Document v1Ygkm0Y7BLyGD1E9Q9LpKeEZ

ca SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20349 1985 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(5)^ OF THE SECURITIES EXCHANGE ACT OF 1934 Forte fiscal year ended >31,1983 Comnittioa file iwiwiw 1-3026 Delaware 1341 Alpa Road, Wayne, New Jersey information Santos ""J^^tbitliirsburti MMytand (201) 428-3000 Securities registered porsoant to Section 12(b) of the Act: JMuli Common Stock, par value SI .00 per share 1 1JA% Senior Subordinated Notes due 1995 New York Stock Exchange New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check marie whether the reentrant (1) has filed all reports required to be filed by Section 13 or 13(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ..a., iw...... As of February 27. 1986, 17,666,301 shares of common stock wen outstanding. The aggregate market value of the voting stock held by non-affillait? of the registrant as of February 27, 1986 was S933.494.340. The aggregate market value wu compute,4 by reference to the closing price on the New York Stock Exchange of the registrant's Common Stock oo such due (S68(/). For purposes of this computation, voting stock held by officers and directors oi the registrant has been excluded. Such exclusion is not intended, and shall not be deemed, to be an *(mission that such officers and directors are affiliates of the registrant. DOCUMENTS INCORPORATED BY REFERENCE 1. The Company's Proxy Statement for the 1986 Annual Meeting of Shareholders is incorporated by reference in Part III, Items 10, 11, 12 and 13. 2. The Company's Annual Report to Shwchoiders for the yew ended December 31. 1983 is incor porated by reference in Part I. Item I. and in Part II. Items 3. 6, 7 and 8. TOTAL OF SEQUENTIALLY NUMBERED PAGES: (S * 5 EXHIBIT INDEX ON SEQUENTIALLY NUMbtREO PAGf$0 A PART I Item 1. Basinas. The Company was incorporate*, under the laws of the State of Delaware in 1929 and has its princi pal executive offices at 1361 Alps Road. Wayne, New Jersey 07470. The "Company" refers to GAF Corporation and its subsidiaries. The Company's operations are grouped into two divisions: (i) the Chemicals Division which operates five domestic specialty chemicals plants, one jointly-owned chemi cals plant located outside the Ui1 cd Stares and four mineral granules plants and (ii) the Building Ma terials Division which operates ten roofing plants, two glass fiber plana and one glass mat plant. The Company also operates a classical music PM radio station in the New York City market. Financial information concerning the Company i industry segments required by Item 1 is included in the Com pany's Annual Report to Sharehc!dcn for the fiscal year ended December 3'. 1985 (the "Annual Re port") in Note 9 of the Notes to Con :lidated Financial Statements. The Company also owns approximately 10% of the outstanding Common Stock of Union Carbide Corporation, a major international tnani tctuner of industrial gases, chemicals and other products. See "Investments and Acquisitions''. CHEMICALS DIVISION Principal Products The Chemicals Division manufactures and sells three major groups of specialty chemicals--acetylene derivatives, surfactants and engineering plastics and a line of mineral roofing granules. Acetylene Derivatives The Chemicals Division manufactures more than 73 different chemical products derived from acetylene. Manufacturing operations ir lude a wide variety of pressure, temperature, catalytic and other processing steps. These specialty tLemicals are sold worldwide primarily to the pharmaceutical, ct 'tnstics, plastics, automotive, agricultural, textiles, oil and gas, paper and print coatings industries. These products are marketed in four groins: intermediates, solvents, polymers and vinyl ethers. Intermediates--These products are butanediol, butynediol, butenediol, propargyl alcohol and Butoxyne* 497. Butanediol is used by oe Company as raw material in manufacturing solvents, poly mers, vinyl ethers and engineering plasucs products. Butanediol is also sold to customers, primarily for use in engineering plastics, urethane elastomers and thermoplastic urethanes. Propargyl alcohol is sold primarily in the oil field and agricultural markets. Butynediol and Butoxyne 497 are sold primarily to the metal plating industry. Butenediol is used as on intermediate in biocides and pharmaceuticals. Solvents--These products are soil to customers os high performance solvena for use in a variety of industries and include BLO* (butyrolactone), THF (tetrahydrofunn), M-Pyrol* or NMP* (N-rnethyl-2-pytTOlidone) and 2-Pyroi* (2-pyrroUdone). They are uned by the Company in manufactur ing polymer: and other downstream products. They are sold to customers for use In agricultural, foundry binder resin and lithographic applications (BLO); agricultural, wire *>id other coatings, plas tics. electronic microchips and integnuad circuits, lubrication o<i extraction and gas purification ap plications (M-Pyrol); vinyl top ooatingt, magnet' tape and PVC cements applications (THF); and pharmaceutical, veterinary and coatings applications (2-Pyrol). In 1985, M-Pyroi was granted "exempt from tolerance'' status by the U. S. Environmental Protection Agency for preharvest use as an inert ingredient in agricultural chemical products. Polymers--The major applications of the polymer product line are in the cosmetics, pharmaceutical, energy, chemical manufacturing, beverage, adhesives and radiation curing industries. V-Pyrcl" (N-vinyl-2 pyrrolidone). the monomer from which PVP polymers and other downstream products are derived, is itself used as a reactive diluent for the radiation curing industry, 3 comonomer for the manu facture of viscosity index improvers for premium'motoroils as well as enhancer1 oil recovery chemiculs 2 ud u a pigment dispersant. The vinylpyirolidone based polymers include the polyvinylpyrrolidone (PVP), Plasdone*, Polyplasdone* and Polyclar* products. The major applications for PVP and Plosdone polymers are in the cosmetic and pharmaceutical industries respectively. PVP is used as a binder, stabilizer, protective colloid, film-former, adhesive detoxicant, adjuvant and viscosity modi fier. Plasdone polymers are used as pharmaceutical excipients, drug and vitamin tablet binders, coating agents and process' g aids in fluid bed granulation. New transdeimal devices utilize these polymers to provide time-controlled medication designed to remain active over long periods of time. Polyplasdone XL and XL10 products are used as drug and vitamin tablet disintegrants. Polyclar AT and Polyclar 10 are used as clarifiers and chill-hazing agents for beer, wine, fruit juices and other beverages. PVP-Iodine is a water soluble, non-staining, microbiocidal product used in human and veterinary ap plications. Gafquat* products are film-forming polymers used in hair care products like the popular mousse products, ss well as conditioners, gels and glazes. Ganex* polymers are alkylated pyrrolidooes showing varying degrees of solubility in water or in mineral oil and solvents which an. used in cosmetic applications such as water-resistant eyeliner and lipstick, and industrial applications such as a film for mer in shoe polishes and a dispersant in agricultural chemical formulations. Copolymers of vinyl pyrrolidone and vinyl acetate, the PVP/VA copo ymen, are used extensively for adhesives and for var ious hair care products. Vinyl Ethers--This product tine consists of monomers and copolymers marketed under the Gantrez* trademark and is primarily used in the cosmetics and pharmaceutical fields. Reactive monomers are employed as building blocks for various agricultural and pharmaceutical chemicals. Ap plications of the copolymen in cosmetics include hair sprays, hair styling and other hair care products, while In the pharmaceutical field, denture adhesives is the major use. The Gantrez* copolymers are also used as film formen in coatings, stabilizers in adhesives and other industrial uses and'au thickeners snd crystal growth inhibitors in detergent formulations. Surfactants The Chemicals Division manufactures and sells surfactants (surface active agents). Surfactants are organic chemical compounds that possess detergent, emulsifying, dispersing, foaming, penetrating snd wetting properties. A major pert of surtetant output is used in the production of packaged soaps and detergents for household, industrial and institutional uses. The balance is used in pulp and paper mak ing, the manufacture of agricultural chemicals, cosmetics, polymer emulsions, metal lubricants, paints snd pharmaceuticals, textile and leather processing, oil drilling operations and many other products. The Chemicals Division's broadest surfactant product line is the lgepal* series of oikyiphenol ethoxylsted surfactants sold primarily to customers for use in (1) household, industrial and institutional detergents. (2) emulsion polymerization and (3) textiles, lgepel surfactants have a wide variety of uses, including detergent compounding (laundry, dry cleaning, dairy, metal and household applications), washing and scouring of natural and man-made textile fibers, paper deinking. corrosion inhibiting, water repellent finishes, rewetting agents for paper towels and tissues, wetting snd spreading agents in water based paints and for emulsion polymerization of vinyl acetate and polyvinyl acetate and other synthetic latex emulsions. The Chemicals Division's Alipal* products are a line of anionic high foaming and frothing, emul sifier agenr, and detergents, often produced for a small number of customers for use in specific applica tions. Major users are the emulsion polymerization, pharmaceutical and agricultural industries. The largest applications of Anton* and Gafac* phosphate esters are deresination of hardwood pulps and corrosion inhibitors in coatings. Anton phosphate esters are sold to the metal working in dustry and Gafac phosphate esters ire told to a variety of industries, from paper to agriculture. r>- major markets for Igepon* alkyl esters surfactants arc synthetic soap ban, dentifrices, shampoos and other cosmetic prepvaiions, textile processing and agricultural dispersants, .ntarox* nonionic surfactants are low foaming additives for commercial and industrial detergents and are primarily so'd for use in spray metai cleaners, machine dishwashing detergents, rinse aids and textile processing. 2 3 Engineering Thermoplastics The Chemicals Division manufactures and sells engineering thermoplastic polyester products based on polybutylene terephthalate ("PB7"). PBT thermoplastics am a developing product line competing in the engineering plastics market with long-established major volume materials such as ny lons, polycarbonates, polyacetals and other products. PBT is manufactured by renting butanediol, an intermediate manufactured by the Company, and dimethy(terephthalate to produce hard plastic pellets. These pellets are used by the Company as raw materials to make a variety of resins, compounds and alloys which are sold to customers, primarily for use in manufacturing Mastic products under the Gafite* and Gaftuf* trademarks. They are also sold directly to customers for use as base resins. The compounds and alloys may contain pigment or glass fiber reinforcement and other additives such aa fire retardants, impact modifiers and mineral fillers. These products incirde polyester molding compounds which ore used to replace metals sad traditional plastics in automotive, eiectrkal/electronic components, appliance and other applications requiring high strength, good electrical properties and resistance to high temperature, chemicals and warping. Gaftcx* polyester elastomers, a new family of products, are flexible, tough, resilient, chemical resistant plastics which can be blow molded, extruded or injection molded. It is formulated for use in seals, flexible telephone cords, hydraulic hose, insulation for communications wire and cable and bellows-type seals for the automotive industry. Mineral Granules Tla Chemicals Division mine* and crushes a nonporoua basalt rock, mostly from its own quarries, producing various types of natural and semi-ceramic coated mineral granules which it tells to the roof ing industry for uh.ui mineral surface on asphalt roofing. The use of granules in roofing contributes substantially to its weathering capability and imparts the decorative coloration to shingles. The granules are sold to asphalt roofing manufacturers throughout most of the United States and in Canada. The Company's Building Materials Division is the Chemicals Division's largest purchaser of granules. Mineral ftHc- for the asphalt coating of shingles and tennis court material is also produced and sold. The Chemicals Division's granules business benefits from the current trend among roofing manu facturers to convert production to glass fiber substrate as the glass product requires more granules per unit of asphalt roofing. In sdtition, the increased popularity of heavyweight three-dimensional shingles which simulate wood has increased granules demand in that they require 30 percent more granules than lower-cost, commodity shingles. Othtr Products The Chemicals Division manufactures iron carbonyl and iron powders for the aerospace, electron ics and powder metallurgy industries. The Chemicals Division also markets outside the United States liquid process filtration systems (consisting of Alter begs manufactured by the Company and hardware produced by two foreign manu facturers to the Company's specifications) which are used in the production of pharmaceuticals. cosmetics, paint, food and beverages. Raw Materials The raw materials used in the production of chemical products are purchased from s large number of outside sources, in many cases pursuant to supply contracts. Certain of the raw materials, including acetylene, arc obtained from limited sources pursuant to long-term supply contracts. With respect to acetylene, the Chemicals Division is supplied domestically at three locations by two suppliers. In addi tion. the Chemicals Division manufactures acetylene intermediates in Marl. West Germany, at a plant jointly owned and operated with Chemische WerkeHtlls A. G. ("HUIs"). Hills supplies acetylene to the plant from an adjacent manufacturing facility, Some of the intermediates manufactured by the joint 3 vesture plant are shipped to the Chemicals Division's plana in the United States for use in manufactur ing many of (he Chemicals Division's other acetylene derivative products. The Company believes that, in the event of interruption of supply from these sources, it could manufacture these intermediates at its facilities or obtain supplies from alternate sources. Raw materials derived from petroleum or natural gas are used in many of the Chemicals Division's manufacturing processes, and consequently the price and availability of petroleum and natural gas nre material to the costs of operations. The Chemicals Division has obtained, and expects to continue to obtain, adequate supplies of these products at reasonable costs. In connection with its mineral granules operadons, the Chemicals Division owns three quarries, with proyen reserves of a minimum of 20 years each, looted in Annapolis, Miasouri, Blue Ridge Sum mit, Pennr.ylvania, and Pembine, Wisconsin. In 1985. the Company purchased land adjacent to two of these quarries for pantiles reserves. The rock used in the production of the Bound Brook. New Jersey plant is purchase from a quarry located nearby. In addition, production capacity was in creased at .the Blue Ridge Summit, Pennsylvania and Annapolis, Missouri plants. International Operaticns The Chemicals Division's international operations, which are consolidated in the results of the Chemicals Division, consist principally of the marketing of chemical producu manufactured by the Chemicals Division in the United States. Subsidiaries are located in various countries of Western Eu rope and in Australia, Brazil, Canada. Japan. Mexico, Singapore and other countries. In certain loca tions, sales are made through distributors rather than through local subsidiaries. The Company's foreign subsidiaries also market the liquid process nitration systems which are produced in Europe. Brazil and Canada for moriteu outside the United Sates. The doubling of capacity for butanediol at the joint venture plant in West Germany, approved as part of the Company's capital expansion program announced in 1984, is scheduled for start-up in mid-1986. The acetylene intermediates manufactured by such plant are marketed through the Chemicals Division's i'.tternationai sales force und GAF-HUls Chunk GmbH, the joint venture between the Com pany and HOIs. The joint venture enables the Chemicals Division to compete effectively in markets ouuide the United Saks In 1985, the Chemicals Division's international operations, including export sales from domestic operations, accounted for approximately 27% of the Chemicals Division's net sales. The Company dues not believe there are anv unusual risks attendant on iu foreign operations. See Note 10 of the Notes to Cnntniidated Financial Stater.ient* in the Annual Report, page 32. for financial information by geo graphic areas. Patents, Trademarks, etc. The Company owns approximately 303 domestic and 360 foreign parents and approximately 147 domestic and 713 foreign trademarks related to the business of its Chemicals Division. The Company balkvea iu righu under lu r.lsilng parents and parent applications to ba materia! in order to maintain iu present position in the industry. The duration of the existing patents and (latent licenses is deemed gen erally satisfactory. Seasonal Variations, Working Capital, Customers Seasonal variations are genetally not material to the business of the Chemicals Division. Inventory balances arc generally sufficient to meet customer demand and do not materially deviate from standards for the industry. Th.? Chemicals Division does not generally provide for extended pay ment terms to customers. The Chemicals Division sells to a wide varic;y of industrial customers wiih particular emphusis on the pharmaceutical and cosmetics industries. No single customer or group of customers under common control is responsible for sales in excess of 10% of the consolidated revenues of the Compuny. In eer- 5 tain instances a single customer may purchase all, or a significant part, of the output of a particular product. The Company does not believe that the lost of any one such customer would have a materiel advene effect on the business of its Chemicals Division. Backlog, Marketing and Sales, Competitive Conditions Backlog is not material to the business of the Chemicals Diviiion or any of its principal products. Sales to the federal government are not material to the business of the Chemicals Division. The Chemicals Division sells its products primarily through its own sales force in the United Stales. The CTmn*?*1* Division is the sole United States producer of a complete line of high-pressure acetylene-based chemicals. The Chemicals Division competes in la acetylene derivatives line with a nsqjor foreign competitor and with another large company which manufactures substantial quantities of butanediol and THF for its own use and for tale to others. In the balance of its chemical businesses, the Chemicals Division competes with many companies, certain of which ara substantially larger than the Company and offer a broader range of products. Gen erally. the Company has responded to this competition by emphasizing product innovation, product quality, reliability of supply and customer service. The Company believes that the great size and diver sified nautre of the chemical industry makes it impossible to give a meaningful estimate of the relative position of the Chemicals Division in the industry. Research and Development Research and Development expenses for both the Chemicals Diviiion and the Building Materials Division in 1983.1984 and 1983 are presented In Note I of the Notes to Consolidated Financial State ments appearing in the Annual Report, page 27, and such figures sro incorporated herein by reference. Most of the amounts shown were expended by the Chemicals Division. As of January 31. 1986, 104 exempt and 84 non-exampt employees were engaged in Companysponsored research and development. The Chemicals Division substantially increased its commitment to its reseoch and development effort during the peat year. Important steps in this direction included the hiring of e number of additional research scientists and the acquisition of state-of-the-art equipment for chemical analysis, pilot studies and materials application development. In 1983, the Chemicals Di vision introduced a number of new or improved products in each of its product lines. The Company expended 8368,431, 81,473.086 and 81.047,343 on customer-sponsored research and development services for the years 1983. 1984 and 1983. respectively. BUILDING MATERIALS DIVISION Principal Products The Building Materials Division manufactures end sells roofing materials to the residential and commercial roofing industries. Residential Roofing The Building Materials Division manufactures and sells complete line of residential roofing shin gles. Shingles are made from an asphalt impregnated fiber glass mat. heavily coated on both sides with layers of waterproofing asphalt, and surfaced with ceramic coated mineral granules. The Division's principal products ere its Sentinel*. Timberline* and Royal Sovereign* brand shin gles. Sentinel shingles ore the Company's standard product line. Timberline premium rooiit.j shingles are e three-dimensional, heavyweight, laminated product offering a Class A tire rating, long-term dura bility and superior aesthetics. The product has gained acceptance as a replacement for wood shake shin- 3 6 gtos, particularly in arid parts of the country such as Texas tad California whan flra codes impose strict requirements, to improve the appearance of homes and enhance the value of property. Royal Sovereign, a new product introduced nationwide in early 1985, la destined to eapitnlJe on the emerging "middle market" for quality roofing shingles at a just slightly higher price than standard Sentinel shingles. All of these types of shtuglcs art sold throughout the United States. The Division also manufactures and sells roll roofing, e less expensive type of prepared roofing than shingles, which is used primarily on relatively small residential and commercial structures such as cabins, sheds and utility buildings with pitched or gently sloping roof lines where the durability and aesthetics of shingles are not required. Roil roofing is also made from an asphalt Impregnated glass mat and may be surfaced with granules. Commercial Ropfing The Building Materials Division markets a complete line of built-up roofing products and acces sories, referred to as the "OAF Suparsystcxn", for use in the application of built-up roofing. Built-up roofing is a form of roofing which, unlike shingles and toll roofing products, is assembled on the roof by application, using heated asphalt, succesaivt layers of vapor retardant (treated paper, vinyl or bitumens) thermal insulation, a weathartight roofing membrane and, in some applications, granules. The Division manufactures the vapor retardant layer, called a "base shaat", and a quality com modity glass membrane under the trademark Gafglas*. both of which are made from asphalt impreg nated glass fiber mat. In 1915, the Division completed its total conversion to glass fiber built-up roofing and. with its captive supply of glass fiber, is in a position to taka advantage of Uw expanding glass segment of built-up roofing as the industry phases out organic felts. The. Division also sells packaged asphalt and accessories such as flashings, vent stacks, fasteners, cements, coatinp and roof insulation supplied by other manufacturers. In the Fall of 1985. the Division started to sell modified bitumen products under the trademark Ruberotd MB* in the Fastern United States. Domestic production and nationwide sales started during ths first quarter of 1916. Ruberoid MB is a single ply roofing system consisting of a strong, resilient, ipunbondud polyester mat coated with a polymer modified asphalt. Modified bitumen systems provide high performance characteristics, such ss weather and water resistance, and labor cost savings due to ease of application. The Division's Mount Vernon. Indiana plant was expanded to install the new manu facturing line for Ruberoid MB. The Division also malls built-up roofing asphalt and products supplied by other building insula tion manufacturers. Raw Materials The major raw materials required for the manufacture of the Division'i roofing products are as phalt, glass fiber, glass fiber met. filler (generally crushed or pulverised limestone, griniia or sand) and granules. Asphalt and filler are available from a large number of suppliers. GAF currently has contracts with several of theca suppliers, uith others available as substitutes. Five of ths Division's roofing plants have easy access to deep water ports allowing delivery of asphalt by ship, which is the most economical means of transport. Roofing granules are purchased from ths Chemicals Divine n end from other suppliers. Over the last several years, the industry has switched from organic fait to glass fiber mat u the "subatrate" or base layer for roofing products, Shingles mads with glass mat require substantially leu asphalt than do shingles made from an organic fait mat, reducing costs for asphalt and increasing use of granules. The Company has a plant which makes glass fiber mat for internal consumption but. until recently, it pur chased all of the glass fiber used in manufacturing its mat from other companies On May 10. 1983. (t * Company acquired the glass fiber manufacturing facilities of Reichhoid Chemicals. Inc,, with plants located in Nashville, Tennessee and Irwindaie. California i.i order to manufacture chopped glass fiber for met substrate, thus achieving a more complete Integra-'on of its roofing manufacturing process. 6 7 Founts, Tradenarks. etc. The Company owm appro,dmately 39 domestic and 53 foreign patents and approximately 67 domestic and 194 foreign trademarks related to the business of its Budding Materials Division. The Company believes the patent protection covering certain of its products to be material to those products, but patents are not of material significance to the business of the Building Materials Division nor to the industry generally. The duration of the existing patents and patent licenses is deemed generally satisfactory. Seasonal Variations. Working Capital, Customers Salas of roofing products generally decline during ths winter months due to adverse weather con ditions. To maintain a morn conamnt level of manufacturing and sake, the Building Materials Division followed in 1995. as well as in previous years, ths practios of "wiatsr dating", principally in northern regions of the linked States, pursuant to which advantageous extendad credit terms'ara offered to creditworthy customers who order end accept delivery of roofing end insulation during the winter monthe. A "winter daring" program is also being offered to customers in 19S6. No tingle cusuxner or group of customrns under common control is responsible for sates in excess of 10% of the consolidated revenues of the Company. .Backlog, Government Salts, Competitive Conditions Backlog is not malarial to the business of the Building Materials Division or any of its principal pru-Hucts. Sales tc the federal government ire not material to the business of the Building Materials Division. The products Industry is highly competitive and incleda* at least six major competitors. inciuo'V .to T *ion and numerous other regional competitors. Competition is baaed largely upon price, <UOih - on capability, complementary products, credit terms and raw materials supply. The Di vision is well positioned in the markcrplace, especially for sales to distributors, as a result of favorable raw material costs and the fact that it offers the most complete line of residential roofing products In the ifiduthy. The Building Materials Divis'on markets Its roofing products through its own sales force which is based in 'Jistnct sales offices acres the United States. A major portion of iu sales tire to wholesale distributors who reset? to roofing contractors and dealers. The remainder of the sales either are to retail ers who sail to the *'-sume. market or direct sales to the construction industry. In late 1984. the Di vision instituted the OAF Easy Finance Program nationwide--a new plan enabling rooting customer* purchasing the Division's products to obtain from Finance America home improvement loans on competitive terms. For several yean, prices in die roofing Industry have declined. To meet this trend, the Division maintains aggressive programs to reduce raw material end other coats, automate production facilities, introduce new products, emphasise sales of profitable high value-added products and maintain tales at a relatively nigh level in relation to plant capacities. In 1986, the Division, formerly The Ruberoid Company, acquired by GAF Corporation in 1967, will ?elebrate iu 100th anniversary. Research and Development The Building Materieli Division is constantly engaged in ne- f*'oducu development and process invwovementt leading to ect savings on.! increased manufacturing efficiencies. In lp83. the Research and Development group of the Division, among other things, successfully introduced the modified bitu men products and various other new products. 7 8 WNCN (TM) Acquired by (he Company tat Juts 1976, WNCN, 104.3 PM. it romnurrlal radto stution broadcaeting to dm New York City nmtropoUtaa ana which pwmn classical musk tad cultural programs, It is on the air 24 hours a day, 7 days a week. OAF Broadcasting Company. Inc., a wholly owned subsid iary of the Company, manages the station and also publishes a monthly magazine. Ktyoott, which i devoted to claaakal muaic aad the ant and includes a complete program guide for the radio station. See "Uam 3. Legal Proceedings" below for a description of a pending lawsuit seeking to compel the Company to sell WNCN on certain terms. 1NVISTMENTS AMD ACQUISITIONS The Company invests hi e wiacy of psograma ia order to masIndie the raters on to short-term investments. Among them are preferred end conunon sioek Invest--is, risk erhitiege. dividend capnee and ssock/flmuns eebinge progmme. The avenge amoent inveeted in theae programs derlng 19*3 was approximately $30 million. While the investment program became Inactive during the last quarter at IMS because of the Company's investment in Union Carbide Corporation ("Union Carbide"), dm progmme have been resumed in 1916. la view of the proceeds maimed from she sale of a portion of the securities of Union Carbide described below, the average amoent Inverted in these programs in 1966 may substantially earned last year's level. These Immatnmim are reviewed on a regular basis by the Audit Committee of the Board of Directors aad by the hill Board. Proa June through August 1985 dm Company purchased 6.961.000 shares (or 9.9%) of dm outrtmtdinf Common Bt^i^slt of U^ti^t^t ( ^Nt^irss ) ^t^t aggregate cost of approximately S336 million. After considering verioue alternatives for enhancing this iavsrtnmnt. the Company commenced a tendar ofto on December 9, I9B3, supplemented ea December 13. to purchase 41 million Shares (appmiiemmly h>% of the total Shares oetssaediag) for a cash price of S6I per Share together with e plan to acquire dm remaining Shares not already owned by dm Company for dm same price in a suhse- quant merger. Union Carbide thee began an eirimaga offer to purchase 33% of to Shams for package of cash and noses with a face vales of SS5 per Shan. On December 26. !43 dm Company amended to offer by increasing iu offer to 374.00 per Share in cash if Union Carbide withdrew its exchange offer, or, ia dm ahanmtive. If Union Carbide did not withdrew Its offer, by offering to purcfcaoc at S74.00 par right, the package of cash, noses end stock which shareholders who tendered their Shane to Union Carbide by its prontion deadline would hive the right to receive. On December 30 and 31. 1913 the Company sold 233,000 Shame. The Company then tanderad 6.72S.000 Shares to Union Caibida. On January 2, the Company again increased its offer to $78 par Shan ta cash, conditioned upon Union Carbide's acceptance of friendly merger. In light of Union Catbida's announcement to expand iu exchange offer to 93% of iu Shares and to pursue s divestiture program similar to that contemplated by the Company and dm fact that the market price of the Shares was reflecting these actions, the Company announced on January I, 1916 iu intention to withdraw iu offer. The Company withdrew 1.833,000 Shane from iu lender to Union Carbide in order to maintain iu approximately 10% shareholding in Union Carbide. Of dm Shame mndarsd by dm Company. 3,499.813 wars nurehmad and paid for by Union Carbide in cask and ia securities and 1,395,It? Shares were rammed to dm Company. Descrip tions of dm purchase price paid by Union Carbide and of dm subsequent tele of portion of dm securi ties received from Union Carbide in to exchange offer era contained in dm Company's Currant lUpon on Form t-K flled on February 27, 1916 end incorporated herein by inference, In connection with dm tender offer, dm Company retained dm investment banking Arm of Drexel Surnhsen Lambert incor porated which has obtained commitments for 33.5 billion of Aaancing. In addition to cash compensa tion already pld. dm Company agreed to pay to such Amt e percentage of any proflt reeliced in the event that the Company disposed of substantially ail of to Shams. Reference is msds to dm Letter Agreement deled December 9. 1983 between (he Company and Drexai Burnham Lambert Incorporated incorporated herein by reference, The Company continues to own 3.228.187 shores iw approximately 10,6%) of the Common Stock of Union Carbide outstanding after its exchange offer. Union Carbide has announced itt intention to sell iu Consumer Producu Division and declared a dividend payable to thereholders of record on February 8 9 IS, 1M6 aqual id the dUhnuca betwemi dm net tab proceeds and dm eatfauamd SI. I bilttoa Mt book value ofdmCouaamcrftodueis Division. As such Division had not been sold by Match 1,1916, Union Carbide broad and distributed lo ks shanboMn rights to receive dm dividend upon coimutriuartou of such Hit. The Compaay ha* announced that k will coadaoe to monitor tha activities of Union Carbide. Depending upon developments and such factors a* the Company considers relevant. including, without Uaioa Carbide's progress with respect to its program snnouacad io its pens iclease dated /senary 2.1916 sod dm market price of the Shares, dm Compaay may datsmina to do om or more of dm fbUoadeg: (a) parchaaa erttkrinaal shame torn time to dam through opes manta purchases, pri vately aagorimad ttaroacdom. aaethar medar oflkror othatwiaa, (b) hold tha thaies k preiaiely owes, (c) mak ooearoi of Uutoe CvMda, (d> ptepoaa a aamgar or shailar huaiaam oossbiuabou transaction bscwero dm Company aed Union Carhida, (a) seek to ielloaoca tha amuagamaet sod policies of Uaioa Carbide or (f) sen or otherwise dlapooo of some, or ad. of dm Sharea it hseadrislly owes iaopee market saias or in privately nsgotismd tremactioer. hi 1 , dm re^f^r^t^u^r^f, i^e srs tiptrria ^u^ks^tt^^ti^j^rs, all dm shame of its $1.20 Convert- Ms Frefenud Slock. Sbamhotdan coevormd 2,324.333 shares of profaned Mock into 2.909.144 shares of commoe stock sod the Company redeemed 111,033 shares of preferred stock it a price of $27.30 plus accrued divideods. As a result of dm ledempdoos, dm Company retired all of ksS 1.20 Convertible Preferred Stock series. la Juao 1913. dm Compaay issued $130 millkm principal amount of 11 3/9% Senior Subordinated Noma duo Juno IS. 1995, redeemable sftar June IS, 1992 at thrir principal amouat phis accrued inter est. tmmuai on dm noma is payable semiannually. Dus to severely reduced availability and lurmand costs kt dm marital fer liability Insurance, pmtirulsriy far chemical manufacturer!, dm Compaay commenced, on November 1, 1995, essentially to seif-feeura ha gansml liability risks. The Company inlands to resume purckess of liability lasovmce at sneb **-- as marital availability usd omts indicate that dks is desirable. In Pehnmcy 1916. the Company's Revolving Credit Apeeraeat was amended to isfleet dtenges kt the bank group and an increase kt the number of banks. On February 24, 1996, dm Company docfeted a two-for-en# stock spilt, subject to approval by sbaruboidart at the Company's Aaeusl Meeting of Shareholders on April 29.1996 of an amendment tu its Canldcam of Incorporation jamming the number of authorised shares of Centrum Slock from 23.000.000 to 100.000.000. A description of other smendmerts to the Company's CwiiticMe of Incor poration to be submkmd for shareholders' approval may Ira found In tbs Prosy 3ttvmeni dated March 27. 1996 for iu 1916 Annual Moating of Shareholders (the ">ro*y Statement") under "Proposal No. 2-Cl--sideation of dm Board of Directors and Other Amendment to the Ceriifkam", rrmlfCIMM AH1*U UinPIrNf The dfecuaiton m to mbassos related and anvironmaniai lawsuits invoicing tha Company, and appearing in response to "Item 3--Legs) Proceedings" below, is Incorporated herein by reference. During the last 13 yean, a wide variety of federal, state and local environmental taws and regaledons have been adopted and continue to be adnpsod and changed. By reaaon of tha nature of the Com pany's pass and present operations end certain of the substances which ere, or have been. used, produced or discharged by the Company't plants, capita) eeptndmtret and increased operating v passes, (he amount of which cannot be estimated at tbit time, mey be occasioned by ihe Company continuing efforts to deal responsibly with environmental matv/is. Activity coftpnues in mauen pertaining to compliance kh the Tosic Substances Control Act. Systems lurv* been set up for assessing risk to Health or en- ironment at early development stages (or new products. Prv-Manufacturing Notices for new chemical io be commercslly inirodocrd arc nled j* required 9 10 Tbe Company betievee that compliance with envisvomeml coctrol requirements will not advmnrjy affect Ha omuMdtive position in the industries in which it is engaged. These requirements resuited is capital expea*urr? of approximately S4.9 million from 1983 through 1983, The Company currently has pisnt to invert an sdditioosl amouat of approximately S3.4 million in pollution abatement facilities is 1916, $4.3 million is 1987 and M J million ia 1931. Included ia these amounts sre the costs sasocistsd with the improvement and iiuuilation of waste water treatment facilities at the Com* party's Usdea. New Jersey plant in order to nwet the higher compliance standards of the New Jersey Department of Environmental Protactioa. Tbs naans sad ages of tht executi<* olflcete of the Company as of Much i, 1986, tha time from which they have served as executive ofliern and Mr present positions whh tha Company, am as follows: Samuel J. Heymrnt (1) a) (3)------- 47 131) Chairman of tbe Board and Chief Executive Officer Jamas T. Sharwte (l> (3).................$2 HU tn* to S/S3 Vi-m Chsltwaa end Chief Arimrctarativc Officer Executive Vice President for Pbwncn and Administration Bdwmd B. Shea (I) (3)....................33 6fU Senior V.ce President, Oaoaral Counsel a id Secretary John A. Brennan............................... 34 1/77 Senior Vice I'teaident end Prasidet,'.. Building Mat'rtala Division Cart R. Eckardt..................................S3 1/79 Senior Vice Ptasi&nr and Ptnaidant. Chamieaia Division Raymond J. Lacroix......................... 30 (1) Msmhsr. Board of Dimeters (2) Member. Executive ComirAuae (3) Member. Retirement Committee H/SI Senior Vice President and Chief Financial Officer Tha foregoing executive otRcers were elected to their positions ny the Board of Dtreows on April 29, 1983 to serve until the next annuel organisation meeting or until their successor* are ideated and have qualified. All axactrtve officers have been m the employ of the Company for mart, than ftve yean a.wept at follows: Pram 1968 to tbs presrni dais, Mr. I layman was, and still it, s principal of a nurnbtr of eiosaly-hald eompanias and partnerships whoss investmsnu Include commercial rail estate and portfolio of publicly ended ancnritice held largely in connection wKh arbitrage activities. Mr. Shcrwin bed been employed by the Company as Executive Vies President Finance until May I9t3, at which lima he resigned to join Triangle Industries, Inc. * Executive Vice President and Chief Financial Officer, In May i*.KM. Mr. Sherwin rejoined the Company u Vice Chairman and Chief Administrative Officer. From 1982 to 1984, Mr. Shu, was counsel to and than s member of the New York law hnn Windelt. Man, Davies and Ives. Prior tc that (imn. he was Chairman of tht Board and General Counsel of Reirhhold Chemicals . Inc, a manufacturer of synthetic resins, basic chemicals and related products. n 11 No arrangements or understandings exist between any executive officer and any other person f rsuant to which the officer was selected as such except that the employment agreement between the Company and Mr. Sherwin provides that he be nominated to serve as a director. There is no family relationship between any of the executive officers. Reference is made to the Proxy Statement for additional information about the executive officers of the Company. Employees At January 31, 1986, the Company employed approximately 4,300 people worldwide. At such date, approximately 1650 employees in the United States and Canada were subject to 24 anion con tracts, which are effective in most cases for two or three year periods. Of these contracts, 9 have expired or will expire in 1986. During 1985, there were no strikes or work stoppages. The Company engaged in a ``spin-off termination", effective September 1, 1984, of the Retire ment Plan for Hourly Paid Employees of GAF Corporation. The Pension benefit Guaranty Corporation issued a Notice of Sufficiency for said plan in September, 1985. Participants then received their fully guaranteed benefits in the form of annuities purchased from an insurance company. The actuarial excess rssets have reverted to the Corporation. The Company has in effect various benefit plans which include a new non-qualified deferred com pensation plan for certain executives, a capital accumulation plan fot its salaried employees, a flexible benefit plan for its salaried employees, a retirement plan for its hourly paid employees, group insurance agreements providing life, accidental death, hospital, surgical, medical and dental coverage and. in addition, the Company has contracted with various health maintenance organizations to provide medi cal benefits. The Company and, in many cases, the employees contribute to the cost of the above de scribed plans. Item 2. Properties The corporate headquarters of the Company and of its Chemicals Division and Building Materials Division are located at 1361 Alps Road. Wayne, New Jersey 07470. The Company leases, from a cor poration it organized, the buildings and approximately 100 acres of land at such location. The Comptiny's headquarters, principal research and development operations, its general administrative and financial operations and its principal electronic data processing facility are located at the Wayne site. The Wayne lease is capitalized in accordance with current accounting practice. See Note 11 of the Notes to Consolidated Financial Statements in the Annual Report, page 32. The WNCN (FM) studio and GAF Broadcasting Company. Inc. are located in leased offices at 1180 Avenue of the Americas, New York, New York. 11 12 The Company's domestic retd properties are aa follow*: Alabama Biimingham Huntsville . Mobile . . , California Fontana . . , Irvine lrwindale . , Florida Tampa . . Georgia Savannah . Illinois Elfin . . . Hodgkins . Lombard . Mount V moo Kansas Leawood.............. Kentucky Calvert City .... Maryland Baltimore.............. Hagerstown .... Massachusetts MUlis.................... Minnesota Minneapolis .... Missouri Annapolis ........... Kansu City .... New Jersey Bound Brook . . . Linden ................. South Bound Brook Wayne New York New York........... Cheektuwaga . . . North Carolina Charlotte.............. Ohio Cincinnati ........... Pennsylvania Blue Ridge Summit Erie...................... King of Prussia . . Leased Property Warehouse* Plant* Plant Plant Sales Office* Plant Plant Plant Credit Office* Salas Office* Sales Office* Plant Sales Office* Plant Plant Research Plant Plant, Warehouse* Plant, Quany Warehouse* Plant. Sales Office Plant. Sates Office Sales Office*. Warehouse* Corporate and Divisions Headquarters", Administrative Offices*. Research Laboratories* Office and Studios" Salas Office* Sales Office* Sales Office* Plant, Quarry Plant Sales Office* 12 DHMsa Building Materials Chemicals Building Materials Building Materials Chemicals Building Materials Building Materials Building Materials Building Materials Building Materials Chemicals Building Materials Building Materials Chemicals Building Materials Chemicals Building Materials Building Materials Chemicals (granules) Building Materials Chemicals (granules) Chemicals Building Materials Corporate, Building Materials and Chemicals WNCN <FM) Building Materials Chemicals Chemical*. Chemicals (granules) Building Materials Chemicals 13 IUjUhUIIUmL South Carolina Chester.............. Tennessee Nashville........... Texas Arlington........... Dallas................. Seadrift.............. Texas City .... Wisconsin Pembina , . . . , Plant Plant Sales Office* Plant Plant Plant Plant, Quarry The Company's foreign real properties sre as follows: Australia Melbourne.................................. Sydney ............................ Sales Office* Sales Office*, Distribution Center* Austria Vienna Sales Office*. Distribution Center* Belgium Sint-Niklaas Saks Office, Distribution Center Brazil Sao Paulo Sales Office* Distribution Center* Canada Mississauga, Ontario . . . . . . Sales Office*. Distribution Center* Ville St.-Laurent, Quebec . . . Sales Office* France Paris.................................. Sales Office*, Distribution Center* Great Britain Esher.......................................... Manchester.................................. Sales Office*, Admimiitr&tive Office* Sales Office*. Distribution Center* Italy Milan.......................................... Sales Office*, Distribution Center* Japan Tokyo.......................................... Sales Office* Mexico Mexico City............................... Sale; Office*, Distribution Center* Leased Property 13 PhrWta Building Materials Building Materials Chemicals Building Materials Chemicals Chemicals Chemicals (granules) Chemicals Chemicals Chemicals Chemicals Chemicals Chemicals Chemicals Chemicals Chemicals Chemicals Chemicals Chemicals Chemicals 14 The Netherlands Schiedam.................... Distribution Center* New Zealand Auckland.................... Distribution Center* Puerto Rico aruUna .................... .............. Sake Office* Singapore Singapore ................. Distribution Center* South Africa Sandton....................... Distribution Center* Spain Barcelona ................. .............. Sales Office*, Distribution Center* Sweden Johanneshov .............. Distribution Center* Switzerland Zug............................ Distribution Center* West Germany Frechcn....................... Distribution Center* DfrM-- Chemicals Chemicals Chemicals Chemicals Chemicals Chemicals Chemicals Chemicals Chemicals Leased Property AfAliete: GAF-HUIs Chemie GmbH Mari, West Germany........... Plant Chemicals The Company, in addition, holds for sale certain closed facilities and parcels of land located in Irwindale, California; Saint Louis, Missouri; Windsor, New York; Gloucester, South Bound Brook and Wayne, New Jersey. The Company's properties arc either owned by the Company or leased to the Company as de scribed in the list above. Information about leases of the Company's properties is contained in Note 11 to the Consolidated Financial Statements of the Annual Report. The plant at Texas City. Texas which produces chloramben, an agricultural chemical sold to Union Carbide Corporation, is owned by that company and leased to the Company. In 1985, this plant was shut down after the contract for sale of chloramben expired. The Company believes that, in general, these plants and facilities, which are of widely varying ages and of different types of construction, have been adequately maintained, ore in good condition and are suitable and adequate for the Company's operations. The Company's major facilities are. in gen eral, satisfactorily utilized and in certain product lines, such as surfactants, operated in 1985 at near or full capacity. Each plant has adequate transportation facilities for both raw materials and finished prod ucts. As part of the Compuny's capital expansion and improvements program launched in late 1984, 14 15 renovation of some of the plants and installation of new equipment have been completed in 198S and more are planned. Capital expenditures were approximately $47 million in 1985 and a moderate in crease is expected in 1986. Item 3. Legal Proceedings. As of February 28, 1986. the Company was a co-defendant in approximately 23,000 pending law suits involving alleged health claims relating to the inhalation of asbestos fiber. The great majority of these cases have been filed in the last five years. The Company has resolved approximately 13,000 other lawsuits involving similar claims. As of February 28, 1986, the Company's insurers have paid approximately $50 million in settlements and judgments with respect to these health claims and approximately $61 million for defense costs. It is anticipated that additional suits will be filed by per sons exposed to asbestos dust at sites where asbestos-containing materials manufactured by the Com pany and others were used. It is impossible to predict the number of such additional lawsuits. However, in 1971 the Company discontinued the sale of its principal asbestos insulation products and in 1975 withdrew from sale of all asbestos products except products in which the asbestos fiber was fully bonded or encapsulated, which products the Company discontinued in 1981. In the opinion of manage ment, based in part on the opinion of its General Counsel with respect to the health claim lawsuits and the lawsuit relating to the availability of insurance coverage described below, the ultimate disposition of these lawsuits will not have a material adverse effect on the Company's financial condition. In May 1979, the Company commenced ar, action in California Superior Court against its insur ance carriers to obtain a judicial determination that the defendants are obligated to defend and indem nify the Company in all present and future asbestos bodily injury cases. In addition, the Company seeks compensatory and punitive damages for breach of insurance contracts, violations of the California Insurance Code, bad faith and certain other claims. Trial commenced on March 4, 1985 and is currently in its third phase in the Superior Court and is expected to continue through 1986 or longer due to the numerous and complex insurance coverage issues and the number of litigants. Between 1979 and March 1984, Insurance Company of North America ("INA") and Home Insur ance Company ("Home") paid all costs of indemnity and defense of the Company in asbestos bodily injrry lawsuits. INA discontinued payment effective March 1, 1984 claiming its policy limits were exhausted. On April 24, 1984, the Company entered into an Interim Agreement with five excess insur ers under which such insurers agreed, subject to mutual reservations of rights, to pay the frill amount of the Company's defense and indemnity costs in usbestos bodily injury cases from the proceeds of first level excess policies in effect from 1952 to 1960 and 1963 to 1976. certain of which have aggregate limits totalling $62.4 million and four of which covering a period of four years have no express ag gregate limits. Two of the policies with aggregate limits covering a period of six years have separate obligations to pay defense costs not chargeable to aggregate limits. In June 1984, the Company imple mented a Settlement Agreement, dated January 31, 1983, with Transamerica Insurance Company ("Transamerica") which requires Transamerica to pay the full cost of the defense of the Company in asbestos bodily injury cases alleging exposure during the terms of Transamerica policies in effect during the years 1951 through 1953. Linder these arrangements, all of the Company's costs for indemnity and defense of asbestos bodily injury are being frilly paid by the insurers. The Company is a defendant in 76 actions commenced by school districts, municipalities and simi lar governmental c itities and homepwners which allege property damage or other injuries in schools or public and private buildings caused, in whole or in part, by what is claimed to be the present or future need to remove asbestos material from those premises. The plaintiffs seek to recover the cost of inspec tions. removal and/or the replacement of asbestos materials plus health screening examinations, coun sel's fees and expenses incurred in connection with the litigation and compensatory and punitive damages. These actions are still in early stages. The Company did not sell asbestos spray or acoustical ceiling products, which are the primary products being removec from buildings. In the opinion of man agement, based in part on the opinion of its General Counsel with respect (o the foregoing lawsuits and the lawsuits relating to availability of insurance coverage described below, the ultimate disposition of these actions will not have a material avlverse effect on the Company's financial condition. 15 In October 1983, the Company filed a lawsuit in Los Angeles, California Superior Court against its past insurance carriers to obtain a-judicial determination that defendants are obligated to defend and indemnify the Company in numerous asbestos related cases referred to in the preceding paragraph. The Company is seeking declaratory relief as well as compensatory damages. This action is presently in the pre-trial pleading stage. 1NA is currently paying, under reservations of rights, all costs of defense of the pending property damage cases. On February 2, 1981, an action was commenced against the Company and GAF Broadcasting Company. Inc., a wholly-owned subsidiary of the Company, by Concert Radio, Inc. in the Supreme Court, County of New York, seeking specific performance, or, in the alternative, damages arising out of the alleged breach of an option agreement for the purchase of radio station WNCN. In 1984, the trial court ruled in favor of the plaintiff and ordered specific performance of the option agreement. The Com pany appealed such judgment to the New York Supreme Court, Appellate Division. In May 1985, the Appellate Division affirmed the trial court ruling that the Company had breached the option agreement to sell radio station WNCN to Concert Radio, Inc., but reversed the portion of the judgment ordering specific performance, thus limiting plaintiff to monetary damages for which a new trial was ordered and is expected to take place in 1986. The Company is a defendant (generally une of several) in a number of cases involving allegedly defective commercial roofing products containing felt substrates which the Company has phased out as a component of roofing products. The number of such cases has declined steadily during the last four years. The amounts claimed in a number of these cases are substantial, typically S 100,000 to S500.000. However, most cases are retried for a fraction of the sum demanded and recovery, if any, from the defendants is frequently apportioned among them, which reduces the burden of such judgments or set tlements on the Company. The Company is a party to a variety of administrative proceedings and lawsuits involving environ mental matters, including being named as a defendant, together with numerous other companies, in several lawsuits and proceedings under the Comprehensive Environmental Response. Compensation and Liability Act (commonly known as "CERCLA" or the "Superfund Law") and similar state laws which seek to recover from generators of hazardous waste the cost of cleaning up so-called "orphan'* waste disposal sites. Most of the lawsuits involving orphan dumpsite* are in the early stages. The Com pany plans to seek dismissal of some of the lawsuits and proceedings on grounds that there appears to be no substantial evidence that hazardous waste for which the Company is responsible is pi csent at the dumpsite. In the great majority of the lawsuits, it is expected that liability, if any, will eventually be apportioned among the companies, including the Com; ny. found responsible for the presence of haz ardous waste at the dumpsite. Based on evidence presently available, it is impossible to predict the eventual liability of the Company in these orphan dumpsite lawsuits. In the opinion of management, based in part on the opinion of its General Counsel, these lawsuits should be resolved gradually over u period of years for amounts which are not material to the financial condition of the Company. The administrative proceedings and lawsuits against the Company (other than orphan dumpsite lawsuits) involve allegations of environmental permit violations which are typically resolved by consent orders and fines. During the tender offer by the Company for common stock of Union Carbide, the Company filed a lawsuit in the U. S. District Court, Southern District, New York, seeking an order enjoining certain antitakeover devices adopted by Union Carbide. The District Court denied the order and the Company has filed a notice of appeal. Union Carbide filed a lawsuit in the U. S. District Court in Connecticut seeking an order enjoining certain alleged securities and antitrust law violations by the Company. The District Court denied a preliminary injunction on grounds that the issue became moot or was not yet ripe for decision when the Company _ ounced its intention to withdraw its tender offer. A description of certain legal proceedings involving the Company and its former and pr< ,;cm direc tors and officers may be found in the Proxy Statement under ''Proposal No. I - Election of Diieetors. Certain Litigation Involving Directors". 16 17 Item 4. SabmtecfcM of Matters to Vote of Security Holden No matters were submitted to a vote of security holders during the fourth quarter of 1985. PART n The information required by Items 5, 6, 7 and 8 is incorporated by reference to the Company's Annual Report as follows: jteaasl lUfrt fm W--wsr. Item 5. Item 6. Item 7. Item 8. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ........................................................................ SELECTED FINANCIAL DATA ..................................................................... MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................................... FINANCIAL STA1EMENTS AND SUPPLEMENTARY DATA Auditors' Report.................................................................................................. Consolidated Statements of Income for the three years ended December 31, 1985 .................................................................. Consolidated Balance Sheets as of December 31. 1985 and 1984 ............................................................................................... Consolidated Statements of Changes in Financial Position for the three years ended December 31, 1985 ...................................................................................... Consolidated Statements of Shareholders' Equity for the three yean ended December 31, 1985 ........................................ Notes to Consolidated Financial Statements ................................................. Supplementary Date (Unaudited): Financial Reporting and Changing Prices ................................................. Quarterly Finatxial Data .............................................................................. 22 22 20-21 32 23 24 25 26 27-32 33 34 Item 9. Disagreamenta on Accounting and Financial Dtedosure. In April 1984, the Company engaged Arthur Andersen A Co. as its independent accountant to replace Deloitte Haskins A Sells. The selection of new auditors, which was reported on Form 8-K (lied on April 27. 1984, did not involve any disagreement with the Company's prior auditors on any matter. FART Ul Item Id. Directors and Executive Oflkera of the Regietraat. The information required by Item 10 is incorporated by reference to the Proxy Statement under the caption "Proposal No. 1 -- Election of Director* -- Nominees". For the information required as to Executive Officers, see Pert I, Item l. "Executive Officers". Item 11. Executive Compensation. Ibe information required by Item 11 is incorpotated by reference to the Proxy Statement under the caption "Proposal No. 1 -- Election of Directors -- Executive Compensation and Certain Transitions". 17 18 I(m1I Security Ownership of Certain Hmiritl Owwn tad Mmipil The information required by Item 12 is incorporated by reference to the Proxy Statement under the capton "Security Ownership of Certain Beneficial Owners and Management". Item 13. Certain Relationships aad Related Transactions. The information required by Item 13 is incorporated by reference to the Proxy Statement under the caption Proposal No. 1--Election of Directors---Executive Compensation and Certain TransactionsCertain Transactions with Related Parties". PART IV Item 14. w-nat-, financial Statement Sefcidnlit and Reperts an Perm S*K. The following documents am filed as pan of this report: Financial statemenu of OAF Corporation and subsidiaries am incorporated by reference to the Company's Annual Report to Shareholders for the fiscal year ended December 31, 1983. See list on page 17 herein. Separate financial statements of OAF Corporation are omitted because its total assets, exclusive of investments in, and advances to, consolidated subsidiaries, constitute 73 percent or mom of the total assets shown by the latest consolidated balance sheet filed and total grots revenues for the latest.period for which profit tad lots statements era filed, exclusive of interest and dividends from, or equity in income of. the consolidated subsidiaries, constitute 73 percent or mom of the total gross revenues shown by the consolidated profit and loaa. statements filed. (a)(2) Unaarlal Slaismaat Sthadulaei The following supplementary financial information Is filed in this Form 10-K and should be read in conjunction with the financial statements in the Annual Report. Report of Independent Public Accountants on Schedules for the years ended December 31. 1983 and 1984 ............................ Opinion of Independent Public Accountants on financial statements and supplementary financial information for the year ended December 31,1983 ................................................ huae am it*. 22 23 Schedule I-- Marketable Securities ..................................................... Schedule V-- Property. Plant and Equipment ...................................... Schedule VI-- Accumulated Depredation of Property, Plant and EeuiHMnt ................................................ Schedule VIH-- Valuation and Qualifying Accounts ............................ 24 23 26 27 Schadulea, other than those lilted above, am omitted because of the absence of the conditions under which they am required or because the required infont,otion, where material, is shown in the financial statements or the notes thereto. 18 H (a)(3) Exhibits: 3. 1 3. 2 4. 10. 1 10. 2 10. 3 10. 4 10. 3 10. 6 10. 7 11. 13. 21.1 21.2 22. 3 22. 24. I 24. 2 -- Restated Certificate of Incorporation, ax died with the Sec retary of State of the State of Delaware on July 3, 1983. -- Bylaw* of the Company (See Exhibit 3.2 to the Company's Form KMC for the year ended December 31. 1984). -- Instrument* defining the rights of security holders, including ir Ventures. The Company hereby undertakes to furnish copies of any long-term debt instruments to the SEC upon request.' -- Interim Agreement dated April 24, 1984 among the Com pany, certain Underwriter* at Lloyd's, London and certain Insurance Companies (See Exhibit 10 to the Company's Form 8-K for the quarter ended July 1, 1984). -- Executive. Incentive Compensation Plan, as amended tht'Migh October 18, 1979 (See Exhibit A(l) to the Company** Form 10-K for the year ended December 31,1979). amend ment thereto (See Exhibit 10.6 to the Company's Form 10-K for the year ended December 31, 1982). -- Plan for the Sale of Restricted and Unrestricted Common Stock to Employees Who Perform Executive. Administra tive or Supervisory Functions (the "Stock Purchase Plan"), as amended through September 23. 1982 (See Ex hibit 10.7 to the Company s Form 10-K for the year ended December 31.1983). and a further amendment thereto (See Exhibit 10.8 to the Company's Form 10-K for the year ended December 31. 1983). -- 1973 Stock Option Plan (See Exhibit 10.9 to the Compan) 's Form 10-K for the year ended December 31,1982). amend ment thereto (See Exhibit 10.9 to the Company's Form 1MC for the year ended December 31, 1982). -- Unanimous written consent of the Stock Option Committee, dated July 22. 1982, amandine the Company's stock option agreements to include Limited Rights (See Exhibit 10.11 to the Company's Form 10-K for the year ended December 31. 1982V -- 1984 Employee Stock Option Plan (See Exhibit 10.2 to the Company * Form 10-Q for the quarter ended April 1. 19S4) and an amendment thereto (See Exhibit 10.3 tc the Com pany's Form 10-Q for the quarter ended April 1. 1984). -- Deferred Compensation Letter Agreement, dated December II. 1983. -- Computation of Earnings per Common Share for the Three Years ended December 31. 1983. -- Annual Report to Shareholders for the fiscal year ended December 31, 1983. -- Proxy Statement for the Company's t986 Annual Meeting of Shareholders. -- <*orm 8-K Report filed by the Company on Feocuary 27, 1986. -- Latter Agreement dated December 9, 1983 between the Com- Kand Drexel Burnham Lambert Incorporated. (See Ex(bX2) to Schedule 14D-1 dated December 10. 1983) -- Subsidiaries of the Company. --Content of Arthur Andersen & Co.. Independent Public Accountants, Included at page 22 of this Report. -- Consent of Deioitte Haskins A Sells. Independent Public Accountants, included at page 23 of this Report. 19 20 (b) 8spert#era6>K. No report oa Form t-K was Slid with tbs Seasides end Exchange Commission during the last quarter of 1965. A report on Form 6-K, concerning the sale of securittee received from Union Carbide in its exchange offer, was died on February 27, 1966. 20 21 sIGNATUKS t Ptitsuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant hat duly caused this report to be sifned on its behalf by the undersigned, thereunto duly authorised. Date: MarchJ<(. 19*6 GAP COMOftATI^t (Registrant) By. Hwiaxi*sr Omtmm miChkfMMtmbmOkm by the I mL rugHlMBants of the Securities exchange Act of 1934, this n reene on behalf of the regtotraul and he the cepocMce and an the Chairman of the Board and Chief Executive Officer Director Director S Director Senior Vice President and Chief Financial Officer Director Director Director and Senior Vice President Director end Vice Chairman Director Director Director March^, 1986 March 1986 Marchp*/. 1986 March Jif, 1986 March ^ 1986 MnrchAy. 1986 March pj/. 1986 March P y. 1986 March j/, 1986 March py, >986 March pjf. 1986 March py IV86 31 22 REPORi OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULES GAK CORPORATION: In connection with our examinations of the consolidated financial statements as of December 31. 1985 and 1984. and for the years then ended, included in GAF Corporation's annual report to share holders and incorporated by reference in this Form 10-K. we have also examined the schedules for the years ended December 31. 1985 and 1984. as listed in the index on page 18 of this Form 10-K. Our examinations of the 1985 and 1984 consolidated financial statements were made Mr the purpose of forming an opinion on those statements taken as a whol . The schedules are presented for purposes of complying with the Securities and Exchange Commissii o`s rules and arc not part of the basic financial statements. The schedules for the years ended December 31. 1985 and 1984 have been subjected to the audiing procedures applied in the examinations of the basic financial statements and. in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the bask financial statements taken as a whole. Roxcland. New Jersey February 10. 1986 Arthur ANDtrtstN A Co. CONSENT CF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports incor porated by reference, or included, in this Form 10-K. into the Company's previously filed Registration Statements on Form S-8 No. 2-53686. No. 2-41036. No. 2-92203 and No. 2-92202. Rosctand. New Jersey MarctwZ7. 1986 Anna ANOKRStN A Co. 23 OPINION OF INDEPENDENT PUBLIC ACCOUNTANTS GAF CORPORATION: We have examined the consolidated statements of income, shareholders' equity and changes in financial position of GAF Corporation and its consolidated subsidiaries for the year ended December 31. 1983: such financial statements are included in your 1985 Annual Report to Shareholders and arc incorporated herein by reference. Our examination was made in accordance with generally accepted auditing standards and. accordingly, include such tests of the accounting records and such other audit ing procedures as we considered necessary in the circumstances. In our opinion, such consolidated financial statements present fairly the results of operations and changes in financial position of the companies for the year ended December 31, 1983, in conformity with generally accepted accounting principles applied on a basis consistent with that of the preceding year. Our examination also comprehended the supplemental schedules of GAF Corporation and its consolidated subsidiaries for the year ended December 31, 1983, listed in Item 14(a)(2) herein. In our opinion, such supplemental schedules, when considered in relation to the basic consolidated financial statements, present fairly in all material respects the information shown therein. Deloitte Haskins & Sells New York, New York February 17, 1984 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS GAF CORPORATION: We hereby consent to the incorporation by reference in the Prospectus included in (a) Post-Effective Amendment No. 11 to Registration No. 2-41036. (b) Fost-Effective Amendment No. 7 to Registration No. 2-53686. (c) Registration No. 2-92202 and id) Post-Effective Amendment No. 1 to Registration No. 2-92203 all on Forms S-8, of our opinion dated Feoruary 17. 1984 appearing in the 1985 Annual Report on Form 10-K of GAF Corporation. Deloitte Haskins & Sells New York, New York March 27. 1986 23 GAF CORPORATION AND SUBSIDIARIES SCHEDULE I SCHEDULE I -- MARKETABLE SECURITIES TMaaf I-- As of December 31, 1985 (Dalian ia Thenaanili) fiindpal Marts* Valet Balaaca Shod or Naaaber of at Paembir 31, Carryiat 1963 Aaafrat Eurodollar Deposits..................................... Foreign Oavcnunm Securities.................. Common Stock-Union Ctrbidt Corporation S 3.030 S 3,030 $ 3,066 3,066 6,726,000 403,431 S 3,070 3,066 476,647 S 3,030 3.066 403.431(a) $411,527 NOTE: (a) Included in (bis total is $202,229 which is classified as Maiketsble Securities, s non-current asset, on the Consoli dated Balance Sheet at December 31, 1965. 24 25 GAF CORPORATION AND SUBSIDIARY SCHEDULE V -- PROPERTY, PLANT AND EQUIPMENT SCHEDULE V Year Ended December 31,1985 (Dell>n hi Tfc--i--80 Ckarilctofa. Land ................................................... . . Land improvomaot* ........................... mUln| end ldUin| mgaaljemanme MnUnaqf and aquipmant................... Cooaauctioa In pregiaaa..................... 8 5,807 9.242 52.398 200,658 10.182 8278,447 8-- 817 2.920 42.239 1.189(a) 847,161 ladra-M. 8 426 96 3.723 22,464 9 826.718 Otharib) 81,416 MS i.r6 5.958 amon 89,250 December 31 ms 8 6,797 9,963 53,631 226,387 11,362 8308,140 Year Ended December 31.1984 Land ................................................. (.and improvements ................................ Buildings Ml building aquipmant.......... Machinery Ml equipment........................ to pragmas....................... 8 6,174 1,895 54,315 211.049 5,714 8286,217 ---------at Caat 8-- 571 751 12,151 4.427(a) 817.900 MnMad S 367 224 2.558 22,521 -- 825,670 Trssuan Barium Acrwmta s' -- _ (20) (21) 41 $-- 0acaaabar*31 1984 8 3,807 9.242 52.558 200.658 10.182 8278,447 Year Ended December 31,1983 (Date* la Tlwmii) (Mto CliMgn CtMiiflCStlMI Jaanvjr 1, Land ............................................. . . Land improvamanu ..................... Buildings and building aquipmant . Machinary and aquipmant............. . . Construction in prognat................ S 6.879 9,451 0 422 227.742 9.217 8313,741 kCmi 8-- 411 1,955 13.512 (1,974Xa) 813,904 Batlramanta $ 705 967 8.481 31.743 1.682 843,578 Accasusta 8-- MS (127) 130 (3) S-- DimcrtiMtd $_ 586 1,408 156 Dteambar 31 1983 S 6.174 8.895 54.385 211,049 5.714 82.150 8286,217 N0TE5: (a) Denote* nai change during year. (b) Rapnaatta acquisition of giiu Aber facilities from Raichhold Chemicals. Inc. Tha tenge* of annual depreciation kw ganarally wm aa follows (applied principally on tha straight line basis): Land improvemenu .......................... 4-l6V)% Buildings and building aquipmant . . . 2'A-\2'A% Machinery and aquipmant................ 5-33* 25 GAF CORPORATION AND SUBSIDIARIES SCHEDULE VI SCHEDULE VI--ACCUMULATED DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT Year Ended December 31, 1985 (Seilers ia Thousands) _,, '"sf1' Land improvements............................ ........ Buildings and building equipment..... ........ Machinery and equipment.................. , ........ $ 3,236 23.943 90.131 SI 19432 Charged la Cestaaad S 300 2,143 14.723 S17.366 s no 3,671 18.863 S22.644 1lalaace ember 31, 1988 S 3,626 24,417 86.011 3114,034 Year Ended December 31, 1984 (OeCais in Tbemaads) Betanor January 1, 1964 /VddMeue Charged to Coma and Ewans RftfrwHtifp Land improvement*........................... ..... Buildings and building equipment..... Machinery and equipment................ S 2.893. 23.762 93,092 S 338 2.330 16.309 S 197 2.171 19,446 SI21.749 819497 821,814 Transfers Between Accounts S-- 4 ___ (4) s__ -- BdiM Deesmber 31, 1984 S 3.236 23.943 90.131 SI 19432 Year Ended December 31, 1983 (Delian la Thousands) CiauMkatioa Balance January 1, 1983 Addfttow Charge* to Casts and Esusasss(s) Retirement* Land improvements........................... ..... Buildings and building equipment..... Machinery and equipment.................. S 2.663 26.383 92.273 S 748 4.670 27.367 S 316 3.634 27.330 S121.321 S32.783 533420 Transtan From Dtseondaued Setmeats S-- 363 800 SI.163 liliid Dienubir 31 1983 S 2.895 23.762 93.092 S121.749 NOTES:(a) Include* Si 1.316 related to the write-off of assets in connection with provisions for certain plant shutdowns and office relocation and a S21.469 provision for depreciation charted to continuing operations. GAP CORPORATION AND SUBSIDIARIES SCHEDULE VHI SCHEDULE Vill--VALUATION AND QUALIFYING ACCOUNTS Dncrtettoe Year Ended December 31, 1985 (DoUan ia Thousands) lalaoce Charged to January 1, Coata and Emcnati Dadacttoes Valuation and Qualifying Accounts Deducted from Assets To Which Thay Apply: Allowance for duubtftil accounts....... Allowaoca for discounts..................... .......................................... Reserve for inventory valuation......... 1.489 S 703 7,189 1.336 $ 987(a) 6,804 2,267 Balaam Dewier 31, MS $3,142 1,874 3,627 DaertstiM Year Ended December 31,1984 (DeMan laTkenaands) Batoeea Charged to Janaary 1, Ceata aad 1784 Etawia Valuation and Qualifying Accounts Deducted from Assets To Which They Applj: Allowance for doubrAU accounts...... .......................................... Allowance for ditcrunts................................................................ Reserve for inventory valuation.................................................... $4,709 914 7,781 $1,313 6,772 2.967 Didacttona S 396(a) 6,197 6.210 Balaam Dacca** 31, 1984 $3,426 1,489 4.338 Year Ended December 31,1983 (Dalton hi Thsamaih) Qmrrtldtt Jsnwttj t, Valuation aad Qualifying Accounts Deducted from Assets To Which Tney Apply: Allowance for doubtAil recounts...................... .......................... Allowance for discount),..................................... .......................... Reserve '.or inventory valuation......................... .......................... $3,034 1,103 2.987 Costs aad Esgaatc* > $4,483 6.733 7,416 DitMrrtm DtftMT S2.l0S(e) 6.926 2.622 $4,709 914 7.781 NOTE, (a) Represents write-offs of uncollectible accounts net of recoveries. 27 28 Information Services 15740 Shady Grove Road Gaithersburg, Maryland 20877*1454 EPO-UIOS 10114 SECURITIES AND EXCHANGE COMMISSIOlT^5-* WASHINGTON, D.C. 20S49 EXHIBITS filed with Form 10-K REGISTRATION STATEMENT under THE SECURITIES ACT OF 1934 G A F Corporation EXHIBIT INDEX Exhibit Nifbtr Dwcriptlow Xml 3. 1 -- Restated Certificate of Incorporation, as filed with the Secretary of State of the 31 State of Delaware on July 3, 1983. 3.2 -- Bylaws of the Company (See Exhibit 3.2 to the Company's Form 10-K. for the year ended December 31, 1984). 4. -- Instruments defining the rights of security holders, including indentures. The Company hereby undertakes to furnish copies of any long-term debt instru ments to the SEC upon request. 10. 1 -- Interim Agreement dated April 24, 1984 among the Company, certain Under writers at Lloyd's. London and certain Insurance Companies (See Exhibit 10 to the Company's Form 8-K for the quarter ended July 1, 1984) 10. 2 -- Executive Incentive Compensation Plan, as amended through October 18, 1979 (See Exhibit A(l) to the Company's Form 10-K for the year ended December .31, 1979), amendment thereto (See Exhibit 10.6 to the Com pany's Form 10-K for the year ended December 31, 1982). 10. 3 -- Plan for the Sale of Restricted and Unrestricted Common Stock to Employees Who Perform Executive, Administrative or Supervisory Functions (the "Stock Purchase Plan"), as amended through September 23, 1982 (See Ex hibit 10.7 to the Company's Form 10-K for the year ended December 31. 1983), and a further amendment thereto (See Exhibit 10.8 to the Compuny's Form 10-K for the year ended December 31. 1983). 10. 4 -- 1973 Stock Option Plan (See Exhibit 10.9 to the Company's Form 10-K for the year ended December 31, 1982), amendment thereto (See Exhibit 10.9 to the Company's Form 10-K for the year ended December 31. 1982). 10. 3 -- Unanimous written consent of the Stock Option Committee, doted July 22. 1982, amending the Company's stock option agreements to include Limited Rights (See Exhibit 1C. 11 to the Company's Form 10-K for the yeur ended December 31. 1982). 10. 6 10. 7 -- 1984 Employee Stock Option Plun (See Exhibit 10.2 to the Compuny's Form 10-Q for the quarter ended April 1. 1984) and an amendment thereto (See Exhibit 10.3 to the Compuny's Form 10-Q for the quurtcr ended April 1. 1984). -- Deferred Compensation Letter Agreement, dated December 11. 1983. si 11. -- Computation of Earnings per Common Shure for the Three Yeurs ended December 31, 1983. 6Q i3. -- Annual Report to Shareholders for the fiscal yeur ended December 31, 1983. 21.1 --Proxy Statement for the Company's 1986 Annual Meeting of Shareholders. t*l 21.2 -- Form 8-K Report filed by the Company on Februury 27, 1986. * 22. 3 -- Letter Agreement dated December 9. 1983 between the Company and Drexel Burnham Lambert Incorporated. (See Exhibit (b)(2) (o Schedule 140-1 dated December 10. 1983) 22. 24. I -- Subsidiaries of the Company. -- Consent of Arthur Andersen &. Co.. Independent Public Accountants, included at puge 22 of this Report. (SI 24. 2 -- Consent of Dcloitte Haskins & Sells. Independent Public Accountants, in cluded at page 23 of this Report, 30 Exhibit 3.1 Exhibit 3.1 RESTATED CERTIFICATE OF INCORPORATION OF GAF CORPORATION GAF Corporation, a corporation organized and existing under tha lavs ef tha Stats of Delaware, hereby certifies as follows: 1. The name of the corporation is GAF Corporation (the * Corporation1*). The naae under which the corporation was originally organised was American I.G. Chemical Corporation. The date of filing of its original Certificate of Incorporation with the Secretary of state was April 26, 1929. 2. This Restated Certificate of Incorporation only restates and integrates and does not further amend the provinions of the Certificate of Incorporation of this corporation as heretofore amended or supplemented and there is no discrepancy between those provisions and the provisions of this Restated Certificate of Incorporation. 2. This Restated certificate of Incorporation has been duly adopted by the loard of Directors of GAF Corporation, pursuant to Section 249 (b) of the General Corporation Lav of tha state of Delaware. 4. The text of the Certificate of Incorporation es amended or supplemented heretofore is hereby restated without further amendments or changes to read as herein set forth in full: FIRST: The name of the Corporation is CAP Corporation. SECOND: The registered office or place of business of the Corporation in ehe State of Delaware is located at 229 South State Street, in the City of Dover, County of Xent. The naae and address of its registered agent is The Prentlee-Kall corporation system, Inc., 229 South State Street, Dover, Delaware 19901. THIRD: The nature of the business of the Corporation and the objects and purposes to be transacted, promoted or carried on by it are as followst (a) To engage in the business of purchasing, manufacturing, compounding, refining, distributing, selling, importing, exporting, exploiting end using, end to purchase, manufacture, compound, refine, diet ill, treat, prepare, analyze, ynthetize, produce end in every way deal in and with, chamicals of ovary kind, chemieal materials, substances end products, including acids, alkalis and salts, their compounds and derivatives, and alto derivatives, materiel/:, products, substances and combinations produced or manufactured thsrefua, including solids, liquids and gtses of til kinds; to engsgs in ths ssptrstion or reduction and treatment of solids, liquids tnd gases into thsir constitusnts; to produeo tnd utlllzt tnd dial in tnd with chemical combinations of til kinds4 (b) To engage in tho buslntss of purchasing, manufacturing, distributing, tailing, importing, exporting, using tnd generally dealing in tnd to purchtso, manuftctura, distribute, sail, Import, expert, uaa and generally daal In ctmaras of til kinds tnd for til usaa and-all parts tnaraof, raw cinematographic films, photographio, photostatic, contact printing tnd aantitisad ptptra, films and pittas, mounting cards tnd fstmas, developing matarials, tools, tpplitness tnd chamlctla, tnd til othar tools, tpplitneaa, dtvieta, aquipmant, chamicals and auppliaa naeaaatry, approprltta or ineidantal to tha taking, dsvsloplng tnd printing of photographs, pictures, photostats, prints tnd othar graphic raproduetlons and to taka, develop, print tnd gtnartlly datl in photographs, picture*, photostats, prints and othar graphic reproduction*. (c) To angaga in tha buslnaas of purehatlng, manufacturing, distributing, tailing, importing, axporting, using and ganarslly dealing in and to purehaaa, manufacture, distribute, sail, import, export, uaa and generally daal in building matarials, floor eevaringa and Industrial produets of all kinds and for all usas end by-product# derived therafrom. (d) To angaga in tha buainasa of mining, quarrying, extracting, boring for, pumping or otherwise acquiring, and to crush, stamp, smalt, amalgamate, refine and in all ways treat, pzapara for market and utilize and sail, ores, metaie, minerals, natural oils and othar substances derived from tha earth, air cr water. (a) To construct, erect, enquire, lease, hire, sail, dispose of, oparata and uaa plants, machinery, aquipmant, apparatus and appliances of any and every kind capable of being used in or it; connection with tha business of tha corporation and to acquire, own, uaa, dsvalop, exploit, dispose of and deal in processes, inventions, apparttua and machinery of any and every kind necessary or useful in connection with its buainsea. (f) To manufacture, produce, buy, acquire, sail, dispose of, import, export, trade in and ganarslly daal in and with goods, varaa, merchandise, commodities, article* and property of any and every class and description, Insofar aa may b* permitted by the lava of the State of Oalavara or of any othar state, territory or country in which tha Corporation may do business! to angaga in any buslnaas, whether manufacturing or otharviaa, which tha Corporation say data advantageous or useful in connection with any or all of the foregoing. -2- (9) To fostar and finance tha davalopnant of chaaical and allied induatriea in the United Statae of America and alsawhara. (h) To subscribe for, or cause to be subscribed for, purchase or otherwise acquire, own, hold, sell, negotiate, assign, deal in, exchange, transfer, aortgage, pledge or otherwise dispose of shares of stock, scrip, bonds, coupons, mortgages, debentures, debenture stock, securities, notes, trade drafts and evidences of indebtedness issued or created by any corporation, joint stock eonpany or association, whether public, quasi-public, private or aunlclpal, or by any doaestic or foreign state, govemaent or govemaental authority or any political or adainlstrative subdivision or departaant thereof and any and all trust, participation or other certificates of, er receipts evidencing interest in, any such shares, instruments or securities, and, while the owner thereof, to possess and to exercise with respect therets ell the rights, powers and privileges of ownership, including the right to vote thereon; to guarantee payaent of dividends on any shares of stock of any corporation, joint stock coapany or association in which the Corporation has or nay at any tins have an interest, and to becoae surety with respect to, endorse or otherwise guarantee the payaent of the principal of or the Interest on any scrip, bonds, coupons, mortgagee, debentures, debenture stock, securities, notes, drafts, bills of exchange or evidence of indebtedness issued or created by any such corporation, joint stock company or assoc1stion. (1) To asks and anter into any and ail arrangaaenta with any doaeatic cr foraign governaantal or municipal authority which say ba deesad to be for the benefit of the Corporation; to obtain froa any much authority or otherwiaa to acquire, by purchase, lease, assignment or in any manner, any powers, rights, privileges, immunities, franchises and concessions which the Corporation asy data desirable; to exsreise and exploit the asae; and to undertake and prosecute any business dependent thereon. (j) To obtain, purchase, or otherwise acquire and to hold, apply for, prosecute, own, use, sell, assign or otherwise dispose of, to grant lieansea in raepeet of and otherwise exploit and turn to account any fr.d all invantione ami iaprovaaente and any letters patent er applications therefor, including design patents of the United States or other countries and to obtain and hold llceneea or other patent rights; to devise, adopt, use, own, purchase or otherwise acquire and to ell, assign or otherwise dispose of any and all tradeaarke, trade names and trademark rights and registrations or application! tor registrations therefor in the United States or any other countries, to apply for and saeura ragiatrationa for trademarks in the United State* and in othar countries, and whan purchasing, acquiring or otherwise obtaining any such -3- 31 trademarks, trad* name* or trademark rights to taka over and acquire the good will, assets and business in connection with which said trademarks, trade names or trademark rights are or have been used; also any and all copyright processes, formulae, trade secrets and devices of all kinds, and to usa, exsrcis* and develop the same. (k) To purchase or otherwise acquire the whole or any part of the property, assets, businsss, good will and rights, and to undertake and assume the whole or any part of the liabilities and obligations, of any person, firm, association or corporation, and to pay for the same in cash, in the stock or shares of stock of any class of the Corporation, or the bonds, notes or other obligations thereof, or otherwise; to hold or in any manner to dispose of the whole or any part of the property or assets so acquired; to conduct the'Hthcle or any part of any businsss so acquired; and to exercise all the powers necessary or convenient in and about the conduct, management and carrying on of such business. (l) To borrow money for any of the purposes of the Corporation, and to issue bonds, debentures, debenture stock, notes and other obligations therefor, and to secure the same by pledge or mortgage of the whole or any part of the property of the Corporation, either real or personal, or to issue bonds, debentures, debenture stock, nates or other obligations without any such security. (a) To enter into, make, perform and carry out contracts of every kind for ary lawful purpose, without limit as to amount, with any person, firm, association, corporation or public, quasi-public or municipal body politic, and with tka govarnaont of any state, territory or country, or any political subdivision or department thereof. (n) To draw, make accept, endorse, discount, execute and issue promissory notes, drafts, warrants, and any and ail kinds of obligations and csrtifieatss and negotiable or transferable instruments, necessary or incidental to the conduct of the business and affairs of the Corporation. (o) To buy, sell, manufacture or cause to be manufactured, produce and generally to traffic and deal in and contract for the eels, purchase, supply and letting on hire or otherwise of any and all fixtures, furniture, implements, instruments, tools, machinery, suppliers, eigne, labels, boxes, advertising matter of every kind, nature and description, and other personal property and things, and to purchase, lease or othetvise acquire, erect, exchange, sell, let or otherwise dispose of, own, maintain, develop, aquip, improve and repair any and all improved or unimproved real estate or property, plants, depots, warehouses, supply stations, stores, buildings and other places. -4 - (p) To issue shares of stock (of arty class) bends, debentures, debenture stock, notes and other obligations of the Corporation for cash, labor done or property, real or personal, or leases thereof, or for any combination of any of the foregoing, or in exchange for the stock, debentures, debenture stock, bonds securities or obligations of any parser., firm, association, corporation or other organization. (q) To acquire by purchase, lease, or otherwise, and to own, hold, sell, mortgage and encumber both improved and unimproved real estate wherever situate; to survey, subdivide, plat, colonize and improve the same for purposes of sale or otherwise, and to construct and erect thereon warehouses, factories, works, plants, stores, mills, hotels, houses and other buildings. , (r) In general, to carry on any business not contrary to the laws of Oelaware and to have and exercise all the powers conferred by the lavs of Delaware upon corporations formed thereunder and to do any and all of the acts and things herein provided for to the same extent as natural persons could do, and in any part of the world, as principal factor, agent, contractor or otherwise, either alone or in conjunction with one or more persons, entities, partnerships, associations, and/or corporations; to establish and maintain offices and agencies within and anywhere outside of the State of Delaware; and to exercise all or any of its corporate powers or rights in the state of Delaware and in any and all other States, Territories, Districts, Colonies, Possessions of Dependencies of the United States of America and in any foreign country. (s) To do everything necessary, proper, advisable or convenient for the accomplishment of any of the purposes or the attainment of any of the objects or the furtherance of any of the powers herein provided for and to do every other act and thing incidental thereto in connection therewith, provided the same be not forbidden by the lavs of Delaware. The foregoing clauses shall be construed as powers as well as objects and purposes, and tha matters expressed in each clausa shall, except if otherwise expressly provided, be in no ways limitad by raferancs to or infarenca from the tanas of any other clause, but shall be regarded ae indepandent objects, purposes end powers; and the enumeration of specific objects, purposes end powers shall not be construed to limit or restrict in any manner the general powers of the Corporation or the meaning of general terms; nor shell the expression of one thing be deemed to exclude another not expressed, although it be of like nature. -5 - 30 Tha Corporation shall be authorizad to exercise and enjoy all othar powers, rights and privileges granted by an Act of the General Assembly of the State of Delaware entitled "An Act providing a General Corporation Law", approved March 10, 1899, to corporations of this character and all the powers conferred upon such corporations by any other laws of the Stnte of * Delaware, in force from tiae to tine, so far as nor in conflict herewith, or which aay be conferred by all acts heretofore or hereafter anendatory of or supplemental to said Act or said lavs and the enumeration of certain powers as Herein specified is not intended as exclusive of, or as a waiver of, any of the powers, rights or privileges granted or conferred by said Act or said lavs now or hereafter in force; provided, however, that the Corporation shall not in any state. Territory, District, Possession or Country carry on any business or exercise any powers not permitted to it under the lavs thereof. FOURTH: The total number of shares of all classes of stock which the Corporation shall have the authority to issue is 31,000,000, consisting of: (1) 25,000,000 shares of Common Stock of the par value of $1 per share, and (2) 6,000,000 shares of Preferred Stock of the par value of $1 per share. The amount of Capital with which the Corporation shall commence business is One Thousand Dollars ($1,000). FIFTH: A description of the different classes of stock of the Corporation and a statement of the designations, powers, preferences and relative, participating, optional or other special rights, .and qualifications, limitations ^r restrictions thereof, fixed by the Certificate of Incorporatei, and the express grant of authority to the doard of Directors to fix by resolution or resolutions certain thereof not so fixed, are as i follows: Preferred Stock Except with respect to the series designated $l;20 Convertible Preferred stock hereinafter established, the Board of Directors is hereby expressly authorized, by resolution or resolutions from time to time adopted, to provide for the issuance of the Preferred Stock in series and :o fix and state, to the extent not fixed by the provisions hereinafter set forth and subject to limitations proscribed by lav, the voting powers, designations, preferences and relative, participating, optional and other special rights of the share of -eh such series and the qualifications, limitations and restrictions thereof, including, but net limited to, determination of any of the following: -6- 37 (a) the distinctive serial designation and tha number of sharaa constituting tha series; (b) tha dividend rata, whether dividends shall ba cumulative and, if so, froa which data, tha payment data or dates for dividends, and tha participating or other special rights, if any, with respect to dividends; (c) the voting powers, full or limited in addition to the voting powers provided by law; (d) whether tha shares shall ba redeeaabla, and, if so, tha price or prices at which, and the tens and conditions on which, tha shares may be redeemed; (a) the anount or amounts payable upon tha shares in the event of voluntary or involuntary liquidation, dissolution, or winding up of the Corporation; (f) whether thi shares shall be entitled to the benefit of a sinking or retirement fund to be applied to the purchase or redemption of shares of the series, and, if so entitled, the amount of such fund and the manner of its application, Including the price or prices at which the shares may be redeemed or purchased through the application of eueh fund; and (g) whether the shares shall be convertible into, or exchangeable for, shares of any other class or classes cr of any other series of the same or any other class or classes of stock of the Corporation and, if so convertible or exchangeable, the conversion price or prices, or the rates of exchange, and the adjustments thereof, if any, at which such conversion or exchange may be made, and any other terms and conditions of such conversion or exchange. Each ehara of each sarlaa of Preferred Stock shall hava the same relative rights as and ba identical in all reapacta with all the other sharea of the seme aeries. Before the Corporation shell issue any sharae of Prafarred Stock of any saries (excapt shares of tha series of SI.20 Convertible Preferred Stock) authorized as herainbafora providad, a csrtificata satting forth a copy of the resolution or resolutions with respect to such sarins adopted by the Board of Directors of the Corporation pursuant to tha foregoing authority veatad in said Board shall be made, filed end recorded in accordance with the then applicable requirements, if any, of the laws of the Stata of Delaware, or, if no certificate la then so required, such certificate shall be signed end acknowledged on behalf of tha Corporation by its President or a Vice President end its corporate seel shall be affixed thereto and attested by its Secretary or an Assistant Secretary and such certificate shall be filed and kept on file at the principal -7 - 38 office of th Corporation in the State of Delaware and in such othar placa or placas as tha Board of Diractora shall dasignata. Unlaas otharvisa providad in any such rasolution or resolutions, tha number of shaies of stock of any such ssrias (including sharas of tha sarias of $1.20 Convartibla Prafarrad Stock) nay ba incraasad or dscraasad (but not balov tha nuabar of sharas tharaof than outstanding) by rasolution or rasolutions of tha Board of Diractora sat forth in a cartificata complying with and filad in accordanca with tha fofagoing raquiraaants. In casa tha nuabar of sharas of any such sarias of Prafarrad Stock ahal1 ba decreased, tha sharas raprasanting such dacraasa shall rasuma tha status of authorizad but unissuad Prafarrad stock. $1.20 Convartibla Preferred Stock Thara is haraby astablishad an initial sarias of Prafarrad stock/ to hava tha dasignations/ powara, prafaraneas and relative, participating/ optional or othar spaoial rights and tha qualifications, limitations or raatrlctians tharaof, harainabova sat forth and to hava tha following tharaof not thara sat forth; (a) Dasignation. Tha sharas of such sarias shall ba dasignatad H$1.20 Convartibla Prafarrad stock", and tha nuabar of sharas constituting such sarias shall initially ba 3,188,520. (b) Dividends. Tha holdars of tha sharas of such sarias shall ba antitlad to racaiva, out of tha assets of tha Corporation legally available tharafor and as and whan declared by tha Board of Directors, cash dividans at, but not exceeding, tha rata of One Dollar and Tva. ty Cants ($1.20) par share par annua, payable quarterly on tha 20th day of tha months of February, Kay, August and November in each year. For tha purposes of this paragraph (b), tha quarter-yearly dividend period shall begin on tha 20th day of tha third calendar month prior to tha month in which tha payment data occurs. Dividends upon tha sharas of such sarias shall ba cumulative, so that if in any dividend period or periods full dividends upon tha outstanding shares of such sarias at tha rata fixed tharafor shall not hava bean paid, tha deficiency shall ba declared and paid or sat apart for payment before any dividend shall ba declared and paid or sat apart for payment of tha coaaon Stock, and before any assets which are by lav available for tha payment of dividends shall ba paid or sat apart for tha purchase or redemption of any sharas of Prafarrad Stock or for tha purchase of any sharas of common Stock. (c) Voting Rights. Each holder of shares of such ssrits shall be sntltlsd to one vota for each share hsld and, axcapt as otherwise herein or by lav provided, ths shares of such series and the shares of Common stock of the Corporation (and any other capital stock of the Corporation at the time entitled thereto) shall vote together as one class, except that while holders of shares of such series, voting as a class, are entitled to elect two directors as hereinafter providad, they shall not be entitled to participate with the Common Stock (or any other capital stock as aforesaid) in the election of any other directors. If and whenever dividends on the shares of such series shall oe in arrears and such arrears shall aggregate an amount at least equal to six quarterly dividends upon such stock, thxm and in such event, the holders of the shares of such series, voting separately as a class, shall be entitled, at the next annual meeting of the stockholders or at a special meeting ha Id in place thereof, or at a special meeting of the holders cf the shares of such series called as hereinafter provided, to elc :t two directors. Whenever all arrears in dividends on the shares of such series then outstanding shall have been paid and dividends thereon for the current quarterly period shall have been paid or declared and a sum sufficient for the payment thereof set aside, then the right of the holders of the shares of such series to elect such number of directors shall cease, but subject always to the same provisions for the vesting of such voting rights in the case of any similar future arrearages in dividends. At any time after such voting power shall have so vested in the shares of such seriss, the Secretary of the Corporation may, and upon the written request of the holders of record of 10% or more in amount of the shares of such series then outstanding, addressed to him at the principal office of the corporation in the State of Kev York shall, call a apaeial moating of tha holdars of the chares of such series for the election of tha directors to ba alacted by them as harainaftar providad, to be held within 30 days after such call and at the place and upon the notice provided by law and in the By*Laws for the holding of resting* of stockholders; provided, however, that tha Secretary shall not be required to call auch special meeting in tha case of any such request received lass than 90 days before tha data fixed for any annual meeting of stockholders. If any such paeial masting retired to be called as above provided shall not ba called by the Secretary within 30 days after receipt of any such request, than tha holders of record of 10% or more in amount of tha shares of such ssrias than outstanding may designate in writing one of thair number to call such masting, and the person so designated may call such massing to be held at tha place and upon the notice above providad. and for that purpose ahall have accasa to tha atoek ledger of the Corporation. Tha Corporation shall pay tha raaaonabla expanses of calling and holding any such special masting. Ho such special -9- 40 meeting and no adjournment thereof shall b hsld on a data latsr than 30 days before tha annual meeting of tha stockholdars or a spaeial meeting hald In placa tharaof naxt succeeding tha tiaa whan tha holders of tha aharaa of such sariaa bacoaa antitlad to alaet directors as abova providad. If any such spaeial aaating shall ba eallad as abova providad and if tha holdsrs of at laast a aajority of tha sharaa of such sariaa than outstanding shall ba praaant or raprasantad by proxy at such Basting or any adjournment thereof, than, wy vote of tha holders of at laast a aajority of tha sharaa of such series present or so raprasantad at such seating, tha than authorized number of directors of tha Corporation shall ba increased by two, and at such aaating, tha holders of tha shares of such sarias shall ba antitlad to elect tha additional diractors so providad for, but any director so elected shall not hold office beyond tha annual aaating of tha stockholdars or special seating hald in placa tharaof naxt succeeding the tiaa whan tha holders of tha shares of such sarias bacosa antitlad to elect diractors as abova providad. whomever tha holders of tha shares of such sarias shall ba divestsd of special voting power as abova providad, tha tarns of office of all parsons elected as diractors by tha holders of tha shares of such series as u class shall forthwith terminate,-and tha authorised number of directors of tha Corporation shall ba reduced accordingly. So long as any shrves of such sarias are outstanding and unless tha vote or consent of a greater nuaber of shares of such series shall than ba required by law, with respect to tha actions referred to in clauses (i) and (ii) below tha consent of the holders of at least two-thirds, and with respect to tha actions referred to in clauses (iii) and (iv) below the consent of the holders of at least a aajority, of the shares of such series at the tiaa outstanding, given in person or by proxy, either ir. writing or at a seating at which the holders of the shares of such series shall vote separately as a class, shall be necessary for effecting or validating each of the following: (i) The authorization, or any Increase in the authorized amount, of any class of stock of the Corporation ranking prior to the shares of such series as to dividends or assets; (ii) the aaend&ent, alteration or repeal of any of the provisions of the Certificate of incorporation of the Corporation, or any certificate amendatory thereof or supplemental thereto, so as to affect materially any of the powers, preferences and rights of the shares of such series; (iii) any Increase in the authorized amount of Preferred stock; or - 10 - 41 (iv) the authorization, or any increase in the authorized aaount, of any class of stock of tho Corporation ranking on a parity with tho Preferred stock. (d) Redeeption. The corporation at ite option, at.any time, or froa time to tiae, on or after June 1, 1972 (except aa otherwise provided in paragraph (b) above), nay redeea all or any of tho shares of such series at the following applicable redemption prices: Redemption Date Redeaption Price Proa June 1, 1972 to and including May 31, 1973 ................ .. .$30.00 per share Proa June 1, 1973 to and 1 including May 31, 1974 .......................$29.SC per share Proa June 1, 1974 to end including May 31, 1975 .......................$29.00 per share Proa June 1, 1975 to and including Nay 31, 1976 ...................$28.50 per share Proa June 1, 1978 to and including May 31, 1977 .......................$28.00 per share Proa and after June 1, 1977 ........... $27.30 per share together in each case with an aaount equal to any dividends accrued or unpaid thereon to the date of redeaption. Zn the event the Corporation shall determine to redeem less than all the shares of such series then outstanding, the Board of Directors shall detezaine the shares of such series so to be redeeaed by loti and the certificate of the Secretary of the Corporation, filed with the Transfer Agent or Agents for ths shsras of such series to be redeeaed, of euch determination by the Board of Directors shall bs eonclusivs. Notice of any proposed redeaption of eherea of euch aeriss ehell be given by the Corporation by nailing a eopy of euch notice at least 30 days prior to ths data fixed for such redeaption to ths holders of record of the shares of such sarias to ba redeeaed, at thair respective addraases appearing on the books of the Corporation. Proa and aftar the date fixed in such notice ea the date of redeaption (unless default be made by the Corporation in providing moneys for the payment of the redeaption price) all dividends upon the eherea of such aeries thsrsby called for redeaption shall esass to accrue, and all rights of ths holders thereof as stockholders of ths Corporation (except ths right to receive payment of said redeaption price) shall cease and determine: or, if the Corporation shall so elect, froa and after - 11 - 42 the date (which data shall ha tha data of radamption or prior tharsto) on which tha corporation shall daposit with a bank or trust company doing business in tha Borough of Manhattan, Tha city of Maw York, state of Maw York as Faying Agent, aonays sufficiant in aaount to pay at tha office of such Paying-Agent, on tha radaaption data, tha said radaaption price (provided tha notice of redemption shall state tha naaa and address of such Paying Agent and tha intention of tha Corporation to daposit iiaid aonays on or before tha data of redemption with such Paying Agent), all dividends on tha shares of such series so called for redemption shall cease to accrue, end all rights of the holders thereof aa stockholders of the Corporation (except the right to receive froa said Paying Agent said radaaption price, and tha right if any, to convert or exchange shares thereof for aharea of tha coaaon Stock) shall thereupon egasa and determine, and by tha dapoait of said moneys with said Paying Agent tha shares of such series so eallsd for rsdsmption shall be redeemed. Any aonays so deposited with said Paying Agent which shall remain unclaiaad by the holders of aharss of such series so called for radaaption at tha end of five full calendar yeara after tha radaaption data shall be paid by said Paying Agent to tha Corporation, and thereafter the holders of the shares of such aeries celled for redemption shall look only to tha Corporation for tha payaent thereof. Tha radaaption of aharea of such aeries Bay also be effected by the purchase, froa tiae to tiao, either et public or private sale, of all or any of tha shar/ea of aueh series, but after May 31, 1972 at a price not greater than the then current redemption price. Shares of such sarias which have bean issued and reacquired in any Banner (excladlng, until tha Corporation elects to retire them shares which ars held as treasury shares but ineluding shares redeemed, shares purchased and retired and shares which have been converted into shares of Coaaon Stock) shall (upon compliance with any applicable provisions of the laws of the state of Oelavare) have the status of authorised and unissued aharea of the class of Preferred Stock undeeignated aa to aeries and aay be redesignated and reissued. (e) Liquidation. The shares of such series shall be preferred with respeot to both earnings and assets of tha Corporation. In the event of the voluntary or involuntary liquidation, dissolution or winding up of the Corporation, the holders of the shares of such eeriee shall be entitled to receive for each share thereof $37.90, together with an aaount equal to accrued and unpaid dividends thareon, before any distribution of asssts shall bs aade to tha holders of the Coaaon Stock.. The holders of the shares of such series shall be entitled to no further participation in any such distribution, and the holders of the Common Stock shall bs entitled to share ratably in all assets of the corporation remaining after payment - 12 - 43 to the holders of the shares of such osriss of the preferential aaounts aforesaid. If, upon any such dissolution, liquidation or vinding up of ths Corporation, tha assets distributabla saong the holders of the shares of such series shall be insuffleant to permit the payssnt in full to such holders cf tha preferential amounts aforesaid, then the entire assets of the Corporation shall be distributed saong the holders >t the shares of such series then outstanding ratably in proportion to the full preferential aaounts to which they shall be entitled respectively. Nothing herein contained, however, shall be deeaed to prevent the redeaption or purcheee of choree of such series in eny aasner permitted by paragraph (d) abovs. Neither the ssrgsr nor consolidation of tha Corporation into or with any othar corporation, nor tha aarger or consolidation of any other corporation into or with tha corporation, net a eale, transfer or leeea of all or any part of tha aasats of the corporation, hall be deeaed to be liquidation, dissolution or winding up of the Corporation within the asaning of this paragraph (e). (f) No Sinking or Retirement Fund. Thar# shall be no sinking or ratireuant fund to be applied to the purcheee or redeaption of shares of ouch series. (g) Conversion. Any shars or shares of such ssrlss (hereinafter this paragraph (g) callad tha "Sharis") may bs convartad, at tha option of the nelder ther***f, in the aanner hereinafter provided, into the number of fully paid and nonassessable shares of Coaaon Stock of the Corporation aa are issuable pursuant to tha formula sat forth in subparagraph 2 and 3 of thla paragraph (g); provided, '.owever, that on to any Share which shall hava been celled for redeaption (unless default be Bade by the corporation in providing moneys for thu payment of the redeaption price thereof), the right of conversion shall terminate at the close of business on ths dots fixsd for rsdsaption. No adjustment shall be aide for dividends accrued on any Sharta that shall bs converted or for dividends on any Coaaon Stock that shall ba isauablo upon tha conversion of such shares. 1. Ths surrender of any Shares for conversion shall ba aads by ths holdsr thereof to the Corporation at its office or agency in the Borough of Manhattan in The City of New York aaintained by the Corporation for that purpose, and such holder hall give written notice to the Corporation at said office or agency that ho elects to convert such Shares in accordance with the provisions thereof end of the parr/arsph (g). Such notice shell also state the name or naass (with addrauaaa) in which the certificate or certificates for Coaaon stock which shall be iaauable on such conversion shall be iusued. "13 " 44 As aoon * practicable after the receipt of such notice and shares, tha corporation ahall issue and shall dalIvor at SAid offlea or agency to tha paraon for vhosa account ouch Sharaa vara ao surrendered, or on his written ordar, a cartificata or cartificataa for tha number of full sharaa of Coaaon Sto.ck isauabla upon tha convaraion of such Sharaa and a check or cash in zaapact of any fraction of a shars based upon narkat value, aa defined in subparagraph 3 (ii) (D) of this paragraph (g), of tha Coaaon Stock on tha data tha conversion ia affected. Sueh conversion shall he deeaed to have been effected on the date on vhich tha Corporation ahall have received such notice and such Shares, end the person or persona in whose neae or neaes any certificate or certificates for Coaaon Stock shell be issuable upon such conversion shell ba deeaed to have become on said date the holder or holders of record of the shares represented theraby; providad, however, that any tfuch aurrandar on any data whan the etock transfer books of the Corporation shall be closed shall not ba deeand to constltuta tha person or persona in whose naaa or naaas tha cartificataa for such Coaaon Stock are to ba issued aa the record holder or holders thereof for any purpose until the close of business on tha next succeeding day cn which auch stock transfor books ahall be open. 2. The basic: Convaraion Rata ahall ba one and twenty-five one-hundredth* (1.25) sharaa of Coaaon Stock of the par value of $1 'jor share for each Share surrendered for convaraion, but shall be increased; or decreased aa providad in subparagraph 3 (lli:> of this paragraph (?). 3. Tha Conversion Rata shall ba subject to adjustment from tins to tlaa as followsi (i) Zf and whenever the Corporation Khali issue any Additional Stock, otherwise then by way of subdivision or combustion of shares (vhich is covered by subparagraph 3 (iii) of this paragraph (g)), than auccaseively upon each sutffc issuance the Conversion Rats shall ba imaediataly (except an provided below) adjusted in accordance with the following formula: $27.50 shall be multiplied by the number of shares of Coaaon Stock outstanding after eny auch issuance, and tha resulting product shall be divided by tha aggregate consideration, determined in accordance with this paragraph (g), received by the Corporation for ite shares of Coaaon Stock thon outstanding. The resulting quotient, adjusted to the nearest .001, shall thereafter be the Conversion Rato until further adjusted as htrsln provided: provided, however, that no such adjustment ahall be aade if the Aforesaid quotient shall b less than the basic Conversion Rata. h- 45 Tot the purposes of this paragraph (g), tha Corporation shall be daaaad to have received as consldaratlon for tha snarss of its Coaaon Stock outstanding at tha tiaa of asking any coaputatien haraundar tha aua of $293,525,331 plus any additional consldaratlon raeaivad by tha Corporation for its aharaa of Additional Stock plus, for aaeh t.Mra of Coaaon Stock hereafter isauad which doaa net constltuta Additional Stock, an aaount datarainad by dividing 927.50 by tha Conversion. Rata. Zn any such computation of tha aggragata consideratK-r, raeaivad by tha Corporation for aharaa of its Coaaon 3ock, there shall be daductad an amount datarainad by dividing 927.50 by tha Conversion Rata, for each share of Coaaon Stock retired fey tha Corporation subsequent to tha data of original issuehc* of Shares.. (ii) Tot tha purposes of any adjuatarnt of tha Conversion Rata pursuant to this subparagraph 3, ths following provisions shall ba applicablet (A) In ease tha Corporation shall at any tiaa laaua any Additional Stock for cash, tha consideration raeaivad by tha Corporation therefor shall ba daaaad to ba tha aaount ol cash raeaivad by tha Corporation for ouch Additions. Stock before deducting therefrom ths aaount of any eoaaistion, discount or other expenses which say have bean paid or incurred by tha Corporation for any underwriting of, or otherwise in connection with tha issuance or sale of, ouch Additional Stock. (5) Zn ease of tha issuance of Additional Stock in connection with a subdivision of tha Coaaon Stock of tha Corporation, tha Corporation shall ba daaaad to have issued such Additional Stock without conaldaration, and such Additional Stock shall ba daaaad to have bean issued and to be outstanding at tha elosa of business on tha record data for tha determination of stockholders entitled to receive tha seas. (C) In case of tha iaauanca of Additional Stock in payment or eatiafaction of any dividend on any claaa of stock of tha Corporation othar than Coaaon Stock, tha aaount of tha conaldaration raeaivad by tha Corporation for ouch Additional Stock shall ba daaaad to ba tha aaount of tha obligation in raapeet of dividonda that shall ba discharged by tha issuance of auch Additional Stock. (D) Zn cats of the iaauanca of Additional Stock for a consideration other than caah (and other than shares of stock or other securities of the Corporation) or a ownaideration part of vhich shall be other than caah (and other 'chan shares of stock or other securities of the Corporation), the amount of such consideration other than - 15 - 46 cash racaivad by the Corporation therefor shall ba daamad to ba tha aarkat valua of tha sharas of Additional Stock on tha data tha iaauanea tharaof is authorizad by tha Board of Oiractors of tha Corporation lass tha cash racaivad, if any. For tha purpoaas of this subparagraph (0) and subparagraph (F) balov tha tarn "market value" shall scan the last raportad sale price for sharas of Common Stock of tha Corporation on tha New York Stock Exchanga on such data. In tha avant there was no raportad sale of tha Corporation's Coaaon Stock on such date market valua shall mean tha naan between tha bid and asked quotations for tha corporation's Common Stock at tha close of`trading on tha New York stock Exchange on such data. (E) In tha case of tha issuance of Additional Stock in exchange for outstanding sharas of stock of any other class, or for other securities, of the Corporation, tha amount of tha consideration racaivad by tha Corporation for such Additional Stock shall ba deemed to ba tha aarkat valua, determined as provided in subparagraph 'D) above, of tha sharas of Additional stock so issued. (F) In tha case of tha issuance of Additional Stock upon conversion of any obligations of tha Corporation that shall ba convertible into Coaaon Stock, tha amount of the consideration racaivad by tha Corporation for auch Additional Stock shall ba deemed to ba tha principal amount of such obligations so converted into auch Additional Stock plus tha amount of cash, if any, requirad to ba paid to tha Corporation in connection with the conversion of such obligations other than by way of adjustment of interest. (C) In the case of the issuance of Additional Stock upon conversion of any shares of tha Corporation that shall ba convertibla lata Common Stock, tha amount of the consideration racaivad by tha corpora'-.ion for such Additional Stock shall ba deemed to bo the amount of tha consideration racaivad by thm Corporation for tha shares so converted plus tha amount of cash if any, required ba paid to tha Corporation in ccnrection with tha conversion of such shcran otlvir than by way of adjustment of dividends. For the purpose .if \h.* s subparagraph, tha amount of tha considerat ion received by the Corporation for tha shares so converted shall ba computed in like manner to that provided in subparagraphs (A), (8), (C), (D) and (E) above, as appropriata, (H) Any adjustments in tha Conversion Rata requirad to ba made in aecordrnce with the provisions hereof by reason of tha issuance of Additional Stock upon tha conversion of convertible obligations or convertible ahares shall be made only (1) as of the close of business on March 31, June 30, September 30 and December 31 in each calendar - 16 - 47 year, in respect of the charts of Additional stock isauad upon such conversion during the quarterly period ending on the *. day, and (ii) as of the close of business on the day up&., which the right to convert ouch convertible obligations or convertible shares shall expire, in respect of the shares of Additional Stock so issued between the close of business on the preceding March 31, June 30, September 30 or December 31, as the case may be, and the close of business on the day on which such right at conversion shall expire. (Z) Neither the purchase or other acquisition by the Corporation of any Common Stock nor the as Is or other disposition by the Corporation of any common Stock at any tine theretofore purchased or otherwise by it shall effect any adjustment of thv conversiot. rate or be taken into account in computing any subsequent adjustment of the Conversion Rate, so long as such common stock is not retired. Shares of Common Stock at anytime held in the treasury-of the Corporation shell be deemed t > be outstanding at that time for the purposes hereof. (iii) In ease the shares of Common Stock issuable upon conversion of the shares at any time outstanding shall be subdivided (by the making of e stock dividend or otherwise) into a greater or contained into a lesser number of shares of Common Stock (whether with or without per value), the Conversion Rate shall be increased in the case of subdivision or deersassd in the ease of e combination to a rate which shall bear the earns Taxation to the Conversion Rets ir. effect immediately prior to such subdivision or combination as the total number of shares of Common Stock outatasdag immediately after such subdivision or combination shall beer to the total number of shares of common Stock outstanding immediately prior to such subdivision or combination. At tha same elms the basic Conversion Rate shall be increased or decreased in the seme proportion. (iv) Xn case of ar.v -`.pita:, reorganization or of any reclassification of the C-.susun Stock of the Corporation or in case of the consolidation cf thm Corporation with or the merger of the Corporation into ary other corporation or of tha sale of the properties and assets of the Corporation as, or substantially as, an entirety to any other corporation, each Share shell aftar such capital reorganization, reclassification of Common Stock, consolidation, merger or sale be convertible into the number of shares of stock or other securities or property of the Corporation, or of the Corporation resulting from such consolidation or surviving *ucli merger or to which suen sale shall be made, ee the case may be:, to which tha Common Stock issuable (at the time of such capital reorganization, reclassification of Common Stock, consolidation, merger or sale) upon conversion of such Share would have been entitled upon such capital reorganization, reclassification of Common Stock, - 17 - 48 consolidation/ merger or sals; and in any such case, if necessary, ths provisions sst forth harain with raspsct to ths rights and interest tharsaftar of ths holdsrs of ths Shares shall bs appropriatsly adjustad so as to bs applicable, as nsarly as nay rsascnably ba, to any sharas of stock or othsr sacuritias or proparty thsraaftar dalivarabla on ths convarsion of ths sh&ras. Ths subdivision or combination of sharss of common stock issuabls upon conversion of ths Sharss at any tins outstanding into a greater or lesser number of shares of Common Stock (whether with or without par valuer shall not be deemed to ba a reclassification of the Common Stock of the Corporation for the purposes of this paragraph. (v) Anything in this paragraph (g) to the contrary notwithstanding/ the Corporation shall,not be required, except as hereinafter provided, to make any adjustment of the Conversion Bate in any case in which the amount by which such Conversion Rate would be changed in accordance with the foregoing provisions would be less than one one-hundredth of a share of Common Stock, but in such case any adjustment that would otherwise be required than to be made will be carried forward and made at the time and together with the next subsequent adjustment which, together with any and all such adjustments so carried forward, shall amount to one one-hundredth of a share of Common Stock. In the event of any subdivision or combination of shares of Common Stock said amount of one one-hundredth (as therefore decreased or increased) shall be proportionately decreased or increased. (vi) Whenever the Conversion Rate shall be adjusted as provided in this paragraph (g), the Corporation shall forthwith file at the office cr wgency in the Borough of Manhattan the City of New York maintained by the Corporation pursuant to subparagraph 1 of this paragraph (g), a statement eigned by the President or one of the Vice Presidents of the Corporation and by its Trcasursr or Assistant Treasurer, stating the adjusted Conversion Rate determined as provided herein. Such statement shall show in dstail tht facts requiring such adjustment. Whenever the conversion Rate is to be adjusted, the Corporation shall cause e notice stating ths adjustment and ths nsw Conversion Rets to be mailed to each holder of record of Sharee at or prior to the time the Corporation mails an interim statament to its shareholders covering the quarterly period during which the facts requiring such adjustment occurred, but in any event within 60 days of the end of such quarter. (vii) In case at any time: (A) the Corporation shell pay any dividend payable in stock upon its Common Stock (other than a dividend payable in Common Stock} or make any distribution (other than cash dividends) to the holders of its Coaaon Stoct; or - 18 - 49 (S) the Corporation shall offar for subscription pro rata to the holders of its Common Stock any additional rharss of stock of any class or any other rights; than, and in sach such case, ths Corporation shall cause at laast twenty days' prior notice to be given to the office or agency in the Borough of Manhattan in The City of New York maintained by the Corporation purusant to subparagraph 1 of this paragraph (*>/ and nailed to each holder of record of Shares, of the date on which the books of the Corporation shall lose or a record be taken for such stock dividend, distribution or subscription rights* Such notice shall also specify the date as of which holders of Comaon Stock of record shall participate in said dividend, distribution or subscription rights. 4. The issue of stock certificates on conversion of Shares shall be made free of any tax in respect of such issue. The Corporation shall not, however, be required to pay any tax which nay be payable in respect of any transfer involved in the issue and delivery of stock in a nane other than that of the holier of the Shares converted, and the Corporation shall not be required to' issue or deliver any such stock certificate unless and until the person or persons requesting the issuance thereof shall have paid to the Corporation the amount of any such tax or shall have established to the satisfaction of the Corporation that such tax has been paid. 5. The Corporation shall at all times keep reserved a number of shares of authorized Common stock sufficient to provide for the conversion of shares on the basis hereinbefore provided. If the Corporation shall purpose to make any change in its capital structure which would change the number of shares of Common Stock into which each Share shall be convertible as herein provided, the Corporation shall at the same time also make provision so that thereafter there shall be a sufficient number of shares of Common Stock authorized and reserved for conversion of outstanding Shares on the new basis. 6. For ths purposes of this paragraph (g) i (i) -Conversion Rate" at any time shall mean the amount of Common Stock of the Corporation into which at such time one Share shell be convertible in accordance with the provisions of this paragraph (g). (ii) "Common Stock" shall msan stock of the Corporation of any class, whether now or hereafter authorized, which has tne right to participate in the distribution of either earnings or assets cf the Corporation without limit as to amount or percentage, provided, however, that the term "Common Stock issuable upon conversion of the Shares" shall mean only the class of common Stock presently authorized and stock of any other class 19 Ko into which such presently authorized common stock may hsraaftsr havs bssn changed. In ca^e by reason of the operation of subparagraph 3 (iv) of this paragraph (g) the Shares shall be convertible into any other shares of stock or other securities or property of the Corporation or of any other corporation, any reference herein to the conversion of Shares pursuant to' this paragraph (g) shall bo deemed to refer to and include the conversion of Shares into such other shares of stock or other securities or property. (ill) "Additional Stock" shall mean any Common Stock issued after April 30, 1967 in addition to the 13,342,060.S shares of Common Stock of the par value of $1 per share of the Corporation, outstanding at such date, other than (A) Common Stock issued upon conversion of Shares in accordance with, the provisions of this peregreph (g) end common Stock issued on conversion of the Corporation's 5-1/2% Convertible Subordinated Notes due April 1, 1983; and (B) Common Stock issued (1) pursuant to one or more stock purchaas plans or stock option plane for employees (including effleers) of the Corporation or of its subsidiaries adoptsd by the Board of Directors of the Corporation, (ii) pursuant to stock options granted to employees of acquired companies which have been assumed by the Corporation and (ill) pursuant to awards of Common Stock under the terms of incentive compensation or other remuneration plans for employees (including officers) of the Corporation or of its subsidiaries adopted by the Board of Directors of the Corporation. Cosson Stock Except as otherwise required by law, as hereinabove provided and at* otherwise provided in the resolution or resolutions, if any, adopted by the Board of Directors of the Corporation with respect to any series of the Preferred Stock, the holders of the Common stock shall exclusively possess all voting power. Each holder of shares of Common Stock shall be entitled to one vote for each share held by him. Whenever there shall have been paid, or declared and set aside for payment, to the holders of the outstanding shares of Preferred Stock and to thm holders of outstanding shares of eny other class of stock having prefarsnee over the Common stock as to the payment of dividends the full amount of dividends and of sinking fund or retirement fund or other retirement payments, if any, to which such holders are respectively entitled in preference to the Common Stock, then dividends may be paid on the Common Stocfc and on any class or scries of stock entitled to participate therewith as to dividends, out of any assets lsgally available for the payment, of dividends, but only when and as declared by the Boatd of Directors. - 20 - 51 In the event of any liquidation, dissolution or vinding up of the Corporation, aftar there shall have baan paid to or sat asida for tha holdara of tha sharas of Prafarrad Stock and any othar class having preference ovar tha Common stock in tha avant of liquidation, dissolution or vinding up of full prafarantial amounts to which thay ara raspactivaly antitlsd, tha holdars of tha Common Stock, and of any class or sarias of stock antitlad to partiepata tharavith, in vhola or in part, as to distributions of assets, shall ba antitlad to racaiva tha, remaining assets of tha Corporation available for distribution, in cash or in kind. Each share o>: common Stock shall have tha same relative rights as and ba indantical in all respects with all tha other sharas of Common Stock. General No holder of any sharas of any class of stock of tha Corporation shall as such holder hava any preemptive right or be entitled as a matter of right to subscribe for ox1 to purchase any othar shares or securities of any class which at any time may be sold or offered for sale by tha Corporation. SIXTH: The names and places of residences of tha incorporators ara as follows: Name R* zidancs Herman A. Hatz, 38 West 74th street New York City, N.Y. Gustave P. Metz 3907-209th Street, Bayaide Long Island, N.Y. Arthur L. Hack, 320 Eastern Parkway, Brooklyn, N.Y. SEVENTH: The Corporation is to hava perpetual existence. EIGHTH: The private property of tha stockholders of ths Corporation shall not ba subject to tha payment of corporate debts to any extant vhataver. NINTH: The following provisions ara adopted for tha regulation of tha business and for tha conduct of tha affairs of tha corporation and for furthar defining, limiting and regulating the powers of ths Corporation, its directors and stockholders: (a; The Corporation may have one or more offices and may conduct its business, in vhols or in part, not only within but without tha State of Delaware. Tha bocks of the 21 - 52 Corporation nay ba leapt outaida tha Stata of Dalavara at such place or placas as nay, fron tina to tina, ba designated by tha Board of Oiractors, axcapt that aithar tha original or a duplicate stock ladgar shall ba kapt at tha principal offica of tha Corporation within tha aaid Stata* (b) subjact to tha provisions of this Cartificata of Incorporation, and tha laws of tha Stata of Dalavara, tha Corporation nay usa and apply its funds or proparty to tha purchasa or acquisition of sharas cf 'its own stock of any class or sarias, froc t-ima to tina, to such axtant and in such Banner and upon such tarns as tha board of directors shall determine. Sharaa of its own stock belonging to tha Corporation shall not ba voted upon, directly or indirectly. (e) Tha miaber of directors of tha Corporation shall bo fixed by tha By-Laws, and nay ba altered, fron tina to tina, by anandnant of tha By-Laws, subject to tha provisions of this Cartificata of Incorporation and to tha provisions of tha laws of tha Stata of Dalavara existing at tha tina. An increase of tha number of directors shall ba deemed to create vacancies, in tha Board, to ba filled in tha manner herein or in tha By-Lavs provided. Any director or any officer sleeted or appointed by tha stockholders or by tha Board of Directors ^ay ba rsnovad at any tina, subject to tha provisions of this Cartificata of Incorporation, in such nannar as shall ba provided in the By-Laws. Directors need not ba stockholders. (d) Subject to the provisions of the By-Lavs the Board of Directors shall have power to naka, altar, and repeal tha By-Laws, and nay provida tharein for tha appointment of am Executive Committee of two or more members from their own number, and of such other committees as the Board may deem advisable, to exercise, during tha intervale betveen meetings of the Board, ell or any of tha powers of the Board which may lawfully be delegated, including the power to authorize the Seel of the Corporation to be affixed to all papers which nay require it. The By-Leva may be altered or repealed at any tina by tha stockholders. (*) The buaineaa of the Corporation shell ba managed by its Board of Directors. Th* Scerd of Directors shell have the power to exercise a11, tue powers of ths Corporation, without any action of or by the stockholders, except as otherwise provided by the Statutes of the State of Delaware or by this Certificate of Incorporation, or by the F.y-Lavs. (f) Except as in this Cartificata of Incorporation otherwise provided, or as provided by Statute to the contrary, the Board of Directors nay, fron tine to tine by vote of a majority of the whole number of directors then in office, without the assent or other action of the - 22 - 53 stockholders borrow or raise money, without Unit as to aaount, Cor any of tho purpoaaa of tha Corporation, and aay authorisa tha iaaua of bonds, dabanturaa, notaa or othar obligations of tha corporation of any natura or in any aannur for aonay so borrovsd, and aay authorisa tha craation of mortgagee upon, or tha pledge, convayanca or assignaant of, tha whole or any part of tha property o2 tha Corporation, real or personal, whether at tha tine cwnao or acquired thereafter, to secure tha payment of such bonds, dabanturaa, notaa or othar obligations and tha interest thereon and aay authorize tha aala or pledge or othar disposition of ouch bonds, debentures, notes or othar obligations of tha Corporation for its corporate purpoaaa. (g) Subject to tha provision of this Certificate of Incorporation, to any provision of'law and to tha provisions of tha By-Laws, tha Board of Directors shall have power to determine whether any, and (if any) wh^t part, of tha net aaaats in excess of tha capital of tha Corporation coaputad in accordance with tha provisions of tha statutes of tha State of Delaware, or, in caaa there shall be no sxeasa, what part of tha net profits for tha fiseal year than current and/or tha preceding fiscal year, subject however to tha provisions of tha statutes of tha State of Delaware, shall be declared and paid out as dividsnds to ths stockholders, and to direct and determine tha uaa and disposition of any such profits or aaaats. (h) Tha Board of Directors shall have powtr, in accordanca vich tha By-Laws, in ita diacration, to fix, determine and vary froa tins to tiaa tha aaount to be ma Stained as surplus, and tha aaount or aaounta to bo sat apart as working capital. (1) Tha Board of Directors in accordance with tha By-Laws, froa tiaa to tiaa, shall dataraine whether and to what extant and at what tiaaa and placae anil undar what conditions and rsgulations tha accounts and books and papers of tho corporation, or any of thea, shall be open to tha inspection of tha stockholders; and no stockholder shall have any right to inspect any account, bank or docuaent of tha Corporation, except as expressly conferred by the lava of tha State of Delaware, or authorized by resolution of tha Board it Directors. (j) In the absence of fraud, no contract or othar transaction batween the Corporation and any other corporation, and no act of the Corporation, shall in any way be affected or invalidated by tha fact that any of tha directors of tha Corporation are pecuniarily or otherwise interested in, or ure directors ar officers of, such othar corporation; and, m the absence of fraud, any director, - 23 - o4 individually, or any fin of which any director nay be a naabar, nay ba a party to, or nay ba pecuniarily or otherwise interested, in, any contract or transaction of the Corporation; PPOVIOED, in any case, that the fact that he or such fin is so intereatad shall be disclosed or shall have bean known to the Board of Directors or a majority thereof; and any director of th* Corporation who is also a director or officer of any such other corporation, or who is also interested, say be counted in determining the existence of a quorum at any seating of the Board of"Directors of the Corporation which shall authorize any such contract, set or transaction and say vote thereat to authorise any nuch contract, act or transaction, with like fores and sffact a if he vers not such director or officer of auck other corporation, or not so intereatad. 1 Any contract, act or trsnssetion of the Corporation or of the directors, sty bs ratified by a vote of fifty-one par cent of the eharee having voting powers at any seating of shareholders, as at any special seating celled for such purpose, end such ratification shall, sc far te persitted by law and by this Cartificate of incorporation, be as valid and as binding as though ratified by every storxholder of the Corporation. (k) The Corporation say, at nny seating of its Board of Directors, sell, convey, assign, transfer, leaea, exchange or Qtherwiaa dispose of Its properties and assets (including its good will and its corporate franchisee), as an entiraty or (substantially as an entirety, upon each terse end conditions and for such consideration (whether eaah or the. stocks or bonds of any corporation or corporations, or other property) as its Board of directors nay dees expedient and for the best interests of the corporation, when end as authorized by the affirmative vote of the holders of a majority of the stock issued and outstanding having voting power, given at a stockholders * masting duly celled for that purpose, or when authorized ay written consent of the holders of e majority of the voting stock issued and outstanding. (l) Subject to the provisions of this Certificate of Incorporation and the By-Laws, the Corporation reserves the right to attend, alter, change, add to or repeal any provisions contained in this Certificate of incorporation, in the Banner preucribed by lav; and all rights herein conferred on officers, directors and stockholders ere granted subject to this reservation. (bj) Subject to the provisions of this Certificate of Incorporation, the Corporation say iaeue itn shares without par valu, of my class oi: series, from time to time, and any securities convertible into eharee without per vilue, of any class or nivUe, for such consideration aa may ba fixed, from tiae to time, by the Beard of Directors, which is hereby expressly authorised to fix the ease, in its absolute and uncontrolled discretion* IP WITKISS WBF8XQF, OAF Corporation has caused this certificate to be signed by Edward E* Shea, its Senior vice President and attested by Isabelle J. Lorana, its Assistant Secretary this 28thdav of June, 19SS. 6AF Corporation ,y 16a &*d~: _> 1 Senior ''ice President ATTESTt y 77 Lorane-Liu i Assistant Secretary . 23 , 56 Exhibit 10.7 57 SAMUCl U. HKYWMMI OAF Corporation I3i Alps Road Wa.wc, N( JC*SCY 0***0 Exhibit 10.7 December 11, 1985 Oear 1 an pleased a> amounco a new GAP employee benefit ^len, executive Oaferred Compensation, for which you as a Hey emplt,. ee are eligible to participate. The Company will pay the full cost of ine plm. The plan will provide either of the two following benefits: 1. An annual benefit commencingjrfien you reach age 85 equal to 73% of your last full year** salary. The benefit will continue for the longer of: .your lifetime and, if you are continuously married from the data your service terminates until the date of your death* fer your spouse1 s lifetime .fifteen years The full annual benefit will be palp providing you have at least 10 year* of service after the commencement of this plan. You will earn and vest in the retlremant benefit in accordance with the following schedule. Years of Plan Service 1 2 3 4 5 X Of Retirement enefit Vested 7 IS 25 31 39 Yean of Plan Service 8 7 8 9 1C % of Retirement Benefit Vested 48 58 70 84 100 Annuil retirement benefit* rny be paid before age 85 with con^any consent. Ihe amount of these benefits will be reduced actuarlally to reflect early commencement. 2. If you die while employed by G/'F, a death benefit of 36% of your amual salary at date of death payable yrruelly to your beneficiary fer a term cf 13 years. ijj* 9U, tv IMAGE EVALUATION TEST TARGET (MM) 4 Sr This microfiche, Including title Information and format Is 1986 Bechtel Information < Services. All rights reserved.1* 1.25 1.4 16 4- 150mm + *7 v V* flEPilH.V Information Service* 15740 Shady Qrova Road Galtharsburg, Maryland 20877-1454 % ,V ^ <> 4S -- Your participation in the Executive Deferred Compensation Plan is voluntary, and if you elect to participate, your election is irrevocable. In view of the cost of this plan to GAP, if you elect to participate the company will cease making the basic 3X of salary and matching contributions to your account in the GAFCAP Plan. You will, however, be allowed to make tax deferred contributions from your salary as provided by the GAFCAP Plan. If you elect not to participate in the Executive deferred Compensation Plan, the company will ccntinue to make contributions to your GAFCAP account in accordance with the Plan provisions. A Hunan Resources representative will contact you shortly to answer any questions yog might have and to enroll you in the Executive Deferred Compensation Plan. At this time you should return a signed, dated copy of this letter to him if you want to participate in the Plan. This plan is a significant addition to your company benefits. Our ability to continue to improve compensation and employee benefit plans is directly related to the progress we are making in achieving superior operating results and containing our costs. I know I can count on your continued efforts towards these objectives. Very t urs, Samuel 0. Heyman I wish to participate in the Executive Deferred Compensation Plan. I understand that GAP will no longer make contributions to my GAFCAP account. date Name 59 Exhibit 11 atf CORPORATION MO omiozmiieb OOHPUTATIOIt OP EARNIM88 PER OONNON SHARE (In Thousand* Exoapt Par Ohara A*oun*o] EXHIBIT 11 ItK No. Yaar Ended Saoanber 31, Ml mi ! 1W-- l I 1080 IBM 1808 PRIMARY CARNIN08 PER COMMON SNARE 1. InooM (laaa) bafara extraordinary oradlta 8. last prafarrad ataek dividend raqufraMnta 8. Insane (lees) bafara axtraardlnary oradlta applicable to uoanon axaak 4, Extraordinary oradlta 9 04,808 800 84,018 3,806 8 41,048 0,080 oa,oao 10,008 1(88,188) 8,070 (38,188) 88,888 .0, Inaoaa (laaa) applicable to aaanan atook 0 Milghtad average nunbar of aharaa of oaaann ataek eutotendlng during tha period (Rata 11 7. Add aaaiawd oxerolee ef nolghtad average nunbar of otoek optIona outotond<ng uolng tha traaaury atook oetltod 0 77,880 10,884 387 8 88,744 14,808 180 8 (8,811) 14,878 87 0. Nolghtad avaraga nunbar of aharaa of ocanon atook and oonnon ataek equivalenta outatandlng during tha period 17,171 14,610 14,448 Ox binary aarnlngi (loaaj bafara oxtraordlnary oradlta (Itan 8 t Iton 8) 10 Prlnary aarnlnga fro* extraordinary oradlta (Itan 4 4 Itan 8) 3.14 1.30 9 8.08 1.08 U.8S] 1.70 11. Prlnory aarnlnga (laaa) par ooonon there (Itan 6 * Itan 81 PMU.Y DILUTED EARNINQO PER QOMON SHARE 18. Itan I above 13. Add preferred atook dividend ragulraaenta 14. Add Internet oxpanaa, laaa inoano tax affaet, of 81 convertible eubordlnoted notaa I 4,80 I 84,010 880 84 8 88,000 8,000 383 I (.47) (33*180) 3,070 410 18. Adjuated tncane (laaa) before extraordinary oradlta 10. Extraordinary oradlta 84^30 8* ,384 41,300 10,700 (20,789) 80,060 17, Total aarnlnga (laaa) I 77,004 9 67,000 (3,4311 18. Itan 0 above 10. Add affaet of oenvoraien of aharaa of preferred atook and dS convertible eubcdlnoted notaa during tha period, aa If converted at beginning of period. Add aaaiaed eonverelon of uelghtad avaraga nunber of aharaa af prafarrad atook and 60 convertible eubordl noted notoe outotending during tha pari Mi 80. 81,80 convertible prafarrad atook ' (a'taroa outatandlng X 1.88) 81. 80 convertible ouaordtnated notaa (*7480,000 for 1804, 90,800,000 for 18S f 100.80) 88. Arid Incranontal nunber of atook opttona outatandlng ualng tha traaaury atook netted at and ef ported ' (ratter tten average) nerkat prloaa Total Polly diluted aarnlnga (Idea) before extraordinary oradlta (Itaa 18 t Itan 83) Fully diluted aarnlnga fron extraordinary erodlta (Itan 18 r Ztn 831 Fully diluted earning* llonn) par oonnon ahero (Xteo 17 -f Itan 83) ,171 11,810 14,448 780 a* a# 110 13,047 1 3,01 1.88 I 4,30 3,046 333 108 17,9M 9 8.30 .87 9 3.17 3,081 306 1 17,807 9 (1,81) 1.48 1 (.191 Note 1i Tha weighted average nunoer uf aharaa of oonion atook outotondlng "no* conputad by adding tha nunber of aharaa outatandlng at tha end of aaoh tan (TO) day period and dividing by 38 for all parloda. 61 Exhibit 13 62 1985 *731,962 S 54,296 $ 77.581 19H4 $731,314 $ 41.046 S 56,702 1983 $699,397 8(29.199) 8 (3.841) $ 3.t4 4.50 $ S -- 3.01 4.30 .20 S 2.62 3.70 $ 2 30 3.17 S 10 S (2.23) (.47) S (2.23) (.47) S .05 m vuiluh Attatr&lh+art MfCfetr (MQMtiC fMfrtmctipcinmHtr iatarmimdttailad mlMutattinetm ofurtKMiii^ aeHykafeiartvcHvaa. StoMlMMiM- jimmianai ffttdrt o! N-vtaytpymiMoae, a kty 6AFandv:!. I 1 t?s i QAF ON THE MOVE IN 1985 A.* demonstrated by the following chronology, GAF wa* on the move in 1985, compiling an impreasive list ofaccomplishments, which included its best earnings per formance in its 20 years as a public company. January 2 GAF introduces its newest asphalt roofing product. Royal Sovereign*, a high performance, residential roofing shingle designed to capitalize on the emerging "middle market" for qual ity roofing shingles. January 22 GAF c 'Us for redemption 1,138,000 shares orit$ SI.20 Convertible Pre ferred Stock. a? 1 GAF intrtcu < v x VC-713*. a new generation ot hair care fixatives. February 11 GAF ai. 'ounces p`m to manufacture Ruberoid MB*, a promising new sin gle-ply roofing system, at Mount Vernon, Indiana plant, underscoring the Company's commitme..; to iu commercial roofing business. Expan sion is to be financed by a $4.8 mil lion industrial revenue oond issue. February 19 GAF complete-: expansion of its pro duction rapacii;' for manufacture of Polyplasdonc* arid Polydar* at its Calvert Cits*. Kentucky plant. March IX CAF call* for redemption the remaining outdancing shares of its $1.20 Convertible Preferred Stock. Apt il 17 CAF reports its fifth consecutivequarter of sharply increased earnings, posting the hi|*nr-u first quarter earn ings m rhe Coinpjuv's history. Income before extraordinary credits was 811.1 million (8.62 per share on a fuUy diluted basis), compared with 87.4 million ($.42 per slurc) a year earlier. Chemicals Division reports the best quarter in its liistory, while Building Materials Division reports its best first quarter in five years. April 18 Groundbreaking is held m connection with expansion ofbutanediol capacity at GAFtjoint venture plant in Marl, West Germany. April 29 Carl R. Eckardt andJohn A. Brennan elected Prcsid'ents. GAF Chemicals Division and Building Materials Division, respectively. Both remain Senior Vice Presidents ofthe Corpo ration. April 29 Based on 1984 performance, Fortu-v magazine ranks GAF 11 th in total return to investors, 23rd in net income at a percent ofstockholders' equity, and 92nd in net income as u percent of talcs among the nation's 500 Ingest industrial companies. May 10 GAF squires Rcichhold Chemicals' Glass Fiber Division for $9.25 mil lion. Financing for the acquisition and related capital expanaion programs is obtained through the issuance of industrial revenue bonds in the aggregate amount of $1.1.5 million. extraordinary credits was 815.4 mil lion ($.86 per share), compared with $11.9 million ($.67 per share) a year earlier. Chemicals Division posts record income for the quarter, while Building Materials reports its best second quarter in seven years. August 14 GAF announces it naa acquired 3,943,600 shares ofUnion Carbide Corporation, or 5.6% ofthat compa ny's total outstanding shares. In a fil ing with the SEC, the Company states that s business combination between GAF and Carbide is among the possibilities being considered. October 17 GAF reports iu seventh consecutive quarter ofsharply increased earnings, with the Chemicals Division record ing iu most profitable third quarter ever and the Building Mcterisls Divi sion posting iu best quarter in five years. Income before extraordinary crediu was $15.6 million ($.87 per share), compared with $12.1 muhor ($.68 a share) a year earlier. December 9 GAF announces tender offer for 80% ofUnion Carbide's outstanding shares. December 13 GAF completed expanaion ofits pro duction capacity for manufacture of butanediol at Calvert City, Kentucky plant. June 3 GAF issues $150 million of ten year, lt-V% senior subordinated notes, the largesr fuuncinp inGAF's histo December 26 GAF amends Union Carbide offer, proposing to pay $74 per share, all cash, for 106% of Union Carbide share*. July 1? CAF reports the highest second quar ter earnings in its history, the sixth lomecuiivc quarter of snarply increased prof..*. Income beliarr December 31 GAF common oock close* at $59. having increased by 140 percent from S.'M'/a a year earlier. OFF TO A STRONG START IN 1T86 January l GAF begins a year-long commemo ration of the 100th Annivemry ofthe formation ofthe company that later became Ruberoid. the predecessor of GAF's Building Materials business. January 2 GAF proposes to increase its offeT for 100% of Union Carbide's outstand ing shares to $78 per share. January H GAF announces withdrawal of its tender offei. -tating that it is not in the best interests ofGAF shareholders to compete ugainst Union Carbide's own exchange offer. GAF tenders 3.5 millio; Carbide shires into that com pany's exchange offer, while retaining more than 3.2 million Union Carbide shares, constituting more than 10 per cent of that company's otnsranding shares. With respect to GAF* Car bide shares accepted m the exchange offer. GAF discloses that it expects to record a pre-tax pair, of approxi mately $v0 million and an after-nx gain of approximately SKI million, or $4.50 per share ofGAF rommon stock, in the quarter ending March .11. 1986 I rluoarv li GAF completes expan-.,on of com mercial roofing maiiufacturii-.g facility at Kmcna. California i el u.ir \ U (iAr report* record earning* for >18;5. mth income before cxiuordinary credits rca.hmg $54.3 million (S3.HI per haic). compared wttn pre vious war's S4I.<* imlhou (SJ.3<> per share) Chemicals Piviuon .'nd CA|t<r<-jd'-4Ming icgi'iei record profit-, while building Material* Division post* it* K*t year ukc FIT4) EARWIGS PER SHARE itkmn) C(bOMMiM)ON STOCK POCE i U M <4 ii n n it t* "Net (ii* tcprvM uu h>vpiu KcMrc f >i14*.>c|m*x sfc4- $f t- " JVt Muc ' icpiomu <*4/ umtf * bcli-u <xii wt Jirui \ v rr%im *i|i 4 fwll\ 4ittiir*i b4t* "t Suu k l*ru < ' i\ l.At \ suf.tti.M. .uk)> pfi*c aivif l If. rih K-i M <>\ C4`h seif i>l .uiompl)*limvnis ntihnlvil (iAt 'v i'iM v.irtnin** pvrtnrnuiiiv in it' ?' xv.i'v .i> 4 puhln iniiipaiiv |\>t ihituiiw-ii.intli pi rn*.) vni!i".l I V> cmlvr .M. l'W\ nii'im Ivtnrv fNIr.i-r-.tiiiar\ . riihtv xx .1* $*4 ' mil lion S' "t j vlurvnn .1 fnllx ililmcil l'4vn. mi'ip.irvil xx ill) tnn'iiK- n|' $4| <i milliitn tS.1 .Vi .1 vlufv >n 4 lullx ihlmvil him nr tltv prvvu'ii. xv.*r ' 1>ix ivims i'|vf.iMni; prntiiv in. fi'jM.J irutn S'*' milli> in P'*4to SI I' x i:iillii>i in l`W. xxhilv r. xvmivv xxvrv nnllii'ii ."nipjiivl in ST.M ,i nnllii n in )`i*4 l'*r tiu- ii.miii |ii.ir'i,r *1 )***. uiiiiniv lvti'Jv i-\ir.niritiiui\ irvihi X\4* Sl_' ' lllllll.lll S ll" 4 ih.ltV Xl'IHIl $*> * imllii'ii s >4 4 \)urv' :.>f fiiv P4 js riml ^ik'oh'f ihv !.>nril>,pufiii vf.-S"4 ^million .i'iiipiri-,1 with SI14. 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P1 : t . . .; 1: . -V, I'**'. 1 :* .f I .* . 1 ll'i! ! * v * m 1 U. 1986. and involving an aggrcgatr investment of$V5 million, will pro vide GAF with sufficient eapi-; 'v to serve its customers for the bal? : of the decade and beyond. Mor over, the fact that GAF'i strategic plan has included capacity increase* a both domestic and international facilities, with each of these locations util nng a different source ofacetylene (2 key raw material in our manufacturing ptotets). has enabled GAF to achieve a measure ofdo ersification sufficient to assure its role for many years to co nc as .1 reliable, low cost supplier o"' .piality products to its customers. GAF accelerated both its activity and investment in research and developtnent in 1965. In this connection, the Chemicals Division increased its annual expenditures in thi* area by 30% over the previous year, 'ind a further increase U projected tor 1986. GAF'* philosophy cored rung the expansion of its research and develop ment operation is that such activity 11 best nurtured not by the indiscrimi nate investment offinancial and human resource* but rather by a care ful. deliberate endeavor to assemble <-> GAF 4 select group ofoutstanding scientist* who bring, in their approach to research, a concern not only for the science iisrif but an appreciation for the relevant business and market ronuderaiions as well, Akhough an important svpect of the Division's research and wvdopmem activity involves uppr<-'. programs designed to mamtam and improve the quality ofGAF` product* while at the same time reducing their cost of pro duction. a continually increasing por tion of the Company's endeavor in this area now being devoted to development of new pioditt ts ami new appliL'iuoin for CAl's existing products ~-tgmfleant i\. GAF'sitcw product development activity n now fully coordinated with the Division's nutk uim department to asm-- that t rincal mterpfai between rew/fil. and development and marketing discidines. Wnile the increased investment entailed in the acceleration ofthe Chernies'* Division's research and development activity cannot be rea sonably expected to yield immediate results, it is noteworthy that GA F did introduce into the market this past year a number of significant new products. These product introduc tion! included a new generation of hair fixatives based on GAF-dcveloped technology for mousse* and styling gels; unique thermoplastic polymer blends suitable for electronic applications, the expanding automo tive body panel market, and undersea oil and gas drilling component*; a new family oflow-foaming, high detergency surfactants for household and industrial uses; and new and improved grades ofGaflcx* thermo* plastic polyester elastomers for appli cations where resistance 10 fatigue and temperature extremes is required. It is anticipated that these new prod ucts will make an increasing contri bution to operating profits in 1986 and beyond. Operating profit* in the Building Materials Division neatly doubled in .'985, despite another lackluster year for the roofing materials industry. Improved performance ofGAF* roofing materials business faulted from Higher unit sales, a more favor able product mix, and increased man ufacturing efficiencies--the latter having enabled GAF to become one of the lowcn cost producers in the industry. The Division's performance was al) 1 hi more impressive when measured avaunt an industiv envi ronment which witnessed reductions m pricis for roofing materwb prod ucts and io:a) sal 1. Finally, an espe cially noteword v ;.ccoiv,phshncw w* the fact tha- vl AF, bs virtue of a substantial increase in it* market share this past year, hat now attained pre dominance as the nation's leading manufacturer ofresidential roofing product*. G AF acquired in May. 1965. Reichheld Chemicals'Glass Fiber Division for 19.25 million, in a move designed to ensure increased control over the Division s manufacturing cost* a: well as its enhanced reliability as a supplier. This business, which includes manufacturing and research and development facilities at Nashville. Tennessee and Irwindale, California has now been devoted to die manufacture ofchopped glass fiber for mar substrate used in the Company's footing products. With its own captive supply of glass fiber, glass mat. and roofing gumaJet. GAF has become die most folly integrated roofing manufacturer in the industry. This provides the Company's build ing materials business, we believe, with a aminct advantage over its competition and has already enabled GAF to forth.' reduce its manufac turing costs--a critical objective in an industry where severe competitive pressure* have exerted downward pressure on price* for quite some time, The mrior elements of the Divi sion's marketing strategy this past year were to achieve a more favorable product mix and distinguish itself and its products in the marketplace- To this end. G AF successfully pursued a number ofinitiatives, two of which ari .worthy of mention at this lime. (1) GAF's Building MMcriali Divi sion developed and introduced into the market two exciting new prod ucts this past year, both of which arc experted to make a significant contri bution to the Division's profits m 1986. The Royal Sovereign', a durable residential shingle, is des.gned to cap italize on the "middle market * for uuahty roofing matciuU at ajust slightly higher price than standard shingles This new high-pet form- ana. designer-created product n experiencing, rapidly if>''rra>.mg sales 1 and can be expected to be a meaning ful contributor to profits in 1986. GAF also developed and brought to market in the latter part of 1985, Ruberoid MB*, a modified bitumen single-ply roofing system. This excit ing new addition to GAF's line of commercial roofing products offers the advantages ofimproved flexibil ity, ease of application, and cost efficiency, and its development underscores GAF's commitment to establish itself as the premier supplier ofcommercial roofing products. (2) GAF continued during the past year to increase market penetration of its premium roofing product, Timberline*. Programs designed to promote increased sales of this prod uct included expansion of the GAF Finance Program, an innovative plan enabling roofing customers purchas ing Timbeilinc and other GAF roof ing pioducts to obtain prompt and easy home improvement loans on competitive terms, and the launching of a nationwide, radio advertising campaign featuring the theme from "Fiddle on the Roof." As a result of these initiatives, Timb.rlinc enjoyed substantially higher sales throughout the country this past year, and further gains are expected in 1986. 6AFs Union Carbidt Invostmont GAF began accumulating shares of the Union Carbide Corporation in June, 1985. By August, GAF had acquired almost 7 million shares, con stituting a 9.9% interest in Carbide, at an average cost of $51 per share. While the shares were initially acquired because they presented an attractive investment opportunity, further analysis compelled GAF to conclude that: (1) Union Carbide, which , insists of several attractive chemicals units, was in many respects an excellent strategic fit and acquisi tion opportunity for GAF; and (2) Despite the size of Union Carbide, our Company's standing in che investment community and its proven management talent would enable it to not only raise sufficient financing for the acquisition but, in the event that an acquisition effort were successful, to successfully incor porate this more sizeable enterprise into GAF's own operations. On December 9,1985, GAF launched a tender offer fot 80% of the common stock of Union Carbide at $68 per share. After GAF subse quently increased its offer to 578 per share, all each, for 100% of the out standing Carbide shares, Union Car bide proposed a plan similar in some respects to GAF'i own agenda for the company. Union Carbide's program called nor only for divestiture of a number of business units (including us Consumer Products segment) but for a broad-based cost cutting effort. When coupled with a competing exchange offer for a substantial por tion of its own outstanding shares, Carbide's plan of action would have required GAF to substantially increase its offer in order to have had a realistic chance of success Under the circumstances, GAF determined that it was not in the interests of its shareholders to continue to compete against Carbide's own exchange offer, GAF instead tendered its own Car bide shares into the company's exchange offer, exchanging almost or;e-halfofits position fora package of cash and securities having an approximate value of $85 per share. With respect to the shares taken in the exchange offer, GAF expects to record, in the quarter ending March 31, 1986, a pre-tax gain of approxi mately $90 million and an after-tax gain of approximately $81 million, or S4.50 per share of GAF common stock. GAF will continue o retain approximately 3.2 million shares of Union Carbide, consisting of 10.6% of Carbide's outstanding .shares, and will determine at a later tune whether it wishes to renew its rentier offer or pursue other alternative courses of action. The determination to wiihdraw GAF's offer for Union Carbide was in keeping with the Company's acquisi tion philosophy, as outlined in my August 19, iy85, letter to you: "You can be assured rhat neither G AF's Board not its management is mesmerized by the thought ofbuild ing imposing empires or increasing the size of GAF for the sake ofsheer size. Quite to the contrary, we intend in our investment outlook to bring to bear the same bottom-line orientation which the Company applies on a dayro-day basis to tnc operation ofits business. In so doing, our criterion for expansion at GAF will continue to be meas .red in terms of maximum return on capita], contribution to earnings, and enhancement ofshare holder values." Although GAF fell short of its goal to acquire Union Carbide, its invest ment has been a financially successful one. Based upon the current market price of Union Carbide's shares, GAF has pre-tax realized and unrealized gains, after expenses, of approxi mately $175 million. Moreover, GAF can derive satisfaction from the fact that it has not only done well for its own shareholders out has succeeded in creating for Carbide shareholders more than S3 billion of increased shareholder value. Finallv, GAF expects to maintain its ownership interest in Union Carbide. As that compai v's major shareholder, we intend u> closely monitor further developments and have retained the flexibility to pursue ar a later time whoever course of action we deter mine to be in GAF's best interest. Prapact* lor ISM As we move into 1986, G \F's two principal businesses continue to out perform the industries in which they operate. Although GAF ser ves sev eral markets which current: y suffer from less than robust economic con ditions, I nevertheless have every i 1 710 confidence that we can continue to improve the profitability of the Cor poration and register substantial yearto-year earnings increases in 1986. As for the Company's Chemicals Division, we anticipate another out standing year. In this regard, results should be favorably influenced this year b/ expansions of our production c~ aciry, new product development, a lc wo- dollar, the anticipated rebou v' of a number ofend user mar'cet'. sut h as electronics, plastics, and magnetic wire coating, and increased marketing penetration in areas of the worlu whose potential we have not yet begun to tap. hi chi* latter connec tion results thus far provide suffi cient basis to expect that international profits will make an even more sig nificant contribution to the Division's overall performance in 1986. With regard to the Company's Building Materials Division, while opt rating profits were sharply higher ban those of the previous year, he business is still far from achiev ing acceptable returns on capital. Although GAF in 1985 managed to improve market share and sharply rcoucc its cost ofdoing business at both administrative and plant levels, its effoi'' s to achieve greater profit ability were inhibited by continued erosion ofpricing in the roofing materials industry. In t': is connection, current prices for GAF's roofing products have now fallen to a point below 1979 levels as a r , u of it; d us erv-u,ide overcapacity, a condition \ ich has persisted for quite some t. tc. Although 1985 witnessed a number of plant closings which oper ated cc icino/e capacity front the industry, and while it would appear that roofing prices have ai least stabi lise.J over the period of the past ninety Jays, it is still too early to tell whether pricing will return to at leas' some semblance of normalcy in the current year. lr. any event, we remain confident that GAP's building materi als business can continue to effec tively compete in a challenging environment, and that 1986 results will demonstrate further improve ments over the prior year. A1 CLMMQailWJaINpVIvml GAF's record ofaccomplishment over the past year was attributable to the exemplary efforts of so many members of the GAF community, and I am delighted to take public cog nizance of their many contributions to the success ofour common endeavor. I would first acknowledge the piv otal role played by GAF's Board of Directors. Through a willingness to analyze, examine, question, deliber ate, disagree, and finally arrive at a consensus, sometimes after recon ciliation of differences, each ofour directors has made an inestimable contribution to the affairs of the Cor poration. This is so not only because ofthe wisdom of their advice and counsel in the formulation and estab lishment of policies from which GAF's executive direction has stemmed, but also because of the con stancy ofBoard support for both the endeavors and fundamental principles ofour Corporation. Foremost among the causal factors in what we have achieved at GAF over the past two yeats has been, and continues to be, my fellow GAF employees. As Chief Executive, I consider myself fortunate to be asso ciated with so many hard working, dedicated, and loyal employees who approach their responsibilities and share the objectives ofGAFV, senior Rianagcmci'C with such an extraordi nary degree of uitcnsity. On a related note, it is worthy of mention that more than 25% of our entire employee population--sala ried, hourly, union and non-union-- are shareholder:; of the Corporation. The degree or employee participation in the owncrihip of GAF is highly unusual, if not unique, in corporate experience and has contributed in no small measure to the creation at GAF of a corporate ethic in which employ ees treat the Corporation's money as ifit were their own--as, in fact, it is! And, finally, I would express my gratitude to our shareholders for their continued support and encourage ment. It has been and is no secret that I care for and about my fellow GAF shareholders, and that onr philosophy of management at GAF emanates from a clear view offor whom and by whom corporate management is employed. While it is ever the role of the ChiefExecutive and the Board of Directors to reconcile the many com pering interests ofthose in the GAF community at large, it is our simple credo that only through sustained achievement for the Company's shareholders can we assure the wellbeing of our employees, customers, suppliers, lenders, and communities in which GAF does business. And it is therefore with no small measure of pride that I recount the fact that over the period of the two years ofnew management's term of office we have managed, by virtue ofour efforts, to increase shareholder wealth by more than $900 million. We trust that we can continue to report such favorable developments in the coming year. Sincerely, bk- SamuclJ. Heyman Chairman of the Board and Chief Executive Officer March 17.1986 '>71 n Cr V__X AF's worldwide specialty chemicals business achieved record profits in 19X5. Division income reached $92.6 million, a 17% gain over the previous year. Sales increased to S364.4 million from $357.2 million in 1984. Results in both years include income from GAF*s 50-percentowned foreign chemicals manufac turing and sales company, (i AF-Hiils Chemie GmbH. Domestic operating income rose to S64.X million in 1985, a 17% gain over the year-earlier level of $35.3 million. Domestic sales increased from S260.9 million to $264.7 mil lion. reflecting increased market : penetration for virtually all nujor product lines which was partiallv off set by reduced selling prices. Despite the continued strength of the dollar through most of the year, interna tional profits increased f. ..in S23.7 million in 1984 to S27.X million in 1985. while international sales for the 1985 year were S99.7 million com pared to $96 3 million m the previous year. The Division's overall profit performance resulted in part from in improved product mix as well as the successful implementation of a wide variety' of programs to effect manu facturing efficiencies >nd energy cost reductions. Flic Chemicals Division produces three major groups or specialty chem icals at five domestic facilities--acety lene derisatives an I surfact mts for markets in 72 countries around the world and engineering plasties for markets located principally in the United States and (\mada. A fourth product line, mineral roofing gran ules, is manufactured at four domestic plains and sold to asphalt rooting manufacture'''! nationwide including GA'c's own Ihuldmg Materials Divi sion. Fhese pebble-hke granules uv develooed from spui.tllv scleitcd i ick and are >.ju.i.. i"d. cm died, usual, and hcat-proussul by CAI iiuo sern-u ramu granules in mure than 2'> udors Acttvlenn Derivatives GAF's line of more than 70 differ ent acetylene derivatives experienced significant growth in 1985. The Company's strength in acetylene derivatives--as evidenced in its tech nology, multi-source plants, broad product line, application research, and dedication to quality--has resulted in increased demand for the Company's existing products and the successful introduction of new and improved product.!. Sales of butanediol to producers of thermoplastic engineering plastics increased substantially in 1985. These plastics are finding increasing applica tion in the automotive, electronics, and appliance industries. In addition, sales of butanediol for urethane and plasticizer end-uses continued to meet increased customer demand. GAF's iccrylciic-dcrived solvents, M-l'yrolf HU)* an i THF." demon strated continued growth by pene trating specialty solvent markets, where high performance and safety are critical requirements. Major petroleum refining compan ies stepped up their demand for MPyrol, GAF's super-safe solvent. This growing demand was attributable to increased recognition of the product's superior performance characteristics, in terms of both cost efficiency and environmental safety, in the extrac tion of automotive lubrication oil. As a result. M-Pyrol has virtually replaced phenol solvent in this petro leum refining application. M-Ryroi also made further inroads this past year in markets previously dominated by furfural, another widely used .extraction solvent. Applications for acetylenic solvents continued to expand as a result of both restrictions placed on exposure to chlorinated solvents in a variety of applications and action taken by the United States Environmental Protec tion Agency in 1984 granting MPyrol exempt status for use in agriculture. M-l'yrol is especially suitable for use in the agricultural market because of the latter's require ment for improved safety characterist'Cs in Connection with products used in herbicides, pesticide's, insecticides, and fungicides. GAP ehemleele endpoly men in Increasingly used In ifnet variety elphermacautlcflir.d heellhetre products. I Laboratory distillation equipment is employed lor the fundamental study o! the organic reactions leading to GAF specialty chemical products. Expanded manufacturing facilities tor "Polyplas done" and "Polyclar key acetylene-based polymers used inphar maceutical formulations and as clariliers in the beverage industry. Sales oi fixative polymers to the li.ure.ire m.irket reached substantially higher lewis m l`JX5 CiAl; s (lakpiat* poly liters g.lined iiu reas -d acceptance in stvling products su:li is mousses. I l.ur mousses have bean one oi the tastes, grow me new products to reach tiie li urea re market in more than a decade. (iantre/* resins, used extensively in li.ur .prayx. continued to maintain their market leadership . (kiffix* V(d713. a lieu generation p ulymcr, was introduced during the year, thereby expanding (i.Af'x product line in the hair t'lx.iiive market. (i.M 's line ot'l'olypl.isjone1 disto rt, grants. used hy major ding manu facturers around tile wodd tor li.irii'.iceuucal tahlets. registered increased sales growth last sear. In order to satisfy rapidly grow ing demand tor I'nl vplasdonv disintcgrants and 1'olvvlar.* (IAb expanded Us production capacity .11 the ( loinpan`. 's C a vert t'itv. Kentuckv facility Pol vpla-dtuie df integrants are used primaril\ hi j'h.irmaccutieal tablets, while Polvelar is employed as i stabi lizer and clarilymg agent in the pro duction or heer. wine, trim inn e., aiklothei beverages New product applu atioiis coninl'iited to incre.isesl demand lor Pl.is.lore' ex.ipiciits in tin ph.irma- ceuticals industry, One such success ful deselopment has heen the use of Plasdone i xcipients in new tratisdermai devices to provide constant, eontrolled-release medication over lengths periods ofiime. Plasdone excipients are also employed as hind ers tor drug and vitamin tablets in both the medical and voternt.irS' markets. CiAh experienced significant gross tii in mm sales of xiirtavt.iiits. netss ithst.uidmg the tact that tile oser.ill suriact.mt market registered 7he GAF family ol spe cialty chsmicats and polymers are incorpo rated into the products of most high growth indus tries: pharmaceuticals, cosmetics, household industrial and institu tional. automotive, ari electronic and electrical components. flat sales in PW5 as compared to the previous year. Ci A P's positive per formance ssas attributable to expanded appliealions tor existing produets, ness- product applications, and improved market pscuctration. (iAFs surfactants include die Igcp.iP series of alkylphenol eilioxy- lated nonionics and the Alipal.*- Ciafacf and Igepoii* series of anionic surfac tants. Several ness Alipal surfactants w ere developed during which exp.u ded our sales to customers pro- du nig latex bases for paint and xpe- lali/ed coatings. Igepals continued to register strong sales to the household cleaner and agricultural chemical markets. The demand tor (iafae as resin emulsifiers and Igepals as demk- ing chemicab remained strong, not withstanding the effect of increased foreign competition m the paper industry in the United States OAl's Igepon line of surfactants continued to gain increasing use m the cosmetics market. Igepon M is a widels used product a liong manufacturers ot low-irrnation synthetic snap bars .nul other new toilecrv products, hi adihtion. other surfactants, such as Igepon i-V7, experienced higher sales to the agri cultural m.irket. Sales of carbon vl iron powders, although ad versclv affected In the downturn m the vIiyuouks mdustrs. esoiTii in ed increased demand ill the defense .nul powdered mc.ilitirgv, industries i i.M ' engineering thermoplastic business, m terms of its sales ti<r automotiii and extrusion applic itniiis, i I'niiiivicd it. grow ill p.uti" n in I USA \k lule 'lie elcitru al electronics m.irkeis n ere depressed durine. most ol tin- 'US's -. .Mr, s.de-. in both ihe-.e sc. toi miptoNixt .li r'ue the l.uter part oi tile \ ear as m\ ent' tles w ere red iti ed ii id i list oilier de main I began to i mini A iimiii'h o| sie.lMIK.ini develop ments o. . ill i ed III I us s M III. h dn in |J Sunning electron microscopy, hen used to characterize carbonyl Inn powder (inset): 5000X magnification ollypeSf material employed in the fabrica tion of electronics parts. enable GAP to continue its rapid expansion of this business in the com ing year: Gafite* PBT alloys have been widely accepted for use in auto igni tion applications, where there is a premium on excellent electrical per formance and smooth surface finish. A UV stabilized Gafite PBT mate rial has been developed for applica tions exposed to extreme direct sunlight. In addition, expanded appli cations for pigmented parts requiring UV protection are presently being developed. A foamable PBT grade is scheduled for market introduction in 1986. This new material offers potential for weight reduction while retaining rhe excellent combination of properties associated with conventional PBT. New high impact PBT materials have been developed and are now being marketed to the electrical/elec tronic connector market, Similar technology has been utilized to provide high impact alloys of PBT for use in exterior automotive parts, New grades of Gaflex? thermoplas tic polyester elastomers, were first introduced in 1985. while the entire Gatlex line is finding expanding applications where resistance to fatigue, corrosion, and temperatu re extremes is required. Mineral Pmdijcis GAFs granules business registered increased sales during 1985. despite the lack of industry-wide growth in asphalt shingle shipments In order to satisfy increased customer demand, production capacity seas expanded at our Blue Ridge Summit, Pennsylva nia and Annapolis. Missouri plants during the pasr year. The 1 division's granules business continued to benefit from the cur rent tu-nd among roofing manufac turers to convert production to glass fiber substrate, the glass product requiring more granules per unit of asphalt roofing. In addition, the increased popularity of three-dimen sional shingles which simulate wood, such as GAF's premium Timberline* shingle, has resulted in increased granules demand on account of the fact that they require 30% more gran ules than lower-cost, commodity shingles. international Despite the continued strength of the dollar through the greater part of the year, international profits increased from S23.7 million to S27.8 million for the 1985 year, while sales were S99.7 million versus $96.3 mil lion m 1984. In achieving record results, GAF's international'chernieals business accounted for 27% of the Company's total chemicals sales while contributing 30% of the Division's profits. The Chen deals Division's interna tional business is conducted by 15 subsidiary companies throughout '.re world and through distributors m those countries wlmh do not haw a GAh subsidiary. Key produce, for international markets are eetylene derivative', surtaetants. and a range of pressure-vessel filter systems, These filter products are manufac tured in Belgium, Germany, Br nl, and Canada for use in the filtratimi of process liquids in industries, such as chemicals, pharmaceuticals, paints, and beverages. GAF is recognized as a market leader in this product line. The Company participates in a joint venture operation in Marl, West Germany. GAF-Hiils Chemie GmbH. CHEMICALS INCOME it n Mdkws) 81 8.' 8J 81 5.S I OAF specialty surfac tants an widely used in a broad line ofhouse holdproducts. QAF's growing interna tional presence--includ ing theAustralasia and North Pacific regions-- offernew and expanding market opportunities. T GAF-Hiils manufactures butanediol and cetrnhydrofuran (THF), a chemi cal intermediate and solvent, respec tively. These products are marketed throughout Europe by both the G AF sales force and GAF-Hiils. The joint venture manufacturing facility is cur rently undergoing a major expansion of its present capacity. This expan sion, scheduled for completion in nnd-1986. will enable GAF to increase market penetration in not only Europe but in export markets throughout the world, such as the North Pacific. International operations are divided into four geographic regional units, the largest of which is the European region. The European unit has responsibility for the Middle East. Africa, and the Indian subcontinent, as well as all European markets. Sales in the European region for 1985 increased by more chan 8% over 1984 levels, notwithstanding the continued strength of the dollar during most of the year. Piasdone and Folyplasdone in the pharmaceutical industry and Polydar in the brewing industry continued to experience strong overseas demand. GAF maintained its position as a lead ing supplier to the hair care industry through increased sales of Gafquat and other polymers used in styling mousses, a very important market segment in Western Europe and a growth area in other parts of the world as well. Sales of BLO, THF. and butenediol for agricultural for mulations continued their strong growth patterns in 1985. Western Hemisphere sales increased by more than H% in 1985, despite 'he adverse impact of high inflation rates and continued cuirency devaluations in most Latin American countries. GAF operates through subsidiaries in Canada. Brazil, and Mexico and through distributors in other countries in that region. A strong performance was recorded throughout rhe Hemisphere by GAF\ filter business and sales of OAF specialty chemicals play a kay role In the manuteeUin ofpharma ceutical. :osmsllc, and industrial products In Jnpan and the North Pacific. polymers to the pharmaceutical and hair care industries. The Australasian region experi enced lower U.S. dollar sales in 1985, both as a result of the recesdon in the electronics industry which severely impacted rhe Company's operations in Southeast Asia, and also due to a 25% decline in the exchange rate of the Australian dollar. GAF is a lead ing supplier in that part of the world of M-Pyrol, which is used exten sively in semiconductor microchip production. Partially offsetting the decline were strong advances in poly mers to the hair care industry, where Australasian markets are now adopt ing formulations similar to those already widely accepted in Europe ind the United States. Sales in the North Pacific region tor 1985 increased by 10% over 198-4. largely on account of significant unit volume increases in acetylenic deriva tives. Lower sales of M-Pyrol, result ing from the depressed state of the semi-conductor industry, were more than offset by substantial increases in the other acetylenic product lines and new business in Korea and the Peo ples Republic ofChina. Rl-M!iWcIi jod mint GAF's research and development activities received increased attention and emphasis in 1985. Research and development expenditures for 1985 increased 2*1% over 1984 levels and reflect management's strategic com mitment to the development of expanded specialty product lines and new systems. Thirty additional scientists, engi neers, and support personnel were added to die research staff in 1985. and GAF's expanded research and development staff is now devoting an increasing portion of its tune to the development of new products for the Company's strongest growth mar kers. Among the new products GAI introduced tins past ve.ir v.cie. A new generation ei| hair fixative's based on (i At-efewelopes! tcehnologr lor m.lllveoe 111.4 ell'IlllO .!. j ! 1,'s.i OAF aojlntsrint plattict and elastomers-- major materials uteri in till dynamic automo tive, electronics,electric, and home appliance markets. ! The ccametka market-- oaeotthe largermn olQAfspecially surfac tants sadpolymers torhairsprays and " aismaaot. and pelt. innovative materials exhibit superior holding properties, are compatible with other solvents, and are uniquely water soluble. New thermoplastic polymer blends, including light-stable formulations for rugged applications such as under sea oil and gas drilling components, high-impact, flame-retardant materi als for electronics applications, and a new high-impact plastic polyblend designed for use in the huge automo tive body panel market. A new family of low-foaming, high detergency surfactants for house hold and industrial uses based on an organic synthesis technology devel oped by GAE Improved grades of Gaflcx thermo plastic elastomers, including a more flexible, blow-molding grade and a heat-stabilized version for automotive applications such as protective com ponent coverings. These new cus tomized plastics systems provide opportunities in other expanding market sectors as well. GAF has also undertaken extensive development work in the biopharma- ceutical area in connection with a num ber of new products and applications, and is developing newer technolo gies and product lines, based on proprietaiy GAF chemistry, which offer exciting opportunities for growth. Moreover, these potential markets can easily te exploited oy GAF be cause of fit Compan- s combination of chemical experti. c. ap ohcation de velopment skills, and sttong technical service and marketing I. vntation: New conmoilc-d-relcaic rystems arc I in the developmental stage at GAF as 4 tally tpuippod net- well. These include materials as carri ers or complcxing agents for anribiotics and anti- tumor medicinal*, a new application which capitalizes on the unusual ability of these substances to solubilize a variety of normally insol mode talon, pormhUap Ifcfl fWAiuAlUa aad Ileal teatiop el newly developed hair uts andskin core products uble drugs for effective treatment of GAF is already a m tor factor in the disc.scs. pharmaceutical industry, where it* Plasdonc acetylene-based polymers GAF has developed a new class of have found increasing application as components m thecomrolkd release of medication. Contributing toGAF's strong presence m die pharmaceu tical area are its surfactants, winch are under active study in a number of laboratories as potentially significant specialty acctylcnir-tv.ed molecules, designed for use not only as process ing aids in the biosynthesis of com plex drugs but so also as carriers fb* normally insoluble ,v. bvt ingredients in connection with cosmetic and agri cultural applications. viricides . "m a wholly separate area, GAF has developed a non-silver imaging tech nique mat affords high resolution photographs directly from electron Peam signals. This processlcss, dry sysicm is designed tot applications where rap u printout of data is an important consideration, such as sHsinic exploration and business eoinmur.icaoons ar 77 T s. ho building Materials Division posted its second consecutive year of sharply improved p'ofits, witn Divi sion income iiK-casing 85% to S20.1 million from Si0.9 million in 1984. 1983's profit performance represented the Division's best year since 1979. Sales in 19H3. reflecting lower prices for the Comnany's products, were S3ft.V9 million versus S370.8 million in the previous year. The continued turnaround in the profitability of the Building Materials Division was attributable to an improved product mi.<, expanded product lines, and manufacturing efficiencies. The significant improve ment in the Division's performance seas achieved notwithstanding severe competitive pressures in the industry, which continued to exert downward pressure on prices throughout most of the ve.tr. Acquisition oi'Rcichhold Chemi cals'Glass Fiber Division in 1983 was an important step in GAF's strategic plan to achieve verticil integration o<" its roofing manufacturing operations The acquisition included manufactur ing and research and development facilities in Nashville. Tennessee and Irss uidale. < Ijhlbrnu. which are now exclusively devoted to the production I of chopped glass fiber for mat subI straw used in the Company's roofing products The Reichhold acquisition svas designed to ensure increased con trol over tin' Division's manufactur ing .util i> \svii as to enhance GAF* reliability as a supplier. With its osvn capos: siipph of glass fiber, glass nut. and rooting granules, GAh is noss the most lulls integrated roofing ! i.i.inufj.'urcr in the industry. i iAt completed during the past s ear a s ibsi antul capital spending pronrim. " hch included nor i.nh an | cstp.in-.ioii i t its iiianut H tunng facilj us in lom..,ia. C alitorma hot the implementation of improve J manu facturing facilities at the Dvis;or s thirteen manufacturing facilities. As a result of inis capital program and the Division's extensive effort to substan tially reduce its cost of production. GAF has become one of the lowest cost producers of any major partici pant in the industry *< Mill liil.D ?< fl Uj Increased sales ol'GAF'x residential roofing products in I9H5 resulted from higher re-roollng demand as svell as the healthy pace of new home construction, both of which benefited from lower interest rates. The Company's performance was highlighted ny record demand for Timbcrline*, GAF s premium roofing product, limberline shingles arc a threc-dimensiona', laminated product offering a Class A fire rating and a 3C-year limited warranty. GAF has accelerated its marketing efforts to reinforce Timbc.line's position as the industry's "rop of the market" prod uct. As a resulr, dealers, contractors and architects are recommending Timbcrline, and an increasing num ber of homeowners are switching to Timberline as a replacement roofing product in order to improve the appearance, and enhance the value, of their homes. Royal Sovereign' CAF's newest residential roofing product, experi enced increased customer demand during the year. Uu>al Sovereign, a durable residential shingle, is designed to capitalize on the "middle market'' for quality shingle* at a ju:; slightly higher price *han standard shingles. This new high-perform ance, designer-created product lias already experience a rapidly increas ing sales and is expected to be a more substantial profit contributor in 198ft. Th'v exciting new product is offered in a wide ratine of colors and feature* a 25-yea i limited warranty. TimtoritM, ifcytl Sovtnifo ttti SutUml UlbUtliH nprzutu OAf't Mtf'Af 4pf jraAKtefcrlta mUKMmtlnt m/M Gins mil manulscturlng miehlnt stGAF's Chester, South Carolina, noting products plant. Packaged asphalt is pro ducedat the Company's rooting products plant In Tampa. Florida. nl tin- (iA!' I iiienee . llrv>c'.nn eoinrihuteil c> tiiv < : n\ > pr.Si >,ik-> improvement. 1 III* i in.irLi.il.',I iliix \ f.ir tlir,uii>)) ,i pronioiii hi.il *4inp.ui>i, te.nnrnm ilu' theme I *! Uwberoni'* broth .inin\vrx.ir\. tli ; tillpi,ill eil.ll'iex eilotolIKTs pnreli.iMiiu I iiiiherline .uul other i iA! pro.lueix to ol't.un prompt .nnl e.n\ home improvement loan* on ,,'llipetHlve UTI1>> 111 .l,l,hllolt io ttx i.ivor-ihle iiiip.i. i on '.ill's, the C, Al` I m.inee I'roi'ram li.i* enal'le,! (i A I-1> \iren.;tIk ii it* rel.iiioiixliipx with rooiiiic , ontr.i, lor* .i> ro*.* rhe eotimrv. I'M A ,otiime,1 ii> c.iiii .nvepuinv l*\ riiniiiu; ontr.ietor* Iv.-m-.e "i tlii.' pro,lu,'t'x *.iipenor h.ni.llme i li.ir.u i.Tixtn* -iii,t ii\ mpl.nv pertxrni.i'.i, e I heller vilex u ere rrior.le.l In Pt~S <>.ifi:l.i*` H.ixe. .iii : 4xph.il(-,v.ite.1 ,*l.ixx tihet pimhnt me.l .i .in iiiuti.'r!.i\ iiH-iii (nr larue. I1 .11 eominer. ul root'.. win. It w.ix intro. 1 !u,e,l into the market hi Visa A* .1 I -'lilt o| tile e\p.lllx|o|l Hi pro mt foil , 4|'4. ll\ II ( i \l x I olll.lll.l. I .llltlll lll.l l.tx !l|t\. II lx ,\|V, Iv-xl (lut the I ,iiii|'.in\ u ili K in .i |Mxii|.iii i>< in, re.i*e iix xlt.ire . if the , ommer. ul 1,','l'iiivi market txr the1 'aliturnu f, xixn in iIk- . online. \ .',r loiivl-i'xt.iWixIu'xl Uuheroiil rootlin' buxine** h.iviin; kvii ae,|inre.; In (iAI' in l`i?. I lie I )i*isinii'x re'C4r, li .uni xlmvl- opnu'in xiep.iriiiK'in pl.m',1 .uioi'r iiixTi'.i'iiii'. role tliix p4xt ve.ir in itx itiiitnlnision to the linre.ixe,) pnutvn- ttve etlioeiiv y oi (iAI '> riniuin; in.m- uijemnni* ueilmm jini tlte iK vel- opineiit ol impr*neJ nuilimi' tor the iinltr.ition oL 1*4x1, r4i\ nuterulx , In tin* i.'ttvr eoiineiltoii, re>e.ir,h .nnl j Jevelxi'mei,: 4*tmt\ io,nxe,i xn new J te,hii*'lx>jiex to .nli.iine the jvrlorin- ; .nne oi i')4s, toriiinl.*iioiix, ijl.ixx nui (i.M ,ievelpe,1ami hroiiuh: to , lll.likel 111 till' l.l'-tsT p.irt ul l`*S , Kulvronl MU', -i mo,hi'te*i bitumen xnu;le-pl\ riixinu; >\>.:em llu*e*,,u> uiii ilevs uilxlunni ix < ,AI line x| uiiniiK r, i.iI rxxtiiiii pro,1n. i> xtfi-fx the .i,i\ .iiii.nte* iini'rxs.'.l pro,e*-ii'C. 4iix1 .r.pluli o.itnm* A 'ii;iHli,4iii portion o| ;exe.irh in,i,ie\ eLipnieni f,x,tin, ex v*.'x.illo, tlx'xl in l'i>x to the >iewi.i|'n*-.vi o| lien -iii.l niipx\ext i*;..,iinix It ii,in ix It':! . ion! MM. < - A! '* prx.ln, i inllx.lu, iixiix dux |,.|,i \e.it in, linle-l H\. I'.lxi' "! ..ppil, 4llOll. .Ill,) ,0x1 vtti- , i,-n, v I Ii,' ,le\ elopment iii.nlxx ill, xharplv in, re.i*e,i mnmmmeiii xu til, p.ltl x| t lAI 1*1 exlabllxll llxell 4* lllv premier xiipplk r xi v,limit,*i, ul toot-` mupixxlii.tx UnKronl Mliixlvnui A neu -i*p|i.il(-l* ixe,1 im ' rL*inelil Ixi 1, xn1eini.il xliini>lex nil unpr,ne,t \4)*,n 'uiixcnxxion .nnl 'upernif vtniieiixixii.i) xi.,-t||;i\ , h.ir.n. I, rixin * \ i ix xx I in i,111 ie,1 xel |- e.i1 4,1li,'x|\,' < ,11 (. M x 11111, Ix |*rx.l,ix ix u In.!. pt.ni.lex '.iixii^ei xe-ihiiti .lur.i.iei ' GAf'i leadmg commer cial tooling product* mludt Gatglas Ply 4. x 7b Qtlgist date Sheet. Galglat Strata vent, and Auhemd Ml lx:i, x .il ,i u i.U i 14nee < I tellipel .mile*, ix xiiliiiix ii *ujvrixi u in.) iexixi.ui,, tiM ,*' i!-!ixiie*l., pi,,ei on n, I1'*** pi xiiixi, iti. I ix x iixti.e ,,| i, M x (*,.: ii,' in iiml i, 11 n me i., huxlx-e >, 'ii:*i,l, (h. I inte.1 Si.il, * l ini.i (In pixel ,in *. A| a ,!! Ii,, iix, ii, n, h n. Ixi lit, ii. 11,111.,, nil. ,,l .ixpti.ill i*t111.' .1 i. lit. .1 in it. 11 il* x,i. Ii j- . 1 i * - i:i.' iii.I hi e mo, i. Ii i, u . II i 11* ,`I ,'111 . f iii iiixif i, *,i, i,e I , l>;i, >1 A I l ii Ii. . I, .in e ) .. l : i ... I ... I ifil- e l i, * 111 11. . * 11111, ; . ii,. Ix .1 .1 i Hi. |x | ,( 4* V CrAttM/Mfty 0/ <**** AraMtfy My ttMnl hfMF%mi- 17 .kho station WNCN iln4.3b.M Now York. CAI s classical [ IIIIIMi station. ICglstC'Cvt all outstand ing performance in iP.-o. Operating income iiH k'.i'kl bv 3M".. to SI. I mil lion oil .1 12".. Ilk ic isc in s lies. I Ik* m.it ion experienced substantially iikrcascd business till' past w ir tram major advertisers. highlighted by a *.1. mling ot advei Using ro'cmiik tioin roi.ni .iihI restaurant accounts. WNCNC sharplv improved tinan vi.il perlorm.ince reflected continued '.li'k ss Ot flic station's tlk'lllC. "The ' ioovi I I to." w Ilk'll was introduced 111 the ; til ot IPS4. I bis theme. with us orioiu.iTion toward upscale listeners m llio 2d-;o-'4-.kgc croup, li.is gamed tor W N( "N one ot the voimcest lis tening audiences jiiv classical lllllsk' station II. (ilO l. lilted States. Now programs w ere developed m lusx i support " I bo (lood l it'o" tlionio sin li is iho "I lampions Uopon' k'ii the popul.tr Now York resort in (Ik summer months ,nul now s v o\ cr.igc ot ski conditions in the Now I nghmd .iro.i during the w intortime W NCN .ilso strcngdicned its I in.u U i.il now s k kk or.ico in I'^.ks. I M'.tiklokl now sst.uikl vli'i: ibunon ot 1 . : '/< . the station's month!'. mag.i/i'i .itikl pioo.i.mi guide. koutributok! i> -1Ik- ot u-k in oik " - 'I 'A Nl N's mar keting o! ik-i:s I ho. i I'iss \\ Nl N highlights Ilk IlklOkl W Nl N won ill M.noi \i 111si-.*t \'.'..iikl iklministorokl bv l oillliu'l I l Ills. |S|I\ Ik-1 o'. k Ikl i. c in I M b'-Mklk ..tine k|it.tills, --no ->| so\oi.il ('iosti gi.m. ,iv. ,n ,K W Nl N I'..is 1 , oil 0,1 III I O. k ill \ O II s '\ Nl N ,..inin,ik .I to uupk tik ii( pio.-: ,m !. in,-k s .k sioik ,1 tv-',,|, ..i,lk ii ilk Ippo . ! , I issl, ,l! tlUlsl, Ik' l.ll ,'k'l ,;:.li, i. , - \VN(!N slaved on-tlie-.nr ticket solium 'Wonts to benefit both Carne gie I lal1 a ikl the Now York Cits Opera Company. W.NCN continued to bro.tde.ist live comer's from its own porf'ormaiko studt i. as w ell .is recorded pertorm.'.iices from the Waterloo I-es tival n: New leases. die C.ir.imoor l estival in New York's Winchester County. and the " Young Concert Artists" series at ih-vdnd Street "Y" in Manhattan. WNCN introduced ,t now pro gram. "Now York Music Maga/mc," wind) covers upcoming concerts m rhe motropolit.nl area thiotigh ,i mag- a/ine-style format WNCN developed .. new "1 m- i coln's Musu in America" concert I senes sponsored by die lord Motor C iomp.inv's L ineohi ! )> vision. \\ Into continuing die popular ! Imago Svmphonv bro.ivlc.ists aikl "A 1 N 1 Presents Cariik Ci; H.,l| 1 omttlit" 1 series W.NCN m..ugur.itcd i uuk|ue series ot k'elebru\ disciokkv pro grams. Iiostokl b\ sir h weli-kilow n figures k.t tin imisk ilworklas liei erh Sills and K m 1 e K.maw a. \\ \l '.N Continued as tile flagship station k. i 11 ik-1 "on cert Music Nci Wkirk. serving .i'the on!\ Now York Siam>n to ho represented bv l "oikvit Musk lb o.kh .ist Sales, the nation'' onl\ all-classical sales represeiu.uise GAT SROADCASTI'-JG INCOME *1.200 T too ~n ~9 506 1 A' WNCN's innovative pry-ramming, coupled with a successlui new marketing theme, "The Good Lite," has gained the station one ot the youngest audiences ot any classical music sta tion in the United States. 18 Management's Discussion and Analysis of Financial Condition and Results ofOperadons/20 Review ofConsolidated Financial lnformation/22 Consolidated Statements offcicomc/23 Consolidated Balance Sheets/24 Consolidated Statements ofChanges in Financial Po^ition/2S Consolidated Statements ofShareholders' EquityHA Notes to Consolidated Financial Statements/2? Auditors' Report/32 Supplementary Data/33 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GAF Corporation Financial Condition Record earnings and significant increases in cash flow from operations substantially improved the Company's financial condition during 1985. The Company's cash flow from operations improved an additional $20 million (25%) in 1935 to $100.3 million after a $38.5 million '92%) increase in 1984. Total working capital increased $36.4 mil lion (26%) to $177.1 million after a $47.5 million (51%) jump in 1984, while total assets increased $426.9 million (94%) in 1985 to $879.2 million. The increased asset base in 1985 principally reflects the Company's $405.4 million investment in 6,728.000 shares of Union Carbide common stock. See Note 5 to Consoli dated Financial Statements. The Company has pre-tax real ized and unrealized gains, after expenses, ofapproximately $175 million fom this investment based on market prices as of February 28.1986. In June 1985, rhe Company issued $150 million in 1'3/a% senior subordinated notes. This financing and other new industrial revenue bonds issued during 1985 increased the Company's percent of debt to debt plus equity, from 29.4% at December 31, 1984, to 55.7% in 1985. As a result, inter est expense was $19.8 million in 1985 as compared with $9.1 million in 1984. However, the added interest expense was more than offset by $22.4 million in investment income. The Company has a $50 million revolving credit facility and additional short-term lines of credit, of which approxi mately $23 million and $67.5 million, respectively, were unused at December 31,1985. See Note 6 to Consolidated Financial Statements. The Company in 1985 called for redemption all of its outstanding shares of$1.20 convertible preferred stock. Shareholders converted 2,324,553 shares of preferred stock into 2,905,144 shares of common stock, and the Company redeemed 111,033 shares ofpreferred stock at a price of $27.50 plus accrncd dividends. The Company, on May 10, 1985, acquired glass fiber manufacturing facilities in Nashville, Tennessee and Irwindale. California from Reichhold Chemicals, Inc. for $9.25 million. The Company is now using these facilities to man ufacture chopped glass fiber for mat substrate used in GAF's roofing products. As a result of this acquisition, GAF has become the most fully integrated roofing manu facturer in the industry, with a captive supply of glass mat, roofing granules, and now glass fiber. Financing for the acquisition and related subsequent capital expansion pro grams was obtained from the issuance of two industrial revenue bonds in the aggregate amount of $13.5 million, with interest rates at substantially less than the prime rate. The Company's capital expenditures increased signifi cantly in 1985 to $47.2 million, as compared with $17.9 mil lion in 1984. The increased capital outlays were part ofthe $118 million capital expansion program announced in the fourth quarter of 1984 to substantially increase production capacity at several of the Company's domestic and foreign operations. The capital expenditure program in 1986 will be financed from the proceeds ofthe industrial revenue bonds, internal cash flow and outside bank borrowings 3s necessary. As of the eno of 1985, the Company had commitments of $9.4 million for approved capital expenditures. Commitments under various capital and operating lease obligations are detailed in Note 11 to Consolidated Financial Statements. Results of Operations GAF in 1985 recorded the highest earnings in its history, both in terms of net income and income before extraordi nary credits. The $54.3 million income before extraordi nary credits was 32% higher than the previous high of$41 million set in 1984, and represented an $83.5 million swing from a loss of $29.2 million in 1983. Operating income from the Chemicals Division and GAF fi roadcasting reached record levels, while the Building Materials Divi sion recorded its best year since 1979. Division income improved more than 25% in 1985 to $113.8 million, reflecting a 17% increase in Chemicals prof its from S79 million to $92.6 million, an 85% increase in Building Materials profits from $10.9 million *o $20.1 mil lion, an 1 a 58% increase in GAF Broadcasting profits from $0.7 million to $1.1 million. Division income in 1984 had nearly tripled over 1983 levels to S90.6 million as a result of 22% higher Chemicals profits and a $45.4 million turn around in Building Materials to a profit ofS10,9 million. 20 82 Consolidated sales increased slightly in 1985 to $732 million after increases of $31.9 million (4.6%) in 1984 and $76.2 million (12.2%) in 1983. Chemicals sales were up $7.2 million (2%) in 1985, reflecting higher unit sales and increased market penetration for all major product lines, after a 1984 sales increase of $34 mi'lion (10.5%). Building Materials sales of$363.9 million were lower by $6.9 million (!:%) in 1985, reflecting a substantial increase in residential roofing unit sales being more than offset by reduced selling prices, resulting from the industry's continuing competitive pricing structure, and lower unit sales of commercial roof ing and insulation. Sales were $370.8 million in 1984 and $373.2 million in 1983. Consolidated operating income for 1985 of $87.9 million tepresents an increase of41% from last year's $62.2 million ;.nd a $60.1 million (216%) iinprovement over 1983 operat ing income of$27.8 million. Gross profit margin, which was 20.7% in 1983, increased to 24.9% and 29.8% in 1984 and 1985, respectively, as a result ofcost control measures implemented by new management in 1984. The Chemicals Division reported record high profits in 1985 of$92 6 million, a 17% increase over the previous high of$79 million for the year 1984 which, in turn, was 22% higher than 1983 results. Operating margins in 1985, 1984 and 1983 were 25.4%, 22.1% and 20%, respectively. The Division continued to show an increasingly high pre tax operating return on assets, with a return of42.6%, 38.8% and 32.6%, respectively, for the years 1985, 1984 and 1983. The Chemicals Division's record performance resulted from increased manufacturing efficiencies, the continuation of a rigid cost control program, and higher unit sales in all major product hues. The Division's international opera tions made an important contribution to this strong per formance. despite the continued strength of the U.S, dollar throughout most of the past year, reporting higher sales and improved profits. International sales increased 3.4% in 1985 after an increase of 12.7% in 1984, while profits, which include GAFs 50% equity in its joint venture manu facturing operation, increased 17.3% in 1985 and 3% in 1984 as compared with 1983. In two years, the Building Materials Division has recorded a $54.6 million swing in operating results to a profit of $20.1 million in 1985, up 85% from $10.9 million in 1984, and from a loss of$34.5 million in 1983. This per formance has been achieved through major cost cutting and production efficiency programs. The Division has bene fited from increased sales volumes in residential roofing, a more favorable product mix as a result ofincreased sales of Timberline* and Royal Sovereign*, the closing ofthree unprofitable plants in 1964, and the effect offull conversion in 1984 from organic to glass fiber roofing production. The rams described have enabled GAF to become one of awest cost producers in the industry. After three con secutive years oflosses in 1981-1983, this turnaround has enabled the Division to show pre-tax operating returns on assets of 10.4% and 6.9% in 1985 and 1984, respectively. Management expects ttus Divisit n to operate at increas ingly higher levels of profitibility in the coming year. Corporate operating expenses were reduced by $3.1 mil lion (16.8%) in 1985, after a decrease of$4.2 million (18.5%) in 1984 as compared with 1983. These reductions were attributable to urograms implemented in 1984 to decentralize operations, reduce corporate staffs, and relo cate the Company's corporate headquarters. Interest expense was S19.8 million in 1985 ;.s compared with $9.1 million in 1984 and $16.3 million ir. 1983. The increase in 1985 primarily reflects the debt service on the Company's senior subordinated notes which were issued in 1985, as well as borrowings in connection with the Company's investment progvam. The added interest rxpense was more than offset by $22.4 million in income on investments, as detailed in Note 5 to Consolidated Financial Statements. For a review of the effects of inflation on the Company's financial statements, see Supplementary Data-Financial Reporting and Changing Prices. REVIEW OF CONSOLIDATED FINANCIAL INFORMATION GAF Corporation Summary ofSelected Financial Data (Millions ofDollars, Except Pa Share Amounts) Year Ended December 31 1985 Net Customer Sales Chemicals Building Materials Broadcasting Consolidated Sales S364.4 363.9 3.7 732.0 Division Income (Loss) Chemicals Building Materials Broadcasting 92.6 20.1 1.1 Total 113.8 Income (Loss) From Continuing Operations 54.3 Earnings (Loss) Per Common Share-- Continuing Operations before Extraordinary Credits: Primary 3.14 Fully Diluted 3,01 Dividends Per Common Share .20 As ofDecember 3) Current Assets Current Liabilities $428.7 3M.6 Working Capital 177.1 Marketable Securities Property, Plant and Equipment--net 202.2 194.1 Total Assets Short-term Debt Total Long-term Debt Shareholders' Equity 879.2 115.4 259.0 298.2 Percent ofDebt to Debt Plus Equity 55.7% 1984 *357.2 370.8 3.3 731.3 1983 *323.2 373.2 3.0 699.4 79.0 10.9 0.7 90.6 41.0 - 2.62 2.30 .10 64.6 (34.5) 0.5 30.6 (29.2) (2.23) (2.23) .05 *254.9 114.2 140.7 -- 159.1 452.3 6.5 82.8 214.0 29.4% *220.9 127.7 93.2 -- 164.5 414.3 30.7 88.8 169.8 41.3% 1982. *294.4 328.8 -- 623.2 55.4 (26.3) -- 29.1 12.2 .64 .70 .50 *212.4 123.4 89.0 -- 192.4 468.3 7.8 157.1 161.9 47.5% 1981 *300.8 371.7 -- 0*2.5 55.9 (38.6) -- 17.3 (28.2) (2.24) (1-57) .80 *337.3 179.4 157.7 -- 196.4 559.8 17 4 215.6 134.7 63.4% Market for Common Stock As of February 28, 1986, the common stock price was *67'/4, and there were 22,368 holders of record ofGAF's outs.'tnding common stock. The following information pertains to the Company's common stock, which is traded on the New York Stock Exchange. Cash Dividends Per Common Share 1985 1984 Price Range ofCommon Stock 1985 1984 High Low Low First Quarter $.05 S -- Second Quarter .05 -- Third Quarter .05 .05 Fourth Quarter .05 .05 First Quarter Second Quarter Third Quarter Fourth Quarter *31J/s 357/* 37Vs 70 *24A 29/a 29V 36 *173/4 187/h 24'/ 25-V4 *15 15'/: 17V 21 CONSOLIDATED statements of income GAF Corporation (Thousands ofDollars, Except Ptr Share Amounts) Year Ended December 31 Net Sales Coots 'sad Expense*: Cost ofProducts Sold Selling, General and Administrative Total Costs and Expenses Operating Income Interest Expense Income on Investments (Note 5) Other Expense--net (Note 2) Income (Lou) Before Income Th^es and Extraordinary Credits Income Taxes (Note 3) Income (Loss) Before Extraordinary Credits Extraordinary Credits (Notes 3 & 4) Net Income (Loss) Eiralap Par Common Shir* (Note 1): Primary: Before Extraordinary Credits Extraordinary Credits Net Income (Loss) Fully D'Juted: Before Extraordinary Credits Extraordinary Credits Net Income (Lou) See Nocci to Consolidated Finuiml Statements. 1985 8731,962 513,813 130,206 644,019 87.943 (,799) 22,438 (3.108) 87,474 33,178 54,296 23,285 8 77,581 1984 8 731,314 548,967 120,139 669,106 62,208 (9.143) 4,151 (2.598) 54,618 13.57? 41.046 15,656 8 56.702 1983 8699,39" 554,876 116,703 671,579 27,818 (16,280) 3,531 (39,258) (24,189) 5,010 (29,199) 25,358 8 (3,841) 8 3.14 1.36 8 4.50 8 3.01 1.29 8 4.30 8 2.62 1.08 8 3.70 8 2.30 .87 8 3.17 8 (2.23) 1.76 8 (.47) 8 (2.23) 1.76 8 (47) CONSOLIDATED BALANCE SHEETS GAF Corporation (Thousands efDollars) D*<tmh~ )i Assets Current Assets Cash Short-term investments (Note 5) Accounts receivable, less reserve: 1985--$5,142; 1984--$5,426 Inventories (Note 1) Other current assets Total Current Assets Marketable Securities (Note 5) Property, Plant and Equipment---net (Note 1) Other Assets Total Assets LhMIidw tad ShnwhoMw* Equity Current Liabilities Short-term debt (Note 6) Current maturities oflong-term debt (Note 6) Accounts payable Accrued liabilities Income taxes payable Total Current Liabilities Long-term Debt Lees Current Maturities (Note 6) Other Liabilities Shinheldm1 Equity (Notes 7 At 8) Preferred stock, SI par value per share: authorised 6,000.000 shaicu; $1.20 convertible scries: issued shares: 1984--2,539,658; at assigned value of$1.25 per share Common stock, $1 par value per share: authorized 25,000,000 shares; issued shares: 198S-17.877.589; 1984--14.508,987 Additional paid-in capital Retained earnings Accumulated translation adjustment Treasury stock, at cose Shareholders' Equity Total Liabilities end Shareholders' Equity Sec Note* to Consolidated Financial Statemenu. 1985 1984 f 7,862 209,298 109.580 94,007 7,966 428,713 202^29 194,006 54,146 1879,174 S 1o,186 53,367 95,139 83,452 6,758 254,902 --- 159.115 38,256 $452,273 $115,380 10,132 57,411 58,924 9,785 251,632 248,853 80,536 S 6.461 10,278 57,868 36,562 2,994 114,163 72,478 51,626 -- 17,878 60,836 229.586 (6.135) (4,012) 298,153 $879,174 3,175 14.500 56,420 156,123 (10,451) (5,770) 214,006 $452,273 14 HU CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION GAF Corporation (Thousands ofDollars) Year Ended Deeember31 Cash and Short-term Investment*,January 1 Source (Use) of Funds: income (Loss) Before Extraordinary Credits Charges (credits) not affecting funds: Depreciation Plant shutdown costs Other--nn Total fund* from operations before extraordinary credit* Extraordinary Credits Total funds from operations Additions to property, plant and equipment Acquisition ofglass fiber facilities Other working capital items* Other Total source before financing and investment activity Financing and investment activity: Increase (decrease) in short-term debt Increase* in long-term debt Decreases in long-term debt Investment in marketable securities Cash dividends Other Total source (use) from financing and investment activity Increase in cash and short-term investments Cash and Short-tarm Investments, Dacombar 31 Other working capital items: Accounts receivable Inventories Other current assets Accounts payable Accrued liabilities Income taxes payable Net source (use) of funds 1985 104,441) (10.S5S) 0.2) (4S7) 22,362 6,791 > 2.492 1984 I 3.027 7.299 1.759 11.859 (0) 710 124,024 Sec Note* to Consolidated Financial Statement*. 1983 102,497) 4,028 4,724 (4,744) 1.057 892 S (6,540' 1965 $ 69,553 54,296 17,366 5,306 76,970 23,285 100,255 (47.161) (9,250) 2,492 16,149 62,485 106,919 195,800 (19471) (202,229) (4,118) 6,3*1 15,122 147,607 8217,160 1984 $23,468 41,046 19,397 4,209 64,652 15,656 80,308 (17,900) -- 24,024 (1.824) 84,608 (24,285) 6,325 (12,407) (4,393) (3,763) (38.523) 46,065 569,553 1983 $12,377 (29,199) 21,469 26,146 (1.937) 16,479 25,358 41,837 (13,904) -- (6,540) 37,240 58.633 (10.554) 62 (34,800) (3.686) 1.436 (47.542) 11,091 123.468 CONSOLIDATED STATEMENTS OF SHAREHOLDERS* EQUITY CAF Corporation (Thousands ofDollars) Year Ended December 31 $1.20 Convertible Preferred Stock: Bdancc, January 1 Converted into common stock: 1985--2,428,625 shares; 1984--9,740 shares; 1983--5,359 shares Redemption ufpreferred stock--111,033 shares Balance, December 31 Common Stock, $1 Par Value Per Share: Balance, January 1 Conversion ofpreferred stock and 5% convertible subordinated notes Balance, December 31 Additional Paid-in Capital: Balance, January 1 Conversion of5% convertible subordinated notes Redemption ofpreferred stock Excess ofproceeds over cost oftreasury common stock sold Other Balance, December 31 Retained Earnings: Balance, January 1 Net Income (Loss) Cash dividends: Preferred stock (per share: 1985--1.30; 1984 and 1963--11.20) Common stock (per share: 1985--5.20; 1984--8.10; 1903-1.05) Balance, December 31 Accumulated Translation Adjustment: Balance, January 1 Accounting change atJanuary 1.1963 Translation adjustment for the year Balance, December 31 TVeaiury Stock, ar cost: 81.20 Convertible preferred stock: Balance, January 1 Repurchase of odd-lot holdings--IF,272 shares Converted into common treasury shares--103,672 shares Balance, December 31: 1984--103,672 shares; 1983--76,400 shares Common stock: Balance, January 1 Repurchased under restricted stock purchase plan: 1984--20,928 shares; 1983--24,013 shares Issued under various stock option and stock purchase plans: 1985--99,212 shares; 1984--81.569 shares; 1983--144,750 shares Repurchase ofodd-lot holdings--233,073 shares Conversion of preferred stock in treasury--129,590 shares Balance, December 31: 1985--226,820 shares; 198-V--196,442 shares; 1983--24,010 shares Shareholders* Equity St. Noifi <u O .n.olijiicd Fmsmul Stitcmcnu 1965 $ 3,175 (3.036) (130) -- 14.509 3469 17J78 56.420 7,167 0*88) 13 124 156,123 77461 (748) (3470) 229,586 (10.451) -- 4.316 (6.135) 1964 5 3.187 (12) 3,175 14,466 43 14,509 55.548 669 -- 128 75 56,420 103,814 56.70? (2,958) (1.435) 156,123 (6.080) -- (4.371) (10,451) 1983 S 3.194 (7) 3,187 14,459 7 14,466 55.008 -- -- 484 56 5K.548 in vtt (3.841) (2.970) (716) 103,814 -- (1,903) (4.177) (6.080) (1.657) -- 1,657 -- (4.113) 1.758 (1.657) (4,012) 8298.153 (932) (725) -- (1,657) 09?) 036) 1,062 (4.840) (4.113) 1 214,006 (532) -- -- (932) (1,151) (152; 1.104 (199) *169,804 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS GAF Corporation 1. Summary of Significant Accounting Policies Principle* ofConsolidation The accounts ofall significant subsidiaries ofthe Company are included in the consolidated financial statements. All significant intercompany transactions and balances have been eliminated. A wholly owned captive insurance subsid iary and the 50 percent ownership ofa foreign chemical manufacturing company are accounted for by the equity method. Short-term Investments anti Marketable Securities Short-term investments and marketable securities are stated at cost. (See Note 5). Inventories Inventories are stated at the lower ofcost (principally aver age) or market. Inventories at December 31 consist ofthe following: Thousands ojDollars Finished goods Work in process Rsw materials and supplies Total inventories 198.5 549,748 16.440 27,819 594,007 1984 140,296 12.891 30,265 583,452 Property, Plant and Equipment and Related Depreciation Depreciation is computed principally on the straight-line method based on the estimated economic lives of the assets. Certain interest charges are capitalized as part ofthe cost of properry, plant and equipment additions. Property. Plant ana Equipment at Decerntier 31 consist ofthe following: 7fnmands ofDollars Land and land improvements buildings and building equipment Machinery and equipment Construction in progress Total Leas Accumulated Depreciation Propetty, r'lant and Equipment---net 1985 5 16.760 53.631 226,387 11,362 308.140 114.054 5194,086 1984 5 15.049 52.558 200,658 10,182 278,447 119.332 $159,115 Investment Ikx Credits The Company accounts for investment tax credits as a reduction ofthe provision for United States income tax (the flow-through method). Research end Development Research and development expenses are charged to opera tions as incurred and amounted to $10.4 million in 1985, $8.7 million in 1984 and $8.C million in 1983. Earnings Per Common Share Primary can.i. gs per common share are based on the weighted average number ofcommon and common equiv alent shares outstanding during each year after giving appropriate effect for preferred stock dividends. Weighced average shares for computing primary earnings per share were (in thousands) 17,171 for 1985, 14,510 for 1984 and 14,442 for 1983. Fully diluted earnings per share are based on the weighted average number ofcommon and common equiv alent shares outstanding and the assumed conversion of convertible securities outstanding after appropriate adjust ment for interest on convertible notes, where the effect of the assumed conversion on net income would be anti-dilu tive. primary and fully diluted earnings per share are stated the same. Weighted average shares for computing fully diluted earnings per share were (in thousands) 18.047 for 1985, 17.993 for 1984 and 17,907 for 1983. 2. Other Fxpense A summary ofOther Expense---net follows: Thousands ofDelian Ytot tndtd Dtctml tr i 1 1985 JV44 Equity method mroinc Plant shutdown costs Proxy contest and related expenses Adjustment of insurance accruals Ottice relocation expenses Miscellaneous--net 1 4.268 $ 5,125 (M-S8) (2,938) (2.400) (5.323) Other F.xpcnsv--net 5(3.108) *(2.596) 1983 S 4,705 (26.146) (10.042) (3.488) (4.287) 1(39.258) Defected Income Tkxct Deferred income taxes arise from reporting certain income and expense items in the financial statements in periods dif ferent from those in which such amounts are report 'd for income tax purposes. V* NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Equity Method Income and Net Auats Financial data for investment! which are accounted for by use ofthe equity method follow*: ThauMMk efZMJen Yttr ended DeeemitfSI Income Statement Data Joint Venture* 1985 Captive insurance Subsidiary Joint Venture* 1984 Captive Insurance Subtidiafy Revenues Costs and Expenacs Operating income $46,417 36,548 9,869 $ 3.403 2.273 1,130 $45,613 35,102 io.sn $3,125 1,834 1,291 Income for the Year GAF Equity rherein Dttmhtrii Balance Sheet Data 5,445 3.138 1,130 U30 6.735 3,834 1,291 1.291 Current Asaeta Nreteutrent Atsett Total Assets Current LiabiUoea Noncurrent Liabilities Total Liabilities Net Assets GAF Equity Therein $ 9.298 36.897 46.195 13,26) 5.1 II 18.37' 27.121 I3.0S2 S 3,307 9.525 12,832 28 7.470 7,498 5.334 5.334 818,997 12.501 31.498 9,615 1.175 10,790 20,708 8.898 $2,088 7.522 9,610 38 4,918 4,956 4.654 4,654 Joint Venture lata presented above pnuiw to GAf/HUi Ghcmic GmbH, ajoint vet..ore between GAP Corporation and Chrmiache Verkt HAk which apmtn a chemical mamifarturinf plant in West Germany. 3. Income Texet Income Taxes consist ofthe following: Tktujmds e/Dellm Ymr ended OeetmitrJI 1985 Federal Foreign State 119,684 7.882 5,612 Income Taws *57 17* 1984 8 4,932 5.835 1805 5)3.572 1983 15,310 (300) 15.010 The differences between the income tax provision (benefit) computed by applying the statutory federal income ux rate to pre-tax income (lost) and the actual tax provision are ss follows! Th*tmndi efDelUn War ended Deetmirt i 1 19*5 195M 1983 Statutory Provision (BeneAi) Adjustment,: Operati lost carryforward Invetiitn ix credits Impact ot' lot t.jn oprrattorn State and local tares Other income Taxes $40,238 $25,125 (11,127) (3.217) (1.581) 3.031 (5.293) $33,178 -- (10. TOO) (1.572) 1.515 (796) 113.572 19.674 -- (2.038) -r- (1.499) 1 5,010 At December 31,1985, rhr Company had for financial reporting pmposes net opentim; loss carryforwards availa ble to offset future income subject to tax of approximately ?12 million, of which approximately $20 million relates to domestic operations. A* of December 31, IV85, provis, >n had not been made for United States income taxes on approximately $20 mil lion of unremitted earnings of consolidated foreign sub sidiaries and the Company's 50% owned joint venture, beetle any United States taxes payable on foreign earnings which may be remitted in the future are expected to be sub stantially reduced by foreign tax credits Extraordinary Credits for 1985.1984 and 1983 include >1,576,000, >1,830,000 and >3,527.000. respectively, repre senting the income ux benefit from the utilization offor eign operating loss carryforwards. The 1985 and 1984 Extraordinary Credits also include income ux benefits of >21,707,000 and >5.479.000 from the utilization of federal and tute operating loss carryforwards. Future utilization ofthe operating loss carryforwards for financial reporting <will require the restoration ofapplicable deferred income ux amounts. 4. Benefit Plans In 1982, the Board ofDirectors of the Company author ized tl.v termination of the Retirement Plan for Salaried Employees (Plan), a defined benefit plan, effective Decem ber 31.1982, and the creation ofa new GAF Capital Accu mulation Plan, a defined contribution plan for eligible salaried employees effectiveJanuary 1,1983. As a result of the termination, transfers of funds were made to the Com- any in 1983 and 1984 in the total amount of S6S,178,0U0. uch reversion ofthe Plan's residual assets to the Com pany created Extraordinary Credits of >8,347,000 and 121,831,000 for the years 1984 and 1983, respectively. Under the new GAF Capital Accumulation Plan, Com pany contributions consist of a basic contribution of three percent of (he compensation of participants for the plan year together with matching contributions, up to an addi tional four percent as specified in the pLn. for those partici pants who have elected to make voluntary contributions to the plan. Each participant is fully vested a> all times in (he balance in each of his or her accounts m the plan. The aggregate contributions made by the Company to the plan and charged to operation* in I9H5. 1984 ana 1983 were $3,I26.0UU, $2,8%,OCX) and $3,029,000. respectively. 90 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The retirement plans for hourly employees and Texas City facility employees are noncontributory defined benefit plans. Company policy is to fund accrued pension expense. Pension expense charged to operations was $559,000 in 1985, $289,000 in 1984 and $430,000 in 1983. A comparison ofthe accumulated plan benefits and plan net assets tor these plans, after giving effect to the spin-ofT/tcrminaiion as discussed in the following paragraph, is presented below: Tkottumdi efCMUn _________ 1985 1984 Actuarial present value of accumulated plan benefits: Vested Nonvested Total $1,877 502 12.37V $83,625 2.461 $86.0*6 81m assets available for benefits I1.2U $V2.626 Assumed rate of return Plan valuation date 851. 1/l/Hs 8% 1/1/84 In 1984, the Company announced a proposed aptn-off/ termination involving its Rctircmenr Plan for Hourly Employees, pursuant to which the Company purchased an annuity contract approximating $69.6 million covering the benefit trued to September 1,1984, for participants of the plan. Assets were sufficient to provide for the accrued benefits ofall hourly participants. Pursuant to governmen tal regulations, excess assets were then "spun-off" to a new plan tor inactive members. The inactive plan was then ter minated. Following government approvals of the spin-off/ termination, excess assets of$16.1 million revet ted to the Company in November. 1985. An additional $3.8 million was received and established as a reserve pending final reso lution of any plan liabilities. The Company will contribute to the plan in future years for active employees to meet lia bilities as they accrue. In addition to providing pension benefits, the Company and its subsidiaries provide cert,in health care and life insurance benefits (or retired employees Substantially ail of the Company's employees, including employee* in foreign countries, may hceomc eligible for those oenefus if they reach normal retirement age while working for the Com- Esny. The cost of teiiree health care and life insurance enefits ($3.2 million nd $.V/ million in 1985 and 1984, respectively) it recognized as expense as claims are imurred As pari of the 1977 and 198(1 discontinuance program-. (he Company provided health and life insurance coverage for certain retired employees of discontinued businesses. The balance of the liability lor such future obligations at December M. 1985 and 1984 was $16.8 million and 118 mil lion. respective!) 5. Marketable Securities During 1985, the Company acquired 6,961,000 shares of Union Cat bide (Carbide), or 9.9% ofthe total outstanding shares, at an average cost of approximately $51 a share. In December 1985, trie Company announced its intention to commence a cash tender offer for all the remaining out standing shares ofCarbide. However, the Company with drew its tender offer in January 1986, and exchanged 3.5 million shares ofCarbide pursuant to Carbide's exchange offer. GAP will report the gain r suiting from that transac tion in the first Quarter of 1986. The Company remains a major Cabidc shareholder, retaining 3,228,187 shares or approximately 10.6% ofCarbide':, outstanding shares, which is classified as Marketable Securities, a non-current asset. After the sale of233.1*00 shares in December, the Com pany at Dcccmb-t ol, 1985, held 6,728,COO shares of Carbide at a total cost of$405.4 million, including approximately $6C million in costs relating to the Compa nys tender oner. At that date, the marker value ofsuch shares was $476.8 million, based on $70Vi per share. The cost basis ofthe 3.5 million shares exchanged inJanuary, $203.2 million, 'us been classified as a current asset at December 31, '985. The remaining $6.1 million ofshort term investmei. t:. at December 31, 1985, and $53.4 million at December 31. 1984, arc stated at cost which approxi mates market. Income on investments for 1985 includes $8.9 million in net realized gans, $10.6 million in dividends and $2.9 mil lion in interest income. Income on investments for 1984 and *983 represen t interest income. The determination of cost in computing realized gains and losses on investments is based on the irtt-in first-out method. 6. Debt and Dividend Restrictions Information regarding short-term debt is as follows: IV85 IVH4 IV83 Aktsl Peeemlier3l: Balance outsi andmg Weighted average interest rate foe ihc Year. Average mensh^'isd shnri-icrmdebt outstanding Maximum month-end short-term sicbr outstanding Wctjth'cti ..vcritfc munih-fnd >mcrc*i Uir IMS. 3*0 8.7% $ 51.757 $118,315 8.6% $ 6.4/,l 8% $17.V|3 $45,78V 11.4% $30.74/, 10.7% J73.V3I $95,517 10.1% Of the total short-term debi outstanding at December 31. 198f. $99.4 million represents margin loans secured by shares of Union Carbide stock. Such loans were repaid in January 1986, with proceeds from the exchange of3.5 mil lion Carbide shares (see Note 5). At December 31, 1985, the Company had unused short term lines of credit aggregating approximately $67.5 mil lion (m addition to the revolving credit facility discussed bekw). The short-term lines oi credit are maintained with barks on terms which expire on various dates. bu< are gen erally renewable. Borrowings generally bear interest at or near the prime commercial lending rate- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Long-term debt at December 31, 1985 and 1984 was as follows: Thousands oJ'Dctlars 1985 1984 9'/2% senior notes due March 31,1987, with annual scheduled principal repayments S 10.600 T/2% senior notes dueJanuary 15, 1992, with annual scheduled principal repayments 16,700 Revolving credit agreement 27,000 Industrial revenue bonds with various interesr rates and maturity dates to 2012. Certain assets are pledged as collateral thereto. 39,926 Obligation under capital lease (Note 11) 9.525 1 [*/<% senior subordinated notes duejune 15, 1995 i 50,000 S. 'rivet tib'c subordinated notes due April 1, 1994 -- Other 5,234 $17,100 19,300 -- 22,981 10,319 -- 7,500 .556 Total Less current maturities 258,985 10,132 82,756 10,278 Long-term debt, less current maturities $248,853 $72,478 The Company has a $50 million revolving credit facility with a consortium of banks, termir.atingJanuary 31,1987. Interest on the borrowings is at the prime rat", a rate based on the London Interbank Offer Rate, or a rate based on the Certificate of Deposit Rate. Under the agreement, a com mitment fee is charged on the daily average unused portion of the commitments. The agreement includes restrictions on the payment of cash ..ividends on GAF common stock, generally based upon 50% of net income subsequent to April 1, 1984, less I all cash dividends and certain other special payments made after April 1, 1984. As of December 31,1985, $50.8 million of retained earnings /ere available under this agreement for such purpos \s The agreement and other loan agreements contain prov sions which, among other things, require the maintenance of minimum working capital and net worth and limit the amount of debt and capital expenditures, restrict the right to sell capital assets, engage in mergers or consolidations and to incur certain contingent obligations. The Company in June 1985. issued $150 million of ll-Vn% senio'subordinated notes duejune 15, 1995. The notes will be redeemable at the option of the Company after June 15, 1992, at their principal amount plus accrued interest. Interest on the note: will be payable on June 15 and December 15 each year. The 5% convertible subo1 dinated notes were convertible into shares of common stock at any time at a conversion price ofS22.50 per share. During 1985 and 1984, $7,500,000 and S700.000, respectively, of notes were converted into 335,331 and 31,111, respectively, shares of common stock. The aggregate maturities of long-term debt for the next five yeais areas follows. Bortowings of$27 million out standing under the revolving credit agreement are included in the 1987 amount based on its term. 7. Capital Stock The Company in 1985 called fGr redemption all of its out standing shares of$1.20 convertible preferred stock. Share holders converted 2,324,553 shares ofpreferred stock into 2,905,144 shares of common stock, and the Company redeemed 111,033 shares o( preferred stock at a price of $27.50 plus accrued dividends. In addition, thr Company converted all 103,672 sha;cs ofits $1.20 convertible pre ferred stock held in treasury into 129,590 shares of common stock to be held in treasury. At December 31, 1985, there were 1,896,753 shares of common stock reserved for issuance under the Company's stock option and stock purchase plans. 8. Stock Option and Stock Purchase Plans In 1984, the Company adopted the 1984 Stock Option Plan which provides for the granting ofincentive and nonquali fied stock options to key employees of the Company and its subsidiaries to purchase common stock of the Company at not less than 100 percent of the fair market value at the date of grant, Under the terms of the plan, options for 800,000 shares of common stock may be granted from time to time until April 30, 1989. The term ofeach option is five years and sixty days. Options may not be exercised during the frst year afeer the date ofgrant, but thereafter, options become exercisable as to 20% ofthe shares subject thereto on each ofthe first through the fifth anniversarits of the date of grant. The Company's 1775 nonqualified stock option plan provided for the granting nf800,000 options to key employees to purchase common stock ofthe Company at not less than 100 percent of the fair market value at the date of grant. Options granted through April 30, 1984, are exer cisable one year after grant and expire after 10 years. Options granted after April 30, 1984, are subject to the same terms and conditions as options issued under the 1984 Stock Option Plan. These plans provide for stock appreciation rights, wherein an option holder may request `'surrender'' of he option in exen mge for payment (in cash or stock) by the Company of the difference between the option and market prices on the date of surrender. The requested surrender of an option may be granted or denied at the discretion of the Executive Compensation Committee of the Board of Directors. The plans also provide for limited stock appreci ation rights permitting the option holder to surrender exer cisable options in the event of a tender or exchange offer for the Company's common stock made by someone other than the Company. Thousands ofDollars I486 1987 1988 '989 1`N() $10,132 19.860 4,107 6,118 3.`485 923? ' rT NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following is a summary of certain information per taining to the 1975 and 1984 stock option plans: Shares Outstanding January 1 Granted Exercised Terminated Outstanding December 31 hi December 31 Exercisable Available for grant Option Price Range Per Share Outstanding Exercised 1985 675,800 92,005 (58,185) (37,520) 672,100 1984 254.400 480.400 (52,000) (7.000) 675,800 1983 404,650 (144,750) (5,500) 254,400 230.895 393,595 201,900 450,200 254,400 124,000 S 9.625 $46,250 S 9.625$23,750 $ 9.625$23,750 $ 9.625$14,875 $ 9.625$14,875 $ 9.625$14,875 In April 1984, the shareholders of the Company approved the 1984 Employee Stock Purchase Plan covering 600,000 shares ofcommon stock. The plan provides for grants of options to purchase shares ofcommon stock on a nondiscriminatory basis to all eligible employees of the Company and its subsidiaries. No options to purchase shares of common stock under the plan may be granted after April 30, 1989. The price at which shares may be pur chased is the lesser of (i) 85% of the fair market value on the date of grant or (ii) 85% of the fair market value on the date ofpurchase. As of December 31,1985, 46,832 shares of common stock, had been isrued under the plan. Under the provisions ofthe Company's 1969 restricted and unrestricted stock purchase plan, 650,000 shares of common stock were authorized for sale to key employees. The plan currently provides that restricted and unrestricted shares may be sold at prices which are not less than 50 per cent and 80 percent, respectively, of the closing market price prcccd:ng the date ofgrant. Under certain conditions, the Company has the right to repurchase restricted shares ofcommon stock at the original selling price. At December 31,1985, there were 277,890 shares available for sale under this stock purchase plan. 9. Business Segments Information Millions ofDollars Year ended December 31 Sales Chemicals* Building Materials Broadcasting Consolidated Sales Division Income (Loss) Chemicals** Building Materials Broadcasting Total Corporate: Operating Expenses Interest Expense Other Income (Expense)--net Net Corporate Expenses Income (Loss) Before Income Taxes and Extraordinary Credits Identifiable Assets Chemicals** Building Materials Corporate and other Total Assets Additions to Property, Plant and Equipment Chemicals Building Material Corporate and otlict Total Depreciation Chemicals Building Materials Corporate and other Toul 1985 $364.4 363.9 3.7 $732.0 S 92.6 20.1 1.1 113.8 (15.4) (19.8) 8.9 (26.3) $ 87.5 $217.3 194.2 467.7 $879.2 $ 21 5 24.4 1.3 $ 47.2 $ 10.3 6.0 1.1 $ 17.4 1984 $357.2 370.8 3.3 $731.3 $ 79.0 10.9 0.7 90.6 (18-5) (9.1) (8.4) (36.0) $ 54.6 $203.8 158.6 89.9 $452.3 $ 9.6 8.0 0.3 $ 17.9 $ 11.1 7.0 1.1 $ 19.4 1983 $323.2 373.2 3.0 $699.4 $ 64.6 (34.5) 0.5 30.6 (22.7) (16.3) (ls.8) (54.8) S(24.2) $198.1 164.1 52.1 $414.3 > 5.2 8.3 0.4 V 13.9 I 10.0 9.3 2.2 $ 21.5 ChciinciU arv nct of imvrxcgnicni laic:. of $27.4 million, S23.2 million jnd 520.9 million for 1985, 1984 and 1983, rcipLViivcIv. Intoricgment sales are recorded il the same prices charged t.>: na I filiated customers. Che,' mils Division income anu identifiable assets inr' ,de G.VF's SU% equity in the income and asu ,.ofGAF'Hills Oiemie GmbH (see Note2). i i 93 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10. Geographic Information Millions efDollars Year ended December 31 Domestic Operations: Net Sales* Operating Income Other Income (Expense) Income (Loss) Brforc Income Taxes and Extraordinary Credits Identifiable Assets Foreign Operations: Net Sales** Operating Income Other Income (Expense)*** Income (Loss) Before Income Taxes and Extraordinary Credits Identifiable Assets*** 1985 1984 1983 $642.9 $ 73.3 (7.3) $649.9 $ 49 2 (14.9) $627.9 $ 16.0 (60.0) $ 66.0 $ 34.3 $ (44.0) $826.6 $404.8 $375.0 $ 89.1 $ 14.6 6.9 * 81.4 $ 13.0 7.3 $ V5 $ 11.8 8.0 S 21.5 $ 20.3 $ 19.8 $ 52.6 $ 47.5 $ 39.3 Domestic sales arc net oftransfers between geographic areas of$40.8 mil lion. $34.9 million and $29.0 million, respectively. *`Foreign sales are net of transfers between geographic areas of $10.4 mil lion. $7.3 million and $9.4 million, respectively. Foreign Operations income and identifiable assets include GAF's 50% equity in the income and assets of GAF/Huls Chcmic GmbH (see Note 2). 11. Commitments and Contingencies The lease for the Company's headquarters in Wayne, N.J., is accounted for as a capital lease and is included in Prop erty. Plant and Equipment--net at December 31, 1985 and 1984 in the amount of 87,106,000 and $7,546,000, respec tively. The related present value offuture net minimum lease payments is reflected as long-rerm debt (see Note 6), and the amortization expense associated with the capital lease is included in depreciation expense. The Company also has operating leases for transportation and data pro cessing equipment and for other buildings. Future minimum lease payments for properties which arc held under long- term noncancelable leases as of December 31, 1985 are as follows; Thousands ofDollars Mmimum Payments Capital Lease Operating Leases 1986 1987 1988 1989 1990 Later Years $ 1.544 1,482 1,419 1.356 .294 7,306 $5,334 1,840 898 714 317 -- Total minimum payments Less interest included above 14,401 4,876 $9.103 Present value of net minimum lease payments $ 9.525 At December 31, 1985, there were various lawsuits pend ing against the Company relating to matters arising from its business, including approximately 23,000 involving bodily injury claims relating to the exposure to asbestos or asbestos-containing products no longer sold by the Com pany. The Company is also named as a defendant in approximately 76 asbestos property damage lawsuits by school districts and other owners ofbuildings seeking to recover damages including the cost of removal of asbestos insulation and other asbestos products. The full cost of indemnity ' .id defense of all tne asbestos bodily injury and property damage lawsuits is being paid by the Company's insurance carriers, subject to reservations of rights. In the opinion of management, the ulcirru:- disposition ofsuch matters will not nave a material adverse effect on the Com pany's consolidated financial position. 12. Supplementary Financial Information Thousands ofDollars Year ended December 31 1985, 1984 Maintenance and repairs Rentals--operating leases6,296 $41,068 $41,796 7,746 1983 $40,822 6,954 AUDITORS' REPORT .Arthur 101 Eisenhower Parkway ANDERSEN Roscland. New Jersey 07068 To the Shareholders and Board of Directors of GAF Corporation: We have examined the consolidated balance sheets of GAF Corporation (a Delaware corporation) and subsidiaries as of December 31. 1985 and 1984, and the related consolidated statements of income, changes in financial position and shareholders' equity for the years then ended. Our exami nations were made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as wv considered necessary in the circumstances. The finan cial stuementa for the year ended December 31, llW3 were examined by other auditors whose report thereon dated February 17, 1984, expressed an unqualified opinion on 2 those statements. - 94 In our opinion, the financial statements referred to above present fairly the financial position of GAF Corporation and subsidiaries as of December 31. 1985 and 1984, and the results of their operations and the changes in their financial position for the years then ended, in conformity wnh gen erally accepted accounting principles consistently applied during the p >ds and on a basis consistent with that of the preceding ye-.. February 10. 1986 SUPPLEMENTARY DATA (Unaudited) Financial Reporting and Changing Prices The Company's financial statements are presented on an historical cost basis and, as such, are not intended to meas ure the effects ofchanging prices in an inflationary econ omy. In accordance with the Statement of Financial Accounting Standards No. 33, "Financial Reporting and Changing Prices," as amended, the following supplemen tary information is presented to reflect the estimated impact ofinflation on the Company's income from continuing operations. The Company's historical financial data have been adjusted for the effects ofchanges in specific prices (current cost basis) on inventories and property, plant and equip ment. Plant and equipment current costs were estimated by adjusting historical costs by externally generated industrial price indexes. Inventory costs were developed using cur rent manufacturing costs. Inventory costs included in the Cost ofProducts Sold were determined on iverage current costs during the year. Depreciation expense was adjusted based on the restated asset values using the same estimated useful lives and depreciation rates used in the primary financial statements. Adjusted income before extraordinary credits of $44.8 million for the year ended December 31.1985, compares to reported earnings of$54.3 million, reflecting the increased cost ofreplacing assets during inflationary periods. This hypothetical decrease in income is du ; to the higher depre ciation expense on property, plant and equipment and higher costs ofinventories sold. Sales and other costs and expenses, including income taxes, have not been adjusted. This points out the higher tax burden on companies during inflationary periods, as the effective tax rate for GAF on the adjusted income statement is 42.6% compared with a rate of37.9% on the 1985 historical financial statements. The management ofthe Company cautions the reader in interpreting this supplementary data due to the required use ofnumerous assumptions and estimates in preparing the information. These data are therefore only an indicator of the effects ofinflation and do not provide a precise measurement. Consolidated Statement of Income Adjusted for Changing Prices Thousands ofDollars Ytar Ended December 31, 1985 As Reported in the Primary Statements (Historical Cost) Adjusted for Changes in Specific Prices (Current Cost) Net Sales $731,962 $731,962 Cost of Products Sold* Depreciation Otncr Expenses--net Interest Expense Income Taxes 498,842 17,366 108,481 19,799 33,178 502,406 23.340 108,481 19.799 33.178 Income Before Extraordinary Credits $54,296 $44,758 Purchasing power gain on net monetary liabilities $ 2,548 Increase in specific prices (current cost) ofinventories and property, plant and equipment held during the year** Effect of increase in (he general price level $ 5,093 12,007 Increase in specific prices over (under) effect ofincrease in the general price level $ (6,314) Excludes $14,971 depreciation expense included in Cost of Produces Sold in the primary financial statements. "The estimated current cost of net Property, Plant and Equipment and Inventories was $248,267 and $94,B24, respectively, at December 31, 1985. Comparison of Selected Supplementary Financial Data Adjusted for Effects of Changing Prices (In Average <385 Dollars) ThousandsofDollars, Except Per Shait Amounts 1985 1984 1983 1982 1981 Net Sales Current cost information: Income (toss) from continuing operations Income (loss) per common share--primary Increase in specific price* ofinventory and property over (andcr) effect of increase in general price level Net assets at year-end Other data, adjusted for general inflation: Purchasing power gain on net monetary liabilities Dividends per common share Year-end market price per common share Average Consumer Price Index $73l,%2 44,758 2 59 (6.314) 347,535 2.548 .20 58 06 322.2 $757,122 26,840 1.64 1,434 286.457 1.999 .10 25.02 311.1 $755,223 (56,109) (4.10) (8.450) 265.459 3,431 .05 17.66 298.4 $694,653 (12.235) (1.08) 4,353 300,709 6.845 .56 15.43 289.1 $795,526 (57,662) (4.37) (28,966) 274,272 25.709 .95 16.46 272.4 e SUPPLEMENTARY DATA (Unaudited) Quarterly Financial Data (Unaudited) Millions ofDollars Except Per Share Amounts First Net Sales Cost ofProducts Sold $175.9 127.1 Gross Profit $ 48.8 Income before Income Taxes and Extraordinary Credits Income Taxes * 19.5 8.4 Income Before Extraordinary Credits Extraordinary Credits 11.1 6.4 Net Income $ 17.5 Earning* Per Common Share* 1985 by Quarter Second Third $188.1 130.2 $193.8 135.1 $ 57.9 $ 58.7 S 25.2 9.8 15.4 8.4 S 23.8 $ 24.9 9.3 15.6 7.3 $ 22.9 Fourth $174.2 121.4 $ 52.8 $ 17.9 5.7 12.2 1.2 $ 13.4 First $169.9 129.8 $ 40.1 $ 10.1 2.7 7.4 6.2 $ 13.6 198* by Quarter Second Third $191.3 143.8 $203.8 151.1 $ 47.5 $ 52.7 $ 15.5 3.6 11.9 3.2 $ 15.1 $ 17.0 4.9 12.1 1.5 $ 13.6 Before Extraordinary Credits Extraordinary Credits $ .72 .42 $ .87 .48 $ .87 .41 $ .67 .07 $ .46 .42 $ .77 .22 $ .79 .10 Net Income $ 1.14 $ 1.35 $ 1.28 $ .74 $ .88 $ .99 $ .89 Fully Diluted: Before Extraordinary Credits Extraordinary Credits $ .62 .36 $ .86 .47 $ .87 .41 $ .67 .07 $ .42 .34 $ .67 .18 $ .68 .08 Net Income $ .98 $ 1.33 $ 1.28 $ .74 $ .76 $ .85 $ .76 *ln accordance with the provisions ofAPB Opinion No. 1S, earnings per share are calculated separately for each quarter and the full year. Accordingly, annual earnings per share will not necessarily equal use total ofthe interim periods. Fourth $166.3 124.3 $ 42.0 $ 12 2 24 9.6 4.8 $ 14.4 $ .61 .33 $ .94 $ .54 .27 $ .81 -,96 BOARD OF DIRECTORS AND OFFICERS l>'s l:: : I I I, \f . ' \ J6 THE WORLD OF GAF Corporate Office* 1361 Alps Road Wayne, NewJersey 07470 Domestic Gnf Corporation's plants, research laboratories and sales offices are located throughout the United States. Chemicals Manufacturing A'ab ?ma-Huntsville Kenaicky-0alvert Ciry Missouri-Annapolis NewJersey-Bound Brook New Jersey-Linden Pennsylvania-Blue Ridge Summit Texas-Seadrift Texas-Texas City Wisconsin-Pembine Seles Offices Califomia-Irvine Illinois-Lombard New lersey-Linden North Carolina-Charlotte Ohio-Cincinnati Pcnnsylvania-King ofPrussia Texas-Arlington Research It Development Maryland-Hacerstown I lew Jersey-Wayne Building Materials Manufacturing Alabama-Mobile California-Fontana Califbmia-Irwindale Florida-Tampa Georgia-Savanruh Indiana-Mount Vernon Maryland-Bclnmore Massachusetrs-Millis Minncsota-Minncapolis Pennsylvania-Erie South Carolina-Chester Tennessee-Nashville Texas-Dallas Seles Offices Alsb:*"!'-Mobile Califomia-Fontana Florida-Tampa Georgia-Savannah niinou-Hodgkins Indiana-Mount Vernon Maryland-Baldmore Massacliusetts-Millis Minnesota-Minneapolis NewJersey-South Bound Brook Pennsylvania-Erie Texas-Dallas Research It Development NewJersey-Wayne Tennessee-Nashville International GAF Corporation's major marketing and service facilities are located throughout the world. European Region Great Britain, Ether-Headquarters Austria-Vienna Belgium-Sint Nildaas France-Paru Great Britain-Manchester Italy-Milan Netherlands-Schiedam South Africa-Sandton Spain-Barcelona Sweden-Johanneshov (headquarters for Norden countries) Switzerland-Zug West Germany-rrechen Western Hemisphere Region Newjersey, Wayne-Headquarten Brsudl-Sao Paolo Can?d*-Mw*ii*auga, Ontario Canada-Ville St. Laurent, Quebec Mexico-Mexico City Puerto Rico-Carolina Australasia Region Australia, Sydncy-Headquarters Australia-Melboume New Zealand-Audtland Republic ofSingapore-Singapore North Pacific Region Japan, Tokyo-Headquarters GAF Broadcasting Company, Inc. New York, New York Subsidiary: GAF Insurance, Ltd. Hamilton, Bermuda Afftlistt: GAF/HOls Chemie GmbH Marl, West Germany SHAREHOLDER INFORMATION Annual Meeting The 1986 AnnualMeeting ofShare holders will be held at 10 a.m., Monday, April 28 at the Chase Manhattan Bank auditorium; Ground floor, Chase Manhattan Plata, New York, NY 10081 Form 10K A copy of the Company's Anriiw Report on Form 1QK as filed with the Securities and Exchange Commission may be obtained, f*ee of charge, by writing to: GAF Corporation Corporate Affairs Department 1361 Alp* Road Wayne, NJ 07470 Dividend Reinvestment Service GAF offers holders ofits common stock the opportunity to buy additional snares through an automatic dividend reinvestment service, administered by Morgan Guaranty Trust Company of New York. For further details contact: Morgan Gummy Trust Company of New York 30 West Broadway New York. NY 10015 (212) 587-651 is GAF's common stock is listed on the New York Stack Exchange (symbol: '`GAF"). Transfer Agent Stock Transfer Agent and Registrar: Morgan Guaranty Trust Company of New York 30 West Broadway New York, NY 10015 GAF Corporation 1986 Printed m USA Exhibit 21.1 101 Samucl J. HK7MAN OAF Corporation isoi alh Road WAVNK, NBW 07470 Pillow Shauhoundis: March 27. 1916 You an cordially invited to attend GAFs Annual Matting of Shareholder* to be held at the Chrse Manhattan Hank auditorium, O&e Chase Manhattan Plaza, New York City at 10:00 A.M. on Monday, April 28. 1986.1 look forward to personally greeting you at the meeting as well u to reviewing for you at that time significant developments u GAP during the past year. The matter* to be voted on are: (I) the election of directors; (2) a proposal to adopt certain amendments to the Company's Certificate of Incorporation, commonly known as anti-takeover provisions, including amandtnanti providing for claasiflcadon of dm Board of Directors and amendments affecting the removal and replacement of director*. the calling and conduct of shareholder meetings, and the taking of action* by written consent in lieu of a shareholders1 meeting; (3) a proposal to amend the Certificate of Incorporation to increase the Compeny's authorized common shares in coaaacdoe with a two-for-one stock split already declared by the Board; and (4) a proposal to ratify the Company's (election of auditors. Your Board of Directors his given caraftil conaidemtir j to these proposals and believes that they are in the bet! interests of the Company and lu shareholders. The Board racommer Js s vote FOB thg proposals and urges you to sign, date and mail the enclosed proxy in the reply envelope ir your earliest convenience. The proposal calling for the adoption of certain anti-takeover amendment* to the Company's Cetttflcass of Incorporation ia inwndad primarily to anlumca OAFs ability to successfully con clude potential ac^uialtkma free from this cancan that a target company will be In s position to utilize a retaliatory offer for OAF is s moans of resisting our own acquisition effort. In this regard, it is our view that a retaliatory offs*, wnteh ia designed to frustrate OAF'S own offer, is n<u likely to be in the best interests of GAF shareholders. Your Board's concern is warranted. 1 believe, by its recenr experience in connection with OAFs tender offer for Union Carbide. During the pendency of GAF's offer, it ivoe to our attention that Carbide'* Board of Director* took under consideration plan- to gain control of GAF s a means of thwarting GAF's offer for Carbide. In view of the fact that GAF m -y wish at a future time :o make a new offer for Union Carbide or pursue the acquisition of other companies, GAF's Board it coa^rKcd that rhesc measures are necessary to enable out Company to successfully pursue an acquisition strati?. which is in the best interests of GAF shareholders. With respect to the proposal to increase GAF's authorized son r:u ^. too Company's Board of Directors has already declared a two-for-on* stock split, subjc ' t approval by shaiehoiders of an increase in the number of authorized common shares, the stork split will be distributed to shetehoidsts of tecoid on May 1,19S6 aa toon as is pncdcabie a1tar the record date if this proposal la approved. The newly authorized shares will be available net -'miy to effectuate the stock split but for potential acquisitions, financings, and other corporate purposes. The enclosed notice and proxy statement will provide you with complete information con cerning the business to come before the meeting. The Company's 19S5 Annual Report is also enclosed. I believe that the actions which are being recommended by your Board of Directors at this dm* are particularly significant in terms of the Company's future direction. Should you inquire further Inforrqati n concerning these matters, pleats do not hesitate to contact our Corporate Affairs Department. Sincerely, Samuil J. Hitman Chairman of the Board and Chief Executive Officer GAF Corporation NOTICE OF ANNUAL MEETING To Bo hold April 28,1986 The Annual Meeting of Shareholders of GAF Corporation will lx held Monday, April 28, 1986 at 10:00 A.M. at the auditorium ofThe Chase Manhattan Bank, N.A., One Chase Manhattan Plaza, New York, New York, for the following purposes: 1. To elect 10 directors; 2. To amend the Corporation's Certificate of Incorporation to classify the Board of Directors and adopt various other amendments affecting, among other things, the removal and replacement of directors, the calling and conduct of shareholders' meetings, and the taking of action by written consent in lieu of a shareholders' meeting, all as mote fully described beginning on page 20 of the accompanying Proxy Statement; 3. To amend the Corporation's Certificate of Incorporation to increase the authorized nuinltar of shares of the Corporation's Common Stock from 23,000.030 shares to 100,000,000 shares; 4. To ratify the selection of Arthur Andersen St Co. as the Corporation's auditors; and 3. To transact sue'.: Miter business as may properly come before the meeting. The Board of Directors has fixed the close of business on March 17, 1986 as the record date for the determination of shareholders entitled to notice of and to vote at the meeting. A list of shareholders entitled to vote at the meeting will be open to the examination of any shareholder, for any purpose j;e;mane to the meeting, at the offices of the Corporation's stock transfer agent, Morgan Guaranty Trust Company, 30 West BroaJway, New York, New York, during ordinary busincs ju'in: for ten days prior to the meeting. By Order of the Board of Directors Wayne, New Jersey March 27, 1986 Edward E. Shea Secretary Return of your signed proxy is the only way your shares can be counted unless you personally cast a ballot at the meeting. No matter how many shares you hold, your proxy vote is important. PLEASE INDICATE YOUR VOTING INSTRUCTIONS ON THE ENCLOSED PROXY CARD ANO SION, OATE AND RETURN IT IN THE ENVELOPE PROVIDED, WHICH NEEDS NO POSTAGE IF MAILED IN THE UNITED STATES. PROXY STATEMENT GAF CORPORATION 1361 Alps Road Wayns, Naw Jarsay 07470 ANNUAL MEETING OF SHAREHOLDERS This proxy statement is furnished to shareholders by the Board of Directors of GAF Corpo ration (the "Corporation" or "GAF") for solicitation ofproxies to be voted at the Annual Meeting of Shareholders to be held on Monday, April 28, 1986, and at any adjournment thereof. The Board of Directors has set March 17, 1985. as the Record Date for the determination of shareholders entitled to notice of, and to vote at, the mating. As of the close o' business on the Record Date, there were outstanding 17,682.034 shares of the Corporation's Common Stock. Holders of record of shares are entitled to one vote for each share held by them as of the Record Date on any matter which may properly come before the meeting. Shares represented by a valid unrevoked proxy will be voted at the meeting, or any adjourn ment thereof, as specified therein by the person giving the proxy. If no specification is made, the shares represented by such proxy will be voted (1) FOR the election of the nominees named herein to the Board of Directors, (2) FOR the classification of the Board of Directors and the other proposed amendments to the Corporation's Certificate of Incorporation, (3) FOR increasing the ntunber of authorized shares of Common Stock of the Corporation, (4) FOR the ratification of the selection of auditors, and (5) in the discretion of the persons named as proxies, on such other matters as may properly come before the meeting. Proxies may be revoked by the person executing the si'me at any time before the authority therety granted is exercised by execution of a later dated proxy, by delivery to and receipt by the Corporation's Secretary of written notice to such effect, or by amending the meeting and voting in person. This statement and the proxies solicited hereby are being first sent or delivered to shareholders on or about March 27, 1986. Proposal No. 1 ELECTION OF DIRECTORS Unless authority to'do so has been withheld, shares represented by proxies will be voted in favor of the election of the following 10 nominees as directors. Directors will be elected by a plurality of the votes cast at the Annual 'Meeting by the holders of shares entitled to vote in the election. If the proposed amendment to the Restated Certificate of incorporation of the Corporation (me "Certificate") concerning the classification of the Board of Directors is adopted (jee Proposal 2 under the heading, "Classification of the Board of Directors and Other Amendments to the Certificate," and Appendix A hereto), at the 1986 Annual Meeting three directors, constituting the "Class I Directors." will be elected for a term expiring at the Annual Meeting in 1987; three directors, constituting the "Class II Directors," will be elected for a term expiring at the Annual Meeting in 1988; and four directors, constituting the "Class in Directors," will be elected for a tern .expiring at the Annual Meeting in 1989 (and, in all cases, until their respective successors are elected and qualify). Set forth opposite each nominee's name below is the year in which su ;h nominee's term would expire. If the proposed amendment to the Certificate is not adopted, all 10 nominees will be elected for a term expiring at the 1987 Annual Meeting of Shareholders (and until their respective successors are elected and qualify). If, prior to the Annual Meeting, any nominee becomes unable to serve as a director by reason ofdeath or otherwise, the persons designated as proxies will have full discretion to vote for another person to serve as director in place of any such nominee. NomliMM The following persons, ail of whom are currently directors of the Corporation, have been nominated for election as directors by the Nominating Committee of the Board. Harold C. Simmons, who has been a director of the Corporation since Apni 1984, is not standing for reelection, and the number of directors of the Corporation has been reduced to 10 accordingly. The information presented below with respect to each nominee has been furnished by that nominee. Unless otherwise stated, all employments nave continued for at least five years. All nominees other than James T. Sherwin, have served the Corporation as directors since December 13. 1983. Mr. Sherwin has served as a director since 1974, except for the period May 983 to May 1984. All present directors were elected to serve until the next annual meeting and unfit their successors are elected and qualify. No family relationship exists between any of the directors, nominees or officers. 2 William P. Lyons Claa* I: Tarm to tapir In 1987 Mr Lyons, age 44, has been President of William P. Lyons & Co., Inc., an investment banking and financial consulting Arm since 1975. In addition, he has been a Professor (Adjunct) at Yale University Law School since 1985, and a Professor (Adjunct) since 1984 and an Associate Professor (Adjunct) from 1979 to 1984 at the Yale University School of Organization and Management. He is a director of Lydall, Inc. and LMH, Lid. Scott A. Rogers, Jr. Ctese I: Term to expire In 1907 Mr. Rogers, age 68, has been a consultant since 1984. He fonneriy was Chairman, Chief Executive Officer, President and a director from 1981 to 1983 of Publishers Equipment Corp., a firm engaged in the engineering and manufacturing ofoffset printing equipment. Prior to that time, he was President and director of General Portland, Inc., s cement and construction aggregates producer. He is a director of Parker Hannifin Corporation. Edward E. Shoo Class I: Torn to oxpiro in 1907 Mr. Shea, age 53, has been Senior Vice President, General Counsel and Secretary, of GAP Corporation since June 1984. From 1982 to 1984 he was counsel to and then a member ofthe New York law firm Windels, Marx, Davies A Ives. Since 1982, Mr. Shea has also been a Professor (Adjunct) in the Finance Department of the Graduate School, of Business, Pace Univeraity. Prior to that time, he was Chairman of the Board anti General Counsel of Reichltold Chemicals, Inc., a manufacturer of synthetic resins, basic chemicals and related products. 107 Or. Jacob E. Goldman Claaa II: Tarm to expire In 1988 Dr. Goldman, age 64, has served as Chairman of the Board of Cauzin Systems Inc., a manufacturer of personal computer accessories, since 1984. He has also been President of Medisystems Management Co., a firm engaged in the devel ..ment cf medical in strument*. since 1982; and he has been President of GB Energy Systems, Inc., a high technology .research and development ventures firm, since 1978. From 1982 to 1983, he was a Senior Vice President and Chief Scientist of Xerox Corporation. Prior to that time,, be was Senior Vice President, Research and Development and a director of Xerox. He is currently serving as a director of General Instrument Co., Burady Corporation, Coratex Scientific Co. and Inn magnetics General Corp. Sanford Kaplan Claaa II: Tarm to axplra In 1980 Mr. Kaplan, age 69, has been a private investor and consultant since 1977. Prior to that time, he was Senior Vice President and a director of Xerox Corporation. He is currently a director of Ashton-Tatc, Cordura Corp., Daisy Systems Corp. Intel Corp., Silicon Systems, Inc., Whittaker Corp. and Wickes Companies, Inc. Jamas T. Sherwin Claaa II: Tarm to axplra in 1988 Mr. Sherwiu, age 52, joined GAF in 1960. He haa been Vice Chairman and Chief Administrative Officer of GAF since May 1984 and was Executive Vice President-- Finance from 1974 to May 1983. He briefly interrupted his service to GAF from June 1983 to May 1984 to serve as Executive Vice President and Chief Financial Officer of Triangle Industries, Inc. a manufacturer of vending machines, currency changers, juke boxes and sopper insulated wire. Upon rejoining GAF in 1984, Mr. Sherwin, a director of the Corporation from 1974 to May 1983, was reelected as a director by the directors pursuant to the terms of an employment contract between Mr. Sherwin and the Corpo ration which expires on May 20, 1986. 4 108 DanM T. Carroll Claaa III: Tarm to axpira In 1M9 Mr. CarroLl, age 60, has been Chairman of the Board and President, since 1982, of The Carroll Group, Inc., a management consulting firm. He was President, Chief Executive Officer and a director from 1980 to 1982 of Hoover Universal, Inc., a manufacturer of automotive and industrial products. He is also a director of Combined International Corp., C-anshare, Inc., Connc Corporation, Diebold, Inc., Wolverine World Wide, lac., Michigan National Corp. and A.M. Casde A Co. SamtMi J. Hcyman Claw IN: Tam to wpiro In 1908 Mr. Heyman, age 47, has been Chairman of the Board and Chief Executive Officer of GAF Corporation since December 13, 1983. He is also a principal of a number of closely-held companies and partnerships, whose investments include commercial real estate and a portfolio of publicly traded securities held largely in connection with arbitrage activities. William Soier Claw ill: Term to txpire in 1969 Mr. Spier, age 51, has been a private investor since 1982. He *vas Vice Chairman of the Board and a director from 1981 to 1982 of Phibro Salomon lac., a commodities and securities firm. From 1980 to 1981, he was Senior Official in die European Division of Pliilipp Brothers Inc., a predecessor of Phibro Salomon Inc. Jo--ph 0* Tydlnga Cla-- III: Tam to axpfoi i>: 1999 Senator Tydings, age S7. has been* member ofthe law fin> of Finley. Xumble, Wagner. Heine. Underberg, Manley A Casey since 1981. Prior to Out he was a member of the law firm of Danzansky. Dickey, Tydings. Quint A Gordon. Senator Tydings was a United States Senator from the State of Maryland from 1965 to 1971. 5 109 Committee*, Meeting* and Director*' Faaa The Board of Directors met fourteen times in 1985. The Board of Directors has delegated certain of its functions and responsibilities to Com mittees of the Board. The Executive Committee is authorized to exercise, in the absence of the Board, all the powers of the Board in the management of the Corporation, with several limited exceptions. Messrs. Heyman, Carroll, Goldman and Spier presently constitute the Executive Committee. The Executive Committee aid not meet during 1985 because frequent meetings of the full Board of Directors were held. The Audit Committee reviews the integrity of the Corporation's financial statements, financial controls and the internal audit function, the function and fees of the independent auditors, the procedures for monitoring the Corporation's investment activities and other matters relating to financial and accounting functions. Messrs. Canoli, Lyons, Rogers and Tydings presently con stitute the Corporation's Audit Committee. The Audit Committee met three rimes in 1985. The Executive Compensation Committee is responsible for the review and administration of the Corporation's compensation practices, policies and plans, including the Executive Incentive Compensation Plan, the 1984 Stock Option Plan and the Employee Stock Purchase Plan; the Stock Option Committee is responsible for the administration of the Corporation's 1975 Stock Option Plan and the Stock Purchase Committee for the administration of the Restricted Stock Plan. Each of these Committees is comprised of Messrs. Goldman, Carroll, Kaplan and Rogets. These Committees met eight times in .1985. The Nominating Committee makes recommendations as to nominees forelection as directors of GAP. It is presently comprised of Messrs. Rogers, Lyons, Spier end Tydings. The members of this Committee met once in 1985. The Committee will consider persons recommended by shareholders for nomination. Such recoimnendatioiv; should describe the qualifications of the candidates and should be submitted in writing to the Secretary of the Corporation at in address first above listed. Recommendations must be received at least 120 days in advance of the customary date of the annual meeting of shareholders, which is presently establi.riwd as the fourth Monday in April. Ttie Retirement Coirunittee is responsible for administering tht Corporation's retirement plans. Messrs. Spier, Heyman, Kaplan, Lyons, Shea and Sherwin presently constitute the Re* tiremem Committee. The Retirement Committee met twice in 1985. Hie total combined attendance for all Board and Committee meetings exceeded 92%. Each director attended more than 75% of the Board and Committee meetings he was scheduled to attend except Harold C. Simmons. Daring 1985, the Corporation compensated members of its Board of Directors who were not employees of the Corporation at tn rite of $15,000 per year plus $609 per met ung of the Board or Committee thereof attended If such Committee meeting was held in conjunction with e Board meeting or by telephone and $1,000 when e Committee meeting was scheduled independent of e Board meeting In addition, a chairperson of e Committee was compensated at die rate of $3,000 per year but only one such retainer was paid annually regardless of the number of Committees a director chaired. In addition, die Corporation provided life insurance in the face amount of $50,000 for any member of the Corporation's Board of Directors who was not an employee of the Corporation. At its meeting on January 27,1986, the tees payable to directors w.-re increased. The annual fee to non-employee directors for the 1986 calendar year was increased t > $18,000 end the fee per meeting was increased to $750 effective January 27, 1986. Curtain Litigation Involving Directors Each of the directors (except Messrs. Sherwin end Simmons) are named as defendants together ' 'ith the Corporation <n a lawsuit in Supreme Court, New York County by Jesse Werner, the former Chairman and Chief Executive Officer of the Corporation, alleging that they wrongfully prevented him from exercising options to purchase 120,000 shares of Common Stock end seeking to recover $800,000 in compensatory damages and $5,000,000 in punitive end exemplary dam* ages. Werner has slso demanded that the Corporation submit to arbitration the dispute with respect to his employment agreement dated September 17, 1981 which the Corporation has declined to perform since the present management as*ur..3d office in December 1983. In Much 1984, the Corporation commenced a lawsuit in Supreme Court, New York County against Werner and certain former directors of the Corporation seeking to recover compensatory damages in connec tion with Werner's compensation arrangements and costs incurred m waging the 1983 proxy contest plus $30,000,000 of punitive damages. In October 1985. The Court of Appeals for the State cf New York ordered the Corporation to proceed with the arbitration. The Corporation is treking review of that decision by the United States Supreme Court. Under its By-Laws and the 7 Delaware General Corporation Law, the present and former directors ?nd officers of the Corpo ration are entitled to indemnification against certain liability, costs and <*xpenses in any action, suit or proceeding as a result of their service in such capacity unless it is finally detemtined that they failed to net in good faith and in a manner which they reasonably believed to be in, or not opposed to, the best interests of the Corporation. The Corporation maintained company reimbursement and directors and officer* liability insurance policies which wear in effect during the period when the foregoing lawsuits were commenced. Several lawsuits are pending in the courts ofNew York and Delaware which wet* commenced by sfaarrSoldets of the Corporation during the recent proxy conmu against Werner, and certain former directors including James T. Sherwin who is a present director and a nominee for reeiection at the annual meeting. The complaints in these lawsuits make a variety of allegations against the former Chief Executive Officer and the farmer directors including mismanagement, corporate waste, breach of fiduciary duties and securities law violations. The defendants have answered and denied these allegations The former directors may be entitled to indemnification by the Corpo ration and coverage under its directors and officers liability insurance policies described in the preceding paragraph. SECURITY OWNKMWP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT As of February 27, 1986, the following persons had tepotted to the Securities and Exchange Commission beneficial ownership in the amounts shown of mote than five percent of a class of voting securities of the Corporation: Name anshfadmas at Omm Samuel J. Heymsn..................... 877 Post Rond East Westport, CT 06881 Harold C. Simmons.................. 4835 LBJ Freeway Dallas. TX 75244 Strong/Corneliuson Capital Management. Inc.................... 815 East Mason Street Milwaukee. Wisconsin 53202 Title at Cteee Common Naturae* OwnaraMa 1,380,179(1) Common 2,125,800(2) Common 1.442.485(3) -- ofCtass 7.81% 12.03% 8.17% 8 112 (1) Mr. Heyman has reported that the shares of Common Stock beneficially owned by him include 10,500 shares of Common Suck owned by a private foundation of which Mr. Heyman is an officer, 935,594 shares of Common Stock owned by partnerships of which Mr. Heyman is Manager- 18,000 shares of Common Stock owned by Annette Heyman, Mr. Heyman s mother, from whom Mr. Heyman has a power of attorney entitling him to vote such shares. Mr. Heyman reported that he has the sole power to vote and to direct the vote, and the sob power to dispose and to direct the disposition of all shares of Common Stock of which he is the beneficial owner, except for 18,000 shares of Common Stock owned by his mother, with inspect to which shams of Common Stock Mr. Heyman shares voting and investment powers with his mother. Mr. Heyman also hokls presently exercisable options to acquire 15,000 sitare* of Common Stock. (2) Mr. Simmons has reported in an amendment to his Schedule 130, dated February 6, 1986, that the shares ofCommon Stock are held by the following corporations which may be Jeemed to be controlled by Mr. Simmons: National City Lines, Inc.>-157,025 shares of Common Stock and The Amalgamated Sugar Company-1,968,775 shares of Common Suck. Mr. Simmons disclaims beneficial ownership of these shares. In May 1983, Amalgamated Sugar issued detachable warrants to purchase one share ecch of GAP Common Stock. Mr. Simmons reports that there are 440,000 warrants presently outstanding and that Amalgamated Su^ar has placrd 440.000 of its OAF shares in escrow to satir'y warrant exercises. The warrant; became exercisable at S30.00 per share on August 28. 1985 and will expire on May 1. 1990. (3) Strong/Corneliuson Capital Management, lac. has reported on iu Schedule > 30, dated Feb ruary 12,1986, that it owns 1,368.400 shares and that it has sole voting and dispositive power with respect to the shares. In addition, it has reported that it also holds 140,000 warrants to purchase 140.000 shares of OAF Common Stock. For a description ot the war.vus, sec footnote (2) above. Strong/Corneliuson has recently advised OAF that it increased its own ership to 1,442.485 shares as of February 27, 1986. o 113 As of February 27, 1916, aaeh director of the Corporation and ail directors and executive officers of the Corporation as a group beneficially owned the following equity securities of the Corporation: Kabl T. Carroll...................... Dr. Jacob E. Goldman.............. Samuel J. Heyman.................... Sanford Kaplan......................... WUlimnP. Lyons......................... Scott A. Kogan, Jr...................... Edward B. Shea........................... James T. Sherwin.................... Harold C. Simmons................. William Spier............................ Joseph D. Tydings.................... AD Directors and fcxecutive Officers an a Group (14 individuals).................... TMe at Common iMMti 9ar3S2 3.533 I,3t0,l79(?) 30,000 24.000(3) 1.000 2,620(4) 1.329(5) 2,125,300(6) 22.300 3,441(7) feriawtet -Srs- ft 7.11% .17% .14% ft ft ft 12.03% .13% ft Comoiob 3,663.377(8) 70.75% "Less *ban .1% (1) Sole voting and investment fx wvr ua'wt indicated othstwiae. (2) See footnote (1) to preceding table.. (3) lochidet 7,500 shares held in trust for the benefit of Mr. Lyons' children of which beneficial ownership is disclaimed by Mr. Lyons. 11.600 sham held in e pension trust of which Mr. Lyons is one of two trusts** and 4,900 sham held jointly by Mr. Lyons and Justine Lyons (4) All sham held jointly with hia wife. 13) Includes 5.000 sham subject to options which are presently exercisable end 5.000 shnm subject to options which era exercisable within 60 days of the date of this Proxy Statement. 16) See footnote (2) to preceding table. (7) Includes 2,550 shares held in e Defined Benefit Trust of which Mr. Tydings is e trustee. (I) See footnotes shows. Includes an additional 100 sham held jointly with a spouse and 47,700 sham which officers who are not directors have the right to acquire upon exercise of options (which are presently cxercissbie). 10 114 EXECUTORC0MPENBAT10N AND CERTAIN TRANSACTIONS CASH COMPENSATION The following information la furnished with respect ao-all cash compensation paid fw services tendered to the Corporation in all capacities during fiscal 1985 by (i) all six current oxecutive officers of the Coqtanuiet! whose cash compensation exceeded $60,000, and (ii) all persona who were executive officers during 1985 as a group: Mane of MS sssm OUKA Samuel J. Heyman Chairman of dm Board and n Chief Executive Offioer 8291,667 $275,000 $14,074 James T. Sherwin Vice Chairman of the Boerd and Chief Administra tive Officer 188.750 175.000 1P.798 Edward E. Shaa.. Senior Vice Pieeident, General Counsel and Secretary 130.417 65.000 15.438 Carl K. Eckardt.... Senior Vice President end heeideat*ChtmicaIs Division 156.667 125,000 20,028 John A, Brennan ... Senior vise President end Pmeideat'Builiing Materials L'ivision 123.333 85,000 16.073 Raymond J. Lacroix Senior Vice Pruideat and Chief Ptaaocial Officer 104,167 45.000 12.86.5 All Executive Officers as s Group--<6 individuals) 8893.00' $770,000 S97.277 (1) Includes cash bonuses earned during 1985 end paid in early 1986 to the executive ovflceu pursuant to the "Executive Incentive Compensation Pten" described below. Bonuses earned during 1984 end paid In early 1985 were reported in the Corporation's 1985 Proxy Statement. (2) Includes the Corporation's cash contribupoiw to the "GAF Capital Accumulation Plan" amt the cost to the Corporation of special life Insurance provided to the Corporation s elected officers. Both plans are described belovv. n 115 IMAGE EVALUATION TEST TARGET (MT-3) A /A* 4% "This mleralieh^ Including title Information and format la 1986 Baclttol Information > Socvleea. All rights reserved.'f* 150mm -6' -- s w 9V *) 4^ >' v ^9 FUFTUm V r'i information Sarvh 15740 Shady Grova Road Gaithersburg, Maryland 20877-1454 Compensation Pursuant To Plana Executive Incentive Compensation Plan GAP has an Executive Incentive Compensation Plan which was approved by the shareholders in May, 1967. The Plan coven approximately 275 officers, managers and other professional employ ret of the Corporation. The Plan provides that the Board of Directors, in to, discretion, may credit to an incentive compensation fond an amount no greater than 6% of the excess of GAF't adjusted income over 6% of the value of shareholders' equity at the beginning of the year for which the computation is made. A percentage of this amount, consisting of not less than 3% nor more than 15%, shall be used for special awards to employees as die Board directs, with the balance to be used for Executive Incentive Compensation Awards to key employees. The Plan provides that the Chief Executive Officer of the Corporation shall furnish the Executive Compensation Committee, and that the Committee shall furnish the Board of Directorn, with recommendations ss to particular awards. An award under the Plan may be payable in cash or GAF Common Stock or both. Common Stock may be subject to restrictions on disposition. Criteria used to determine awards include the level of success achieved during the year by the employee, the Division or department in which the employee works and the Corporation. For fiscal 1985, the total Incentive compensation fond was determined to be $2.875,000 for allocation among the 275 eligible officers, managers and employees. All award.', made for fiscal 1985 were paid in cash. The awards paid to the executive officers appear in the Cash Compensation Table. 1969 Restricted Stock Purchase Plan The Plan for the Sate of Restricted and Unrestricted Common Stock to Employees Who Perform Executive. Administrative or Supervisory Functions authorizes the sale of an aggregate of 650,000 shares of Common Stock to foil-time executive, administrative and supervisory em ployees of the Corporation and its subsidiaries. The price of Restricted Shares must be at least 50% of the closing price of the Corporation's Common Stock on the New York Stock Exchange on the last trading day on which such stock was traded preceding the date on which an employee is designated as one to whom such shares may be offered for sale. To accept an award, the employee must make payment in foil of the purchase price. The Plan authorizes the safe of shares subject to prescribed restrictions ns to disposition ("Restricted Shares") and without such restrictions ("Unrestricted Shares"). Alt sales under the 12 1969 Purchase Plan to d"'* have been of Restricted Shares. Restricted Shares may not be resold, assigned, ttensferred, pledged, hypothecated or otherwise disposed of, except as provided in the Plan, for a one-year period from the date of purchase and such further per.od or periods as may be provided by u<e Committee. Since March 1984, the policy of the Stock Purchase Committee with respect to new sales pursuant to the Plan has been to provide for the lapsing of the restrictions on one-fifth of the stock awarded on each of the first through fifth anniversaries of the date of sale. The polii a in effect prior to that time provided, in general, for a nine year lapsing schedule on restrictions, and there are Restricted Shares outstanding which are sdll subject to the nine year schedule. If a participant's employment terminates for certain reasons prior to the fifth anniversary of the date a purchase or due to death prior tc the completion of five years of continuous employment, the Corporation has the right to repurchase the shares which remain subject to restrictions at -ie price which the employee paid for them. The selection of eligible employees to receive awards under the Plan is made by the Stock Purchase Comm -tee. Awards are based on the Committee's evaluation of an employee's past or potential contribution to the Corporation or its subsidiaries. The Committee determines the number of shares to be awarded to any employee, the date of the award and the terns and conditions governing the sward. There is no stated maximum or minimum number of shares which may be awarded under die Plan to any one eligible person or group of persons. No awards of stock were made to executive officers under this Plan in 1985. Several executive officers do. however, own shares which they purchased in prior years on which the restrictions lapsed in IV85. The difference between the original purchase price and the market value on the date of lapse for the Restricted Shares was as follows: Carl R. Eckardt $45,871 (992 shares); John A. Brennan -1*6,573 (1,768 shares); Raymond J. Lacroix - $12,092 (364 shares) and all executive officers as a greup (6 individuals) - $114.537 - (3,124 shares). Stock Op <n Plans 1975 Sr*k Option Plan. This Plan authorizes the grant of "non-qualified" options (within the meaning of 'he Internal Revenue Code) to purchase a maximum of 800,000 shares of the Corporation's Common Stock to key employees. The exercise price at which shares of Common Stock may be purchased may not be less than 1005b of the fair market value of the shares on the date the opti* - is granted. Options granted after April 30, 1984 are exercisable as to 205b of the shares after the expiration of one year from the date of grant. 405b after two yean. 605b efter three years. 805b after four years, and 1005b after five years, with no such option to be exercisable a: to all or any 13 portion thereof more than 60 days after the fifth anniversary of the date of grant. Options granted on or before April 30, 1984 may not be exercised unless the optionee has remained in the continuous employ of the Corporation or its subsidiaries for a period of one year after the date of grant, but thereafter may be exercised in full at any time over the remaining term of. the option. Such earlier options expire not later than ten yean from the date of gran' end there is no maximum amount of options which may be exercised in any year. The selection of eligible employees to receive options is made by the Stock Option Com mittee. Awards of options are based on the Stock Option Committee's evaluation of an employee's past or potential contribution to the Corporation or its subsidiaries. The Stock Option Committee determines the number of shares to be optioned to my employee, the date of the option grant end the terms and conditions governing the options. Ha re is to stated maximum or minimum number of options or shares which may be issued to any one eligible person or group df persons. The 1975 Stock Option Pten aud the Corporation's right to grant options under it terminated on February 12, 1985. Options outstanding on February 12 were not affected by the termination of the Plan. 1984 Stock Option Plan. This Plan authorizes the grant of options to purchase a maximum of 800.000 shares of the Corporation's Common Stock. Options may be either options intended to be "incentive stock options" within the meaning of section 427.A of the Internal Revenue Code of 1954, as amended (the "Code"), or ''non-qualified'' stock options for purposes of the Code. The exercise price of options granted must be at le ut equal to the fair market value of such shares on the date of grant. With respect to any incentive stock option granted to a participant who owns stock possessing more than 10% of the voting rights of the Corporation's outstanding capital stock oo the date of grant, the exercise price of the option must be at least equal ro 110% of the Fair Market Value on the data of grant. The term of each option is five years and sixty days (five years for certain incentive stock options granted to persons owning mere than 10% of the Corporation's Stock). Options may not be exercised during the first year after the date of grant. Thereafter, except as noted below, each option becomes exercisable as to 20% of the shares subject thereto on each of the first through the fifth anniversaries of the date of grant. With respect to options granted to persons owning more than 10% of the Corporation's stock, the option will become exercisable us to the fins! 20% of shares subject thereto four years and ten months from the date of grant. The selection of eligible employees to receive options is made by the Executive Compensation Committee. Awards of options are based on ihe Executive Compensation Committee's evaluation 14 of an employee's past or potential contribution to the Corporation or its sulssidiaries. The Executive Compensation Committee determines the number of shares to be optioned to any employee, the date of the option grant, whether the option is intended to be an incentive stock option or a nonqualified stock option, and other terms governing the options. There is no stated maximum or minimum number of options or shares which may be issued to any one eligible person or group of persons. However, the aggregate fair market value of the Common Stock (determined a: the date ofthe option grant) for which any employee may be granted incentive stock options in any calendar year may not exceed $100,000, plus certain carryover allowances from the previous three yem permitted under the Code. Holders of stock options granted under both the 1975 and 1984 Stock Option Plans have certain limited stock.appreciation rights ("Limited Rights") which are in addition to the stock appreciation rights already included under the 1975 and 1984 Stock Option Plans. These Limited Rights apply only in the event of a tender or exchange offer for the Corporation's Common Stock by a bidder other than the Corporation, and entitle the option holder to surrender any then exercisable option or portion thereof and receive either cash or the Corporation's Common Stock, as determined by the Executive Compensation Committee or Stock Option Committee, as appli cable, equal to the difference between the aggregate fair market value ci the shares subject to options on the cate of surrender (aa determined in accordance with tho Limited Rights) and the aggregate option price. IS The following table includes, for each executive officer named in the Executive Compen sation Table and for all executive officers as a group, data on the following: (i) all options granted in fiscal 1983 under the 1984 Stock Option Plan [each" of which includes provision for stock appreciation rights ("SARs")] whether incentive stock op .ions nr nonqualified stock options and (U) the net value realized in ahares or cash on exercise of options awarded in previous years under both the 1973 and 1984 Stock Option Plana. Samuel J. Hcymaa............ James T. Shcrwin............. Edward E. Shea............... Carl R. Eckwdt................ John A. breorum............... Raymond 1. Lacroix........ All Executive Officers as a Group (4 individuals)....... S taw 0 0 0 0 0 0 0 Mat value of epNsM mm 0 0 $40,873 0 0 0 $40,873 (1) Net value of shares received on exercise of options (market value on date of exercise less exercise price). No stock appreciation rights were exercised. Employtt Stock Purchase Plan The 1984 Employee Stock Purchase Plan authorize# the gram of .options to purchase a maximum of 600,000 shres of the Corporation's Common Stock on a non-oiscriminatory basis to all full time employees of the Corporation and its subsidiaries except emnlc/ect who own 3% or mote of the total combined voting power of all classes of stock of the Corporation. All options granted shall be for the same number of shares unless the Executive Compensation Committee provides that the number of shares granted by each option shall bear a uniform relationship to the compensation of each eligible employee. The price at which shares of stock may be purchased unde: any offering is 83% of the lesser of fair market value of the Common Stock on the date of grant or the date purchase. Payments for stock purchased may be made either by immediate delivery of the hill purchase price, on an installment basis through payroll deductions or a combination of both. 16 120 There have been three offerings of stock pursuant to the Plan on October 1. 1984, June 3, 1985 and January 20, 1986. All three offerings have granted employees the option to purchase a number of shares which bean a uniform relationship to compensation. Options not exercised by the end of the offering period (typically one month) expire. The following table sets forth, as to each of the executive officers named in the Cash Compensatioo Table above (except Mr. Heyman who is not eligible to participate) and to all executive officers as a group the number of sharea of the Corporation's Common Stock purchased by immediate payment or payroll deduction pursuant to the Plan during 1985 and the aggregate net value of the shares purchased over and above tbs purchase price thereof. fwne m mwmMu ar Number In dreup James T. Sharwin ............................. Edward E. Shea................................. Carl R. Eckardt................................. John A. Brennan............................... Raymond J. Lacroix.......................... All Executive Officers....................... u a Group (5 individuals) Numeral 48r 348 334 86 374 285 0 267 187 1.456 906 Mss wn slilo 28.05 18.70 28.05 18.70 28.05 -- 18.70 28.05 18.70 28.05 ISRSSm af Sharea Pumbaaaed) S3.310(2) 1.528 2.645(2) --' 1.807(2) S9.290 (1) Net value of shares purchased on exercise of options (market value on data of gram, based on closing price on New York Stock Exchange, leu exercise price). (2) Thau executive officers an participating in the third offering under the Stock Purchase Plan by payroll deduction. They will acquire shafts on August 29,1986 with an aggregate exercise price u follows; James T. Sherwln--S9.750; Carl R. Eckardt--$8,000 and Raymond J. Lacroix--$5,250. The exercise price per share will be the lesser of $48.24 or 85% of the dosing market price on August 29. 1986, adjusted to reflect the stock split which will occur if Proposal No. 3, infra, Is approved by the shareholders at the 1986 Annual Meeting. 17 Prior Pension Plan On September 23, 19&2. the Board of Directors authorized the termination, effective De cember 31, 1982, of the OAF Salaried Employees' Retirement Plan (the "Pension Plan"), a defined benefit pension plan. All participants in the Pension Plan wj were not otherwise vested became vested on the termination date and each participant became entitled, as one of several options, to receive an annuity contract providing for the monthly payment of his accrued benefit aa of December 31, 1982, in accordance with the terms of the Pension Plan. Masers. Sberwia, Eckardt, Brennan and Lacroix elected to receive annuity contracts which will provide at age 65 monthly payments for their accrued benefits of $4,334, $663, $1,218 and $908, respectively, pursuant to the terms of the Penaion Plan. No other current executive officers were participants in the Pension Plan at the time of Its termination. Capitol Accumulation Plan Effective January 1. 1983, the Corporation adopted the OAF Capital Accumulation Plan ("OAPCAP'') for salaried employees to encoui ege employees to accumulate funds for retirement. OAFCAP is e profit sharing retirement plan which contains a salary reduction arrangement which complin with Section 401(h) of the Internal Revenue Code of 1934, aa amended. Pursuant to OAPCAP. each participant may elect to reduce Ms compensaticn by up to 14% (thereby excluding from his income for federal income ux purposes the amount of such reduction) and to have the Corporation contribute such amount to OAFCAP on his behalf. The Corporation will contribute an additional amount equal to 3% of a participant's compensation and will match the leaser of 4% of a participant's compensation or two-utirda of participant's salary reduction contribution. A participant aieo may elect to make non-deductible (for federal income tax purpose) voluntary contributions to OAPCAP In an amount not to exceed 10% of bis compensation. Diavibudona commence as soon ss practicable after either the termination of employment or retirement, and a participant may elect t) receive payment either (a) in monthly installments over a period equal to the participant's life expectancy or that of Ms spouse, If longer, or (b) in a lump sum. The amounts contributed during Aa^al 1983 by the Corporation to the executive officers are listed in the Executive Compensation Table. Executive Deferred Compensation Program In November 1983. the Corporation established a new deferred compensation plan for the benefit of key employees. The benefit payable under the Plan, which accrues in accordance with s ten year schedule, consists of an annual payment commencing at age 65 equal to 25% of a II 122 covered employee't but roll year's salary. rhe benefit will continue foi Ae longer of IS yean or the joint lifetimes of the employee and his spouse. If a covered employee dies while employed by the Corporation, a death benefit of 36% of the employee's annual income at the date of death is payable to the employee's beneficiary for a term of IS yean. Employees who participate in this plan are not entitled to have employer contributions made to their accounts, if any, under QAFCAP. Employees am selected for eligibility for this plan baaed upon the key nature of their responsibilities. Key managerial and professional employees, including all executive officers, were offered participation in November 19fiS. All executive officers accepted except Mr. Shea. S'jnce th plan wet in effect for leas than two months la 1919. the amount of vested benefits to which reh executive officer wu entitled at the end of 1969 was negligible. 5*v*rtmc PMicy The Corporation's beak.- severance policy for salaried employees pro.ides for payments to employees baaed upon the age and length of service of the employee at the time of termination. Pursuant to the terms of this policy, the only executive office;! currently entitled to severance payments In excess of $60,000 am Car! R. Eckardt and Jamas T. Sherwin. Mr. Eckardt would be entitled to a severance payment of $60,000 and Mr. Sherwir. would be entitled to e severance payment of $97,900. as adjusted by the terms of his employment agreement with the Corporation which expires on May 21, 1916. Uft Iniuranct In 1989 employees of the Corporation warn eligible to enroll on e contributory bests In s beuefttt package providing generally tor tarn Ufa Insurance equal to approximately two times current annual base salary, an accidental death and dismsmberment payment equal to two times current annua.) bam salary and monthly long-term disability benefits of approximately 2% of two times current annual salary. All elected officers received this aforementioned accidental death and dismemberment and long-term disability coverages on a non-contributory basis; in addition, they are eligible to receive group term life insurance coverage equal to approximately four times current annual base salary on a non-contributory bails. The cost to the Corporation of such insurance coverage for ell executive officers is listed In the Executive Compensation Table. !*> 123 Ptnomt The Corporation provides certain panonal benefit* 10 its executive officera which h difficult to quantify in tama of buefawaa or panonal usa. The Corporation ba concluded, however, after raaaoaabia iaquiry, that the aggregate ambuata anribotabi. to such panonal beneflta do not iaaay event exceed tba leaear of S25.000 or 10% of total caah ronyomartna far ench peraon named in the Cteli Cnmpaimrton Tahie above, or, aa to aU executive officer of the Corpotetion aa a group, (ha laaaar of S2S.OOO dtnaa the amobor of panona in dm gioiip or 10% of the total caah compenaadon for hi group. CERTAIN TNANSACTIONt WITH RELATED PANTO la 1963. the Corporetloo engaged Pinky. Kumbie, Wagner, Heine. Undatterg, Manley 4 Catty, to tender legal aarvieea in eonneeilon with a variety of manat*. Joaepb O. Tydiaga. a director of the Corporation, ie a member of this ftim. During 1913. the Corpotetion paid Ffnloy. Kumbie, Wagner. Heine, Uadarberg, Manley 4 Caaay feet and diabunemanta which were lau than 1% of the ftnn'e tevenuaa for the iaat full fiacal year. la I9>3. the Coiporariaa engaged O.B. Energy Syetataa. Inc, aa a coaatlttm on eeearch and development pnnuanr to a cootraet between it and tl(a Corporation. Dr. Jacob B. Goldmrn. a director of the Cotporetioa. ia President of 0.6. Energy Syetatne. Inc. During 19*3. die Corpo ration paid O.B. Energy Syetama, lac. 160,000 ht feat. Proposal Hn. t CUBBWC6TI0N OP THE BOARD OP PWBCTOBB ANP OTHER AMENDMENT! TO THE CERTIFICATE The hoard of Director* of the Corporation hat approvad by a unanimous vote of thorn preaant a number of mudmantr to the Corporation*! Keatatud CattHicata of Incorporation (the "Cemifkata'*) and haa dimetad that they be tubminad to a vote of the iharehofden at the Annual Meeting. To be adopted, thia propoaal require* the affirmative vote of holders of a majority of all omatendhtg tharea of Common Stock of the Corporation amilled to vote thereon at the meeting. The Board of Director* betievea that it la in the beat laureate of dw Corporation to amend the Cartiftcate to give effect to the propoccd amondmema. 20 124 I Appendix A to Mi proxy it--meat coeuiat the text of the proposed amendments *o the Certificate, and the following di'jcuasion b qualified in its entirety by reference to such Appendix. Tha pwpoaad amendments no iManclaiad, and the purpose of soma of the amendment* b to pwvant circumvention of the desired protection afforoed by other*. Accordingly, the Board ha* approved theaa ameadnr-- m a aingie propoaal. Any sharohotd-- who favor wme but oppoee othero of tfaeae prepared amendment* will hero to deride, therefore, if the advantage* of the amendments they favor outweigh the itiaarivntag*a of the oaaa they oppow. Vote* may nor be cast in favor of or apt-- peedoaa of aria rropoaal No. 2 aad anampta 10 do ro on the proxy card will intelld-- than card's voting in*ana don* on thb Propoaal. The propoeed amendments to the Cettificaw would (a) provide for a classiflad Bond of Db-- aad author-- -- diracton to iacraaaa ordacraaaa the lion of the Board widths -- limits -- by propoaod Article NINTH (e) aad to ftll vacaacba oo tho Board; (b) provide that any shareholder action bo taken only at a meodag of shareholder* and not by wrioan conssnt; (e) provide the: only the Chairman of the Baud at the Bond of Director* end not the shareholder* ue authonxed to call special --etingi of -- iharahotdert; (d) provide certain procedure* that a shareholder mutt follow in order to nomin-- any perron for election to tha Board of Director* or to bring any busin-- before an annual --ting of iharahotdan; (a) provide that the Board of Director* b exchieiveiy authorised to aambliih tbt tight*, power*, dude* end proceduie* governing the Board and the management of dw Corporation; (f) provide that director* may not be removed without cause end may he removed for cause oaiy by the hold-- of a majority of the ouwtaading than** aaddad to vow, includiag, in cart-- circumstances, dw vow of the holder* of a majority of dw them* not beneficially owned by any owner of more than Stfe of dw total vodag power of all dm-- of stock of the Corporation; aad (g) provide that antes* can-- condition* art met. dw proposed amendments may not he altered, amended, changed or repealed without e vow of the holder* of not be* dwn t0% of dw Corporation'* thares andried to vow thereon. Thb may be considered 10 be an anti*tnkeover proposal. As more fully dbcuaaed below, dw primary purpose of the propo*sd amendment* is to enhance the Corporation'! ability to successfully conclude any potential acquisition free from tha concern that a target company will be in a position w utilise a retaliatory offer for OAF as i means of misting tha Corporation's acqubtUon effort. Tha Board of Dir wtor* believe* that such a retaliatory offer, designed solely to thwart the Corporation's offer is *-, likely to be in the best Imamu of the Cotporadon'it ihurehofctert. The Corporation has from Urns to lima purchased sororities in other corporations and reg ularly reviews iu holdings of such securities to datemuse, among other things, whether to 21 125 increase, decrease. bold or liquidate such holding* or whether to seek to acquire control of any luch corporation by tender offer or otherwise, la this eonnoction, th Board of Director is swart that iri recent years, several corporations have made defensive counteroffers in response acquisition attempts- During the pendc-iicy of the Corporation's teceat tender offer for Union Carbide Cor poration. the Corporation's hoard of Directors becaim aware that the Board of Directors of Union Carbide took under consideration such a plan to gain control of tha Corporation at a means of frusamiag the Corporation's offer for Union Carbide, as the Corporation may wish at a ftiture time to make a aaw offer for Union Carbide or purine the acquisition of other eompaoies, the Cor poration's Boerd believes thee these proposed amendments am necessary to enable the Corporation to auccasafWly pursue en acquisition strategy which it in tha bast intaiests of the Corporation's shareholders. Tha proposed amandmants are also iarended so promow conditions of continuity and stability in tha Corporation'a leadership, businass. managamant and policies and to ensure that all share holders am afforded tha opportunity at shareholder mattings to fully discuss and consider matters which affect their rights. Although tha proposed amandmants are intended primarily to dtut and discourage r*isU?>tory counter reactor offers, the proposed amendments. If adopted, will necessarily have the effec; of making more difficult ail tender offers or other acquisibona of stock for tha purpose of acquiring control of the Board i*f Directors regardluss of tha offeror's modvatioa, es well as proxy contests or oriur attempts to chnngr managamant. To the extent adoption of the proposed amendment* makes the acquisition of control or a change in management of the Corporation more difficult, uia Corporation may booonre a toes attractive turnover target. As a result, offers from a significant shareholder or from third parties to acquire soma or aU oftha shares of the Corporation which tome shareholders might deem to be favorable could be diacouranad. Funhtv, to the extent tender offers or accumulations of tha Corporation's stock an discouraged, shareholders may be deprived of lire higher market prices for their stock which often prevail as a result of such event* Accordingly, before voting on the proposed amendments to the Certificate, shareholder* sri urged u> read carefully tha following tactions of this Proxy Stawnwnt which discuss the raxvxu for and effect* of tha proposed amandmants and describe more hilly the specific provisions of each proposed amendment. ' he Corporation is not at present involved in the acquisition of any otiw. company nor is it p ss i tiy aware of any ponding nr threatened effort to acquire the Corporation r 10 cha'ip<t current 22 management, either by a third party or by any holder or holders of any substantial block of the Corporation's Common Stock. The Board of Directors has concluded that it is desirable to consider these amendments at a time when the Corporation is not involved in an acquisition. Description of ths Proposed Amendment to the Certificate Classification of the Board ofDirectors. Under the Corporation's current By-Laws, each of the directors of the Corporation is elected annually by the shareholders for a term of one year. The proposed amendment to Article NINTH (e) of the Certificate provides for a Board of Directors divided into three classes having staggered three-year terms, to take effect beginning with the election of directors at .he 1986 Annual Meeting. If the proposed amendment is approved, at the 1986 Annual Meedng three directors will be elected for terms expiring in 1987, three for terms expiring in 1988, and four for terms expiring in 1989, as more fully described under "ELECTION OF DIRECTORS." At each Annual. Meeting after 1986, directors would be elected to succeed those whose terms then expire, each newly elected director to serve for a three-year term. The proposed amendment also limits the number of directors on the classified Board to a maximum of twenty-four and a minimum of three. The amendment vests in the Board the power, by vote of a majority of the directors then in office, to fix the exact number of such directors within these limits and to fill vacancies in the Board which may occur as a result of an increase in the number of such directors, or because of resignations or otherwise. Any director chosen by the Board to fill a vacancy shall hold office until the next election of the class for which such director shall have been chosen. The provisions for a classified Board, combined with the ability of the Board to increase the size of the Board, will extend the time required to elect a majority of the directors from one annual meeting to as many as three annual meetings. Thus, the classification of directors will have the effect of making it more difficult to change (he over-all composition of the Board of Directors and will therefore make it more difficult for the management of a company which the Corporation may be seeking to acquire to affect a sudden change in control of the Corporation in order to terminate the Corporation's acquisition efforts. However, tender offers or other acquisitions of stock for the purpose of acquiring control of the Board and proxy contests or other attempts to change man agement which are not undertaken as defensive tactics may also be discouraged by adoption of this proposal. The Board of Directors also believes that classification of the Board will promote continuity and stability of the Corporation's leadership, management policies and business strategies by 23 127 assuring that experienced personnel associated with the implementation of these policies and strategies will be on the Board at all times. Removal of Directors; Filling Vacancies on the Board of Directors. The Corporation's By-Laws presently provide that a director may be removed, either with or without cause, by the affirmative vote of the holders of a majority of the outstanding shares of the stock of the Corpo ration entitled to vote. Under Delaware law, a director on a classified Board may be removed from office during his or her term without cause only if the Certificate of Incorporation so provides. The proposed amendment to Article NINTH (c) specifically provides that directors may be removed only for cause and only by the affirmative vote of the holders of a majority of the Corporation's shares entitled to vote thereon, including, in certain circumstances, the vote of the holders of a majority of the shares not beneficially owned by a Related Person (as defined). Accordingly, the proposed amendment would eliminate the present ability of the holders of a majority of the Corporation's shares to remove a director without cause. Proposed Article NINTH (q) to the Certificate defines a Related Person generally as any person or entity which is the beneficial owner of more than 3% of the total voting power of all classes of stock of the Corporation entitled to vote generally in the election of directors. However, any person or entity which owned 5% or more of the Corporation's outstanding Common Stock on March 17, 1986 will not be deemed a Related Person. The provisions of proposed. Article NINTH (c) relating to the removal of directors and those which limit the number of directors are believed necessary in order to assure that the advantages of a classified Board are not circumvented. The provisions for a classified Board of Directors, together with the other provisions of the proposed amendment, if adopted, would make it more difficult to remove directors, and ultimately the management, even if a majority of shareholders decide to do so. In particular, absent the approval of shareholders having sufficient votes to amend proposed Article NINTH (c), it would not be possible to change the majority of the directors at any annual meeting, e. cn where 'the only reason for the change may be shareholder dissatisfaction with the performance of the incumbent directors. Procedures for Shareholder Nominations and Proposals. The proposed amendments to Article NINTH (c) and new Article NINTH (o) of the Certificate set forth the procedures that a shareholder must follow in order to nominate any person for election to the Board of Directors or io bring any business before an annual meeting of shareholders. Currently, no such procedural requirements exist in either the Certificate or the By-Laws. 24 128 Both amendments will provide that a shareholder must furnish written notice of the shareholder's nomination or business proposal to the Secretary of the Corporation not less than 60 days prior to the first anniversary of the date of the last meeting of shareholders called for the election of directors. The amendments would, accordingly, eliminate the present ability of share holders to nominate directors or introduce business matters from the floor at the annual meeting of shareholders without having provided prior notice thereof to the Corporation. In addition, proposed Article NINTH (c)(iv) would provide that a shareholder's notice with respect to the nomination of candidates for election to the Board of Directors must contain certain information concerning the nominee, including his age, business and residence addresses and principal oc cupation, and the number of shares of stock of the Corporation beneficially owned by him. The proposed amendment to Article NINTH (c) (iv) would not be appliceble to nominations by the * Board of Directors or a nominating committee of the Board. New proposed Article NINTH (o) would provide that a shareholders' notice with respect to business miners to be brought before a shareholders' meeting must contain a brief description of the business matter, the identity of and . number of shares owned by the shareholder proposing such business matters, and any interest of the shareholder in such business matter. New proposed Article NINTH (o) would not affect the current requirement that shareholder proposals be delivered to the Corporation at least 120 days prior to the anniversary of the date the prior year's proxy statement was released to shareholders in order to be included in the proxy statement. The procedures set forth in proposed Article NINTH (c)(iv) and new proposed Article NINTH (o) will prohibit last-minute attempts by a shareholder to nominate a director or present a business proposal at an annual shareholders' meeting, even if such a nomination or proposal might be desired by a .majority of the shareholder;. These procedures will enable the Board of Directors of the Corporation to be informed in advaiv s of nominations or business proposals (including any that may be made by a person seeking to acc,-.iiic control of the Coiporation) to be presented at meetings of shareholders in order to prepare informed and reasoned positions with respect to such nomi nations and business proposals. These procedures would also eliminate the element of surprise that a person seeking to acquire the CcH >xjratton might otherwise use to advantage in making a shareholder proposal. Requirement that Any Special Meeting be Called by the Roard of Directors. Under the Corporation's current By-Laws, special meetings may be called by the Chairman of the Board, 'he Board of Directors or the President and shall be called by the Secretary at the request in writing of shareholders owning at least a majority of the shares of capital stock of the Corporation issued end outstanding and entitled to vote. New proposed Article NINTH (p) would provide that only the Chairman of the Board or the Board of Directors and not the shareholders are authorized to call 23 special meetings of the shareholders. Thus, the proposed amendment would eliminate the present ability of shareholders to call special meetings of the shareholders. If adopted, the proposed amendment would make it more difficult to remove directors, and ultimately, the management, even if a majority of shareholders desire to do so. Requirement that Any Shareholder Action Be Taken Only at a Meeting. New proposed Article NINTH (n) to the Certificate would require that any shareholder action be taken only at a meeting of shareholders. At present, any action which may be taken at any annual or special meeting of shareholders may also be taken without a meeting, without prior written notice and without a vote, if a consent in witting, setting fo.th the action so taken, is signed by the holders of outstanding stock having not less chan the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. The amendment is designed to assure hat matters of importance are presented and voted on at fhareholder meetings and not decided by ; major shareholder without giving all shareholders an opportunity to be heard and to vote at a mt eting of shareholders. The Board believes that it is important for shareholders to be able to discuss matters which may affect their rights and for management to be able tc jive advance consideration to any such matters, and that ii: is therefore appropriate for shareholders of a publicly-held corporation to take action affecting the corporation and its shareholders only at a meeting. This amendment, combined with the amendment eliminating die right of shareholders to call special meetings (see "Requirement that Any Special Meeting be Called by the Boarc of Directors''; would effectively preclude shareholders from taking any action except at a special meeting called by the Board of Directors or at any annual meeting. Accordingly, the proposed amendments may make it more difficult for shareholders to take action opposed by the Board of Directors and t'.us deter persons from seeking to acquire substantial stock positions in or control of the Corporation, including an attempt to acquire contr'i of the Corporation made in response to any attempt by the Corporation to acquire securities or control of another corporation. Authority of Board of Directors to Manage the Business and Affairs of the Corporation. Under Delaware law, the business and affairs of the corporation shall be managed by or under the direction of the Board of Directors except as otherwise provided by Delaware law or the certificate of incorporation. The Corporation's Certificate currently permits both the Cer tificate a>id the By-Laws to qualify this authority with respect to certain matters. The proposed amendment to Article NINTH (e) of the Certificate would provide that the Board has the exclusive 26 13U authority to establish the rights, powers, duties and procedures governing the Board and the management of the business and affairs of the Corporation. The proposed amendment would prevent shareholders from seeking to disrupt the manage ment and policies of the Board of Directors by adopting changes to the By-Laws which, for example, alter the vote required for any action of the Board or the election by the Board of officers of the Corporation. This amendment is viewed as a necessary adjunct to die classification of the Corporation's Board of Director*. The adoption of the proposed amendment may also deter certain mergers, tender offers or other future takeover attempts favored by the holders of some or a majority of the Corporation's voting stock, including an attempt made in response to any effort by the Corporation to acquire securities or control of another corporation. Inertasid Shareholder Vote for Alteration, Amendment or Repeal of Proposed Amendments, At present, any alteration, amendment, repeal or rescission of any provision of the Certificate must be approved by a majority of the directors of the Corporation then in office and by the affirmative vote of the holders of a majority of the outstanding stcck of the Corporation entitled to vote at a meeting. Proposed new Article TENTH of the Certificate would provide that any alteration, amendment, repeal or rescission of Articles NINTH and TENTH of the Certificate must be approved by the affirmative vote of the holders of not less than eighty percent (80%) of the outstanding stock of the Corporation entitled to vote generally in the election of directors, subject to the previsions of any series of preferred stock which may at any time be outstanding. However, this supermajority voting requirement will not apply to any change recommended to the stockholders by two-thirds of the whole Board of Directors so long as a majority of the directors acting upon such matter shall be Continuing Directors. Proposed Article NINTH (q) generally defines a Continuing Director as any member of the Board of Directors who is not a Related Person and who (i) was a director on March 17, 1986, (ii) became a director prior to the time that any person or entity became a Related Person or (ill) was recommended to succeed a Continuing Director by a majority of Continuing Directors. Inasmuch as all of the nominees for election at the 1986 annual Meeting were directors on March 17, 1986 and none of the nominees are Related' Persons, all of such persons will bn deemed Continuing Directors for purposes of Article NINTH (q). In addition, under proposed Article TENTH no By-Law provisions inconsistent with the proposed amendments to Articles NINTH and TENTH may be adopted. The requirement of an increased shareholder vote is designed to prevent a shareholdei with a majority of the voting stock from avoiding the requirements of the proposed amendments by simply repealing them. If this proposal is adopted, any shareholder desiring to alter, amend, repeal or rescind any of the proposed amendments without the support of current management would have 27 1 to obtain the affirmative vote of the holders cl at least 80% of the Corporation's outstanding shares. Such a requirement would thus limit a majority snareholder's ability to act unilaterally without the support of other shareholder). This proposal will, however, make it hard to change any of the amendments proposed in this proxy statement. In general, a supermajority vote of 80% is difficult to obtain, even when there is substantial shareholder support for a proposal, as it is not uncommon for less than 80% of the total number of shares of stock entitled to vote at a meeting to cast ballots. For example, the percentage of shares represented In person or by proxy at the Corporation's last three annual meetings of shareholders was: 1983-78.31%, 1984-84.2% and 1983-78.94%. With respect to the Corporation's voting stock, the obtaining of a supermajority vote may be fcnher complicated by the fact that, at February 27, 1986, Mr. Hcymui and Harold C. Simmons* (who is currently a director, but is not standing for reelcction) beneficially owned more than 19% of the outstanding Common Stock. Thus, assuming that they retain or increase their shareholdings, it would be a practical necessity that the affirmative voce of at least one of them be obtained in order to adopt certain proposed amendments to the Certificate of Incorporation. Conforming Amendment. To avoid any conflicts with the proposed amendments a con forming amendment to Article NINTH (k) of die Certificate is proposed. Proposed changes are set forth in Appendix A hereto. OttHK Possible Anti-Takeover Provision* In the Corporation's Certificate The Certificate and By-Laws of the Corporation do not currently contain provisions intended by the Corporation to have ``antitakeover" effects, although the Corporation is authorized to issue up to 6,000.000 shares of Preferred Stock, in respect of which the Board may determine voting and other rights. The Preferred Stock could be issued so as to dilute the stock ownership or voting power of persons seeking to obtain control of the Corporation and could be utilb -d to frustrate a takeover plan. In addition. Preferred Stock could be privately placed. However, the Board has no present intention of issuing Preferred Stock for any of such purposes. Cumulative voting is not permitted under the Corporation's Certificate. The proposed amendments, combined with the power of the Board of Directors to issue a ciosr of authorized, but unissued Preferred Stock, may have the effect of maintaining the continuity of management end may make changes in management more difficult, even if a majority of share holders might consider such changes advisable. * Mr. Simmons disclaims beneficial ownership of these shares. See footnote (2) on page 9.. 28 132 Other than the amendment to Increase the number of authorized shares of Common Stock discussed in Proposal No. 3, the Board does not presently contemplate adopting, or recommending to the shareholders for thsir adoption, any further amendments to the Corporation's Certificate or By-Laws which would affect the ability of third parties to take over or change control of the Corporation, except for amendments to the Corporation's By-Laws to be adopted by Use Board to conform them to the proposed amendments. The Board of Olreetors rooommontfo a veto "FOR" Proposal 2. Proposal No. 3 INCREASE OP AUTHORIZED SHARES OP COMMON STOCK AND RELATED MATTERS Gensral The Board of Directors has approved by a unanimous vote of those present and recommends that the shareholders consider and approve an amendment to Article FOURTH of the Certificate that would increase the number of authorized shares of Common Stock from 25,000,000 shares to 100,000,000 shares. To be adopted, this proposal requires the affirm* -ive vote of holders of a majority of all outstanding shares of Common Stock of the Corporation entitled to vote thereon at the meeting. The Board of Directors believes that it is in the best interests ofshe Corporation to amend the Certificate to give effect to the proposed amendments. Appendix B to this proxy statement contains the text of the proposed amendments to the Certificate, and the following discussion is qualified in its entirety by reference to such Appendix. As of February 27, 1986, there were 17,666,301 shares of Common Stock issued and outstanding. Approximately 2,089,765 additional shares of Common Stock were reserved for issuance in connection with the Corporation's 1969 Restricted Stock Plan. 1975 and 1984 Stock Option Plans and 1984 Stock Purchase Plan. This leaves a balance of 5,158,422 authorized but unissued shares (including shares held in treasury) available and unreserved for future use. On February 24, 1986, the Board of Directors authorized a 2 for 1 stock split pursuant to which all holders of record of GAF Common Stock on May 8. 1986 would be entitled to receive one additional share of Common Stock for each share held. This authorization, however, is necessarily conditioned upon the approval by the shareholder* of an increase in the authorised Common Stock of the Corporation sufficient to allow the issuance of more than 17,000,000 new shares of Common Stock. 29 133 In addition, the Board of Directors considers it desirable that the Corporation have a further amount of Common Stock available for issutu-cc in connection with possible additional stock splits and dividends, acquisitions, financings, employee benefit plans and other corporate purposes in order to avoid, in each instance, (he delay rjid expense otherwise involved in obtaining shareholder approval for individual amendments tu r'.ie Certificate of Incorporation. Other than such matters, the Corporation has no present plans, rnrangements, understandings or commitments io issue any additional shares of Common Stock. If the prooosed amendments to increase the number of authorized shares of Common Stoc' are approved, there will be 80.1S8.422 unissued and unre served shams of Common Stock (including sharrs held in treasury), of which approximately 18,000,000 will be issued in the stock split if the shareholder? approve this proposal. The Corporation continuously reviews opportunities to acquire businesses, some of which might involve the issuance of shares of Common Stock. The Board of Directors believes that if authorization of any increase in the Common Stock were postponed until a specific need arose, the delay and expense incident to obtaining the approval of shareholders at that time could significantly impair the Corporation's ability to meet its financing or other objectives. If the proposed amend ment is approved, the Board of Directors would be able to issue, for any proper corporate purpose, such authorized but unissued shares without further action by the shareholders. The Common Stock is entitled to dividends when, as and if declared by the Board of Directors. The holders of Common St< :k have full voting powers and are entitled to receive any distribution made to shareholders :n liquidation. No holders of Common Stock arc entitled, as a matter of preemjpfive or other nght as such holdeu, to subscribe for or purchase any stock of the Corporation, whether presently available or made available by amei.dment to the Certificate of Incorporation, or any obligation of the Corporation convertible into such stock. Depending on the purpose terms and conditions, any issuance of shares of the Coiportion's Common Stock could have the effect of diluting current shareholders' proportionate interests in the Corporation. Potential Anti- Takeover Effect* Although not a factor in the Board or1 Directors' decision to propose the amendment to increase the number of authorized shares of Common Stocic. one of its effects may be tv enable the Board to render more difficult or to discourage an attempt to obtain control of the Corporation by means of & merger, tender offer, proxy contest or otherwise, and thereby protect the continuity of present mansgement. The Board would have the additional shares available to effect a sale of -hares, merger, consolidation or similar transaction v/hereby the number of die Corporation's )0 134 outstanding (hires would be increased and thereby would dilute the interest of a party attempting to obtain control of the Corporation as well as the voting rights of the Corporation's other shareholders. Adoption of the proposed amendment could reinforce the effects of the other proposed amendments to the Certificate for which shareholder approval is being sought st this meeting. See Proposal No. 2 above. AiMWonal Proposed Amandmant The Board of Directors also has approved and recommends that the shareholders consider and approve an amendment to Article FIFTH of the Certiflcata that would delete the designation of a series of $1.20 Convertible Preferred Stock. The Corporation redeemed and retired all outstanding shares of this series in 1985 and has no intention of authorizing the issuance of any more shares of this series. The Corporation would continue to have a claw of Preferred Stock, par value SI, undesign* ated as to any series, it the Corporation subsequently decides to issue a series of Preferred Stock, it may do so by filing a Certificate of Designation with the Secretary of State of the State of Delaware, iu state of incorporation, letting forth tiw relative rights, qualifications, limitations, restrictions and powers of the series. Tha Board of Ohoetora Hacommarda a Volt "FOB" This Proposal 3. PROPOSAL TO RATIFY MLOCTION OF AUDITORS Upon recommendation of the Audit Committee, the Board of Directors has selected Arthur Anderter A Co. to audit the Corporation's accounts for 1916. Arthur Andersen A Co. has provided audit services to the Corporation since 1984, including the examination of financial statemenu and the rekaed review of the Internal accounting controls of the Corporation and iu consolidated subsidiaries, examinations cf employee benefit plans and trusts, and meetings with the audit committee of the Board of Directors. The Board of Directors recommends that the shareholders ratify tire selection of Arthur Andersen A Co. u auditors. A representative of Arthur Andersen A Co. is expected to be present the meeting to answer appropriate questions and will have an opportunit" ;o make a statement. Tha Board of Diroetort Rooommonda a Voia "FOR" Thla Proposal. 31 135 1987 SHAREHOLDER PROPOSALS Proposal* of securities holders intended for inclusion in the Proxy Statement and presentation at the 19fc Annual Meeting must he received by the Corporation at its principal executive offices prior to November 28. 1988. All propoeals received will be subject to the applicable nilts of the Securities and Exchange Commission. See also "Procedure for Shareholder Nomination* snd Proposals" in Proposal No. 2, above. OTHER MATTERS The cost of solicitation of proxies will be borne by the Corporation. In addition to use of the mails, proxies may be solicited by telephone, telegraph or personal interview by employees of the Corporation without additional compensation. The Corporation has also retained Kissel-Blake Inc. to aid in the solicitation of proxias at an estimated aggregate fee of $14,000, f.hia out-of-pocket expanses. The Corporator) will reimburse brokerage firms, banks, trustees, nominees end other persons utilized by the Corporation for their out-of-pocket expenses in forwarding proxy materia) to me beneficial owners of the Corporation's stock. Management does not know of any other matter* that will be presented at tha meeting other than matter* incident to the conduct thereof. However, if any matters properly come before the meeting or any adjountmanu, it Is intended that the holders of the proxies named in the accom panying form of proxy will vota thereon in rhe!* discretion. For s copy of the Corporation's Annual Report on Form IOK for the year anting December 31, 1943 as filed with tha Securities and Exchanga Commfcuiun. plant contact: Office of the Secretary. OAF Corporation, 1361 Alps Road, Building K>. Wayna. New Jersey 07470. By Order of the Boerd of Directon. Wayne. New Jersey Match 27, 1946 Edwaed E. Shea Srcrtiary 32 13ii APPENDIX A PftOPOtSO AMENDMENTS TO ARTICLE NINTH OP THE RESTATED CERTIFICATE OP INCORPORATION OP OAF CORPORATION* Ankle NINTH; (c) (i) Summer, Election and Term of Directors. The number at dimeton of me Corpo ration (exclusive of dilution to be elected by the holden of eny one or non u .-tab of Preferred Stock of the Corporation which may at tome time be outstanding, voting separately as a class or classes) shall be lived from time to time by action of not less than a m^jrity of the members of the Board of Directors then la office, but in no event shall be .leu man three nor more than twenty-four. The directors (other than thou who may be elected by the holders of any one or more series of Preferred Stock of the Corporation which may at some time be outstanding, voting separately u a clus or elutes) shall be clauified. with impact to the time for which they severally hold office, into three classes, as nearly equal in number u pouiblc with the term of office of one class expiring each year. At the annual meeting of stockholders in 1986 three directors of the Am clus shall be sleeted to hold office for e term expiring at the next succeeding annual meeting, three directors of the second clau shall be elected to hold office for a term expiring u the second succeeding annual meeting, and four directors of the third clus shall be elected to hold office for a term expiring at the third succeeding annual meeting, with the members of each clau to bold ofAce until their respective successors era elected end qualified. Subject to the provision*, of Paragraph (ii> of Article NINTH (c). at each annual matting of the stockholder* uf uta Corporation haId after the 1986 meeting, the successors to the clau of directors whose term expires at thst meeting shall ba elected to hold office for a tarn expiring ai me third succeeding annual meeting. Notwithstanding the foregoing end except u otherwise required by law, whenever (ha holders of any one or more series of Preferred Stock shall have the right, voting separately us s clus or claues. to elect ono or move directon of the Corporation, the terms of the director * directors elected by such holden shall expire at the next succeeding annual meeting of stockholders. (ii) Newly Created Directorships and Vacancies. Newly created directorship# resulting from any increase in the number of directors <exct,x Increases resulting fror the rights of the hotden of one or more series of Preferred Stock of the Corporation which mu> at some time be * Only those sections of Atoclf NINTH which arc proposed to be revised or added are set fonh in this Appendix. Substantially all of the tost of theae sections is new. except for section NINTH (k). A-1 4 137 around:, tg, /ot.;ng separately at a class or classes, to elect directors) and any vacancies on the Board of Directs resulting from death, resignation, disqualification, removal or other reason shall be filled solely by the affirmative vote of a majority of the directors then in office, even though less than a quotum c; the Board of Directors. Any director elected in accordance with the preceding sentence shall hold office for the remainder of the full term of the class of directors in which the new directorship was ofeated or the vacancy occurred and undl such director's successor shall have been elected and qualified. No decrease in the number of directors shall shorten the term of any incumbent director. Notwithstanding the foregoing, awd except as otherwise required by law, whenever the holders of any one or more series of Preferred Stock shall have the right, voting separately aa a class or clvases, to elect one or more directors of the Corporation, the terms of the director or directors elected by such holders shall expire si the next succeeding annual meeting of stockholders (iii) Removal of Director!. Notwithstanding any ocher provisions of this Certificate of Incorporation or the By-Laws of the Corporation (and notwithstanding the fact that some lesser percentage may be specified by Jaw). any director or the entire Board of Directors may be removed from office at any time, but only for cause and only by the affirmative vote of the holders of a majority of the Voting Stock; provided, however, that if a proposal to remove a director is made whan then exists one or more Related Persons, then such minority vote must include the affir mative vote of the holders of majority of the Disinterested Shares. Notwithstanding the fore going, and vtxcept aa otherwise required by law. whenever the holders of any one or more series of Preferred Stock shall have the right, voting separately as a class or classes, to elect one or mote directors of the Corporation, the provisions of this F'vagraph (Hi) of Ankle NINTH (c) shall not apply with respect to the director or directors sleeted by such holders of Preferred Stock. (tv) Notice ofStockholder Nominee!, Nominations of persons for election to the Board of Directors of the Corporation shall be mads only (I) by or M the direction of the Board of Directors or (2) by any stockholder of the Corporation entitled to vote for the election of directors at a meeting of stockholders who complies with the procedures km forth in this Peregmph (iv) of Ankle NINTH (c). Such nominatioai, other than those made by or at the direction of the Board of Directors, shall be mode by notice in writing delivered ot mat'ed by Am class United Stater mail, postage prepaid, to the Secretary of the Corporation not leu than sixty (60) days prior the first anniversary of the date of the last meeting of stockholders called for the election of directors. Such stockholder's notice shall tet forth; (l) u to each parson whom such stockholder proix>te> to nominal for election or re-election u a director, (A) the name, age, business address ami. if known, residence address of each nominee proposed in such notice. (B) the principal occupation or employrrwnt ol each such nominee, D the number of shares of itock of the Corporation which A-2 138 are beneficially owned by each such nominee, and (D) such other information as v.ould be required by the Federal Securities Laws and the Rules and Regulations promulgated thereunder in respect of an individual nominated as a directo: of the Corporation and for whom proxies are solicited by the Board of Directors of the Corporation (including such nominee's written consent to being named in the proxy statement as a nominee and to serving as a director if elected); and (ii) as to the stockholder giving the notice (A) the name and address, m they appear on the Corporation's books, of such stockholder, and (B) the class and number of shores of stock of the Corporation which are benefici' Uy owued by such stockholder. Notwithstanding the foregoing, nothing in this Paragraph (iv) of. Jticle NINTH (c) shall be interpreted or construe*, to require the inclusion of information about such nominee in any proxy statement distributed by, at the direction of, or on behalf of the Board of Directors. The chairman of any meeting of stockholders may, if the facts warrant, determine and declare to the meeting (hat a nomination was not made in accordance with the procedures prescribed by this Paragraph (iv) of Article NINTH (c), and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. (e) Exclusive Authority of the Board. The property, business ana affairs of the Corporation shall be managed and controlled by the Board of Directors. Notwithstanding any other provision of this Ccrdficate of Incorporation or (he By-laws of the Corporation and subject to (he provisions of Article NINTH (c) of this Certificate of Incorporation, the Board of Directors shall have the exclusive right to establish the rights, powers, dudes, rules and procedures that from time to time shall (i) govern the Board of Directors and each of its members, including witliout limitation the vote required for any action by the Board of Directors, and (ii) affect the directors' power to manage and direct the property, business and affairs of the Corporation, including without lim itation the election of officers of the Corporation and the assignment of powers and duties to such officers. (k) Disposition of Substantially All Assets. The Corporation may, at any meeting of its Board of Directors, sell, convey, assign, transfer, lease, exchange or otherwise dispose of its properties and assets (including its good will and its ;orporate franchises), as an entirety or substantially as an entirety, upon such terms and condition:, ana for such consideration (whether cash or the stocks or bonds of any corporation or corporate,< j. ur/Jther property) as its Board of Directors may deem expedient and for the best interests of the Corporation, when arid as authorized 13ft by the affirmative vote of the holders of a majority of the stock issued and outstanding having voting power, given at a stockholders' meeting duly called for that purpose. (n) Stockholder Action. Any action required or permitted to be taken by the stockholders of the Corporation must be effected at a duly called annual or special meeting of such stockholders and may not be effected by any consent in writing by such stockholders. (o) Stockholder Proposals at Annual Meetings. Business may be properly brought before an annual meeting of stockholders by a stockholder only upon the stockholder's timely notice thereof in writing to the Secretary of the Corporation. To be timely, a stockholder's notice must be in writing and delivered or mailed by first class United States mail, postage prepaid, to the Secretary of the Corporation not less than sixty (60) days prior to the first anniversary of the date of the last meeting of stockholders called for the election of directors. A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting (i) a brief description of the business desired to be brought before the annual meeting, (ii) the name and record address of the stockholder oroposing such business, (iii) the class and number of shares of stock of the Corporation which are beneficially owned by the stockholder, and (iv) ny material interest of Che stockholder in such business. Notwithstanding the foregoing, nothing in t sis subparagraph (o) shall be interpreted or construed to require-the inclusion of information about any such proposal in any proxy statement distributed by, at the direction of, or on behalf of the Board of Directors. The chairman of an annual meeting may, if die facts warrant, determine and decUue to the meeting that business was not properly brought before the meeting in accordance with the pro visions of this sqbparagraph (o), and if he should so determine, he shall so declare to the meeting and any such business not properly brought before the meeting shall not be transacted. (p) Call of Special Meetings. Special meetings of the stockholders of the Corpc ration for any purpose or purposes may be called at any time only by the Chairman of the Hoard o' Direciois or by a majority of the members of tiie Board of Directors, and the power of stockholders to call a special meeting for any and all purposes whatsoever is specifically denied. (q) Definitions. For the purposes of this Article NINTH and Article TENTH tne terms set forth below shall be defined as follows: A-4 140 (i) "Affiliate" and "Associate" have the meanings set forth in Rule 12b-2 under the Secu rities Exchange Act of 1934 as in effect on March 27, 1986. (ii) Beneficial ownership shall be determined pursuant to Rule 13d-3 under the Securities Exchange Act of 1934 as in effect on March 27, 1986. (iii; "Continuing Director" means any member of the Board of Directors of the Corporation who is unaffiliated with and is not a Related Person and (x) held the office of director on March 17,1986, (y) became a member of the Board of Directors prior to the time that any Related Person became a Related Person, or (z) is a person recommended to succeed a Continuing Director by a majority of Continuing Directors then on the Board of Directors. (iv) "Disinterested Shares" means shares of Voting Stock beneficially owned by stockholders other than Related Persons. (v) "Related Person" means and includes any individual, corporation, partnership or other person or entity, or any group of two or more of the foregoing that have agreed to act together, which, together with its Affiliates and Associates, beneficially owns, i.i the aggregate, five percent (3%) or more of the outstanding Voting Stock, and any Affiliate or Associate of any such individual, corporation, partnership or other person or entity, together with the successors and assigns of any such individual, corporation, partnership or other person or entity or Affiliate or Associate in any transaction or series of transactions not involving a public offering of the Corporation's stock within the meaning of the Securities Act of 1933, as amended; provided, however, that the term "Related Person" shall not include any individual, corporation, partnership or other person, entity or any group of two or more of the foregoing or any Affiliate or Associate of any such individual, corporation, partnership or other person or entity which beneficially owned on March 17. 1986 five percent (3%) or more of the outstanding Common Stock of the Corpo ration. (vi) "Voting Stock" means all outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors of the Corporation, and each reference to a percentage or portion of shares of Voting S'ock shall refer to such percentage or portion of the votes entitled to be cast by such shares. A-5 141 PROPOSED NEW AR11CLE TENTH OF THE RESTATED CERTIFICATE OF INCORPORATION OF OAF CORPORATION Article TENTH: (a) Certificate ofIncorporation. Notwithstanding any other provisions of this Certificate of Incorporation or the By-Laws of the Corporation (and notwithstanding the fact that some lesser percentage may be specified by law), the affirmative vote of the holders of not less than 80% of the outstanding Voting Stock shall be required to amend, alter, change or repeal Articles NINTH and TENTH of this Certificate of Incorporation, subject to the provisions of any series of preferred stock which may at rhe time be outstanding; provided, however, that the provisions of this Article TENTH shall not apply to, and only such vote as shall be required by statute shall be required for, any amendment, alteration, change or repeal recommended to the stockholders by two-thirds of the whole Board of Directors of the Coiporation. orovided that and so long as a majority of the members of the Board of Directors acting upon such matter shall be Continuing Directors. (b) By-Laws. If any By-Law of the Corporation shall be altered, amended, repeajed or added in a manner which is inconsistent with any provisions of this Certificate of Incorporation, the provisions of this Certificate of Incorporation shall govern. Subject to the foregoing, the Board of Directors shall have the power to make, alter, amend, repeal or rescind the By-Laws of the Corporation. A-6 APPENDIX B PROPOSED AMENDMENTS TO ARTICLES FOURTH AND FIFTH OF THE RESTATED CERTIFICATE OF INCORPORATION OF OAF CORPORATION* FOURTH: The total number of share* of all classes of stock which the Corporation shall have the authority to issue is 106,000,000, consisting of: (1) 100,000,000 shares of Common Stock, par value $1 per share, and (2) 6,000,000 shares of Preferred Stock, par value $1 per share. FIFTH: A description of the different classes of stock of the Corporation and a statement of the designations, powers, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, fixed by the Certificate of Incorporation, and the express grant of authority to the Board of Directors to fix by resolution or resolutions certain rights, qualifications, limitations or restrictions thereof not so fixed, are &s follows: rniffrlQ CHOCK A The Board of Directors is hereby expressly authorn -1. by resolution or resolutions from to time adopted, to provide for the issuance of the Preferred Stock in series and to fix and . to the extent not Axed by the provisions hereinafter set forth and subject to limitations prescribed by law, the voting powers, designations, preferences and relative, participating, optional and other special rights of the share of each such series arid the qualifications, limitations and restrictions thereof, including, but not limited to, determination of any of the following: (a) the distinctive serial designation and the number of shares constituting the' series: (b) the dividend rate, whether dividends shall be cumulative and, if so, from which date, the payment date or dates for dividends, and the participating or other special rights, if any, with respect to dividends; (c) the voting powers, full or limited in addition to the voting powers provided by law; * The text is marked to indicate the changes which would be effected by the proposed amendments. Underlined words indicate that the text has beer, .evised. Carets indicate that text has been deleted. B-l 143 (d) whether the shares shall be redeemable, and, if so, the price or prices at which, and the terms and conditions on which, the shares may be redeemed; (e) the amount or amounts payable upon the shares in the event of voluntary or involuntary liquidations, dissolution or winding up of the Corporation; (f) whether the shares shall be entitled to the benefit of a sinking or retirement fund to be applied to the purchase or redemption of shares of the series, and, if so entitled, the amount of such fuada sod the manner of its application, including the price or prices at which the shares may be redeemed or purchased through the application of such fund; and (g) whether t! ' snares shall be convertible into, or exchangeable for, shares of any other class or classes or of any other series of the same or any class or classes of stock of the Corporation, and if so convertible or exchangeable, the conversion price or prices, or the rates ot exchange, and the adjustments thereof, if any, at which such conversion or exchange may be made, and any other terms and conditions of such conversion or exchange. Each share of each series of Preferred Stock shall have the same relative rights as, and be identical in all respects with, all the shares of the same senes. Before the Corporation shall issue any shares of Preferred Stock of any series A authorized as hereinbefore provided, a certificate setting forth a copy of the resolution or resolution* with respect to such series adopted by the Board of Directors of the Corporation pursuant to the foregoing authority vested in said Board shall be made, filed and recorded in accordance with the then applicable requirements. If any, of the laws of the State of Delaware, or, if no certificate is then ao required, such certificate shall be signed and acknowledged on behalf of the Corporation by its Chairman of the Board, Vice Chairman of the Board, President or a Vic,, President and its corporate seal shall ue affixed thereto and attested by its Secroaury or tn Assistant Secretary and such certificate shall be filed and kept on file at the principal office of the Corporation in the State of Delaware and in such other place or places as the Board o* Directors shall designate. Unless otherwise provided in any such resolution or resolutions, the number of stock of any series A may be increased or decreased (but not below the number of shares thereof then outstanding) by resolution or resolutions of the Board cf Directors set forth in a certificate complying with and filed in accordance with the foregoing requirements, in case the number of shares of any such series of Preferred Stock shall be decreased, the shares representing such decrease shall resume the status of authorized but unissued Preferred Stock. A 4 B-2 A 144 Common Stock Except as otherwise required by law, as thereinabove provided and as otherwise provided in the resolution or resolutions, if any. adopted by the Board of Directors of the Corporation with respect to any series of the Preferred Stock, the holders of the Common Stock shall exclusively possess all voting power. Each holder of shares of Common Stock shall be entitled to one vote for each share held by him. Whenever there shall have been paid, or declared and set aside for payment, to the holders of the outstanding shares of Preferred Stock and to the holders of outstanding shares of any other class of stock having preference over the Common Stock as to the payment of dividends the full * amount of dividends and of sinking fund or retirement fund or other retirement payments, if any, to which such holders are respectively entitled in preference to the Common Stock, then dividends may be paid on the Common Stock and on any class or series of stock entitled to participate therewith as to dividends, out of any assets legally available for the payment of dividends, but only when and as declared by the Board of Directors. In the event of any liquidation, dissolution or winding up of the Corporation, after there shall have been paid to or set aside for the holders of the shares of Preferred Stock and any other class having preference over the Common Stuck in the event of liquidation, dissolution or winding up of full preferential amounts to which they are respectively entitled, the holders of the Common 'Stock, and of any claas or aeries of stock entitled to participate therewith, in whole or in part, as to distributions of assets, shall be entitled to receive the remaining resets of the Corporation available for distribution, in cash or in kind. Each share of Common Stock shall have the same relative rights re and be identical in all respects with all the other snares of Common Stock. 4 B-3 J 14 ) YOUR VOTE IS IMPORTANT PLEASE DATE, SION AND RETURN THE ENCLOSED WHITE PROXY PROMPTLY. v Notice of Annual Meeting April 28, 1986 and Proxy Statement GAF Corporation J 146 Exhibit 21.2 147 SECURITIES AMD EXCHANGE COMMISSION Washington, D.c. 20349 FORM -* > CURRENT REPORT Pursuant to section 13 or 15(d) of ths Ssouritiss Exchange Aot of 1934 Data of Report (Data of sarliast svant reported)i January 27, 1946 GAP CORPORATION (Xxaet name of regLissttrrai nt as specified in its charter) 4 Delaware (State or other 7*!SMon------ tlfriZmir Iurisdlotion ;f noorporation) File Nuaher) Identification No.) \ Aina Road. Wayne. New Jersey 07470 rasa of principal executive offloes) Registrant's telephone nuaher, including area codet (201) 624-3000 148 item 2, Acquisition or Dlanoaltion of Ainti. on January 16, 1966, Union carbida corporation ("Union Carbida"), pursuant to its exchange offer, ?urchaaad 3,499,613 abaraa of ita Common Stock, par valua 1.00 par share, tandarad by vholly-ovned eubsidiarlea of tha registrant. Union Carbida paid for such abaraa a total tun rechaassha, prioa of $297,464,499, consisting of $69,996,695 967,195,200 principal amount of sanior Debentures dua 2006, $69,996,200 principal amount of Sanior Notes dua 1996 and $69,996,200 principal amount of Sanior Notes dua 1993. On January 27, 1986, tha registrant sold $43,500,000 principal amount of Sanior Dabanturaa dua 2006 for $45,369,000, $34,750,000 principal amount of Sanior Notes dua 1996 for $35,165,000 and $34,750,000 principal amount of sanior Nctaa dua 1993 for $34,402,500. Tha procaada racalvad froa tha aala of tha foregoing securities, together with tha cash orooeeda racalvad in Union Carbide's exchange offer, totalled $184,953,395 and vara used primarily to repay margin loans in tha amount of $99,400,000, tha registrant's revolving credit line in tha amount of $27,000,000, and other credit linaa In the amount of $21,000,000. \ > 149 SIGNATURE Pursuant to tha requirements of tha Sacuritias Ixchange Act of 1934, tha registrant has duly oauaad this raport to ba signed on its bahalf by tha undersigned haraunto duly authorised. GA? CORPORATION Data: February 24, 1916 By tfaaet Titlei Kdvard 1. Shaa Senior Vice President and General counsel Exhibit 22 151 Exhibit 22 LIST OF SUBSIDIARIES Domestic Subsidiaries GAT Broadcasting Company, Inc............................... Delaware GAP Chemicals Corporation....................................... Delaware GAP Realty Corporation..............................................Delaware Jay 6 Company, Inc...................................................... Delaware Mayfair Investments, Inc.......................................Delaware Foreign Subsidiaries GAP (Australasia) Pty. Ltd..................................... Australia GAP (Belgium) N.V........................................................ Belgium GAP do Brasil Industrie e Comercio Ltda.......... Brazil GAP (Canada) Inc......................................................... Canada GAP (Deutschland) G.a.b.K...................................... West Germany GAP (Francs) S.A................. ......................................... Prance GAP (Great Britain) Co. Ltd.........................Great Britain GAP Insurance Ltd................. ....................................... Bermuda GAP (Italia) Ltd.......................................................... Italy GAP (Japan) Ltd............................................................ Japan GAP Corporation de Mexico, s.A. de c.v............ Mexico GAP (Norden) A.B.......................................................... Sweden GAP (Osterreich) G.m.b.H....................... .................. Austria GAP (Singapore) Private Ltd................................... Singapore GAP (South Africa) Pty. Ltd................................... South Africa GAP (Switzerland) A.G.......................................... ...Switzerland Affiliate GAT-Huls Chemie G.m.b.H............................................ West Germany 152 FILMED MARCH 1986 BECHTEL information Services '`This microfiche, including title information and format is 1986 Bechtel Information Services. All rights reserved."