consolidated statements of income Medusa Corporation and
Subsidiaries
Year Ended December 31 1996 1995 1994
(In Thousands, except per share data)
Net Sales $323,377 $293,327 $276,293
Costs and Expenses:
Cost of sales 200,999 184,997 189,028
Selling, general and administrative 26,546 23,492 21,328
Depreciation and amortization 14,253 15,448 13,830
241,798 223,937 224,186
Operating Profit 81,579 69,390 52,107
Other Income (Expense):
Interest income 1,155 2,225 1,262
Interest expense (3,674) (7,575) (7,526)
Miscellaneous-net 145 (193) (6)
(2,374) (5,543) (6,270)
Income Before Taxes and Extraordinary
Item 79,205 63,847 45,837
Provision for Income Taxes 24,945 20,635 15,957
Income Before Extraordinary Item 54,260 43,212 29,880
Extraordinary Item, less applicable
income tax reduction (Note E) (1,770) - -
Net Income $ 52,490 $ 43,212 $ 29,880
______________________________________________________________________________
Net Income Per Common Share:
Primary:
Income before extraordinary item $ 3.35 $ 2.68 $ 1.81
Extraordinary item (.11) - -
$ 3.24 $ 2.68 $ 1.81
Fully Diluted:
Income before extraordinary item $ 3.17 $ 2.55 $ 1.76
Extraordinary item (.10) - -
$ 3.07 $ 2.55 $ 1.76
Primary Average Common Shares
Outstanding 16,181 16,139 16,540
______________________________________________________________________________
See Notes to Consolidated Financial Statements
consolidated balance sheets Medusa Corporation and Subsidiaries
December 31 1996 1995
(In Thousands, except share data)
ASSETS
Current Assets:
Cash and short-term investments $ 25,045 $ 33,166
Accounts receivable, less allowances
of $1,173 ($609 in 1995) 28,708 21,410
Inventories 31,177 29,266
Other current assets 4,490 4,395
Total Current Assets 89,420 88,237
Property, Plant and Equipment 125,729 118,864
Intangible and Other Assets 8,297 12,477
Total Assets $223,446 $219,578
______________________________________________________________________________
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt $ 41 $ 41
Accounts payable 15,575 14,952
Accrued compensation and payroll taxes 7,014 5,608
Other accrued liabilities 9,247 8,589
Income taxes payable 2,728 2,500
Total Current Liabilities 34,605 31,690
Long-Term Debt 4,084 61,624
Accrued Postretirement Health Benefit Cost 27,760 27,446
Reserves and Other Liabilities 2,745 2,611
Accrued Pension Liability 282 659
Shareholders' Equity:
Preferred shares, without par value-3,000,000
shares authorized:
1,000,000 shares each of Class A Serial Preferred;
Class B Serial Preferred; and Class C Preferred
Shares - -
Common shares, without par value:
Authorized-50,000,000 shares
Outstanding-16,924,006 shares
(16,329,901 in 1995) 1 1
Paid in capital 57,159 23,433
Retained earnings 140,124 97,515
Unvested restricted common shares (39) (40)
Unearned restricted common shares (7,516) (5,672)
Currency translation adjustment (930) (890)
Total Paid in Capital and Retained
Earnings 188,799 114,347
Less Cost of Treasury Shares-1,367,440 shares
(836,267 shares in 1995) (34,829) (18,799)
Total Shareholders' Equity 153,970 95,548
Total Liabilities and Shareholders'
Equity $223,446 $219,578
______________________________________________________________________________
See Notes to Consolidated Financial Statements
consolidated statements of cash flows Medusa Corporation and Subsidiaries
Year Ended December 31 1996 1995 1994
(In Thousands)
Cash Flows From Operating Activities:
Net income $ 52,490 $ 43,212 $ 29,880
Adjustments to reconcile net income to net
cash provided from operating activities:
Depreciation and amortization 14,253 15,448 13,830
Provision (benefit) for deferred income
taxes 10 (944) 1,660
Postretirement health benefit cost 232 222 491
(Gain) loss on sale of capital assets (181) (33) 12
Accounts receivable 7,298 2,626 (716)
Inventories and other current assets (1,800) (7,793) 1,774
Accounts payable and other current
liabilities 2,998 220 5,430
Other assets 1,840 (231) 1,986
Accrued pension, reserves and other
liabilities 1,368 (46) (2,475)
Net Cash Provided From Operating
Activities 63,912 52,681 51,872
Cash Flows From Investing Activities:
Capital expenditures (19,806) (25,345) (14,694)
Proceeds from sale of capital asset 239 359 1,622
Net Cash Used By Investing Activities: (19,567) (24,986) (13,072)
Cash Flows From Financing Activities:
Purchase of treasury shares (13,599) (1,878) (14,608)
Dividends paid (9,881) (8,152) (8,264)
Stock options exercised 1,882 1,649 1,278
Proceeds from issuance of long-term debt - 365 -
Payments on long-term debt (30,868) (35,000) -
Issuance of restricted shares - - 63
Net Cash Provided From (Used By)
Financing Activities (52,466) (43,016) (21,531)
Increase (Decrease)In Cash And Short-Term
Investments (8,121) (15,321) 17,269
Cash And Short-Term Investments At
Beginning Of Year 33,166 48,487 31,218
Cash And Short-Term Investments At End Of Year $ 25,045 $ 33,166 $ 48,487
______________________________________________________________________________
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for:
Interest (net of $26 capitalized
in 1995) $ 4,064 $ 7,566 $ 7,509
Income taxes 24,707 20,896 14,367
______________________________________________________________________________
See Notes to Consolidated Financial Statements
consolidated statements of shareholders' equity
Medusa Corporation and Subsidiaries
Unvested
Restricted
Common Paid in Retained Common
Shares Capital Earnings Shares
____________________________________________________________________
(In Thousands, except share data)
Balance At January 1, 1994 $ 1 $16,377 $40,839 $ (26)
Net income 29,880
Dividends paid-$.50 per
common share (8,264)
Issuance of 83,070 restricted
common shares 2,045 (79)
Forfeiture of 51,000 restricted
common shares (768)
Exercise of 187,536 stock options 2,070
Purchase of 652,157 treasury shares
Amortization for vesting of
restricted common shares 79
Currency translation adjustment
Balance At December 31, 1994 1 19,724 62,455 (26)
Net income 43,212
Dividends paid-$.50 per
common share (8,152)
Issuance of 117,940 restricted
common shares 2,851 (120)
Exercise of 149,417 stock options 2,000
Purchase of 82,402 treasury shares
Retirement of 35,697 treasury shares (1,142)
Amortization for vesting of
restricted common shares 106
Currency translation adjustment
Balance At December 31, 1995 1 23,433 97,515 (40)
Net income 52,490
Dividends paid-$.60 per
common share (9,881)
Issuance of 95,080 restricted
common shares 2,741 (119)
Exercise of 225,537 stock options 4,313
Purchase of 441,206 treasury shares
Conversion of subordinated notes
to 805,161 common shares 26,672
Amortization for vesting of
restricted common shares 120
Currency translation adjustment
Balance At December 31, 1996 $ 1 $57,159 $140,124 $ (39)
_______________________________________________________________________
See Notes to Consolidated Financial Statements.
consolidated statements of shareholders' equity
Medusa Corporation and Subsidiaries
Unearned
Restricted Currency Total
Common Translation Treasury
Shareholders'
Shares Adjustment Shares Equity
________________________________________________________________________
__
(In Thousands, except share data)
Balance At January 1, 1994 $(2,759) $ (786) $(2,169) $51,477
Net income 29,880
Dividends paid-$.50 per
common share (8,264)
Issuance of 83,070 restricted
common shares (1,903) 63
Forfeiture of 51,000 restricted
common shares 768
Exercise of 187,536 stock options 2,070
Purchase of 652,157 treasury shares (15,400) (15,400)
Amortization for vesting of
restricted common shares 383 462
Currency translation adjustment (315) (315)
Balance At December 31, 1994 (3,511) (1,101) (17,569) 59,973
Net income 43,212
Dividends paid-$.50 per
common share (8,152)
Issuance of 117,940 restricted
common shares (2,731)
Exercise of 149,417 stock options (494) 1,506
Purchase of 82,402 treasury shares (1,878) (1,878)
Retirement of 35,697 treasury shares 1,142
Amortization for vesting of
restricted common shares 570 676
Currency translation adjustment 211 211
Balance At December 31, 1995 (5,672) (890) (18,799) 95,548
Net income 52,490
Dividends paid-$.60 per
common share (9,881)
Issuance of 95,080 restricted
common shares (2,622)
Exercise of 225,537 stock options (2,431) 1,882
Purchase of 441,206 treasury shares (13,599) (13,599)
Conversion of subordinated notes
to 805,161 common shares 26,672
Amortization for vesting of
restricted common shares 778 898
Currency translation adjustment (40) (40)
Balance At December 31, 1996 $(7,516) $ (930) $(34,829) $153,970
________________________________________________________________________
See Notes to Consolidated Financial Statements.
notes to consolidated financial statements
Medusa Corporation and Subsidiaries
NOTE A-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the company and its
wholly-owned subsidiaries. All significant intercompany items have been
eliminated.
The company processes mineral deposits, principally limestone, by
converting these material resources through physical and chemical
methods to intermediate products (cement and aggregates) sold to the
construction industry principally in the eastern half of the United
States. Sales of such products constitute more than 90% of consolidated
net sales and net income.
Cash and Short-Term Investments
For purposes of the statement of cash flows, the company considers cash
equivalents to be all highly liquid securities with an original maturity
of three months or less. Estimated fair value approximates the carrying
amount.
Inventories
Inventories are valued principally at the lower of cost or market
determined using the last-in, first-out (LIFO) cost method. The average
cost method is used for substantially all supplies.
Property, Plant and Equipment
Depreciation of property, plant and equipment for financial reporting
purposes is provided over the estimated useful lives of the assets
principally by the straight-line method.
Net Income Per Share
Primary net income per share is computed by dividing net income by the
weighted average number of common shares and common share equivalents
(options) outstanding during the period. Fully diluted net income per
share is computed based on the weighted average number of common shares
and common share equivalents outstanding during the period, as if the
convertible subordinated notes were converted into common shares at the
beginning of the period after giving retroactive effect to the
elimination of interest expense, net of income tax effect, applicable to
the subordinated notes.
Use of Estimates in the Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
The company estimates its quarry's end-of-life-cycle closing costs and
amortizes them based on actual annual stone production over the quarries
total estimated stone reserves.
NOTE B-INVENTORIES
At December 31 (in thousands):
1996 1995
Finished goods $13,594 $12,980
Work in process 3,424 2,993
Raw materials 1,124 2,015
Supplies 13,035 11,278
$31,177 $29,266
________________________________________________
Use of the first-in, first-out (FIFO) cost method would have increased
inventories from the amounts reported at December 31 by $7,590,000 in
1996 and $7,238,000 in 1995.
NOTE C-PROPERTY, PLANT AND EQUIPMENT-AT COST
At December 31 (in thousands):
1996 1995
Land $ 10,989 $ 10,831
Buildings and improvements 22,169 20,465
Machinery and equipment 343,028 327,523
376,186 358,819
Less accumulated
depreciation (250,457) (239,955)
$125,729 $118,864
________________________________________________
NOTE D-LEASES
The company leases various cement storage facilities, vehicles and
various other equipment under capital and operating leases with terms
from one to forty years.
Future minimum payments, by year, and in the aggregate, under
capitalized leases and operating leases with initial or remaining terms
of one year or more are as follows at December 31, 1996 (in thousands):
Capital Operating
Leases Leases
1997 $ 181 $ 1,329
1998 181 1,097
1999 181 537
2000 181 123
2001 181 92
Thereafter 4,686 1,728
Total minimum
lease payments 5,591 $ 4,906
Less interest (1,791)
Present value of
future minimum
lease payments $ 3,800
_________________________________________________
The costs of assets capitalized under leases at December 31 are as
follows (in thousands):
1996 1995
Machinery and equipment $ 4,035 $ 4,035
Less accumulated
depreciation (1,880) (1,693)
$ 2,155 $ 2,342
________________________________________________
The weighted average interest rate for capital leases was 3.7% in 1996.
The capital lease agreements contain certain covenants which, among
other things, require the company to meet certain consolidated financial
tests, including tests relating to minimum net worth, financial
leverage, fixed obligation coverage and cash flow coverage. At December
31, 1996, the minimum required level of net worth under these covenants
was $25.0 million.
Rental expense was $1,942,000, $1,828,000, and $2,069,000 for 1996, 1995
and 1994, respectively.
NOTE E-SHORT AND LONG-TERM FINANCING
The company has an unsecured $65.0 million Revolving Credit Agreement
("Revolver") with four banks that expires December 31, 2001. The
Revolver allows borrowings bearing interest at .35% to .75% per annum
above the reserve-adjusted rate at which Eurodollar deposits are offered
by prime banks in the Eurodollar interbank market ("LIBOR"). The
Revolver bears a commitment fee of .2% to .35% per annum on the unused
portion. The interest rate and commitment fee vary based on the
company's ratio of consolidated liabilities to net worth. The company
also has unsecured bank lines of credit totalling $20.0 million. At
December 31, 1996, no amounts were outstanding under any of these credit
facilities.
Long-term debt consists of the following at December 31 (in thousands):
1996 1995
6% convertible subordinated
notes, due 2003, interest
payable semi-annually $ - $57,500
Capitalized leases 3,800 3,800
Other 325 365
4,125 61,665
Less current portion (41) (41)
$ 4,084 $61,624
________________________________________________
The 6% convertible subordinated notes ("Notes") were redeemed effective
December 2,1996. Note holders representing $26.7 million in Notes
converted into 805,161 common shares, with the balance of the holdings
receiving cash of $30.8 million. This redemption, including the write-
off of unamortized debt issuance costs, was $1,770,000 net of income tax
benefit of $787,000 and is reflected as an extraordinary item.
The Revolver contains certain convenants which, among other things,
require maintenance of certain levels of net worth and certain specified
ratios of current assets to liabilities, interest coverage and
liabilities to net worth. At December 31, 1996 the company was in
compliance with all covenants.
The average interest rate incurred on all borrowings was 6.7% in 1996,
7.5% in 1995, and 7.3% in 1994.
The company has available bank stand-by letter of credit facilities of
$10.0 million of which $6.0 million was being utilized at December 31,
1996. These facilities bear a commitment fee of .5% per annum on the
used portion. These instruments, the fair value of which approximates
market, are considered off-balance-sheet risk and represent conditional
commitments issued to guarantee the company's performance to various
third parties.
The fair value of the convertible subordinated notes was $56.2 million
in 1995 and was estimated based on the current rates offered to the
company for debt of the same remaining maturities.
NOTE F-POSTRETIREMENT HEALTH BENEFITS
The company provides substantially all employees with health care and
life insurance benefits through unfunded defined benefit plans upon
retirement.
The net periodic postretirement benefit cost was as follows (in
thousands):
1996 1995 1994
Service cost $ 539 $ 422 $ 470
Interest cost on
accumulated
postretirement benefit
obligation 1,495 1,583 1,511
Net amortization (521) (702) (523)
Net periodic postretire-
ment benefit cost $1,513 $1,303 $1,458
_________________________________________________
The following table sets forth the plans' funded status reconciled with
the amounts shown in the company's balance sheets at December 31 (in
thousands):
1996 1995
Accumulated Postretirement
Benefit Obligation:
Retirees $10,670 $10,474
Eligible active plan
participants 4,229 4,826
Other active plan
participants 6,795 7,596
21,694 22,896
Unrecognized net gain 7,176 5,742
28,870 28,638
Less current amount in other
accrued liabilities (1,110) (1,192)
Accrued Postretirement Health
Benefit Cost $27,760 $27,446
________________________________________________
In 1996, the cost of benefits was assumed to increase by 9.50%
initially and then decrease gradually to 5% by 2002 and remain at that
level thereafter. In prior years, the cost of benefits was assumed to
increase 10.25% annually through 1996 and then decrease gradually to 5%
by 2002, and remain at that level thereafter. An increase in the
assumed health care cost trend rate by one percentage point would
increase the accumulated postretirement benefit obligation as of
December 31, 1996 by approximately $2.6 million and the net periodic
postretirement benefit cost by $0.3 million for the year. The discount
rate in determining the accumulated postretirement benefit obligation
was 7.25% in 1996 (7.25% in 1995 and 8.5% in 1994).
NOTE G-INCOME TAXES
A reconciliation between the statutory federal income tax rate and the
company's effective income tax rate is as follows:
1996 1995 1994
Statutory rate 35.0% 35.0% 35.0%
State income tax, net of
federal income tax
benefits 2.6 3.7 4.2
Percentage depletion (5.8) (5.6) (4.7)
Tax exempt interest (.1) (.2) -
Other (.2) (.6) .3
Effective rate 31.5% 32.3% 34.8%
_________________________________________________
Components of the provision for income taxes were as follows (in
thousands):
1996 1995 1994
Deferred income tax
expense (benefit) $ 10 $ (944) $ 1,660
Current income tax
expense 24,935 21,579 14,297
$24,945 $20,635 $15,957
________________________________________________________
The income tax provisions include state income tax provisions of
$3,260,000, $3,720,000 and $2,988,000 for 1996, 1995 and 1994,
respectively.
Components of the net deferred tax assets shown in the company's
balance sheets at December 31 were as follows (in thousands):
1996 1995
Net book value of fixed assets
in excess of tax basis $(11,484) $(10,727)
Financial reporting accrual
for postretirement health
benefits 11,707 11,713
Other financial reporting
accruals 4,010 3,805
Other taxable temporary
differences (636) (611)
Other deductible temporary
differences 1,608 1,035
$ 5,205 $ 5,215
________________________________________________
Net deferred income tax assets associated with certain current items
included in other current assets were
$2,815,000, and $2,609,000 at December 31, 1996 and 1995, respectively.
Net deferred income tax assets associated with certain non-current items
are included in intangible and other assets.
NOTE H-PENSIONS AND EMPLOYEE BENEFIT PLANS
The company has defined benefit pension plans which cover substantially
all of its employees. The plans generally provide benefit payments
using a formula based on length of service and final average
compensation, except for most hourly employees for whom the benefits are
a fixed amount per year of service. The company's policy is to fund at
least the minimum required by applicable regulations.
Net periodic pension cost was as follows (in thousands):
1996 1995 1994
Service cost-benefits
earned during the year $ 1,193 $ 929 $ 1,013
Interest cost on projected
benefit obligation 2,287 2,059 1,859
Actual return on plan
assets (4,792) (4,983) 966
Curtailment effect of early
retirement incentive 339 - -
Net amortization and
deferral 2,699 3,225 (2,750)
Net periodic pension cost $ 1,726 $ 1,230 $ 1,088
________________________________________________________
The following table sets forth, by funded status, the amounts recognized
in the company's balance sheets at December 31 for its pension plans (in
thousands):
1996 1995
Over- Under- Over- Under-
funded* funded* funded* funded*
Actuarial present value
of benefit obligations:
Vested $10,239 $14,987 $9,139 $17,338
Nonvested 686 4,048 269 148
Accumulated benefit
obligation 10,925 19,035 9,408 17,486
Effect of future pay
increases 3,440 - 3,000 -
Projected benefit
obligation 14,365 19,035 12,408 17,486
Plan assets at fair
value 13,862 18,754 11,975 16,827
Projected benefit
obligation less than
(in excess of) plan
assets (503) (281) (433) (659)
Unrecognized net (gain)
loss on assets 531 (1,146) 235 1,193
Unrecognized net (asset)
obligation (65) 622 894 323
Unrecognized prior service
cost 331 1,427 (81) 746
Additional minimum
liability - (903) - (2,262)
Net recorded pension
asset (liability) $ 294 $ (281) $ 615 $ (659)
____________________________________
*Overfunded plans are those in which plan assets at fair value exceed
the accumulated benefit obligation. Underfunded plans are those in
which the accumulated benefit obligation exceeds plan assets at fair
value.
Prepaid pension cost included in intangible and other assets was
$294,000 and $615,000 at December 31, 1996 and 1995, respectively.
The pension intangible asset included in intangible and other assets was
$903,000 and $2,262,000 at December 31, 1996 and 1995, respectively.
A non-cash decrease of $1,359,000 and increase of $96,000 to the pension
intangible asset and accrued pension liability was required to record
the additional minimum liability in 1996 and 1995, respectively.
Assumptions used as of December 31 were:
1996 1995 1994
Discount rate 7.25% 7.25% 8.50%
Rate of increase in
compensation levels 5.00% 5.00% 5.00%
Expected long-term rate
of return on assets 8.50% 8.50% 8.50%
_________________________________________________
At December 31, 1996 and 1995, all plan assets were primarily invested
in listed stocks and bonds.
Certain company employees are covered under multi-employer union pension
plans. Amounts contributed under these plans were approximately
$102,000, $105,000, and $113,000 for 1996, 1995 and 1994, respectively.
NOTE I-STOCK-BASED COMPENSATION PLANS
The company has two stock-based compensation plans: the 1991 Long-Term
Incentive Plan which includes the facility to award both stock options
and restricted stock and the Non-Employee Director Restricted Stock
Plan. In accounting for its employee compensation plans, the company
applies APB Opinion No. 25, "Accounting for Stock Issued to Employees,"
and related Interpretations. Accordingly, no compensation expense is
recognized for the company's stock options. Compensation expense
recognized for its employee restricted stock awards was $484,000 in
1996. The pro forma net income and earnings per share listed below
reflect the impact of measuring compensation expense for options granted
in 1995 and 1996 in accordance with the fair-value-based method
prescribed by Statement of Accounting Standards No. 123, "Accounting for
Stock-Based Compensation." These amounts may not be representative of
the effects on reported net income for future years as options vest over
a three-year period and generally additional awards are made each year.
1996 1995
Net income As reported $52,490 $43,212
Pro forma 51,453 42,735
Primary net income per As reported $ 3.24 $ 2.68
share Proforma 3.18 2.65
Fully diluted net As reported $ 3.07 $ 2.55
income per share Proforma 3.01 2.52
_______________________________________________________
The weighted-average fair value of options granted was $7.90 per share
in 1996 and $6.58 in 1995. This estimate was based on using the Black-
Scholes multiple option-pricing model with the following weighted-
average assumptions:
1996 1995
Dividend yield 2.36% 2.46%
Volatility 31.79% 31.79%
Risk-free interest rates 6.43% 6.35%
Expected lives in years 3.75 3.73
_________________________________________________
Options are granted to officers and other key employees at an exercise
price equal to the fair market value of the shares on the date of grant.
Options become exercisable at a rate of 50% one year, 75% two years and
100% three years after grant, and expire ten years after the date of
grant (five years for options prior to 1995). A summary of stock option
activity follows:
_____________ 1996_______ 1995______________1994
Number Weighted Number Weighted Number Weighted
of Average of Average of Average
Shares Price Shares Price Shares Price
(000) (000) (000)
Outstanding at
January 1 615 $21.69 549 $18.15 527 $12.79
Granted 263 28.81 247 24.38 246 24.48
Exercised (225) 19.14 (149) 13.39 (187) 11.04
Canceled (28) 23.20 (32) 20.40 (37) 20.00
Outstanding at
December 31 625 $25.54 615 $21.69 549 18.15
Options
exercisable
at December 31 206 $22.20 240 $18.42 216 $12.99
___________________________________
A summary of information regarding stock options outstanding December
31, 1996 follows:
___________ Options Outstanding Options
Exercisable
Weighted
Average Weighted Weighted
Number of Remaining Average Number of Average
Range of Exercise Shares Contractual Exercise Shares Exercise
Prices (000) Life Price (000) Price
$24.25-$28.81 576 7.67 $26.40 157 $24.32
$12.67-$16.08 49 1.12 $15.35 49 $15.35
___________________________________
The restricted stock award plan provides for awards of common stock to
executive officers subject to resale restrictions. The restrictions on
outstanding awards are scheduled to lapse upon the achievement of
certain performance objectives. The company awarded 91,000 and 88,000
shares in 1996 and 1995, respectively. For both
the stock options and restricted stock, as of December 31, 1996, 766,244
shares were available for future awards.
Under the Non-Employee Director Restricted Stock Plan, directors who are
not full-time employees of the company receive annual retainers
equivalent to $15,000 in shares of common stock with any fractioned
portion paid in cash. The shares are issued each year after the
company's annual meeting, are forfeitable if the director ceases to
remain a director until the company's next annual meeting, and may not
be sold for a period of five years, or until the director leaves the
board. As a group, non-employee directors received 4,080 shares in
1996.
Note J-SUBSEQUENT EVENT
On January 13, 1997 the company acquired Lime Crest Corporation. The
total purchase price for the stock was $12.8 million. The acquisition
will be accounted for as a purchase and, accordingly, the company's
consolidated financial statements will include the operating results
from the date acquired.
management's responsibility for financial reporting
The accompanying consolidated financial statements of Medusa Corporation
and subsidiaries have been prepared by management in conformity with
generally accepted accounting principles and, in the judgment of
management, present fairly and consistently the company's financial
position and results of operations. These statements by necessity
include amounts that are based on management's best estimates and
judgments and give due consideration to materiality.
The accounting systems and internal accounting controls of the company
are designed to provide reasonable assurance that the financial records
are reliable for preparing consolidated financial statements and
maintaining accountability for assets and that, in all material
respects, assets are safeguarded against loss from unauthorized use or
disposition. Qualified personnel throughout the organization maintain
and monitor these internal accounting controls on an ongoing basis.
Management continually monitors the system of internal control for
compliance. In addition, the company's internal auditor systematically
reviews the adequacy and effectiveness of the controls and reports
thereon.
The consolidated financial statements have been audited by Deloitte &
Touche LLP, independent auditors, whose report appears on this page.
The Audit Committee of the Board of Directors, composed solely of
outside directors, meets periodically with management, with the
company's internal auditor, and with the independent auditors to review
matters relating to the quality of financial reporting and internal
accounting control and the nature, extent and results of their audits.
The company's internal auditor and independent auditors have free access
to the Audit Committee.
Robert S. Evans, Chairman of the Board
R. Breck Denny, Vice President - Finance & Treasurer
Edward A. Doles, Corporate Controller
independent auditors' report
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF MEDUSA CORPORATION:
We have audited the accompanying consolidated balance sheets of Medusa
Corporation and subsidiaries (the "Company") as of December 31, 1996 and
1995 and the related consolidated statements of income, shareholders'
equity and of cash flows for each of the three years in the period ended
December 31, 1996. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion
on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of the Company at
December 31, 1996 and 1995 and the results of its operations and its
cash flows for each of the three years in the period ended December 31,
1996 in conformity with generally accepted accounting principles.
Deloitte & Touche, LLP
Deloitte & Touche, LLP
Cleveland Ohio
January 27, 1997
five-year summary of financial data Medusa Corporation and
Subsidiaries
As of and for the Year Ended December 31 1996 1995 1994 1993 1992
________________________________________________________________________
(In Thousands, except per
share data, percents and ratios)
Net sales $323,377 $293,327 $276,293 $248,038 $181,777
Operating profit 81,579 69,390 52,107 33,141 16,914
Net interest expense (2,519) (5,350) (6,264) (5,916) (3,989)
Miscellaneous 145 (193) (6) (500) 93
Income before provision for
taxes 79,205 63,847 45,837 26,725 13,018
Income taxes 24,945 20,635 15,957 8,526 3,941
Income before cumulative effect
of a change in accounting 54,260 43,212 29,880 18,199 9,077
Extraordinary item (1996),
Cumulative effect of a change
in accounting (1993) (1,770) - - 711 -
Net income $ 52,490 $ 43,212 $ 29,880 $ 18,910 $ 9,077
________________________________________________________________________
Income per common share:
Primary $3.35(A) $2.68 $1.81 $1.12(B) $.56
Fully diluted $3.17(A) $2.55 $1.76 $1.12(B) $.56
________________________________________________________________________
Average number of shares
outstanding 16,054 16,018 16,334 16,268 16,130
________________________________________________________________________
Other Financial Information
Capital expenditures $ 19,806 $ 25,345 $ 14,694 $ 15,372 $ 11,548
Payments for businesses
acquired - - - 50,511 -
Depreciation and amortization 14,253 15,448 13,830 13,958 12,703
Total assets 223,446 219,578 218,600 204,177 118,565
Interest-bearing debt 4,125 61,665 96,300 96,300 38,800
Shareholders' equity 153,970 95,548 59,973 51,477 34,974
Capital employed 158,095 157,213 156,273 147,777 73,774
Return on average capital
employed 33% 28% 20% 16%(C) 13%
Current ratio 2.6 2.8 1.5 3.2 2.5
Cash flow(D) $ 66,804$ 57,905 $ 45,873 $ 32,229 $ 21,974
%Cash flow to net sales 21% 20% 17% 13% 12%
________________________________________________________________________
(A)Excluding ($.11) primary, ($.10) fully diluted for extraordinary
charge from redemption of convertible subordinated notes.
(B)Excluding non-cash credit of $.04 per common share for cumulative
effect of a change in accounting for income taxes.
(C)Calculated on income after extraordinary item (1996) and before
cumulative effect of a change in accounting (1993).
(D)Income after extraordinary charge (1996) and before cumulative effect
of a change in accounting (1993) plus depreciation and amortization,
deferred income taxes, other non-cash charges or credits, and
incremental charge for postretirement health benefit costs.
management's discussion and analysis
RESULTS OF OPERATIONS
Year 1996 Compared With 1995
Net sales for the year ended December 31, 1996, increased to $323.4
million from $293.3 million in 1995. Cement net sales rose 11% over
last year as 6% unit volume increases and price increases implemented
April 1, 1996 and April 1, 1995, resulted in 5% higher cement prices
over 1995. U.S. cement demand in 1996 exceeded 1995's record levels.
Charlevoix, Clinchfield and Demopolis volume rose 7.9%, 7.3% and 6.5%,
respectively, while Wampum's volume was flat. These increases are
chiefly attributed to the record U.S. demand as it affected the
company's markets.
Aggregate's net sales for the year rose 6% over 1995 on 4% higher unit
volume and 2% price increases. Net sales at the company's highway and
safety construction operation rose 16% over 1995.
Cost of sales as a percent of sales fell to 62.2% in 1996 compared with
63.1% in 1995. The reduction was due primarily to increased cement
volumes and prices and continued high cement capacity utilization of
94% in 1996 compared to 95% in 1995. Fourth quarter 1996 cost of sales
were also reduced by favorable physical inventory adjustments of $1.4
million, principally from higher than estimated production realized at
three of four cement plants. However, a second quarter $1.2 million
one-time pretax charge, $.8 million after-tax, or $.04 per common
share, for the company's voluntary early retirement incentive program
negotiated at the Wampum plant and higher annual worker's compensation
costs partially offset the favorable impacts on cost of sales.
Depreciation and amortization expense decreased $1.1 million to $14.3
million from $15.4 million in 1995. Lower levels of capital
expenditures and the closure of Edinburg in 1995 which added $.9
million of depreciation that year account for the decrease.
Selling, general and administrative expense as a percent of sales
increased to 8.2% in 1996 from 8.0% in 1995. Higher salaries, wages,
related personnel costs, outside service costs, increased bad debt
expenses and other inflationary pressures caused this overall increase.
Operating profit for 1996 of $81.6 million compares with $69.4 million
in 1995. The improvement in operating results can be attributed to the
reasons discussed above.
Interest expense of $3.7 million decreased $3.9 million from $7.6
million in 1995 resulting from both the payment of $35.0 million of
10% unsecured Senior Notes on December 15, 1995 and the conversion of
the 6% convertible subordinated notes on December 2, 1996. Interest
income decreased $1.1 million resulting from lower average cash and
short-term investment balances as well as lower overall interest rates.
The company's effective tax rate of 31.5% for 1996 was lower than the
federal statutory rate of 35% and the 32.3% in 1995 principally due to
a higher percentage depletion deduction and lower effective state tax
rates.
Per share amounts are all presented on a fully diluted basis, and for
1996, after the extraordinary charge. Net income for 1996 of $52.5
million, or $3.07 per common share, compares with a net income of $43.2
million, or $2.55 per common share, in 1995.
Environmental Matters
In common with other producers engaged in similar operations, the
company is subject to a wide range of federal, state and local
environmental laws and regulations pertaining to air and water quality,
as well as the handling, treatment, storage, and disposal of waste
materials. Compliance with increasingly stringent standards has
resulted in higher expenditures for both capital improvements and
operating costs. The company's policies stress environmental
responsibility and regulatory compliance. The company has recorded
current and long-term accruals to reflect its environmental obligations,
based on current information. Subject to the three specific matters
discussed below, management does not anticipate that regulatory
compliance will have a material adverse effect on its results of
operations, financial condition or liquidity.
The U.S. Environmental Protection Agency ("EPA") held a public meeting
on April 26, 1996 concerning regulation of Cement Kiln Dust ("CKD").
Collected in air pollution control devices, CKD is a by-product of
cement manufacturing and is usually stored at plant sites. A 1980
amendment to the Resource Conservation and Recovery Act ("RCRA")
exempted CKD from regulation as a hazardous waste (the so-called "Bevill
Amendment"). Until new regulations become enforceable and "Tailored
Management Standards" are set, CKD will remain exempt under the Bevill
Amendment as a low toxicity/high volume waste. Notice of new proposed
rulemaking is expected from the EPA in November, 1997. The proposal is
expected to provide a "Conditional Exclusion" under the Tailored
Management Standards for CKD, in lieu of more stringent "Management
Standards" under Subtitle C of RCRA. Under the Tailored Management
Standards, CKD would retain its Bevill status, while CKD not so managed
would be classed a hazardous waste subject to Subtitle C requirements of
RCRA. Through trade associations, Medusa and others in the industry,
are urging EPA to allow the states to continue to regulate CKD. The
company has concluded preliminarily that CKD regulation is unlikely to
have a material effect on the operations of the Demopolis, Alabama,
Clinchfield, Georgia or the Wampum, Pennsylvania plants. With respect
to the Charlevoix, Michigan plant, the company is presently working with
a consultant and the Michigan Department of Environmental Quality
("MDEQ") on the design and licensing of an on-site CKD monofill and
evaluating use of alternate raw materials to reduce CKD generation. Due
to the size and importance of the Charlevoix plant to the company's
overall operations and the uncertainty of final CKD rulemaking,
management is currently unable to conclude whether or not new CKD
regulation is likely to have a material effect on the company's
operations, financial condition or liquidity.
On June 21, 1991, a release of #2 fuel oil occurred at the Charlevoix
plant. The company immediately filed a report with MDEQ. The matter
was thoroughly investigated by MDEQ. Under the supervision of MDEQ, the
company immediately took measures, to preclude migration of the oil to
surface water and beyond plant boundaries. Data now available indicates
such measures are effectively precluding migration. The company
regularly submits detailed reports to MDEQ concerning the status of
affected areas. The company has retained an environmental consultant to
assist in remediation of the oil release. In December, 1993 the company
established a $1.4 million contingent liability on its books. The
charge represents management's current estimate of remediation costs.
As additional information becomes available, changes in the estimate of
the liability may be required. The company will continue to examine
remediation alternative at the site, none of which are now expected to
have a material effect on the company's results of operations, financial
condition or liquidity.
At the company's Wampum plant, kiln stack opacity is measured by
continuous opacity monitors ("COM's"). Because the plant burns waste-
derived liquid fuel ("WDLF"), the Pennsylvania Department of
Environmental Protection ("PaDEP") requires penalty payments for
exceedences from main stack opacity standards. Data recorded by the
COM's is sent to PaDEP quarterly and a penalty obligation is incurred
according to PaDEP policy. Whenever a COM reading exceeds an opacity
policy limit, WDLF burning ceases. Recently, the state required a COM
on the gravel bed filter stack (a device which removes dust from clinker
cooler vent gas). Such COM addition increased the company's opacity
penalties. On January 11, 1996, the company met with PaDEP to discuss
the causes of opacity excursions from the main stack and the gravel bed
stack. The company indicated that modifications would be made to
clinker coolers #1 & #2 during the annual maintenance shut down. The
company expects such will result in a reduction in clinker cooler vent
volume and opacity exceedances from the gravel bed filter. By
agreement, penalties were held in abeyance pending results of the
modifications. After the modifications, the second quarter, 1996
exceedences dropped significantly. Although, for a 12-month period of
1995 - 1996, the penalties were greater than $175,000, such penalties
were compromised at $94,000. On January 7, 1997 PaDEP notified the
company that third quarter, 1996 penalties were $23,000, but stated that
it was unable to accept any penalty payment due to EPA oversight.
Management is currently unable to conclude whether PaDEP or EPA
regulation of opacity from Wampum plant emission sources is likely to
have a material effect on the company's results of operations, financial
condition or liquidity.
RESULTS OF OPERATIONS
Year 1995 Compared With 1994
Net sales for the year ended December 31, 1995, increased to $293.3
million from $276.3 million in 1994. Cement net sales rose 7% over
last year. While cement unit volume for the period decreased by 3.5%,
price increases implemented April 1, 1995, August 1, 1994, and April 1,
1994, resulted in 12% higher cement prices over 1994. U.S. demand in
1995 approximated the record levels of 1994. Wampum, Charlevoix and
Demopolis volume fell 5.5%, 4.6% and 4.9%, respectively, while
Clinchfield rose 2.8%. These declines are chiefly attributed to
competition from higher levels of cement imports, heavy mid-season
rains and early winter conditions in the fourth quarter, low year end
1994 inventory levels restricting sales particularly early in the year,
and the company's maintenance of prices in lieu of volume.
Aggregate's sales from comparable operations for the year rose 1% over
1994 on 1% higher selling prices and flat unit volume. Sales from a
closed operation were $.4 million in 1995 and $1.6 million in 1994. In
addition, the period reflected 9% higher sales for the company's
highway and safety construction operation.
In August 1995, the company closed its Edinburg, Pennsylvania sand and
gravel facility which was experiencing continued operating losses. The
facility contributed less than one-half of one percent to 1994
consolidated sales. A charge of $1.3 million, or $.05 per fully
diluted share, was incurred to reflect the cost of the closing. The
net book value of the facility, less proceeds anticipated from asset
sales, is recorded as additional depreciation expense of $.9 million.
Other closing costs are recorded as additional cost of sales of $.4
million.
Cost of sales as a percent of sales fell to 63.1% in 1995 compared with
68.4% in 1994. The reduction was due primarily to increased cement
prices and improved cement capacity utilization of 95% in 1995 from 91%
in 1994. The fourth quarter 1995 settlement of insurance claims
reduced cost of sales by $1.5 million. Fourth quarter 1995 cost of
sales were also reduced by favorable physical inventory adjustments of
$1.5 million, principally from higher than estimated production
realized at Charlevoix, and favorable adjustments for lower than
estimated maintenance and stripping costs at the aggregates quarries.
Increased kiln fuel cost and inflationary pressure on labor and fringes
partially offset the favorable impacts on cost of sales.
Depreciation and amortization expense increased $1.6 million from $13.8
million in 1994. The increase was due to the Edinburg closure as well
as higher levels of capital expenditures in 1995 and 1994.
Selling, general and administrative expense as a percent of sales
increased to 8.0% in 1995 from 7.7% in 1994. Higher salaries, wages,
related personnel costs, outside service costs and other inflationary
pressures caused this overall increase.
Operating profit for 1995 of $69.4 million compares with $52.1 million
in 1994. The improvement in operating results can be attributed to the
reasons discussed above.
Interest income increased by $963,000 for 1995 compared with 1994, due
to higher levels of cash and short-term investments. Interest expense
was approximately the same for both periods.
The company's effective tax rate of 32.3% for 1995 was lower than the
federal statutory rate of 35% and the 34.8% in 1994 principally due to
a higher percentage depletion deduction and lower effective state tax
rates.
Per share amounts are all presented on a fully diluted basis. Net
income for 1995 of $43.2 million, or $2.55 per common share, compares
with a net income of $29.9 million, or $1.76 per common share, in 1994.
Liquidity and Capital Resources
At December 31, 1996, the company had $25.0 million of cash and short-
term investments. The company has available an unsecured $65.0 million
five-year revolving credit facility for short-term working capital
needs that expires December 31, 2001, and unsecured bank lines of
credit totaling $20.0 million. At December 31, 1996, no amounts were
outstanding under any of these facilities.
Working capital at December 31, 1996, decreased $1.7 million from
December 31, 1995, due principally higher levels of accrued incentive
compensation, accrued insurance and accounts payable. Increases in
receivable and inventory balances were nearly offset by $8.1 million
less in cash balances which is directly related to the $30.9 million
payment on redemption of the convertible notes in December 1996. The
increases in the asset and liability accounts are related to the
increases in profits and general business activities of the business.
The ratio of current assets to current liabilities was 2.6:1 at
December 31, 1996, and 2.8:1 at December 31, 1995.
Capital expenditures for 1996 were $19.8 million compared with $25.3
million for 1995. The continued high level of expenditures relate
primarily to capital improvements to maintain our facilities current
capacities, enhance productivity and reduce operating costs and are
only limited by our ability to complete the work in a productive and
efficient manner.
Due to a strong balance sheet and cash flow from operations, strength
of the company's markets and a commitment to enhancing ongoing
shareholder value, the company raised the quarterly dividend from 12
cents to 15 cents, effective with the first quarter 1996. This
represents a 25% increase and was the second increase in dividend rates
in just over two years.
The company's Board of Directors has authorized the purchase of
outstanding shares, under which the company, in its discretion makes
open market purchases from time-to-time. The company purchased 441,000
shares for $13.6 million during 1996. The company intends to continue
this program in 1997 as conditions warrant.
U.S. cement consumption hit record levels for the third consecutive year
in 1996 as the construction sector posted moderate gains during the
year. Cement imports were down modestly in 1996 from 1995 levels and
are expected to drop again in 1997. The company expects its plants will
continue to run full out in 1997 to meet continued strong demand.
Reflecting these favorable trends the company has announced up to a
$4.00 per ton price increase in all its markets effective April 1, 1997.
QUARTERLY RESULTS (UNAUDITED)
Summarized quarterly financial results for 1996 and 1995 appear in the
table below (in thousands, except per share amounts):
Net
Net Gross Income Earnings Per Share
Sales Profit (Loss) Primary Fully Dilluted
1996
1st $ 45,073 $ 7,999 $ 1,192 $ .07 $ (a)
2nd 85,995 29,489 14,969 .93 .87
3rd 109,295 39,259 22,094 1.38 1.27
4th 83,014 31,378 14,235(b) .87(b) .84(b)
$323,377 $108,125 $ 52,490(b) $ 3.24(b) $ 3.07(b)
_________________________________________________________________
Net
Net Gross Income Earnings Per Share
Sales Profit (Loss) Primary Fully Dilluted
1995
1st 45,620 $ 6,811 $ (303) $ (.02) $ (a)
2nd 80,165 26,768 12,696 .79 .74
3rd 94,827 32,074 16,373 1.01 .95
4th 72,715 27,922 14,446 .89 .84
$293,327 $ 93,575 $ 43,212 $ 2.68 $ 2.55
_________________________________________________________________
(a) Anti-dilutive
(b) After an extraordinary charge, net of income taxes, of $1,770
or, $(.11) and $(.10) primary and fully dilluted per share,
respectively.
MARKET AND DIVIDEND INFORMATION-COMMON SHARES
New York Stock Exchange Composite Price Per Share Dividends Per Share
1996 1995 1996 1995
High Low High Low
1st 311/4 251/4 26 213/8 $ .15 $ .125
2nd 311/4 281/4 257/8 221/4 .15 .125
3rd 325/8 271/4 285/8 245/8 .15 .125
4th 351/8 305/8 281/4 231/8 .15 .125
$ .60 $ .500
______________________________________________________________________
At December 31, 1996 there were approximately 4,486 holders of record of Medusa
common shares.