Document 99VXKyJkdBxmnBQ06RJXBkB07

CERTAIN-TEED PRODUCTS CORPORATION ANNUAL REPORT 1969 MODULAR ,,, CONSTRUCTION-' new life for the building industry through ModularSciences Inc. CTD036506 COVER: A child's toy blocks symbolize the ease and simplicity with which mod ular building components may be adapted to a wide variety of shelters -- from summer cottages to sky scrapers. For more on modular construction and Certain-teed's growing in volvement in it, see pages 3 and 21. i CERTAIN-TEED PRODUCTS CORPORATION ANNUAL REPORT For the Year Ended December 31,1969 Certain-teed Products Corporation President's Message to Shareholders.............................. Modular Construction: New Life for the Building Industry Shelter Industries............................................................... Piping & Plastics Industries................................................ Gustin-Bacon....................................................................... Certain-teed Saint Gobain.................................................. Financial Section ............................................................... Directors, Executive Committee, Officers........................ Plants, Sales Offices and Other Facilities........................ Modular Sciences, Inc..................................................................... 21 Directors, Executive Committee, Officers................................ \. . 21 President's Message to Shareholders............................................ 22 Financial Section............................................................................... 24 Transfer Agent Bankers Trust Company, New York Registrar The Chase Manhattan Bank, New York Common Stock Listed New York Stock Exchange and Pacific Coast Stock Exchange CTD036507 IKd tnff IhamBtoDdlos The past year has been one of considerable progress and exciting changes for Certainteed. It was also a year that ended on a note of sadness and a deep sense of loss with the untimely death on December 27 of Mr. Rawson G. Lizars, our Company's board chair man. Mr. Lizars was an uncom monly gifted executive whose sound judgement and wise counsel will be greatly missed by his friends and associates in the Company and in the in dustry he served so well. For the year 1969, sales climbed to $216,589,266. This compares with $194,099,767 in 1968. The increase in sales re flects volume increases, price increases, and certain acquisi tions described more fully be low. Net earnings after taxes for the year were $7,579,611, as compared with $7,440,764 in 1968. Earnings per share on a fully diluted basis were $1.49 for both years. The 1969 earn ings per share of $1.60, based on the average shares of Com mon Stock outstanding, com pared with $1.70 in 1968, and reflects the conversions of Ser ies A Convertible Preferred Stock into Common Stock. During 1969, incremental profits normally derived from increased sales were largely offset by rising costs not yet covered by adequate price in creases, and by certain non recurring conditions. Local labor costs at our East St. Louis, Illinois, plant rose to such a level during the early part of the year that the manu facture of prepared roofing had to be terminated at this loca tion. Start-up costs at two new PVC pipe plants and the de velopment costs for production of our new PVC siding prod ucts temporarily impaired prof its. An abnormal fluctuation in certain lumber and plywood prices during the year resulted in a narrowing of profit margins of the Wm. Cameron Division as high-cost inventories were liquidated. The earning power of the Company was considerably in creased during 1969 as a result of several acquisitions, the ex penditure of over $11.5 million in capital improvements, and the considerable progress made by unconsolidated subsidiaries and associated companies. The Company entered the carpet manufacturing business through the acquisition of KOB Carpet Manufacturing Com pany and KOB Carpets, Inc.Dis tribution facilities of the Com pany have been strengthened through the acquisition of two pipe distributors in the south west, Bowles & Edens Supply Company and The Rohan Com pany, and acquisition of a millwork distributor in the north east, Middle Atlantic Millwork Company. Two new PVC pipe plants, one at Social Circle, Georgia, and one at Waco, Texas, extended the Company's service area to provide PVC pipe products to the southwest and the southeast. The McPher son, Kansas, PVC production facilities were also enlarged during the year, with the effect that total PVC pipe production capacity has been doubled. Work is continuingon the Com pany's new roofing plant at Avery, Ohio, and the expanded felt mill production facilities are now in operation. A new plant at Tyler, Texas, for pro duction of fiberglass reinforced plastic products is nearing com pletion and is commencing the manufacture of bathroom com ponents. . Modular Sciences, Inc., for merly Commercial Acceptance Corporation, made substantial progress during the year in de veloping an organization and facilities to advance the modu lar concept of building. A plant to produce modules was con structed at Hartford, Alabama, and motor inns were con structed by the use of modules in Atlanta, Georgia, and Jack sonville, Florida. The company has started an aggressive pro gram of acquiring responsible building companies desiring to grow with Modular Sciences, Inc. as a significant modular builder of residential and com mercial structures throughout the world. A separate report on Modular Sciences, Inc. begins on page 21 of this annual report. Because Certain-teed is vi tally concerned with the pollu tion problems facing our na tion, and because of the increas ing use of our pipe products in CTD036508 the fight against pollution, an investment was made during 1969 in a manufacturer of water pollution control equipment. Called Nayadic Sciences, Inc., with headquarters in West Chester, Pennsylvania, the company is currently produc ing and marketing a patented sewage-treatment concept based on a biological process that fills a need in municipal, industrial and commercial wa ter systems. Certain-teed Saint Gobain In sulation Corporation under went a year of intensive efforts to bring its production facilities up to the efficiency levels which are obtainable under the pro cesses acquired from Compagnie de Saint Gobain. Several scheduled shut-downs of pro duction lines for further modi fications and an unexpected fur nace failure caused loss of pro duction during the period when insulation shipments would normally have been at the high est level. A new warehouse facility at the Mountaintop, Pennsylvania, plant was com pleted during the year, and a new warehouse is scheduled to be completed during the first half of 1970 at the Berlin, New Jersey, plant. An evalua tion of CSG's business pros pects for 1970 supports the view that the company should see its first year of profitable operations. During 1969, CSG incurred a loss of $2,377,924 (see Note 7 (c) in the Notes to Financial Statements). As a result of a far-reaching corporate reorganization in 1969, Certain-teed now consists of three major operating divi sions.The divisions are: Shelter Industries, Piping & Plastics In dustries, and Gustin-Bacon. The largest of these--Shelter Industries--is headed by Vice President and General Mana ger Byron Radaker, and com bines the previously separate Building Materials and Wm. Cameron Divisions with KOB Carpets, Inc., our wholly-owned subsidiary. Shelter Industries also is responsible for market ing of PVC home siding, form erly distributed by the Plastics Division, and for marketing of fiber glass insulation produced by CSG. Piping & Plastics Industries combines the previously sep arate Plastics and Pipe Divi sions, with Corporate Execu tive Vice President Harold McNabb serving as general manager. This group now manu factures and markets Certainteed's complete line of both PVC and asbestos cement pipe, and, in a recent move, has ac quired exclusive rights to the leasing and distribution in the United States of trenchless pipe and conduit installation equip ment. Called the Badger Sys tem, it is produced by the British firm of Hudswell Yates Developments, Ltd. Certain-teed's third operat ing division, Gustin-Bacon, con tinues to be headed by Vice President and General Manager E. L. Melton. The year 1970 has begun with the housing industry feeling the full impact of the decline in housing starts resulting from ' the shortage and cost of mort gage money. We believe that the conditiofi in the mortgage market will improve, in part by specific government assistance, and in part by a moderation of interest rates brought about by a relaxation of monetary policy. During this difficult period, every effort is being made to limit capital expenditures to those which can provide im mediate profit benefits. The ex penditures made in 1969, and prior years, have already posi tioned the Company to take advantage of the growth in building activity which is re quired to meet the rapidly in creasing housing shortages throughout the country. In conclusion, I wish to ex press my sincere appreciation to our shareholders, customers and friends for their coopera tion throughout the year; and to commend the efforts of our employees, all of whom have contributed so much in 1969, and whose continued coopera tion is essential to our success in the future. Respectfully submitted, President and Chairman of the Board Ardmore, Pennsylvania March 16,1969 2 CTD036509 Special Report to Shareholders QO O New Life For The Building Industry Late last year in Jacksonville, Florida, a dramatic demonstra tion took place. It was conduct ed by Modular Sciences, Inc. for a special gathering of busi ness leaders from throughout the country. At that time, a three-bed room, two-bath home was com pleted in approximately six hours, ready for occupancy. The foundation was poured the day before. The three compon ents comprising the house (pre viously built at the company's Hartford, Alabama, manufac turing plant) were shipped to the job site, set in place by crane, joined together, and anchored to the foundation. Nearby, the company dem onstrated similar capabilities in the erection of a 128-room motor inn, complete with res taurant and cocktail lounge. In each instance, the com ponents used were factoryfinished, and included utilities, carpeting and even much of the decorating. The technique employed is called modular construction, and it represents a major change in building--from the construc tion of summer cottages to sky scrapers. This controlled environment, assembly-line approach to building offers numerous ad vantages. In the first place, ma terials can be handled more efficiently. Modern machinery makes even the simple acts of sawing and nailing a precision process. But even more impor tant, work can continue inside a plant all year long, virtually immune to capricious weather, snags in the delivery of mate rials to isolated construction sites and erratic availability of skilled labor--all of which combine to compound con struction time and costs. Modular techniques also provide the manufacturer with far greater control over the quality of materials which are given careful scrutiny to assure that the highest standards are maintained. Quality, in fact, is absolutely essential in an effi cient factory operation since a single defective part can raise havoc, jamming or slowing down production. Modular construction in its purest form is a logical exten sion of the technology of mass production that has been so successful in other industries. Many building experts believe it is the only hope for meeting this nation's future shelter needs. As one authority recent ly pointed out, "Factory pro duced modules may be the big gest change in housing since man came out of the cave." In the years ahead, modular construction promises to fill the widening gap in the construc tion of low and medium priced, single and multi-family dwell ings. But what is more impor tant, it can bring the prices of .these dwellings within reach of e majority of American fam ilies who are now excluded from the market by rising building costs. Modular con- CTD036510 struction also will provide vigorous new life for the build ing industry, and will most certainly add an entirely new dimension to the growing market for building materials. The sizes and architectural styles of modular shelters are numerous, and can be tailored to the requirements of a wide variety of commercial and in stitutional facilities, as well as residential structures. These in clude restaurants, day-care centers, offices and rest homes, all of which will be needed in ever increasing numbers as our population continues to ex pand. The Federal Government has placed major importance on factory-produced components as a key element in its search for new ways to deal with what has come to be known as the "shelter gap." The U.S. Depart ment of Housing & Urban De velopment, in fact, now views the modular approach to con struction as essential to the success of "Operation Break through," its major program aimed primarily at increasing the production of housing for families of modest incomes. Encouraged by the deep con cern and growing financial ap propriations of Federal housing authorities, as well as those at the state and local level, the technology of assembly-line homebuilding has emerged so rapidly in recent years that it has attracted some of the coun try's largest companies, many of which come from fields com pletely alien to the construction industry.' In the long run, however, those who stand to benefit most from this emerging new indus try are broad-based building materials firms like Certainteed, with long experience in, and a sound understanding of, building and construction. At Certain-teed we have for some time recognized the dramatic changes taking place in the building industry that only recently have received nation wide attention. As a result, the Company has set a course that takes full advantage of our unusually strong indus try position by directing our expansion and diversification plans toward development of the widest possible range of building systems and materials to meet the soaring future de mands of both modular and conventional construction. As a step toward that goal, a major expansion program for Modular Sciences will begin in 1970. This will include not only the creation of additional man ufacturing facilities, but the acquisition of building firms across the country. This will extend the Company's total capabilities beyond manufac turing to on-site construction as well. Another building system using a modular concept that might be called an "Erector Set" technique has been devel oped by the Company. It is particularly effective in areas where climatic conditions re quire concrete construction. The system consists of light weight, extruded asbestos ce ment components that are easily assembled by two men without special equipment. No single component is heavier than one or two men can han dle easily. While each of these develop ments is exciting in its own right and holds great promise for the future, they are only a part of the Company's continu ing search for new ways to meet the nation's future shel ter needs. It has been estimated that some two million marriages annually produce more than a million net new households. Add to this more than half a 4 CTD036511 million obsolete structures de molished each year, freeway appropriations, urban renewal and other factors that further diminish existing structures-- plus the pent-up demand that already prevails--and this country's shelter needs total between two and three million starts annually. What's more, since 1965 each year's demand has exceeded actual construc tion by a wide margin. At Certain-teed, we are vital ly concerned with these rather awesome statistics, and we are determined to play a major role in answering the challenge they represent. As outlined in the pages of this report, Certainteed's capital expenditures this year for new plant capacity reached an all-time high in order to meet only current de mands and those of the fore seeable future. Looking further ahead,however,our Company's research and development pro gram, backed by our majorityowned subsidiary, Alpha Re search & Development, is firmly committed to a position of lead ership in developing the excit ing building materials of tomor row along with new and unique approaches to construction techniques. Modular construc tion is only the beginning. Our industry today stands at the threshold of a new era where the old ways of doing things are no longer adequate. Only a few short years from now, even our present methods and materials may seem archaic by comparison. Certain-teed's !\ A modular motel room is lifted by crane onto a concrete foundation during con struction of a new motor inn in Jack sonville, Florida. Another motor inn was completed by Modular Services, Inc. in Atlanta, Georgia, during 1969, and a third is now under construction in Columbia, South Carolina. long experience and -growing resources, however, place the Company at the very center of the industry, with unmatched flexibility and the proven capa bility that will enable us to respond to the unprecedented opportunities that lie ahead. A completed modular motel room leaves the Hartford, Alabama, plant of Mod ular Services en route to Jacksonville, Florida, where it will become part of a new. 128-room motor inn. The VAC House, designed by Vencedor Development Corporation, combines the structural advantages of poured-inplace concrete with an easily assem bled construction system of extruded asbestos cement components. The lightweight components are easily car ried by one or two men, and may be assembled without special equipment. CTD036512 r O Shelter Industries represents an integrated approach to the manufacturing and marketing of the Company's broad line of building materials. It is aimed at providing interior and exter ior products to be used in all types of shelters, including homes, apartments, schools, churches, office buildings or any other structures that pro vide protection from the ele ments. These products include roofing, carpeting, wood and aluminum doors and windows, vinyl siding, broadloom and in door-outdoor carpeting, build ing insulation, fiberboard and other building products. Six regional offices staffed with technical and marketing consultants have been strategi cally located across the coun try. The offices, which also serve as administrative centers, are located in Chicago, Dallas, San Francisco, Savannah, Tacoma and Wilmington, Dela ware. Plans call for continued ex pansion of the Shelter Indus tries product line in order to provide a more complete build ing materials package marketed through widely diverse distri bution channels. Products will continue to be promoted and pre-sold to all classes of trade --from general contractors and builders to housewives--and sold through all kinds of dis tribution channels--from inte rior decorating boutiques to cash-and-carry lumber yards. Current production facilities of Shelter Industries include eight roofing materials plants, five felt plants, a carpet mill, an aluminum door and window 6 CTD036513 II plant, and one of the nation's largest millwork plants located in Waco, Texas. Work is continuing on the Company's new roofing plant at Avery, Ohio, and the expanded felt mill production facilities are now in operation. The Cartersville, Georgia, carpet plant was also expanded in 1969. Another major expansion program now underway at Certain-teed's McPherson, Kansas, PVC plant will increase sub stantially the Company's pro duction capacity for vinyl sid ing. Sales of this particular product have grown dramati cally over the past year. The many Certain-teed prod ucts being marketed through Shelter Industries enjoy great popularity among discriminat ing home owners and builders, and include well-known trade names such as Hallmark shin gles, Ideal Qualitybilt millwork and CSG fiber glass insulation. The Hallmark asphalt shin gle, also known as the "Shangle," was first introduced by Certain-teed only two years ago, and since that time has captured a substantial share of the new construction, replace ment and remodeling markets. The appeal of the Shangle lies in its unusual design that com bines the beauty of wood shakes with the advantages of asphalt. Ideal Qualitybilt millwork in cludes a decorator line of Span ish, Mediterranean and Colon ial doors, as well as casement and four-way windows, man tels, kitchen cabinets and hun dreds of other items that also find wide application in remod eling, replacement projects and new construction. Since its introduction little more than two years ago, CSG fiber glass insulation sales have steadily increased. The Ideal aluminum door and window line, produced in Waco, Texas, and introduced late in 1968, has already made deep market penetration in the southwest. Two relative newcomers to the Certain-teed line of prod ucts are Hollybrook Carpet and Quiet-Step carpet tiles. Both have wide customer appeal and are quickly producing market impact. Shelter Industries is the ve hicle that will enable Certainteed to expand greatly its share of the market for shelter prod ucts during the Seventies--an era of unprecedented construc tion activity with nearly un limited potential for the Com pany's ever widening line of products and services. ! I CTD036514 R Piping & Plastics Industries consolidates the production, distribution facilities and per sonnel of Certain-teed's previ ously separate Pipe and Plas tics Divisions and offers a com plete line of both PVC and asbestos cement pipe for the growing markets in sewage dis posal, water distribution, irri gation and water pollution con trol, as well as for those in oil and gas transmission and tele phone and electrical conduits. The combined facilities and experience of these two divi sions provide one of the most extensive product-service packages of its type available in the industry. Piping & Plastics Industries has recently acquired exclusive rights to leasing and distribu tion in the United States of the Badger System: a fast, efficient, trenchless pipe and conduit in stallation technique.The equip ment is produced by the British firm of Hudswell Yates Devel opments, Ltd., and will be mar keted in this country by Cer tain-teed's newly formed sub sidiary, Certain-teed Badger, Inc. The Badger uses a machinemounted blade to penetrate vertically below ground, then tunnels in a horizontal direc tion, pulling a continuous line of pipe behind it through the pre-formed tunnel. It is capable of installing pipe, cable or con duits as large as 24 inches in diameter to a depth of nine feet with a minimum surface disturbance. The equipment will operate in nearly any ter rain, and produces substantial savings in pipe installation costs when compared with con ventional trenching methods. Two new Certain-teed PVC pipe plants were completed during 1969 and are now in full operation. One is in Waco, Texas; the other is in Social Circle, Georgia, near Atlanta. These new facilities will strengthen Certain-teed's posi tion in the southeastern and southwestern markets where there is great demand for water and sewage systems. Also new in 1969 was Communiplan/W, the first compu terized engineering service that provides a preliminary feasi bility study to aid in the design and planning of rural water piping systems. This unusual service, introduced by Piping & Plastics Industries, is avail able without cost to consulting engineers and local communi ties in the interest of develop ing economical, rural potable water systems. In the years ahead, this new Division's growing resources are expected to play a major role in Certain-teed's increas ing involvement in water puri fication, sewage disposal, con struction and plastics. IMHHH v To combat water pollution along Lake Cobbosseecontee in Maine, Certain-teed asbestos cement pipe was used in a new 12-mile interceptor sewer line. 8 CTD036515 O Certain-teed's Gustin-Bacon Division serves a number of broad markets with products designed for the construction, automotive, transportation, mining, petroleum and rein forced plastics industries. This diversity results in a steady level of sales and earnings, and provides exceptional oppor tunities for additional areas of growth. Increased sales were achieved over this wide product range during 1969 as the Division deepened its market penetra tion. The G-B line of mechani cal pipe couplings and fittings, for example, continued to show steady growth through in creased usage and wider ad aptations by industry. This relatively new concept in join ing pipe is now used extensively for nearly every pipe coupling application in construction, mining and the petroleum and process industries. During 1969, Gustin-Bacon also introduced Plaingrip cou plings, thereby expanding its line to include plain-end pipe. Standpipe T's and additional fittings were also added in 1969 to further broaden the pipe coupling line. Maxibrake, the spring actu ated safety and parking brake for air equipped vehicles with cam-type brakes, continued itssteady sales growth and is now standard equipment in major fleets, busses, off-highway equipment and with indepen dent truck operators. Since their introduction nearly 15 years ago, Maxibrakes have be come the only widely accepted parking and emergency brak ing devices for heavy duty ve hicles, and are still the only fail-safe, tamper-proof units available on the market. Maxi brakes are now gaining an in ternational reputation through export to foreign countries and through manufacture by over seas licensees. Gustin-Bacon's transporta tion products also include Ultralite railroad car insulation as well as locomotive pistons, gas kets, brake cylinder release valves, welded fittings, air hoses, Lock-tite cotter pins and other specialty items developed especially for railroad use. Re cent development and produc tion of fiber glass reinforced plastic railroad components, in cluding caboose doors and en gine compartment panels, have proved successful, and ex panded activity in this area can be expected. Production facilities for Gustin-Bacon's quality line of Ultralite fiber glass thermal acoustical insulations operated at near capacity throughout the year. These products are mar keted nationally to the con struction industry by Certainteed's associated company. Certain-teed Saint Gobain In sulation Corporation. Sales of Amberlite sounddeadening felts and safety pad dings held pace with the num ber of new cars manufactured, and the automobile industry continues to provide a sizeable portion of this product's vol ume. Amberlite is a product seldom seen by an automobile buyer, but it performs its job effectively and quietly. Amber lite sound-deadening felts and safety paddings are used to muffle engine and road noises, serve as a heat shield under the hood, and are molded and contoured to pad dashboards for added passenger safety. In dustry projections of steady increases in the production of new cars, coupled with the growing demand for quieter and safer vehicles, indicate op portunities for additional growth in the applications of this product through research and development. Late in 1969, Gustin-Bacon also increased its production of Ultrastrand fiber glass used in the production c.f reinforced plastics. Additions also were made to the Division's manage ment, technical and engineering staffs to carry out a program for updating manufacturing facilities in order to increase production and achieve deeper penetration of this market. 10 CTD036517 I CTD036518 !' Attic Pak, a unique packaging innovation that simplifies the handling of home insulation for do-it-yourselfers, was introduced by CSG during 1969. Attic Pak enables homeowners to upgrade existing insulation for full comfort and economy. 12 CTD036519 \ Certain-teed Saint Gobain In sulation Corporation increased production and sales of its fiber glass insulations approximately 30 percent in 1969. At the same time, the quality of CSG prod ucts achieved a level unequaled in the industry. Other major accomplish ments in 1969 included a rebuildingofthe furnaceatBerlin, New Jersey, construction of a warehouse at the Mountaintop, Pennsylvania, plant, and an equipment modification which increased production of pipe covering and round air duct by ?.5 percent. The company also increased all fabrication facili ties to provide more of the so phisticated end products which its markets require. From a management stand point, CSG strengthened its po sition in several ways. First of all, people who have been with CSG since its formation in 1967 have gained the necessary ex perience of working together to efficiently coordinate their ef forts. Second, new personnel were recruited in 1969 to add needed capabilities in several important areas. Finally, a new department was established to coordinate all company activi ties in order to effectively service our customer require ments. The development of manage ment at CSG was essential for the successful adaptation of the advanced Saint Gobain processes to the needs of American markets, and for the internal communication and di rection necessary to achieve the profit levels of which the company is capable. A continuous ribbon of fiber glass flows down the production line at CSG's Berlin, New Jersey, plant. The manufacturing techniques employed by CSG are the most advanced in the industry, and are based upon the technical expertise of the world's leader in glass and glass fiber technology, Compagnie de Saint Gobain. CTD036520 Certain-teed Products Corporation and Consolidated Subsidiaries O Years ended December 31,1969 and 1968 NET SALES ............................ COSTS AND EXPENSES: Cost of goods sold.......... Selling and administrative 0 Ob O 1969 $216,589,266 1968 $194,099,767 176,424,244 25,471,163 201,895,407 14,693,859 156,919,265 22,034,996 178,954,261 15,145,506 OTHER INCOME--net ....................................................................................... FEDERAL INCOME TAXES (net of investment credit of $389,000 and $306,000) 301,752 14,995,611 7,416,000 NET INCOME ..................................................................................................... 7,579,611 RETAINED EARNINGS AT BEGINNING OF YEAR......................................... DIVIDENDS: Preferred Stock ........................................................................................... Common Stock ........................................................................................... 57,066,761 64,646,372 799,034 3,391,858 4,190,892 69,258 15,214,764 7,774,000 7,440,764 53,605,095 61,045,859 1,071,845 2,907,253 3,979,098 RETAINED EARNINGS AT END OF YEAR $ 60,455,480 $ 57,066,761 Net income per common share based on weighted average shares outstanding...................................................................................................' Net income per common share, assuming full dilution............................. Depreciation of plant and equipment amounted to $5,043,983 in 1969 and $4,586,181 in 1968. The accompanying notes are an integral part of this statement. $1.60 $1.49 $1.70 $1.49 14 CTD036521 f Years ended December 31, 1969 and 1968 l 1969 1968 SOURCE OF FUNDS: Net income.................................................................................................. $ 7,579,611 Depreciation and amortization ................................................................... 5,383,646 Changes in long-term debt.......................................................................... 66,080 Stock issued under stock option and compensation plans and exercise of stock purchase warrants................................................................ 1,596,870 Net increase in working capital resulting from acquisitions of businesses 1,818,513 Decrease/(lncrease) in working capital..................................................... 3,078,202 $19,522,922 S 7,440,764 4,924,336 (448,8091 3,219,502 (3,464,735) 11,671,058 APPLICATION OF FUNDS: Increase in property, plant and equipment, net........................................... $11,684,767 Dividends .................................................................................................... 4,190,892 Investments in associated company and unconsolidated subsidiaries .. . 3,140,717 Other, net............'....................................................................................... 506,546 $19,522,922 $ 5,020,821 3,979,098 2,181,838 489,301 $11,671,058 CTD036522 Certain-teed Products Corporation and Consolidated Subsidiaries at December 31,1969 and 1968 ASSETS 1969 CURRENT ASSETS: Cash ............................................................................................................ $ 2,341,061 1968 S 1,840,084 Short-term investments, at cost................................................................. 5,471,587 16,700.205 Accounts and notes receivable, less allowance for uncollectibles of $1,738,116 and $1,132,053--Note 7 (c).............................................. 29,840,604 26,530.320 Inventories, including raw materials and supplies amounting to $8,785,000 and $7,628,991--at lower of cost or market...................................... Total current assets......................................................................... 36,184,956 73,838,208 32.033.265 77,103,874 INVESTMENTS IN AND RECEIVABLES FROM ASSOCIATED COMPANY AND UNCONSOLIDATED SUBSIDIARIES--Notes 1 and 7(c) .............. 20,303,131 1 7,162,414 PROPERTY, PLANT AND EQUIPMENT, at cost, less depreciation of $39,930,395 and $36,793,432--Note 2 ..................................................... 55,904,862 49,090,820 OTHER ASSETS AND DEFERRED CHARGES 3,681,491 3,315,097 INTANGIBLE ASSETS, at amortized cost The accompanying notes are an integral part of this statement. 2,004,327 $155,732,019 2,208,926 $148,881,131 16 CTD036523 I LIABILITIES 1969 CURRENT LIABILITIES: Accounts payable and accrued expenses--Note 7 (c)............................. Notes payable to banks............................................................................... Current installments on long-term debt--Note 3 ..................................... Federal income taxes ................................................................................. Total current liabilities..................................................................... $ 20,332,043 1,965,050 975,298 3,221,968 26,494,359 1968 S 19,400.597 1,333,702 307 210 5,640,314 26,681.823 LONG-TERM DEBT--Note 3 ............................................................................. 11,606,908 11,246,725 DEFERRED FEDERAL INCOME TAXES........................................................... 2,493,455 2,734,002 OTHER NONCURRENT AND DEFERRED ITEMS........................................... 2,630,002 STOCKHOLDERS' EQUITY--Notes 1,3,4, 5, and 7: Preferred Stock, $1 par value, authorized 2,000,000 shares; 845,949 shares designated as Series A Convertible, issued 845,949 and 1,010,328 shares (liquidation preference $21,148,725 and $25,258,200) 845,949 Common Stock, $1 par value, authorized 7,500,000 shares, issued 4,343,480 and 4,070,232 shares......................................................... 4,343,480 Capital in Excess of Par Value................................................................... 47,085,664 Retained Earnings ....................................................................................... 60,455,480 Less: Common Stock held in treasury, at cost--21,486 and 51,686 shares (223,278) Total stockholders' equity............................................................... 112,507,295 $155,732,019 2,458,283 1,010,328 4,070,232 44,150,088 57,066,761 (537,111) 105,760,298 $148,881,131 CTD036524 At December 31. 1969 1. In 19(39. thn Company acquired the outstanding stock of throe companies in exchange for 180,000 share's of the Company's Common Stock. A maximum of 50.000 ad ditional shares are issuable contingent on future earn ings of two of tlie companies. The accounts of these companies are included in consolidation for I960 on the basis of poolings of interests. The financial statements at December 31. 19G8, and for the year then ended have been restated to include the accounts of such companies. Also, m I960, the Company purchased all the out standing capital stock of four companies in exchange for 68.G19 shares of the Company's Common Stock These transactions have been accounted for as pur chases and the accompanying consolidated statement of income and retained earnings includes the results of operations of these companies from dates of acquisition to December 31. 19G9; sales and net income of these companies and the excess of purchase price over net assets acquired, included in the accompanying consoli dated financial statements, are not significant. The investment ($2,158,816) in Modular Sciences, Inc. ("Modular"), a 60% owned company (formerly Com mercial Acceptance Corporation), is carried at cost less the Company's share of Modular's accumulated losses since July 1, 1968 (date of acquisition of majority owner ship by the Company). The Company also had notes receivable due from Modular aggregating $1,720,000. The accounts of Modular have not been consolidated because it is not a significant subsidiary, financial statements of Modular are included elsewhere in this Annual Report. 2. Property, Plant and Equipment consists of: Land........................................................................$ 2,341,508 Buildings ............................................................... 26,501.303 Equipment............................................................... 63,202.171 Construction in progress.................................... 3,790,275 $95,835,257 Depreciation on plant and equipment is computed by the straight-line method on the basis of annual rates ranging generally from 2% to 12% in the case of buildings, and 5% to 20% in the case of equipment. Property, plant and equipment with a net book amount of approximately $3,500,000 has been pledged as col lateral for certain mortgages payable. 3, Long-term debt, exclusive of current installments, consists of: 5 55% Notes payable to insurance company, requiring pay ments of $550,000 annually from 1970 to 1986, the remaining unpaid balance becoming due in 1987 ...........$ 9,450,000 Capitalized lease agreements, requiring payments through 1989 ..................................... 1,267,525 Other........................................................................ 889,383 $11,606,908 The note agreement relating to the notes payable to insurance company provides, among other matters, for prepayment options, the maintenance of a prescribed amount of consolidated working capital, and certain limitations on the declaration of dividends, other than stock dividends. At December 31, 1969, consolidated Retained Earnings of approximately $14,100,000 were not restricted as to the payment of Common Stock dividends. 4. Dividends on the Series A Convertible Preferred Stock are cumulative at the annual rate of $.90 per share Each share is entitled to one vote, has a liquidating value of S25 per share plus accrued unpaid dividends, is convertible into one share of Common Stock and may bo called by the Company after June 30, 1971 (subject to the conversion rights of the holders) at a price of $25 per share plus accrued unpaid dividends. At December 31, 19G9, there was outstanding a trans ferable Stock Purchase Warrant for 20,000 shares of Common Stock exercisable prior to June 22, 1972, at a per share price of $23.05 The Company has reserved a sufficient number of unissued shares for issuance against the warrant. In 1969, the Company entered into employment agree ments with certain officers which provide for compen sation to be made to such officers through the issuance of 30,000 shares of Common Stock. The shares issued are subject to certain restrictions and forfeiture provi sions contained in such agreements. The market value at date of issuance of such shares is being charged to operations pursuant to the terms of the agreements. Changes in shares of capital stock and in capital in ex cess of par value during the year are summarized as follows. Preferred ______ Common StockStock issued Treasury Warrants issued Shares Shares Shares Shares Balance at December31,1968, as p-eviousiy reported 3 890.232 51.686 20.000 1,010.328 Restatement tor coolings of mieresis--Note 1 180 000 Capital In Excess of Par Value $43,171,537 978.551 Balance at DecemDer31, f968. as restated 4 070.232 51.686 20.000 1.010,328 44.150.088 Exercise of stock options --Note S 39.750 (200} 500 688 791 Conversion ol preferred Slock 164.879 (164.879) Resulting from companies purchased-- Note 1 68,619 1,795.990 Pursuant to employment agreements-- see above (30.000) 553.995 Costs related to the acquisition of a company (103,200) Balance at December 31, 1969 4 343.480 21,486 20,000 845,949 $47,085,664 5. Pursuant to stock option plans for officers and key employees, options for the purchase of 36,200 shares of Common Stock were outstanding at December 31, 1969, at per share prices ranging from $13.75 to $38.38 and options for 38,900 shares are subject to future grant. During 1969 options for 16,800 shares were granted, options for 39,950 shares were exercised, and options for 400 shares lapsed, of which options for 300 shares are not subject to future grant. During 1969 options for 500 shares of Series A Convertible Preferred Stock were exercised. No options for purchase of shares of Series A Convertible Preferred Stock were outstanding as at December 31, 1969. 18 CTD036525 II 11 6. Charges In income for the current year for costs in curred under existing pension plans maintained by the Company amount to approximately $410,000. The fore going costs are after revisions, as at January 1, 1909, in actuarial assumptions (relating principally to increased future yields), which resulted in an actuarial gain of approximately $3,048,000 that was applied to the un funded liability and the remaining balance of $1,800,000, representing an overfunded amount, is being amortized ou:r a twenty-year period. The Company intends 'to accrue but presently does not plan to fund current service costs The actuarially computed value of vested benefits is less than the pension plan assets at December 31. 19G9. The revisions in actuarial assumptions had no material effect on net income for the year. 7. (a) The Company is contingently obligated to reim burse a finance company or an affiliate thereof for losses incurred piior to January 1, 1975, on certain installment or term receivables acquired by them, up to a maximum of $3,000,000, and for losses arising from risks against which the Company is carrying insurance or has a reserve. In addition, the Company has outstanding guarantees aggregating approximately $1,087,000 and contingent obligations under assigned long-term leases which provide for annual rentals aggregating approxi mately $190,000. (b) Under date of February 27,1969, the District Director of Internal Revenue, Philadelphia, Pennsylvania, issued reports to the Company and subsidiaries (including one subsidiary since liquidated) proposing assessments of approximately $13,400,000, exclusive of interest, for the years 1961 through 1965, inclusive. The Company filed a protest to these proposed assessments on July 24, 1969, and with respect to the significant matters included in the reports, the Company believes that it has meri torious defenses and is vigorously contesting the pro posed assessments; consequently, no provision has been made therefor in the accompanying financial statements. (c) The Company owns 50/o of the voting stock, to gether with 5,750 shares of $60 Cumulative First Preterred Stock ($1,000 per share liquidating preference) and 10,372 shares of $60 Cumulative Second Preferred Stock ($1,000 per share liquidating preference), of Cer tain-teed Saint Gobain Insulation Corporation ("CSGM); in addition, the Company holds a $1,400,000 subordi nated note receivable from CSG, due in 1974. The invest ment in the capital stock is carried at cost ($14,771,025), which exceeded the Company's equity in the net assets of CSG by $6,351,027 at December 31, 1969. The Com pany's equity declined during the year ended December 31, 1969, by $1,837,924, which represents CSG's net loss for that period less the forgiveness of $540,000 of prior years' unpaid accrued interest on income debentures held by a French company which owns the other 50/o of CSG's voting stock. In the opinion of the Company's management, CSG's accumulated net losses of $7,807,606 subsequent to June 1967 (the last month CSG's accounts were consolidated with those of the Company and the last full month ownership of all classes of CSG stock was held by the Company) represent only a temporary impairment of the Company's investment, since it is the opinion of CSG's management that the conversion of various manufacturing facilities substantially com pleted during the latter part of 1969 to utilize patent and process rights acquired in 1967 by CSG from the French company should enable CSG to realize future profitable results. The opinion of the independent public ac countants reporting on the financial statements of CSG as at and for the year ended December 31, 1969, has been made subject to the contingency with respect to such future profitable operations. The 1969 Financial statements of CSG will be included in the Company's Annual Report on Form 10-K to be filed with the Securities and Exchange Commission. Current accounts receivable and accounts payable in clude balances of $4,239,992 and $1,274,043, respectively, with CSG. 8. EVENT SUBSEQUENT TO DATE OF ACCOUNTANTS' REPORT: On March 13, 1970, the Company entered into an agree ment to acquire a business in consideration for the issuance of 150,000 shares of Common Stock. The com pany to be acquired presently holds an interest in certain companies to be acquired by a subsidiary, Modu lar Sciences, Inc. Upon completion of these acquisitions, the Company will receive an additional 245,000 shares of Modular Sciences, Inc. Common Stock. ACCOUNTANTS' REPORT To the Board of Directors Certain-teed Products Corporation Ardmore, Pennsylvania We have examined the consolidated balance sheet of Certain-teed Products Corporation and consolidated sub sidiaries as at December 31, 1969 and the related con solidated statement of income and retained earnings and the supplemental consolidated statement of funds for the year then ended. Our examination was made in ac cordance with generally accepted auditing standards, and accordingly included such tests of the accounting records and such other auditing procedures as we con sidered necessary in the circumstances. In our opinion, subject to the effect, if any, of the matters discussed in Notes 7(b) and 7(c), the accompany ing consolidated balance sheet and consolidated state ment of income and retained earnings present fairly the consolidated financial position of Certain-teed Products Corporation and consolidated subsidiaries at December 31, 1969, and the consolidated results of their operations for the year then ended, in conformity with generally accepted accounting principles applied on a basis con sistent with that of the preceding year, and the ac companying consolidated statement of funds for the year ended December 31, 1969, presents fairly the sup plemental information shown therein. New York, N Y. January 30,1970 CTD036526 I 20 Board of Directors Malcolm Meyer, Chairman Ralph M. Bateman M. S. Davis, Jr. E. A. Diefenbach J. R. Johnston I. S. Kampmann, Jr. Harold McNabb N. W. Pearson G. S. Sutcliffe Executive Committee Malcolm Meyer Harold McNabb E. A. Diefenbach N. W. Pearson Officers Malcolm Meyer President and Chairman of the Board Harold McNabb Executive Vice President E. A. Diefenbach Vice President, Finance M. S. Davis, Jr. Vice President Morris C. Hoven Vice President E. L. Melton Vice President Byron C. Radaker Vice President Keith Swinehart Vice President Fred N. Vinson Vice President James L. Strickland Treasurer Charles E. DeLong Secretary and Resident Counsel N. J. Mueger Assistant to President T. F. Merkel Comptroller John F. Mencer Assistant Secretary and Assistant Treasurer Harold Barnard Assistant Secretary (Mrs.) M. C. Latimer Assistant Secretary CTD036527 II I1 Modular Sciences, Inc. Annual Report 1969 Board ot Directors Malcolm Meyer, Chairman William G. Hays, Jr., Vice-Chairman E. A. Dietenbach Caleb F. Fox, III Walter B. Frambes Walter V. Gearhart Philip Y. Meyer James A. Parker Byron C. Radaker Frederick G. Reiter Herbert W. Traylor Executive Committee Malcolm Meyer, Chairman E. A. Diefenbach William G. Hays, Jr. Walter B. Frambes Officers Malcolm Meyer, Chairman of the Board William G. Hays, Jr,, Vice-Chairman of the Board E. A. Diefenbach, President M. S. Davis, Jr., Executive Vice President T. F. Merkel, Vice President, Treasurer, and Controller Morris C. Hoven, Vice President Herbert W. Traylor. Vice President James A. Parker, Secretary General Counsel Grizzard, Jones, Parker & Simons, Atlanta, Georgia Auditors Arthur Andersen & Co., Atlanta, Georgia Transfer Agents Trust Company of Georgia, Atlanta Registrars The Chase Manhattan Bank, New York CTD036528 I TEo)mir In 1968, Certain-teed Products Corporation acquired a controlling interest in Modular Sci ences and shortly thereafter announced that our Company would become the construction arm for Certain-teed. During 1969, many developments have taken place to make this a reality. Confirming our belief that modular construc tion will shortly become the accepted way for building most housing and many commercial structures, the stockholders approved a change in the name of the Company from Commercial Acceptance Corporation to Modular Sciences,Inc. Recognizing the need for additional cash re sources for a growing building business, steps were taken to place privately $3 million of a new 6 percent Convertible Preferred Stock. Steps were also taken to secure a source for long-term mortgage money to be used to finance Companybuilt motor inns, and at this point approximately $13 million of mortgage money has been arranged for use by the Company. It is our belief that the modular construction concept will gain acceptance in the near future by its use among prominent far-sighted builders who recognize its cost-saving attributes. It is not our single purpose to build modular plants for builders to come to us, but rather to identify with the Company a number of successful building operations around the country which have already experienced construction through components and are ready for construction through modules. It is also our belief that the role of land acquisi tion and development, architectural skills, the knowledge and experience in working with the many government-sponsored housing programs and the construction, marketing and sale of hous ing are all essential elements in building a suc cessful business for our Company. Therefore, it is our plan to merge into the Company a number of carefully selected, successful builders who will operate in their respective local areas under the umbrella of Modular Sciences, Inc. Because of the fact that the Company's efforts are directed primarily at the construction busi ness, and as a result its financial success will be the direct result of the contribution of the par ticipating builders, we believe Modular Sciences, Inc. represents a most interesting vehicle for builders wishing to take advantage of the capital resources and economies available through the Company and its parent company. Toward this end, agreements have been reached with a prominent builder in St. Louis, Missouri. Several companies are involved in the acquisition, including a home manufacturing plant which trades under the name of Concord Homes. The effect of this acquisition will be to provide the Company with a modular production facility and an existing market penetration in the mid-section of the country. A new modular con struction plant is expected to be built shortly in connection with the needs of this profit center. 22 CTD036529 I1 , - jjjgl I| ' . I jH1 The organizational structure within the Com pany has been established to accommodate a number of individual builder profit centers, and it is expected that other builders will join the Com pany in the near future. During 1969, Modular Services, Inc., a subsidi ary, completed a modular production plant at Hartford, Alabama, and modules were produced for a motor inn in Jacksonville. Florida. The plant is presently producing modules for a motor inn in Columbia, South Carolina. The company expects to continue the construction and sale of motor inns as a part of its modular business. The operations of this subsidiary in 1969 were organ izational in nature as a result of the development of a program for the construction of modules and their utilization in motor inn construction. Vencedor Development Corporation completed its first full calendar year with the Company in 1969 and produced a profit. Two housing develop ments are under way in Puerto Rico, and a new development is starting in Southern Florida. The Vencedor operation includes land acquisition and development, manufacture of extruded as bestos cement building components, the con struction of residential housing for both the general public and the government of Puerto Rico, and the marketing and sale of housing. It is a fully integrated building operation and fits well into our broad building concept. During 1969, steps were taken to convert the Finance Division of the Company into a mortgage placement and servicing facility for the many, building operations underway and contemplated. Plans are proceeding and will be discussed fur ther as developments take place. Losses were incurred in this Division during 1969 as a sub stantial number of repossessed houses were sold. A study of ultimate costs of liquidating the remaining houses and installment obligationsindicates they will approximate income and established reserves (as to additional contingent liabilities, see Note 5 to the Financial State ments). As this Division changes its direction, profits should accrue from its efforts. The year 1969 should be looked upon as a year in which the concepts conceived for modular con struction moved from the development stage to the construction stage. The addition of other builders will accelerate this program so that the Company can make a significant impact on em ploying its concepts in the period when a high level of building activity is expected. In conclusion, we wish to express our sincere appreciation to our shareholders, customers and our lenders for their cooperation throughout the year, and to commend the efforts of our em ployees, all of whom have contributed so much to the development of the Company. Respectfully submitted, Chairman of the Board Ardmore, Pennsylvania March 16,1970 President CTD036530 Modular Sciences, Inc. and Subsidiaries ati'dit' -VriX' hjiIUoK iionaa : jY<ii rA ab (fdaotCd For the Year Ended December 31,1969 REVENUES: Sale of houses, land and construction materials...................................................................... $ 3,590,743 COSTS AND EXPENSES: Cost of houses, land and construction materials sold............................................................ Selling and administrative expenses........................'.............................................................. Interest expense.............................................................................................................................. Provision for Puerto Rican income taxes .............................................................................. Income from nontinance operations........................................................................................... 2,785,086 266,200 400,394 31,500 3,483,180 107,563 LOSS FROM FINANCE OPERATION (Note 4)..................................................................................... (355,654) NET LOSS......................................................................................................................................... (248,091) RETAINED EARNINGS (DEFICIT), beginning of year.................................................................. (1,858,653) RETAINED EARNINGS (DEFICIT), end of year (Note 6)................................................................ $(2,106,744) LOSS PER SHARE, based on average shares outstanding............................................................ Audited figures tor calendar year 1968 are not available due to a change in the Company's fiscal year-end. $( ,13) For the Year Ended December 31,1969 SOURCE OF FUNDS: Increase in notes payable and lease obligations...................................................................... Increase in accounts payable and accrued expenses............................................................. Decrease in finance operation assets, less reserves................................................................ Exercise of stock options and warrants................................................................... ,............... $ 4,296,331 775,357 147,523 13,141 $ 5,232,352 APPLICATION OF FUNDS: Net loss for year......................................................................................................................... Less--Depreciation ................................................................................................................. Motel properties additions....................................................................................................... Increase in real estate development assets.............................................................................. Increase in other assets........................................................................................................... Property, plant and equipment additions, net........................................................................... Increase in cash, receivables andinventories......................................................................... The accompanying notes are an integral part ot these statements. $ 248,091 83,369 164,722 1,926,988 1,274,227 986,366 621,531 258,518 $ 5,232,352 CTD036531 Modular Sciences, Inc. and Subsidiaries December 31, 1969 and 1968 ASSETS CASH ................................................................................................................... ACCOUNTS RECEIVABLE................................................................................. INVENTORIES, at lower of cost (first-in, first-out) or market............................. REAL ESTATE DEVELOPMENT ASSETS, at cost (Note 2)............................. MOTEL PROPERTIES under construction, and related equipment, at cost . .. PROPERTY, PLANT AND EQUIPMENT, at cost, less depreciation (Note 3) . . . FINANCE OPERATION ASSETS, less reserves (Note 4)................................. OTHER ASSETS: Goodwill and manufacturing rights (Note 1)............................................... Preferred stock of The Oxford Finance Companies, Inc., at cost (Note 5) . . Deferred charges (Note 1)........................................................................... Miscellaneous......................................... 1969 $ 139,186 172,356 458,007 9,587,747 1,955,390 797,092 4,469,520 1,187,049 741,400 984,656 52,528 2,965,633 $20,544,931 1968 $ 120,551 147,685 242,795 8,313.520 28,402 258,930 4,617,043 1,187,049 743,000 50,118 1,980,167 $15,709,093 LIABILITIES NOTES PAYABLE AND LEASE OBLIGATIONS (Note 6).................................. ACCOUNTS PAYABLE AND ACCRUED EXPENSES....................................... SUBORDINATED LIABILITIES (Note 6)........................................................... CONTINGENT LIABILITIES (Notes 2, 4 and 5) STOCKHOLDERS' INVESTMENT (Notes 1,6, 7 and 9): Common stock, $.50 par value, authorized 5,000,000 shares, outstanding 1,955,116 shares in 1969 and 1,952,616 shares in 1968 .............................. Capital in excess of par value................................................................... Retained earnings (deficit) ....................................................................... The accompanying notes are an integral part ot these balance sheets. Certain 1968 amounts have been reclassified to conform with the 1969 presentation. $10,694,462 1,844,730 4,672,845 977,558 4,462,080 (2,106,744) 3,332,894 $20,544,931 $ 6,398,131 1,069,373 4,673,745 976,308 4,450,189 (1,858,653) 3,567,844 $15,709,093 CTD036532 December 31,1969 1. PRINCIPLES OF CONSOLIDATION AND INTANGIBLE ASSETS: The accompanying financial statements have been prepared on a consolidated basis and include the accounts of ail subsidiaries after elimination of all significant intercompany balances and transactions. In 1968, the Company acquired a subsidiary engaged in the devel opment of real estate and construction of housing in Puerto Rico. This transaction was accounted for as a purchase and in this con nection $955,563 goodwill was recorded. This amount is reflected in the accompanying balance sheet together with $231,486 manu facturing rights, under a license agreement with Certain-teed Products Corporation, that were recorded in 1968 by the Puerto Rican subsidiary upon purchase of the stock of a construction materials manufacturing company. The Company does not plan to amortize these intangible assets unless there is a diminution in the value thereof. Further goodwill will arise in the event addi tional common stock (maximum 500,000 shares) is issued to the former owners, contingent upon the future earnings of the Puerto Rican companies through 1972. During 1969, significant start-up costs were incurred by the modu lar manufacturing plant operated by a subsidiary. In this connec tion, costs amounting to $984,656 are reflected in the accompanying balance sheet as deferred charges and will be amortized over a five-year period, commencing in March, 1970, the expected end of the start-up period. Recovery of these costs is dependent upon the success of future operations. 2. REAL ESTATE DEVELOPMENT OPERATIONS: ' Real estate development assets, at cost, are located primarily in Puerto Rico and consist of: 1969 1968 Land under development . $8,753,866 $7,967,246 Houses under construction 833,881 346,274 $9.587,747 $8,313,520 Substantially all of the land under development and houses under construction are pledged as collateral to mortgage notes. All costs and expenses incurred during the development and con struction period are being capitalized and are being charged to cost of sales ratably as the houses and land are sold. The pur chase prices of certain properties are based, in part, on profits from the projects and therefore, the amounts recorded for land under development, and the related subordinated liabilities, may be adjusted when the purchase prices are finally determined. 3. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment consist of: At cost-- Real estate development construction equipment........................................................ ........ Modular manufacturing plant facilities and equipment . ..'....................... .... Construction materials manufacturing plant facilities and equipment ................... ........ Other equipment............................................ ........ Less--Accumulated depreciation............... ........ 1969 $448,447 238,353 107,682 169,428 963,910 166,818 $797,092 1968 $103,765 _ 104.480 131.810 340.055 81.125 $258,930 Real estate development construction equipment costing approxi mately $366,000 is pledged as collateral to equipment obligations. The modular manufacturing plant facilities and related equip ment are leased by a subsidiary from a municipality and the cost thereof and related lease obligations have been recorded in the financial statements. Depreciation is computed principally by the straight-line method. 4. FINANCE OPERATION: Finance operation assets, less reserves, consist of: 1969 Insiallments receivable, including installmenis due after one year.................... $3,836,280 Receivable under conlraci with Certam-ieed Products Corporation ............... Installment receivables under loreclosure, foreclosed properties, insurance claims, etc 2,156,342 897,155 6,889.777 Less-- Unearned finance charges and Reserve for credit and foreclosure losses . . . 1,888.801 531,456 $4,469,520 1968 $2,653,064 2.683,924 1,813,092 7,150,080 1,911,657 621,380 $4.6t 7,0*43 Loss from finance operation for the year ended December 31. 1969, is shown below: Revenues-- Finance charges and contract income earned........................................................................... $ 553,766 Commissions, gain on sate of foreclosed properties, rental income, etc ............................................ 169.648 723,414 Costs and expenses-- Operating and administrative expenses................................ 607,225 Interest expense ..................................................................... 208.843 Provision for credit and foreclosure losses ....................... 263,000 1,079,068 Loss from finance operation ................................................ $ (355,654) Installment receivables are for low-cost housing and are due in monthly installments over periods of twelve years and longer. The receivable under contract with Certain-teed Products Corpo ration originated in 1963 and represents the Company's lO'/a equity in a low-cost housing installment mortgage portfolio now held by a third party. The remaining balance of this receivable is due on a monthly basis as payments are made by mortgagors to the third party. Under this contract, the Company is committed to purchase, within two years, those mortgages that default. At December 31, 1969, the Company had a contingent liability in this connection amounting to $25,000,000, after deducting its 10#/o equity. The pur chase price to the Company of those mortgages that have de faulted but have not yet been purchased at December 31, 1969, amounted to $353,000. The Company must pay a service charge on defaulted mortgages that are not purchased within six months of the default date. Finance charges and contract income earned are recognized under the sum-of-the-digits method for financial reporting purposes. For income tax reporting, th straight-line method is used as install ments are collected. The Company is not providing deferred in come taxes for the income currently recognized for financial reporting purposes but deferred for income tax purposes since unused prior years' loss carry-forwards remain for reduction of future taxable income. 5. WARRANTY CLAIMS: In June, 1968, the Company made certain warranties to the pur chaser of a substantial portion of the Company's installment re ceivables, primarily as to the validity and priority of real estate liens securing the assets sold. Preferred stock of The Oxford Finance Companies, Inc. ($735,000 cost) was placed in escrow to indemnify the purchaser against any losses arising from breach of warranties, if any, and was to have been released in June, 1969, if there were no unremedied warranty claims. Prior to the scheduled escrow release date, the purchaser sub mitted warranty claims covering substantially all of the assets previously sold. The Company is in the process of evaluating the validity of these claims and will defend those that, in the opinion of legal counsel, are without merit. The ultimate effect, if any, on the accompanying financial statements is not presently deter minable. 26 CTD036533 6. NOTES PAYABLE, LEASE OBLIGATIONS AND SUBORDINATED LIABILITIES: Notes payable, lease obligations and subordinated liabilities con sist of: 1969 Description Total Payable Within One Year 1968 Total 6%-l2 85% mortgage notes, secured by land under development and houses under construction, due $3,059,806 in 1970. $169,220 in 1971. $930,572 in 1972 and $96,836 thereafter ..................... $ 4.256.434 8%-9%% notes payable to banks, unsecured....................... 2,316,155 6 Vj % Series F senior notes, unsecured, due $283,350 in 1971. $566,700 in 1972, $566,700 in 1973 and $472,250 in 1974 ........................................ 1,889,000 9Vz % notes payable to Certain-leed, unsecured.......... 1,720,000 Lease obligations, secured by modular manufacturing plant .. 250,000 Equipment obligations, secured by construction equipment .... 214,779 Life insurance policy loans .... 48,094 Total notes payable and lease obligations ....................... $10,694,462 $3,059,806 2,316,155 1,720,000 10,000 140.849 48,094 $7,294,904 $3,852,071 604,021 1.889.000 _ _ 53.039 -- $6,398,131 Description 1969 Total Payable Wilhin One Year 1968 Total 672 % Series C senior subordinated notes, unsecured, due $73,500 each year commencing in 1971 ............... $ 735,000 Liabilities assumed from a predecessor company, subordinated to other liabilities relating to development of certain Puerto Rican real eslatft;dup in 1972 or upon earlier completion of project .. 1,418.418 Liabilities subordinated to certain notes payable to banks and $1,250,000 of liabilities assumed from a predecessor company-- Contracts payable to president of a subsidiary, due solely out of "net proceeds received from sale of houses," as defined................................. 2,119,427 Noninterest-bearing debenture payable to Certain-teed, due in 1973 ...................................... 400,000 Total subordinated liabilities .. $ 4,672,645 $ $ -- -- $ 735,000 1,419,318 2,119,427 400,000 $4,673,745 The agreements under which the senior notes payable were issued provide, among other things, that the Company will not permit net worth to be less than $2,000,000 or certain percentages of senior and subordinated indebtedness. In addition, certain restrictions are placed on payment of cash dividends and other payments. At December 31, 1969, no amounts are available for such restricted payments. 7 COMMON STOCK, CAPITAL IN EXCESS OF PAR VALUE AND RELATED MATTERS: Changes in common stock and capital in excess of par value dur ing the year ended December 31, 1969, are as follows: Common Slock Balance, beginning of year................................ $976,303 Proceeds received for 2,500 shares of common slock issued upon exercise of stock options and warrants................................ 1,250 Balance, end of year.......................................... .. $977,558 Capilal <n Excess of Par Value $4,450,189 11.891 $4,462,080 At December 31, 1969, oFficers and key employees held options to purchase 70,000 shares of common stock at prices ranging from $2.75 to $10.25 per share, of which options for 23,327 shares are exercisable currently. During the year, options for 1,000 shares were exercised at an option price of $4.50 per share, warrants for 1,500 shares were exercised at a price of $5.76 per share, options for 13,000 shares were granted and options and warrants for 6,500 shares expired. An additional 10,000 shares are reserved for future options. In November, 1969, the Company's Board of Directors authorized the issuance of 15,000 shares of common stock to Certain-teed Products Corporation in exchange for certain patent rights. As of December 31,1969, these shares had not been issued. At December 31, 1969, a total of 595,000 shares of authorized and unissued common stock was reserved as indicated above and in Note 1. Under an agreement, the Company may be required to repurchase up to 72,120 shares of the Company's common stock owned by an officer, in the event of his death, at a price of $5.34 per share. The Company has life insurance on this officer to provide the funds necessary to purchase this stock. 8. EVENT SUBSEQUENT TO DATE OF AUDITORS' REPORT: On March 13, 1970, the Company entered into agreements to ac quire the outstanding stock of three companies (Concord Homes, Inc., Fischer & Frichtel Development Corporation and Fischer & Frichtel, Inc.) in exchange for 548,667 shares of the Company's common stock and $400,000 cash. In addition, Certain-teed Prod ucts Corporation, Modular's parent, entered into an agreement to acquire a company affiliated to certain of these companies. AUDITORS' REPORT To the Stockholders of Modular Sciences, Inc.: We have examined the consolidated balance sheet of Modular Sciences, Inc. (formerly Commercial Acceptance Corporation; a Georgia corporation and a subsidiary of Certain-teed Products Corporation) and subsidiaries as of December 31, 1969, and the related statements of loss and retained earnings (deficit) and source and application of funds for the year then ended. Our examination was made in accordance with generally accepted auditing standards, and accordingly included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances. In our opinion, subject to (1) the recovery of deferred start-up costs of the modular manufacturing plant (as discussed in Note 1), and (2) the effect of any adjustments that may result from cer tain warranty claims (as discussed in Note 5), the accompanying consolidated financial statements present fairly the consolidated financial position of Modular Sciences, Inc. and subsidiaries as of December 31, 1969, and the results of their operations and the source and application of funds for the year then ended, in con formity with generally accepted accounting principles applied on a basis consistent with that of the preceding period. Atlanta, Georgia, January 23,1970 / CTD036534 Certain-teed Products Corporation's new headquarters complex in Valley Forge. Pennsylvania, is currently under construction and is expected to be completed by the fall of 1970. The facilities will consolidate the Company's widely scattered Philadelphia area operations, and will include the executive and administrative offices of Shelter Industries, Piping & Plastics Industries. Certain-teed Saint Gobain Insulation Corporation and Modular Sciences. Inc. EXECUTIVE OFFICES Ardmore. Pennsylvania DIVISION OFFICES Ardmore. Pennsylvania Bala-Cynwyd. Pennsylvania Fort Washington, Pennsylvania Kansas City. Kansas RESEARCH LABORATORIES Blue Island, Illinois Kansas City, Kansas McPherson, Kansas North Wales, Pennsylvania Savannah, Georgia Waco. Texas SALES OFFICES Ambler, Pennsylvania Anaheim, California Arlington, Virginia Atlanta, Georgia Baltimore, Maryland Baton Rouge, Louisiana Cartersville. Georgia Chicago, Illinois Chicago Heights, Illinois Cleveland, Ohio Dallas, Texas Detroit, Michigan Houston, Texas Kansas City, Kansas King of Prussia. Pennsylvania McPherson, Kansas Marlton, New Jersey Metuchen, New Jersey Orinda, California Phoenix, Arizona Richmond, California Roanoke, Virginia San Francisco, California San Mateo, California Savannah, Georgia St. Louis, Missouri Social Circle, Georgia Tacoma, Washington Wilmington. Delaware PLANTS Ambler. Pennsylvania Avery, Ohio Berlin, New Jersey Buffalo, New York Cartersville, Georgia Chicago Heights, Illinois Dallas, Texas East St. Louis, Illinois Hartford, Alabama Hillsboro, Texas Kansas City, Kansas (3) Kansas City, Missouri McPherson, Kansas Mountaintop, Pennsylvania Richmond, California Riverside, California Santa Clara, California Savannah, Georgia Social Circle, Georgia St. Louis, Missouri Tacoma, Washington Tyler, Texas Vega Alta, Puerto Rico Waco, Texas (3) York, Pennsylvania DISTRIBUTION FACILITIES Abilene, Texas Albuquerque, New Mexico Amarillo, Texas Atlanta, Georgia Austin. Texas Baltimore, Maryland Beaumont, Texas Carlisle, Pennsylvania Chicago, Illinois Corpus Christi. Texas Dallas, Texas (3) Dawsonville, Georgia Fort Worth, Texas Glendale, L.I., New York Harlingen, Texas Houston, Texas LaMirada, California Little Rock, Arkansas Longview, Texas Los Angeles, California Lubbock, Texas Lufkin, Texas Midland, Texas Mount Laurel, New Jersey Odessa, Texas Portland, Oregon San Angelo, Texas San Antonio, Texas (2) San Francisco, California Shreveport, Louisiana Springfield, Massachusetts Tampa, Florida Texarkana, Texas Tyler, Texas Waco, Texas (2) Wichita Falls, Texas Woodbury Heights, New Jersey A cross-sectional view of pmc wood magnified thousands of times scanning electron photomicrograph Icchmques at the Blue Island, lllinc laboratories of Certam-teed's majority-owned subsidiary. Alpha Resear^ Development, Inc. Alpha's highly skilled and experienced research* provides technical assistance lo all of Certain tncd's divisions jnl development of new and improved materials and products, and alsl engaged in a wide variety of research, development, engineering andal ing programs for outside industrial and governmental clients. 28 CTD036535 CTD036536 CERTAIKTEED 120 EAST LANCASTER AVENUE, ARDMORE, PENNSYLVANIA 19003 MODULAR SCIENCES, INC. CTD036537