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PLAINTIFF'S EXHIBIT CERTAIN-TEED PRODUCTS CORPORATION ANNUAL REPORT 1968 the challenge ofthe seventies CTD036228 c The Challenge of the Seventies 1 Operations in 1968 4 Commercial Acceptance Corporation 5 Certain-teed Saint Gobain Insulation Corporation 6 KOB Carpets, Incorporated 7 Alpha Research & Development, Incorporated 8 Building Materials Division 9 Pipe Division 10 Plastics Division 11 Wm. Cameron & Company Division 12 Gustin-Bacon Division 13 Financial Section 14 Directors, Executive Committee and Officers 20 Executive, Division and Sales Offices, Research Laboratories and Plants 21 COVER: Freddy and Drarrell Butter live in Montopolis, a lowincome area on the outskirts of Austin, Tex. The housing plight of the Butler family and of millions of families like theirs Is what "The Challenge of the Seventies" is all about. CTD036229 TO OUR SHAREHOLDERS die challenge ofthe seventies In the decade ahead, the greatest single challenge facing in dustry and government is to find, within the profit-centered framework of the free enterprise system, solu tions to the growing maze of social and economic problems with which we are now faced. For American in dustry generally, and for Certain-teed particularly, this is the "Challenge of the Seventies." While these problems take numerous forms--and their eventual solutions will depend heavily upon the imaginative application of our tal ents and resources -- the mounting need for more and better housing is at the heart of many. The passage through Congress of the 1968 Hous ing and Urban Development Act cor roborates the firm belief of concerned citizens everywhere that slums can no longer be tolerated. This Act, one of the most am bitious housing laws in the nation's history, has set as a national goal the construction or rehabilitation of 26 million dwellings over the next 10 years. To accomplish this mammoth undertaking, private involvement in housing must be motivated on an un precedented scale, stimulating the development of new construction ma terials and building techniques, changing antiquated building codes, increasing the supply of trained man power, providing new sources of mortgage capital, and enlarging our sense of social responsibility. Certain-teed's management has focused on the impending crisis that we now face, and has done con siderable study and planning toward mobilizing the Company's research and development, plant expansion and acquisition programs to prepare for our vital role in meeting the challenge. Late last year, in Austin, Tex., we were privileged to participate in a ceremony that highlights the nation's search for a solution to the problem of housing the poor. On that day, then President Johnson dedicated an ex perimental low-income housing proj ect, Austin Oaks '68, supervised by the University of Texas in cooperation with the U.S. Department of Housing & Urban Development. One of the 10 prototype homes in the experiment was built by Certain-teed. Austin Oaks '68 involves one of the most complete studies of its type ever made, and is aimed at de veloping guidelines for low-income housing. The two-year project will in clude intensive research of the engi neering, architectural and even the sociological features of each home, as well as a detailed cost analysis of its construction, operation and maintenance. The one-story, two-bedroom Certain-teed House, aimed at the lowincome market, employs a new sys tem of masonry construction created by the Company. It consists of ex truded asbestos cement components which fit together like a giant Erector Set to make a flexible, modular sys tem that reduces field construction costs and may be applied to a wide variety of shelter sizes and styles, in cluding two-story townhouses. The Certain-teed House is a product of the resources and imagi nation of the Company's many divisions and demonstrates the ever- CTD036230 .. we have all the restlessness and disorder in the cities because people who cannot eat in a decent place, cannot sleep in a decent place and cannot grow up in a decent place are just not going to be decent citizens . . --Former President Lyndon B. Johnson at the dedication of Austin Oaks '68. 2 V5*=\ widening role of Certain-teed in the building and construction industry. The architectural components, for ex ample, were developed in coopera tion with the Pipe Division with its technical skill in the production of ex truded asbestos cement materials. The Wm. Cameron Division supplied the doors, windows, kitchen cabinets, decorative blinds and the interior and exterior trim. Fiberglass insulation and ductwork came from Certain-teed Saint Gobain Insulation Corp., while the asphalt shingles for the roof were produced by the Building Materials Division. Future models of the house will include all-plastic plumbing pro duced by the Plastics Division. The Certain-teed House is one step in |he company's continuing search for the materials and products that will answer the "Challenge of the Seventies." But it is but a part of our involvement in the task which lies ahead. Rehabilitation of our cities and rural poverty areas, as well as the construction of totally new cities to accommodate a burgeoning popula tion, will need to include new and im proved hospitals, schools, colleges, libraries, shopping centers, neighbor hood recreation facilities, job training centers, hotels and motels. It will also need to include the modernization and expansion of water, sewage, gas, electric, telephone and municipal services as well as transportation ar teries. And along with this explosive growth will be an accompanying in crease in industrial construction to meet the rising demands of a more and more affluent consumer. Certain-teed, through its divi sions serving a large and growing CTD036231 "In pursuing our goals of full employment, better housing, excel lence in education; in rebuilding our cities and improving our rural areas; in protecting our environment and enhancing the quality of life; in all these and more, we will and must press urgently forward." --President Richard M. Nixon in his Inaugural Address. segment of the construction industry, is uniquely equipped to be a signifi cant part of this venture. Paralleling the construction pace of the Seventies will be unusual growth in the market for home fur nishings as a result of the combined increase in population and consumer income. In anticipation of this, agree ments have been made for the ac quisition by Certain-teed of KOB Carpets, Inc., of Cartersville, Ga., which produces tufted broadloom carpeting distributed through a na tionwide network of distributors and dealers. The "Challenge of the Seven ties" clearly calls for an undertaking requiring all of the economic wisdom and industrial skills at our command, as well as new and as yet undevised partnerships between government and private enterprise. Certain-teed Products Corporation has a large and growing stake in the outcome, and is poised to play a leading role in an swering the challenge. We are pleased to announce that during 1968 the Board of Direc tors elected Geoffrey S. Sutcliffe, dep uty chairman of Turner & Newall, Ltd., a director, and E. L. Melton, Byron C. Radaker, and Fred N. Vinson as vice presidents ot the company. Mr. Ron ald G. Soothill, former chairman of Turner & Newall, Ltd., and a director of the company, retired during the year. We also regret that Mr. Donald N. Clausen, who served for many years as a director and counsel, has retired from the board. We sincerely appreciate the fine services of these gentlemen. We wish to express our ap preciation for the cooperation of our stockholders, customers and friends; and to commend the efforts of our employees, all of whom have con tributed much in 1968, and whose continued cooperation is essential to our success in the future. Respectfully submitted, Chairman of the Board The Certam-teed House at Austin Malcolm Meyer President Ardmore, Pennsylvania February 20,1969 CTD036232 operations in 1968 The year 1968 produced a sharp recovery for the Company as housing activity in the country began its move toward the levels required to meet the housing needs of the Seven ties. Sales climbed to $177,580,550, from $167,176,426 in 1967, reflecting an improvement in both volume and prices for our major product lines. Net earnings after taxes for the year were $6,904,254, as compared with $3,034,156 for 1967. Earnings per share of Common Stock (stated be fore and after conversion of Series A Convertible Preferred Stock) were $1.65 and $1.45, based on the aver age number of shares outstanding, as compared with 530 and 640 for 1967. Results of operations for 1967 reflect the inclusion for the first six months of certain sales, costs and expenses arising from activities which, effective June 30, 1967, were transferred to a 50 percent-owned company, Certainteed Saint Gobain Insulation Corpo ration (CSG). During 1968, CSG invested more than $10 million in capital im provements to utilize patents and processes acquired from Compagnie de Saint Gobain. During the year, CSG incurred a loss of $2,665,712 (see note 8(d) to Notes to Financial Statements) resulting from curtail ment in production of its insulation products during the shut-down of plant facilities for the conversion pro gram. This phase of CSG's expansion program should be completed in 1969, and a profitable base estab lished for further expansion to meet anticipated market demands (see page 6). The Company acquired in 1968 a controlling interest in Com mercial Acceptance Corporation (CAC) through the conversion of Sub ordinated Notes into Common Stock (see page 5), and is entering the home furnishings market through the acquisition of KOB Carpets, Inc. (see page 7). The financial position of the Company was further strengthened during 1968 through the sale of 150,000 shares of Common Stock upon the exercise of outstanding stock purchase warrants. Working capital at the year end rose to $48,185,089, from $44,848,665 at the close of 1967. As a result of the exercise of conversion rights by the holders of the Series A Convertible Preferred Stock, Common Stock increased dur ing the year by 487,107 shares. Divi dend payments on the Common Stock during 1968 amounted to $2,857,253, or 800 per share. Dividend payments on the Series A Convertible Preferred Stock during 1968 amounted to $1,071,845, or 900 per share. The level of capital expendi tures is being stepped up to provide new plant capacity, and in 1969 are likely to more than double those of 1968. A new roofing plant in Ohio, three PVC pipe plants to serve the Southeast, the Southwest and the West Coast, along with a number of improvements to our existing facilities to increase capacity and reduce costs are presently planned. Prices of the Company's ma jor building products showed im provement in 1968 over the levels experienced in 1967, but generally failed to return to the levels of prior years. With continuing increases in costs, it is clear that additional price increases are necessary to fully re store adequate profit margins. Recent price increases have been announced for certain of the Company's prin cipal products. As this report goes to press, a new Administration in Washington is seeking effective solutions to the housing problems of our nation. Our Company believes that a unified ef fort by industry, labor, government and the general public will be re quired in the decade ahead to make significant inroads into this most diffi cult area. Success in this undertaking will bring great rewards for our coun try, our industry and our Company. CTD036233 commercial acceptance corporation A majority of the Common Stock of Commercial Acceptance Corporation was acquired during the year by Certain-teed. This company, whose history of operations has been in the fields of construction, mort gage financing and real estate, is ex panding rapidly into motel operations and new commercial and residential construction techniques. A new plant is now under construction in Alabama and will be utilized by the Modular Sciences Di vision of the company to manufacture modular motel rooms. The modular units will be completed in the plant and shipped as a finished product, including equipment and furnishings T\K MJTM. OR MOTOR INN such as air conditioning, heating, wiring, plumbing, ceramic tile bath rooms, and even carpeting. The units will be delivered to a motel site, set in place on a foundation by cranes and will need only connection of utilities. Immediate plans are to limit production to the manufacture of such units for the company's Matador Mo tor Inns Division. However, long term plans may include use of the com pany's skill and technology in pro ducing modular residential units and certain types of commercial buildings. The Matador Motor Inns Divi sion of CAC has been established for the purpose of owning and operating motor inns which will be built of mod ular units. They are designed for use primarily by commercial and family travelers. Each Matador Motor Inn will include a restaurant, "The Cape and Sword," and a swimming pool. Heat ing and air conditioning, with indi vidual room controls, will be provided and there will be a variety of room sizes, including family rooms. The first Matador Motor Inn is now under construction in Atlanta adjacent to a large amusement complex, "Six Flags Over Georgia." Plans call for owner ship and operation of additional motel units and, at a later date, establish ment of a franchising program. Vencedor Development Cor poration, another division, is engaged in real estate development and resi dential and commercial construction in Puerto Rico. Approximately 2,500 houses, with a price range of $14,000 to $20,000, are planned for construc tion on three company-owned tracts in suburban San Juan, two of which are presently being developed. This Division also operates a manufacturing facility for production of asbestos cement products. In addi tion to various types of pipe, the plant produces extruded components used in a modular system of masonry con struction. The parts can be quickly assembled on a concrete slab foun dation and provide housing at a low cost with a wide flexibility in design. Vencedor will construct some modular homes of this type in its pres ent projects, and is planning to use the system for low-cost housing else where in Puerto Rico and in the Caribbean area. The modular ma sonry house also has great potential in the continental United States for commercial applications and for lowand medium-priced residences. CTD036234 certain-teed saint gobain insulation corporation (csg) Certain-teed Saint Gobain Insulation Corporation (CSG), head quartered in Bala-Cynwyd, Pa., was a company undergoing change in 1968 as two of the company's three manu facturing facilities, in Mountaintop, Pa., and Berlin, N.J., were completely rebuilt. The third facility, in Kansas City, Kan., received a partial conver sion to the advanced fiberglass man ufacturing processes developed by Compagnie de Saint Gobain, Paris, France. Compagnie de Saint Gobain, which owns CSG jointly with Certainteed, has been a world leader in glass manufacture for more than 300 years. One of its first projects was making glass for the famed Hall of Mirrors at Versailles. Since then, Saint Gobain has grown to be the largest glass works in Europe and one of the larg est in the world, and has pioneered many of the technological develop ments in the manufacture of glass fiber and related products. The right to use its patents and advanced tech nology for the production of fiberglass and other insulation products has been granted to CSG, forming the basis for the company's rebuilding program. As a result of its plant conver sions, Certain-teed Saint Gobain is the second largest producer of fiber glass insulations in the country. CSG today manufactures and markets fi berglass home insulation, residential and commercial ceiling panels, and fiberglass insulations for industrial and commercial construction, mobile homes, appliances, equipment, and the transportation industry. CSG sales offices are located throughout the United States, and the Company operates distribution cen ters in Chicago, III.; Long Island, N.Y.; La Mirada, Calif.; and Baltimore, Md. A new distribution center is now un der construction in Atlanta, Ga. With its plant conversions to the Saint Gobain processes, with ca pabilities to produce a complete line of insulating materials, and with a marketing network throughout the United States, Certain-teed Saint Gobain is laying the foundation for a period of rapid expansion. CSG fiberglass insulation is finding wide acceptance among mobile home manufacturers CTD036235 kob carpets, inc Certain-teed has entered the rapidly expanding broadloom carpet ing market through its recent ac quisition of KOB Carpets, Inc., of Cartersville, Ga., which produces a line of plush, scroll and shag carpet ing using modern synthetic yarns of nylon, acrylics and polyester for the new residential construction, house hold replacement, vacation, and mo bile home markets. KOB has demonstrated its ability to successfully serve a market that is steadily climbing. Soft floor ing's dramatic growth in recent years is attributable to new technologies and the introduction of versatile, man made fibers which together have brought wall-to-wall carpeting price levels within the reach of most family budgets. Carpeting sales in the next decade are expected to receive a strong boost from the population ex plosion, particularly among young families; the attendant rapid increase in personal income; changing con sumer tastes evidenced by greater home-oriented interest and individu ality of expression; the strong up surge in housing starts; and FHA's recent authorization to include car peting under its mortgage insurance programs. To meet projected demand requirements, KOB in 1969 plans to expand its Cartersville production facility and to add new tufting and finishing equipment. Part of this program calls for KOB's entry into the contract (com mercial and institutional) carpeting market which has substantial growth prospects. As labor continues to be in shorter supply and increasingly more costly, architects, commercial sponsors, and contract buyers are re lying more heavily on carpeted floors that, in most applications, cost less to maintain than those that are uncar peted. They are also becoming more aware of carpeting's other features, including acoustical, safety, sanita tion and thermal insulation, as well as design aesthetics. Certain-teed's channels of distribution in the building materials field are expected to significantly sup plement KOB's national distribution network, while the new partnership will provide a base from which Certain-teed can further extend its in terests into the household furnishings market. 7 CTD036236 alpha research & development, inc. Certain-teed Products Cor poration this year acquired control ling interest in Alpha Research & Development, Inc. The privatelyowned research firm, located in Blue Island, III., is engaged in a wide vari ety of research, development, engi neering and testing programs for both industrial and governmental clients. In recent years, Alpha Re search & Development's many research projects, utilizing the com pany's extensive background in sur face chemistry and its stereoscanning electron microscope facilities, have resulted in the development of a num ber of commercial products. Among these were studies in corrosion and corrosion inhibitors, coatings, adhesives, detergents and dental restorations. The company's outstanding technical capabilities are expected to add a new dimension to Certain-teed's research and development of new and improved products, materials and techniques in all of its divisions. Yeast cells magnified thousands ot times by scanning electron photomicrograph techniques at Alpha Research & Development laboratories in Blue Island, III. CTD036237 building materials division This year, the Building Mate rials Division acquired a new felt mill at Avery, Ohio, to meet the rising de mand for the Division's roofing mate rials in the homebuilding and home improvement markets. In the coming year, the Avery facilities will undergo rehabilitation and a new roofing plant will be built adjacent to it. The total complex is expected to go into full production by 1970, and will add substantially to the Division's total output. The eight other plants throughout the country are also being studied in anticipa tion of increasing their production capacities. The Hallmark asphalt shingle, also known as the "Shangle", con tinues to capture the attention of ar chitects, builders and homeowners throughout the country, and is the result of the Division's continuing pro gram to design roofing products of high style and quality that will appeal to discriminating buyers of homes as well as apartment house builders. In 1968, the Research Depart ment launched a program to devise new roofing application methods that will reduce on-site labor which is an increasingly acute problem as the labor market shrinks. Successful re sults from this program will give Certain-teed another advantage for its roofing materials. By this time next year, primed hardboard siding will be added to the Division's product line, and is ex pected to double sales of fiberboard materials. Also slated for introduction by 1970 is fiberglass roof insulation and fiberglass acoustical ceiling panels. In the year ahead, the Build ing Materials Division's capabilities for manufacturing roof coatings and cements will be expanded, making it possible to increase the sales volume of waterproofing products. The market for fiberglass in sulation, distributed through the Build ing Materials Division, continues to grow at a rapid rate as people de mand greater home comfort, winter and summer, and become more and more aware of the economies of fiber glass home insulation. Modern heat ing and air conditioning, requiring more and heavier insulation to in crease their efficiency, are an added factor in the rising demand for this product. This Division is also giving careful consideration to the handling of carpeting made by KOB Carpets, Inc., Certain-teed's newest subsidi ary. There is a growing trend among building materials distributors to mar ket this product, offering an excellent opportunity for additional profit. 9 CTD036238 pipe division 10 In the decade ahead, instal lation of new pipelines will be the first step in growth of industrial construc tion, in expansion of communities, in urban redevelopment, and in the huge new programs for redistribution of the nation's water supplies, as well as for irrigation and flood control. The meth ods to be used for water pollution control also depend upon pipelines as their most essential ingredient. Certain-teed's Pipe Division is challenged to play an important role in this growth. The continuing goal of mod ernizing and automating all six asbestos-cement plants to increase capacity and lower costs is progress ing as scheduled, with several plants increasing production capability in 1968. Quality control is at an all-time high as a result of a continuing pro gram of personnel training and technical innovation. Facilities for im proving customer service have been installed in each of the plants. In changing to a total market ing concept, the Pipe Division has or ganized its sales force to cover the broad markets of oil and gas distribu tion systems, salt water disposal sys tems, various industrial piping applications, contractors and munic ipalities, and plumbing supply houses. The Pipe Division, which mar kets the polyvinyl chloride (PVC) pipe products of the Plastics Division, re cently introduced the FLUID-TITE joint for PVC pipe. With this new product and an expanded production capabil ity and marketing program, PVC pipe sales were dramatically increased. On many projects, combinations of PVC and asbestos-cement pipe are sold. This link-up of two materials permits transmission not only of water and wastes, but oil, gas, and nearly any thing suitable for transportation via pipe or conduit. Progress has also been made in sales of Certain-teed's new asbes tos-cement fluid transmission pipe, developed to meet present and future requirements for soil conservation programs and for long-distance trans port of water. In 1968, the Division custom-designed and sold F-T pipe for use in major projects in the West and Southwest. The Pipe Division expects that its capacity, which has been greatly increased, will provide an excellent source of profits in the years ahead. CTD036239 plastics division The Plastics Pipe Institute has estimated that by 1976 plastics will have 37 percent of the market for sewers, 30 percent for drain, waste and vent systems and 28 percent for potable water. Plastic pipe also now accounts for about 16 percent of gas utility lines in the United States, and is expected to increase at least 25 percent annually in the next few years, according to a recent report in the Wall Street Journal. This optimistic outlook has placed Certain-teed's Plastics Divi sion, the leading polyvinyl chloride (PVC) pipe producer in the nation, at the brink of an unprecedented period of growth. The Division's modern plant in McPherson, Kan., has undergone substantial expansion in recent years to meet the mounting demand for its products. In 1968, additional steps were taken to increase production of pipe as well as solid vinyl siding, gut ters and downspouts for the growing home construction market. Late in 1968, PVC pipe pro duction began at the Division's new plant in Waco, Tex., to meet the rap idly expanding market in the South and Southwest. The McPherson plant was enlarged to include 53 acres, and ground was broken early in 1969 for a new manufacturing building. Prop erty has also been acquired near At lanta, Ga., for construction of a third PVC pipe extrusion plant. Additional plant locations are also under consideration. Ten years ago the operation consisted of one extruder capable of 11 making pipe up to four inches in di ameter. Today, numerous extruders turn out pipe in sizes ranging from half an inch to 15 inches in diameter, much of it in 40-foot lengths. The accepted use of large di ameter vinyl pipe has opened the new and productive markets in rural and municipal water distribution, private and municipal gas distribution, farm and turf irrigation, electrical conduct ing, oil field process lines and resi dential plumbing. Sales of the Division have tri pled in the last three years. In 1968, the company supplied on one job alone the pipe and fittings for 780,000 feet of gas distribution lines con nected to nearly 5,000 services in 20 Central Missouri communities. A recent technological break through enables the company to pro duce siding at lower costs than those generally experienced in the industry. In the years ahead, it is anticipated that the market for the Division's new vinyl siding may equal and possibly surpass the spiraling demand for its pipe products. CTD036240 wm. cameron & ca division 12 This year marks a century of growth for the Wm. Cameron & Co. Division, one of the nation's largest distributors of building materials and a leading manufacturer of millwork for the growing residential and industrial construction industry. Headquartered in Waco, Tex., the Division has 19 wholesale branch offices and warehouses serving the building materials market throughout the Southwest. It also operates a plant in Waco that produces a complete line of millwork, including doors, win dows, frames, entrances, mantels and decorative blinds. Cameron products, marketed under the name IDEAL Qualitybilt Woodwork, are distributed through 400 jobbers in 44 states in cluding Alaska, and in Canada. Substantial investments have been made recently to enlarge a num ber of warehouses in order to pro vide ever-improved service to the Division's dealers during an era of growing construction activity in the Southwest. Studies are also being made on the future construction of additional warehouses in various parts of the country. Two major steps taken in the past year--construction of a new metal products plant and installation of a priming operation for millwork-- will add greater depth to the IDEAL product line. The metal products plant is housed in a new building located in Waco, Tex. Production of a quality line of aluminum windows began in August, and plans call for expansion of the line to include sliding patio doors, storm doors and other alumi num products for homesand commer cial buildings. Most of the equipment in the new plant was designed and built by the company. IDEAL aluminum windows carry the Quality Certified Seal of the Architectural Aluminum Manufactur ers Association and meet or exceed strict FHA Minimum Property Standards. The priming operation is also housed in a new building with modern facilities for applying a prime coat to a wide range of products, including windows, frames and blinds. The de mand for factory-primed millwork has increased dramatically in recent years, and IDEAL'S new, ultra-modern facility will enable the company to capitalize on this expanding market. CTD036241 gustin-bacon division The Gustin-Bacon Division in 1968 showed a substantial increase in sales and operating profits for its wide range of products used in the construction, automotive, transporta tion, mining, petroleum and rein forced plastics industries. Generally, these industries have shown consis tent, above-average growth and offer both immediate and long range op portunities for the introduction of new products and profitable expansion of the Division's production capacity. Much of Gustin-Bacon's suc cess this year is attributable to the higher sales volume of Amberlite sound deadening felts and safety padding for the growing automotive market; to increased sales of an ex panding line of fiberglass specialty products for the transportation indus try; and of piping products used pri marily in construction and mining. The demand for GustinBacon's quality line of Ultralite fiber glass thermal and acoustical insula tions continues at a very high level. Plans for the coming year will be aimed at increasing production capacity and providing additional manufacturing facilities to meet the growing demand for fiberglass used in the production of reinforced plas tics products. Recent surveys show that by 1976 one out of every three, or more than 300,000 bathrooms installed in the U.S. will include fiberglass rein forced plastic components. Similar favorable conditions exist in the mar ket for fiberglass reinforced plastic tanks and vessels. In order to capitalize on this growing market, Gustin-Bacon is in creasing its manufacturing capacity for Ultrastrand fiberglass reinforce ments and expanding its research and development .activities in this area. A complete facility will soon be placed into operation for the production of highly specialized products, includ ing fiberglass reinforced plastic bath room components and storage tanks and vessels. Long range forecasts con tinue to reflect increasing new car sales reaching toward the 10 million per year level, with added emphasis on sound deadening felts and safety padding. Automobile design changes also continue to dictate greater use of plastic parts. Plans are being formu lated for an expansion of manufactur ing facilities for the production of Amberlite felts and paddings and, during the coming year, Gustin-Bacon will begin production of certain plas tic products forthe automotive market. New items such as the Wedgetite safety brake for trucks and the Plain Grip pipe coupling are ex pected to bring added sales volume in the year ahead. 13 CTD036242 Certain-teed Products Corporation and Consolidated Subsidiaries consolidated statement of income and retained earnings Years ended December 31,1968 and 1967 1968 NET SALES ................................................................................................................................. $177,580,550 1967 $167,176,426 COST AND EXPENSES: Cost of goods sold ......................................................... Selling and administrative ...................................................................................................... 143,454,793 20,140,436 163,595,229 13,985,321 OTHER INCOME/(Deductions)--net......................................................................................... FEDERAL INCOME TAXES (net of investment credit of $298,000 and $163,000)--Note 7 ........ NET INCOME.............................................................................................................................. RETAINED EARNINGS AT BEGINNING OF YEAR.................................................................... 167,933 14,153,254 7,249,000 6,904,254 52,414,416 59,318,670 DIVIDENDS: Preferred Stock.................................................................................................................... Common Stock................................................................................................................... 1,071,845 2,857,253 3,929,098 RETAINED EARNINGS AT END OF YEAR............................................................................... $ 55,389,572 Net income per share on average shares outstanding............................................................ Pro forma net income per share (reflecting conversion of outstanding preferred stock)........ $1.65 $1.45 Depreciation of plant and equipment amounted to $4,528,684 in 1968 and $5,132,502 in 1967. The accompanying notes are an integral part of this statement. 140,752,897 20,369,911 161,122,808 6,053,618 (192,462) 5.861.156 2,827,000 3.034.156 53,257,696 56,291,852 1,336,286 2,541,150 3,877,436 $ 52,414,416 $.53 $.64 CTD036243 consolidated statement offunds Years ended December 31,1968 and 1967 SOURCE OF FUNDS: Net income ........................................................................................................ Depreciation of fixed assets and amortization of intangible assets................... Deferred Federal income taxes ......................................................................... Increase in long-term debt................................................................................. Stock issued under stock option plans and exercise of stock purchase warrants Decrease in other assets and deferred charges................................................ APPLICATION OF FUNDS: Increase in property, plant and equipment, net................................... Dividends ........................................................................................... Decrease in long-term debt................................................................ Investments in associated company and unconsolidated subsidiaries Increase in other assets and deferred charges................................... Other, net ........................................................................................... Increase in working capital.................................................................. 1968 $ 6,904,254 4,866,839 387,643 -- 3,202,352 _ $15,361,088 1967 $ 3,034,156 5,570,481 413,589 6,619,954 17,371 1,871,205 $17,526,756 $ 4,830,542 3,929,098 302,177 2,181,838 560,999 220,010 3,336,424 $15,361,088 $ 4,106,366 3,877,436 -- 949,108 -- 420,193 8,173,653 $17,526,756 CTD036244 Certain-teed Products Corporation and Consolidated Subsidiaries consolidated balance sheet at December 31,1968 and 1967 ASSETS 1968 CURRENT ASSETS: Cash ....................................................................................................................................... $ 1,699,016 1967 $ 1,139,665 Short-term investments,at cost................................................................................................ 16,700,205 14,500,000 Accounts and notes receivable, less allowance for uncollectibles of $1,095,053 and $837,573--Note 8d..................................................................................... 24,632,638 23,421,285 Inventories, including raw materials and supplies amounting to $7,374,494 and $7,576,484--at lowerof cost or market............................... Totalcurrent assets ............................................................. 28,753,277 71,785,136 25,643,095 64,704,045 INVESTMENTS IN AND RECEIVABLES FROM ASSOCIATED COMPANY AND UNCONSOLIDATED SUBSIDIARIES--Notes 1 and 8d........................................................ 17,162,414 13,421,025 PROPERTY, PLANT AND EQUIPMENT, at cost, less depreciation of $36,621,568 and $33,060,460--Note 2 .............................................................................................................. 48,611,943 48,405,312 OTHER ASSETS AND DEFERRED CHARGES......................................................................... 3,180,409 4,083,734 INTANGIBLE ASSETS, at amortized cost................................................................................... 2,208,926 $142,948,828 2,547,081 $133,161,197 The accompanying notes are an integral part of this statement. CTD036245 LIABILITIES CURRENT LIABILITIES: Accounts payable and accrued expenses--Note 8d Current installments on long-term debt--Note 3 . ... Federal income taxes.............................................. Total current liabilities LONG-TERM DEBT--Note 3............................................................................. DEFERRED FEDERAL INCOME TAXES.......................................................... OTHER NONCURRENT AND DEFERRED ITEMS............................................. STOCKHOLDERS' EQUITY--Notes 3, 4, 5, and 8: Preferred Stock, $1 par value, authorized 2,000,000 shares; 1,024,428 shares designated as Series A Convertible, issued 1,010,328 and 1,487,535 shares (liquidation preference $25,258,200 and $37,188,375)............................... Common Stock, $1 par value, authorized 7,500,000 shares, issued 3,890,232 and 3,389,948 shares...................................................... Capital in Excess of Par Value....................................................................... Retained Earnings ......................................................................................... Less: Common Stock held in treasury, at cost--51,686 and 201,686 shares . Total stockholders' equity..................... 1968 1967 17 $ 18,194,994 304,805 5,100,248 23,600,047 $ 17,053,634 296,467 2,505,279 19,855,380 11,231,938 11,534,115 2,734,002 2,346,359 2,458,283 2,678,293 1,010,328 1,487,535 3,890,232 43,171,537 55,389,572 (537,111) 102,924,558 $142,948,828 ' 3,389,948 41,551,034 52,414,416 (2,095,883) 96,747,050 $133,161,197 CTD036246 notes to financial statements CTD036247 AT DECEMBER 31, 1968 The financial statements at December 31, 1967, and for the year then ended (as reclassified) are shown for comparative purposes only. Reference should be made to the previously issued Annual Report for the Accountants' Report and notes pertaining to those financial statements. 1. On March 1, 1968, the Company exchanged the shares held in a wholly owned consolidated subsidiary, Vencedor Manufacturing Com pany, Inc., for 50% of the voting stock and a debenture of a newly organized company, Vencedor Development Corporation. The Com pany's equity in the results of operations of Vencedor Development Corporation from March 1, 1968 to November 29, 1968 (date of dis position to an unconsolidated subsidiary) is not material. On July 1, 1968, the Company exchanged subordinated notes of Commercial Acceptance Corporation ("CAC") for shares of CAC's common stock, as a result of which the Company's holdings in CAC's common stock increased from 13% to over 50%. On November 29, 1968, CAC acquired all of the capital stock of Vencedor Development Corporation and in connection therewith issued additional shares of its common stock, subject to possible future adjustment, to the Com pany. As at December 31, 1968, the Company, after including shares acquired during the year for cash, owns 60% of the outstanding common stock of CAC. The accounts of CAC have not been con solidated because CAC is not a significant subsidiary and its opera tions from date of acquisition of majority ownership to December 31, 1968 (which are not material) relate principally to the mortgage finance business. The carrying amount of the investment in CAC ($1,998,862) represents cost less a resen/e and approximates the underlying equity thereof as computed on the basis of CAC's audited consolidated financial statements as at December 31, 1968. Subsequent to December 31, 1968, the Company entered into an agreement to acquire, in a pooling of interests, the outstanding stock of KOB Carpet Manufacturing Co. and KOB Carpets, Inc., in exchange for a maximum of 130,000 shares of the Company's Common Stock. On a combined basis these two companies are not deemed to be significant. 2. Property, Plant and Equipment consists of: Land ........................................................................$ 2,251,895 Buildings and land appurtenances........................ 24,569,167 Equipment................................................................ 56,649,943 Construction in progress........................................ 1,762,506 $85,233,511 Depreciation on plant and equipment is computed principally by Ihe straight-fine method on the basis of annual rates ranging generally from 2% to 121/2% in the case of buildings and land appurtenances, and 5% to 20% in the case of equipment. 3. Long-term debt, exclusive of current installments, consists of: 5.55% Notes payable to insurance company, re quiring payments of $550,000 annually from 1970 to 1986, the remaining unpaid balance be coming due in 1987 .............................................$10,000,000 Contract payable, requiring payments of $206,650 annually through 1972 ........................................ 619,950 Other ........................................................................ 611,988 $11,231,938 The note agreement relating to the notes payable to insurance com pany 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, 1968, consolidated Retained Earn ings of approximately $12,100,000 were not restricted as to the pay ment of Common Stock dividends. 4. Dividends on the Series A Convertible Preferred Stock are cumula tive at the annual rate of 90* per share. Each share is entitled to one vote, has a liquidating value of $25 pbr share plus accrued unpaid dividends, is convertible into one share of Common Stock and may be called by the Company after June 30, 1971 (subject to the con version rights of the holders) at a price of $25 per share plus accrued unpaid dividends. In connection with the exercise of Stock Purchase Warrants, capital in excess of par value was increased during the year by $1,229,728, representing the excess of the proceeds received on the issuance of 150,000 shares of Common Stock held in the treasury over the aver age cost thereof. At December 31, 1968, there was outstanding a transferable 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 shares of treasury stock for issuance against the warrant. Changes in shares of capital stock and in capilal in excess of par value during the year are summarized as follows: Common Stock Issued Treasury Warrants Shares Shares Shares Preferred Stock Issued Shares Capital in Excess of Par Value Balance at January 1. 1968 3.389.948 201,686 170,000 1,487,535 $41,551,034 Exercise of stock options--Note 5 13,177 9,900 390,775 Conversion of preferred stock 487,107 (487,107) Exercise of warrants (150,000) (150,000) 1,229,728 Balance at December31.1968 3.890.232 51,686 20,000 1,010,328 $43,171,537 5. Pursuant to stock option plans for officers and key employees, options for the purchase of 59,750 shares of Common Stock were outstanding at December 31, 1968, at per share prices ranging from $13.75 to $38.38, and options for 55,600 shares are subject to future grant. During the current year options for 1,700 shares were granted, options for 13,177 shares were exercised and options for 2,913 shares lapsed. A1 December 31, 1968, options granted to certain officers and key employees for the purchase of 500 shares of Series A Convertible Preferred Stock were outstanding at per share prices of $17.875 and $19,125. During the current year options for 9,900 shares were exer cised and options for 4,000 shares lapsed. 6. Charges to income for costs incurred under existing pension plans maintained by the Company amount to approximately $465,000. Cur rent service cost is funded as accrued. Unfunded prior service cost is being amortized over a ten-year period and is being funded over a twenty-year period. The actuarially computed value of vested bene fits is less than the pension plan assets at December 31, 1968. 7. The provision for Federal income taxes includes a deferred amount of $344,000. 8. (a) The Company is contingently obligated to reimburse a finance company or an affiliate thereof for losses incurred prior 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. In addi tion, the Company has outstanding guarantees aggregating approx imately $1,247,000, and contingent obligations under assigned long-term leases which provide annual rentals aggregating ap proximately $190,000. (b) As at December 31. 1968, approved additions to and replace ments of fixed assets approximate $10,400,000. (c) Federal income tax returns of certain prior years of the Com pany and subsidiaries (including one subsidiary since liquidated) are being examined by the Internal Revenue Service, The Company has been advised orally that a dralt of a Revenue Agent's Report, which is now under review by the Review Staff of the District Direc tor's Office, proposes assessments of approximately $13,400,000, exclusive of interest; however, since no formal report has been received by the Company, it is impossible to know what the Internal Revenue Service's final position will be. With respect fo the sig nificant matters discussed by the agent, the Company believes that it has meritorious defenses to the assessments under con sideration, and intends to vigorously contest them; consequently, no provision has been made therefor in the accompanying finan cial statements. (d) The Company owns 50% of the voting stock, together with 4,500 shares of $60 Cumulative First Preferred Stock ($1,000 per share liquidating preference) and 10,372 shares of $60 Cumulative Second Preferred Stock ($1,000 per share liquidating preference), of Certain-teed Saint Gobain Insulation Corporation {"CSG"); in addition, the Company holds a $1,400,000 subordinated note re ceivable from CSG, due in 1974. The investment in the capital stock is carried at cost ($13,521,025), which exceeded the Com pany's equity in the net assets of CSG by $4,513,203 at December 31, 1968. The Company's equity declined during the year ended December 31, 1968, by $2,665,712, the amount of CSG's net loss tor that period, which amount includes an extraordinary loss of $171,913 incident to the demolition of certain manufacturing equip ment. In the opinion of the Company's management, CSG's ac cumulated net losses of $5,429,682 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 im pairment of the Company's investment since it is the opinion of CSG's management that significant future profitable operations are expected to result from a conversion of various manufacturing facil ities which is taking place in order to utilize patent and process rights acquired in 1967 by CSG from a French company (also the owner of the other 50% of CSG's voting stock). The opinion of the independent public accountants reporting on the financial state ments of CSG as at and for the year ended December 31,1968, has been made subject to the contingency with respect to such future profitable operations. The 1968 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 include bal ances of $2,347,858 and $1,294,695, respectively, with CSG. 19 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 subsidi aries as at December 31, 1968 and the related consolidated statement of income and retained earnings and the supple mental consolidated statement of funds for the year then ended. Our examination was made in accordance with generally ac cepted auditing standards, and accordingly included such tests of the accounting records and such other auditing proce dures as we considered necessary in the circumstances. In our opinion, subject to the effect, if any, of the matters discussed in Notes 8 (c) and 8 (d), the accompanying consoli dated balance sheet and consolidated statement of income and retained earnings present fairly the consolidated financial position of Certain-teed Products Corporation and consolidated subsidiaries at December 31, 1968, and the consolidated re sults of their operations for the year then ended, in conformity with generally accepted accounting principles applied on a basis consistent with that of the preceding year, and the ac companying consolidated statement of funds for the year ended December 31, 1968, presents fairly the supplemental informa tion shown therein. New York, N. Y. January 27,1969, except for Note 1 which is as of February 7, 1969. CTD036248 CERTAINWD 20 Board of Directors Rawson G. Lizars. Chairman Ralph M. Bateman M. S. Davis, Jr. E. A. Diefenbach J. R Johnston I. S. Kampmann, Jr. Harold McNabb Malcolm Meyer N. W. Pearson G. S. Sutcliffe Executive Committee Rawson G. Lizars, Chairman Malcolm Meyer Harold McNabb E. A. Diefenbach N. W. Pearson Officers Rawson G Lizars Chairman of the Board Malcolm Meyer President Harold McNabb Executive Vice President E. A Diefenbach Vice President and Comptroller 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 and Assistant Secretary Charles E. DeLong Secretary and Resident Counsel N. J. Mueger Assistant to President T. F. Merkel Assistant Comptroller Harold Barnard Assistant Secretary (Mrs.) M. C. Latimer Assistant Secretary Transfer Agent Bankers Trust Company, New York Registrar The Chase Manhattan Bank, New York CTD036249 fci' 4'r *', *> *3.**r- j-'S/;.. v-iiiu; ' ,,:vv^r^;,nvVi;r`.,,;v:; CERTAIN-TEED PRODUCTS CORPORATION Ardmore, Pennsylvania 19003 CERTAINTEED CTD036251