-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VexSi9G9o3N56wlewOLbZ3vl1G0X8PyLKg0VV9g6ciJMnNIWUIGBNTJeuh/xbu3E /VHxdCe0m6oMrtVITiGObQ== 0000757011-98-000003.txt : 19980223 0000757011-98-000003.hdr.sgml : 19980223 ACCESSION NUMBER: 0000757011-98-000003 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980220 SROS: CSX SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: USG CORP CENTRAL INDEX KEY: 0000757011 STANDARD INDUSTRIAL CLASSIFICATION: CONCRETE GYPSUM PLASTER PRODUCTS [3270] IRS NUMBER: 363329400 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-08864 FILM NUMBER: 98546605 BUSINESS ADDRESS: STREET 1: 125 S FRANKLIN ST STREET 2: DEPT. 188 CITY: CHICAGO STATE: IL ZIP: 60606 BUSINESS PHONE: 3126064000 10-K 1 FORM 10-K FOR THE PERIOD ENDED 12-31-97 - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------- FORM 10-K ----------------- (Mark One) X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For fiscal year ended December 31, 1997 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) 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 ------------------- ---------------- New York Stock Exchange Common Stock, $0.10 par value Chicago Stock Exchange ----------------------------- ---------------------- New York Stock Exchange Preferred Share Purchase Rights Chicago Stock Exchange ------------------------------- ---------------------- 8.5% Senior Notes, Due 2005 New York Stock Exchange --------------------------- ----------------------- New York Stock Exchange Warrants Chicago Stock Exchange -------- ---------------------- Securities Registered Pursuant to Section 12(g) of the Act: None - -------------------------------------------------------------------------------- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |_| Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes |X| No |_| As of January 31, 1998, the aggregate market value of USG Corporation common stock held by nonaffiliates (based upon the New York Stock Exchange ("NYSE") closing prices) was approximately $2,455,716,000. As of January 31, 1998, 47,048,720 shares of common stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE 1. Portions of the Corporation's 1997 Annual Report to Stockholders are incorporated by reference in Parts I, II and IV of this Form 10-K Report. 2. The Corporation's definitive Proxy Statement for use in connection with the Annual Meeting of Stockholders to be held on May 13, 1998 is incorporated by reference in Part III of this Form 10-K Report. 3. A list of exhibits incorporated by reference is presented in this Form 10-K Report beginning on page 13. TABLE OF CONTENTS
PART I Page - ------ ---- Item 1. Business........................................................................................ 3 Item 2. Properties...................................................................................... 8 Item 3. Legal Proceedings............................................................................... 9 Item 4. Submission of Matters to a Vote of Security Holders............................................. 9 PART II - ------- Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters........................ 10 Item 6. Selected Financial Data......................................................................... 10 Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition........... 10 Item 8. Financial Statements and Supplementary Data..................................................... 10 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............ 10 PART III - -------- Item 10. Directors and Executive Officers of the Registrant.............................................. 11 Item 11. Executive Compensation.......................................................................... 12 Item 12. Security Ownership of Certain Beneficial Owners and Management.................................. 12 Item 13. Certain Relationships and Related Transactions.................................................. 12 PART IV - ------- Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K................................. 13 Signatures.................................................................................................... 20
PART I Item 1. BUSINESS (a) General Development of Business United States Gypsum Company ("U.S. Gypsum") was incorporated in 1901. USG Corporation (together with its subsidiaries, called "USG" or 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. In 1988, the Corporation incurred approximately $2.5 billion in debt primarily to finance a plan of recapitalization in response to an unsolicited takeover attempt. As a result of high leverage and a severe cyclical downturn in its constructionbased markets, the Corporation initiated a comprehensive restructuring of its debt (the "Restructuring") in 1990 that was completed on May 6, 1993, through implementation of a "prepackaged" plan of reorganization under United States bankruptcy law. In accordance with the prepackaged plan, $1.4 billion of debt and accrued interest was converted into equity and interest expense was significantly reduced. The Corporation accounted for the Restructuring using the principles of fresh start accounting as required by AICPA Statement of Position 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code" ("SOP 90-7"). Pursuant to such principles, individual assets and liabilities were adjusted to fair market values as of May 6, 1993. Excess reorganization value, the portion of the reorganization value not attributable to specific assets, amounted to $851 million and was scheduled to be amortized over five years. Due to the Restructuring and implementation of fresh start accounting, financial statements subsequent to May 6, 1993, are not comparable to financial statements through that date. Following the Restructuring, the Corporation was engaged in a financial strategy of reducing debt and growing its gypsum, ceilings and distribution businesses through a balanced application of free cash flow between debt reduction and capital expenditures. This strategy had the dual objective of reaching a target debt level of $650 million within five years and achieving investment grade status with respect to its senior public debt issues for the first time since 1988. These objectives were largely realized in 1997. As a result of refinancings implemented in 1994 and 1995, combined with various debt repayments since 1993, the Corporation reduced its total debt to $620 million as of December 31, 1997, from $1,556 million as of May 6, 1993. In the fourth quarter of 1997, Standard & Poor's raised its rating of USG's debt to investment grade BBB. As of December 31, 1997, Moody's rating of USG debt was Ba1, one level below investment grade. In addition to these achievements, the remaining $83 million balance of excess reorganization value was eliminated as of September 30, 1997. This balance, which would have been amortized through April 1998, was offset by the elimination of a valuation allowance in accordance with SOP 90-7. USG's financial strategy going forward will be to increase the proportion of free cash flow it spends on capital projects, while reviewing possible applications of its cash for other corporate purposes. (b) Financial Information About Industry Segments Financial information pertaining to industry segments included in "Notes to Financial Statements - Note 15. Industry and Geographic Segments" of the Corporation's 1997 Annual Report to Stockholders is incorporated herein by reference. (c) Narrative Description of Business Through its subsidiaries, USG 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. USG's operations are organized into two core businesses: North American Gypsum and Worldwide Ceilings. 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 and L&W Supply Corporation ("L&W Supply") in the United States, the gypsum business of CGC Inc. ("CGC") in Canada and Yeso Panamericano S.A. de C.V. in Mexico. U.S. Gypsum is the largest producer of gypsum wallboard in the United States and accounted for nearly one-third of total domestic gypsum wallboard sales in 1997. L&W Supply is the country's largest distributor of wallboard and related products and in 1997 distributed approximately 10% of all gypsum wallboard in the United States (including approximately 27% of U.S. Gypsum's wallboard production). Products North American Gypsum manufactures and markets building and industrial products used in a variety of applications. Gypsum panel products are used to finish the interior walls and ceilings in residential, commercial and institutional construction. These products provide aesthetic as well as sound-dampening and fire-retarding value. The majority of these products are sold under the SHEETROCK brand name. Also sold under the SHEETROCK brand name is a line of joint compounds used for finishing wallboard joints. The DUROCK line of cement board and accessories provides fire-resistant and water-damage resistant assemblies for both interior and exterior construction. The Corporation also produces a variety of plaster products used to provide a custom finish for residential and commercial interiors. Like SHEETROCK brand wallboard, these products provide aesthetic, sound-dampening and fire-retarding value. Plaster products are sold under the trade names of RED TOP, IMPERIAL and DIAMOND. The Corporation also produces gypsum-based products for agricultural and industrial customers to use in a number of applications, including soil conditioning, road repair, fireproofing and ceramics. Manufacturing North American Gypsum's products are manufactured at 44 plants located throughout the United States, eastern Canada and in central Mexico. In June 1997, ground was broken for the $110 million SHEETROCK wallboard plant in Bridgeport, Ala., that was first announced in 1996. This facility is scheduled to begin operation in mid-1999. Construction is also underway to build a $90 million facility to manufacture gypsum wood fiber ("GWF") panels at the Gypsum, Ohio, plant. This facility will produce high-performance construction panels from synthetic gypsum, recycled paper and wood fiber using USG's patented GWF technology. Production is scheduled to begin by the end of 1999. In the fourth quarter of 1997, the Corporation purchased through CGC a gypsum fiber panel plant in Port Hawkesbury, Nova Scotia, from Louisiana-Pacific Corporation. This acquisition complements the GWF business plan. Gypsum wood fiber products manufactured at both plants will be marketed under the FIBEROCK brand name. The Corporation also announced in 1997 that it will invest $90 million to rebuild and modernize its East Chicago, Ind., plant. The existing SHEETROCK wallboard manufacturing line at the East Chicago plant will be replaced with a new, state-of-the-art wallboard manufacturing line and warehouse to serve the Midwest/Great Lakes region. This new wallboard manufacturing line will have an annual capacity of 550 million square feet, replacing the old production line that has approximately 200 million square feet of capacity. The new East Chicago line is expected to begin production by the end of 1999. Gypsum rock is mined or quarried at 14 company-owned locations in the United States and Canada. In 1997, these facilities provided approximately 89% of the gypsum used by the Corporation's plants in North America. Certain plants purchase synthetic gypsum or natural gypsum rock from various outside sources which accounted for approximately 11% of the gypsum used in the Corporation's North American plants. The Corporation's geologists estimate that recoverable rock reserves are sufficient for more than 30 years of operation based on the Corporation's average annual production of crude gypsum during the past five years. Proven reserves contain approximately 209 million tons, of which approximately 66% are located in the United States and 34% in Canada. Additional reserves of approximately 153 million tons are found on three properties not in operation. The Corporation's total average annual production of crude gypsum in the United States and Canada during the past five years was 9.9 million tons. 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 USG's wallboard production processes. The Corporation does research and development at the USG Research and Technology Center in Libertyville, Ill. The staff at this center provides specialized technical services to the operating units and do product and process research and development. The center is especially well-equipped for carrying out fire, acoustical, structural and environmental evaluations of products and building assemblies. The center also has an analytical laboratory for chemical analysis and characterization of materials. Development activities can be taken to the pilot plant level before being transferred to a full-size plant. Marketing and Distribution Distribution is carried out through L&W Supply, building materials dealers, home improvement centers and other retailers, contractors and specialty wallboard distributors. Sales of gypsum products are seasonal to the extent 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 1997, about 44% of total industry volume demand for gypsum wallboard was generated by new residential construction activity, 39% of volume demand was generated by residential and nonresidential repair and remodel activity, 10% of volume demand was generated by new nonresidential construction activity and the remaining 7% of volume demand was generated by other activities such as exports and temporary construction. L&W Supply, which was organized in 1971 by U.S. Gypsum, currently has 176 distribution locations in 34 states. It is a service-oriented organization that stocks a wide range of construction materials and delivers less than truckload quantities of construction materials to a job site and places them in areas where work is being done, thereby reducing or eliminating the need for handling by contractors. Although L&W Supply specializes in distribution of gypsum wallboard (which accounts for approximately 50% of its total net sales), joint compound and other products manufactured primarily by U.S. Gypsum, 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 86% of its facilities from third parties. Usually, initial leases run from three to five years with a five-year renewal option. Competition The Corporation competes in North America as the largest of 14 producers of gypsum wallboard products and in 1997 accounted for nearly one-third of total gypsum wallboard sales in the United States. In 1997, U.S. Gypsum shipped 8.4 billion square feet of wallboard, the highest level in the Corporation's history, out of total U.S. industry shipments (including imports) estimated at 26.5 billion square feet, also a record. Principal competitors in the United States are: National Gypsum Company, Georgia-Pacific Corporation, James Hardie Gypsum, The Celotex Corporation, Temple-Inland Forest Products Corporation, American Gypsum and several smaller, regional competitors. Major competitors in Canada include BPB Westroc and Georgia-Pacific Corporation. In Mexico, the Corporation's major competitor is Panel Rey. L&W Supply's largest competitor, Gypsum Management Supply, is an independent distributor with locations in the southern, central and western United States. There are several regional competitors, such as, GDMA/RINKER in the southeast (primarily in Florida) and Strober Building Supply in the northeastern United States. L&W Supply's many local competitors include lumber dealers, hardware stores, home improvement centers and acoustical tile distributors. Worldwide Ceilings Business Worldwide Ceilings, which manufactures and markets interior systems products worldwide, includes USG Interiors, Inc., the international interior systems business managed as USG International ("USG International") and the ceilings business of CGC. Worldwide Ceilings is a leading supplier of interior ceiling products used primarily in commercial applications. In 1997, Worldwide Ceilings was estimated to be the largest producer of ceiling grid and the second largest producer of ceiling tile in the world. Products Worldwide Ceilings manufactures and markets ceiling grid, ceiling tile, and wall systems and, in Europe and Asia Pacific, access floor systems. USG's integrated line of ceiling 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 and ACOUSTONE brands of ceiling tile and the DX, FINELINE, CENTRICITEE, CURVATURA and DONN brands of ceiling grid. Manufacturing Worldwide Ceilings' products are manufactured at 20 plants located in North America, Europe and Asia Pacific. These include 10 ceiling grid plants, 5 ceiling tile plants, 2 plants that produce other interior products and 3 plants that produce or prepare raw materials for ceiling tile and grid. Principal raw materials used in the production of Worldwide Ceilings' products include mineral fiber, steel, perlite, starch and high-pressure laminates. Certain of these raw materials are produced internally, while others are obtained from various outside suppliers. Shortages of raw materials used in this segment are not expected. In early 1997, construction began on a $35 million project that includes the replacement of two old production lines with one modern, high-speed line at its ceiling tile plant in Cloquet, Minn. This project, which is anticipated to be completed by mid-1998, will reduce manufacturing costs and add capacity to meet increasing worldwide demand. In 1997, the Corporation acquired a 60% interest in a joint-venture company operating a ceiling grid manufacturing facility in Shenzhen, China. USG Interiors maintains its own research and development facility in Avon, Ohio, which provides product design, engineering and testing services in addition to manufacturing development, primarily in metal forming, with tool and machine design and construction services. Additional research and development is carried out at the Corporation's research and development center in Libertyville, Ill., and at its "Solutions Center"SM in Chicago, Ill. Marketing and Distribution Worldwide Ceilings' products are sold primarily in markets related to the new construction and renovation of commercial buildings as well as the retail market for small commercial contractors. Marketing and distribution to large commercial users is conducted through a network of distributors and installation contractors as well as through L&W Supply. Competition The Corporation estimates that it is the second largest producer/marketer of acoustical ceiling tile in the world. Principal global competitors include Armstrong World Industries, Inc. (the largest manufacturer), OWA Faserplattenwerk GmbH (Odenwald) and The Celotex Corporation. 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. Other Information The Corporation's plants are substantial users of energy. Five major fuel types are used in a mix consisting of 79% natural gas, 10% electricity, 7% oil, 2% coke and 2% purchased hot air. With few exceptions, plants that use natural gas are equipped with fuel stand-by systems, principally oil. Primary fuel supplies have been adequate and no curtailment of plant operations has resulted from insufficient supplies. Supplies are likely to remain sufficient for projected requirements. Energy price swap agreements are used by the Corporation to hedge the cost of certain purchased fuel. Neither industry segment has any special working capital requirements or is materially dependent on a single customer or a few customers on a regular basis. No single customer of the Corporation accounted for more than 10% of the Corporation's 1997 or 1996 consolidated net sales. Because orders are filled upon receipt, neither industry segment has any significant backlog. Loss of one or more of the patents or licenses held by the Corporation would not have a major impact on the Corporation's business or its ability to continue operations. No material part of any of the Corporation's business is subject to renegotiation of profits or termination of contracts or subcontracts at the election of the government. All of the Corporation's products regularly require improvement to remain competitive. The Corporation also develops and produces comprehensive systems employing several of its products. In order to maintain its high standards and remain a leader in the building materials industry, the Corporation performs on-going extensive research and development activities and makes the necessary capital expenditures to maintain production facilities in good operating condition. One of the Corporation's subsidiaries, U.S. Gypsum, is a defendant in asbestos lawsuits alleging both property damage and personal injury. Information pertaining to legal proceedings included in "Notes to Financial Statements - Note 16. Litigation" of the Corporation's 1997 Annual Report to Stockholders is incorporated herein by reference. (d) Financial Information About Foreign and Domestic Operations and Export Sales Financial information pertaining to foreign and domestic operations and export sales included in "Notes to Financial Statements - Note 15. Industry and Geographic Segments" of the Corporation's 1997 Annual Report to Stockholders is incorporated herein by reference. Item 2. PROPERTIES The Corporation's plants, mines, quarries, transport ships and other facilities are located in North America, Europe, and Asia Pacific. Many of these facilities are operating at or near full capacity. All facilities and equipment are in good operating condition, and in management's judgment, sufficient expenditures have been made annually to maintain them. The locations of the production properties of the Corporation's subsidiaries, grouped by industry segment, are as follows (plants are owned unless otherwise indicated): North American Gypsum Gypsum Wallboard and Other Gypsum Products
United States Canada ------------- ------ Baltimore, Md. Norfolk, Va. Hagersville, Ontario Boston (Charlestown), Mass. Oakfield, N.Y. Montreal, Quebec Detroit (River Rouge), Mich. Plaster City, Calif. St. Jerome, Quebec (currently idle) East Chicago, Ind. Plasterco (Saltville), Va. Empire, Nev. Santa Fe Springs, Calif. Fort Dodge, Iowa Shoals, Ind. Fremont, Calif. Sigurd, Utah Galena Park, Texas Southard, Okla. Gypsum, Ohio Sperry, Iowa Jacksonville, Fla. Stony Point, N.Y. New Orleans, La. Sweetwater, Texas Mexico ------ Puebla, Puebla
Joint Compound Surface preparation and joint treatment products are produced in plants located at Chamblee, Ga.; Dallas, Texas; East Chicago, Ind.; Fort Dodge, Iowa; Galena Park, Texas; Gypsum, Ohio; Jacksonville, Fla.; Port Reading, N.J.; Sigurd, Utah; Tacoma, Wash. (leased); Torrance, Calif.; Hagersville, Ontario, Canada; Montreal, Quebec, Canada; Puebla, Mexico; and Port Klang, Malaysia (leased). Gypsum Rock Gypsum rock is mined or quarried at Alabaster (Tawas City), Mich.; Empire, Nev.; Fort Dodge, Iowa; Oakfield, N.Y.; Plaster City, Calif.; Plasterco (Saltville), Va.; Shoals, Ind.; Sigurd, Utah; Southard, Okla.; Sperry, Iowa; Sweetwater, Texas; Hagersville, Ontario, Canada; Little Narrows, Nova Scotia, Canada; and Windsor, Nova Scotia, Canada. Synthetic gypsum is processed at Belledune, New Brunswick, Canada. Mining operations at Oakfield, N.Y., are scheduled to be shut down by mid-1998. Paper Paper for gypsum wallboard is manufactured at Clark, N.J.; Galena Park, Texas; Gypsum, Ohio; Jacksonville, Fla.; North Kansas City, Mo.; Oakfield, N.Y.; and South Gate, Calif. Ocean Vessels Gypsum Transportation Limited, a wholly owned subsidiary of the Corporation, headquartered in Bermuda, owns and operates a fleet of three self-unloading ocean vessels. Under 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. Other Products A mica-processing plant is located at Spruce Pine, N.C.; perlite ore is produced at Grants, N.M.; and drywall metal products are manufactured at Medina, Ohio (leased). Metal lath, plaster and drywall accessories and light gauge steel framing products are manufactured at Puebla, Mexico. Various other products are manufactured at La Mirada, Calif. (adhesives and finishes); New Orleans, La. (lime products); and Port Hawkesbury, Nova Scotia, Canada (gypsum fiber panel products). Worldwide Ceilings Ceiling Tile Acoustical ceiling tile and panels are manufactured at: Cloquet, Minn.; Greenville, Miss.; Walworth, Wis.; San Juan Ixhuatepec, Mexico; and Aubange, Belgium. Ceiling Grid Ceiling grid products are manufactured at: Cartersville, Ga.; Stockton, Calif.; Westlake, Ohio; Auckland, New Zealand (leased); Dreux, France; Oakville, Ontario, Canada; Peterlee, England (leased); Port Klang, Malaysia (leased); Viersen, Germany; and Taipei, Taiwan (leased). A coil coater and slitter plant used in the production of ceiling grid is also located in Westlake, Ohio and a slitter plant is located in Stockton, Calif. (leased). Other Products Access floor systems products are manufactured at: Peterlee, England (leased); and Port Klang, Malaysia (leased). Mineral fiber products are manufactured at Red Wing, Minn. and Walworth, Wis. Wall system products are manufactured at Medina, Ohio (leased). Drywall metal products are manufactured at Prestice, Czech Republic (leased) and Oakville, Ontario, Canada. Item 3. LEGAL PROCEEDINGS Information pertaining to legal proceedings included in "Notes to Financial Statements - Note 16. Litigation" of the Corporation's 1997 Annual Report to Stockholders is incorporated herein by reference. Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None during the fourth quarter of 1997. PART II Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Information with respect to the principal market on which the Corporation's common stock is traded, the range of high and low market prices and number of stockholders of record included in "Selected Quarterly Financial Data" of the Corporation's 1997 Annual Report to Stockholders is incorporated herein by reference. There have been no dividends declared since the third quarter of 1988. Bank credit agreements and other debt instruments have previously prohibited or restricted the payment of cash dividends. Although currently permitted within certain limits under the Corporation's existing debt agreements, the Corporation is not paying a dividend at this time. On November 22, 1996, the Corporation entered into a retention agreement with an employee, formerly the principal stockholder of a corporation certain of whose assets were purchased by the Corporation, whereby the Corporation agreed to grant shares of unregistered common stock, $0.10 par value, having an aggregate value equal to $250,000 in five separate annual installments each having a value equal to $50,000, in reliance on the private offering exemption afforded by Section 4 (2) of the Securities Act of 1933, as amended. The second annual grant in the amount of 1,062 shares was made on November 24, 1997. The unregistered common stock is restricted from transfer, resale or other disposition until November 22, 2001. Item 6. SELECTED FINANCIAL DATA Selected financial data included in "Comparative Five-Year Summary" of the Corporation's 1997 Annual Report to Stockholders is incorporated herein by reference. Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION "Management's Discussion and Analysis of Results of Operations and Financial Condition" of the Corporation's 1997 Annual Report to Stockholders is incorporated herein by reference. Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Financial statements and supplementary data included in "Consolidated Statement of Earnings," "Consolidated Balance Sheet," "Consolidated Statement of Cash Flows," "Notes to Financial Statements" and "Report of Independent Public Accountants" of the Corporation's 1997 Annual Report to Stockholders is incorporated herein by reference. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information about directors has been omitted from this report as it will be filed with the Securities and Exchange Commission (the "SEC") in a definitive proxy statement pursuant to Regulation 14A, which definitive proxy statement is incorporated herein by reference. Executive Officers of the Registrant (as of February 1, 1998) Has Held Name, Age Present and Present Position Prior Business Experience in Past Five Years Position Since
- ----------------------------------------------------------------------------------------------- -------------------- William C. Foote, 46 President and Chief Executive Officer, L&W Supply Corporation June 1997 Chairman and Chief Executive from September 1991 to January 1994; President and Chief Officer Executive Officer, USG Interiors, Inc. from January 1993 to January 1994; President and Chief Operating Officer from January 1994 to January 1996; President and Chief Executive Officer to April 1996; Chairman, President and Chief Executive Officer from April 1996 to June 1997. P. Jack O'Bryan, 62 President and Chief Executive Officer, United States Gypsum June 1997 President and Chief Operating Company to January 1993; Senior Vice President and Chief Officer; President and Chief Technology Officer, USG Corporation to August 1994; Senior Vice Executive Officer, United President - Worldwide Manufacturing and Technology to October States Gypsum Company; President 1995; Executive Vice President- Worldwide Ceilings to September and Chief Executive Officer, 1996; President and Chief Executive Officer, USG Interiors, Inc. USG Interiors, Inc. since October 1995; Executive Vice President - Operations to June 1997. Richard H. Fleming, 50 Vice President and Treasurer to January 1994; Vice President January 1995 Senior Vice President and Chief and Chief Financial Officer to January 1995. Financial Officer Arthur G. Leisten, 56 Senior Vice President and General Counsel to March 1993; Senior February 1994 Senior Vice President and General Vice President, General Counsel and Secretary to February 1994. Counsel Harold E. Pendexter, Jr., 63 Same position. January 1991 Senior Vice President and Chief Administrative Officer Raymond T. Belz, 57 Vice President Financial Services and Financial Vice President and Controller; Administration, United States Gypsum Company to January 1994; September 1996 Vice President Financial Vice President and Controller, USG Corporation, Vice Operations, North American Gypsum President Financial Services, United States Gypsum Company to and Worldwide Ceilings January 1995; Vice President and Chief Financial Officer, North American Gypsum from January 1995 to September 1996; Vice President and Controller since January 1995. Brian W. Burrows, 58 Same position. March 1987 Vice President, Research and Technology John E. Malone, 54 Vice President and Controller, USG Corporation to January 1994; January 1994 Vice President and Treasurer Vice President - Finance, USG International, from March 1993 to February 1995. Daniel J. Nootens, 59 Vice President Manufacturing, United States Gypsum Company from June 1997 Vice President; Executive November 1990 to July 1994; Executive Vice President & Chief Vice President, Strategic Operating Officer, United States Gypsum Company from July 1994 Manufacturing & Capital to September 1996; Executive Vice President-Operations, North Investments, North American American Gypsum from September 1996 tp June 1997. Gypsum and Worldwide Ceilings Robert B. Sirgant, 57 Vice President, National Accounts and Marketing - East, United January 1995 Vice President, Corporate States Gypsum Company to July 1994; Vice President, National Accounts Accounts, United States Company to January 1995. Dean H. Goossen, 50 Vice President, General Counsel and Secretary, Xerox Financial Corporate Secretary Services Life Insurance Company to February 1993; Assistant February 1994 Secretary, USG Corporation to February 1994.
Item 11. EXECUTIVE COMPENSATION Information required by Item 11 has been omitted from this report as it will be filed with the SEC in a definitive proxy statement pursuant to Regulation 14A, which definitive proxy statement is incorporated herein by reference. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information required by Item 12 has been omitted from this report as it will be filed with the SEC in a definitive proxy statement pursuant to Regulation 14A, which definitive proxy statement is incorporated herein by reference. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information required by Item 13 has been omitted from this report as it will be filed with the SEC in a definitive proxy statement pursuant to Regulation 14A, which definitive proxy statement is incorporated herein by reference. PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) The following documents are filed as part of this 10-K Report: 1. The consolidated financial statements, notes to financial statements and report of independent public accountants included in the Corporation's 1997 Annual Report to Stockholders and listed below are incorporated herein by reference: Consolidated Statement of Earnings - Years ended December 31, 1997, 1996 and 1995. Consolidated Balance Sheet - As of December 31, 1997 and 1996. Consolidated Statement of Cash Flows - Years ended December 31, 1997, 1996 and 1995. Notes to Financial Statements. Report of Independent Public Accountants. 2. Supplemental Financial Statement Schedules: Schedule II - Valuation and Qualifying Accounts. Report of Independent Public Accountants With Respect to Financial Statement Schedule. All other schedules have been omitted because they are not required, are not applicable, or the information is included in the financial statements or notes thereto. 3 Exhibits (Reg. S-K, Item 601): Exhibit No. Page ------- ----
3 Articles of incorporation and by-laws: (a) 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). (b) Amended and Restated By-Laws of USG Corporation, dated as of May 12, 1993 (incorporated by reference to Exhibit 3(b) of Amendment No. 1 to USG Corporation's Registration Statement No. 33-61162 on Form S-1, dated June 16, 1993). 4 Instruments defining the rights of security holders, including indentures: (a) Indenture dated as of October 1, 1986 between USG Corporation and Harris Trust and Savings Bank, Trustee (incorporated by reference to Exhibit 4(a) of USG Corporation's Registration Statement No. 33-9294 on Form S-3, dated October 7, 1986). (b) Resolutions dated March 5, 1987 of a Special Committee created by the Board of Directors of USG Corporation relating to USG Corporation's 8.75% Debentures due 2017 (incorporated by reference to Exhibit 4(c) of USG Corporation's 1993 Annual Report on Form 10-K, dated March 14, 1994). (c) Resolutions dated February 1, 1994 of a Special Committee created by the Board of Directors of USG Corporation relating to USG Corporation's 9.25% Senior Notes due 2001 (incorporated by reference to Exhibit 4(f) of USG Corporation's Registration No. 33- 51845 on Form S-1, dated February 16, 1994). (d) Resolutions dated August 3, 1995 of a Special Committee created by the Board of Directors of USG Corporation relating to USG Corporation's 8.5% Senior Notes due 2005 (incorporated by reference to Exhibit 4(b) of Amendment No. 3 to USG Corporation's Registration Statement No. 33-60563 on Form S-3, dated July 28, 1995). (e) Warrant Agreement dated May 6, 1993 between USG Corporation and Harris Trust and Savings Bank, as Warrant Agent, relating to USG Corporation's Warrants (incorporated by reference to Exhibit 4.3 of USG Corporation's Form 8-K, dated May 7, 1993). (f) Form of Warrant Certificate (incorporated by reference to Exhibit 4(g) of Amendment No. 4 to USG Corporation's Registration Statement No. 33-40136 on Form S-4, dated November 12, 1992). (g) Rights Agreement dated May 6, 1993 between USG Corporation and Harris Trust and Savings Bank, as Rights Agent (incorporated by reference to Exhibit 10.1 of USG Corporation's Form 8-K, dated May 7, 1993). (h) Form of Common Stock certificate (incorporated by reference to Exhibit 4.4 to USG Corporation's Form 8-K, dated May 7, 1993). The Corporation and certain of its consolidated subsidiaries are parties to long-term debt instruments under which the total amount of securities authorized does not exceed 10% of the total assets of the Corporation and its subsidiaries on a consolidated basis. Pursuant to paragraph (b)(4)(iii)(A) of Item 601 of Regulation S-K, the Corporation agrees to furnish a copy of such instruments to the Securities and Exchange Commission upon request. 10 Material contracts: (a) 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). (b) 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). (c) Amendment and Restatement of USG Corporation Supplemental Retirement Plan, effective as of July 1, 1997 and dated August 25, 1997. 21 (d) Termination Compensation Agreements (incorporated by reference to Exhibit 10(h) of USG Corporation's 1991 Annual Report on Form 10-K, dated March 5, 1992). (e) Indemnification Agreements (incorporated by reference to Exhibit 10(g) of Amendment No. 1 to USG Corporation's Registration No. 33-51845 on Form S-1). (f) Bankruptcy Court Order issued April 23, 1993 confirming USG Corporation's Prepackaged Plan of Reorganization (incorporated by reference to Exhibit 28.1 of Form 8-K filed by USG Corporation on May 7, 1993). (g) Consulting Agreement dated August 11, 1993 between USG Corporation and James W. Cozad (incorporated by reference to Exhibit 10(aw) in USG Corporation's Registration Statement 33- 51845, on Form S-1). (h) Form of Employment Agreement dated May 12, 1993 (incorporated by reference to Exhibit 10(h) of Amendment No. 1 to USG Corporation's Registration Statement No. 33-61152 on Form S-1). (i) Amendment of Termination Compensation Agreements (incorporated by reference to Exhibit 10(j) of Amendment No. 1 to USG Corporation's Registration Statement No. 33-61152 on Form (S-1). (j) Credit Agreement dated as of July 27, 1995 among USG Corporation and the Banks listed on the signature page thereto and Chase Manhattan Bank (formerly Chemical Bank) as Agent (incorporated by reference to Exhibit 99(a) of Amendment No. 3 to USG Corporation's Registration Statement No. 33-60563 on Form S-3, dated July 28, 1995). (k) Amendment No. 1, dated as of February 1, 1996 to the Credit Agreement (incorporated by reference to Exhibit 10(q) of USG Corporation's 1995 Annual Report on Form 10-K, dated February 29, 1996). (l) Amendment No. 2, dated as of May 14, 1997, to the Credit Agreement. 38 (m) 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). (n) 1997 Annual Management Incentive Program - USG Corporation. 47 (o) Omnibus Management Incentive Plan (incorporated by reference to Annex A to USG Corporation's Proxy Statement and Proxy dated March 28, 1997). (p) First Amendment to Omnibus Management Incentive Plan, dated as of November 11, 1997. 55 (q) Amended and Restated Stock Compensation Program for Non-Employee Directors of USG Corporation, dated July 1, 1997. 56 13 Portions of USG Corporation's 1997 Annual Report to Stockholders. (Such report is not deemed to be filed with the Commission as part of this Annual Report on Form 10-K, except for the portions thereof expressly incorporated by reference.) 64 21 Subsidiaries 90 23 Consents of Experts and Counsel 91 24 Power of Attorney 92 27 Financial Data Schedule 93 (b) Reports on Form 8-K: No reports on Form 8-K were filed during the fourth quarter of 1997.
Index to exhibits filed with the Annual Report on Form 10-K for the year ended December 31, 1997 Exhibit Page
10(c) Amendment and Restatement of USG Corporation Supplemental Retirement Plan 21 10(l) Amendment No. 2 to the Credit Agreement 38 10(n) 1997 Annual Management Incentive Program - USG Corporation 47 10(p) First Amendment to Omnibus Management Incentive Plan 55 10(q) Amended and Restated Stock Compensation Program for Non-Employee Directors 56 13 Portions of USG Corporation's 1997 Annual Report to Stockholders 64 21 Subsidiaries 90 23 Consent of Experts 91 24 Power of Attorney 92 27 Financial Data Schedule 93
If you wish to receive a copy of any exhibit, it may be obtained, upon payment of reasonable expenses, by writing to: Dean H. Goossen, Corporate Secretary USG Corporation Department #188 P.O. Box 6721 Chicago, IL 60680-6721 USG CORPORATION SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS (Dollars in millions) Provision Receivables Charged to Written Off Beginning Costs and and Discounts Ending Balance Expenses Allowed Balance ------- -------- ------- -------
Year ended December 31, 1997: Doubtful accounts................................. $ 14 $ 5 $ (5) $ 14 Cash discounts.................................... 3 52 (52) 3 Year ended December 31, 1996: Doubtful accounts................................. 11 7 (4) 14 Cash discounts.................................... 3 46 (46) 3 Year ended December 31, 1995: Doubtful accounts................................. 11 6 (6) 11 Cash discounts.................................... 3 44 (44) 3
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS WITH RESPECT TO FINANCIAL STATEMENT SCHEDULE We have audited in accordance with generally accepted auditing standards, the consolidated financial statements included in USG Corporation's annual report to stockholders incorporated by reference in this Form 10-K, and have issued our report thereon dated January 22, 1998. Our audit was made for the purpose of forming an opinion on the consolidated financial statements taken as a whole. The financial statement schedule on page 18 is the responsibility of the Corporation's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the consolidated financial statements. The financial statement schedule has been subjected to the auditing procedures applied in the audit of the consolidated financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the consolidated financial statements taken as a whole. /s/Arthur Andersen LLP ---------------------- ARTHUR ANDERSEN LLP Chicago, Illinois January 22, 1998 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 20, 1998 By: /s/ Richard H. Fleming --------------------------- Richard H. Fleming Senior 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 20, 1998 - -------------------------- WILLIAM C. FOOTE Chairman and Chief Executive Officer (Principal Executive Officer) /s/ Richard H. Fleming February 20, 1998 - --------------------------- RICHARD H. FLEMING Senior Vice President and Chief Financial Officer (Principal Financial Officer) /s/ Raymond T. Belz February 20, 1998 - --------------------------- RAYMOND T. BELZ Vice President and Controller (Principal Accounting Officer) ROBERT L. BARNETT, KEITH A. BROWN, ) By:/s/ Richard H. Fleming W. H. CLARK, W. DOUGLAS FORD, ) Richard H. Fleming JAMES C. COTTING, LAWRENCE ) Attorney-in-fact M. CRUTCHER, DAVID W. FOX, ) Pursuant to Power of Attorney PHILIP C. JACKSON, JR., MARVIN E. LESSER, ) (Exhibit 24 hereto) P. JACK O'BRYAN, JOHN B. SCHWEMM, ) February 20, 1998 JUDITH A. SPRIESER, Directors ) EX-10 2 MATERIAL CONTRACTS EXHIBIT 10(c) USG CORPORATION SUPPLEMENTAL RETIREMENT PLAN (As Amended and Restated Effective as of July 1, 1997) McDermott, Will & Emery Chicago, Illinois USG CORPORATION SUPPLEMENTAL RETIREMENT PLAN SECTION 1 Introduction 1.1. The Plan, the Company. Effective January 1, 1976 UNITED STATES GYPSUM COMPANY established UNITED STATES GYPSUM COMPANY SUPPLEMENTAL RETIREMENT PLAN (the "Plan"). On January 1, 1985 UNITED STATES GYPSUM COMPANY became a wholly-owned subsidiary of USG CORPORATION and effective as of that date USG CORPORATION was substituted for UNITED STATES GYPSUM COMPANY as the "Company" under the Plan and the name of the Plan was changed to USG CORPORATION SUPPLEMENTAL RETIREMENT PLAN. The term "Company" as used in the Plan means UNITED STATES GYPSUM COMPANY up to January 1, 1985 and USG CORPORATION (and any successor thereto) on and after that date. The provisions of this subsection and the following provisions of the Plan constitute an amendment and restatement of the Plan, as previously amended, effective as of July 1, 1997 (the "New Effective Date"), subject to any subsequent amendments. 1.2. Employers. Each subsidiary of the Company that is an employer under USG Corporation Retirement Plan (the "Retirement Plan") or under USG Corporation Investment Plan (the "Investment Plan") shall be an "Employer" under this Plan unless specified to the contrary by the Company by writing filed with the Committee described in subsection 1.4. 1.3. Purpose. The Company and certain of its subsidiaries maintain and are employers under the Retirement Plan and the Investment Plan, each of which plans is intended to meet the requirements of a "qualified plan" under Section 401(a) of the Internal Revenue Code. The purpose of this Plan, a nonqualified plan, is to provide for eligible employees benefits that could have been earned and paid under the Retirement and Investment Plans and under any other qualified defined benefit and defined contribution plans maintained by the controlled group of corporations of which the Company is a member ("other USG Defined Benefit and Defined Contribution Plans") but for the following limitations: (a) Section 401(a)(4) of the Internal Revenue Code requires that contributions or benefits provided under a qualified plan must not discriminate in favor of highly compensated employees and therefore amounts deferred by employees, if any, under the Company's management incentive compensation programs until their retirement or other termination of employment may not be considered as a part of their employment compensation in determining the amount of their contributions, benefits provided with respect to their contributions, and employer provided benefits under the Retirement and Investment Plans and other USG Defined Benefit and Defined Contribution Plans. (b) Sections 401(a)(17) and 404(l) of the Internal Revenue Code limit the amount of employees' annual compensation that may be taken into account in determining the benefits that may be paid to them from the Retirement and Investment Plans and other USG Defined Benefit and Defined Contribution Plans and the deductible Employer contributions that may be made to those plans to provide such benefits. (c) Sections 401(k) and 401(m) of the Internal Revenue Code require that employees' before-tax contributions and Employer matching contributions under USG Defined Contribution Plans be tested to prevent discrimination in favor of highly compensated employees and as a result of such tests employees' before-tax contributions and shares of Employer matching contributions under such plans may be limited. (d) Section 402(g) of the Internal Revenue Code limits the amount of before-tax contributions that an employee may make under the Investment Plan and other USG Defined Contribution Plans. (e) Section 415 of the Internal Revenue Code places limitations on the amount of benefits that may be paid from and contributions that may be made to the Retirement Plan and the Investment Plan and other USG Defined Benefit and Defined Contribution Plans. The Plan also allows Participants to elect to make before-tax contributions to the Plan in excess of the amount of contributions permitted under the terms of the Investment Plan. In no event shall any benefits be payable under this Plan that would duplicate benefits that become payable under any other qualified or nonqualified plan maintained by the Company, any other Employer or any other member of the controlled group of corporations of which the Company is a member. 1.4. Plan Administration. The Plan is administered by the committee (the "Committee") that is responsible for administration of the Retirement Plan and the Investment Plan. To the extent appropriate, the Committee has, concerning Part A Supplemental Benefits and Part A Supplemental Death Benefits described in Section 3, the same powers, rights, duties and obligations it has as to the Retirement Plan and, concerning Part B Supplemental Benefits and Part B Supplemental Death Benefits described in Section 4, the same powers, rights, duties and obligations it has as to the Investment Plan, including the right to require the completion of such forms or applications with respect to benefit payments as it deems appropriate. 1.5. Preservation of Benefits. Benefits shall be provided under the Plan on and after the New Effective Date to, or with respect to, former employees of the Company who became entitled to such benefits before that date in accordance with the terms of the Plan as in effect at the time of their retirement or other termination of employment. If an employee of an Employer was participating in the Plan immediately prior to the New Effective Date and continues to participate in the Plan on and after that date, benefits payable under Section 3 of this Plan to, or with respect to, such employee shall not be less than what they would have been if the Plan as in effect immediately prior to the New Effective Date continued in effect on and after that date without change, but only taking into account for this purpose benefits accrued by the employee under the Retirement Plan and all other USG Defined Benefit Plans prior to the New Effective Date, and benefits payable under Section 4 of this Plan to, or with respect to, such employee shall not be less than his account described in subsection 4.6 determined as of the New Effective Date and as subsequently adjusted pursuant to subsection 4.6 to reflect deemed investment of the account. SECTION 2 Eligibility for Participation 2.1. Covered Employee. A "Covered Employee" means an employee of an Employer under the Plan who is a highly compensated employee as defined in Section 414(q) of the Internal Revenue Code, unless the Committee specifies that such employee shall not be considered as a Covered Employee for any purpose of the Plan by writing filed with the Secretary of the Company prior to, or within 30 days after, the date the employee otherwise would become eligible for participation in the Plan. 2.2. Eligibility. Subject to the conditions and limitations of the Plan, each employee of an Employer who was a "Participant" in the Plan on June 30, 1997 shall continue as a Participant in the Plan after that date. Subject to the conditions and limitations of the Plan, each other employee of an Employer shall become eligible to enroll in this Plan and become a "Participant" on the first date occurring on or after the New Effective Date on which: (a) he is a Covered Employee; and (b) the benefits he accrues, or the contributions he is required to make or could elect to make, or his share of employer derived contributions under one or more of the Retirement Plan, the Investment Plan, and other USG Defined Benefit and Defined Contribution Plans, are less than what they would have been (or, as to elected contributions, could have been) as a result of the limitations described in subsection 1.3. Each employee will be notified of the date he is eligible to enroll in the Plan and become a Participant and will be notified of the enrollment procedures established by the Committee. 2.3. Period of Participation. An employee of an Employer who becomes a Participant in this Plan will continue as a Participant in the Plan in accordance with its provisions until all benefits to which he is entitled under the Plan have been distributed to him. However, a Participant will not be entitled to make contributions or accrue additional benefit entitlements under this Plan for any period during which he is not a Covered Employee. SECTION 3 Part A Supplemental Benefits 3.1. Intent. The Employers intend that benefits be provided pursuant to the provisions of this Section 3 that are actuarially equivalent to the benefits that would have been provided under the Retirement Plan and other USG Defined Benefit Plans if the limitations described in subsection 1.3 did not exist, if before-tax contributions the Participant makes pursuant to subsection 3.3 had been made under the Retirement Plan and any other applicable USG Defined Benefit Plan on an after-tax basis, and if amounts deferred under the Company's 1989 and subsequent management incentive compensation programs or deferred under subsections 4.3 and 4.4 of the Plan had not been deferred but instead paid at the proper time and included in employment compensation for purposes of the Plans, provided that the contribution requirement described in subsection 3.3 is met. 3.2. Limited Benefits, Unlimited Benefits, Part A Supplemental Benefits and Part A Supplemental Death Benefits. For purposes of this Section 3, the term "Limited Benefits" means the benefits that become payable to or with respect to a Participant under the Retirement Plan and all other USG Defined Benefit Plans. The term "Unlimited Benefits" means the benefits that would have become payable to or with respect to a Participant under such Plans if the limitations described in subsection 1.3 did not exist, if before-tax contributions the Participant makes pursuant to subsection 3.3 had been made under the Retirement Plan and any other applicable USG Defined Benefit Plan on an after-tax basis, and if amounts deferred by the Participant under the Company's 1989 and subsequent management incentive compensation programs or deferred under subsections 4.3 and 4.4 of the Plan had not been deferred but instead paid to the Participant at the proper time during employment and then included in the Participant's employment compensation for purposes of those Plans. Benefits that become payable under this Section 3 to a Participant are referred to as "Part A Supplemental Benefits". Benefits that become payable under this Section 3 to any person as a result of the death of a Participant are referred to as "Part A Supplemental Death Benefits". 3.3. Participant Contribution Requirement. A Participant's entitlement to Part A Supplemental Benefits and Part A Supplemental Death Benefits described in subsections 3.5 and 3.7 is subject to the Participant making before-tax contributions under this Plan. Such contributions must equal the after-tax contributions the Participant would have been required to make under the Retirement Plan and all other USG Defined Benefit Plans: (a) if amounts contributed on a before-tax basis under this Plan, deferred by the Participant under the Company's management incentive compensation programs, or deferred under subsections 4.3 and 4.4 of the Plan had not been so contributed or deferred but paid to the Participant at the proper time during employment and then included in the Participant's employment compensation for purposes of those plans; (b) if the annual compensation limitation imposed by Section 401(a)(17) of the Internal Revenue Code (as described in subparagraph 1.3(b)) did not apply to the Participant; and (c) if the limitations imposed under Section 415 of the Internal Revenue Code (as described in subparagraph 1.3(f)) did not apply to the Participant. Notwithstanding the foregoing, a Participant may be eligible for and make after-tax contributions under the Retirement Plan or another USG Defined Benefit Plan even though the limitations described above in this subsection may prevent or limit his accrual of benefits under such plans. In such case, the Participant will accrue benefits under this Plan based on such after-tax contributions as if they had been made under this Plan on a before-tax basis. The Committee shall maintain a bookkeeping account in the name of each Participant who makes before-tax contributions under this subsection to reflect such contributions and, where required, interest on such contributions. The term "interest" as used in this Plan with respect to Participants' before-tax contributions made under this subsection shall mean "interest" as defined in the Retirement Plan with respect to participant contributions under that plan but shall not include a higher rate of interest required to be applied under the Retirement Plan for certain purposes pursuant to Section 411(c)(2) of the Internal Revenue Code. 3.4. Compensation Deferral Elections. A Participant's before-tax contributions under this Section 3 shall be made pursuant to a compensation deferral election filed with his Employer prior to the calendar year such contributions are to begin or, in the case of a Participant who first becomes eligible to make such contributions during but after the beginning of a calendar year, filed with his Employer not more than 30 days after so becoming eligible, subject to the following: (a) The Participant's election shall apply to employment compensation otherwise payable after the later to occur of the date the Participant becomes eligible to make before-tax contributions and the date the election is filed with his Employer. (b) Such election shall be automatically revoked if the Participant ceases to be a Covered Employee and such revocation shall be effective as to employment compensation the Participant is entitled to receive during the period he ceases to be a Covered Employee. (c) Such election may be voluntarily revoked by the Participant before the beginning of any subsequent calendar year. A voluntary revocation shall be effective as to employment compensation the Participant is entitled to receive during that and subsequent calendar years unless prior to the commencement of any subsequent calendar year the Participant makes another compensation deferral election. Such later election shall apply as to employment compensation otherwise payable during calendar years beginning after the election is made. Any period during which a Participant does not make contributions under the Plan (and, where applicable, does not elect to make after-tax contributions under the Retirement Plan or another USG Defined Benefit Plan upon which benefits would accrue under this Plan) shall be disregarded for purposes of any subsequent calculation of benefit service (as defined in subsection 4.3 of the Retirement Plan) or compensation (as described in subsection 3.3 above for purposes of determining contributions under this Plan) used in determining the Participant's Unlimited Benefits for a subsequent Plan year. 3.5. Amount of Part A Supplemental Benefits. Subject to the contribution requirement described in subsection 3.3, Part A Supplemental Benefits shall become payable under the Plan to a Participant upon the Participant's retirement or earlier termination of employment with the Company and its subsidiaries. A Participant's Part A Supplemental Benefits shall be in an amount that is actuarially equivalent to the amount by which the Participant's Unlimited Benefits exceed the Participant's Limited Benefits. For purposes of this Section 3, actuarially equivalent benefits shall be calculated on the basis of the actuarial factors, assumptions and tables applied for that purpose under the Retirement Plan, to the extent deemed appropriate by the Committee. 3.6. Payment of Part A Supplemental Benefits. Subject to the provisions of this subsection 3.6, Part A Supplemental Benefits shall be paid in a lump sum within 30 days after such benefits become payable or, if the entire amount of such benefits cannot be determined by the Committee within that 30 day period, payment shall be made in one or more installments as determined by the Committee but with the last payment due by the 30th day following the date the Committee determines the total amount of such benefits. The Committee in its discretion may from time to time establish rules incorporating objective standards that shall govern the form of payment of Part A Supplemental Benefits that initially become payable during a subsequent calendar year. A copy of such rules, certified by the Chairman or Secretary of the Committee, shall be filed with the Secretary of the Company before the beginning of the calendar year for which they first become effective. Any such rules in effect at the start of a calendar year may not be modified or rescinded in that calendar year or thereafter with respect to the form of payment of Part A Supplemental Benefits that initially become payable to any person under the Plan during that calendar year. Notwithstanding the foregoing provisions of this subsection: (a) Payment of a Participant's Part A Supplemental Benefits must be made or commence not later than February 1 of the calendar year next following the calendar year in which he attains age 65 years or, if later, his termination of employment with the Company and its subsidiaries occurs. (b) If the Committee determines that a Participant whose Part A Supplemental Benefits are being paid over a period of more than one year has incurred a severe financial hardship as a result of the occurrence of an unanticipated event beyond the Participant's control, the Committee may direct that an advance payment of part or all of the Covered Participant's Part A Supplemental Benefits be made, but the amount thereof shall not exceed the amount needed for such financial hardship. (c) If a Change in Control as determined in accordance with the provisions of Section 18 of the Retirement Plan as in effect on the New Effective Date should occur, Part A Supplemental Benefits that initially became payable to a Participant before the Change in Control but have not been paid or paid in full shall be distributed in accordance with the same form of payment as in effect with respect to those benefits immediately prior to the Change in Control, but any Part A Supplemental Benefits that initially become payable after the Change in Control shall be distributed in a lump sum to the person entitled thereto within 30 days after they become payable. (d) If a Participant's death occurs while employed by the Company or any subsidiary of the Company or if a Participant's death occurs after he had become entitled to Part A Supplemental Benefits but before payment of such benefits has commenced or has been completed, Part A Supplemental Death Benefits shall be payable with respect to the Participant only if and to the extent provided in subsection 3.7. (e) Spousal consent rules that apply under the Retirement Plan or any other USG Defined Benefit Plan with respect to forms of payment of benefits shall not apply under this Plan. 3.7. Amount and Payment of Part A Supplemental Death Benefits. Part A Supplemental Death Benefits shall be payable under the Plan as follows: (a) If a Participant's death occurs while employed by the Company or a subsidiary of the Company and if he had an Eligible Spouse (as defined in subsection 5.1) immediately prior to his death, the Participant's Eligible Spouse shall be entitled to a lump sum Part A Supplemental Death Benefit under this Plan which is actuarially equivalent (based on the age of the Eligible Spouse) to any additional monthly pre-retirement survivor annuity benefits that would have been payable to the Participant's Eligible Spouse under the Retirement Plan and all other USG Defined Benefit Plans if the Participant's Limited Benefits equalled his Unlimited Benefits. The Part A Supplemental Death Benefit under this subparagraph 3.7(a) shall be paid to the Participant's Eligible Spouse in a lump sum as soon as practicable after the Participant's death. If the Participant did not have an Eligible Spouse at the time of his death, no Part A Supplemental Death Benefits shall be payable under the Plan with respect to that Participant other than payment to the Participant's Supplemental Plan Beneficiary (as defined in subsection 5.2) of an amount equal to the Participant's before-tax contributions under the Plan with interest as soon as practicable after the Participant's death. (b) If a Participant's death occurs after he had both retired (or otherwise terminated employment) and become entitled to Part A Supplemental Benefits but before payment of such benefits had been made or had commenced, and if he had an Eligible Spouse at the time of his death, the Participant's Eligible Spouse shall be entitled to a lump sum Part A Supplemental Death Benefit which is actuarially equivalent (based on the age of the Eligible Spouse) to any additional monthly pre-retirement survivor annuity benefits that could have been payable to the Participant's Eligible Spouse under the Retirement Plan and all other USG Defined Benefit Plans if the Participant's Limited Benefits equalled his Unlimited Benefits. The Part A Supplemental Death Benefit under this subparagraph 3.7(b) shall be paid to the Participant's Eligible Spouse in a lump sum as soon as practicable after the Participant's Death. If the Participant did not have an Eligible Spouse at the time of his death, no Part A Supplemental Death Benefits shall be payable under the Plan with respect to that Participant other than payment to the Participant's Supplemental Plan Beneficiary of an amount equal to the Participant's before-tax contributions under this Plan with interest as soon as practicable after the Participant's death. (c) If a Participant's death occurs while receiving Part A Supplemental Benefits, his Supplemental Plan Beneficiary shall be entitled to Part A Supplemental Death Benefits equal to the death benefits, if any, payable under the form of payment of his Part A Supplemental Benefits. SECTION 4 Part B Supplemental Benefits 4.1. Intent. The provisions of this Section 4 are intended to allow a Participant to elect to make part or all of the additional before-tax contributions he could have made under the Investment Plan and all other USG Defined Contribution Plans, and to earn the additional matching contributions that would have been made by his Employer and credited to his accounts under those plans as a result of such additional before-tax contributions, if the limitations described in subsection 1.3 did not exist and if amounts contributed on a before-tax basis under this Plan or deferred by the Participant under the Company's 1989 and subsequent management incentive compensation programs had not been so contributed or deferred but instead paid to the Participant at the proper time during employment and then included in the Participant's employment compensation for purposes of those plans. This Section 4 also permits Participants to make additional before-tax contributions to the Plan in excess of the amount permitted under the terms of the Investment Plan and to select one or more deemed investments, the investment experience of which will be the basis or index by which his accounts will be adjusted under this Plan. 4.2. Part B Supplemental Benefits and Part B Supplemental Death Benefits. Benefits that become payable under this Section 4 to a Participant are referred to as "Part B Supplemental Benefits" or as "Supplemental Investment Plan Benefits." Benefits that become payable under this Section 4 to any person as a result of the death of a Participant are referred to as "Part B Supplemental Death Benefits" or as "Supplemental Investment Plan Benefits." 4.3. Elective Participant Contributions. A Participant may elect to make part or all of the additional before-tax contributions described in subsection 4.1. A Participant's before-tax contributions under this subsection 4.3 shall be made by a compensation deferral election that is made in such form and in such manner as the Committee shall determine; provided any such election shall be made prior to the calendar year such contributions are to begin, or if a Participant first becomes eligible to make such contributions after the beginning of any calendar year, not more than 30 days after so becoming eligible. A Participant's compensation deferral election under this subsection 4.3 shall apply to employment compensation otherwise payable after the later to occur of the date the Participant becomes eligible to make before-tax contributions and the date the compensation deferral election is made. A Participant's compensation deferral election may be revoked by the Participant before the beginning of any subsequent calendar year. The revocation shall be effective as to employment compensation the Participant is entitled to receive during that and subsequent calendar years unless prior to the commencement of any subsequent calendar year the Participant makes another compensation deferral election. Such later election shall apply as to employment compensation otherwise payable during calendar years beginning after such later election is made. Notwithstanding the foregoing, a Participant's compensation deferral election automatically shall be revoked for any period he ceases to be a highly compensated employee as defined in Section 414(q) of the Internal Revenue Code. 4.4. Additional Elective Participant Contributions. A Participant who is making the maximum permitted deferral under subsection 4.3 may elect to make additional before-tax contributions pursuant to this subsection 4.4. Such additional contributions shall be a percentage (in whole number increments) of the Participant's employment compensation which, when added to the percentage of the Participant's before-tax contributions to this Plan pursuant to subsection 4.3 and to the Investment Plan and all other USG Defined Contribution Plans, shall not exceed twenty percent. A Participant's before-tax contributions under this subsection 4.4 shall be made by a compensation deferral election made in such form and manner as the Committee shall determine; provided any such election shall be made prior to the calendar year such contributions are to begin, or if a Participant first becomes eligible to make contributions under this subsection 4.4 after the beginning of any subsequent calendar year, not more than 30 days after so becoming eligible. A Participant's compensation deferral election under this subsection 4.4 shall apply to employment compensation otherwise payable after the later to occur of the date the Participant becomes eligible to make before-tax contributions and the date the election is made. A Participant may revoke or reinstate his deferral election under this subsection 4.4 in accordance with the rules on revocation and reinstatement of deferral elections found in subsection 4.3. 4.5. Employer Matching Contributions. A Participant who makes before-tax contributions under subsection 4.3 shall be entitled to "Employer Matching Contributions" under this Plan equal to the additional "corporation matching contributions" he would have been entitled to receive under the Investment Plan if such before-tax contributions were permitted to be made under the Investment Plan. Employer matching contributions will not be made on any before-tax contributions made pursuant to subsection 4.4. For purposes of this Section 4, "corporation matching contributions" means all forms of matching contributions provided for in Section 4 of the Investment Plan. 4.6. Separate Accounts, Subaccounts, Deemed Investments. The Committee shall maintain a bookkeeping account in the name of each Participant who makes before-tax contributions under this Section 4 and shall maintain a separate bookkeeping account in his name to reflect Employer Matching Contributions attributable to such before-tax contributions. In accordance with rules established by the Committee, each Participant's account shall be adjusted to reflect the investment experience of one or more deemed investments selected by the Participant from among the investment funds offered in the Investment Plan. The Committee may maintain such subaccounts as it deems necessary to effect the immediately preceding sentence. Any reference to a Participant's "account" or "accounts" shall include all subaccounts established on behalf of the Participant by the Committee in accordance with this subsection. Each Participant's accounts and subaccounts shall be adjusted at such time and in such manner as accounts of participants in the Investment Plan are adjusted to reflect the balances that would have been in such accounts if they had in fact been maintained under the Investment Plan as described above. However, as of the New Effective Date, each Participant's accounts and subaccounts are not charged the amounts that they would have been charged to represent fees and expenses if they had in fact been maintained under the Investment Plan. The Committee in its discretion may elect at some future date to charge all or a portion of such amounts to the accounts and subaccounts of Participants in accordance with such rules as it may establish. 4.7. Withdrawals. No withdrawals may be made under this Plan with respect to a Participant's accounts prior to the Participant's termination of employment with the Company and all of its subsidiaries other than hardship withdrawals described below. A Participant may request a hardship withdrawal from the portion of his account that he would be entitled to receive under subsection 4.8 if he terminated employment with the Company and all subsidiaries on the date of such withdrawal. A Participant who is receiving installment distributions (if such are permitted under subsection 4.9) also may request a hardship withdrawal. Any hardship withdrawal shall be made in the same manner and subject to the same conditions and limitations as are set forth in the Investment Plan for hardship withdrawals from participants' before-tax accounts. However, if a Participant incurs a hardship, he must request a hardship withdrawal under this Plan to the extent required to satisfy the immediate and heavy financial need caused by such hardship before he may request a hardship withdrawal under the Investment Plan or any other USG Defined Contribution Plan. A withdrawal shall be made from the Plan as soon as practicable after the request for the withdrawal is received and approved by the Committee and shall be charged to the appropriate account of the Participant as of the date the withdrawal is actually made pursuant to rules established by the Committee. 4.8. Vesting of Accounts. Upon a Participant's termination of employment with the Company and all of its subsidiaries, the Participant (or in the event of his death, his Supplemental Plan Beneficiary, as defined in subsection 5.2) shall be entitled to the entire balance in the Participant's account which reflects his before-tax contributions made under this Section 4 (subject to adjustments required of such account until complete distribution thereof). The Participant or Supplemental Plan Beneficiary, as the case may be, shall be entitled to that portion of the balance in the Participant's account which reflects the Participant's share of Employer Matching Contributions the Participant or Supplemental Plan Beneficiary would have been entitled to under the Investment Plan if such contributions were "corporation matching contributions" made under the Investment Plan and such account had been maintained as a "corporation account" under that Plan (subject to adjustments required of such account until complete distribution of the vested portion thereof). 4.9. Distribution of Accounts. Subject to the provisions of this subsection 4.9, Part B Supplemental Benefits shall be paid in a lump sum within 30 days after such benefits become payable or, if the entire amount of such benefits cannot be determined by the Committee within 30 days, payment shall be made in one or more installments as determined by the Committee but with the last payment due by the 30th day following the date the Committee determines the total amount of such benefits. The Committee in its discretion may from time to time establish rules incorporating objective standards that shall govern the form of payment of Part B Supplemental Benefits that initially become payable during a subsequent calendar year. The distribution options for Part B Supplemental Benefits established by the Committee under this subsection 4.9 may differ from the distribution options established by the Committee under subsection 3.6 for the distribution of Part A Supplemental Benefits, but shall be established in the same manner and subject to the same conditions and limitations as are set forth in subsection 3.6, except that subparagraph 3.6(d) shall not apply in the event of the death of a Participant. SECTION 5 Spouses, Beneficiaries, Funding 5.1. Eligible Spouse. The spouse of a Participant will be considered as an "Eligible Spouse" as of any date only if at least six months prior thereto the Participant and his spouse were lawfully married under the laws of the state where the marriage was contracted and the marriage remains legally effective. 5.2. Supplemental Plan Beneficiary. A "Supplemental Plan Beneficiary" means a person who has been designated by a Participant as such by writing signed by the Participant and filed with the Committee prior to the Participant's death. If a Participant failed to designate a Supplemental Plan Beneficiary or if the person he designated predeceases the Participant, the Participant's Beneficiary under the Retirement Plan shall be his Supplemental Plan Beneficiary as to Part A Supplemental Death Benefits and his Beneficiary under the Investment Plan shall be his Supplemental Plan Beneficiary as to Part B Supplemental Death Benefits. 5.3. Funding. Benefits payable under this Plan to a Participant or his Supplemental Plan Beneficiary shall be paid directly by the Employers from their general assets in such proportions as the Company shall determine to the extent such benefits are not paid from a Special Retirement Account (established pursuant to Supplement A of this Plan) or from a so-called "rabbi trust", an irrevocable grantor trust the assets of which are subject to the claims of creditors of the Employers in the event of their insolvency. The Employers shall not be required to segregate on their books or otherwise any amount to be used for the payment of benefits under this Plan, except as to any amounts paid or payable to a Special Retirement Account under Supplement A of this Plan or to a "rabbi trust". SECTION 6 General Provisions 6.1. Statement of Accounts. The Committee shall furnish each Participant with a statement of his Part B Supplemental Benefits accounts under this Plan as of each December 31, and may in its discretion furnish such statements at more frequent intervals. 6.2. Employment Rights. Establishment of the Plan shall not be construed to give any Participant the right to be retained in the employ of the Company or any other Employer or to any benefits not specifically provided by this Plan. 6.3. Interests Not Transferable. Except as to withholding of any tax under the laws of the United States or any state or municipality, the interests of Participants and their Supplemental Plan Beneficiaries under the Plan are not subject to the claims of their creditors and may not be voluntarily or involuntarily transferred, assigned, alienated or encumbered. 6.4. Controlling Law. The laws of Illinois shall be controlling in all matters relating to the Plan. 6.5. Gender and Number. Where the context admits, words in the masculine gender shall include the feminine and neuter genders, the plural shall include the singular and the singular shall include the plural. 6.6. Action by the Company. Any action required of or permitted by the Company under the Plan shall be by resolution of its Board of Directors or by a duly authorized committee of its Board of Directors, or by a person or persons authorized by resolution of its Board of Directors or such committee. 6.7. Successor to the Company or Any Other Employer. The term "Company" as used in the Plan shall include any successor to the Company by reason of merger, consolidation, the purchase or transfer of all or substantially all of the Company's assets, or otherwise. The term "Employer" as used in the Plan with respect to the Company or any subsidiary shall include any successor to that corporation by reason of merger, consolidation, the purchase or transfer of all or substantially all of the assets of that corporation, or otherwise. 6.8. Facility of Payment. Any amounts payable hereunder to any person under a legal disability or who, in the judgment of the Committee, is unable to properly manage his affairs may be paid to the legal representative of such person or may be applied for the benefit of such person in any manner which the Committee may select. Any payment made in accordance with the next preceding sentence shall be a full and complete discharge of any liability for such payment under the Plan. SECTION 7 Amendment and Termination While the Employers expect to continue the Plan, the Company must necessarily reserve and reserves the right to amend the Plan from time to time or to terminate the Plan at any time. However, no amendment of the Plan nor the termination of the Plan may cause the reduction or cessation of any benefits that, but for such amendment or termination, are payable under this Plan or would become payable under this Plan after the date such amendment is made or the termination of the Plan occurs with respect to benefits accrued under the Retirement Plan and all other USG Defined Benefit Plans prior to such date, and with respect to Participants' before-tax contributions made under this Plan prior to such date and Employer Matching Contributions attributable to such before-tax contributions. SUPPLEMENT A TO USG CORPORATION SUPPLEMENTAL RETIREMENT PLAN A-1. Purpose, Special Retirement Account. The purpose of this Supplement A is to provide for installment payments of part or all of the accrued benefits under Part A of the Plan of each Eligible Participant to an individual account (the "Special Retirement Account") the Participant established in his name with a bank or trust company designated by the Company pursuant to an agreement between the Participant and the Company (the "Special Retirement Agreement"). A-2. Eligible Participant. The term "Eligible Participant" as used in this Supplement A means a Participant in Part A of the Plan who had established a Special Retirement Account on or before May 1, 1993. No Participant has been eligible to establish a Special Retirement Account after May 1, 1993. A-3. Accrued Benefit and Death Benefit Values, After-Tax Accrued Benefit and Death Benefit Values. The following terms used in this Supplement A shall have the following meanings: (a) "Accrued Benefit Value" as of any date means the present value of an Eligible Participant's Part A Supplemental Benefits under the Plan as of that date, as determined by the Committee (calculated on the bases of the actuarial factors, assumptions and tables then applied for that purpose under the Retirement Plan and benefit limitations imposed by the Internal Revenue Code then in effect, and assuming that no payments have been made to the Eligible Participant's Special Retirement Account pursuant to Paragraph A-5 and that the Eligible Participant will not have any additional service or employment compensation). (b) "After-Tax Accrued Benefit Value" as of any date means an Eligible Participant's Accrued Benefit Value as of that date less Applicable Income Taxes. (c) "Accrued Death Benefit Value" means, in the case of an Eligible Participant whose death occurs prior to receipt of any portion of the Participant's Part A Supplemental Benefits, the present value as of the date of the Eligible Participant's death, as determined by the Committee, of the Part A Supplemental Death Benefits, if any, payable to the Eligible Participant's Eligible Spouse as of that date (calculated on the basis of the actuarial factors, assumptions and tables then applied under the Retirement Plan in determining the present value of accrued death benefits and benefit limitations imposed by the Internal Revenue Code then in effect, and assuming that no payments have been made to the Eligible Participant's Special Retirement Account). (d) "After-Tax Accrued Death Benefit Value" means, in the case of an Eligible Participant described in the next preceding sentence, the Accrued Death Benefit Value as of the date of the Eligible Participant's death less Applicable Income Taxes. A-4. Applicable Income Taxes. "Applicable Income Taxes" means, with respect to any amount, federal, state and local income taxes on such amount (using for this purpose, and subject to such rules as the Committee may establish, the highest published applicable individual income tax rate in effect for the calendar year as to which such taxes are being determined), provided that state and local income taxes shall be considered net of federal income tax benefits. A-5. Payments to the Special Retirement Account. Subject to the provisions of Paragraph A-6, the following payments will be made to the Special Retirement Account of each Eligible Participant. As of the beginning of each calendar quarter, the Committee shall determine the Employee's After-Tax Accrued Benefit Value as well as the amount, if any, by which such value exceeds the fair market value of all assets of the Special Retirement Account as of the end of the preceding calendar quarter. If Employee's After-Tax Accrued Benefit Value exceeds the fair market value of such assets by $100,000 or more, a payment will be made to the Special Retirement Account equal to the difference between such values. Payments required to be made to the Special Retirement Account under this Paragraph A-5 shall be made directly by the Company or from USG Corporation Deferred Benefit Trust, or from both sources, as soon as practicable after the amounts of the payments have been determined by the Committee. Pursuant to the terms of the Special Retirement Agreement, the Company will gross-up the amount of a payment made to the Special Retirement Account under this Paragraph A-5 so as to provide funds for the Applicable Income Taxes payable by the Eligible Participant on such payment and will make payments to (or with respect to) the Eligible Participant in order to provide funds for the Applicable Income Taxes payable on investment income earned by the Special Retirement Account. A-6. Adjustment of Part A Supplemental Benefits and Part A Supplemental Death Benefits Upon Retirement or Death. For the purpose of determining the amount of payments to be made to an Eligible Participant's Special Retirement Account pursuant to Paragraph A-5, it is assumed that no portion of the Part A Supplemental Benefits he has accrued has been paid under the Plan. However, each payment made to an Eligible Participant's Special Retirement Account shall reduce the obligation of the Plan to provide Part A Supplemental Benefits and Part A Supplemental Death Benefits to or with respect to that Eligible Participant and thus benefits otherwise payable under the Plan shall be reduced to reflect such payments. Upon an Eligible Participant's retirement or death before retirement, the following shall apply: (a) No further payments need be made under the Plan to the Eligible Participant's Special Retirement Account. (b) The Committee shall determine the amount of Part A Supplemental Benefits or Part A Supplemental Death Benefits that would be payable under the Plan as a result of such retirement or death if no payments had been made to the Eligible Participant's Special Retirement Account and also shall determine the After-Tax Accrued Benefit Value or After-Tax Accrued Death Benefit Value, as the case may be, of those benefits. (c) The benefits determined under subparagraph (b) next above shall be reduced so that their After- Tax Accrued Benefit Value or After-Tax Accrued Death Benefit Value equals the amount by which the After-Tax Accrued Benefit Value or After-Tax Accrued Death Benefit Value, determined in accordance with subparagraph (b) next above, exceeds the fair market value of all assets of the Eligible Participant's Special Retirement Account as of the date of his retirement or death, disregarding assets of the Special Retirement Account, if any, that are required to be paid to the Company. Subject to the provisions of subparagraph (d) next below, the resulting benefits shall be the actual Part A Supplemental Benefits or Part A Supplemental Death Benefits that will be paid under the Plan to, or with respect to, the Eligible Participant. (d) Subparagraph 3.7(b) of the Plan provides for the payment of Part A Supplemental Death Benefits to the Eligible Spouse of an Eligible Participant who dies after retirement but before payment of any portion of the Eligible Participant's Part A Supplemental Benefits had been made or commenced. However, if an Eligible Participant retires but dies before all assets in the Eligible Participant's Special Retirement Account not in excess of the Eligible Participant's After-Tax Accrued Benefit Value have been distributed to him, the Special Retirement Agreement requires that the undistributed portion of such assets be distributed as soon as practicable after the Eligible Participant's death to the Eligible Participant's Beneficiary under the Special Retirement Agreement. In this case, Part A Supplemental Death Benefits shall be payable under subparagraph 3.7(b) of the Plan to the Eligible Spouse of the Eligible Participant only to the extent, if any, the fair market value of the assets distributed from the Special Retirement Account to the Eligible Participant after his retirement and the assets distributed or to be distributed from the Special Retirement Account to such Beneficiary is less than the After- Tax Accrued Death Benefit Value of the Part A Supplemental Death Benefits otherwise payable to the Eligible Spouse under Part A of the Plan. (e) The actual Part A Supplemental Benefits or Part A Supplemental Death Benefits determined under subparagraphs (c) and (d) next above shall be paid as provided in subsection 3.6 or 3.7 of the Plan, whichever applies. (f) If the fair market value of all assets in the Eligible Participant's Special Retirement Account as of the date of his retirement or death exceeds the After-Tax Accrued Benefit Value or the AfterTax Accrued Death Benefit Value, whichever applies, the Special Retirement Agreement provides that such excess assets shall be returned to the Company. A-7. Terms and Provisions of the Plan. All the terms and provisions of the Plan shall apply to this Supplement A and vice versa, except that where and to the extent the terms and provisions of the Plan and this Supplement A conflict, the terms and provisions of this Supplement A shall govern. EX-10 3 MATERIAL CONTRACTS EXHIBIT 10(l) Execution Copy AMENDMENT NO. 2 dated as of May 14, 1997 (this "Amendment"), among USG Corporation, a Delaware corporation (the "Borrower"), the financial institutions parties hereto (the "Lenders") and The Chase Manhattan Bank, a New York banking corporation, formerly known as Chemical Bank, in its separate capacity as agent for the Lenders (the "Agent"). PRELIMINARY STATEMENTS. (1) The Borrower, the Lenders, the Issuing Banks and the Agent have entered into the Credit Agreement dated as of July 27, 1995, as amended by Amendment No. 1 thereto dated as of February 1, 1996 (the "Credit Agreement") and have agreed to amend the Credit Agreement as hereinafter set forth. (2) Capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed to such terms in the Credit Agreement. In consideration of the premises and the agreements, provisions and covenants herein contained, the parties hereto hereby agree, on the terms and subject to the conditions set forth herein, as follows: SECTION 1. Amendment of the Credit Agreement. The Credit Agreement is hereby amended as follows: 1. Section 1.01 of the Credit Agreement is hereby amended to delete the definition of "Applicable Commitment Fee" contained therein and to substitute the following therefor: "Applicable Commitment Fee" shall mean, for any date, the applicable number of basis points (expressed as a percentage) set forth below based on the Debt/EBITDA Ratio as of the last day of the Borrower's most recently ended period of four consecutive fiscal quarters: Debt/EBITDA Ratio Applicable Commitment Fee ----------------- ------------------------- (in basis points)
greater than 3.00 to 1.0 31.25 greater than 2.50 to 1.0 but less than or equal to 3.00 to 1.0 25.00 greater than 2.00 to 1.0 but less than or equal to 2.50 to 1.0 22.50 greater than 1.50 to 1.0 but less than or equal to 2.00 to 1.0 20.00 greater than 1.25 to 1.0 but less than or equal to 1.50 to 1.0 18.75 greater than 1.00 to 1.0 but less than or equal to 1.25 to 1.0 15.00 less than or equal to 1.0 to 1.0 12.50
For purposes of the foregoing, the Applicable Commitment Fee at any time shall be determined by reference to the Debt/EBITDA Ratio as of the last day of the Borrower's most recently ended fiscal quarter, provided, that, in calculating the Debt/EBITDA Ratio for purposes of this definition, Debt shall not include obligations with respect to letters of credit (including Letters of Credit issued hereunder) entered into in the ordinary course of business and having an aggregate outstanding face amount of up to $50,000,000 to the extent such letters of credit are not drawn on or, if and to the extent drawn on, such drawing is promptly reimbursed following receipt by the applicable account party of a demand for reimbursement following payment on the letter of credit. Following the end of any such fiscal quarter, any change in the Applicable Commitment Fee shall become effective for all purposes on and after the earlier of (i) the date of delivery to the Agent of the Debt/EBITDA Ratio Certificate for such fiscal quarter and (ii) the date of delivery to the Agent of the Financial Officer's certificate and applicable financial statements described in Sections 5.07(a), (b) and (c) relating to such fiscal quarter. Notwithstanding the foregoing, at any time during which the Borrower has failed to deliver the Financial Officer's certificate and applicable financial statements described in Sections 5.07(a), (b) and (c) with respect to a fiscal quarter in accordance with the provisions thereof for more than five days after such certificate and the applicable financial statements are due, and until such time as such financial statements are so delivered, the Applicable Commitment Fee shall be 31.25 basis points. 2. Section 1.01 of the Credit Agreement is hereby amended to delete the definition of "Applicable Eurodollar Margin" contained therein and to substitute the following therefore: "Applicable Eurodollar Margin" shall mean, for any date, with respect to the Revolving Loans comprising any Eurodollar Borrowing, the applicable margin set forth below based on the Debt/EBITDA Ratio as of the last day of the Borrower's most recently ended period of four consecutive fiscal quarters: Debt/EBITDA Ratio Applicable Commitment Fee ----------------- ------------------------- (in basis points)
greater than 3.00 to 1.0 112.5 greater than 2.50 to 1.0 but less than or equal to 3.00 to 1.0 75.00 greater than 2.00 to 1.0 but less than or equal to 2.50 to 1.0 62.50 greater than 1.50 to 1.0 but less than or equal to 2.00 to 1.0 55.00 greater than 1.25 to 1.0 but less than or equal to 1.50 to 1.0 45.00 greater than 1.00 to 1.0 but less than or equal to 1.25 to 1.0 40.00 less than or equal to 1.0 to 1.0 37.50
For purposes of the foregoing, the Applicable Eurodollar Margin at any time shall be determined by reference to the Debt/EBITDA Ratio as of the last day of the Borrower's most recently ended fiscal quarter, provided, that, in calculating the Debt/EBITDA Ratio for purposes of this definition, Debt shall not include obligations with respect to letters of credit (including Letters of Credit issued hereunder) entered into in the ordinary course of business and having an aggregate outstanding face amount of up to $50,000,000 to the extent such letters of credit are not drawn on or, if and to the extent drawn on, such drawing is promptly reimbursed following receipt by the applicable account party of a demand for reimbursement following payment on the letter of credit. Following the end of any such fiscal quarter, any change in the Applicable Eurodollar Margin shall become effective for all purposes on and after the earlier of (i) the date of delivery to the Agent of the Debt/EBITDA Ratio Certificate and (ii) the date of delivery to the Agent of the Financial Officer's certificate and applicable financial statements described in Sections 5.07(a), (b) and (c) relating to such fiscal quarter. Notwithstanding the foregoing, at any time during which the Borrower has failed to deliver the Financial Officer's certificate and applicable financial statements described in Sections 5.07(a), (b) and (c) with respect to a fiscal quarter in accordance with the provisions thereof for more than five days after such certificate and the applicable financial statements are due, and until such time as such financial statements are so delivered, the Applicable Eurodollar Margin shall be 112.50 basis points. 1.3 Section 5.09 of the Credit Agreement (which requires the pledge to the Collateral Trustee of newly created or acquired domestic Material Subsidiaries) is hereby deleted in its entirety. 1.4 Section 6.09 of the Credit Agreement is hereby amended to delete the maximum Debt/EBITDA Ratio of 4.50 to 1.00 set forth in subsection (a) thereof and to substitute a maximum Debt/EBITDA Ratio of 4.00 to 1.00 therefor. SECTION 2. Release of Collateral. Pursuant to Section 9.07(c)(ii) of the Credit Agreement, all of the Lenders hereby direct the Collateral Trustee, and instruct the Borrower to direct the Collateral Trustee, to release its Lien on all of the "Collateral" (as defined in the Collateral Trust Agreement) in accordance with the procedures described in Section 7 of the Collateral Trust Agreement. SECTION 3. Representations and Warranties. The Borrower represents and warrants to each of the Lenders and the Agent that: (a) This Amendment has been duly authorized, executed and delivered by it and constitutes its legal, valid and binding obligation, enforceable in accordance with its terms except as such enforceability may be limited by bankruptcy, insolvency, reorganization, fraudulent transfer, moratorium or other similar laws affecting creditors' rights generally and by general principles of equity (regardless of whether such enforceability is considered in a proceeding at law or in equity). (b) Before and after giving effect to this Amendment, the representations and warranties set forth in Article V of the Credit Agreement are true and correct in all material respects with the same effect as if made on the date hereof, except to the extent such representations and warranties expressly relate to an earlier date. (c) Before or after giving effect to this Amendment, no Event of Default or Potential Event of Default has occurred and is continuing. SECTION 4. Condition to Effectiveness. The amendments to the Credit Agreement set forth in this Amendment shall become effective as of the date first above written when the Agent shall have received counterparts of this Amendment that, when taken together, bear the signatures of the Borrower, the Agent and each Lender. SECTION 5. Credit Agreement. Except as specifically amended hereby, the Credit Agreement and each Loan Document shall continue in full force and effect in accordance with the respective provisions thereof as in existence on the date hereof. After the date hereof, any reference to the Credit Agreement shall mean the Credit Agreement as amended hereby. SECTION 6. Applicable Law. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. SECTION 7. Counterparts. This Amendment may be executed in two or more counterparts, each of which shall constitute an original but all of which when taken together shall constitute but one contract. SECTION 8. Expenses. The Borrower agrees to reimburse the Agent for its out-of-pocket expenses in connection with this Amendment, including the reasonable fees, charges and disbursements of Sidley & Austin, counsel for the Agent. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed by their respective authorized officers as of the day and year first written above. USG CORPORATION By_____________________________ Name:__________________________ Title:_________________________ THE CHASE MANHATTAN BANK, individually and as Agent By______________________________ Name:___________________________ Title:__________________________ BANKERS TRUST COMPANY By______________________________ Name:___________________________ Title:__________________________ CITIBANK, N.A. By______________________________ Name:___________________________ Title:__________________________ THE BANK OF TOKYO-MITSUBISHI, LTD., CHICAGO BRANCH By______________________________ Name:___________________________ Title:__________________________ BANK OF MONTREAL By______________________________ Name:___________________________ Title:__________________________ BANQUE PARIBAS, CHICAGO BRANCH By______________________________ Name:___________________________ Title:__________________________ By______________________________ Name:___________________________ Title:__________________________ THE FIRST NATIONAL BANK OF CHICAGO By______________________________ Name:___________________________ Title:__________________________ THE FUJI BANK, LIMITED By______________________________ Name:___________________________ Title:__________________________ THE INDUSTRIAL BANK OF JAPAN, LIMITED, CHICAGO BRANCH By______________________________ Name:___________________________ Title:__________________________ LASALLE NATIONAL BANK By______________________________ Name:___________________________ Title:__________________________ MORGAN GUARANTY TRUST COMPANY OF NEW YORK By______________________________ Name:___________________________ Title:__________________________ THE NORTHERN TRUST COMPANY By______________________________ Name:___________________________ Title:__________________________ THE SANWA BANK, LIMITED, CHICAGO BRANCH By______________________________ Name:___________________________ Title:__________________________ TORONTO DOMINION (TEXAS), INC. By______________________________ Name:___________________________ Title:__________________________ ARAB BANKING CORPORATION By_____________________________ Name:__________________________ Title:_________________________ MITSUBISHI TRUST & BANKING CORPORATION, CHICAGO BRANCH By______________________________ Name:___________________________ Title:__________________________ WACHOVIA BANK OF GEORGIA, N.A. By______________________________ Name:___________________________ Title:__________________________ TRUST COMPANY BANK By______________________________ Name:___________________________ Title:__________________________ CAISSE NATIONALE DE CREDIT AGRICOLE By______________________________ Name:___________________________ Title:__________________________ THE MITSUI TRUST & BANKING CO. LTD., NEW YORK BRANCH By______________________________ Name:___________________________ Title:__________________________ THE SUMITOMO BANK, LTD., CHICAGO BRANCH By______________________________ Name:___________________________ Title:__________________________ EX-10 4 MATERIAL CONTRACTS EXHIBIT 10(n) 1997 Annual Management Incentive Program USG Corporation PURPOSE To enhance USG Corporation's ability to attract, motivate, reward and retain key employees of the Corporation and its operating subsidiaries and to strengthen the existing mutual interest between such key employees and the Corporation's stockholders by providing incentive award opportunities to such key employees who discharge their accountabilities in a manner which makes a measurable contribution to the Corporation's earnings. INTRODUCTION This Annual Management Incentive Program is in effect from January 1, 1997 through December 31, 1997. ELIGIBILITY Individuals eligible for participation in this Program are those officers and other key employees occupying management positions in Broadband 16 or higher (775 or more points). Employees who participate in any other annual incentive program of the Corporation or any of its subsidiaries are not eligible to participate in this Program. GOALS For the 1997 Annual Management Incentive Program, Adjusted Net Earnings, Goal Income and Strategic Targets for USG Corporation, Subsidiaries and Profit Centers will be determined by the Grants and Awards Subcommittee of the Compensation and Organization Committee of the USG Board of Directors (the "Subcommittee") after considering recommendations submitted from USG Corporation and Operating Subsidiaries. Except in the case of a Named Executive Officer (as defined in the Administrative Guidelines below), Profit Center goals may be adjusted by the Chairman of USG Corporation if business conditions or other significant unforeseen circumstances beyond the control of the Profit Center have a major impact on opportunity. AWARD VALUES For the Annual Management Incentive Program, position target incentive values are based on level of accountability and are expressed as a percent of approved annualized salary. (EXCEPTION: For the transition year of 1997, the target incentive value will be expressed as a percent of approved annualized salary or annualized reference point, whichever is higher.) Resulting award opportunities represent a fully competitive incentive opportunity for 100% (target) achievement of Corporate, Operating Subsidiary and/or Profit Center goals: - ------------------------------------------------------------------------------------------------------------------- Position Target Incentive Value -------------------------------
Chairman, President & CEO - USG Corporation 65% - ------------------------------------------------------------------------------------------------------------------- Executive Vice President-Operations, USG Corporation; 60% President & CEO, U.S. Gypsum Company; President & CEO, USG Interiors, Inc. - ------------------------------------------------------------------------------------------------------------------- Executive Vice President International Development 55% and Distribution, USG Corporation - ------------------------------------------------------------------------------------------------------------------- USG CORPORATION Senior Vice President & General Counsel 50% Senior Vice President & Chief Administrative Officer Senior Vice President & Chief Financial Officer - ------------------------------------------------------------------------------------------------------------------- USG CORPORATION & OPERATING SUBSIDIARIES OFFICERS AND MANAGERS President & CEO, L&W Supply Corporation 40% Executive Vice President, USG Interiors, Inc; President & CEO, CGC, Inc. Executive Vice President - Operations, U.S. Gypsum Company Executive Vice President Marketing, U.S. Gypsum Company Executive Vice President, USG International, Ltd. Vice President & Controller, USG Corporation; Vice President Financial Services, North American Gypsum and Worldwide Ceilings Vice President Research & Technology, USG Corporation Vice President & Treasurer, USG Corporation Vice President Human Resources - Operations, USG Corporation - ------------------------------------------------------------------------------------------------------------------- GENERAL MANAGERS (PROFIT CENTER HEADS) Sales of $50 Million and over 30% Sales Under $50 Million 25% - ------------------------------------------------------------------------------------------------------------------- USG CORPORATION, OPERATING SUBSIDIARIES & PROFIT CENTERS OFFICERS AND MANAGERS Position Reference Point: $174,000 and over 35% Position Reference Point: $154,005 - $173,999 30% Position Reference Point: $125,085 - $154,004 25% Position Reference Point: $111,600 - $125,084 20% Position Reference Point: $ 89,400 - $111,599 15% Position Reference Point: Below $89,400 10% - -------------------------------------------------------------------------------------------------------------------
AWARDS Incentive awards for all participants in the 1997 Annual Management Incentive Program will be reviewed and approved by the Subcommittee. The total of all incentive awards paid under this program will not exceed 4.0% of USG Corporation's 1997 consolidated goal income. In the event that awards otherwise payable pursuant to the Annual Management Incentive Program exceed such amount, all awards will be reduced prorata to an aggregate amount equal to 4.0%. For all participants, the annual incentive award opportunity is the annualized salary in effect at the beginning of the calendar year (March 1 of the calendar year for the twenty most senior executives) multiplied by the applicable position target incentive value percent. Incentive awards for 1997 will be based on:
o ADJUSTED NET EARNINGS: 20% - 60% OF INCENTIVE (net earnings plus amortization of excess reorganization value plus reorganization debt discount, net of taxes) based on the Corporation's year-end financial statements. o GOAL INCOME: 20% - 60% OF INCENTIVE (net sales less cost of sales and selling and administrative expenses) based on the Corporation's year-end financial statements. o STRATEGIC FOCUS TARGET: 20% OF INCENTIVE o PERSONAL PERFORMANCE: 20% OF INCENTIVE [except in the case of the twenty (20) most senior executives whose awards are based solely on degree of achievement of Adjusted Net Earnings and/or Goal Income (60%) and Strategic Focus Target (40%) results]. o Except in the case of a Named Executive Officer, other appropriate performance measures as approved by the Subcommittee.
1. For participants to qualify for the ADJUSTED NET EARNINGS and/or GOAL INCOME segment comprising 60% of their award, their respective organization (e.g. Corporation/Group/ Subsidiary, etc. as described on page 6) must achieve 75% or higher of its adjusted net earnings or goal income target. 2. ADJUSTED NET EARNINGS and GOAL INCOME segment award amounts will be determined according to the following schedule: Adjusted Net Earnings/ Adjustment Factor for Corporate, Group, Goal Income Achievement Subsidiary or Profit Center Performance
- ---------------------------------------------------------------------------------------------------------- Below 75% 0% 75% 50% 80% 60% 90% 80% 100% 100% 110% 120% 120% 140% 140% 180% 150% 200%
3. For participants to qualify for the STRATEGIC FOCUS TARGET segment comprising 20% (40% for the twenty most senior executives) of their incentive award, their respective organization must achieve a minimum level of performance related to the specified strategic focus. The Strategic Focus Targets will be measurable, verifiable and derived from the formal strategic planning process (e.g., cost reduction, sales growth, market share gain, margins, etc.). The award adjustment factor for this segment will range from 0.5 (after achieving minimum performance levels) to 2.0 for maximum attainment. Participants will receive schedules of Strategic Focus Targets upon approval by the Subcommittee. 4. Except with respect to the twenty (20) most senior executives (including the Named Executive Officers) whose awards are based solely on achievement of Adjusted Net Earnings, Goal Income and Strategic Focus Targets, participants will have a third segment comprising 20% of their incentive award based upon their individual Personal Performance Rating according to the following schedule:
Personal Performance Rating Personal Performance Adjustment Range Far Exceeded Expectations 1.70 - 2.00 Exceeded Expectations 1.20 - 1.50 Achieved Expectations 0.80 - 1.10
The maximum incentive award including all segments of this Program is 200% of the target incentive opportunity. The Subcommittee may eliminate awards to any participant who fails to receive a Personal Performance Rating of "Achieved Expectations" or better under the Corporation's Performance Planning and Review (PPR) system. 5. Target incentive award opportunities and calculations of awards for participants will be based on the achievement of specific Corporate, Group, Subsidiary and/or Profit Center adjusted net earnings, goal income and strategic focus targets as displayed on the following page or as otherwise may be established subject to approval of the Chairman: Basis for Financial Measures Basis for Incentive Award Strategic Focus Participants (60% of Target Incentive) Incentive Award - -------------------------------------------------------------------------------------------------------------------
USG Corporation USG Corporation Senior Executive 60% Adjusted Net Earnings, USG Corporation 40% Management USG Corporation Staff 60% Adjusted Net Earnings, USG Corporation 20% - ------------------------------------------------------------------------------------------------------------------- North American Gypsum Executive VP - Operations, 20% Adjusted Net Earnings, USG Corporation 40% NAG U.S. Gypsum Company Executive VP - Marketing, 40% Goal Income, North American Gypsum U.S. Gypsum Company General Mgr - IGD 20% Goal Income, Subsidiary 20% Profit Center General Mgr - Materials Division 40% Goal Income, Profit Center/Division Profit Center Staff Executive VP, CGC, Inc 20% Adjusted Net Earnings, USG Corporation 40% NAG 20% Goal Income, North American Gypsum 20% Goal Income, CGC, Inc President & General Mgr, YPSA 20% Goal Income, North American Gypsum 20% YPSA 40% Goal Income, YPSA U.S. Gypsum Staff 25% Goal Income, North American Gypsum 20% NAG 35% Goal Income, U.S. Gypsum Company CGC, Inc Staff 20% Goal Income, North American Gypsum 20% CGC 40% Goal Income, CGC, Inc - ------------------------------------------------------------------------------------------------------------------- Worldwide Ceilings Executive VP, USG Interiors, Inc 20% Adjusted Net Earnings, USG Corporation 40% WWC Executive VP, USG International, Ltd 40% Goal Income, Worldwide Ceilings USG Interiors, Inc Staff 25% Goal Income, Worldwide Ceilings 20% WWC 35% Goal Income, USG Interiors, Inc USG International, Ltd Staff 25% Goal Income, Worldwide Ceilings 20% WWC 35% Goal Income, USG International, Ltd - ------------------------------------------------------------------------------------------------------------------- L&W Supply Corporation President & CEO 20% Adjusted Net Earnings, USG Corporation 40% L&W 20% Goal Income, North American Gypsum 20% Goal Income, L&W Supply L&W Supply Corporation Staff 20% Goal Income, North American Gypsum 20% L&W 40% Goal Income, L&W Supply - -------------------------------------------------------------------------------------------------------------------
6. SPECIAL AWARDS In addition to the incentive opportunity provided by this Program, a special award may be recommended for any participant or non-participant, other than a Named Executive Officer, who has made an extraordinary contribution to the Corporation's welfare or earnings. GENERAL PROVISIONS - -------------------------------------------------------------------------------- 1. The Subcommittee shall review and approve the awards recommended for officers and other employees who are eligible participants in the 1997 Annual Management Incentive Program. The Subcommittee shall submit to the Board of Directors, for their ratification, a report of the awards for all eligible participants including corporate officers approved by the Subcommittee in accordance with the provisions of the Program. 2. The Subcommittee shall have full power to make the rules and regulations with respect to the determination of achievement of goals and the distribution of awards. No awards will be made until the Subcommittee has certified goal achievement and applicable awards in writing. 3. The judgement of the Subcommittee in construing this Program or any provisions thereof, or in making any decision hereunder, shall be final and conclusive and binding upon all employees of the Corporation and its subsidiaries whether or not selected as beneficiaries hereunder, and their heirs, executors, personal representatives and assigns. 4. Nothing herein contained shall limit or affect in any manner or degree the normal and usual powers of management, exercised by the officers and the Board of Directors or committees thereof, to change the duties or the character of employment of any employee of the Corporation or to remove the individual from the employment of the Corporation at any time, all of which rights and powers are expressly reserved. 5. No award will be paid to a Program participant who is not a regular full-time employee in good standing at the end of the calendar year to which the award applies; except an award which would otherwise be payable based on goal achievement may be recommended in the event of retirement, disability or death or in the event the participant is discharged without cause from the employment of the company during the year. 6. The awards made to employees shall become a liability of the Corporation or the appropriate subsidiary as of December 31, 1997 and all payments to be made hereunder will be made as soon as practicable after said awards have been approved. ADMINISTRATIVE GUIDELINES - -------------------------------------------------------------------------------- 1. Award values will be based on annualized salary in effect for each qualifying participant at the beginning of the year (March 1 for the twenty most senior executives). Any change in duties, dimensions or responsibilities of a current position resulting in a new evaluation and an increase or decrease in reference points will be applied for Incentive Program purposes on a prorata basis with the respective reference point and target incentive value to apply for the actual number of full months of service at each evaluation except for such a change with respect to a Named Executive Officer, in which case any change in reference points and target incentive value, for any reason, shall not become effective until January 1 of the following year. 2. As provided by the Program, no award is to be paid any participant who is not a regular full-time employee in good standing at the end of the calendar year to which the award applies. However, in the event an eligible participant with three (3) or more months of active service in the Program year subsequently retires, becomes disabled or dies, or is discharged from the employment of the Company without cause, the participant (or beneficiary) may receive an award which would otherwise be payable based on goal achievement, prorated for the actual months of active service during the year. 3. Employees participating in any other incentive or bonus program of the parent Corporation or a Subsidiary who are transferred during the year to a position covered by the Annual Management Incentive Program (other than a Named Executive Officer) will be eligible to receive a potential award prorated for actual full months of service in the two positions with the respective incentive program and target incentive values to apply. For example, a Marketing Manager promoted to Director, Marketing on August 1, will be eligible to receive a prorata award for seven months based on the Marketing Manager Plan provisions and values, and for five months under the Annual Management Incentive Program provisions and target incentive values. 4. In the event of transfer of an employee (other than a Named Executive Officer) from an assignment which does not qualify for participation in any incentive or bonus plan to a position covered by the 1997 Annual Management Incentive Program, the employee is eligible to participate in the Annual Incentive Program with any potential award prorated for the actual months of service in the position covered by the Program during the year. A minimum of three months of service in the eligible position is required. 5. Participation during the current Program year for individuals employed from outside the Corporation is possible with any award to be prorated for actual full months of service in the eligible position. A minimum of three full months of service is required for award consideration. 6. Exceptions to established administrative guidelines can only be made by the Subcommittee and only with respect to participants other than Named Executive Officers. 7. For purposes of this Program, a "NAMED EXECUTIVE OFFICER" will include any executive officer who is deemed a "named executive officer" for 1997 under Item 402 (a)(3) of Regulation S-K under the Securities Exchange Act of 1934 and was employed by the Corporation or a Subsidiary on the last day of the year. EX-10 5 MATERIAL CONTRACTS EXHIBIT 10(p) FIRST AMENDMENT TO OMNIBUS MANAGEMENT INCENTIVE PLAN OF USG CORPORATION FIRST AMENDMENT dated as of November 11, 1997 (this "First Amendment"), to the Omnibus Management Incentive Plan of USG Corporation (the "Plan"), which Plan was adopted and approved by the Compensation and Organization Committee (the "Committee") of the Board of Directors of USG Corporation (the "Corporation") on February 11, 1997, and approved by the stockholders of the Corporation on May 14, 1997. WHEREAS, the Committee has approved an amendment to the Plan to require stockholder approve of certain modifications of awards under the Plan; NOW, THEREFORE, in consideration of the premises, the Plan is hereby amended as set forth below: Section 5(a)(iv) of the Plan is hereby amended by the addition of the following sentence at the end thereof: "Notwithstanding anything in this Plan to the contrary, awards of Restricted Stock that are not performance-based shall have restriction periods of not less than three (3) years." The second paragraph of Section 9(b) of the Plan is hereby amended by the addition of the following sentence at the end thereof: "In addition, unless the shareholders of the Corporation shall have first approved thereof, no amendment of the Plan or any award agreement thereunder shall be effective which would permit the re-pricing of outstanding stock options or the waiver of restrictions on outstanding restricted stock awards." 3. Except as expressly amended and modified by this First Amendment, the Plan is hereby ratified and confirmed in all respects. IN WITNESS WHEREOF, the Corporation has caused this First Amendment to be executed by its officers thereunto duly authorized as of the 11th day of November 1997. USG CORPORATION By /s/ Harold E. Pendexter, Jr. ------------------------------- Harold E. Pendexter, Jr. Senior Vice President and Chief Administrative Officer Attest: /s/ Dean H. Goossen - ------------------- Dean H. Goossen Corporate Secretary EX-10 6 MATERIAL CONTRACTS EXHIBIT 10(q) USG CORPORATION STOCK COMPENSATION PROGRAM FOR NON-EMPLOYEE DIRECTORS (as amended and restated) Article 1. Establishment, Purpose, and Duration 1.1 Establishment of the Plan. USG Corporation, a Delaware corporation (the "Corporation"), hereby amends and restates in its entirety the non-employee director incentive stock compensation plan known as the "USG Corporation Stock Compensation Program for Non-Employee Directors" (herein, as so amended and restated, called the "Plan"), as set forth in this document. The Plan provides for the annual grant of shares of the common stock of the Corporation ("Shares") to non-employee directors and for the acquisition of Deferred Stock Units (as herein defined) by non-employee directors, subject to the terms and provisions set forth herein. Upon approval by the Board of Directors of the Corporation, the Plan shall become effective as of July 1, 1997 (the "Effective Date"), and shall remain in effect as provided in Section 1.3 herein. The Plan is intended as a replacement for certain compensation arrangements for non-employee directors in effect prior to the Effective Date, including the Plan prior to this amendment and restatement, and the Corporation's Directors' Deferred Fee Plan (collectively, the "Prior Programs"). The Prior Programs will continue to apply in the future only with respect to applicable compensation earned by non-employee directors for periods of service prior to July 1, 1997. 1.2. Purpose of the Plan. The purpose of the Plan is to promote the achievement of long-term objectives of the Corporation by linking the personal interests of non-employee directors to those of the Corporation's stockholders and to attract and retain non-employee directors of outstanding competence. 1.3 Duration of the Plan. The Plan will commence as of the Effective Date and shall remain in effect until terminated or amended by the Board of Directors pursuant to Article 9. Article 2. Definitions In addition to the terms defined in the Plan, these terms shall have the meanings set forth below: (a) "Deferred Stock Unit" or "Unit" means an award acquired by a Participant as a measure of participation under the Plan, and having a value which changes in direct relation to changes in the value in the relevant number of Shares during the applicable period. (b) "Fair Market Value" shall equal the mean of the high and low sales prices of a Share on The New York Stock Exchange on the relevant date, or, if there were no sales on such date, on the last trading date preceding the relevant date. Article 3. Administration 3.1 The Committee on Directors. The Plan shall be administered by the Committee on Directors (the "Committee") of the Board of Directors of the Corporation, subject to the restrictions set forth in the plan. 3.2 Administration by the Committee. The Committee shall have the full power, discretion, and authority to interpret and administer the Plan in a manner which is consistent with the Plan's provisions. In no event, however, shall the Committee have the power to determine Plan eligibility, or to determine the number, the value, the vesting period, or the timing of awards to be made under the Plan (all such determinations being automatic pursuant to the provisions of the Plan). 3.3 Decisions Binding. All determinations and decisions made by the Committee pursuant to the Plan, and all related orders or resolutions of the Committee shall be final, conclusive, and binding on all persons, including the Corporation, its shareholders, employees, directors, Participants, and their estates and beneficiaries. Article 4. Participation. 4.1 Participation. Persons eligible to participate in the Plan are limited to non-employee directors who are serving on the Board on the date of each scheduled award under the Plan ("Participants"). Article 5. Annual Equity Grants for Participants. 5.1 Annual Equity Grants. Commencing July 1, 1998, each Participant shall receive an annual equity grant of five hundred (500) Shares on July 1 each year, or a proportionate share of such grant based on full months of service as a non-employee director since the prior July 1. In lieu of issuing fractional Shares, the Corporation shall round up to the nearest full Share. 5.2 Timing of Payout. Certificates for Shares awarded pursuant to this Article 5 shall be issued as soon as administratively practicable following July 1 each year. 5.3 Deferral Election. In lieu of receiving his or her annual equity grant in Shares, any Participant may elect to receive all or a portion of any such grant in the form of Deferred Stock Units. Any such election shall be made pursuant to Article 7. 5.4 Biennial Review. The Committee shall conduct a biennial review of the appropriateness of the annual equity awards granted pursuant to this Article 5. In the event the Committee determines that an adjustment in the amount of equity awards pursuant to this Article 5 is appropriate, the Committee shall make a recommendation to the Board for an appropriate amendment. Article 6. Retainer Share Payments 6.1 Portion of Retainers Paid in Shares. During the term of this Plan, each Participant shall receive twenty-five percent (25%) of his or her annual retainer for board service in the form of Shares, payable as the third quarter installment of such annual retainer. 6.2 Number of Shares Paid. The number of Shares to be issued pursuant to Section 6.1 will be determined on September 25th of each year (or the next trading date if such date is not a date on which shares are traded on The New York Stock Exchange), and shall equal twenty-five percent (25%) of the then current annual retainer for board service, divided by the Fair Market Value of a Share on such date. In lieu of issuing fractional Shares, the Corporation shall round up to the nearest full share. 6.3 Timing of Payout. Certificates for Shares payable pursuant to this Article 6 shall be issued as soon as administratively practicable following the conclusion of the third calendar quarter. Article 7. Annual Deferral Opportunity 7.1 Termination of Prior Programs; Deferral of Retainers and Meeting Fees. The Prior Programs are hereby terminated. In lieu thereof, any Participant may elect during the term of this Plan to receive all or a portion of the cash component of his or her annual retainer or meeting fees for board service in the form of Deferred Stock Units. Any Participant may also elect to receive all or a portion of his or her annual equity grant awarded pursuant to Section 5.1 in the form of Deferred Stock Units. Elections to receive Deferred Stock Units shall be irrevocable and shall be subject to the provisions of this Article 7 and Article 8. 7.2 Annual Deferral Election. Any election to receive all or a portion of the cash component of a Participant's annual retainer, meeting fees or annual equity grant in the form of Deferred Stock Units shall be made by December 1 for all payments to be made in the succeeding calendar year. Each new Participant shall make his or her election upon election to the Board. Deferral elections may only be made in ten percent (10%) increments. 7.3 Number of Deferred Stock Units. The number of Deferred Stock Units to be granted in connection with an election pursuant to Section 7.2 shall equal (x) the number of Shares being deferred, in the case of annual equity grants, and (y) the dollar value of the portion of the annual retainer and meeting fees being deferred, divided by the Fair Market Value of a Share on the last day of the applicable quarter, in the case of installments of annual retainers, or the applicable meeting date, in the case of meeting fees. 7.4 Vesting of Deferred Stock Units. Subject to the terms of this Plan, all Deferred Stock Units acquired under this Article 7 shall vest upon the acquisition of such Deferred Stock Units. Article 8. Deferred Stock Units 8.1 Value of Deferred Stock Units. Each Deferred Stock Unit shall have a value that is equal to the Fair Market Value of a Share on the relevant valuation date, it being understood that subsequent to the date of an award or acquisition of a Deferred Stock Unit, its value shall change in direct relationship to changes in the Fair Market Value of a Share. 8.2 Dividend Equivalents. Dividend equivalents shall be earned on Deferred Stock Units provided under this Plan and shall be converted into an equivalent amount of Deferred Stock Units based upon the value of a Deferred Stock Unit on the payment date of the related dividend. The converted Deferred Stock Units will be fully vested upon conversion. 8.3 Timing and Amount of Payout. Except as provided otherwise in the Plan, the amount payable to a Participant shall be the aggregate value of the Participant's vested Deferred Stock Units, if any, on the date that the Participant terminates his or her service on the Board, normally payable in cash in a lump sum within thirty (30) days following the Participant's termination of service on the Board. In lieu of a lump sum payment, a Participant may elect, in a writing filed with the Corporate Secretary of the Corporation prior to termination of his or her Board service, to receive payment of such amount in cash in two installments. The first installment, equal to fifty percent (50%) of such amount, shall be made within thirty (30) days following the Participant's termination of service on the Board. The second installment, including interest credited at the prime interest rate of The First National Bank of Chicago in effect on the date of such termination, shall be made one year after the first installment. 8.4 Deferred Stock Unit Account. A Deferred Stock Unit Account (the "Account") shall be established and maintained by the Corporation for each Participant receiving Deferred Stock Units under the Plan. As the value of each Deferred Stock Unit changes pursuant to Section 8.1, the Account established on behalf of each Participant shall be adjusted accordingly. Each Account shall be the record of the Deferred Stock Units granted to the Participant under Article 7 of the Plan, shall be maintained solely for accounting purposes, and shall not require a segregation of any Corporation assets. 8.5 Annual Reports. Participants with Deferred Stock Units shall receive annual reports providing detailed information about their Accounts and changes in their Accounts during the preceding year. Article 9. Amendment, Modification, and Termination 9.1 Amendment, Modification, and Termination. The Board may terminate, amend, or modify the Plan at any time and from time to time. 9.2 Awards Previously Granted. Unless required by law, no termination, amendment, or modification of the Plan shall in any material manner adversely affect any award previously provided under the Plan, without the written consent of the Participant holding such award. Article 10. Miscellaneous 10.1 Severability. In the event any provision of the Plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included. 10.2 Benefit Transfers. The interests of any Participant or beneficiary entitled to payments hereunder shall not be subject to attachment or garnishment or other legal process by any creditor of any such Participant or beneficiary nor shall any such Participant or beneficiary have any right to alienate, anticipate, commute, pledge, encumber, or assign any of the benefits or rights which he or she may expect to receive, contingently or otherwise under this Plan except as may be required by the tax withholding provisions of the Internal Revenue Code of 1986 ("Code") or of a state's income tax act. Notwithstanding the foregoing, amounts payable with respect to a Participant hereunder may be paid as follows: (a) Payments with respect to a disabled or incapacitated person may be paid to such person's legal representative for such person's benefit, to a custodian under the Uniform Gifts or Transfers to Minors Act of any state, or to a relative or friend of such person for such person's benefit; and (b) Transfers by the Participant to a grantor trust established pursuant to Sections 674, 675, 676 and 677 of the Code for the benefit of the participant or a person or persons who are members of his or her immediate family (or for the benefit of their descendants) shall be recognized and given effect, provided that any such transfer has not been disclaimed prior to the payment, and the trustee of such trust certifies to the Committee that such transfer occurred without any payment of consideration for such transfer. 10.3 Beneficiary Designation. Each Participant under the Plan may, from time to time, name any beneficiary or beneficiaries (who may be named contingently or successively) to whom any benefit under the Plan is to be paid in the event of his or her death. Each designation will revoke all prior designations by the same Participant, shall be in a form as provided in Appendix A hereto, and will be effective only when filed by the Participant in writing with the Corporate Secretary of the Corporation, acting on behalf of the Board, during his or her lifetime. In the absence of any such designation, benefits remaining unpaid at the Participant's death shall be paid to the Participant's estate. 10.4 No Right of Nomination. Nothing in this Plan shall be deemed to create any obligation on the part of the Board to nominate any director for reelection by the Corporation's shareholders. 10.5 Shares Available. The Shares delivered under the Plan may be either treasury shares, originally issued Shares, or Shares that have been reacquired by the Corporation, including shares purchased in the open market. 10.6 Stock Splits/Stock Dividends. In the event of any change in the outstanding Shares of the Company by reason of a stock dividend, recapitalization, merger, consolidation, split-up, combination, exchange of Shares, or the like, the aggregate number of and class of Shares and Deferred Stock Units awarded hereunder may be appropriately adjusted by the Committee, whose determination shall be conclusive. 10.7 Successors. All obligations of the Corporation under the Plan with respect to awards granted hereunder shall be binding on any successor to the Corporation, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation, or otherwise, of all or substantially all of the business and/or assets of the Corporation. 10.8 Requirements of Law. The granting of awards under the Plan shall be subject to all applicable laws, rules, and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required. 10.9 Governing Law. The Plan, and all agreements hereunder, shall be construed in accordance with and governed by the laws of the State of Delaware. Chicago, Illinois July 1, 1997 APPENDIX A USG CORPORATION STOCK COMPENSATION PROGRAM FOR NON-EMPLOYEE DIRECTORS - -------------------------------------------------------------------------------- Name (Please Print) In the event of my death, the following person is to receive any benefits payable under the USG Corporation Stock Compensation Program for Non-Employee Directors ("Plan"). NOTE: The primary beneficiary(ies) will receive your Plan benefits. If more than one primary beneficiary is indicated, the benefits will be split among them equally. If you desire to provide for distribution of benefits among primary beneficiaries on other than an equal basis, please attach a sheet explaining the desired distribution in full detail. If the primary beneficiary(ies) is no longer living, the secondary beneficiary(ies) will receive the benefits, in a similar manner as described above for the primary beneficiary(ies). o Primary Beneficiary o Secondary Beneficiary - -------------------------------------------------------------------------------- Last Name First M.I. Relationship - -------------------------------------------------------------------------------- Street Address City, State, Zip Code - -------------------------------------------------------------------------------- Beneficiary Social Security or Tax ID Number o Primary Beneficiary o Secondary Beneficiary - -------------------------------------------------------------------------------- Last Name First M.I. Relationship - -------------------------------------------------------------------------------- Street Address City, State, Zip Code - -------------------------------------------------------------------------------- Beneficiary Social Security or Tax ID Number If a trust or other arrangement is listed above, include name, address, and date of arrangement below: - -------------------------------------------------------------------------------- Name Address Date o For additional beneficiary, check here and attach an additional sheet of paper. This supersedes any beneficiary designation previously made by me under this Plan. I reserve the right to change the beneficiary at any time. - --------------------------- Date: --------------------------- Sign Your Full Name Here - --------------------------- Your Social Security Number Date received by USG Corporation By: ---------------------- ANNUAL DEFERRAL ELECTION USG CORPORATION STOCK COMPENSATION PROGRAM FOR NON-EMPLOYEE DIRECTORS The undersigned Participant in the USG Corporation Stock Compensation Program for Non-Employee Directors hereby makes the following election: (1) Annual equity grant. The amount of percent (to 100% in10% increments) of my annual equity grant payable to me after January 1, 1998 and through December 31, 1998 shall be deferred. Such amount shall be credited to a Deferred Stock Unit Account established and maintained for my benefit under the terms of the Plan. (2) Cash annual retainer payments. The amount of percent (to a maximum of 100% in 10% increments) of my director's annual retainer payable to me in cash after January 1, 1998 and through December 31, 1998 shall be deferred. Such amount shall be credited to a Deferred Stock Unit Account established and maintained for my benefit under the terms of the Plan. (3) Cash meeting fee payments. The amount of percent (to 100% in 10% increments) of my director's cash meeting fees payable to me after January 1, 1998 and through December 31, 1998 shall be deferred. Such amount shall be credited to a Deferred Stock Unit Account established and maintained for my benefit under the terms of the Plan. I acknowledge that this irrevocable election and my rights hereunder are subject to the terms and conditions of the USG Corporation Stock Compensation Program for Non-Employee Directors. Date: --------------------------- Signature of Participant: ------------------------------- Name of Participant: ------------------------------------ - -------------------------------------------------------------------------------- First Middle Last Social Security Number RETURN THIS ELECTION ALONG WITH THE USG CORPORATION STOCK COMPENSATION PROGRAM FOR NON-EMPLOYEE DIRECTORS BENEFICIARY FORM TO: DEAN H. GOOSSEN, CORPORATE SECRETARY. EXECUTIVE SUMMARY OF KEY ELEMENTS: STOCK COMPENSATION PROGRAM FOR NON-EMPLOYEE DIRECTORS I. Annual Grant of Stock An annual grant, presently set at 500 shares, will be issued each July 1st to non-employee directors in service at the time of the grant. Those directors who have served less than 12 full months, counted from the prior July 1st, will receive a pro-rated grant as provided by the Plan. Directors will have the option of deferring all or a portion of the annual grant by conversion of the deferred portion into "deferred stock units" on a one Share/one unit basis. Deferred share units will fluctuate in value and become taxable as described in III below and be paid out in cash as described in IV below. Portions of the annual grant not converted into deferred stock units become taxable compensation at the time the grant is issued. II. Annual Retainer The current annual retainer is $26,000. The new Plan continues the requirement that one-quarter of this retainer be paid in the form of USG Shares, payable as the third quarter installment. These shares are delivered as soon as is practical following the September 25th valuation date. No deferral of these shares is permitted and they thus become a taxable compensation item at the time of their delivery. III. Annual Deferral Opportunities The remainder of the annual retainer as well as all meeting and committee fees are paid in cash but may be deferred, in part or in whole (in 10% increments) upon your election. If a deferral election is made, the portion of the cash compensation so deferred will be converted to "deferred stock units" whose initial value will be equivalent to the cash compensation deferred. These deferred stock units will fluctuate in value exactly as the value of a USG Share fluctuates. In addition, your deferred stock unit account will be credited with dividend equivalents. Any compensation deferred under this plan will not be taxable until actually paid out (subsequent to retirement). IV. Timing of Deferred Stock Unit Account Pay-out Your Deferred Stock Unit account balance will be paid out in cash in a lump sum within thirty days of your retirement unless you elect in writing to receive your payment in two installments. If the installment method is elected, the first installment equal to fifty percent of such amount will be paid within thirty days of the date of retirement and the second installment one year later. During the intervening year your remaining account balance will be credited with earnings at the prime rate of The First National Bank of Chicago. You will have a taxable event upon each payout. EX-13 7 EX-13 A/R OR Q/R TO SECURITY HOLDERS EXHIBIT 13 USG CORPORATION FINANCIAL REVIEW
Page MANAGEMENT'S DISCUSSION AND ANALYSIS 65 CONSOLIDATED FINANCIAL STATEMENTS Statement of Earnings 70 Balance Sheet 71 Statement of Cash Flows 72 NOTES TO FINANCIAL STATEMENTS 1. Significant Accounting Policies 73 2. Earnings Per Share 74 3. Financing Arrangements 74 4. Debt 75 5. Financial Instruments and Risk Management 76 6. Purchase of Subsidiary Minority Interest 77 7. Writedown of Assets 77 8. Income Taxes 77 9. Inventories 78 10. Property, Plant and Equipment 78 11. Leases 78 12. Employee Retirement Plans 78 13. Stock-Based Compensation 79 14. Stockholders' Equity 80 15. Industry and Geographic Segments 81 16. Litigation 83 REPORT OF MANAGEMENT 87 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS 87 SELECTED QUARTERLY FINANCIAL DATA 88 FIVE-YEAR SUMMARY 89
USG CORPORATION MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Overview 1997 was an excellent year for USG Corporation. Strong operating results were realized by all of USG's businesses. Increased demand led to record levels of shipments for all major product lines. In pursuit of its goal of improving financial flexibility, USG achieved its debt reduction objective and was awarded an investment grade BBB rating by Standard & Poor's. Significant progress also was made toward the Corporation's strategic objectives of investing for growth and maintaining operational excellence. USG continues to report EBITDA (earnings before interest, taxes, depreciation, depletion, amortization and certain other income and expense items) as a result of its financial restructuring in 1993 and the restructuring's effect (i.e., fresh start accounting charges) on financial reporting through September 30, 1997. While EBITDA is primarily used to facilitate comparisons of current and historical results, it can also be helpful in understanding cash flow generated from operations that is available for taxes, debt service and capital expenditures. However, EBITDA should not be considered by investors as an alternative to net earnings as an indicator of the Corporation's operating performance or to cash flows as a measure of its overall liquidity. Results of Operations Consolidated Results. A bar chart entitled "Net Sales (millions of dollars)" on page 19 of the Annual Report to Stockholders shows that for the years 1995, 1996 and 1997 (shown on the x-axis) the Corporation had net sales (shown on the y-axis) of $2,444 million, $2,590 million and $2,874 million, respectively. A bar chart entitled "EBITDA (millions of dollars)" on page 19 of the Annual Report to Stockholders shows that for the years 1995, 1996 and 1997 (shown on the x-axis) the Corporation had EBITDA (shown on the y-axis) of $417 million, $437 million and $572 million, respectively. Net sales of $2,874 million in 1997 represented the sixth consecutive year of improved sales and an increase of $284 million, or 11%, over 1996. EBITDA increased for the fifth consecutive year, amounting to $572 million, up $135 million, or 31%, from 1996. The strong results in 1997 were attributable to (i) records for average selling price and shipments of SHEETROCK brand gypsum wallboard (ii) record sales of ceiling tile and DONN ceiling grid and (iii) record shipments of SHEETROCK joint compound and DUROCK cement board. In 1996, net sales were up 6%, while EBITDA increased 5% versus 1995. Gross profit as a percentage of net sales was 27.4% in 1997, compared with 24.9% in 1996, and 24.7% in 1995. Gross profit in 1996 was lowered by a $7 million provision to cost of products sold associated with actions implemented to improve the operating efficiencies of USG's European businesses. In 1997, USG began modifying its computer-based systems that are affected by the year 2000 date change. Anticipated spending for this modification is not expected to have a material impact on the Corporation's ongoing results of operations. Selling and administrative expenses of $281 million in 1997 increased $13 million, or 5%, over 1996. Expenses of $268 million in 1996 were up $24 million, or 10%, compared with 1995. The increase for each year primarily reflects higher levels of expenses related to incentive compensation and benefits as well as costs to consolidate and upgrade customer service functions for the gypsum and ceilings businesses. As a percent of net sales, selling and administrative expenses were 9.8% in 1997, 10.3% in 1996 and 10.0% in 1995. The noncash, no-tax-impact amortization of excess reorganization value reduced operating profit by $127 million in 1997 and by $169 million in each of 1996 and 1995. Excess reorganization value was established in connection with USG's 1993 financial restructuring that was accounted for using the principles of fresh start accounting. Excess reorganization value was scheduled to be amortized over a five-year period through April 1998. However, as of September 30, 1997, the remaining balance of $83 million was offset by the elimination of a valuation allowance. See "Note 8. Income Taxes" for additional information. Interest expense continued to decline in 1997 as a result of debt reduction. Interest expense of $60 million in 1997 was down 20% from 1996. Interest expense of $75 million in 1996 declined 24% from the 1995 level of $99 million. In 1995, the Corporation recorded a $30 million pretax ($24 million after-tax) charge in connection with the disposal of its insulation manufacturing business. This charge is reflected in other expense, net in the Consolidated Statement of Earnings. See "Note 7. Writedown of Assets" for additional information. The Corporation's income tax expense is computed based on pretax earnings excluding the noncash amortization of excess reorganization value, which is not deductible for federal income tax purposes. In 1997, income tax expense amounted to $172 million, compared with $117 million in 1996 and $97 million in 1995. The Corporation's effective tax rates for 1997, 1996 and 1995 were 53.9%, 88.9% and 149.0%, respectively. Excluding the amortization of excess reorganization value and, in 1995, a $15 million write-off of excess reorganization value associated with the writedown of the insulation business, the Corporation's 1997, 1996 and 1995 effective tax rates were 38.6%, 38.9% and 39.0%, respectively. See "Note 8. Income Taxes" for additional information. USG's reported net earnings in 1997 were $148 million, and diluted earnings per share were $3.03. These earnings were net of the noncash amortization of excess reorganization value of $127 million, or $2.60 per diluted share. In 1996, reported net earnings amounted to $15 million, and diluted earnings per share were $0.31. These earnings were net of (i) the noncash amortization of excess reorganization value of $169 million and (ii) the noncash amortization of reorganization debt discount of $1 million included in interest expense. Together, these items reduced 1996 net earnings by $170 million, or $3.58 per diluted share. In 1995, USG reported a net loss of $32 million and a loss per share of $0.71. This loss included (i) the noncash amortization of excess reorganization value of $169 million (ii) the noncash amortization of reorganization debt discount of $4 million included in interest expense and (iii) the $24 million after-tax writedown of the insulation business. Together, these items reduced 1995 net earnings by $197 million, or $4.37 per share. Market Conditions and Outlook. Based on preliminary data issued by the U.S. Bureau of the Census, U.S. housing starts were an estimated 1.474 million units in 1997. Housing starts totaled 1.477 million units in 1996 and 1.354 million units in 1995. Despite the virtually unchanged level of housing starts in 1997 as compared with 1996, the U.S. wallboard market continued to grow in 1997. Record U.S. industry shipments of wallboard were up 3% versus 1996, due in part to very strong demand from remodeling and nonresidential markets. Repair and remodel activity continued its upward trend in 1997. As for new nonresidential construction, the finishing of nonresidential interiors follows contract awards by as much as a year. As a result, demand from this market improved in 1997 due to a 1% increase in U.S. nonresidential construction in 1996 versus 1995 as measured in floor space for which contracts were awarded. Barring any major change in the U.S. economy, new residential construction should continue at a relatively high level in 1998. Demand for USG products from both residential and nonresidential repair and remodeling is expected to continue its upward trend in 1998. Nonresidential construction rose 10% in 1997 as compared with 1996. This increase should be beneficial to USG in 1998 due to the lag in the finishing of nonresidential interiors of roughly one year. Construction activity in Canada and Mexico is expected to maintain the recovery begun in 1997. USG's exposure to markets outside North America is primarily concentrated in Europe but also includes sales to Asia and Latin America. We anticipate that demand in Eastern Europe and Latin America will continue to grow, while conditions in Western Europe will remain stable. The prospects for Asian construction markets are not good, but USG's presence there is relatively minor. USG CORPORATION Core Business Results (millions) Net Sales EBITDA - ---------- ------------------------------- ------------------------------ 1997 1996 1995 1997 1996 1995 ---- ---- ---- ---- ---- ----
North American Gypsum: U.S. Gypsum Company $ 1,565 $ 1,390 $ 1,309 $ 458 $ 347 $ 327 L&W Supply Corporation 981 841 753 36 29 26 CGC Inc. (gypsum) 124 114 102 20 16 11 Other subsidiaries 95 83 75 28 25 22 Eliminations (427) (361) (315) (3) - - ----- ----- ----- --- --- --- Total 2,338 2,067 1,924 539 417 386 ----- ----- ----- --- --- --- Worldwide Ceilings: USG Interiors, Inc. 425 398 385 65 53 58 USG International 229 228 235 13 2 5 CGC Inc. (ceilings) 34 30 28 3 3 4 Eliminations (54) (44) (39) - - - --- --- --- -- -- -- Total 634 612 609 81 58 67 --- --- --- -- -- -- Corporate - - - (48) (38) (36) Eliminations (98) (89) (89) - - - --- --- --- --- --- --- Total USG Corporation 2,874 2,590 2,444 572 437 417 ===== ===== ===== === === ===
North American Gypsum. A bar chart entitled "Net Sales (millions of dollars)" on page 21 of the Annual Report to Stockholders shows that for the years 1995, 1996 and 1997 (shown on the x-axis) North American Gypsum had net sales (shown on the y-axis) of $1,924 million, $2,067 million and $2,338 million, respectively. A bar chart entitled "EBITDA (millions of dollars)" on page 21 of the Annual Report to Stockholders shows that for the years 1995, 1996 and 1997 (shown on the x-axis) North American Gypsum had EBITDA (shown on the y-axis) of $386 million, $417 million and $539 million, respectively. Net sales of $2,338 million in 1997 were up $271 million, or 13%, and EBITDA of $539 million rose $122 million, or 29%, compared with 1996. For 1996, net sales of $2,067 million increased $143 million, or 7%, while EBITDA of $417 million increased $31 million, or 8%, over 1995. Strong results in 1997 for United States Gypsum Company primarily reflect records for average price and shipments of SHEETROCK gypsum wallboard. The average selling price of SHEETROCK wallboard in 1997 was $122.65 per thousand square feet, up 11% compared with the 1996 average price of $110.56. The average price in 1995 was $110.44. Shipments of SHEETROCK wallboard totaled 8.4 billion square feet, compared with 8.0 billion square feet in 1996 and 7.6 billion square feet in 1995. In addition, shipments of SHEETROCK joint compound and DUROCK cement board also set records in 1997. U.S. Gypsum's manufacturing costs for SHEETROCK wallboard were down slightly in 1997 due to improved operating efficiencies resulting from cost-reduction projects implemented in 1996 and 1997. Comparing 1996 with 1995, lower furnish prices for wastepaper, the primary raw material of wallboard paper, resulted in a 4% decrease in manufacturing costs. U.S. Gypsum's plants operated at 99% of capacity in 1997, compared with the estimated average rate of 96% for the U.S. industry. In 1996, U.S. Gypsum's plants operated at 94% of capacity. L&W Supply Corporation, USG's building products distribution business, reported record net sales in 1997 due to record shipments of wallboard and record sales of complementary building materials. EBITDA for L&W Supply improved significantly in each of the past three years as a result of gross profit improvements for all of its product lines. As of December 31, 1997, L&W Supply operated a total of 176 locations in the United States. CGC Inc.'s gypsum business experienced improved net sales and EBITDA in both 1997 and 1996 primarily due to stronger domestic shipments in eastern Canada and exports to the United States. Worldwide Ceilings. A bar chart entitled "Net Sales (millions of dollars)" on page 22 of the Annual Report to Stockholders shows that for the years 1995, 1996 and 1997 (shown on the x-axis) Worldwide Ceilings had net sales (shown on the y-axis) of $609 million, $612 million and $634 million, respectively. A bar chart entitled "EBITDA (millions of dollars)" on page 22 of the Annual Report to Stockholders shows that for the years 1995, 1996 and 1997 (shown on the x-axis) Worldwide Ceilings had EBITDA (shown on the y-axis) of $67 million, $58 million and $81 million, respectively. Net sales of $634 million in 1997 were up $22 million, or 4%, and EBITDA of $81 million increased $23 million, or 40%, compared with 1996. Adjusting for a $7 million charge taken in 1996 to improve operating efficiencies for USG's European businesses, EBITDA in 1997 increased 25%. The increase in net sales reflects record sales of ceiling tile and DONN ceiling grid. These records were attributable to strong demand in the U.S. nonresidential market (both new construction and renovation) and growing international demand. EBITDA in 1997 was favorably affected by higher volume and prices, reduced manufacturing costs and improved international operating efficiencies. USG's international sales, which are primarily concentrated in Europe, have not been materially affected by recent economic events in Asia. Net sales in 1996 for Worldwide Ceilings rose slightly to $612 million, while EBITDA of $58 million fell $9 million, or 13%, compared with 1995. The slightly higher sales in 1996 reflect record shipments of ceiling tile at higher average selling prices and increased shipments of ceiling grid. These improvements were partially offset by the absence of full-year results for the U.S. insulation manufacturing business that was sold in April 1996. The lower level of EBITDA was primarily attributable to (i) a $7 million provision associated with actions implemented to improve the operating efficiencies of USG's European businesses (ii) expenses associated with enhancing customer service systems and (iii) start-up costs related to a new ceiling tile line placed in service in 1996 at the Greenville, Miss., plant. Liquidity and Capital Resources Following its 1993 financial restructuring, USG was engaged in a financial strategy of reducing debt and growing its gypsum, ceilings and distribution businesses through a balanced application of free cash flow between debt reduction and capital expenditures. Two objectives of this strategy involved reaching a target debt level of $650 million within five years and achieving an investment grade rating on its capital structure. As of December 31, 1997, total debt amounted to $620 million, reflecting a net reduction since May 1993 of $936 million. In the fourth quarter of 1997, Standard & Poor's raised its rating of USG's debt to investment grade BBB. As of December 31, 1997, Moody's rating of USG debt was Ba1, one level below investment grade. Going forward, USG's financial strategy will be to increase the proportion of free cash flow it spends on capital projects, while reviewing possible applications of its cash for other corporate purposes. A bar chart entitled "Debt Principal (millions of dollars)" on page 23 of the Annual Report to Stockholders shows that as of December 31, 1995, 1996 and 1997 (shown on the x- axis) the Corporation's principal amount of total debt (shown on the y-axis) was $926 million, $772 million and $620 million, respectively. A bar chart entitled "Capital Spending (millions of dollars)" on page 23 of the Annual Report to Stockholders shows that for the years 1995, 1996 and 1997 (shown on the x-axis) the Corporation had capital spending (shown on the y-axis) of $147 million, $120 million and $172 million, respectively. Debt Reduction. In 1997, total debt was reduced $152 million, or 20%, from the December 31, 1996, total of $772 million. Debt repayments during 1997 primarily consisted of $85 million of revolving bank loans, $48 million of 8.75% senior debentures due 2017 and $41 million of 8% senior notes due 1997. These repayments were partially offset by increased borrowing on the Corporation's Canadian credit facility. Capital Expenditures. Capital expenditures amounted to $172 million in 1997, compared with $120 million in 1996. As of December 31, 1997, the Corporation's capital expenditure commitments for the replacement, modernization and expansion of operations amounted to $363 million, compared with $173 million as of December 31, 1996. In the North American Gypsum business, ground was broken in June 1997 for a new $110 million plant in Bridgeport, Ala. This facility will manufacture SHEETROCK brand wallboard using 100% synthetic gypsum and is expected to begin operation in mid-1999. Construction is also under way to build a $90 million facility to manufacture gypsum wood fiber panels at the Gypsum, Ohio, plant. The new production line is expected to begin operating by the end of 1999. Complementing this investment in the gypsum wood fiber business was the acquisition of a gypsum fiber panel plant in Port Hawkesbury, Nova Scotia, in late 1997. Gypsum wood fiber products manufactured at these plants will be marketed under the FIBEROCK brand name. In October 1997, USG announced that it will invest $90 million to rebuild and modernize its wallboard manufacturing line at the East Chicago, Ind., plant. This new line is also expected to begin production by the end of 1999. Additional capital investments in 1997 included cost-reduction projects such as the installation of stock cleaning equipment to utilize lower grades of recycled paper and the installation of processes to accommodate the use of synthetic gypsum at manufacturing facilities where it is more economical than natural sources of gypsum rock. In the Worldwide Ceilings business, construction began in early 1997 on a $35 million project that includes the replacement of two old production lines with one modern, high-speed line at the ceiling tile plant in Cloquet, Minn. This project will be completed by mid-1998. The Corporation periodically evaluates possible acquisitions or combinations involving other businesses or companies in industries and markets related to its current operations. The Corporation believes that its available liquidity is generally adequate to support most opportunities and that it has access to additional financial resources to take advantage of other opportunities. Working Capital. Working capital (current assets less current liabilities) as of December 31, 1997, amounted to $264 million, and the ratio of current assets to current liabilities was 1.7 to 1. As of December 31, 1996, working capital was $159 million, and the ratio of current assets to current liabilities was 1.4 to 1. Cash and cash equivalents as of December 31, 1997, amounted to $72 million, compared with $44 million as of December 31, 1996. This increase reflects 1997 net cash flows from operating activities of $332 million, partially offset by net cash flows to investing and financing activities of $170 million and $134 million, respectively. Receivables (net of reserves) were $297 million as of December 31, 1997, up from $274 million as of year-end 1996, while inventories increased to $208 million from $185 million, and accounts payable rose to $146 million from $141 million. These increases reflect the greater level of business in 1997. Available Liquidity. The Corporation has additional liquidity available through several financing arrangements. Revolving credit facilities in the United States, Canada and Europe allow the Corporation to borrow up to an aggregate of $611 million (including a $125 million letter of credit subfacility in the United States), under which, as of December 31, 1997, outstanding revolving loans totaled $97 million and letters of credit issued and outstanding amounted to $84 million, leaving the Corporation with $430 million of available credit. The Corporation had additional borrowing capacity of $50 million as of December 31, 1997, under a revolving accounts receivable facility (see "Note 3. Financing Arrangements"). A shelf registration statement filed with the Securities and Exchange Commission allows the Corporation to offer from time to time debt securities, shares of preferred and common stock or warrants to purchase shares of common stock, all having an aggregate initial offering price not to exceed $300 million. As of the filing date of the Corporation's 1997 Annual Report on Form 10-K, no securities had been issued pursuant to this registration. Legal Contingencies. One of the Corporation's subsidiaries, U.S. Gypsum, is a defendant in asbestos lawsuits alleging both property damage and personal injury. See "Note 16. Litigation" for information concerning the asbestos 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. The Corporation believes that neither these matters nor any other known governmental proceeding regarding environmental matters will have a material adverse effect upon its earnings or consolidated financial position. See "Note 16. Litigation" for additional information on environmental litigation. Forward-Looking Statements. This Management Discussion and Analysis, "Note 16. Litigation" and other sections of this report contain forward-looking statements related to management's expectations about future conditions. Actual business or other conditions may differ significantly from management's expectations and accordingly affect the Corporation's sales and profitability or other results. Actual results may differ due to factors over which the Corporation has no control, including economic activity such as new housing construction, interest rates and consumer confidence; competitive activity such as price and product competition; increases in raw material and energy costs; and the outcome of contested litigation. The Corporation assumes no obligation to update any forward-looking information contained in this report. USG CORPORATION CONSOLIDATED STATEMENT OF EARNINGS (millions, except per share data) Years ended December 31, - --------------------------------- ------------------------ 1997 1996 1995 ---- ---- ----
Net sales....................................................... $ 2,874 $ 2,590 $ 2,444 Cost of products sold........................................... 2,087 1,945 1,841 ----- ----- ----- Gross profit.................................................... 787 645 603 % of net sales............................................... 27.4 24.9 24.7 Selling and administrative expenses............................. 281 268 244 Amortization of excess reorganization value..................... 127 169 169 --- --- --- Operating profit................................................ 379 208 190 Interest expense................................................ 60 75 99 Interest income................................................. (3) (2) (6) Other expense, net.............................................. 2 3 32 --- --- --- Earnings before income taxes.................................... 320 132 65 Income taxes.................................................... 172 117 97 --- --- --- Net earnings (loss)............................................. 148 15 (32) === === === Net Earnings (Loss) Per Common Share: Basic........................................................ 3.19 0.32 (0.71) ==== ==== ===== Diluted...................................................... 3.03 0.31 (0.71) ==== ==== =====
The notes to financial statements are an integral part of this statement. USG CORPORATION CONSOLIDATED BALANCE SHEET (millions, except share data) As of December 31, - ----------------------------- ------------------ 1997 1996 ---- ---- Assets Current assets: Cash and cash equivalents.................................................... $ 72 $ 44 Receivables (net of reserves of $17 and $17)................................. 297 274 Inventories.................................................................. 208 185 Current and deferred income taxes............................................ 63 46 --- --- Total current assets.................................................... 640 549 --- --- Property, plant and equipment, net........................................... 982 887 Excess reorganization value (net of accumulated amortization as of December 31, 1996 - $635)............................................ - 210 Other assets................................................................. 304 218 --- --- Total assets............................................................ 1,926 1,864 ===== ===== Liabilities and Stockholders' Equity Current liabilities: Accounts payable............................................................. 146 141 Accrued expenses............................................................. 220 200 Debt maturing within one year................................................ 10 49 --- --- Total current liabilities............................................... 376 390 --- --- Long-term debt............................................................... 610 706 Deferred income taxes........................................................ 163 243 Other liabilities............................................................ 630 548 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; outstanding 46,780,845 and 45,724,561 shares (after deducting 48,919 and 31,488 shares held in treasury)....... 5 5 Capital received in excess of par value...................................... 258 231 Deferred currency translation................................................ (25) (10) Reinvested earnings (deficit)................................................ (91) (249) --- ---- Total stockholders' equity (deficit).................................... 147 (23) --- --- Total liabilities and stockholders' equity.............................. 1,926 1,864 ===== =====
The notes to financial statements are an integral part of this statement. USG CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS (millions) Years ended December 31, - ---------- ------------------------ 1997 1996 1995 ---- ---- ----
Operating Activities: Net earnings (loss)............................................. $ 148 $ 15 $ (32) Adjustments to reconcile net earnings (loss) to net cash: Amortization of excess reorganization value.................. 127 169 169 Depreciation, depletion and amortization..................... 70 65 67 Current and deferred income taxes............................ (2) (8) (8) Net (gain) loss on asset dispositions........................ - (2) 27 (Increase) decrease in working capital: Receivables.................................................. (23) (28) 24 Inventories.................................................. (23) (10) (2) Payables..................................................... 5 10 8 Accrued expenses............................................. 20 14 (27) Increase in other assets........................................ (10) (2) (10) Increase in other liabilities................................... 19 64 30 Other, net...................................................... 1 (4) (12) --- --- --- Net cash flows from operating activities..................... 332 283 234 --- --- --- Investing Activities: Capital expenditures............................................ (172) (120) (147) Net proceeds from asset dispositions............................ 2 10 7 Purchase of subsidiary minority interest........................ - (49) - --- --- --- Net cash flows to investing activities ...................... (170) (159) (140) ---- ---- ---- Financing Activities: Issuance of debt................................................ 116 77 576 Repayment of debt............................................... (265) (231) (804) Short-term borrowings (repayments), net......................... (3) - 5 Issuances of common stock....................................... 18 4 2 --- --- --- Net cash flows to financing activities....................... (134) (150) (221) ---- ---- ---- Net Increase (Decrease) in Cash and Cash Equivalents............ 28 (26) (127) Cash and cash equivalents at beginning of period................ 44 70 197 --- --- --- Cash and cash equivalents at end of period...................... 72 44 70 === === === Supplemental Cash Flow Disclosures: Interest paid................................................... 64 74 88 Income taxes paid............................................... 168 116 108
The notes to financial statements are an integral part of this statement. USG CORPORATION NOTES TO 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 two core businesses: North American Gypsum, which manufactures and markets gypsum wallboard and related products in the United States, Canada and Mexico, and Worldwide Ceilings, which manufactures and markets ceiling tile, ceiling grid and other interior systems products worldwide. Distribution is carried out through L&W Supply Corporation, a wholly owned subsidiary of the Corporation; building materials dealers; home improvement centers and other retailers; specialty wallboard distributors; and contractors. Consolidation. The consolidated financial statements include the accounts of the Corporation and its subsidiaries. All significant intercompany balances and transactions are eliminated in consolidation. Use of Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses. Actual results could differ from these estimates. Reclassifications. Certain amounts in the prior years' financial statements and notes thereto have been reclassified to conform with the 1997 presentation. Revenue Recognition. The Corporation recognizes revenue upon the shipment of products. Cash and Cash Equivalents. Cash and cash equivalents primarily consist of time deposits with original maturities of three months or less. Inventory Valuation. Most of the Corporation's domestic inventories are valued under the last-in, first-out ("LIFO") method. The remaining inventories are stated at the lower of cost or market 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. Depletion is computed on a basis calculated to spread the cost of gypsum and other applicable resources over the estimated quantities of material recoverable. Excess Reorganization Value. In the third quarter of 1997, the remaining $83 million balance of excess reorganization value was eliminated. This balance, which would have been amortized through April 1998, was offset by the elimination of a valuation allowance in accordance with AICPA Statement of Position 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"). See "Note 8. Income Taxes" for additional information. Excess reorganization value totaling $851 million was recorded in 1993 in connection with a comprehensive restructuring of the Corporation's debt. The Corporation accounted for the restructuring using the principles of fresh start accounting as required by SOP 90- 7. Pursuant to these principles, individual assets and liabilities were adjusted to fair market value. Excess reorganization value was the portion of the reorganization value not attributable to specific assets. Goodwill. Goodwill is amortized on a straight-line basis over a period of 40 years. On a periodic basis, the Corporation estimates the future undiscounted cash flows of the businesses to which goodwill relates in order to ensure that the carrying value of goodwill has not been impaired. Goodwill is included in other assets on the Consolidated Balance Sheet. Financial Instruments. The Corporation uses derivative instruments to manage well-defined interest rate, energy cost and foreign currency exposures. The Corporation does not use derivative instruments for trading purposes. The criteria used to determine if hedge accounting treatment is appropriate are (i) the designation of the hedge to an underlying exposure (ii) whether or not overall uncertainty is being reduced and (iii) if there is a correlation between the value of the derivative instrument and the underlying obligation. Interest Rate Derivative Instruments: The Corporation utilizes interest rate swap agreements to manage the impact of interest rate changes on its underlying floating-rate debt. These agreements are designated as hedges and qualify for hedge accounting. Amounts payable or receivable under these swap agreements are accrued as an increase or decrease to interest expense on a current basis. To the extent the underlying floating-rate debt is reduced, the Corporation terminates swap agreements accordingly so as not to be in an overhedged position. In such cases, the Corporation recognizes gains and/or losses in the period the agreement is terminated. Energy Derivative Instruments: The Corporation uses swap agreements to hedge anticipated purchases of fuel to be utilized in the manufacturing processes for gypsum wallboard and ceiling tile. Under these swap agreements, the Corporation receives or makes payments based on the differential between a specified price and the actual closing price for the current month's energy price contract. These contracts are designated as hedges and qualify for hedge accounting. Amounts payable or receivable under these swap agreements are accrued as an increase or decrease to cost of products sold, along with the actual spot energy cost of the corresponding underlying hedge transaction, the combination of which amounts to the predetermined specified contract price. Foreign Exchange Derivative Instruments: The Corporation has operations in a number of countries and has intercompany transactions among them and, as a result, is exposed to changes in foreign currency exchange rates. The Corporation manages these exposures on a consolidated basis, which allows netting of certain exposures to take advantage of any natural offsets. To the extent the net exposures are hedged, forward contracts are used. Gains and/or losses on these foreign currency hedges are included in net earnings in the period in which the exchange rates change. Foreign Currency Translation. Net currency translation gains or losses on foreign subsidiaries are included in deferred currency translation, a component of stockholders' equity. Research and Development. Research and development expenditures are charged to earnings as incurred and amounted to $19 million, $19 million and $18 million in the years ended December 31, 1997, 1996 and 1995, respectively. 2. Earnings Per Share In accordance with Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share," basic earnings per share were computed by dividing net earnings by the weighted average number of shares of common stock outstanding during the year. The reconciliation of basic earnings per share to diluted earnings per share is shown in the following table. Computation of the loss per share for 1995, on a diluted basis, is omitted because options and warrants have an antidilutive effect. (millions, except Net Shares Per Share share data) Earnings (000) Amount ---------------------------------------------------------
1997 Basic earnings $ 148 46,269 $ 3.19 Effect of Dilutive Securities: Options 930 Warrants 1,528 - ---------------------------------------------------------- Diluted earnings 148 48,727 3.03 ========================================================== 1996 Basic earnings 15 45,542 0.32 Effect of Dilutive Securities: Options 853 Warrants 1,115 - ---------------------------------------------------------- Diluted earnings 15 47,510 0.31 ==========================================================
As a result of the adoption of SFAS No. 128, the Corporation's reported earnings per share ("EPS") for 1996 were restated as follows:
Primary EPS as reported $ 0.31 Effect of SFAS No. 128 0.01 - ----------------------------------------------------- Basic EPS as restated 0.32 ===================================================== Fully diluted EPS as reported 0.30 Effect of SFAS No. 128 0.01 - ----------------------------------------------------- Diluted EPS as restated 0.31 =====================================================
3. Financing Arrangements Accounts Receivable Facility. The Corporation has an accounts receivable facility (the "Receivables Facility") in which USG Funding Corporation, a special-purpose subsidiary of the Corporation formed under Delaware law, entered into agreements with United States Gypsum Company and USG Interiors, Inc. These agreements provide that USG Funding purchases trade receivables (excluding intercompany receivables owed by L&W Supply) of U.S. Gypsum and USG Interiors as generated, in a transaction designed to be a "true sale" under applicable law. USG Funding is a party to a Master Trust arrangement (the "Master Trust") under which the purchased receivables are then transferred to Chase Manhattan Bank as Trustee to be held for the benefit of certificate holders in such trust. A residual interest in the Master Trust is owned by USG Funding through subordinated certificates. Under a supplement to the Master Trust, certificates representing an ownership interest in the Master Trust of up to $130 million have been issued to Citicorp Securities, Inc. Debt issued under the Receivables Facility has a final maturity in 2004 but may be prepaid at any time. The interest rate on such debt is fixed at 8.2% through a long-term interest rate swap. Pursuant to the applicable reserve and eligibility requirements, the maximum amount of debt issuable under the Receivables Facility as of December 31, 1997 and 1996, (including $80 million outstanding as of each date) was $107 million and $105 million, respectively. Under the foregoing agreements and related documentation, USG Funding is a separate corporate entity with its own separate creditors that will be entitled to be satisfied out of USG Funding's assets prior to distribution of any value to its shareholder. As of December 31, 1997 and 1996, the outstanding balance of receivables sold to USG Funding and held under the Master Trust was $179 million and $157 million, respectively, and debt outstanding under the Receivables Facility was $80 million as of each date. Receivables and debt outstanding in connection with the Receivables Facility remain in receivables and long-term debt, respectively, on the Consolidated Balance Sheet. Shelf Registration. In 1996, the Securities and Exchange Commission declared effective a shelf registration statement that allows the Corporation to offer from time to time (i) debt securities (ii) shares of $1.00 par value preferred stock (iii) shares of $0.10 par value common stock and/or (iv) warrants to purchase shares of common stock, all having an aggregate initial offering price not to exceed $300 million. As of the filing date of the Corporation's 1997 Annual Report on Form 10-K, no securities had been issued pursuant to this registration. 4. Debt Total debt, including debt maturing within one year, as of December 31 consisted of the following: (millions) 1997 1996 - ------------------------------------------------------------
Revolving credit facility due 2002 $ 25 $ 110 Receivables Facility due 2003 and 2004 80 80 8% senior notes due 1997 - 41 9.25% senior notes due 2001 150 150 8.5% senior notes due 2005 150 150 8.75% sinking fund debentures due 2017 92 140 Canadian credit facility due 2002 72 - Canadian credit facility due 1997 - 50 Industrial revenue bonds 46 40 Other debt 5 11 Less unamortized discount - (17) - ------------------------------------------------------------- Total 620 755 =============================================================
The Corporation maintains a $500 million unsecured revolving credit facility, which includes a $125 million letter of credit subfacility, with a syndicate of banks under a credit agreement. The revolving credit facility expires in 2002 with no required amortization prior to maturity. As of December 31, 1997, outstanding revolving loans totaled $25 million, and letters of credit issued and outstanding amounted to $84 million, leaving the Corporation with $391 million of available credit under the revolving credit facility. The revolving loans bear interest at the London Interbank Offered Rate ("LIBOR") as determined from time to time plus an applicable spread based on the Corporation's net debt to EBITDA ratio (as defined in the credit agreement) for the preceding four quarters. As of December 31, 1997, the applicable spread was 0.4%. The average rate of interest on the revolving loans was 6.1% and 6.3% during the years ended December 31, 1997 and 1996, respectively. See "Note 5. Financial Instruments and Risk Management" for information on instruments used by the Corporation to manage the impact of interest rate changes on LIBOR-based bank debt. The credit agreement contains restrictions on the operation of the Corporation's business, including covenants pertaining to liens, sale and leaseback transactions, and mergers and acquisitions of businesses not related to the building industry. On June 2, 1997, the Corporation executed through CGC Inc. a $77 million (U.S.) ($110 million Canadian), parent-guaranteed, Canadian credit facility due 2002. This facility was later amended to increase the credit line by $14 million (U.S.) ($20 million Canadian) for one year. As of December 31, 1997, outstanding loans totaled $72 million (U.S.), leaving $19 million (U.S.) of available credit under this facility. The method of calculating interest and the covenants related to this facility are virtually the same as those for the U.S. facility described above. The average rate of interest on the Canadian loans was 4.6% during the period of June 2, 1997, through December 31, 1997. The average rate of interest on a different Canadian credit facility that was in effect during the period of January 1, 1997, through its termination on June 4, 1997, was 6.2%. The Corporation also maintains a parent-guaranteed, multicurrency ($20 million U.S. equivalent), European line of credit. As of December 31, 1997, there were no outstanding loans under this facility. The industrial revenue bonds had interest rates ranging from 3.7% to 8.8%, with maturities through 2032. All debt classified as "other debt" had average interest rates of 4.5% and 4.6% as of December 31, 1997 and 1996, respectively, with varying payments due through 2006. There were no short-term borrowings outstanding as of December 31, 1997. Short-term borrowings outstanding as of December 31, 1996, totaled $7 million, and the weighted average interest rate on these borrowings as of that date was 4.2%. The fair market value of total debt outstanding was $646 million and $788 million as of December 31, 1997 and 1996, respectively, based on indicative bond prices as of those dates. As of December 31, 1997, aggregate scheduled maturities of long-term debt were $10 million for each year 1998 through 2000, $160 million in 2001 and $107 million in 2002. 5. Financial Instruments and Risk Management The following table presents the carrying amounts and estimated fair value of the Corporation's derivative portfolio as of December 31: (millions) 1997 1996 - --------------------------------------------------
Interest Rate Contracts: Notional amount $ 105 $ 171 Carrying amount - - Fair value (10) (10) Energy Swaps: Notional amount 30 39 Carrying amount - - Fair value - 4 Foreign Exchange Contracts: Notional amount 22 15 Carrying amount - - Fair value - - - --------------------------------------------------
The amounts reported as fair value represent the market value as obtained from broker quotations. The negative fair values are estimates of the amounts the Corporation would need to pay as of December 31, 1997 and 1996, to cancel the contracts or transfer them to other parties. The Corporation is exposed to credit losses in the event of nonperformance by the counterparties on all its derivative contracts. All counterparties have investment grade credit standing; accordingly, the Corporation anticipates that these counterparties will be able to satisfy fully their obligations under the contracts. The Corporation does not obtain collateral or other security to support financial instruments subject to credit risk but monitors the credit standing of counterparties. Interest Rate Risk Management. As of December 31, 1997, the Corporation had a swap agreement in place to pay 7.2% in exchange for LIBOR on $25 million notional principal for the years 1998 through 2000. In addition, the Corporation has entered into $80 million of interest rate swap agreements to hedge its Receivables Facility on which the interest payments are based on commercial paper rates. Under these agreements, the Corporation pays a fixed rate of 8.2% in exchange for the monthly commercial paper rate due on the Receivables Facility. As of December 31, 1996, the Corporation owned an interest rate cap that capped the Corporation's expected LIBOR-based interest payments on $25 million notional principal at 5.6% for 1997. The Corporation also had swap agreements in place to pay 7.1% in exchange for LIBOR on $50 million notional principal for the years 1997 through 2000 and on $25 million notional principal for 2001 and 2002. Also, as of December 31, 1996, the Corporation had interest rate swap agreements to hedge $80 million of its Receivables Facility. Energy Risk Management. As of December 31, 1997 and 1996, the Corporation had over-the-counter swap agreements to exchange monthly payments on notional amounts of energy amounting to $30 million and $39 million, respectively, all extending one year or less. Foreign Exchange Risk Management. As of December 31, 1997, the Corporation had a number of foreign currency forward contracts in place (primarily Canadian dollars and Belgian francs) to hedge its exposure to exchange rate fluctuations on foreign currency transactions. These foreign exchange contracts mature on the anticipated cash requirement date of the hedged transaction, generally, within one year. As of December 31, 1996, the Corporation had a foreign exchange forward contract in place to hedge the refinancing of the purchase of the minority interest in CGC. This contract was for $15 million (U.S.) and matured in January 1997. The deferred gain on this foreign exchange hedge was not significant as of December 31, 1996. 6. Purchase of Subsidiary Minority Interest In the fourth quarter of 1996, the Corporation purchased the minority interest in its Canadian subsidiary, CGC. The common shares of publicly held stock totaled approximately 6 million and were acquired at a price of $11 (Canadian) per share. The total amount paid in U.S. dollars for the shares was $49 million. This payment was financed initially through an interim Canadian credit facility due 1997 that was replaced in 1997 by a long-term Canadian credit facility due 2002. As a result of the transaction, CGC recorded goodwill of $41 million (U.S.), which is included in other assets on the Consolidated Balance Sheet and is being amortized over 40 years. 7. Writedown of Assets In the fourth quarter of 1995, the Corporation recorded a $30 million pretax ($24 million after-tax) charge in connection with the sale of its insulation manufacturing business in the United States, which was completed in the second quarter of 1996, and the closure of its insulation plant in Canada. Included in this charge is a $15 million noncash, no-tax-impact write-off of excess reorganization value associated with these businesses. The remainder of the charge primarily reflects a writedown of the assets of these businesses to their net realizable value. The total charge is reflected in other expense, net in the Consolidated Statement of Earnings. 8. Income Taxes Earnings before income taxes consisted of the following: (millions) 1997 1996 1995 - ----------------------------------------------------
U.S. $ 301 $ 138 $ 73 Foreign 19 (6) (8) - ----------------------------------------------------- Total 320 132 65 =====================================================
Income taxes consisted of the following: (millions) 1997 1996 1995 - ----------------------------------------------------
Current: Federal $ 147 $ 90 $ 67 Foreign 10 5 10 State 26 17 15 - ---------------------------------------------------- 183 112 92 - ---------------------------------------------------- Deferred: Federal (12) 3 7 Foreign 2 1 (2) State (1) 1 - - ---------------------------------------------------- (11) 5 5 - ---------------------------------------------------- Total 172 117 97 ====================================================
Differences between actual provisions for income taxes and provisions for income taxes at the U.S. federal statutory rate (35%) were as follows: (millions) 1997 1996 1995 - --------------------------------------------------------
Taxes on income at federal statutory rate $ 112 $ 46 $ 23 Excess reorganization value amortization 44 59 64 Foreign earnings subject to different tax rates 2 2 2 State income tax, net of federal benefit 16 12 10 Percentage depletion (3) (3) (3) Other, net 1 1 1 - -------------------------------------------------------- Provision for income taxes 172 117 97 ======================================================== Effective income tax rate 53.9% 88.9% 149.0% ========================================================
Significant components of deferred tax (assets) liabilities as of December 31 were as follows: (millions) 1997 1996 - ----------------------------------------------------
Property, plant and equipment $ 155 $ 171 Debt discount - 7 - ---------------------------------------------------- Deferred tax liabilities 155 178 - ---------------------------------------------------- Pension and postretirement benefits (78) (97) Reserves not deductible until paid (126) (106) Other 2 1 - ---------------------------------------------------- Deferred tax assets before valuation allowance (202) (202) Valuation allowance - 90 - ---------------------------------------------------- Deferred tax assets (202) (112) - ----------------------------------------------------- Net deferred tax (assets) liabilities (47) 66 =====================================================
A valuation allowance of $90 million, which had been provided for deferred tax assets relating to pension and retiree medical benefits prior to the Corporation's financial restructuring in 1993, was eliminated in the third quarter of 1997. The elimination of this allowance reflects a change in management's judgment regarding the realizability of these assets in future years as a result of the Corporation's pretax earnings levels and improved capital structure over the past three years. In accordance with SOP 90-7, the benefit realized from the elimination of this allowance was used to reduce the balance of excess reorganization value to zero in the third quarter of 1997. The Corporation used a net operating loss carryforward of $100 million to offset U.S. taxable income in 1994 through 1996. Because of the uncertainty regarding the application of the Internal Revenue Code to this carryforward as a result of the Corporation's financial restructuring in 1993, the carryforward could be reduced or eliminated. The Corporation does not provide for U.S. income taxes on the portion of undistributed earnings of foreign subsidiaries that are intended to be permanently reinvested. The cumulative amount of such undistributed earnings totaled approximately $144 million as of December 31, 1997. 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. 9. Inventories As of December 31, 1997 and 1996, the LIFO values of domestic inventories were $153 million and $141 million, respectively, and would have been higher by $4 million and $7 million, respectively, if they were valued under the FIFO and average production cost methods. The LIFO value of U.S. domestic inventories exceeded that computed for U.S. federal income tax purposes by $30 million as of December 31, 1997 and 1996. Inventory classifications as of December 31 were as follows: (millions) 1997 1996 - --------------------------------------------------------
Finished goods and work in progress $ 132 $ 118 Raw materials 65 58 Supplies 11 9 - -------------------------------------------------------- Total 208 185 ========================================================
10. Property, Plant and Equipment Property, plant and equipment classifications as of December 31 were as follows: (millions) 1997 1996 - -------------------------------------------------------
Land and mineral deposits $ 61 $ 58 Buildings and realty improvements 262 248 Machinery and equipment 895 758 - ------------------------------------------------------- 1,218 1,064 Reserves for depreciation and depletion (236) (177) - ------------------------------------------------------- Total 982 887 =======================================================
11. Leases 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 $51 million, $46 million and $41 million in the years ended December 31, 1997, 1996 and 1995, respectively. Future minimum lease payments required under operating leases with initial or remaining noncancelable terms in excess of one year as of December 31, 1997, were $36 million in 1998, $31 million in 1999, $26 million in 2000, $20 million in 2001 and $18 million in 2002. The aggregate obligation subsequent to 2002 was $19 million. 12. Employee Retirement Plans Pension Plans. The Corporation and most of its subsidiaries have defined benefit retirement plans for all eligible employees. Benefits of the plans are generally based on years of service and employees' compensation during the final years of employment. The Corporation's contributions are made in accordance with independent actuarial reports. The Corporation made fundings of $25 million and $13 million in 1997 and 1996, respectively, to one of its plans. Pension plan assets consist primarily of publicly traded common stocks and debt securities. Net pension expense included the following components: (millions) 1997 1996 1995 - ---------------------------------------------------------------
Service cost-benefits earned during the period $ 12 $ 12 $ 9 Interest cost on projected benefit obligation 36 35 35 Actual return on plan assets (96) (62) (72) Net amortization 57 27 38 - -------------------------------------------------------------- Net pension expense 9 12 10 ==============================================================
The following table presents a reconciliation of the funded status of the pension plans as of December 31: (millions) 1997 1996 - -----------------------------------------------------------------
Amount of assets available for benefits: Funded assets of the plans at fair market value $ 554 $ 464 Accrued pension expense 13 26 - ------------------------------------------------------------------ Total assets of the plans 567 490 - ------------------------------------------------------------------ Present value of estimated pension obligation: Vested benefits 369 349 Nonvested benefits 33 32 - ------------------------------------------------------------------ Accumulated benefit obligation 402 381 Additional benefits based on projected future salary increases 126 111 - ------------------------------------------------------------------ Projected benefit obligation 528 492 - ------------------------------------------------------------------ Plan assets in excess of (less than) projected benefit obligation 39 (2) ==================================================================
The expected long-term rate of return on plan assets was 9% for the years ended December 31, 1997 and 1996. The assumed weighted average discount rate used in determining the accumulated benefit obligation was 7.25% and 7.5% as of December 31, 1997 and 1996, respectively. The rate of increases in projected future compensation levels was 5% for both years. Postretirement Benefits. The Corporation maintains plans that provide retiree health care and life insurance benefits for all eligible employees. Employees generally become eligible for the retiree benefit plans when they meet minimum retirement age and service requirements. The cost of providing most of these benefits is shared with retirees. The following table summarizes the components of net periodic postretirement benefit cost: (millions) 1997 1996 1995 - --------------------------------------------------------
Service cost of benefits earned $ 6 $ 6 $ 4 Interest on accumulated postretirement benefit obligation 15 16 13 Net amortization (deferral) - - (1) - -------------------------------------------------------- Net periodic postretirement benefit cost 21 22 16 ========================================================
The status of the Corporation's accrued postretirement benefit obligation recognized on the Consolidated Balance Sheet as of December 31 was as follows: (millions) 1997 1996 - -----------------------------------------------------------
Accumulated postretirement benefit obligation: Retirees $ 123 $ 119 Fully eligible active participants 14 17 Other active participants 82 86 - ----------------------------------------------------------- 219 222 Unrecognized net gain (loss) 9 (7) - ----------------------------------------------------------- Accrued postretirement benefit obligation 228 215 ===========================================================
The assumed health-care-cost trend rate used in measuring the accumulated postretirement benefit obligation was 8% as of December 31, 1997, and 9% as of December 31, 1996, with a rate gradually declining to 5% by 2000 and remaining at that level thereafter. A one-percentage-point increase in the assumed health-care-cost trend rate for each year would increase the accumulated postretirement benefit obligation by $31 million and $33 million as of December 31, 1997 and 1996, respectively, and would increase the net periodic postretirement benefit cost by $3 million and $4 million for the years ended December 31, 1997 and 1996, respectively. The assumed discount rate used in determining the accumulated postretirement benefit obligation was 7.25% and 7.5% as of December 31, 1997 and 1996, respectively. 13. Stock-Based Compensation The Corporation has issued stock options from three successive plans under its long-term equity program. Under each of 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 ranging from two to three years. The options expire on the 10th anniversary of the date of the 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. The Corporation accounts for stock-based compensation in accordance with Accounting Principles Board Opinion No. 25 and discloses such compensation under the provisions of SFAS No. 123, "Accounting for Stock-Based Compensation." The fair value of each option grant was estimated as of the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for options granted in 1997 and 1996; no options were granted in 1995: 1997 1996 - ---------------------------------------------------
Expected lives (years) 7.4 7.4 Risk-free interest rate 6.8% 5.9% Expected volatility 29.6% 33.0% Dividend yield - - - ---------------------------------------------------
The weighted average fair value of options granted during the years ended December 31, 1997 and 1996, was $15.61 and $14.17, respectively. If the Corporation had elected to recognize compensation cost for stock-based compensation grants consistent with the method prescribed by SFAS No. 123, net earnings and net earnings per common share for 1997 and 1996 would have changed to the following pro forma amounts: (millions, except per share amounts) 1997 1996 - -----------------------------------------------------
Net earnings: As reported $ 148 $ 15 Pro forma 144 13 Basic EPS: As reported 3.19 0.32 Pro forma 3.12 0.29 Diluted EPS: As reported 3.03 0.31 Pro forma 2.96 0.28 - -----------------------------------------------------
Stock option activity was as follows: (options in thousands) 1997 1996 1995 - ------------------------------------------------------------
Options: Outstanding, January 1 2,565 2,560 2,765 Granted 378 359 - Exercised (882) (343) (173) Canceled (12) (11) (32) - ------------------------------------------------------------- Outstanding, December 31 2,049 2,565 2,560 Exercisable, December 31 1,339 1,889 1,369 Available for grant, December 31 1,671 467 929 Weighted average exercise price: Outstanding, January 1 $ 21.71 $ 19.19 $ 18.78 Granted 34.60 29.40 - Exercised 18.20 10.75 10.88 Canceled 32.00 28.29 28.33 Outstanding, December 31 25.54 21.71 19.19 Exercisable, December 31 22.06 18.82 16.31 - ------------------------------------------------------------
The following table summarizes information about stock options outstanding as of December 31, 1997: Options Outstanding Options Exercisable ------------------- ------------------- Weighted Weighted Average Weighted Range of Average Remaining Average Exercise Options Exercise Contractual Options Exercise Prices (000) Price Life (yrs.) (000) Price -----------------------------------------------------------
$ 5 - 15 545 $ 10 5.4 545 $ 10 15 - 25 181 22 6.6 181 22 25 - 35 1,323 32 7.4 613 33 - ------------------------------------------------------------ Total 2,049 1,339 ============================================================
14. Stockholders' Equity Changes in stockholders' equity as of December 31 are summarized as follows: (millions) 1997 1996 1995 - -----------------------------------------------------
Common Stock: Beginning balance $ 5 $ 5 $ 5 Ending balance 5 5 5 - ---------------------------------------------------- Capital Received in Excess of Par Value: Beginning balance 231 223 221 Issuances of common stock 18 4 2 Other, net 9 4 - - ---------------------------------------------------- Ending balance 258 231 223 - ---------------------------------------------------- Deferred Currency Translation: Beginning balance (10) (6) (13) Change during the period (15) (4) 7 - ----------------------------------------------------- Ending balance (25) (10) (6) - ----------------------------------------------------- Reinvested Earnings (Deficit): Beginning balance (249) (259) (221) Net earnings (loss) 148 15 (32) Other, net 10 (5) (6) - ----------------------------------------------------- Ending balance (91) (249) (259) - ----------------------------------------------------- Total stockholders' equity (deficit) 147 (23) (37) =====================================================
There were 48,919 and 31,488 shares of $0.10 par value common stock held in treasury as of December 31, 1997 and 1996, respectively. These shares were acquired through the forfeiture of restricted stock and the surrender of shares in settlement of tax withholding obligations. Warrants. As of December 31, 1997 and 1996, outstanding warrants amounted to 2,489,898 and 2,591,091, respectively. The warrants are exercisable, subject to applicable securities laws, at any time prior to May 6, 1998, at which time they expire. Each share of common stock issued upon exercise of a warrant prior to the distribution date (as defined in the Rights Agreement described below) and prior to the redemption or expiration of the Rights will be accompanied by an attached Right issued under the terms and subject to the conditions of the Rights Agreement as it may then be in effect. On May 6, 1993, a total of 2,602,566 warrants, each to purchase a share of common stock at an exercise price of $16.14 per share, in addition to common stock, were issued to holders of certain debt that was converted to equity in the financial restructuring implemented on that date. Upon issuance, each of the warrants entitled the holder to purchase one share of common stock at a purchase price of $16.14 per share, subject to adjustment under certain events. Stockholder Rights Plan. On May 6, 1993, a rights plan (the "Rights Agreement") was adopted pursuant to which the Corporation declared a distribution of one right (the "Rights") upon each share of common stock. The Rights, which are intended to protect the Corporation and its stockholders in the event of an unsolicited attempt to acquire the Corporation, generally become exercisable 10 days following the announcement of the acquisition of 20% or more of the outstanding common stock by someone other than the Corporation or one of its employee benefit plans (10% in the case of an acquisition that the Corporation's Board of Directors determines to represent a threat of acquisition not in the best interests of the Corporation's stockholders) or 10 business days after commencement of a tender offer for 30% or more of the outstanding common stock. When exercisable, each of the Rights entitles the registered holder to purchase one-hundredth of a share of a junior participating preferred stock, series C, $1.00 par value per share, at a price of $35 per one-hundredth of a preferred share, subject to adjustment. The Rights also provide for a so-called "flip-in" feature and an exchange feature. In the event that the Corporation is the surviving corporation and its common stock remains outstanding and unchanged in a merger or other business combination with such acquiring party or the acquiring party engages in one of a number of self-dealing transactions specified in the Rights Agreement, or in the event that there is a 10% acquisition that the Board of Directors determines to represent a threat of acquisition not in the best interests of the Corporation's stockholders, each holder of a Right, other than the acquiring party, will thereafter have the right, subject to the exchange feature, to receive upon exercise thereof that number of shares of common stock having a market value at the time of such transaction of two times the exercise price of the Right. 15. Industry and Geographic Segments Transactions between industry and geographic segments are accounted for at transfer prices that are approximately equal to market value. Intercompany transfers between industry and geographic segments are not material. Eliminations reflect intercompany sales between industry segments. No single customer accounted for 10% or more of consolidated net sales. Export sales to foreign unaffiliated customers represent less than 10% of consolidated net sales. Segment operating profit (loss) includes all costs and expenses directly related to the segment involved and an allocation of expenses that benefit more than one segment. Segment operating profit (loss) also includes the noncash amortization of excess reorganization value, which had the impact of reducing operating profit and identifiable assets for North American Gypsum and Worldwide Ceilings. Corporate identifiable assets include the assets of USG Funding, which represent the outstanding balances of receivables purchased from U.S. Gypsum and USG Interiors, net of reserves. As of December 31, 1997, 1996 and 1995, such receivables, net of reserves, amounted to $128 million, $121 million and $110 million, respectively, including $95 million, $89 million and $78 million purchased from U.S. Gypsum and $33 million, $32 million and $32 million purchased from USG Interiors as of the respective dates. USG CORPORATION Industry Segments North American Worldwide (millions) Gypsum Ceilings Corporate Eliminations Total - ------------------------------------------------------------------------------------------------------------
1997 - ---- Net sales................................... $ 2,338 $ 634 $ - $ (98) $ 2,874 Amortization of excess reorganization value. 62 65 - - 127 Operating profit (loss)..................... 429 (1) (49) - 379 Depreciation, depletion and amortization.... 48 17 5 - 70 Capital expenditures........................ 126 45 1 - 172 Identifiable assets......................... 1,247 398 289 (8) 1,926 1996 - ---- Net sales................................... 2,067 612 - (89) 2,590 Amortization of excess reorganization value. 82 87 - - 169 Operating profit (loss)..................... 291 (44) (39) - 208 Depreciation, depletion and amortization.... 44 15 6 - 65 Capital expenditures........................ 63 56 1 - 120 Identifiable assets......................... 1,161 478 230 (5) 1,864 1995 - ---- Net sales................................... 1,924 609 - (89) 2,444 Amortization of excess reorganization value. 82 87 - - 169 Operating profit (loss)..................... 262 (34) (38) - 190 Depreciation, depletion and amortization.... 42 14 11 - 67 Capital expenditures........................ 96 49 2 - 147 Identifiable assets......................... 1,157 531 243 (4) 1,927
Geographic Segments Transfers Between United Other Geographic (millions) States Canada Foreign Areas Total - --------------------------------------------------------------------------------------------------------------
1997 - ---- Net sales................................... $ 2,570 $ 184 $ 251 $ (131) $ 2,874 Amortization of excess reorganization value. 101 14 12 - 127 Operating profit............................ 356 9 14 - 379 Depreciation, depletion and amortization.... 57 8 5 - 70 Capital expenditures........................ 136 30 6 - 172 Identifiable assets......................... 1,610 178 138 - 1,926 1996 - ---- Net sales................................... 2,319 169 242 (140) 2,590 Amortization of excess reorganization value. 135 18 16 - 169 Operating profit (loss)..................... 209 1 (2) - 208 Depreciation, depletion and amortization.... 53 6 6 - 65 Capital expenditures........................ 102 13 5 - 120 Identifiable assets......................... 1,518 177 169 - 1,864 1995 - ---- Net sales................................... 2,161 155 246 (118) 2,444 Amortization of excess reorganization value. 135 18 16 - 169 Operating profit (loss)..................... 191 (3) 2 - 190 Depreciation, depletion and amortization.... 56 6 5 - 67 Capital expenditures........................ 123 19 5 - 147 Identifiable assets......................... 1,594 146 187 - 1,927
16. Litigation Asbestos and Related Insurance Litigation. One of the Corporation's subsidiaries, U.S. Gypsum, is among many defendants in lawsuits arising out of the manufacture and sale of asbestos-containing materials. U.S. Gypsum sold certain asbestos-containing products beginning in the 1930s; in most cases, the products were discontinued or asbestos was removed from the formula by 1972, and no asbestos-containing products were sold after 1977. Some of these lawsuits seek to recover compensatory and in many cases punitive damages for costs associated with the maintenance or removal and replacement of asbestos- containing products in buildings (the "Property Damage Cases"). Others seek compensatory and in many cases punitive damages for personal injury allegedly resulting from exposure to asbestos-containing products (the "Personal Injury Cases"). Property Damage Cases. U.S. Gypsum is a defendant in 16 Property Damage Cases, many of which involve multiple buildings. One of the cases is a conditionally certified class action comprised of all colleges and universities in the United States, which certification is presently limited to the resolution of certain allegedly "common" liability issues (Central Wesleyan College v. W.R. Grace & Co., et al., U.S.D.C. S.C.). Another class action, brought on behalf of various public entities in the state of Texas, was settled in August 1997. The settlement amount will be paid over the next 12 months and will be partially funded by insurance. Sixteen additional property damage claims have been threatened against U.S. Gypsum. Results to Date: In total, U.S. Gypsum has settled approximately 110 Property Damage Cases involving 240 plaintiffs, in addition to four class action settlements. Twenty-four cases have been tried to verdict, 16 of which were won by U.S. Gypsum and five lost; three other cases, one won at the trial level and two lost, were settled during appeals. In the cases lost, compensatory damage awards against U.S. Gypsum have totaled $11.5 million. Punitive damages totaling $5.5 million were entered against U.S. Gypsum in four trials. Two of the punitive damage awards, totaling $1.45 million, were paid, and two were settled during the appellate process. In 1997, one Property Damage Case was filed against U.S. Gypsum, three cases were dismissed before trial, six were settled, one closed case was reopened, and 16 were pending at year end. U.S. Gypsum expended $7.8 million for the defense and resolution of Property Damage Cases and received insurance payments of $15.5 million in 1997. During 1996, two Property Damage Cases were filed against U.S. Gypsum, three cases were dismissed before trial, eight were settled, and 23 were pending at year end; U.S. Gypsum expended $33.4 million for the defense and resolution of Property Damage Cases in 1996 and received insurance payments of $84 million. In 1995, three Property Damage Cases were filed against U.S. Gypsum, seven cases were dismissed before trial, three were settled, two were closed following trial or appeal, and 32 were pending at year end. U.S. Gypsum expended $36 million for the defense and resolution of Property Damage Cases and received insurance payments of $48.6 million in 1995. A substantial portion of the insurance payments received during the years 1995 through 1997 constituted reimbursement for amounts expended in connection with Property Damage Cases in prior years. U. S. Gypsum's estimated cost of resolving pending Property Damage Cases is discussed below. (See "Estimated Cost.") Personal Injury Cases. U.S. Gypsum is also a defendant in approximately 67,000 Personal Injury Cases pending at December 31, 1997, as well as an additional approximately 7,000 cases that have been settled but will be closed over time. Filings of new Personal Injury Cases totaled 23,500 claims in 1997, compared with 28,000 new claims in 1996 and 14,000 in 1995. U.S. Gypsum's average settlement cost for Personal Injury Cases over the past three years has been approximately $1,600 per claim, exclusive of defense costs. Management does not anticipate that the average settlement cost for currently pending claims will vary significantly from historical amounts, due largely to opportunities for block settlements of large numbers of claims and the apparently high percentage of asbestos personal injury claims that appear to have been brought by individuals with little or no physical impairment. However, other factors, including the possible insolvency of co-defendants, could have an adverse impact on settlement costs. U.S. Gypsum is a member, together with 19 other former producers of asbestos-containing products, of the Center for Claims Resolution (the "Center"), which has assumed the handling of all Personal Injury Cases pending against U.S. Gypsum and the other members of the Center. Costs of defense and settlement are shared among the members of the Center pursuant to predetermined sharing formulae. Virtually all of U.S. Gypsum's personal injury liability and defense costs are paid by those of its insurance carriers that in 1985 signed an Agreement Concerning Asbestos-Related Claims (the "Wellington Agreement"), obligating them to provide coverage for the defense and indemnity costs incurred by U.S. Gypsum in Personal Injury Cases. Punitive damages have never been awarded against U.S. Gypsum in a Personal Injury Case; whether such an award would be covered by insurance under the Wellington Agreement would depend on state law and the terms of the individual policies. U. S. Gypsum and the Center were parties to a class action settlement known as "Georgine" that would have required most future Personal Injury Cases to be resolved through an administrative system and provided prescribed levels of benefits based on the nature of the claimants' physical impairment. However, on June 25, 1997, the Supreme Court affirmed a May 1996 ruling by a federal appellate court finding that class certification in Georgine was improper (Amchem Products, Inc. v. Windsor, Case No. 96-270). Since the invalidation of the Georgine settlement, U.S. Gypsum and the other Center members have been named in a substantial number of additional Personal Injury Cases. The defendants in Georgine, including U.S. Gypsum, have stated their intention to pursue another claims-handling vehicle that would serve as an alternative to the tort system, although there can be no assurance that such an alternative can be found and implemented. During 1997, approximately 23,500 Personal Injury Cases were filed against U.S. Gypsum, approximately 5,000 claims were refiled or amended to add U.S. Gypsum as a defendant, and approximately 14,000 were settled or dismissed. U.S. Gypsum incurred expenses of $31.6 million in 1997 with respect to Personal Injury Cases, of which $27.2 million is being paid by insurance. During 1996, approximately 28,000 Personal Injury Cases were filed against U.S. Gypsum, and approximately 20,000 were settled or dismissed. U.S. Gypsum incurred expenses of $28.6 million in 1996 with respect to Personal Injury Cases, of which $21.6 million was paid by insurance. (The reduction in the portion of the cost paid by insurance in 1996 was attributable to the impact of certain insurer insolvencies.) During 1995, approximately 13,000 Personal Injury Cases were filed against U.S. Gypsum, and 17,600 were settled or dismissed. U.S. Gypsum incurred expenses of $32.1 million in 1995 with respect to Personal Injury Cases, of which $30.9 million was paid by insurance. As of December 31, 1997, 1996 and 1995, approximately 74,000, 59,600 and 50,000 Personal Injury Cases, respectively, were pending against U.S. Gypsum. U. S. Gypsum's estimated cost of resolving the pending Personal Injury Cases is discussed below. (See "Estimated Cost.") Insurance Coverage Action. U.S. Gypsum sued its insurance carriers in 1983 to obtain coverage for asbestos cases (the "Coverage Action") and has settled all disputes with 12 of its 17 solvent carriers. As of December 31, 1997, after deducting insolvent coverage and insurance paid out to date, approximately $325 million of potential insurance remained, including approximately $140 million of insurance from five carriers that have agreed, subject to certain limitations and conditions, to cover both property damage and personal injury costs; $140 million from two carriers that have agreed, subject to certain limitations and conditions, to cover personal injury but not yet property damage; and approximately $45 million from three carriers that have not yet agreed to cover either. U.S. Gypsum is attempting to negotiate a resolution of the Coverage Action with the five remaining defendant carriers but may be required to litigate additional issues in its effort to secure the contested coverage. During 1995 and 1996, following an Illinois Appellate Court ruling awarding U.S. Gypsum coverage for Property Damage Cases, several carriers paid U.S. Gypsum approximately $133 million as reimbursement for past property damage costs. These amounts were added to U.S. Gypsum's reserve for asbestos costs (discussed below). Aggregate insurance payments exceeded U.S. Gypsum's total expenditures for all asbestos-related matters, including property damage, personal injury, insurance coverage litigation and related expenses, by $2.3 million for 1997, $41 million in 1996 and $10 million in 1995, due primarily to nonrecurring reimbursement for amounts expended in prior years. Insolvent Carriers: Four of U.S. Gypsum's domestic insurance carriers, as well as underwriters of portions of various policies issued by Lloyds and other London market companies, providing a total of approximately $106 million of coverage, are insolvent. Because these policies would already have been consumed by U.S. Gypsum's asbestos expenses to date if the carriers had been solvent, the insolvencies will not adversely affect U.S. Gypsum's coverage for future asbestos-related costs. However, U.S. Gypsum is pursuing claims for reimbursement from the insolvent estates and other sources and expects to recover a presently indeterminable portion of the policy amounts from these sources. In February 1997, U.S. Gypsum was paid approximately $11 million by the receiver for one of the insolvent carriers. Estimated Cost. The asbestos litigation involves numerous uncertainties that affect U.S. Gypsum's ability to estimate reliably its probable liability in the Personal Injury and Property Damage Cases. In the Property Damage Cases, such uncertainties include the identification and volume of asbestos-containing products in the buildings at issue in each case, which is often disputed; the claimed damages associated therewith; the viability of statute of limitations, product identification and other defenses, which varies depending upon the facts and jurisdiction of each case; the amount for which such cases can be resolved, which has normally (but not uniformly) been substantially lower than the claimed damages; and the viability of claims for punitive and other forms of multiple damages. Uncertainties in the Personal Injury Cases include the number, characteristics and venue of Personal Injury Cases that are filed against U.S. Gypsum; the Center's ability to continue to negotiate pretrial settlements at historical or acceptable levels; the level of physical impairment of claimants; the viability of claims for punitive damages; and the Center's ability to develop an alternate claims-handling vehicle that retains the key benefits of Georgine. As a result, any estimate of U.S. Gypsum's liability, while based upon the best information currently available, may not be an accurate prediction of actual costs and is subject to revision as additional information becomes available and developments occur. Currently Pending Cases: Subject to the above uncertainties and based in part on information provided by the Center, U.S. Gypsum estimates that it is probable that currently pending Property Damage and Personal Injury Cases can be resolved for an amount totaling between $200 million and $265 million, including defense costs. These amounts are expected to be expended over the next three to five years. Significant insurance funding is available for these costs, as detailed below. Future Cases: U.S. Gypsum is unable to reasonably estimate the cost of resolving Property Damage Cases and Personal Injury Cases that will be filed in the future. The company anticipates that few additional Property Damage Cases will be filed, as a result of the operation of statutes of limitations and the impact of certain other factors, although it is possible that any cases that are filed may seek substantial damages. It is anticipated that Personal Injury Cases will continue to be filed in substantial numbers for the foreseeable future, although the percentage of such cases filed by claimants with little or no physical impairment is expected to remain high. However, the company does not believe that the number and severity of future cases can be predicted with sufficient accuracy to provide the basis for a reasonable estimate of the liability that will be associated with such cases. Accounting for Asbestos Liability: As of December 31, 1997, U.S. Gypsum had reserved $200 million for liability from pending Property Damage and Personal Injury Cases (equaling the lower end of the estimated range of costs provided above). U.S. Gypsum had a corresponding receivable from insurance carriers of approximately $160 million, the estimated portion of the reserved amount that is expected to be paid or reimbursed by committed insurance. Additional amounts may be reimbursed by insurance depending upon the outcome of litigation and negotiations relating to insurance that is presently disputed. U.S. Gypsum had an additional reserve of $110 million as of December 31, 1997, that was available for future asbestos liabilities and asbestos-related expenses. The company continues to accrue $18 million per year for asbestos costs, and will periodically compare its estimates of liability to then-existing reserves and available insurance assets and adjust its reserves as appropriate. It is possible that U.S. Gypsum will determine in the future that additional charges to results of operations are necessary, although whether additional charges will be required and, if so, the timing and amount of such charges, cannot presently be predicted. Conclusion. The above estimates and reserves will be re-evaluated periodically as additional information becomes available. It is possible that additional charges to earnings may be necessary in the future if the amounts reflected above prove insufficient in light of future events, and that any such charge could be material to results of operations in the period in which it is taken. However, it is management's opinion, taking into account all of the above information and uncertainties, including currently available information concerning U.S. Gypsum's liabilities, reserves and probable insurance coverage, that the asbestos litigation will not have a material adverse effect on the liquidity or consolidated financial position of the Corporation. 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 costs associated with these sites, including site investigations and feasibility costs, site cleanup and remediation, legal costs, and fines and penalties, if any. In addition, environmental costs connected with site cleanups on USG-owned property are also covered by reserves established in accordance with the foregoing. The Corporation believes that neither these matters nor any other known governmental proceeding regarding environmental matters will have a material adverse effect upon its earnings or consolidated financial position. REPORT OF MANAGEMENT Management of USG Corporation is responsible for the preparation, integrity and fair presentation of the financial information included in this report. The financial statements have been prepared in accordance with generally accepted accounting principles and necessarily include certain amounts that are based on management's estimates and judgment. Management is responsible for maintaining a system of internal accounting controls to provide reasonable assurance as to the integrity and reliability of the financial statements, the proper safeguarding and use of assets, and the accurate execution and recording of transactions. Such controls are based on established policies and procedures and are implemented by trained personnel. The system of internal accounting controls is monitored by the Corporation's internal auditors to confirm that the system is proper and operating effectively. The Corporation's policies and procedures prescribe that the Corporation and its subsidiaries are to maintain ethical standards and that its business practices are to be consistent with those standards. The Corporation's financial statements have been audited by Arthur Andersen LLP, independent public accountants. Their audit was conducted in accordance with generally accepted auditing standards and included consideration of the Corporation's internal control system. Management has made available to Arthur Andersen LLP all the Corporation's financial records and related data, as well as minutes of the meetings of the Board of Directors. Management believes that all representations made to Arthur Andersen LLP were valid and appropriate. The Board of Directors, operating through its Audit Committee composed entirely of nonemployee directors, provides oversight to the financial reporting process. The Audit Committee meets periodically with management, the internal auditors and Arthur Andersen LLP, jointly and separately, to review financial reporting matters, internal accounting controls and audit results to assure that all parties are properly fulfilling their responsibilities. Both Arthur Andersen LLP and the internal auditors have unrestricted access to the Audit Committee. William C. Foote Chairman and Chief Executive Officer Richard H. Fleming Senior Vice President and Chief Financial Officer Raymond T. Belz Vice President and Controller REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Stockholders and Board of Directors of USG Corporation: We have audited the accompanying consolidated balance sheets of USG Corporation and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of earnings and cash flows for the years ended December 31, 1997, 1996 and 1995. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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, the financial statements referred to above present fairly, in all material respects, the financial position of USG Corporation and subsidiaries as of December 31, 1997 and 1996, and the results of their operations and their cash flows for the years ended December 31, 1997, 1996 and 1995, in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP - ----------------------- ARTHUR ANDERSEN LLP Chicago, Illinois January 22 , 1998 USG CORPORATION SELECTED QUARTERLY FINANCIAL DATA (unaudited) (millions, except per share data) First Second Third Fourth Total Quarter Quarter Quarter Quarter Year ------- ------- ------- ------- ----
1997 ---- Net sales................. $ 673 $ 723 $ 757 $ 721 $ 2,874 Gross profit.............. 177 202 210 198 787 Operating profit (a)...... 69 88 97 125 379 Net earnings (a).......... 15 27 34 72 148 Per common share: Net earnings (b) - basic 0.33 0.57 0.74 1.53 3.19 - diluted 0.32 0.55 0.70 1.45 3.03 Price range (c) - high 38.750 38.625 48.000 51.500 51.500 - low 30.000 29.875 35.750 41.375 29.875 EBITDA.................... 127 147 156 142 572 1996 ---- Net sales................. 602 642 678 668 2,590 Gross profit.............. 131 160 179 175 645 Operating profit (a)...... 22 53 67 66 208 Net earnings (loss) (a)... (15) 4 13 13 15 Per common share: Net earnings (loss)(b)- basic (0.32) 0.09 0.27 0.28 0.32 - diluted (0.32) 0.09 0.26 0.26 0.31 Price range (c) - high 30.500 29.000 29.875 34.500 34.500 - low 24.000 24.000 25.750 28.125 24.000 EBITDA.................... 79 110 125 123 437
(a) The noncash amortization of excess reorganization value, which had no tax impact, reduced operating profit and net earnings by approximately $42 million in each quarter during 1996 and in the first, second and third quarters of 1997. Excess reorganization value, which was established in connection with a financial restructuring in 1993, was scheduled to be amortized through April 1998. However, in the third quarter of 1997, the remaining balance of $83 million was offset by the elimination of a valuation allowance. (b) Basic earnings per common share were calculated using average shares outstanding during the period. Diluted earnings per common share were calculated using average shares and common stock equivalents outstanding during the period. Consequently, the sum of the four quarters is not necessarily additive to the total for the year. (c) Stock price ranges are for transactions on the New York Stock Exchange (trading symbol USG), which is the principal market for these securities. Stockholders of record as of January 31, 1998: Common - 4,704; Preferred - none. USG CORPORATION FIVE-YEAR SUMMARY (a) (unaudited) (dollars in millions, except per share data) May 7 January 1 Years ended December 31, through through ------------------------ December 31 May 6, 1997 1996 1995 1994 1993 1993 ---- ---- ---- ---- ---- ----
Earnings Statement Data: Net sales........................................ $ 2,874 $ 2,590 $ 2,444 $ 2,290 $ 1,325 $ 591 Gross profit..................................... 787 645 603 517 263 109 Selling and administrative expenses.............. 281 268 244 244 149 71 Amortization of excess reorganization value...... 127 169 169 169 113 - Operating profit................................. 379 208 190 104 1 38 Interest expense................................. 60 75 99 149 92 86 Interest income.................................. (3) (2) (6) (10) (4) (2) Other expense (income), net...................... 2 3 32 3 (8) 6 Reorganization items............................. - - - - - (709) Earnings (loss) before extraordinary items and changes in accounting principles.......... 148 15 (32) (92) (108) 640 Extraordinary gain (loss), net of taxes.......... - - - - (21) 944 Cumulative effect of accounting changes.......... - - - - - (150) Net earnings (loss).............................. 148 15 (32) (92) (129) 1,434 Net earnings (loss) per common share (b): Basic......................................... 3.19 0.32 (0.71) (2.14) (3.46) Diluted....................................... 3.03 0.31 (0.71) (2.14) (3.46) Balance Sheet Data (as of the end of the period): Working capital ................................. 264 159 167 311 185 271 Current ratio.................................... 1.70 1.41 1.46 1.83 1.41 2.02 Property, plant and equipment, net............... 982 887 842 755 754 767 Total assets..................................... 1,926 1,864 1,927 2,173 2,195 2,234 Total debt (c)................................... 620 772 926 1,149 1,531 1,556 Total stockholders' equity (deficit)............. 147 (23) (37) (8) (134) 4 Other Information: EBITDA........................................... 572 437 417 325 155 63 Capital expenditures............................. 172 120 147 64 29 12 Gross margin %................................... 27.4 24.9 24.7 22.6 19.8 18.4 EBITDA margin %.................................. 19.9 16.9 17.1 14.2 11.7 10.7 Market value per common share (b)................ 49.00 38.88 30.00 19.50 29.25 Average number of employees...................... 13,000 12,500 12,400 12,300 11,900 11,750
(a) Due to a financial restructuring and implementation of fresh start accounting, financial statements for periods subsequent to May 6, 1993, are not comparable to financial statements for periods through that date. Accordingly, a vertical line has been added to separate such information. (b) Per share information for the period of January 1 through May 6, 1993, was omitted because, as a result of the financial restructuring and implementation of fresh start accounting, it is not meaningful. Market value per common share reflects the closing stock price on December 31 of the applicable year. (c) Total debt is shown at principal amounts for all periods presented. The carrying amounts of total debt (net of unamortized reorganization discount) as reflected on the Corporation's balance sheets were $755 million, $907 million, $1,122 million, $1,476 million and $1,461 million as of December 31, 1996, 1995, 1994 and 1993, and May 6, 1993, respectively. EX-21 8 SUBSIDIARIES EXHIBIT 21 SUBSIDIARIES The companies listed below are the primary subsidiaries of the Corporation. The financial data for these subsidiaries, as well as for other subsidiaries which are not considered to be significant and are therefore excluded from this exhibit, comprised the Corporation's consolidated financial statements. Organized Under Name of Company Laws of - --------------- ------- Domestic:
United States Gypsum Company(a)......................................................... Delaware USG Interiors, Inc. (a)................................................................. Delaware L&W Supply Corporation (a)(b)........................................................... Delaware USG International, Ltd.................................................................. Delaware USG Foreign Investments, Ltd. (a)....................................................... Delaware USG Interiors International, Inc........................................................ Ohio USG Funding Corporation................................................................. Delaware La Mirada Products Co., Inc............................................................. Ohio USG Foreign Sales Corporation........................................................... Virgin Islands Gypsum Engineering Company.............................................................. Delaware Alabaster Assurance Company, Ltd........................................................ Vermont International: CGC Inc. (a)............................................................................ Canada USG Canadian Mining Ltd................................................................. Ontario Gypsum Transportation Limited........................................................... Bermuda Yeso Panamericano, S.A. de C.V.......................................................... Mexico USG Manufacturing Worldwide, Ltd........................................................ Caymans Panama Gypsum Company................................................................... Panama USG Interiors (Donn) S.A................................................................ Belgium Donn Products GmbH...................................................................... Germany USG Interiors Eastern Manufacturing GmbH................................................ Germany USG Interiors East Sales GmbH........................................................... Germany USG (U.K.) Ltd.......................................................................... United Kingdom USG France S.A.......................................................................... France USG (Netherlands) B.V................................................................... Netherlands USG Interiors (Europe) S.A.............................................................. Belgium USG Interiors Coordination Centre S.A................................................... Belgium USG Belgium Holdings S.A................................................................ Belgium USG Asia Pacific Holdings Pty. Ltd...................................................... Singapore USG Interiors Pacific Ltd............................................................... New Zealand USG Interiors Australia Pty. Ltd........................................................ Australia USG Interiors (Far East) SDN BHD........................................................ Malaysia Shenzhen USG Zhongbei Building Materials Co. (60% ownership)............................ China Alabaster Engineering (Nederland) B.V................................................... Netherlands Red Top Technology (Nederland) B.V...................................................... Netherlands
(a) Accounts for material revenues. (b) As of December 31, 1997, L&W Supply conducted its business out of 176 locations in 34 states using various names registered under applicable assumed business name statutes. EX-23 9 CONSENTS OF EXPERTS EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation by reference of our reports dated January 22, 1998, included in this Form 10-K for the year ended December 31, 1997, into the Corporation's previously filed Registration Statements Nos. 33-40136 and 33-64217 on Form S-3 and 33-22581, as amended, 33-22930, 33-36303, 33-52573, 33-52715, 33-63554 and 33-65383 on Form S-8. /s/ Arthur Andersen LLP ----------------------- ARTHUR ANDERSEN LLP Chicago, Illinois January 22, 1998 EX-24 10 POWER OF ATTORNEY EXHIBIT 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose name appears below constitutes and appoints Richard H. Fleming, Raymond T. Belz, and Dean H. Goossen and each of them, his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for and in his or her name, place and stead, in any and all capacities, to sign the Annual Report on Form 10-K for the year ending December 31, 1997 of USG Corporation and any or all amendments thereto, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his substitutes, may lawfully do or cause to be done by virtue hereof. This power of attorney has been signed as of the 10th day of February, 1998, by the following persons:
/s/ William C. Foote /s/ W.H. Clark - -------------------- -------------- William C. Foote, W. H. Clark, Director, Chairman of the Board Director and Chief Executive Officer /s/ P.J. O'Bryan /s/ James C. Cotting - ---------------- -------------------- P.J. O'Bryan, James C. Cotting, Director, President and Chief Director Operating Officer /s/ Robert L. Barnett /s/ Lawrence M. Crutcher - --------------------- ------------------------ Robert L. Barnett, Lawrence M. Crutcher, Director Director /s/ Keith A. Brown /s/ W. Douglas Ford - ------------------ ------------------- Keith A. Brown, W. Douglas Ford, Director Director /s/ David W. Fox /s/ John B. Schwemm - ---------------- ------------------- David W. Fox, John B. Schwemm, Director Director /s/ Philip C. Jackson, Jr. /s/ Judith A. Sprieser - -------------------------- ---------------------- Philip C. Jackson, Jr. Judith A. Sprieser, Director Director /s/ Marvin E. Lesser - -------------------- Marvin E. Lesser Director
EX-27 11 FINANCIAL DATA SCHEDULE WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
5 1,000,000 12-MOS DEC-31-1997 DEC-31-1997 72 0 314 17 208 640 1,218 236 1,926 376 610 0 0 5 142 1,926 2,874 2,874 2,087 2,087 281 0 57 320 172 148 0 0 0 148 3.19 3.03
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