 289 106 617
======================================================================
(a) The table excludes $5.340 billion of liabilities subject to compromise which
will be addressed under the provisions of the Proposed Plan. See Part II,
Item 8, Note 2, Voluntary Reorganization Under Chapter 11, for additional
information on liabilities subject to compromise.
(b) Purchase obligations primarily consist of contracts to purchase energy and
certain raw materials.
(c) The Corporation has $1.005 billion of debt classified as liabilities subject
to compromise. See (a) above.
(d) Other long-term liabilities primarily consist of asset retirement
obligations that principally extend over a 50-year period. The majority of
associated payments are due toward the latter part of that period.
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 2006.
The above table excludes liabilities related to postretirement benefits
(retiree health care and life
34
insurance). The Corporation voluntarily provides postretirement benefits for
eligible employees and retirees. The portion of benefit claim payments made by
the Corporation in 2005 was $15 million. See Part II, Item 8, Note 12, Employee
Retirement Plans, for additional information on future expected cash payments.
As of December 31, 2005, 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 $72 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. Only one individual filed a proof of
claim in the Debtors' Chapter 11 Cases alleging silica-related personal injury.
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 18, 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
35
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 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
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
36
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 (personal injury and property damage) then pending against U.S. Gypsum
and future asbestos personal injury claims to be filed against it through 2003
could be resolved in the tort system for an amount between $889 million and
$1.281 billion, including defense costs, and that within this range the most
likely estimate was $1.185 billion. 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 billion.
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. After the Filing,
the asbestos reserve was not revised as the Corporation was unable to estimate
the outcome of the bankruptcy proceedings regarding the estimation of Debtors'
asbestos liability.
As a result of the Asbestos Agreement and Proposed Plan, in the fourth
quarter of 2005, the Corporation recorded a pretax charge of $3.1 billion
($1.935 billion, or $44.36 per share, after tax) for all asbestos-related
claims, increasing the reserve for all asbestos-related claims to $4.161
billion. This reserve includes the Debtors' obligations to fund asbestos
personal injury claims as will be set forth in the Proposed Plan (recorded at
$3.95 billion on the assumption that the Proposed Plan is confirmed but that the
Fair Act is not enacted as set forth in the Proposed Plan); the Debtors'
estimate of the cost of resolving asbestos property damage claims filed in its
chapter 11 proceedings, including estimated legal fees associated with those
claims; and the Debtors' estimate of resolving other asbestos-related claims and
legal expenses associated with those claims.
If the Proposed Plan is not confirmed, the amount of Debtors' asbestos
personal injury liabilities will not be resolved and will likely be subject to
substantial dispute and uncertainty. In that event, if the amount of such
liabilities is not resolved through negotiation or through federal asbestos
legislation, such liabilities likely will be determined through litigation in
the bankruptcy proceeding. The Official Committee of Asbestos Personal Injury
Claimants and the Futures Representative have stated in a court filing that they
estimate that the net present value of the Debtors' present and future asbestos
personal injury liabilities 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. If the Proposed
Plan is not confirmed, the amount of Debtors' liabilities for asbestos personal
injury liabilities could ultimately be determined to be significantly different
from the currently accrued reserve. 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 18, Litigation, for additional information on
the background of asbestos litigation, developments in the Corporation's
reorganization proceeding and defined terms.
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.
At December 31, 2005, the assumed discount rate was determined based on
the Hewitt Yield Curve (the "HYC"), which was designed by Hewitt Associates to
provide a means for plan sponsors to value the liabilities of their defined
benefit pension and postretirement benefit plans. The HYC is a hypothetical
37
\
double A yield curve represented by a series of annualized individual discount
rates. Each bond issue underlying the HYC is required to have a rating of Aa or
better by Moody's Investor Service, Inc. or a rating of AA or better by Standard
& Poor's. Prior to using the HYC, the assumed discount rate was developed by
using as a benchmark the yield on investment grade corporate bonds rated AA or
better with terms that approximated 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
2005
2006 Projected
Percentage Net Annual Benefit
Assumption Change Benefit Cost Obligation
- ---------------------------------------------------------------------------
Pension Benefits:
Discount rate 0.5% increase $(8) $(67)
Discount rate 0.5% decrease 9 75
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 29
- ---------------------------------------------------------------------------
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 2005.
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 12, Employee Retirement Plans, for additional
information regarding costs, plan obligations, plan assets, assumptions and the
health-care-cost trend rate.
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 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.
38
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2005, the Corporation adopted FIN 47, "Accounting for Conditional
Asset Retirements." This interpretation clarifies that uncertainty about the
timing and (or) method of settlement of a conditional asset retirement
obligation should be factored into the measurement of the liability when
sufficient information exists to make a reasonable estimate of the fair value of
the obligation. In connection with the adoption of this interpretation, a
noncash, after-tax charge of $11 million ($18 million pretax) was reflected in
the consolidated statement of operations as a cumulative effect of a change in
accounting principle as of December 31, 2005.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements related to management's
expectations about future conditions. The effects of the Corporation's Chapter
11 reorganization and the conduct, outcome and costs of the Chapter 11 Cases,
including the ultimate outcome and costs associated with the Corporation's
agreement to resolve its asbestos liabilities, 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 major customers; and the
unpredictable effects of acts of terrorism or war upon domestic and
international economies and financial markets; and acts of God. The Corporation
assumes no obligation to update any forward-looking information contained in
this report.
39
ITEM 7a. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
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. In addition, the Corporation uses
financial instruments, including fixed and variable rate debt, to finance its
operations in the normal course of business.
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 $55 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, or to hedge selected risk of changes in the
Corporation's net investment in foreign subsidiaries. As of December 31, 2005,
the Corporation had no outstanding foreign currency or other similar contracts.
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. The
investment portfolio is recorded at fair value in the Corporation's financial
statements with changes in fair value being recorded as gains or losses in the
Corporation's earnings. 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.
See Part II, Item 8, Note 1, Significant Accounting Policies, and Note 15,
Derivative Instruments, for additional information on the Corporation's
financial exposures.
40
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Page
----
CONSOLIDATED FINANCIAL STATEMENTS:
Statements of Operations........................................................ 42
Balance Sheets.................................................................. 43
Statements of Cash Flows........................................................ 44
Statements of Stockholders' Equity (Deficit).................................... 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS:
1. Significant Accounting Policies............................................ 46
2. Voluntary Reorganization Under Chapter 11.................................. 48
3. Stockholder Rights Plan ................................................... 61
4. Earnings Per Share.......................................................... 61
5. Marketable Securities....................................................... 62
6. Inventories................................................................ 62
7. Property, Plant and Equipment.............................................. 62
8. Goodwill and Other Intangible Assets....................................... 62
9. Accrued Expenses........................................................... 63
10. Accumulated Other Comprehensive Income..................................... 63
11. Asset Retirement Obligations............................................... 63
12. Employee Retirement Plans.................................................. 63
13. Stock-Based Compensation................................................... 66
14. Income Taxes............................................................... 67
15. Derivative Instruments..................................................... 68
16. Segments................................................................... 69
17. Commitments and Contingencies.............................................. 70
18. Litigation................................................................. 70
19. Quarterly Financial Data (unaudited)....................................... 77
Report of Independent Registered Public Accounting Firm.............................. 78
Schedule II - Valuation and Qualifying Accounts...................................... 80
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.
41
USG CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(millions, except per-share data) Years Ended December 31,
- --------------------------------------------------------------------------------------------------------------
2005 2004 2003
- --------------------------------------------------------------------------------------------------------------
Net sales $5,139 $4,509 $3,666
Cost of products sold 4,037 3,672 3,121
- --------------------------------------------------------------------------------------------------------------
Gross profit 1,102 837 545
Selling and administrative expenses 352 317 324
Provision for asbestos claims 3,100 - -
Chapter 11 reorganization expenses 4 12 11
- --------------------------------------------------------------------------------------------------------------
Operating profit (loss) (2,354) 508 210
Interest expense 5 5 6
Interest income (10) (6) (4)
Other income, net - - (9)
- --------------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes and cumulative
effect of accounting change (2,349) 509 217
Income taxes (benefit) (924) 197 79
- --------------------------------------------------------------------------------------------------------------
Earnings (loss) before cumulative effect of accounting change (1,425) 312 138
Cumulative effect of accounting change (11) - (16)
- --------------------------------------------------------------------------------------------------------------
Net earnings (loss) (1,436) 312 122
==============================================================================================================
Net Earnings (Loss) Per Common Share:
Basic and diluted before cumulative effect of accounting change (32.67) 7.26 3.19
Cumulative effect of accounting change (0.26) - (0.37)
- --------------------------------------------------------------------------------------------------------------
Basic and diluted * (32.92) 7.26 2.82
==============================================================================================================
- ----------
* The sum of the components may not be the same as the total.
The notes to consolidated financial statements are an integral part of these
statements.
42
USG CORPORATION
CONSOLIDATED BALANCE SHEETS
(millions, except share data) As of December 31,
- --------------------------------------------------------------------------------------------------------------
2005 2004
- --------------------------------------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 936 $ 756
Short-term marketable securities 234 138
Restricted cash 78 43
Receivables (net of reserves: 2005 - $14; 2004 - $14) 453 413
Inventories 315 338
Income taxes receivable 6 24
Deferred income taxes 2 25
Other current assets 155 53
- --------------------------------------------------------------------------------------------------------------
Total current assets 2,179 1,790
- --------------------------------------------------------------------------------------------------------------
Long-term marketable securities 329 312
Property, plant and equipment, net 1,946 1,853
Deferred income taxes 1,423 152
Goodwill 64 43
Other assets 201 128
- --------------------------------------------------------------------------------------------------------------
Total assets 6,142 4,278
==============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable 281 270
Accrued expenses 275 224
Current portion of long-term debt - 1
Deferred income taxes 6 -
Income taxes payable 38 75
- --------------------------------------------------------------------------------------------------------------
Total current liabilities 600 570
- --------------------------------------------------------------------------------------------------------------
Deferred income taxes 28 25
Other liabilities 476 417
Liabilities subject to compromise 5,340 2,242
Commitments and contingencies
Stockholders' Equity (Deficit):
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: 2005 - 49,985,222 shares; 2004 - 49,985,222 shares 5 5
Treasury stock at cost: 2005 - 5,348,001 shares; 2004 - 6,675,689 shares (219) (256)
Capital received in excess of par value 435 417
Accumulated other comprehensive income 72 17
Retained earnings (deficit) (595) 841
- --------------------------------------------------------------------------------------------------------------
Total stockholders' equity (deficit) (302) 1,024
- --------------------------------------------------------------------------------------------------------------
Total liabilities and stockholders' equity (deficit) 6,142 4,278
==============================================================================================================
The notes to consolidated financial statements are an integral part of these
statements.
43
USG CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(millions) Years Ended December 31,
- --------------------------------------------------------------------------------------------------------------
2005 2004 2003
- --------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net earnings (loss) $ (1,436) $ 312 $ 122
Adjustments to Reconcile Net Earnings (Loss) to Net Cash:
Provision for asbestos claims 3,100 - -
Cumulative effect of accounting change 11 - 16
Depreciation, depletion and amortization 125 120 112
Deferred income taxes (1,261) 49 59
Gain on asset dispositions (5) (1) -
(Increase) Decrease in Working Capital:
Receivables (31) (92) (34)
Income taxes receivable 19 2 (12)
Inventories 27 (58) (5)
Payables (30) 77 12
Accrued expenses 41 15 (37)
Increase in other assets (43) (38) (25)
Increase in other liabilities 20 31 53
Change in asbestos receivable - 11 19
Decrease in liabilities subject to compromise (2) (1) (29)
Other, net (29) 1 (14)
- --------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 506 428 237
- --------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital expenditures (198) (138) (111)
Purchases of marketable securities (648) (546) (256)
Sales or maturities of marketable securities 533 332 194
Net proceeds from asset dispositions 5 6 2
Acquisitions of businesses (29) (5) (20)
Deposit of restricted cash (35) (36) (7)
- --------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (372) (387) (198)
- --------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Repayment of debt (1) (1) -
Issuances of common stock 45 7 -
- --------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 44 6 -
- --------------------------------------------------------------------------------------------------------------
Effect of exchange rate changes on cash 2 9 12
NET INCREASE IN CASH AND CASH EQUIVALENTS 180 56 51
Cash and cash equivalents at beginning of period 756 700 649
- --------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period 936 756 700
==============================================================================================================
Supplemental Cash Flow Disclosures:
Interest paid 2 2 2
Income taxes paid, net 341 126 19
The notes to consolidated financial statements are an integral part of these
statements.
44
USG CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Capital
Common Received Accumulated
Shares Treasury in Excess Retained Other
Issued Shares Common Treasury of Par Earnings Comprehensive
(millions, except share data) (000) (000) Stock Stock Value (Deficit) Income (Loss) Total
- ---------------------------------------------------------------------------------------------------------------------------
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
===========================================================================================================================
Comprehensive Income:
Net loss (1,436) (1,436)
Foreign currency translation 6 6
Change in fair value of
derivatives, net of tax of $34 54 54
Minimum pension liability,
net of tax benefit of $3 (5) (5)
-----
Total comprehensive income (1,381)
Stock issuances 1,330 37 8 45
Other (2) 10 10
- ---------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 2005 49,985 (5,348) 5 (219) 435 (595) 72 (302)
===========================================================================================================================
The notes to consolidated financial statements are an integral part of these
statements.
45
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.
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 $16
million, $13 million and $16 million in the years ended December 31, 2005, 2004
and 2003, respectively.
RESEARCH AND DEVELOPMENT
Research and development expenditures are charged to earnings as incurred and
amounted to $17 million, $17 million and $18 million in the years ended December
31, 2005, 2004 and 2003, 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.
46
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 original
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 2005, 2004 and 2003.
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 historically accounts for stock-based
compensation under the intrinsic value method, which measures compensation cost
as the quoted market price of the stock at the date of grant less the amount, if
any, that the employee is required to pay.
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 2005, 2004 and 2003.
Effective January 1, 2006, the Corporation adopted SFAS No. 123(R),
"Share-Based Payment," which requires companies to recognize in the income
statement the grant-date fair value of stock options and other equity-based
compensation issued to employees. Because the Corporation is not currently
issuing stock options or any other form of share-based compensation, the
adoption of SFAS No. 123(R) did not have an impact on the Corporation's
financial position, cash flows or results of operations.
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
47
effective portion of changes in the fair value of the derivative is recorded to
accumulated other comprehensive income ("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. For derivatives designated as net investment hedges, changes in
value are recorded in OCI.
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,
2009, are generally designated as cash flow hedges.
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, or to
hedge selected risk of changes in the Corporation's net investment in foreign
subsidiaries. These contracts are generally designated as either cash flow
hedges or hedges of net investment.
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 was $3 million, $2 million and $(8) million in
2005, 2004 and 2003, respectively.
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 jointly administered as In re: USG Corporation et al. (Case No. 01-2094).
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 ("Beadex"); B-R Pipeline Company; La Mirada Products Co.,
Inc.; Stocking Specialists, Inc.; USG Industries, Inc.; and USG Pipeline
Company. The Chapter 11 Cases do not include any of the Corporation's non-U.S.
subsidiaries or companies that were acquired post-petition by L&W Supply.
In late January 2006, the Debtors, the committee representing asbestos
personal injury claimants (the "Official Committee of Asbestos Personal Injury
Claimants" or "ACC"), and the legal representative for future asbestos personal
injury claimants (the "Futures Representative") reached an agreement to resolve
Debtors' present and future asbestos personal injury liabilities and to
cooperate in the confirmation of a plan of reorganization consistent with that
resolution (the "Asbestos Agreement"). The Asbestos Agreement was approved by
USG's Board of Directors on January 29, 2006, and was executed by the Futures
Representative and each law firm representing a member of the ACC. The Asbestos
Agreement also is supported by the committee representing unsecured creditors
(the "Official Committee of Unsecured Creditors") and the committee representing
the Corporation's shareholders (the "Official Committee of Equity Security
Holders"). The Asbestos Agreement does not include asbestos property damage
claims, and the committee representing asbestos property damage claimants (the
"Official Committee of Asbestos Property Damage Claimants") has not taken a
position on the Asbestos Agreement.
48
As contemplated by the Asbestos Agreement, the Debtors expect to file a
proposed plan of reorganization (the "Proposed Plan") and Disclosure Statement
with the United States Bankruptcy Court for the District of Delaware (the
"Bankruptcy Court") in February 2006 incorporating the terms of the Asbestos
Agreement and addressing the treatment of all other claims and interests.
Pursuant to the Proposed Plan, a trust would be created and funded by Debtors
pursuant to Section 524(g) of the Bankruptcy Code, and this trust would
compensate all qualifying present and future asbestos personal injury claims
against Debtors. If confirmed by the courts, the Proposed Plan would contain an
injunction channeling all asbestos personal injury claims against the Debtors to
the Section 524(g) trust for payment and precluding any individual or entity
from bringing an asbestos personal injury claim against Debtors. This channeling
injunction would include any asbestos personal injury claims against Debtors
relating to A.P. Green Refractories Co. ("A.P. Green"), a former subsidiary of
U.S. Gypsum and the Corporation. The amount that the Debtors would be required
to pay to the Section 524(g) asbestos personal injury trust would depend upon
whether national legislation creating a trust for payment of asbestos personal
injury claims is enacted by the 10th day after final adjournment of the 109th
Congress. If the Proposed Plan is confirmed and the legislation is enacted by
that date, the Debtors' funding obligation to the Section 524(g) trust would be
$900 million. If the Proposed Plan is confirmed and such legislation is not
enacted before that date, or is enacted but held unconstitutional, the Debtors'
funding obligation to the Section 524(g) trust would total $3.95 billion.
Under the Proposed Plan, allowed claims of all other creditors, including
allowed claims of general unsecured creditors, would be paid in full, with
interest where required. Disputed claims, including disputed asbestos property
damage claims, would be resolved in the bankruptcy proceedings or other forum,
where appropriate. Upon resolution of those disputed claims, the allowed amount
of any such claims would also be paid in full, with interest where required.
Shareholders of the Corporation as of the effective date of the Proposed Plan
would retain their shares, and pursuant to a proposed shareholder rights
offering, would have the right to purchase, at $40.00 per share, one new common
share of the Corporation for each share owned as of the effective date of the
rights offering.
There are important conditions to the Asbestos Agreement. One of the
conditions of the Asbestos Agreement is that the Proposed Plan must be confirmed
and have an effective date on or before August 1, 2006, absent written agreement
among all parties to the Asbestos Agreement to extend that time. There can be no
assurance that the Proposed Plan will be confirmed or, if confirmed, become
effective by August 1, 2006.
Additional information about the Proposed Plan, the Section 524(g)
asbestos personal injury trust contemplated by the Proposed Plan, funding
relating to the Proposed Plan, and conditions and other factors relating to the
effectiveness of the Proposed Plan is set forth, below, in Developments in the
Reorganization Proceeding and Note 18, 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. 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.
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.
Expenses associated with this plan amounted to $23 million in 2005, $16
million in 2004 and $23 million in 2003. Expense declined in 2004 from
prior-year levels primarily due to accruals in 2003 and 2002 of deferred amounts
that were paid in 2004.
On January 10, 2006, the Bankruptcy Court approved the USG Corporation
2006 Corporate Performance Plan (the "CPP"). The CPP is effective for eligible
participants from January 1, 2006, through December 31, 2006, or through and
including the effective day of a plan of reorganization for the Corporation,
whichever comes first. The CPP provides participants, who hold key positions
identified as eligible, with two cash payments equal to a specified percentage
of their annual base salary. The second payment is subject to a performance
adjustment based on the Corporation's 2006 calendar-year results, which
49
could increase the second payment up to 50% or eliminate it altogether. The cost
of the new plan is projected to be approximately $22 million for 2006 before
taking into account the performance feature.
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 federal district court
judge. Judge Conti hears matters relating to estimation of the Debtors'
liability for asbestos personal injury claims. Other matters are heard by Judge
Fitzgerald. Four official committees were appointed in the Chapter 11 Cases -
the Official Committee of Personal Injury Claimants (or ACC), the Official
Committee of Asbestos Property Damage Claimants, the Official Committee of
Unsecured Creditors and the Official Committee of Equity Security Holders. In
addition, the Bankruptcy Court appointed Dean M. Trafelet as the Futures
Representative. The appointed committees together with Mr. Trafelet play
significant roles in the Chapter 11 Cases and the resolution of the Chapter 11
Cases.
The Debtors currently have the exclusive right to file a plan of
reorganization, and pursuant to the Asbestos Agreement, the Debtors expect to
file a Proposed Plan in February 2006. Pursuant to the Proposed Plan, a trust
would be created and funded by Debtors pursuant to Section 524(g) of the
Bankruptcy Code, and this trust would compensate all qualifying present and
future asbestos personal injury claims against the Debtors. If confirmed by the
courts, the Proposed Plan would contain an injunction channeling all asbestos
personal injury claims against the Debtors to the Section 524(g) trust for
payment and precluding any individual or entity from bringing an asbestos
personal injury claim against the Debtors. This channeling injunction would
include any asbestos personal injury claims against the Debtors relating to A.P.
Green and its affiliates.
The Section 524(g) asbestos personal injury trust would be funded by the
Debtors on the effective date of the Proposed Plan by payment of $890 million in
cash; issuance of an interest-bearing promissory note in the principal amount of
$10 million payable on December 31, 2006; and issuance of a contingent payment
note in the amount of $3.05 billion.
The contingent payment note of $3.05 billion would be payable to the
Section 524(g) trust depending upon whether the Fairness in Asbestos Injury
Resolution Act of 2005 or substantially similar legislation creating a national
asbestos personal injury trust (collectively, the "FAIR Act") is enacted and
made law by the 10th day after final adjournment of the 109th Congress (the
"Trigger Date"). With certain exceptions, outlined below, the Debtors'
obligations under the $3.05 billion contingent payment note would be cancelled
if the FAIR Act is enacted and made law by the Trigger Date. If the FAIR Act is
not enacted and made law by the Trigger Date, or is enacted but held
unconstitutional, the Debtors would be obligated to make payments under the
$3.05 billion contingent payment note to the Section 524(g) trust as follows:
$1.9 billion of the contingent payment note would be payable within 30 days
after the Trigger Date, and the remaining $1.15 billion of the contingent
payment note would be payable within 180 days after the Trigger Date. Interest
would accrue on the $1.15 billion payment beginning 30 days after the Trigger
Date.
Each of the Debtors would be co-obligors and jointly and severally liable
under both the $10 million note and the $3.05 billion contingent payment note.
The $10 million note would be secured by 51 percent of the voting stock of U.S.
Gypsum. The Debtors would also grant to the Section 524(g) trust a right to own
51 percent of the voting stock of one of the reorganized Debtors, exercisable
upon the occurrence of specified contingencies, to secure payment of the first
$1.9 billion of the contingent payment note.
Pursuant to the Asbestos Agreement, the Proposed Plan will also address
the Debtors' obligations under the $3.05 billion contingent payment note if the
FAIR Act is enacted by the Trigger Date but is subject to a constitutional
challenge to its validity. If there is a constitutional challenge within 60 days
of enactment, the Debtors would be obligated to pay the $3.05 billion note if
the constitutional challenge results in a final, non-appealable order that the
FAIR Act is (i) unconstitutional in its entirety; or (ii) unconstitutional
insofar as it applies to debtors in chapter 11 cases whose plans of
reorganization had not yet been confirmed and become substantially consummated
as defined in the Asbestos Agreement. If the constitutional challenge is
resolved by a final, non-appealable order in any manner other than as described
in the preceding sentence, then the $3.05 billion contingent payment, including
the right of the trust to own stock of one of the Debtors, would be cancelled.
The Asbestos Agreement also requires that the Debtors use their reasonable
best efforts to have the Proposed Plan confirmed by the courts and effective
50
July 1, 2006. The Asbestos Agreement provides further that if the Proposed Plan
is not confirmed and effective by August 1, 2006, the Asbestos Agreement will be
terminated unless extended by written agreement of the parties to the Asbestos
Agreement, and the Proposed Plan might not be confirmed.
The Debtors' financial obligations under the Proposed Plan, if confirmed,
would depend upon, among other things, whether the $3.05 billion contingent
payment note becomes due. The Debtors propose to fund their obligations under
the Proposed Plan through accumulated cash; new debt financing; tax refunds; and
a rights offering to the Corporation's stockholders. The Debtors' accumulated
cash and marketable securities totaled $1.577 billion as of December 31, 2005.
The Corporation expects to raise $1.8 billion in new equity funding through a
rights offering pursuant to which each stockholder as of the record date of the
rights offering will receive a right to purchase, for each USG Corporation
common share held on that date, one new USG Corporation common share at a price
of $40.00. If all stockholders were to exercise their right to purchase these
additional shares, the percentage ownership of each stockholder in the
Corporation would remain unchanged by the rights offering. These rights are
expected to be freely tradeable during the offering period in which they are
outstanding. The date for the rights offering has not been established but the
rights offering is not expected to commence prior to confirmation of the
Proposed Plan. Subject to the approval of the Bankruptcy Court, the rights
offering will be supported by a backstop equity commitment from Berkshire
Hathaway Inc., a current stockholder of the Corporation. Under the terms of the
agreement, Berkshire Hathaway Inc. has agreed to exercise all rights distributed
to it in the rights offering and purchase from the Corporation, at the same
purchase price, all or substantially all of the shares that are not otherwise
issued pursuant to the exercise of rights by other stockholders. Subject to
approval of the Bankruptcy Court, the Corporation would pay Berkshire Hathaway
Inc. a fee of $100 million as consideration for its commitment. The Bankruptcy
Court has scheduled a hearing regarding approval of the Berkshire Hathaway Inc.
backstop equity commitment on February 23, 2006. It is possible that another
entity may offer an alternative to the Berkshire Hathaway Inc. backstop
commitment prior to the hearing. The Berkshire Hathaway Inc. backstop equity
commitment will expire on September 30, 2006, subject to extension to November
14, 2006, in certain circumstances, including the payment of an additional $20
million fee.
In connection with the backstop equity commitment, the Corporation and
Berkshire Hathaway Inc. entered into a shareholder's agreement whereby Berkshire
Hathaway Inc. agreed, among other things, that for a period of seven years
following completion of the rights offering, except in limited circumstances, it
would not acquire beneficial ownership of the Corporation's voting securities
if, after giving effect to the acquisition, Berkshire Hathaway Inc. would own
more than 40% of the Corporation's voting securities (or such higher percentage
of voting securities that Berkshire Hathaway Inc. would own after making any
purchases required under the backstop equity commitment described above).
Berkshire Hathaway Inc. further agreed that, during such seven-year period, it
would not solicit proxies with respect to securities of the Corporation or
submit a proposal or offer involving a merger, acquisition or other
extraordinary transaction unless such proposal or offer is (i) requested by the
Corporation's Board of Directors, or (ii) made to the Board of Directors
confidentially, is approved by a majority of the voting power of the Corporation
not owned by Berkshire Hathaway Inc. and is determined by the independent
members of the Board of Directors to be fair to the stockholders. The
shareholder's agreement also provides that, with certain exceptions, any new
shares of common stock acquired by Berkshire Hathaway Inc. in excess of those
owned on the date of the agreement (and shares distributed on those shares,
including in the rights offering) will be voted proportionally with all voting
shares.
The parties also entered into a registration rights agreement whereby the
Corporation granted Berkshire Hathaway Inc. registration rights with respect to
its shares of the Corporation's common stock.
In addition to accumulated cash and the rights offering, the Corporation
also expects to fund its obligations under the Proposed Plan, if confirmed,
through about $1 billion of financing in the second half of 2006 if the $3.05
billion contingent payment note becomes due. Further, the Corporation's cash
contributions to the Section 524(g) asbestos trust would be tax deductible and
would be expected to generate a cash tax refund based upon a net operating loss
that would be created. Assuming that the $3.05 billion contingent payment note
becomes due and is payable to the Section 524(g) asbestos trust, the Corporation
would expect to receive a cash tax refund of about $1.1 billion. If this tax
refund has not been received by the Corporation when the final payment is due to
the trust, the Corporation would likely require additional debt financing to
make such payment.
There are numerous factors and conditions that will
51
affect confirmation of the Proposed Plan. These include, among others, the
following requirements: the class or classes of claimants whose claims are to be
addressed by the Section 524(g) asbestos personal injury trust must be
established and vote in favor of the Proposed Plan by at least 75% of those
voting; the Bankruptcy Court or the United States District Court for the
District of Delaware (the "District Court") must issue various findings of fact
and conclusions of law required to create a Section 524(g) asbestos personal
injury trust and issue an injunction channeling all asbestos personal injury
claims against Debtors to the Section 524(g) trust, including the findings that
the asbestos trust is designed to pay present claims and future demands that
involve similar claims in substantially the same manner and that the trust own,
or have the right to acquire if specified contingencies occur, a majority of the
voting stock of a relevant Debtor, its parent corporation, or a subsidiary that
is also a Debtor; the Bankruptcy Court or the District Court must issue various
findings that the Proposed Plan complies with all other applicable requirements
of the Bankruptcy Code; the Bankruptcy Court or the District Court must enter a
confirmation order (and, if the Bankruptcy Court enters the confirmation order,
the District Court must affirm it); and the Bankruptcy Court and the District
Court, as required, must enter the Section 524(g) injunction set forth in the
Proposed Plan. The Asbestos Agreement also requires that the Proposed Plan must
be confirmed and become effective no later than August 1, 2006 (unless otherwise
agreed to by the parties to the Asbestos Agreement). The failure to resolve
disputes with any objectors to the Proposed Plan could materially hinder
satisfaction of the requirement in the Asbestos Agreement that the Proposed Plan
be effective by August 1, 2006.
If the Proposed Plan, or a substantially similar plan, is not confirmed,
the amount of Debtors' present and future asbestos personal injury liabilities
will be unresolved. In such a situation, the amount of those liabilities may be
resolved through litigation which was pending at the time the Asbestos Agreement
was reached. Proceedings relating to estimation of the Debtors' asbestos
personal injury liabilities were pending before Judge Conti at that time. The
parties to the Asbestos Agreement have agreed to seek a stay of the estimation
proceedings. Proceedings relating to whether Debtors other than U.S. Gypsum are
responsible for U.S. Gypsum's asbestos liabilities and whether the Debtors are
responsible for the asbestos liabilities of A.P. Green were pending before Judge
Fitzgerald.
At the time the Asbestos Agreement was reached, there were key, contested
issues among the parties relevant to estimation of Debtors' asbestos personal
injury liabilities that were being addressed in the estimation litigation
proceeding before Judge Conti. Those key issues included: whether claimants who
do not have objective evidence of asbestos-related disease are entitled to be
compensated by Debtors and whether such claimants are entitled to vote on any
plan of reorganization; the characteristics and number of present and future
claimants who are likely to have had exposure to the Debtors'
asbestos-containing products sufficient to cause disease; whether the particular
type of asbestos present in certain of the Debtors' products during the relevant
time has been shown to cause cancer; and the appropriate claim values to apply
to legitimate present and future asbestos personal injury claims.
At the time the Asbestos Agreement was reached, there were also litigation
proceedings before Judge Fitzgerald relating to whether Debtors other than U.S.
Gypsum have responsibility for U.S. Gypsum's asbestos liabilities and whether
the Debtors have responsibility for the asbestos liabilities of A.P. Green. In
2004, the Debtors other than U.S. Gypsum filed a complaint 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 ACC and the Futures Representative opposed the Debtors in these
proceedings. The ACC and the Futures Representative have alleged that the
asbestos personal injury liabilities of U.S. Gypsum exceed its value, and, in
opposition to the Debtors' complaint, the ACC and the Futures Representative
filed counterclaims seeking a ruling that the assets of all Debtors are
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.
The ACC and the Futures Representative also have alleged 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 responsible for A.P. Green's
asbestos liabilities due to U.S. Gypsum's acquisition by merger of A.P. Green in
1967 and that, pursuant to the merger documents, U.S. Gypsum assumed A.P.
Green's liabilities. They further allege that because the Debtors other than
U.S. Gypsum are liable for U.S. Gypsum's liabilities, the other Debtors are
therefore liable for A.P. Green's liabilities. The Official Committee of
Asbestos Property Damage
52
Claimants asserted similar counterclaims.
The Proposed Plan, if confirmed, would resolve the issue of Debtors'
liability for present and future asbestos personal injury claims relating to
A.P. Green by channeling those claims to the Section 524(g) trust created
pursuant to the Proposed Plan. A.P. Green, which manufactured and sold
refractory products, was acquired through a merger of A.P. Green into U.S.
Gypsum on December 29, 1967. On the next business day after the merger, January
2, 1968, U.S. Gypsum conveyed A.P. Green's assets and liabilities to a newly
formed Delaware corporation and wholly owned subsidiary of U.S. Gypsum, also
called A.P. Green Refractories Co. This newly formed corporation is also
referred to herein as "A.P. Green." A.P. Green was operated as a wholly owned
subsidiary of U.S. Gypsum until 1985, at which time A.P. Green became a wholly
owned subsidiary of the Corporation. In 1988, A.P. Green became a publicly
traded company when its shares were distributed to the stockholders of the
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 through creation
and funding of a Section 524(g) trust. 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).
In September 2005, the debtors in the A.P. Green reorganization proceeding
filed a proposed plan of reorganization which, if approved, would resolve the
asbestos liabilities of the debtors in that proceeding by channeling those
asbestos liabilities to a trust created under Section 524(g) of the Bankruptcy
Code. The plan documents specifically exclude U.S. Gypsum from the protection of
the proposed channeling injunction. The proposed plan of reorganization in the
A.P. Green proceedings has not been confirmed. A confirmation hearing is
scheduled for June 5, 2006. The A.P. Green plan documents state that the trust
that will address asbestos claims against A.P. Green will be funded with
approximately $334 million dollars in insurance proceeds and 21% of the stock of
a corporate affiliate of A.P. Green. The plan documents state that, as of A.P.
Green's petition date, about 235,757 asbestos-related claims were pending
against it and about 58,899 such claims were pending against an affiliate. Prior
to its petition date, A.P. Green had resolved about 203,000 asbestos-related
claims for about $448 million in indemnity costs. In addition, A.P. Green had
resolved approximately 49,500 asbestos-related claims in the aggregate amount of
$491 million, which were unpaid as of the petition date. (These 49,500 claims
are included in the 235,757 pending claims referenced above.)
The Proposed Plan to be filed by the Debtors in their Chapter 11 Cases
contemplates that all asbestos personal injury claims against the Debtors
relating to A.P. Green will be channeled to the Debtors' Section 524(g) trust.
However, the Proposed Plan is subject to numerous conditions. There is no
guarantee that the Proposed Plan will be confirmed. If the Proposed Plan is not
confirmed, the Debtors will remain in chapter 11, the amount of Debtors' present
and future asbestos personal injury liabilities will be unresolved, and the
terms and timing of any plan of reorganization ultimately confirmed in Debtors'
Chapter 11 Cases are unknown. In such a situation, it cannot be known what
amount will be necessary to resolve Debtors' present and future asbestos
personal injury liabilities, including alleged liabilities relating to A.P.
Green; how the plan of reorganization ultimately approved will treat other
pre-petition claims; whether there will be sufficient assets to satisfy Debtors'
pre-petition liabilities; and what impact any plan of reorganization ultimately
confirmed may have on the value of the shares of the Corporation's common stock
or other securities. The interests of the Corporation's stockholders may be
substantially diluted or cancelled in whole or in part.
POTENTIAL FEDERAL LEGISLATION REGARDING ASBESTOS PERSONAL INJURY CLAIMS
On April 19, 2005, Senator Arlen Specter, R-Pa., introduced in the United
States Senate legislation addressing compensation and administration of asbestos
personal injury claims. The legislation is titled the Fairness in Asbestos
Injury Resolution Act of 2005 (Senate Bill 852, the "FAIR Act of 2005" or the
"Act"). The FAIR Act of 2005 is co-sponsored by 17 Republican Senators and three
Democratic Senators. The Act was referred to the Senate Committee on the
Judiciary and was approved by the committee on May 27, 2005, with 13 senators
voting in favor of the bill and five voting against it. However, several
senators on the committee who voted in favor of the bill stated that additional
changes must be made to the Act in order for them to vote in favor of passage of
the bill by the full Senate. The FAIR Act of 2005 has not been approved by the
full Senate, has not been considered by the
53
House of Representatives, is not law and may not become law.
The FAIR Act of 2005 approved by the Senate Judiciary Committee is
intended to establish a nationally administered trust fund to compensate
asbestos personal injury claimants. In the Act's current form, companies that
have made past payments for asbestos personal injury claims would be required to
contribute amounts on a periodic basis to a national trust fund 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. A copy
of the FAIR Act of 2005 as introduced is available at http://thomas.loc.gov
(type in "S. 852" in the search field).
In the Act's current form, the amounts to be paid to the national trust
fund are based on an allocation methodology set forth in the Act. In addition to
the annual payments required under the allocation methodology, defendant
participants may be subject to surcharges under certain circumstances, including
but not limited to a failure of the scheduled contributions to meet the
defendant participants' guaranteed annual funding requirements under the Act.
The amounts that participants, including the Debtors, would be required to pay
are not dischargeable in a bankruptcy proceeding. In addition, the Act, in its
current form, requires affected companies currently in chapter 11, including the
Debtors, to make their first payment to the national trust fund not later than
60 days after enactment of the FAIR Act of 2005, notwithstanding the fact that
the companies are still in chapter 11 proceedings. The Act 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
(including current chapter 11 debtors) would return to the court system to
resolve claims not paid by the national trust fund.
As stated above, pursuant to the Proposed Plan to be filed by Debtors, the
amount that Debtors would be required to pay into the Section 524(g) asbestos
personal injury trust would be contingent upon whether the FAIR Act of 2005 or
substantially similar legislation (collectively, the "FAIR Act") is enacted by
Congress by a date specified in the Proposed Plan.
The outcome of the legislative process is inherently speculative, and it
cannot be known whether the FAIR Act will ever be enacted or, if enacted, what
the terms of the final legislation might be. Previously, in April 2004, a
similar, but not identical, bill (the Fairness in Asbestos Injury Resolution Act
of 2004) was introduced in the Senate and was approved by the Senate Committee
on the Judiciary, but the full Senate defeated a motion to proceed with floor
consideration of the bill. Enactment of the FAIR Act addressing the financial
contributions of the Debtors for asbestos personal injury claims would have a
material impact on the amount the Debtors would be required to pay into its
Section 524(g) trust if the Proposed Plan is confirmed, and, even if the
Proposed Plan is not confirmed, enactment of such legislation would materially
impact the amount of the Debtors' asbestos personal injury liability.
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 have 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
54
claims totaling $29.5 million as duplicates; expunged 471 claims totaling $232.4
million as amended or superceded; allowed the reduction of 847 claims by a total
of $21.6 million; and allowed the correction of the Debtors on 1,533 claims and
the reclassification of 291 claims to general unsecured claims. The Debtors
continue to analyze and reconcile filed claims. In addition to the general
unsecured claims described in this paragraph, approximately 1,400 asbestos
property damage claims were filed as of the bar date. To date, the court has
disallowed more than 400 asbestos property damage claims alleging more than $300
million in damages. Approximately 100 additional asbestos property damage claims
have been withdrawn. The asbestos property damage claims are described in Note
18, Litigation, under Developments in the Reorganization Proceeding.
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 Official Committee of 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. Under the Proposed
Plan, the avoidance action would be dismissed.
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.
Under the Proposed Plan, allowed claims of general unsecured creditors
would be paid in full, with interest where required. Disputed general unsecured
claims, litigation claims, and asbestos property damage claims would be resolved
in the bankruptcy proceedings or other forum, where appropriate. Upon resolution
of those disputed claims, the allowed amount of any such claims would be paid in
full, with interest where required.
In connection with the resolution 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.
FINANCIAL STATEMENT PRESENTATION
The accompanying consolidated financial statements have been prepared in
accordance with AICPA SOP 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code," and 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, the Debtors, or any
of them, 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
55
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 achieve profitability 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 proceedings. This includes its ability to meet
post-petition obligations of the Debtors and to meet obligations of the
non-Debtor subsidiaries.
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
estimate of liability associated with asbestos claims expected to be filed
against U.S. Gypsum in the tort system through 2003. This liability, in addition
to liability for post-2003 claims, is the subject of significant dispute in the
Chapter 11 Cases. See Note 18, 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) 2005 2004
- ----------------------------------------------------------------------
Asbestos reserve $ 4,161 $ 1,061
Debt 1,005 1,005
Accounts payable 173 169
Accrued expenses 36 37
Other long-term liabilities 8 13
- ---------------------------------------------------------------------
Subtotal 5,383 2,285
Elimination of intercompany accounts payable (43) (43)
- ---------------------------------------------------------------------
Total 5,340 2,242
=====================================================================
DEBT
As a result of the Filing, 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) 2005 2004
- --------------------------------------------------------------
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 $1.268 billion and $1.121 billion as of December 31, 2005 and
2004, 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, 2005, 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
56
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 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, 2005, U.S. Gypsum and USG Interiors had net
pre-petition payable balances to the Parent Company for Intercompany Corporate
Transactions of $302 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, 2005, U.S. Gypsum, USG Interiors and L&W Supply had net
post-petition receivable balances from the Parent Company for Intercompany
Corporate Transactions of $732 million, $31 million and $289 million,
respectively. 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 operations consisted of the following:
(millions) 2005 2004 2003
- --------------------------------------------------------------
Legal and financial advisory fees $ 36 $ 24 $ 19
Bankruptcy-related interest income (32) (12) (8)
- -------------------------------------------------------------
Total 4 12 11
=============================================================
INTEREST EXPENSE
Contractual interest expense not accrued or recorded on pre-petition debt
totaled $80 million in 2005. From the Petition Date through December 31, 2005,
contractual interest expense not accrued or recorded on pre-petition debt
totaled $337 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 $27 million in 2005 and $61 million from the Petition
Date through December 31, 2005. For financial reporting purposes, no
post-petition accruals have been made for contractual interest expense not
accrued or recorded on pre-petition debt.
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 are
prepared under the same basis as the Corporation's consolidated financial
statements and accurately provide information required under the Bankruptcy
Code, they are nonetheless unconsolidated, unaudited and prepared in a format
different from that used for the Corporation's
57
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; B-R Pipeline Company; La Mirada Products Co., Inc.; Stocking
Specialists, Inc.; USG Industries, Inc.; and USG Pipeline Company.
The condensed DIP financial statements are presented as follows:
DEBTOR-IN-POSSESSION STATEMENTS OF OPERATIONS (UNAUDITED)
(millions) Years Ended December 31,
- ---------------------------------------------------------------------------------------------------------------
2005 2004 2003
- ---------------------------------------------------------------------------------------------------------------
Net sales $ 4,626 $ 4,065 $ 3,302
Cost of products sold 3,683 3,389 2,863
Selling and administrative expenses 300 267 278
Provision for asbestos claims 3,100 - -
Chapter 11 reorganization expenses 4 12 11
Interest expense 4 4 5
Interest income (2) (2) (2)
Other income, net (14) (2) (6)
- --------------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes and cumulative effect of accounting change (2,449) 397 153
Income taxes (benefit) (953) 162 66
- --------------------------------------------------------------------------------------------------------------
Earnings (loss) before cumulative effect of accounting change (1,496) 235 87
Cumulative effect of accounting change (10) - (13)
- --------------------------------------------------------------------------------------------------------------
Net earnings (loss) (1,506) 235 74
==============================================================================================================
58
DEBTOR-IN-POSSESSION BALANCE SHEETS (UNAUDITED)
(millions) As of December 31,
- -----------------------------------------------------------------------------
2005 2004
- -----------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 698 $ 516
Short-term marketable securities 187 135
Restricted cash 77 38
Receivables (net of reserves: 2005 - $10; 2004 - $10) 400 373
Inventories 262 275
Income taxes receivable 6 24
Deferred income taxes - 25
Other current assets 147 45
- -----------------------------------------------------------------------------
Total current assets 1,777 1,431
- -----------------------------------------------------------------------------
Long-term marketable securities 298 276
Property, plant and equipment (net of accumulated
depreciation and depletion: 2005 - $819; 2004 - $728) 1,663 1,604
Deferred income taxes 1,423 152
Goodwill 64 43
Other assets 434 361
- -----------------------------------------------------------------------------
Total assets 5,659 3,867
=============================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities:
Accounts payable 239 237
Accrued expenses 250 203
Deferred income taxes 7 -
Income taxes payable 36 58
- -----------------------------------------------------------------------------
Total current liabilities 532 498
- -----------------------------------------------------------------------------
Other liabilities 445 391
Liabilities subject to compromise 5,340 2,242
Stockholders' Equity (Deficit):
Preferred stock - -
Common stock 5 5
Treasury stock (219) (256)
Capital received in excess of par value 145 101
Accumulated other comprehensive income 53 3
Retained earnings (deficit) (642) 883
- -----------------------------------------------------------------------------
Total stockholders' equity (deficit) (658) 736
- -----------------------------------------------------------------------------
Total liabilities and stockholders' equity (deficit) 5,659 3,867
=============================================================================
59
DEBTOR-IN-POSSESSION STATEMENTS OF CASH FLOWS (UNAUDITED)
(millions) Years Ended December 31,
- -----------------------------------------------------------------------------------------------
2005 2004 2003
- -----------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net earnings (loss) $(1,506) $ 235 $ 74
Adjustments to Reconcile Net Earnings (Loss) to Net Cash:
Provision for asbestos claims 3,100 - -
Cumulative effect of accounting change 10 - 13
Corporate service charge (1) (1) (1)
Depreciation, depletion and amortization 108 101 94
Deferred income taxes (1,264) 45 54
Gain on asset dispositions (5) (1) -
(Increase) Decrease in Working Capital:
Receivables (18) (97) (37)
Income taxes receivable 18 (3) (7)
Inventories 17 (43) -
Payables (26) 66 10
Accrued expenses 38 14 (21)
Increase in pre-petition intercompany receivable - (38) -
(Increase) decrease in post-petition intercompany receivable 5 70 (9)
Increase in other assets (46) (36) (9)
Increase in other liabilities 18 32 45
Change in asbestos receivables - 11 19
Decrease in liabilities subject to compromise (2) (1) (29)
Other, net (19) (6) (10)
- ----------------------------------------------------------------------------------------------
Net cash provided by operating activities 427 348 186
- ----------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital expenditures (152) (118) (88)
Purchases of marketable securities (574) (507) (256)
Sales or maturities of marketable securities 499 332 194
Net proceeds from asset dispositions 5 1 2
Acquisitions of businesses (29) (5) (20)
Deposit of restricted cash (39) (31) (7)
- ----------------------------------------------------------------------------------------------
Net cash used for investing activities (290) (328) (175)
- ----------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Issuances of common stock 45 7 -
- ----------------------------------------------------------------------------------------------
Net cash provided by financing activities 45 7 -
- ----------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 182 27 11
Cash and cash equivalents at beginning of period 516 489 478
- ----------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period 698 516 489
==============================================================================================
Supplemental Cash Flow Disclosures:
Interest paid 2 2 2
Income taxes paid, net 302 114 2
60
3. STOCKHOLDER RIGHTS PLAN
The Corporation's stockholder rights plan, dated March 27, 1998, as amended, 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.
On January 29, 2006, in connection with the Proposed Plan, the Board
approved (i) an amendment to the Corporation's existing stockholder rights plan
to permit the equity rights offering to proceed without triggering the plan and
to accelerate the termination of the existing plan to 11 days after the
effectiveness of the Corporation's plan of reorganization; and (ii) the adoption
of a new Reorganization Rights Plan, effective January 30, 2006. Under the new
plan, if any person acquires beneficial ownership of 5% or more of the
Corporation's voting stock, stockholders other than the 5% triggering
stockholder will have the right to purchase additional common stock of the
Corporation at half the market price, thereby diluting the triggering
stockholder. Stockholders who already own 5% or more of the common stock of the
Corporation as of January 30, 2006, including Berkshire Hathaway Inc. will not
trigger these rights so long as they do not acquire more than an additional 1%
of the voting stock of the Corporation while the plan is in effect, other than
pursuant to proportional participation in the rights offering. The new rights
plan also provides that the term "Acquiring Person" will not include Berkshire
Hathaway Inc. (and certain of its affiliates) to the extent that Berkshire
Hathaway Inc. acquires beneficial ownership of the Corporation's common stock in
transactions contemplated or permitted by the equity commitment agreement and
the shareholder's agreement. The new rights plan will expire on December 31,
2006, or, if later, 30 days after the effectiveness of the plan of
reorganization if the FAIR Act has not been enacted and made law by the 10th day
after final adjournment of the 109th Congress. However, the Board has the power
to accelerate or extend the expiration date of the rights. See Note 2, Voluntary
Reorganization Under Chapter 11, for more information.
4. EARNINGS PER SHARE
The reconciliation of basic earnings per share to diluted earnings per share is
shown in the following table:
Weighted
Net Average
(millions, except Earnings Shares Per-Share
share data) (Loss) (000) Amount
- ---------------------------------------------------------------------
2005:
Basic loss $(1,436) 43,622 $(32.92)
- --------------------------------------------------------------------
Diluted loss (1,436) 43,622 (32.92)
====================================================================
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
====================================================================
Options to purchase 0.2 million, 1.9 million and 2.6 million shares of
common stock as of December 31, 2005, 2004 and 2003, 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.
61
5. MARKETABLE SECURITIES
Investments in marketable securities as of December 31 consisted of the
following:
2005 2004
- -------------------------------------------------------------------------------
Fair Fair
Amortized Market Amortized Market
(millions) Cost Value Cost Value
- ------------------------------------------------------------------------------
Asset-backed securities $244 $243 $174 $173
U.S. government and agency securities 168 166 121 121
Municipal securities 21 21 36 36
Corporate securities 123 123 112 112
Time deposits 10 10 8 8
- -----------------------------------------------------------------------------
Total marketable securities 566 563 451 450
=============================================================================
Contractual maturities of marketable securities as of December 31, 2005,
were as follows:
Fair
Amortized Market
(millions) Cost Value
- ---------------------------------------------------------------
Due in 1 year or less $229 $227
Due in 1 - 5 years 41 41
Due in 5 - 10 years - -
Due after 10 years 52 52
- --------------------------------------------------------------
322 320
Asset-backed securities 244 243
- --------------------------------------------------------------
Total marketable securities 566 563
==============================================================
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.
Management has evaluated the nature of all unrealized losses in marketable
securities, and has determined that the losses are related to the level of
interest rates. Investments in marketable securities that were in an unrealized
loss position consisted of the following:
2005 2004
- --------------------------------------------------------------------------------------
Less Than 12 Months Less Than 12 Months
(millions) 12 Months or Longer 12 Months or Longer
- --------------------------------------------------------------------------------------
Asset-backed securities $143 $39 $149 $2
U.S. government and agency securities 89 32 83 -
Corporate securities 41 20 34 -
- -----------------------------------------------------------------------------------
Total fair market value 273 91 266 2
- -----------------------------------------------------------------------------------
Aggregate amount of unrealized losses 2 1 1 -
===================================================================================
6. INVENTORIES
Inventories as of December 31 consisted of the following:
(millions) 2005 2004
- --------------------------------------------------------------
Finished goods and work in progress $195 $188
Raw materials 99 133
Supplies 21 17
- --------------------------------------------------------------
Total 315 338
==============================================================
The LIFO value of U.S. inventories was $240 million and $258 million as of
December 31, 2005 and 2004, respectively. Inventories would have been higher by
$38 million and $31 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 $17
million and $15 million as of December 31, 2005 and 2004, respectively.
7. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment as of December 31 consisted of the following:
(millions) 2005 2004
- --------------------------------------------------------------
Land and mineral deposits $ 107 $ 102
Buildings and improvements 835 772
Machinery and equipment 1,919 1,814
Computer software and systems
development costs 67 43
- --------------------------------------------------------------
2,928 2,731
Reserves for depreciation and depletion (982) (878)
- --------------------------------------------------------------
Total 1,946 1,853
==============================================================
8. GOODWILL AND OTHER INTANGIBLE ASSETS
All of the Corporation's goodwill relates to the Building Products Distribution
operating segment. Goodwill increased in 2005 as a result of the acquisition of
two businesses during the year. Other intangible assets, excluding intangible
pension assets, are principally trade names and as of December 31, 2005, totaled
$3 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.
62
9. ACCRUED EXPENSES
Accrued expenses as of December 31 consisted of the following:
(millions) 2005 2004
- --------------------------------------------------------------
Employee compensation $102 $ 74
Self-insurance reserves 57 53
Other 116 97
- --------------------------------------------------------------
Total 275 224
==============================================================
10. ACCUMULATED OTHER COMPREHENSIVE INCOME
OCI as of December 31 consisted of the following:
(millions) 2005 2004
- ---------------------------------------------------------------------------
Gain on derivatives, net of tax $60 $ 6
Foreign currency translation 21 15
Minimum pension liability, net of tax (8) (3)
Unrealized loss on marketable securities, net of tax (1) (1)
- --------------------------------------------------------------------------
Total 72 17
==========================================================================
During 2005, accumulated net after-tax gains of $71 million ($116 million
pretax) on derivatives were reclassified from OCI to earnings. As of December
31, 2005, the estimated net after-tax gain expected to be reclassified within
the next 12 months from OCI to earnings is $51 million.
11. ASSET RETIREMENT OBLIGATIONS
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 accounting for
asset retirement obligations requires a number of estimates by management as to
the timing of asset retirements, the cost of retirement obligations, discount
and inflation rates used in the determination of fair values and the methods of
remediation associated with the Corporation's asset retirement obligations. The
Corporation generally utilizes assumptions and estimates reflective of the most
likely remediation method on a site-by-site basis.
In December 2005, the Corporation adopted Financial Accounting Standards
Board Interpretation No. 47 ("FIN 47"), "Accounting for Conditional Asset
Retirements." This interpretation clarifies that uncertainty about the timing
and (or) method of settlement of a conditional asset retirement obligation
should be factored into the measurement of the liability when sufficient
information exists to make a reasonable estimate of the fair value of the
obligation. In connection with the adoption of this interpretation, a noncash,
after-tax charge of $11 million ($18 million pretax) was reflected in the
consolidated statement of operations as a cumulative effect of a change in
accounting principle as of December 31, 2005. If FIN 47 had been adopted
effective January 1, 2003, net earnings and earnings per share for 2005, 2004
and 2003 would not be materially different, and the liability for asset
retirement obligations as of January 1, 2003, December 31, 2003, and December
31, 2004, would have been approximately $44 million, $51 million and $60
million, respectively.
In January 2003, the Corporation adopted 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 operations as a
cumulative effect of a change in accounting principle as of January 1, 2003.
Changes in the liability for asset retirement obligations during 2005 and
2004 consisted of the following:
(millions) 2005 2004
- ---------------------------------------------------------------
Balance as of January 1 $43 $35
Accretion expense 3 3
Liabilities incurred 7 6
Adoption of FIN 47 18 -
Liabilities settled - (2)
Foreign currency translation - 1
- --------------------------------------------------------------
Balance as of December 31 71 43
==============================================================
12. 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 strategy for existing
retirees and eligible active
63
employees who may qualify for retiree medical coverage in the future. The plan
amendment resulted in participants paying a greater portion of their retiree
health-care costs and a reduction in the Corporation's accumulated
postretirement benefit obligation.
On May 19, 2004, the Financial Accounting Standards Board ("FASB") issued
FASB Staff Position ("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) 2005 2004 2003
- --------------------------------------------------------------------------
Pension Benefits:
Service cost of benefits earned $ 34 $ 31 $ 27
Interest cost on projected benefit obligation 56 54 52
Expected return on plan assets (56) (53) (52)
Net amortization 20 19 11
- -------------------------------------------------------------------------
Net pension cost 54 51 38
=========================================================================
Postretirement Benefits:
Service cost of benefits earned 13 14 12
Interest cost on projected benefit obligation 19 22 21
Net amortization (4) 1 -
- -------------------------------------------------------------------------
Net postretirement cost 28 37 33
=========================================================================
The Corporation uses a December 31 measurement date for its plans. The
accumulated benefit obligation ("ABO") for the defined benefit pension plans was
$858 million and $773 million as of December 31, 2005 and 2004, respectively.
The following table summarizes projected pension and accumulated postretirement
benefit obligations, plan assets and funded status as of December 31:
Pension Postretirement
------------------- -------------------
(millions) 2005 2004 2005 2004
- ----------------------------------------------------------------------------------------------
Change in Benefit Obligation:
Benefit obligation as of January 1 $ 1,003 $ 907 $ 350 $ 371
Service cost 34 31 13 14
Interest cost 56 54 19 22
Participant contributions 13 13 5 4
Benefits paid (55) (65) (15) (16)
Plan amendment - - 2 (76)
Actuarial (gain) loss 22 54 (21) 29
Foreign currency translation 4 9 1 2
- ---------------------------------------------------------------------------------------------
Benefit obligation as of December 31 1,077 1,003 354 350
=============================================================================================
Change in Plan Assets:
Fair value as of January 1 810 704 - -
Actual return on plan assets 64 72 - -
Employer contributions 71 78 10 12
Participant contributions 13 13 5 4
Benefits paid (55) (65) (15) (16)
Foreign currency translation 3 8 - -
- ---------------------------------------------------------------------------------------------
Fair value as of December 31 906 810 - -
=============================================================================================
Funded Status:
As of December 31 (171) (193) (354) (350)
Unrecognized prior service cost 19 20 (69) (78)
Unrecognized net loss 234 237 73 97
- ---------------------------------------------------------------------------------------------
Net balance sheet prepaid (liability) 82 64 (350) (331)
=============================================================================================
Components in the Consolidated Balance Sheets:
Long-term other assets 92 71 - -
Long-term other liabilities (26) (13) (350) (331)
Intangible assets 4 2 - -
Accumulated other comprehensive loss 12 4 - -
- ---------------------------------------------------------------------------------------------
Net balance sheet prepaid (liability) 82 64 (350) (331)
=============================================================================================
64
ASSUMPTIONS
The following tables reflect the assumptions used in the accounting for the
plans:
Pension Postretirement
-------------- --------------
2005 2004 2005 2004
- --------------------------------------------------------------------------------------------------------------------------------
Weighted-average assumptions used to determine benefit obligations as of December 31:
Discount rate 5.75% 5.75% 5.8% 5.75%
Compensation increase rate 4.0% 4.2% - -
- -------------------------------------------------------------------------------------------------------------------------------
Weighted-average assumptions used to determine net cost for years ended December 31:
Discount rate 5.75% 6.0% 5.75% 6.0%
Expected return on plan assets 7.0% 7.5% - -
Compensation increase rate 4.2% 4.2% - -
The assumed health-care-cost trend rate used to measure the postretirement
plans' obligations as of December 31 were as follows:
2005 2004
- ------------------------------------------------------------------------------------------------------
Health-care-cost trend rate assumed for next year 9.25% 10.0%
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 2011
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 $ 6 $ (5)
Effect on postretirement benefit obligation 59 (50)
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.
PLAN ASSETS
The pension plans' asset allocations by asset categories as of December 31 were
as follows:
Asset Categories 2005 2004
- --------------------------------------------------------------
Equity securities 69% 68%
Debt securities 22% 24%
Other 9% 8%
- -------------------------------------------------------------
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, 2005, the plans' target asset allocation percentages were 61% for
equity securities, 22% for debt securities and 17% for other. The actual
allocations for equity and debt securities exceeded their targets at year end.
Additional investment opportunities in the "other" category are being
identified, which are expected to bring actual allocations closer to target
allocations in 2006.
Investment risk is monitored by the Corporation on an ongoing basis, in
part through the use of quarterly investment portfolio reviews, compliance
reporting by investment managers, and periodic asset/liability studies and
reviews of the plan's funded status.
65
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 2006. 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
- ----------------------------------------------------------
2006 $ 45 $ 14 $ (2)
2007 47 15 (2)
2008 50 16 (2)
2009 55 18 (2)
2010 59 19 (3)
2011 - 2015 390 122 (15)
- ----------------------------------------------------------
13. STOCK-BASED COMPENSATION
There have been no stock options or other forms of stock-based compensation
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 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.
Because there have been no stock options or other forms of share-based
compensation granted since the Filing, the adoption of SFAS No. 123(R),
"Share-Based Payment," did not have an impact on the Corporation's financial
position, cash flows or results of operations.
Stock option activity was as follows:
(options in thousands) 2005 2004 2003
- --------------------------------------------------------------
Options:
Outstanding, January 1 1,932 2,600 2,699
Granted - - -
Exercised (1,327) (295) (21)
Cancelled - (373) (78)
- --------------------------------------------------------------
Outstanding, December 31 605 1,932 2,600
Exercisable, December 31 605 1,932 2,600
Available for grant, December 31 - - -
- --------------------------------------------------------------
Weighted Average Exercise Price:
Outstanding, January 1 $ 37.66 $ 34.89 $ 34.31
Granted - - -
Exercised 34.51 24.04 10.31
Cancelled - 29.15 21.25
Outstanding, December 31 44.57 37.66 34.89
Exercisable, December 31 44.57 37.66 34.89
- --------------------------------------------------------------
The following table summarizes information about stock options outstanding
as of December 31, 2005:
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 66 5.0 $ 22 66 $ 22
25 - 35 51 0.9 34 51 34
35 - 55 488 2.9 49 488 49
- ---------------------------------------------------------------
Total 605 3.0 45 605 45
===============================================================
As of December 31, 2005, common shares totaling 604,650 were reserved for
future issuance in conjunction with existing stock option grants. As
contemplated by the anti-dilution provisions of the related equity plans,
outstanding stock options will be adjusted appropriately to reflect the rights
offering. There were no common shares reserved for future grants. Shares issued
in option exercises may be originally issued or from treasury shares.
66
14. INCOME TAXES
Earnings before income taxes and cumulative effect of accounting change
consisted of the following:
(millions) 2005 2004 2003
- ---------------------------------------
U.S. $ (2,457) $ 397 $ 161
Foreign 108 112 56
- ---------------------------------------
Total (2,349) 509 217
=======================================
Income taxes consisted of the following:
(millions) 2005 2004 2003
- --------------------------------------
Current:
Federal $ 189 $ 113 $ 20
Foreign 33 29 14
State 40 14 3
- -------------------------------------
262 156 37
- -------------------------------------
Deferred:
Federal (1,033) 27 36
Foreign - 3 (1)
State (153) 11 7
- -------------------------------------
(1,186) 41 42
- -------------------------------------
Total (924) 197 79
=====================================
Differences between actual provisions for income taxes and provisions for
income taxes at the U.S. federal statutory rate (35%) were as follows:
(millions) 2005 2004 2003
- -----------------------------------------------------------
Taxes on income
at U.S. federal statutory rate $(822) $ 178 $ 76
Chapter 11 reorganization
expenses 2 1 3
Foreign earnings subject
to different tax rates - 2 3
State income tax, net of
federal benefit (74) 17 7
Valuation allowance adjustment - - (1)
Reduction of tax reserves (34) - -
Reduction of income tax payable - - (4)
Other, net 4 (1) (5)
- -----------------------------------------------------------
Provision for income
taxes (924) 197 79
===========================================================
Effective income tax rate 39.3% 38.6% 36.6%
===========================================================
Significant components of deferred tax assets and liabilities as of
December 31 were as follows:
(millions) 2005 2004
- --------------------------------------------------------
Deferred Tax Assets:
Pension and postretirement benefits $ 119 $ 114
Reserves not deductible until paid:
Asbestos reserves 1,698 435
Other reserves 21 20
Capitalized interest 6 9
Self insurance 21 24
Net operating loss and tax credit
carryforwards 27 22
Other 9 12
- --------------------------------------------------------
Deferred tax assets before valuation
allowance 1,901 636
Valuation allowance (79) (34)
- --------------------------------------------------------
Total deferred tax assets 1,822 602
- --------------------------------------------------------
Deferred Tax Liabilities:
Property, plant and equipment 310 326
Post-petition interest expense - 107
State taxes 62 5
Derivative instruments 51 4
Inventories 8 8
- --------------------------------------------------------
Total deferred tax liabilities 431 450
- --------------------------------------------------------
Net deferred tax assets 1,391 152
========================================================
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 due
to uncertainty regarding their ultimate realization. Of the total valuation
allowance as of December 31, 2005, $55 million relates to the reserve for
asbestos claims, $12 million relates to foreign net operating loss and tax
credit carryforwards, and $12 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 from the
date of origin.
On October 22, 2004, the President signed the American Jobs Creation Act
of 2004. This act created a temporary incentive for U.S. corporations to
repatriate accumulated income earned abroad by providing an 85%
dividends-received deduction for certain dividends from controlled foreign
corporations. During the fourth quarter of 2005, the Corporation decided to take
67
advantage of the one-time opportunity under the act to reduce future taxes by
repatriating $91 million of foreign earnings. This resulted in $4 million of tax
expense that was recognized in the fourth quarter of 2005.
During the third quarter of 2005, the Internal Revenue Service ("IRS")
finalized its audit of the Corporation's federal income tax returns for the
years 2000 through 2002. As a result of the audit, the Corporation's federal
income tax liability for the years 2000 through 2002 was increased by $60
million in the aggregate, which was covered by liabilities previously recorded
on the Corporation's financial statements. In addition, due to the results of
the audit, a portion of the Corporation's recorded income tax contingency
reserves became unnecessary. Consequently, the Corporation's income tax
provision was reduced (and consolidated net earnings increased) in 2005 by $25
million.
In the aggregate (including the impact on related state income tax
liabilities), the audit resulted in net cash outflows by December 31, 2005, of
$99 million, including $44 million directly related to the 2000 through 2002
audit and an additional $55 million relating to the Corporation's 2003 and 2004
years. A substantial portion of the outflows relating to the audited years and
all of the outflows relating to the 2003 and 2004 years were the result of the
disallowance by the IRS of the Corporation's current deduction of contractual
interest on debt incurred prior to its bankruptcy filing in 2001. In addition,
the audit is expected to result in net cash outflows of $11 million related to
the 2000 year. Because this amount is considered a pre-petition liability under
the Bankruptcy Code, the timing of payment is subject to Bankruptcy Court
approval and has not yet been determined. Assuming that the contractual interest
is ultimately paid, a substantial portion of these outflows will be recovered by
the Corporation on its tax returns in future years following its emergence from
bankruptcy.
The Corporation's financial statements include amounts recorded for
contingent tax liabilities with respect to loss contingencies that are deemed
probable of occurrence. The pre-petition portion of such amounts is included in
liabilities subject to compromise on the Corporation's consolidated balance
sheets, while the post-petition portion is included in income taxes payable.
These loss contingencies relate primarily to tax disputes with various state tax
authorities and costs incurred with respect to the Chapter 11 Cases. The
Corporation's U.S. income tax returns for 2002 and prior years have been audited
by the IRS and are closed.
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 $355 million as of December 31, 2005. 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.
The income tax receivable of $6 million and $24 million recorded by the
Corporation as of December 31, 2005 and 2004, respectively, relates primarily to
the temporary overpayment of taxes in various jurisdictions and the carryback of
various federal and state net operating losses. The amount recorded as of
December 31, 2005, is expected to be refunded to the Corporation or utilized to
satisfy a portion of its tax liabilities during 2006.
15. DERIVATIVE INSTRUMENTS
COMMODITY DERIVATIVE INSTRUMENTS
As of December 31, 2005, the Corporation had swap contracts to exchange monthly
payments on notional amounts of natural gas amounting to $347 million. These
contracts mature by December 31, 2009. As of December 31, 2005, the fair value
of these swap contracts, which remained in OCI, was a $101 million ($61 million
after-tax) unrealized gain. The amount of ineffectiveness in 2005 was a pretax
gain of $32 million compared with immaterial amounts in 2004 and 2003.
FOREIGN EXCHANGE DERIVATIVE INSTRUMENTS
As of December 31, 2005 and 2004, 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, or to hedge selected risk of changes in the Corporation's
net investment in foreign subsidiaries.
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 fully satisfy
68
their obligations under the contracts. The Corporation receives collateral from
its counterparties based on the provisions in certain credit support agreements.
Similarly, the Corporation may be required to post collateral if aggregate
payables exceed certain limits. Currently, the Corporation has no collateral
requirement. The Corporation enters into master agreements which contain netting
arrangements that minimize counterparty credit exposure.
16. SEGMENTS
OPERATING SEGMENTS
(millions) 2005 2004 2003
- -----------------------------------------------------------------
Net Sales:
North American Gypsum $ 3,222 $ 2,753 $ 2,299
Worldwide Ceilings 707 688 607
Building Products Distribution 2,048 1,738 1,295
Eliminations (838) (670) (535)
- -----------------------------------------------------------------
Total 5,139 4,509 3,666
=================================================================
Operating Profit (Loss):
North American Gypsum (2,466) 428 209
Worldwide Ceilings 62 62 39
Building Products Distribution 149 103 53
Corporate (90) (73) (77)
Chapter 11 reorganization
expenses (4) (12) (11)
Eliminations (5) - (3)
- -----------------------------------------------------------------
Total (2,354) 508 210
=================================================================
Depreciation, Depletion
and Amortization:
North American Gypsum 100 94 84
Worldwide Ceilings 19 18 19
Building Products Distribution 3 3 4
Corporate 3 5 5
- -----------------------------------------------------------------
Total 125 120 112
=================================================================
Capital Expenditures:
North American Gypsum 174 120 97
Worldwide Ceilings 19 14 12
Building Products Distribution 3 2 1
Corporate 2 2 1
- -----------------------------------------------------------------
Total 198 138 111
=================================================================
(millions) 2005 2004 2003
- ------------------------------------------------------------
Assets:
North American Gypsum $ 3,664 $ 2,042 $ 1,935
Worldwide Ceilings 415 438 409
Building Products Distribution 487 417 347
Corporate 1,748 1,513 1,226
Eliminations (172) (132) (118)
- ------------------------------------------------------------
Total 6,142 4,278 3,799
============================================================
GEOGRAPHIC SEGMENTS
(millions) 2005 2004 2003
- ------------------------------------------------------------
Net Sales:
United States $ 4,626 $ 4,065 $ 3,302
Canada 420 384 330
Other Foreign 333 291 235
Geographic transfers (240) (231) (201)
- ------------------------------------------------------------
Total 5,139 4,509 3,666
============================================================
Long-Lived Assets:
United States 1,812 1,684 1,622
Canada 187 174 161
Other Foreign 148 123 125
- ------------------------------------------------------------
Total 2,147 1,981 1,908
============================================================
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. An operating loss of $2.466 billion in 2005 for the North American
Gypsum segment resulted from a $3.1 billion provision for asbestos claims
associated with the Asbestos Agreement and Proposed Plan. See Note 2, Voluntary
Reorganization Under Chapter 11, and Note 18, Litigation.
L&W Supply, which makes up the Building Products Distribution segment,
completed two acquisitions during 2005. Total cash payments for these
acquisitions amounted to $29 million. As of December 31, 2005, L&W Supply
operated out of 192 locations in the United States. During the first quarter of
2006, L&W Supply purchased the outstanding stock of several companies located in
the Midwestern United States for approximately $80 million. All of these
acquisitions were part of L&W Supply's strategy to profitably grow its specialty
dealer business.
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.
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On a worldwide basis, The Home Depot, Inc. accounted for approximately 11%
of the Corporation's consolidated net sales in 2005, 2004 and 2003. 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.
17. 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 $93 million, $86
million and $84 million in the years ended December 31, 2005, 2004 and 2003,
respectively. Future minimum lease payments required under operating leases with
initial or remaining noncancelable terms in excess of one year as of December
31, 2005, were $85 million in 2006, $69 million in 2007, $52 million in 2008,
$38 million in 2009 and $28 million in 2010. The aggregate obligation subsequent
to 2010 was $135 million.
LETTERS OF CREDIT AND RESTRICTED CASH
The Corporation has a $175 million credit agreement, which expires on April 30,
2008, with LaSalle Bank N.A. (the "LaSalle Facility") to provide letters of
credit needed to support business operations. As of December 31, 2005, there
were outstanding $72 million of letters of credit under the LaSalle Facility,
which are cash collateralized at 103%.
As of December 31, 2005, a total of $78 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 18, 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.
18. LITIGATION
ASBESTOS AND RELATED BANKRUPTCY LITIGATION
One of the Corporation's subsidiaries and a Debtor, 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. 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.
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 asbestos personal injury cases pending against U.S.
Gypsum, two other Debtors, L&W Supply and Beadex, have been named as defendants
in a small number of asbestos personal injury cases. The ACC, the Futures
Representative, and the Official Committee of Asbestos Property Damage Claimants
have also 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 the Corporation.
More information regarding the asbestos cases against U.S. Gypsum and L&W
Supply, Beadex, and A.P. Green is set forth below.
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 federal district court judge. Judge Conti hears matters
relating to estimation of the Debtors' liability for asbestos personal injury
claims. Other matters are heard by Judge Fitzgerald. Four official committees
were appointed in the Chapter 11 Cases - the Official Committee of Personal
Injury Claimants (or ACC), the Official Committee of Asbestos Property Damage
Claimants, the Official Committee of Unsecured Creditors and the Official
Committee of Equity Security Holders. In addition, the Bankruptcy Court
appointed Dean M. Trafelet as the Futures Representative. The appointed
committees, together with Mr. Trafelet, play significant roles in the Chapter 11
Cases and the resolution of the Chapter 11 Cases.
After appointment of Judge Conti to Debtors' Chapter 11 Cases in late
2004, the Debtors requested Judge Conti to conduct hearings to estimate Debtors'
70
asbestos personal injury liability, taking into account the legal and scientific
issues that govern the validity of 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'
liability for present and future asbestos personal injury claims based upon
these rulings. Key liability issues include: 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; the
characteristics and number of present and future claimants who are likely to
have had exposure to the Debtors' asbestos-containing products sufficient to
cause disease; whether the particular type of asbestos present in certain of the
Debtors' products during the relevant time has been shown to cause cancer; and
the appropriate claim values to apply to legitimate present and future asbestos
personal injury claims.
The ACC and the Futures Representative opposed the type of estimation proposed
by the Debtors. The ACC and the Futures 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 ACC and the
Futures 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.
The parties have had several hearings before Judge Conti relating to
estimation of the Debtors' asbestos personal injury liabilities, and prior to
the time the Asbestos Agreement was reached, Judge Conti had established a
schedule for discovery relating to the estimation proceedings.
In addition to the motion the Debtors filed seeking estimation of their
asbestos personal injury liabilities, the Debtors also filed a motion in 2002
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.
The parties to the Asbestos Agreement have agreed to seek a stay of the
proceeding relating to estimation of the Debtors' asbestos personal injury
liabilities and the Debtors' motion relating to the voting rights of claimants
who cannot satisfy objective standards of asbestos-related disease.
There also were proceedings before Judge Fitzgerald relating to whether
Debtors other than U.S. Gypsum have responsibility for U.S. Gypsum's asbestos
liabilities and whether the Debtors have responsibility for the asbestos
liabilities of A.P. Green. In the fourth quarter of 2004, the Debtors other than
U.S. Gypsum filed a complaint for declaratory relief before Judge Fitzgerald
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 ACC and the Futures Representative opposed the Debtors in this
proceeding. The ACC and the Futures Representative have alleged that the
asbestos personal injury liabilities of U.S. Gypsum exceed its value, and, in
opposition to the Debtors' complaint, the ACC and the Futures Representative
filed counterclaims in late 2004 seeking a ruling that the assets of all Debtors
are 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. The Official Committee of Asbestos Property
Damage Claimants asserted similar counterclaims.
In that same proceeding, the asbestos committees and the Futures
Representative also sought a ruling 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 asbestos committees
and the Futures Representative also have alleged 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 responsible for A.P. Green's asbestos liabilities due
to U.S. Gypsum's acquisition by merger of A.P. Green in 1967 and that, pursuant
to the merger documents, U.S. Gypsum assumed A.P. Green's liabilities. They
further allege that because the Debtors other than U.S. Gypsum are liable for
U.S. Gypsum's liabilities, the other Debtors are therefore liable for A.P.
Green's liabilities.
The Proposed Plan, if confirmed, would resolve the issue of the Debtors'
liability for asbestos personal injury claims relating to A.P. Green by
channeling those claims to the Section 524(g) trust. A.P. Green, which
manufactured and sold refractory products, was acquired through a merger of A.P.
Green into U.S. Gypsum on December 29, 1967. On the next business day after the
merger, January 2, 1968, U.S. Gypsum
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conveyed A.P. Green's assets and liabilities to a newly formed Delaware
corporation and wholly owned subsidiary of U.S. Gypsum, also called A.P. Green
Refractories Co. This newly formed corporation is also referred to herein as
"A.P. Green." A.P. Green was 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 through creation
and funding of a Section 524(g) trust. 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).
In September 2005, the debtors in the A.P. Green reorganization proceeding
filed a proposed plan of reorganization which, if approved, would resolve the
asbestos liabilities of the debtors in that proceeding by channeling those
asbestos liabilities to a trust created under Section 524(g) of the Bankruptcy
Code. The plan documents specifically exclude U.S. Gypsum from the protection of
the proposed channeling injunction. The A.P. Green proposed plan of
reorganization has not been approved. A hearing on confirmation of the proposed
plan is scheduled for June 5, 2006. The plan documents state that the trust that
will address asbestos claims against A.P. Green will be funded with
approximately $334 million in insurance proceeds and 21% of the stock of a
corporate affiliate of A.P. Green. The plan documents state that, as of A.P.
Green's petition date, about 235,757 asbestos-related claims were pending
against it and about 58,899 such claims were pending against an affiliate. Prior
to its petition date, A.P. Green had resolved about 203,000 asbestos-related
claims for about $448 million in indemnity costs. In addition, A.P. Green had
resolved approximately 49,500 asbestos-related claims in the aggregate amount of
$491 million, which were unpaid as of the petition date. (These 49,500 claims
are included in the 235,757 pending claims referenced above.)
The A.P. Green plan documents do not provide an estimate of the amount of
A.P. Green's present or future asbestos liabilities and do not indicate the
percentage of recovery that A.P. Green asbestos claimants will receive from the
trust established pursuant to the plan. However, based upon the plan documents
filed in the A.P. Green reorganization proceeding, it appears that the assets in
the trust established to pay A.P. Green asbestos claims will not be sufficient
to pay in full the presumed liability for present and future asbestos claims
against A.P. Green.
If the Proposed Plan to be filed in Debtors' Chapter 11 Cases is not
confirmed, the Debtors' alleged liability for asbestos personal injury claims
relating to A.P. Green will likely be addressed through continued litigation
proceedings in the Debtors' Chapter 11 Cases.
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 asbestos 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. Counsel for the Official Committee of
Asbestos Property Damage Claimants has stated in a court hearing that the
committee believes that the amount of the asbestos property damage claims may
reach $1 billion.
Most of the asbestos property damage claims filed do not provide evidence
that the Debtors' asbestos-containing 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 the property
damage claims, including the lack of evidence that the Debtors' products were
ever
72
installed in the buildings at issue, the failure to file the claims within the
applicable statutes of limitation or repose, and the lack of evidence that the
claimants have any injury or damages. The Debtors intend to address many of
these claims through an objection and disallowance process in the Bankruptcy
Court. Beginning in late 2004, the Debtors began filing objections to asbestos
property damage claims that did not provide any evidence that the Debtors'
products were installed in the buildings at issue. To date, in response to these
objections, the Court has disallowed more than 400 asbestos property damage
claims for failure to provide sufficient product identification evidence. In
addition, approximately 100 asbestos property damage claims have been withdrawn.
Debtors have also filed motions challenging an additional approximately 540
claims. These motions are scheduled to be heard by Judge Fitzgerald on February
21, 2006.
At present, approximately 900 property damage claims remain pending
involving approximately 1,700 buildings. This includes the approximately 540
claims that are the subject of the Debtors' pending motion before the Bankruptcy
Court.
The Proposed Plan will provide that all remaining asbestos property damage
claims timely filed in the Debtors' bankruptcy proceedings would be resolved in
these bankruptcy proceedings or other forum, where appropriate. Upon resolution
of these claims, the allowed amount, if any, of such claims would be paid in
full. The Debtors believe that they have substantial defenses to these claims,
including that the majority of the claims do not provide even minimal evidence
that Debtors' asbestos-containing products were ever installed in the buildings
at issue, statute of limitations or repose defenses for some claims, and the
lack of evidence that the claimants have any injury or damage. However, the
number of asbestos property damage claims to be resolved in the Debtors'
bankruptcy proceedings is significantly greater than the number of asbestos
property damage claims pending at the Petition Date.
The following is a summary of the asbestos personal injury and property
damage cases pending against U.S. Gypsum and certain other Debtors as of the
Petition Date.
Asbestos Personal Injury Cases: Prior to the Filing, U.S. Gypsum managed the
handling and settlement of asbestos personal injury cases through its membership
in the Center for Claims Resolution (the "Center"). As reported by the Center,
U.S. Gypsum was a defendant in more than 100,000 pending asbestos personal
injury cases as of the Petition Date, as well as an additional approximately
50,000 personal injury cases that may be the subject of settlement agreements.
These numbers do not include asbestos personal injury claims that would have
been filed after June 25, 2001, the Petition Date, but for the automatic stay.
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 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 was 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 asbestos 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.
73
Beadex, a subsidiary of U.S. Gypsum and a Debtor in the bankruptcy
proceedings, was named as a defendant in approximately 60 asbestos personal
injury cases pending primarily in the states of Washington and Oregon as of the
Petition Date. Beadex manufactured and sold joint compound containing asbestos
from 1963 through 1978 in the northwestern United States. Beadex has confirmed
approximately $11 million in primary or umbrella insurance coverage available to
pay asbestos-related costs, as well as $15 million in available excess coverage.
Asbestos Property Damage Cases: As of the Petition Date, U.S. Gypsum was a
defendant in 11 asbestos 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.). In
addition, a South Carolina state court certified a second class action on the
eve of the Petition Date. This second action is styled Anderson Memorial
Hospital v. W.R. Grace & Co., et al., Case No. 92-CP-25-279 (Hampton County
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.
Approximately 1,400 asbestos property damage claims were filed against the
Debtors prior to the bar date. More than 500 have been disallowed or withdrawn.
Approximately 900 claims for about 1,700 buildings remain pending. Approximately
540 claims of these 900 claims are the subject of a pending motion challenging
those claims which is scheduled to be heard by Judge Fitzgerald on February 21,
2006.
Insurance Coverage: As of December 31, 2005, all prior receivables relating to
insurance remaining to cover asbestos-related costs had been collected by U.S.
Gypsum, and its insurance coverage for asbestos claims has been completely
exhausted. As noted above, Beadex has approximately $26 million in primary and
excess insurance.
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
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
74
damages.
Based upon the results of the actuarial study, the Corporation determined
that, although substantial uncertainty remained, it was probable that asbestos
claims (personal injury and property damage) then pending against U.S. Gypsum
and future asbestos personal injury claims to be filed against it through 2003
could be resolved in the tort system for an amount between $889 million and
$1.281 billion, including defense costs, and that within this range the most
likely estimate was $1.185 billion. 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 the reserve for asbestos claims to $1.185 billion. 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.
As a result of the Asbestos Agreement and Proposed Plan, in the fourth
quarter of 2005, the Corporation recorded a pretax charge of $3.1 billion
($1.935 billion, or $44.36 per share, after tax) for all asbestos-related
claims, increasing U.S. Gypsum's reserve for all asbestos-related claims to
$4.161 billion. This reserve includes the Debtors' obligations to fund asbestos
personal injury claims as will be set forth in the Proposed Plan (recorded at
$3.95 billion based upon the assumption that the Proposed Plan will be
confirmed, but that the FAIR Act or substantially similar legislation is not
enacted as set forth in the Proposed Plan). This reserve also includes the
Debtors' estimate of the cost of resolving asbestos property damage claims filed
in its chapter 11 proceedings, including estimated legal fees associated with
those claims; and the Debtors' estimate of resolving other asbestos-related
claims and estimated legal expenses associated with those claims.
If the Proposed Plan is not confirmed, the amount of Debtors' asbestos
personal injury liabilities will not be resolved and will likely be subject to
substantial dispute and uncertainty. In that event, if the amount of such
liabilities is not resolved through negotiation or through federal asbestos
legislation, such liabilities likely will be determined through litigation in
the bankruptcy proceeding. The amount of Debtors' asbestos personal injury
liabilities could be determined to be significantly different from the currently
accrued reserve. 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 Bankruptcy Court and is captioned USG Corporation and United States
Gypsum Company v. Center for Claims Resolution, Inc. and Safeco Insurance
Company of America, Case No. 01-08932. The court 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, the court issued an order and memorandum
75
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. 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.
The Center bond litigation is pending before Judge Fitzgerald and has not
been resolved. Pursuant to the Proposed Plan, the Center bond litigation would
be resolved in the bankruptcy proceedings.
Conclusion: There are numerous factors and conditions that will affect
confirmation of the Proposed Plan. One of the requirements of the Asbestos
Agreement is that the Proposed Plan be confirmed and effective no later than
August 1, 2006. There is no guarantee that the Proposed Plan will be confirmed
or, if confirmed, become effective by August 1, 2006. If the Proposed Plan is
not confirmed, the Debtors will remain in chapter 11, the amount of Debtors'
present and future asbestos personal injury liabilities will be unresolved, and
the terms and timing of any plan of reorganization ultimately confirmed in
Debtors' chapter 11 cases are unknown. In such a situation, it cannot be known
what amount will be necessary to resolve Debtors' present and future asbestos
personal injury liabilities; how the plan of reorganization ultimately approved
will treat other pre-petition claims; whether there will be sufficient assets to
satisfy Debtors' pre-petition liabilities; and what impact any plan of
reorganization ultimately confirmed may have on the value of the shares of USG
Corporation's common stock. The interests of the Corporation's stockholders may
be substantially diluted or cancelled in whole or in part.
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 claimant filed a proof of claim alleging silica
personal injury liability 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. None of these claimants filed
proofs of claim in the bankruptcy case, and the dates of alleged injury are not
specified in the state court complaints. However, U.S. Gypsum believes that the
claims against it in these lawsuits should be stayed as a result of the Filing.
In the third quarter of 2005, 14 of these complaints, involving 392 plaintiffs,
were voluntarily dismissed without prejudice to refile. The Corporation does not
have sufficient information to estimate the likely cost of resolving the pending
silica 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. The
Proposed Plan will provide that the one silica claimant who timely filed a proof
of claim in the Debtors' bankruptcy proceedings will have his claim resolved in
those proceedings or other forum, where appropriate.
The Corporation believes that these silica matters, including the pending
state court complaints, will not have a material impact on its financial
position, cash flows or results of operations.
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
76
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 other known governmental
proceedings regarding environmental matters will have a material adverse effect
upon its financial position, cash flows or results of operations.
19. QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarter
----------------------------------------
(millions, except share data) First Second Third (a) Fourth (a)
- ------------------------------------------------------------------------
2005:
Net sales $ 1,173 $ 1,287 $ 1,344 $ 1,335
Gross profit 214 267 301 320
Operating profit (loss) 124 181 211 (2,870)(b)
Net earnings (loss) 77 110 158 (1,781)(b)
Per Common Share:
Basic (c) 1.77 2.55 3.58 (39.94)(b)
Diluted (c) 1.77 2.53 3.57 (39.94)(b)
- ------------------------------------------------------------------------
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 (c) 1.33 1.86 2.10 1.98
Diluted 1.33 1.86 2.10 1.97
- ------------------------------------------------------------------------
(a) Fourth quarter 2005 operating loss, net loss and loss per common share
include a $37 million pretax ($23 million after-tax) noncash adjustment
that should have been recorded in the third quarter. The adjustment
relates to certain of the Corporation's natural gas derivative
instruments, which no longer qualified for hedge accounting in the third
quarter. If the adjustment had been recorded in the third quarter of 2005,
consolidated net earnings for that quarter would have been $181 million.
(b) Fourth quarter 2005 operating loss, net loss and loss per common share
include a provision of $3.1 billion pretax ($1.935 billion after-tax, or
$43.39 per share) for asbestos claims. Fourth quarter 2005 net loss and
loss per common share also include an after-tax charge of $11 million, or
$0.25 per share, for the cumulative effect of an accounting change.
(c) The sum of the four quarters is not the same as the total for the year.
77
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, 2005 and 2004 and
the related consolidated statements of operations, cash flows and stockholders'
equity (deficit) for each of the three years in the period ended December 31,
2005. 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, 2005 and 2004, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2005, 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. In
January 2006, the Corporation reached an Asbestos Agreement in which all present
and future asbestos personal injury claims made against the Corporation would be
resolved through cash payments by the Corporation into a trust established as
part of the bankruptcy, if approved by the Bankruptcy Court. The Asbestos
Agreement and the Corporation's Proposed Plan for emerging from its Chapter 11
bankruptcy proceedings are described in Note 2. It is not certain that the
Asbestos Agreement or the Proposed Plan will ultimately be approved, or
consummated as described. Should the Asbestos Agreement or the Proposed Plan not
be approved or consumated, there is uncertainty as to the resolution of the
Corporation's asbestos litigation. The uncertainty raises substantial doubt
about the Corporation's ability to continue as a going concern. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
As discussed in Note 11, 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," and effective December 31, 2005, the Corporation
adopted Financial Accounting Standards Board Interpretation No. 47, "Accounting
for Conditional Asset Retirements."
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, 2005,
based on criteria established in Internal Control - Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway Commission and our
report dated
78
February 13, 2006, expressed an unqualified opinion on management's assessment
of the effectiveness of the Corporation's internal control over financial
reporting and an unqualified opinion on the effectiveness of the Corporation's
internal control over financial reporting.
DELOITTE & TOUCHE LLP
Chicago, Illinois
February 13, 2006
79
USG CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Beginning Ending
(millions) Balance Additions (a) Deductions (b) Balance
- ---------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2005:
Doubtful accounts $ 11 $ 3 $ (4) $ 10
Cash discounts 3 49 (48) 4
- ---------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2004:
Doubtful accounts 12 5 (6) 11
Cash discounts 3 43 (43) 3
- ---------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 2003:
Doubtful accounts 14 2 (4) 12
Cash discounts 3 50 (50) 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
80
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
effective 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 CONTROL 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, 2005. 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, 2005, 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 13, 2006
(b) REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of USG Corporation:
We have audited management's assessment, included in the accompanying Management
Report on Internal Control Over Financial Reporting, that USG Corporation and
subsidiaries (the "Corporation") maintained effective internal control over
financial reporting as of December 31, 2005, 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 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.
81
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, 2005, 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, 2005,
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, 2005 and 2004 and the related consolidated statements of operations, cash
flows and stockholders' equity (deficit) for each of the three years in the
period ended December 31, 2005. Our audit also included the accompanying
financial statement schedules, Schedule II - Valuation and Qualifying Accounts.
Our report dated February 13, 2006 expressed an unqualified opinion on those
financial statements and accompanying financial statement schedules and included
explanatory paragraphs regarding (i) matters which raise substantial doubt about
the Corporation's ability to continue as a going concern and (ii) a change in
the method of accounting for asset retirement obligations due to the
Corporation's adoption of Statement of Financial Accounting Standards ("SFAS")
No. 143, "Accounting for Asset Retirement Obligations" in 2003, and Financial
Accounting Standards Board Interpretation No. 47, "Accounting for Conditional
Asset Retirements" in 2005.
DELOITTE & TOUCHE LLP
Chicago, Illinois
February 13, 2006
(c) CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
On October 1, 2005, the Corporation began to roll out a new enterprise resource
planning system in the United States and Canada. The rollout is being undertaken
in phases and is currently planned to be substantially completed in 2007.
Management expects that the new system will enhance operational efficiencies and
help the Corporation better serve its customers. Other than the changes related
to the new system, 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.
82
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
EXECUTIVE OFFICERS OF THE REGISTRANT (AS OF FEBRUARY 14, 2006):
NAME, AGE AND PRESENT POSITION
PRESENT POSITION BUSINESS EXPERIENCE DURING THE LAST FIVE YEARS HELD SINCE
- ----------------------------------- ---------------------------------------------------- -----------------
William C. Foote, 54 Chairman, Chief Executive Officer and President to January 2006
Chairman and Chief Executive January 2006.
Officer
James S. Metcalf, 48 President and Chief Executive Officer, L&W Supply January 2006
President and Chief Operating Corporation, to March 2002; Senior Vice President; President,
Officer Building Systems, to February 2004; Executive Vice President;
President, Building Systems, to January 2006.
Edward M. Bosowski, 51 President, Growth Initiatives and International, to February January 2006
Executive Vice President and Chief 2001; Senior Vice President, Marketing and Corporate
Strategy Officer; President, USG Strategy; President, USG International, to February 2004;
International Executive Vice President, Marketing and Corporate Strategy;
President, USG International, to January 2006.
Stanley L. Ferguson, 53 Vice President and General Counsel to May 2001; Senior Vice March 2004
Executive Vice President and President and General Counsel to February 2004.
General Counsel
Richard H. Fleming, 58 Same position. February 1999
Executive Vice President and
Chief Financial Officer
Brian J. Cook, 48 Vice President, Human Resources, to February 2005. February 2005
Senior Vice President, Human
Resources
Marcia S. Kaminsky, 47 Vice President, Communications, to February 2005. February 2005
Senior Vice President,
Communications
Dominic A. Dannessa, 49 Senior Vice President, CRM and Global Supply Chain, U.S. January 2006
Vice President; Executive Vice Gypsum Company, to August 2003; Senior Vice President,
President, Manufacturing, Building Manufacturing, U.S. Gypsum Company, to January 2006.
Systems
Brendan J. Deely, 40 Vice President, Operations, L&W Supply Corporation, to April June 2005
Vice President; President and Chief 2004; Senior Vice President and Chief Operating Officer,
Operating Officer, L&W Supply L&W Supply Corporation, to June 2005.
Corporation
83
NAME, AGE AND PRESENT POSITION
PRESENT POSITION BUSINESS EXPERIENCE DURING THE LAST FIVE YEARS HELD SINCE
- ----------------------------------- ------------------------------------------------------------ -----------------
Fareed A. Khan, 40 Vice President, Marketing & Business Development, L&W January 2006
Vice President; Supply Corporation, to May 2002; Vice President, Marketing,
Executive Vice President, Sales and U.S. Gypsum Company, to October 2003; Senior Vice President,
Marketing, Building Systems Supply Chain & CRM and IT, U.S. Gypsum Company, to
January 2006.
Karen L. Leets, 49 Assistant Treasurer, McDonald's Corporation, to March 2003. March 2003
Vice President and Treasurer
D. Rick Lowes, 51 Vice President and Treasurer to October 2002. October 2002
Vice President and Controller
Peter K. Maitland, 64 Same position. February 1999
Vice President, Compensation,
Benefits and Administration
Donald S. Mueller, 58 Vice President of Research and Chief Technology February 2005
Vice President, Research and Officer, Ashland Specialty Chemical Co., to October
Development 2003; Director, Industrial and State Relations for
Environmental Science Institute, Ohio State
University, to December 2004.
Clarence B. Owen, 57 Senior Vice President, International, USG Interiors, January 2003
Vice President and Chief Inc., to May 2001; Vice President to May 2001; Vice
Technology Officer President, International and Technology, to January 2003.
John Eric Schaal, 62 Associate General Counsel to February 2002. February 2002
Corporate Secretary and
Associate General Counsel
COMMITTEE CHARTERS AND CODE OF BUSINESS CONDUCT
The Corporation's code of business conduct and ethics (applicable to directors,
officers and employees and titled 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 paper 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 Code of Business Conduct applicable to executive officers,
directors or persons performing similar functions will be promptly disclosed on
the Corporation's website in the "Investor Information" 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 11, 2005, 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.
84
ITEM 11. EXECUTIVE COMPENSATION
Information required by Item 11 is included in the Corporation's definitive
Proxy Statement, which is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
The following table sets forth information about 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, 2005, including the Long-Term Incentive and Omnibus Management
Incentive Plans, both of which were approved by the Corporation's stockholders.
NUMBER OF SECURITIES
REMAINING AVAILABLE FOR
FUTURE ISSUANCE UNDER
NUMBER OF SECURITIES TO BE WEIGHTED AVERAGE EQUITY COMPENSATION
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 604,650 $44.57 -
Equity compensation plans
not approved by
stockholders - - -
- ----------------------------------------------------------------------------------------------------------------
Total 604,650 $44.57 -
- ----------------------------------------------------------------------------------------------------------------
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.
85
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).
3.4 Amendment No. 1 to the Certificate of Designations of Junior Participating
Preferred Stock, Series D (incorporated herein by reference to Form 8-K
filed by USG Corporation on February 1, 2006).
INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES:
4.1 Indenture dated as of October 1, 1986, between USG Corporation and Wells
Fargo Bank, N.A., successor Trustee to National City Bank of Indiana,
which was 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 Amendment No. 1, dated January 30, 2006, to the Rights Agreement, dated as
of March 27, 1998, by and between the Corporation and Harris N.A.,
successor to Harris Trust and Savings Bank, as Rights Agent (incorporated
by reference to Exhibit 4.1 of USG Corporation's Amendment No. 1 to Form
8-A, dated January 30, 2006).
4.4 Form of Common Stock certificate (incorporated by reference to Exhibit 4.4
to USG Corporation's Form 8-K, dated May 7, 1993).
4.5 USG Corporation Reorganization Rights Plan, dated as of January 30, 2006
(incorporated by reference to Exhibit 4.1 of USG Corporation's Form 8-A,
dated January 30, 2006).
The Corporation and certain of its consolidated subsidiaries are parties
to long-term debt instruments under which the total amount of securities
authorized does not exceed 10% of the total assets of the Corporation and
its subsidiaries on a consolidated basis. Pursuant to paragraph
(b)(4)(iii)(A) of Item 601 of Regulation S-K, the Corporation agrees to
furnish a copy of such instruments to the Securities and Exchange
Commission upon request.
86
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). *
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).
87
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).
10.17 First Amendment to Master Letter of Credit Agreement and First Amendment
to Pledge Agreement (incorporated by reference to Exhibit 10 of USG
Corporation's Form 10-Q, dated March 31, 2005).
10.18 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). *
10.19 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). *
10.20 2006 Annual Management Incentive Program of USG Corporation, with
revisions approved on February 8, 2006 (incorporated by reference to
Exhibit 10.1 of USG Corporation's Form 8-K, dated February 13, 2006). *
10.21 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). *
10.22 Omnibus Management Incentive Plan (incorporated by reference to Annex A to
USG Corporation's Proxy Statement and Proxy, dated March 28, 1997). *
10.23 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). *
10.24 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). *
10.25 Third Amendment to Omnibus Management Incentive Plan, dated as of March
25, 2004 (incorporated by reference to Exhibit 10.25 of USG Corporation's
Annual Report on Form 10-K, dated December 31, 2004). *
10.26 Stock Compensation Program for Non-Employee Directors (as Amended and
Restated Effective as of January 1, 2005) of USG Corporation (incorporated
by reference to Exhibit 10.2 of USG Corporation's Form 8-K, dated November
14, 2005). *
10.27 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). *
10.28 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). *
10.29 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). *
88
10.30 Senior Executive Severance Plan, dated January 1, 2005 (incorporated by
reference to Exhibit 10.29 of USG Corporation's Annual Report on Form
10-K, dated February 18, 2005). *
10.31 Amendment and Restatement of USG Corporation Retirement Plan, dated
December 29, 1999 (incorporated by reference to Exhibit 10.37 of USG
Corporation's Annual Report on Form 10-K, dated December 31, 2004). *
10.32 First Amendment of USG Corporation Retirement Plan, dated May 22, 2001
(incorporated by reference to Exhibit 10.38 of USG Corporation's Annual
Report on Form 10-K, dated December 31, 2004). *
10.33 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). *
10.34 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). *
10.35 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). *
10.36 Fifth Amendment of USG Corporation Retirement Plan, dated August 4, 2005.
* **
10.37 Sixth Amendment of USG Corporation Retirement Plan, dated January 27,
2006. * **
10.38 USG Corporation 2006 Corporate Performance Plan, dated January 25, 2006
(incorporated by reference to Exhibit 10 to USG Corporation's Form 8-K,
dated January 25, 2006). *
10.39 Settlement Term Sheet, dated January 24, 2006, by and among USG
Corporation and its debtor subsidiaries, the Official Committee of the
Asbestos Personal Injury Claimants and Dean M. Trafelet, in his capacity
as the Legal Representative for Future Claimants in the Reorganization
Cases (incorporated herein by reference to Form 8-K filed by USG
Corporation on January 30, 2006).
10.40 Equity Commitment Agreement, dated January 30, 2006, by and between USG
Corporation and Berkshire Hathaway Inc. (incorporated herein by reference
to Form 8-K filed by USG Corporation on January 30, 2006).
10.41 Shareholder's Agreement, dated January 30, 2006, by and between USG
Corporation and Berkshire Hathaway Inc. (incorporated herein by reference
to Form 8-K filed by USG Corporation on January 30, 2006).
10.42 Registration Rights Agreement, dated January 30, 2006, by and between USG
Corporation and Berkshire Hathaway Inc. (incorporated herein by reference
to Form 8-K filed by USG Corporation on January 30, 2006).
OTHER:
21 Subsidiaries **
23 Consents of Experts and Counsel **
24 Power of Attorney **
31.1 Rule 13a - 14(a) Certifications of USG Corporation's Chief Executive
Officer **
31.2 Rule 13a - 14(a) Certifications of USG Corporation's Chief Financial
Officer **
32.1 Section 1350 Certifications of USG Corporation's Chief Executive Officer **
32.2 Section 1350 Certifications of USG Corporation's Chief Financial Officer **
* 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
89
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 14, 2006
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 14, 2006
- -------------------------------------
WILLIAM C. FOOTE
Chairman and Chief Executive Officer
(Principal Executive Officer)
/s/ Richard H. Fleming February 14, 2006
- -------------------------------------
RICHARD H. FLEMING
Executive Vice President and
Chief Financial Officer
(Principal Financial Officer)
/s/ D. Rick Lowes February 14, 2006
- -------------------------------------
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, ) Richard H. Fleming
W. DOUGLAS FORD, DAVID W. FOX, ) Attorney-in-fact
VALERIE B. JARRETT, STEVEN F. LEER, ) Pursuant to Power of Attorney
MARVIN E. LESSER, JOHN B. SCHWEMM, ) (Exhibit 24 hereto)
JUDITH A. SPRIESER ) February 14, 2006
Directors )
90