THE
MONARCH
CEMENT COMPANY
1998 ANNUAL REPORT
March 12, 1999
ANNUAL REPORT TO STOCKHOLDERS
Consolidated net sales for 1998 exceeded $99 million, an 8% increase over
1997 net sales. In order to achieve this record level of sales, the Company
supplemented its production by purchasing clinker from foreign markets.
Higher costs associated with cement produced from purchased clinker increased
the Company's cost of sales by 11% and reduced its gross profit margin to 21%
of net sales for the year 1998 as compared to 23% for 1997.
Passage of the Federal Transportation Equity Act for the 21st Century
(TEA-21) creates an opportunity for the Company to further increase sales.
This Act establishes a program which, for the first time, guarantees a minimum
funding level for highway programs of $167 billion over the next six years.
This is a 40% increase over funding levels of the previous transportation bill
(ISTEA) passed in 1991. With the potential for increased demand for cement,
production capacity becomes an important factor in determining sales volume.
In order to increase capacity, it is necessary to invest substantial sums to
modernize and improve the efficiency of the specialized machinery and
equipment used in the manufacture of cement.
Monarch has basically been in a sold-out position for the last five
years. In 1994, Monarch began supplementing its production through the
purchase of clinker and cement. At the same time, the Company implemented
plans to increase production capacity primarily by modifying current equipment
to take advantage of new technology. Advanced computerization also allowed
the Company to scientifically monitor its production processes thereby
increasing efficiency and output. As these improvements came on line, the
Company was able to produce enough to satisfy its customers' needs. During
1998, demand increased to the point where the Company once again purchased
clinker to supplement production, thus prompting management to further
evaluate ways to increase capacity.
Additional modernization completed on two of Monarch's cement kilns in
1998 increased annual rated capacity to 725,000 tons. In order to meet the
anticipated increase in demand due to the passage of TEA-21, the Company plans
to further increase plant capacity through equipment purchases and the
addition of precalciners to each of its preheater kilns. It is anticipated
that the first of these precalciners will be operational in the year 2001 and
the second one by the end of the year 2002. When completed, production
capacity will approach one million tons per year. Monarch plans to finance
these investments from internally generated funds.
We wish to acknowledge our Heavenly Father for the Company's strong
balance sheet and financial position which enables us to make these capital
investments to meet the future challenges of the industry. We express our
appreciation to our employees for their hard work and determination and to our
customers for their loyalty. We also wish to thank you, our stockholders, for
your continued support and invite you to attend your corporation's annual
meeting to be held at 2:00 p.m. on April 14, 1999 in the corporate office,
Humboldt, Kansas.
WALTER H. WULF WALTER H. WULF, JR.
Chairman of the Board President and Vice Chairman of the Board
THE MONARCH CEMENT COMPANY AND SUBSIDIARIES
SELECTED FINANCIAL DATA
FOR THE FIVE YEARS ENDED DECEMBER 31, 1998
(Dollar amounts in thousands except per share data)
1998 1997 1996 1995 1994
Net sales . . . . . . . . . . $99,495 $91,820 $86,733 $81,667 $73,646
Net income. . . . . . . . . . $ 9,653 $10,103 $10,546 $ 7,673 $ 3,998
Net income per share. . . . . $2.30 $2.40 $2.50 $1.81 $.94
Total assets. . . . . . . . . $84,882 $76,233 $68,648 $59,783 $52,522
Long-term obligations . . . . $ - $ - $ - $ - $ -
Cash dividends declared
per share . . . . . . . . . $.68 $.60 $.52 $.46 $.44
Stockholders' investment
per share . . . . . . . . . $15.35 $13.68 $11.73 $9.68 $8.11
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Liquidity
At December 31, 1998, current assets of The Monarch Cement Company and
Subsidiaries (the Company) exceeded current liabilities by $39,909,458
resulting in a current ratio of 5.59 to 1. The Company's cash needs in 1998
were satisfied by cash generated from operations and internal funds. The
amount of cash and short term investments decreased during 1998. The Company
does not currently have an established line of credit with a bank; however,
the Company believes its capital resources are adequate to meet its current
capital expenditure requirements and liquidity needs.
Capital Resources
During 1998, the Company invested $9,519,155 in property, plant and
equipment. The Company regularly has capital expenditures of $5,000,000 to
$6,000,000 per year in keeping its equipment and facilities in good operating
condition. Due to recent and projected market demands, the Company has been
aggressively updating its equipment to improve efficiency and increase
capacity. As a result, the Company's 1998 expenditures exceeded the amount
normally spent on capital expenditures. The Company plans further
improvements to two of its cement kilns, additional computerization of its
cement manufacturing processes and miscellaneous equipment purchases and
facility improvements in both the cement and ready-mixed concrete segments in
1999. It is expected that the Company's capital expenditures will approximate
$10,000,000 during 1999 and that the funds for these projects will be provided
from internal sources.
At the regular meeting of the Board of Directors held on December 13,
1996, the Board authorized management from time to time to purchase shares of
Monarch stock, up to a maximum amount of 400,000 shares. These purchases may
be either Capital Stock or Class B Capital Stock and are to be acquired on
such terms and at such times as management considers appropriate. Funds for
these purchases would be provided from internal sources. During 1997 and
1998, the Company purchased 48,894 shares of Monarch stock.
Results of Operations
General--For the last three years, demand for cement in the Company's
market has been excellent. During this period, the Company sold the entire
cement production capacity of its Humboldt plant. Plant modifications
completed in recent years increased the production capacity of the Humboldt
plant and improved its efficiency. These favorable market conditions and the
Company's increased production capacity are the primary factors that have led
to the Company's improved profitability over that experienced in 1995 and
1994.
The Company's ready-mixed concrete operations experienced an increase in
profitability during 1998 primarily as a result of an improvement in ready-
mixed concrete prices. During 1997 and 1996, the segment was adversely
affected by a slight decline in prices for ready-mixed concrete and by
increasing costs of labor and supplies. These factors vary from local market
to local market and from year to year, and no one factor or local market
accounts for the change in profitability during the three-year period.
1998 Compared to 1997--The Company's 1998 net sales increased
approximately 8% primarily as a result of an increase in the volume of cement
sold and a slight increase in the product prices.
The Company's cost of sales increased 11% for 1998 as compared to 1997.
Modernization of one of the cement kilns and major maintenance on related
equipment reduced the Company's clinker production during the second quarter
of 1998. To help offset the reduction in clinker produced and to meet the
anticipated demand for cement, the Company purchased additional clinker from
foreign markets. Higher costs associated with cement produced from purchased
clinker increased the Company's cost of sales and reduced its gross profit
margin to 21% for 1998 as compared to 23% for 1997. Although purchased
clinker reduced the Company's gross profit margin, such purchases enabled the
Company to meet the service demands of its customer base in both the cement
and ready-mixed concrete markets.
The decrease in "Other, net" during 1998 as compared to 1997 was due
primarily to the sale of investment securities in 1997.
1997 Compared to 1996--The Company's 1997 net sales increased
approximately 6% as compared to 1996 due primarily to increased prices for
cement.
The 10% increase in cost of sales for 1997 as compared to 1996 is
primarily due to a significant increase in maintenance costs at the cement
plant in Humboldt. During the first quarter of 1997, the Company performed
significant preventive maintenance on each of its three cement kilns, as well
as other major pieces of equipment. Cost of sales also increased because of
increased volume and costs in the ready-mixed concrete and sundry building
materials segment, as mentioned above. As a result of these factors, the
Company's gross profit from operations for the year 1997 declined to 23% of
net sales as compared to 26% for 1996.
The increase in "Other, net" during 1997 as compared to 1996 was due
primarily to the sale of investment securities.
Year 2000--As has been widely publicized, there is widespread concern in
the U.S. economy and elsewhere that computer systems and applications,
including those imbedded in equipment and facilities, that use only two digits
to identify years may create problems when the year 2000 arrives. Any of the
Company's computer systems or plant equipment systems that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the year
2000. This could result in a system failure or miscalculation, causing a
disruption of operations.
The Company has completed its assessment of Year 2000 issues relative to
information technology (IT) and non-IT computer hardware, software, and
operating systems. The Company primarily relied upon a qualified and
experienced external resource to inventory, test for Year 2000 compliance, and
prepare detailed recommended solutions on any non-compliant hardware or
software systems. The recommended solutions have been presented to and
assessed by the Company's Year 2000 management team and it has been determined
that the costs of addressing the Year 2000 compliance issues will not be
material to the Company's business, operations or financial condition. This
assessment was based upon the fact that 93% of the Company's computer hardware
is Year 2000 compliant, 86% of its operating systems are compliant and 86% of
its computer software is compliant.
Through a combination of equipment replacement and periodic software
updates required through maintenance agreements, the Company expects to have
all significant systems in compliance by the year 2000. Replacements of non-
compliant hardware systems with new systems will be capitalized and amortized
over the life of the new systems. The cost of annual software maintenance
agreements, which include Year 2000 compliant upgrades, will be expensed as
incurred. The Company's primary accounting and management information systems
were Year 2000 compliant at the end of 1998. The Company does not anticipate
any material disruptions in its operations as a result of any failure by the
Company to be in compliance.
The Company is dependent upon numerous third parties including customers,
power generators, financial institutions and other significant suppliers. The
Company has no control over these third parties systems and potential Year
2000 IT and non-IT system problems. The Company intends to inquire of third
parties and seek guidance as to their state of readiness. However, there can
be no assurance that the Company can avoid disruptions of supplies and
services from its suppliers or purchases by its major customers in the event
that these entities encounter unforeseen Year 2000 problems, any of which
could have a material adverse effect on the Company's business, operations or
financial condition. The Company is not aware of any material risks
associated with these other entities.
Forward-Looking Statements--Certain statements under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and elsewhere in this Annual Report and Form 10-K report filed
with the Securities and Exchange Commission, constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements involve known and unknown risks,
uncertainties, and other factors that may affect the actual results,
performance or achievements expressed or implied by such forward-looking
statements. Such factors include, among others: general economic and business
conditions; competition; raw material and other operating costs; costs of
capital equipment; changes in business strategy or expansion plans; and demand
for the Company's products.
Inflation--Inflation directly affects the Company's operating costs. The
manufacture of cement requires the use of a significant amount of energy. The
price of energy, as well as the prices of the specialized replacement parts
and equipment the Company must continually purchase, tend to increase directly
with the rate of inflation causing manufacturing costs to increase. The
manufacture of cement requires a significant investment in property, plant and
equipment and a trained work force to operate and maintain this equipment.
These costs do not materially vary with the level of production. As a result,
by operating at or near capacity, regardless of demand, companies can reduce
per unit production costs. The continual need to control production costs
encourages overproduction during periods of reduced demand.
DESCRIPTION OF THE BUSINESS
The Monarch Cement Company (Monarch) was organized as a corporation under
the laws of the State of Kansas in 1913 and has been principally engaged,
throughout its history, in the manufacture and sale of portland cement.
The manufacture of portland cement by Monarch involves the quarrying of
clay and limestone and the crushing, drying and blending of these raw
materials into the proper chemical ratio. The raw materials are then heated
in kilns to 2800o Fahrenheit at which time chemical reactions occur forming a
new compound called clinker. After the addition of a small amount of gypsum,
the clinker is ground into a very fine powder which is known as portland
cement. The term "portland cement" is not a brand name but is a term that
distinguishes cement manufactured by this chemical process from natural
cement, which is no longer widely used. Portland cement is the basic material
used in the production of ready-mixed concrete which is used in highway,
bridge and building construction where strength and durability are primary
requirements.
The Company is also in the ready-mixed concrete, concrete products and
sundry building materials business. Ready-mixed concrete is manufactured by
combining aggregates with portland cement, water and chemical admixtures in
batch plants. It is then loaded into mixer trucks and mixed in transit to the
construction site where it is placed by the contractor.
The following table sets forth for the last three fiscal years the dollar
amount of sales to unaffiliated customers, intersegment sales, operating
profit and identifiable assets contributed by Industry Segment A (cement
manufacturing) and Industry Segment B (ready-mixed concrete and sundry
building materials):
1998 1997 1996
(In Thousands)
Sales to Unaffiliated Customers-
Industry: Segment A $43,726 $39,539 $36,838
Segment B 55,769 52,281 49,895
Intersegment Sales-
Industry: Segment A 8,191 8,868 10,764
Segment B 408 263 236
Operating Profit-
Industry: Segment A 12,019 12,943 13,665
Segment B 2,401 1,176 1,773
Identifiable Assets-
Industry: Segment A 33,621 28,425 27,254
Segment B 20,064 16,400 15,656
<FN>
All of the Company's operations and sales are in one geographic area.
LINES OF BUSINESS
The Company is engaged in the manufacture and sale of the principal types
of portland cement and ready-mixed concrete and sundry building materials.
The portland cement products are sold under the "MONARCH" brand name.
The marketing area for Monarch's products, which is limited by the
relatively high cost of transporting cement, consists primarily of the State
of Kansas, the State of Iowa, southeast Nebraska, western Missouri, northwest
Arkansas and northern Oklahoma. Included within this area are the
metropolitan markets of Des Moines, Iowa; Kansas City, Missouri; Springfield,
Missouri; Wichita, Kansas; Omaha, Nebraska; Lincoln, Nebraska and Tulsa,
Oklahoma. Sales are made primarily to contractors, ready-mixed concrete
plants, concrete products plants, building materials dealers and governmental
agencies. Companies controlled by Monarch sell ready-mixed concrete, concrete
products and sundry building materials in metropolitan areas within Monarch's
primary market. Monarch cement is delivered either in bulk or in paper bags.
The cement is distributed both by truck and rail, either common or private
carrier.
The following table sets forth for the last three fiscal years of the
Company the percentage of total sales contributed (1) by the manufacture and
sale of portland cement and (2) by the sale of ready-mixed concrete and sundry
building materials:
Total Sales
December 31,
1998 1997 1996
Portland Cement . . . . . . . . . 43.9% 43.1% 42.5%
Ready-Mixed Concrete and
Sundry Building Materials . . . 56.1% 56.9% 57.5%
100.0% 100.0% 100.0%
STOCK MARKET AND DIVIDEND DATA
On March 1, 1999, Monarch's stock was held by approximately 700 record
holders. Monarch is the transfer agent for Monarch's stock which is traded on
the over-the-counter market. Over-the-counter market quotations reflect
interdealer prices, without retail mark-up, mark-down or commission and may
not necessarily represent actual transactions. Following is a schedule of the
range of high and low bid quotations of Monarch's stock as reported by
Fahnestock & Co. Inc. and dividends declared for each quarter of its two
latest fiscal years:
1998 1997
Price Dividends Price Dividends
Quarter Low High Declared Low High Declared
First $20.75 $27.00 $ - $15.00 $17.50 $ -
Second $25.25 $29.00 $.16 $17.50 $20.00 $.14
Third $23.00 $29.00 $.16 $19.75 $22.00 $.14
Fourth $21.00 $25.25 $.36* $20.50 $25.00 $.32*
<FN>
*Reflects declaration of two $.18 and $.16 dividends payable in the
first quarter of 1999 and 1998, respectively.
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
The Monarch Cement Company:
We have audited the accompanying consolidated balance sheets of The Monarch
Cement Company (a Kansas corporation) and Subsidiaries as of December 31, 1998
and 1997, and the related consolidated statements of income, comprehensive
income, stockholders' investment and cash flows for each of the three years in
the period ended December 31, 1998. 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, the financial statements referred to above present fairly, in
all material respects, the financial position of The Monarch Cement Company
and Subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
Kansas City, Missouri,
February 12, 1999
TABLE
THE MONARCH CEMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 AND 1997
ASSETS 1 9 9 8 1 9 9 7
CURRENT ASSETS:
Cash and cash equivalents $ 4,254,795 $ 4,093,317
Short term investments, at cost which
approximates market 19,622,255 20,930,123
Receivables, less allowances of $412,000 in 1998
and $447,000 in 1997 for doubtful accounts 10,762,210 7,972,699
Inventories, priced at cost which is not in
excess of market-
Cost determined by last-in, first-out method-
Finished cement $ 1,634,302 $ 1,168,177
Work in process 1,703,942 316,370
Building products 1,184,358 1,127,182
Cost determined by first-in, first-out method-
Fuel, gypsum, paper sacks and other 1,899,440 1,318,911
Cost determined by average method-
Operating and maintenance supplies 7,082,948 7,375,598
Total inventories $13,504,990 $11,306,238
Refundable federal and state income taxes 14,051 221,072
Deferred income taxes 410,000 415,000
Prepaid expenses 45,284 27,921
Total current assets $48,613,585 $44,966,370
PROPERTY, PLANT AND EQUIPMENT, at cost, less
accumulated depreciation and depletion of
$79,239,388 in 1998 and $74,556,421 in 1997 29,372,287 25,517,772
DEFERRED INCOME TAXES 1,390,000 1,810,000
OTHER ASSETS 5,506,149 3,938,890
$84,882,021 $76,233,032
LIABILITIES AND STOCKHOLDERS' INVESTMENT
CURRENT LIABILITIES:
Accounts payable $ 4,640,205 $ 3,518,686
Accrued liabilities-
Federal and state income taxes 951,809 274,450
Dividends 1,503,984 1,349,029
Compensation 824,709 704,425
Miscellaneous taxes 418,609 342,454
Other 364,811 194,051
Total current liabilities $ 8,704,127 $ 6,383,095
ACCRUED POSTRETIREMENT BENEFITS 9,620,253 9,838,905
ACCRUED PENSION EXPENSE 50,276 321,184
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 2,371,601 2,004,424
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' INVESTMENT:
Capital Stock, par value $2.50 per share-
Authorized 10,000,000 shares, Issued
2,290,049 shares at December 31, 1998
and 2,292,891 shares at December 31, 1997 $ 5,725,123 $ 5,732,227
Class B Capital Stock, par value $2.50 per
share-Authorized 10,000,000 shares, Issued
1,887,347 shares at December 31, 1998 and
1,922,823 shares at December 31, 1997 4,718,367 4,807,058
Retained Earnings 51,492,274 45,486,139
$61,935,764 $56,025,424
Plus: Unrealized holding gain 2,200,000 1,660,000
Total stockholders' investment $64,135,764 $57,685,424
$84,882,021 $76,233,032
<FN>
The accompanying notes are an integral part of these consolidated balance sheets.
THE MONARCH CEMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1 9 9 8 1 9 9 7 1 9 9 6
NET SALES $99,494,758 $91,819,836 $86,732,555
COST OF SALES 78,349,584 70,781,950 64,095,481
Gross profit from operations $21,145,174 $21,037,886 $22,637,074
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 6,725,013 6,919,368 7,198,992
Income from operations $14,420,161 $14,118,518 $15,438,082
OTHER INCOME (EXPENSE):
Interest income $ 1,222,052 $ 1,057,501 $ 792,065
Other, net (389,405) 727,446 295,511
$ 832,647 $ 1,784,947 $ 1,087,576
INCOME BEFORE PROVISION FOR INCOME TAXES $15,252,808 $15,903,465 $16,525,658
PR0VISION FOR INCOME TAXES 5,600,000 5,800,000 5,980,000
NET INCOME $ 9,652,808 $10,103,465 $10,545,658
Basic earnings per share $2.30 $2.40 $2.50
<FN>
The accompanying notes are an integral part of these consolidated statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1 9 9 8 1 9 9 7 1 9 9 6
NET INCOME $ 9,652,808 $10,103,465 $10,545,658
UNREALIZED APPRECIATION ON AVAILABLE
FOR SALE SECURITIES (Net of deferred tax
expense of $350,000, $450,000 and $240,000
for 1998, 1997 and 1996, respectively) 540,000 684,000 357,000
COMPREHENSIVE INCOME $10,192,808 $10,787,465 $10,902,658
<FN>
The accompanying notes are an integral part of these consolidated statements.
THE MONARCH CEMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
Class B Unrealized Stock-
Capital Capital Retained Treasury Holding holders'
Stock Stock Earnings Stock Gain Investment
Balance at 1-1-96 $5,464,672 $5,133,553 $29,806,550 $ - $ 619,000 $41,023,775
Net income - - 10,545,658 - - 10,545,658
Cash dividends
($.52 per share) - - (2,196,190) - - (2,196,190)
Transfer of shares 145,168 (145,168) - - - -
Purchase of
treasury stock - - - (149,504) - (149,504)
Retirement of
treasury stock (32,500) - (117,004) 149,504 - -
Unrealized holding gain - - - - 357,000 357,000
Balance at 12-31-96 $5,577,340 $4,988,385 $38,039,014 $ - $ 976,000 $49,580,739
Net income - - 10,103,465 - - 10,103,465
Cash dividends
($.60 per share) - - (2,529,428) - - (2,529,428)
Transfer of shares 181,327 (181,327) - - - -
Purchase of
treasury stock - - - (153,352) - (153,352)
Retirement of
treasury stock (26,440) - (126,912) 153,352 - -
Unrealized holding gain - - - - 684,000 684,000
Balance at 12-31-97 $5,732,227 $4,807,058 $45,486,139 $ - $1,660,000 $57,685,424
Net income - - 9,652,808 - - 9,652,808
Cash dividends
($.68 per share) - - (2,849,221) - - (2,849,221)
Transfer of shares 88,691 (88,691) - - - -
Purchase of
treasury stock - - - (893,247) - (893,247)
Retirement of
treasury stock (95,795) - (797,452) 893,247 - -
Unrealized holding gain - - - - 540,000 540,000
Balance at 12-31-98 $5,725,123 $4,718,367 $51,492,274 $ - $2,200,000 $64,135,764
<FN>
The accompanying notes are an integral part of these consolidated statements.
THE MONARCH CEMENT COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
1 9 9 8 1 9 9 7 1 9 9 6
OPERATING ACTIVITIES:
Net income $ 9,652,808 $ 10,103,465 $ 10,545,658
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and depletion 5,564,672 4,991,992 4,702,070
Gain on disposal of assets (119,398) (246,799) (263,133)
Realized gain on sale of other investments - (840,820) (314,963)
Change in assets and liabilities:
Receivables, net (2,789,511) 587,538 (424,468)
Inventories (2,198,752) (581,154) 153,103
Refundable federal and state income taxes 207,021 89,661 (193,762)
Deferred income taxes, current 5,000 35,000 (30,000)
Prepaid expenses (17,363) (2,479) 11,404
Deferred income taxes, long-term 420,000 540,000 60,000
Long-term notes receivable (750) 11,956 31,084
Accounts payable, notes payable
and accrued liabilities 2,166,077 (466,623) (121,707)
Accrued postretirement expense (218,652) 25,336 98,770
Accrued pension expense (270,908) (69,051) (62,464)
Minority interest in earnings of subsidiaries 558,627 453,039 466,758
Net cash provided by operating activities $ 12,958,871 $ 14,631,061 $ 14,658,350
INVESTING ACTIVITIES:
Acquisition of property, plant and equipment $ (9,519,155) $ (6,494,536) $ (6,017,716)
Net purchases of subsidiaries' stock - (1,029,410) -
Proceeds from disposals of property,
plant and equipment 219,366 419,956 507,647
Payment for purchases of equity investments (517 939) - (160,762)
Proceeds from disposals of equity investments - 1,366,291 877,379
Increase in other assets (508,570) (517,091) (245,265)
(Increase) decrease in short term investments, net 1,307,868 (4,826,402) (9,030,275)
Net cash used for investing activities $ (9,018,430) $(11,081,192) $(14,068,992)
FINANCING ACTIVITIES:
Subsidiaries' dividends paid to minority interest $ (191,450) $ (173,746) $ (238,698)
Cash dividends (2,694,266) (2,362,279) (2,030,179)
Subsidiaries' purchase of treasury stock - (9,420) -
Purchase of treasury stock (893,247) (153,352) (149,504)
Net cash used for financing activities $ (3,778,963) $ (2,698,797) $ (2,418,381)
Net Increase (Decrease) in Cash and Cash Equivalents $ 161,478 $ 851,072 $ (1,829,023)
Cash and Cash Equivalents, beginning of year 4,093,317 3,242,245 5,071,268
Cash and Cash Equivalents, end of year $ 4,254,795 $ 4,093,317 $ 3,242,245
<FN>
The accompanying notes are an integral part of these consolidated statements.
THE MONARCH CEMENT COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998, 1997 AND 1996
(1) SUMMARY OF ACCOUNTING POLICIES
(a) Description of Business--The Monarch Cement Company (Monarch) has been
principally engaged, throughout its history, in the manufacture and sale of
portland cement. The marketing area for Monarch's products consists primarily
of the State of Kansas, the State of Iowa, southeast Nebraska, western
Missouri, northwest Arkansas and northern Oklahoma. Sales are made primarily
to contractors, ready-mixed concrete plants, concrete products plants,
building materials dealers and governmental agencies. Companies controlled by
Monarch sell ready-mixed concrete, concrete products and sundry building
materials in metropolitan areas within Monarch's primary market.
Monarch has direct control of certain operating companies which have been
deemed to be subsidiaries within the meaning of the rules and regulations of
the Securities and Exchange Commission. Accordingly, the financial statements
of such companies have been consolidated with Monarch's financial statements.
All significant intercompany transactions have been eliminated in
consolidation. Minority interests in net income have been recorded as
reductions in other income in the accompanying statements of income. The
minority interests in net income were $558,627, $453,039 and $466,758 during
1998, 1997 and 1996, respectively.
(b) Use of Estimates--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.
(c) Inventories--Inventories of finished cement, work in process and
building products are priced by the last-in, first-out (LIFO) method. Under
the average cost method of accounting (which approximates current cost), these
inventories would have been $2,061,000, $1,763,000 and $1,472,000 higher than
those reported at December 31, 1998, 1997 and 1996, respectively. The cost of
manufactured items includes all material, labor, factory overhead and
production-related administrative overhead required in their production.
Other inventories are purchased from outside suppliers. Fuel and
other materials are priced by the first-in, first-out (FIFO) method while
operating and maintenance supplies are priced by the average cost method.
(d) Property, Plant and Equipment--Depreciation of property, plant and
equipment is provided by charges to operations over the estimated useful lives
of the assets using primarily the declining balance method. Depletion rates
for quarry lands are designed to amortize the cost over the estimated
recoverable reserves. Expenditures for improvements which significantly
increase the assets' useful lives are capitalized while maintenance and
repairs are charged to expense as incurred.
(e) Earnings per Share--The Company reports basic earnings per share in
accordance with Statement of Financial Accounting Standard No. 128, (SFAS 128)
"Earnings Per Share". Basic earnings per share is based on the weighted
average common shares outstanding during each year. Dilutive earnings per
share is based on the weighted average common and common equivalent shares
outstanding each year. Monarch has no common stock equivalents and therefore,
does not report dilutive earnings per share. The weighted average number of
shares outstanding was 4,198,333 in 1998, 4,215,859 in 1997 and 4,226,397 in
1996.
(f) Comprehensive Income--In June, 1997, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standard No. 130,
"Reporting Comprehensive Income" (SFAS 130), effective for periods ending
after December 15, 1998. SFAS 130 establishes new rules for the reporting of
comprehensive income and its components; however, the adoption of this
statement had no impact on the Company's net income or stockholders'
investment. Prior years' financial statements have been restated to conform
to these requirements. The only component of other comprehensive income is
unrealized gain on securities, net of deferred income tax. These securities
are classified as available-for-sale.
(g) Statements of Cash Flows--The Company considers overnight cash
investments to be cash equivalents. All other highly liquid short term
investments, generally with an original maturity of six months or less, are
considered short term investments. Interest and income taxes paid during each
of the three years for the period ended December 31, are as follows:
1998 1997 1996
Interest paid $ 1,517 $ 4,279 $ 13,392
Income taxes paid $4,624,633 $6,111,378 $6,833,624
(2) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 1998 and 1997 consisted of:
Depreciation
Lives (Years) 1998 1997
Quarry lands $ 710,188 $ 710,188
Mill site and buildings 12 - 50 13,719,463 12,059,599
Machinery and equipment 5 - 25 69,929,906 65,626,862
Transportation equipment 3 - 12 20,167,701 18,289,567
Office furniture and fixtures 5 - 20 877,443 922,607
Office and other buildings 10 - 30 2,218,438 1,869,848
Construction in process 988,536 595,522
$108,611,675 $100,074,193
Less--Accumulated depreciation and depletion 79,239,388 74,556,421
$ 29,372,287 $ 25,517,772
(3) Investments
The Company's short term investments consist of corporate commercial
paper with maturities of six months or less and have been classified as held-
to-maturity. The amortized cost, which approximates market value, is
reflected in the balance sheet. Other assets includes equity securities which
have been classified as available-for-sale. Realized gains are computed using
the specific identification method. The equity investment results for the
years ended December 31, 1998, 1997 and 1996 are as follows:
1998 1997 1996
Fair value of investments $4,890,000 $3,485,000 $2,876,000
Cost of investments 1,240,000 725,000 1,250,000
Fair value in excess of cost $3,650,000 $2,760,000 $1,626,000
Unrealized gain recorded in equity $2,200,000 $1,660,000 $ 976,000
Deferred income taxes 1,450,000 1,100,000 650,000
$3,650,000 $2,760,000 $1,626,000
Proceeds from sale of securities $ - $1,366,291 $ 877,380
Realized gains $ - $ 840,820 $ 314,963
(4) INCOME TAXES
The components of the provision for federal and state income taxes in the
accompanying consolidated statements of income are as follows:
1998 1997 1996
Current provision for income tax:
Federal $4,480,000 $4,780,000 $5,045,000
State 1,045,000 1,130,000 1,145,000
$5,525,000 $5,910,000 $6,190,000
Deferred provision for income tax:
Federal $ 60,000 $ (85,000) $ (170,000)
State 15,000 (25,000) (40,000)
$ 75,000 $ (110,000) $ (210,000)
Provision for income tax $5,600,000 $5,800,000 $5,980,000
The provision for federal and state income taxes in the accompanying
consolidated statements of income differs from the amount computed at the
federal statutory income tax rate as follows:
1998 1997 1996
Provision for federal taxes
at statutory rates $5,238,000 $5,466,000 $5,684,000
State income taxes, net of
federal tax benefit 680,000 724,000 718,000
Percentage depletion (546,000) (568,000) (602,000)
Minority interest in
consolidated income 223,000 181,000 187,000
Other, net 5,000 (3,000) (7,000)
Accrued income tax expense $5,600,000 $5,800,000 $5,980,000
The tax effect of significant temporary differences representing deferred
tax assets and (liabilities) are as follows:
1998 1997
Current:
Reserve for bad debts $ 165,000 $ 190,000
Vacation 245,000 225,000
Net current deferred tax assets $ 410,000 $ 415,000
Noncurrent:
Depreciation $ (800,000) $(1,004,000)
Postretirement benefits 3,845,000 3,935,000
Pension (210,000) (35,000)
Unrealized holding gains (1,450,000) (1,100,000)
Other, net 5,000 14,000
Net long-term deferred tax assets $ 1,390,000 $ 1,810,000
(5) POSTRETIREMENT BENEFITS
Monarch provides certain postretirement health care, accident and life
insurance benefits to all retired employees who, as of their retirement date,
have completed ten or more years of credited service under the pension plans.
These benefits are self-insured by Monarch and are paid out of Monarch's
general assets.
Following is a reconciliation of benefit obligations and funded status as
of December 31, 1998 and 1997:
1998 1997
Reconciliation of benefit obligation
Accumulated postretirement benefit
obligation at beginning of year $11,422,549 $ 10,757,921
Service cost 85,689 144,193
Interest cost 687,667 786,231
Actuarial (gain)/loss (1,220,420) 487,201
Benefits and expenses paid (992,008) (752,997)
Accumulated postretirement benefit
obligation at end of year $ 9,983,477 $ 11,422,549
Funded status $(9,983,477) $(11,422,549)
Unrecognized actuarial (gain)/loss 363,224 1,583,644
(Accrued) benefit cost $(9,620,253) $ (9,838,905)
The assumed annual rate of increase in the per capita cost of covered
health care benefits was 5%, 6% and 7% for 1998, 1997 and 1996, respectively.
This rate is assumed to decrease 1% per year to an ultimate rate of 4%.
1998 1997 1996
Components of net periodic benefit cost
Service cost $ 85,689 $ 144,193 $ 133,134
Interest cost 687,667 786,231 765,423
Net periodic benefit cost $ 773,356 $ 930,424 $ 898,557
Weighted-average assumptions
as of December 31
Discount rate 7.00% 7.00% 7.50%
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. A one-percentage-point change in
assumed health care cost trend rates would have the following effects:
1% Increase 1% Decrease
Effect on net periodic benefit cost $ 90,465 $ (66,908)
Effect on postretirement benefit obligation 1,040,719 (760,662)
(6) PENSION PLANS
Monarch has defined benefit pension plans covering substantially all
permanent employees. Plans covering staff (salaried) employees provide
pension benefits that are based on years of service and the employee's last
sixty calendar months of earnings or the highest five consecutive calendar
years of earnings out of the last ten calendar years of service, whichever is
greater. Plans covering production (hourly) employees provide benefits of
stated amounts for each year of service. Generally, Monarch's funding policy
is to contribute annually the maximum amount that can be deducted for federal
income tax purposes. Contributions are intended to provide for benefits
attributed to service to date and for those expected to be earned in the
future. The assets of the plans are primarily equities, bonds and government
securities.
Following is a reconciliation of benefit obligations, plan assets and
funded status as of December 31, 1998 and 1997:
1998 1997
Reconciliation of projected benefit obligation
Projected benefit obligation at
beginning of year $22,544,337 $20,856,066
Service cost 324,782 283,370
Interest cost 1,518,426 1,556,225
Actuarial (gain)/loss (362,816) 1,440,891
Benefits paid and expenses (1,531,879) (1,592,215)
Projected benefit obligation at end of year $22,492,850 $22,544,337
Reconciliation of fair value of plan assets
Fair value of plan assets at beginning of year $25,587,691 $23,109,411
Actual return on plan assets 1,705,463 4,070,495
Benefits paid and expenses (1,531,879) (1,592,215)
Fair value of plan assets at end of year $25,761,275 $25,587,691
Funded status $ 3,268,425 $ 3,043,354
Unrecognized net actuarial loss (3,293,576) (3,559,706)
Unrecognized transitional obligation 34,072 43,935
Unrecognized prior service cost 514,809 559,939
Prepaid benefit cost $ 523,730 $ 87,522
The following table presents the accumulated benefit obligation, fair
value of net assets and prepaid (accrued) pension expense by plan as of
December 31, 1998 and 1997:
Humboldt Des Moines
Staff Production Production
December 31, 1998
Accumulated benefit obligation $12,221,649 $ 7,392,125 $ 2,879,076
Fair value of net assets 13,755,555 8,760,515 3,245,205
Prepaid (accrued) pension expense 7,527 566,479 (50,276)
December 31, 1997
Accumulated benefit obligation $12,166,615 $ 7,428,564 $ 2,949,158
Fair value of net assets 13,543,421 8,749,140 3,295,130
Prepaid (accrued) pension expense (178,378) 408,706 (142,806)
The following table presents the components of net periodic pension cost
as of December 31, 1998, 1997 and 1996:
1998 1997 1996
Service cost $ 324,782 $ 283,370 $ 253,229
Interest cost 1,518,426 1,556,225 1,515,004
Expected return on plan assets (2,229,872) (2,008,078) (1,931,827)
Amortization of transitional obligation 9,863 9,863 9,863
Amortization of prior service cost 45,130 45,130 34,880
Recognized net actuarial (gain)/loss (104,537) (20,651) (16,862)
Net periodic pension (income) $ (436,208) $ (134,141) $ (135,713)
The weighted average assumptions used to determine net pension cost and
benefit obligations as of December 31 are as follows:
1998 1997 1996
Discount rate 7.00% 7.00% 8.00%
Expected return on plan assets 9.00% 9.00% 9.00%
Rate of compensation increase (Staff plan only) 4.50% 4.50% 4.50%
(7) COMMITMENTS AND CONTINGENCIES
According to various agreements with certain minority stockholders, under
specified circumstances, the Company is obligated to acquire such shares, if
requested to do so, at a value which approximates the minority interest on the
Balance Sheet.
(8) STOCKHOLDERS' INVESTMENT
Class B Capital Stock has supervoting rights of ten votes per share and
restricted transferability. Class B Capital Stock is convertible at all times
into Capital Stock on a share-for-share basis. Capital Stock has only one
vote per share and is freely transferable.
(9) BUSINESS SEGMENTS
In June, 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 131, "Disclosures about Segments of an
Enterprise and Related Information" (SFAS 131), effective for periods ending
after December 15, 1998. SFAS 131 did not significantly change the way the
Company previously reported information about its operating segments.
The Company groups its operations into two business segments - cement
manufacturing and the sale of ready-mixed concrete and sundry building
materials. The Company's business segments are separate business units that
offer different products. The accounting policies for each segment are the
same as those described in the summary of significant accounting policies.
Following is information for each segment for the years ended December 31,
1998, 1997 and 1996:
Ready-Mixed
Concrete
Cement and Sundry Adjustments
FOR THE YEAR ENDED Manu- Building and
DECEMBER 31, 1998: facturing Materials Eliminations Consolidated
Sales to unaffiliated
customers $43,726,111 $55,768,647 $ - $99,494,758
Intersegment sales 8,191,578 407,764 (8,599,342) -
Total net sales $51,917,689 $56,176,411 $ (8,599,342) $99,494,758
Income from operations $12,019,185 $ 2,400,976 $14,420,161
Other income, net 832,647
Income before income taxes $15,252,808
Identifiable assets at
December 31, 1998 $33,621,343 $20,063,428 $53,684,771
Corporate assets 31,197,250
Total assets at
December 31, 1998 $84,882,021
FOR THE YEAR ENDED
DECEMBER 31, 1997:
Sales to unaffiliated
customers $39,538,659 $52,281,177 $ - $91,819,836
Intersegment sales 8,867,866 263,503 (9,131,369) -
Total net sales $48,406,525 $52,544,680 $ (9,131,369) $91,819,836
Income from operations $12,942,513 $ 1,176,005 $14,118,518
Other income, net 1,784,947
Income before income taxes $15,903,465
Identifiable assets at
December 31, 1997 $28,424,449 $16,400,181 $44,824,630
Corporate assets 31,408,402
Total assets at
December 31, 1997 $76,233,032
Ready-Mixed
Concrete
Cement and Sundry Adjustments
FOR THE YEAR ENDED Manu- Building and
DECEMBER 31, 1996: facturing Materials Eliminations Consolidated
Sales to unaffiliated
customers $36,838,233 $49,894,323 $ - $86,732,555
Intersegment sales 10,764,176 235,795 (10,999,971) -
Total net sales $47,602,409 $50,130,118 $(10,999,971) $86,732,555
Income from operations $13,665,251 $ 1,772,831 $15,438,082
Other income, net 1,087,576
Income before income taxes $16,525,658
Identifiable assets at
December 31, 1996 $27,253,943 $15,656,197 $42,910,140
Corporate assets 25,738,269
Total assets at
December 31, 1996 $68,648,409
Total sales by segment before adjustments and eliminations includes both
sales to unaffiliated customers, as reported in the Company's consolidated
statements of income, comprehensive income and stockholders' investment, and
intersegment sales. Intersegment sales are accounted for by the same method
as sales to unaffiliated customers.
Income from operations is total net sales less operating expenses. In
computing income from operations, none of the following items have been added
or deducted: general corporate income and expenses, interest expense and
income taxes. Also, no amounts have been excluded for corporate
administrative expense because the amounts which cannot be identified by
segment are not significant. Depreciation for cement manufacturing and
ready-mixed concrete, respectively, was: $2,924,251 and $2,640,421 in 1998;
$2,666,994 and $2,318,654 in 1997; and $2,570,085 and $2,121,550 in 1996.
Capital expenditures for cement manufacturing and ready-mixed concrete,
respectively, including capital assets of businesses acquired were:
$4,966,346 and $4,552,809 in 1998; $3,245,853 and $3,248,683 in 1997; and
$2,448,248 and $3,569,468 in 1996. Identifiable assets by segment are those
assets that are used in the Company's operations in each industry.
During 1998, 1997 and 1996, there were no sales to any one customer in
excess of 10% of consolidated net sales.
CORPORATE INFORMATION
CORPORATE OFFICE DIRECTORS
449 1200 Street Jack R. Callahan
P.O. Box 1000 Retired President, The Monarch
Humboldt, KS 66748 Cement Company
Phone: (316) 473-2225
Fax: (316) 473-2447 Karl Callaway
Retired Farmer
AUDITORS Ronald E. Callaway
Arthur Andersen LLP Retired transport truck driver,
Kansas City, Missouri Agricultural Carriers, Inc.
David L. Deffner
ANNUAL MEETING Professor of Music, American River
The annual meeting of the College, Director of Music, Davis
stockholders of The Monarch Community Church
Cement Company is held the
second Wednesday in April of Robert M. Kissick
each year at the Company's Chairman, Hydraulic Power Systems, Inc.
corporate offices.
Richard N. Nixon
Shareholder in law firm of Stinson,
TRANSFER AGENT AND REGISTRAR Mag & Fizzell, P.C.
The Monarch Cement Company
P.O. Box 1000 Byron J. Radcliff
Humboldt, KS 66748-1000 Rancher
Byron K. Radcliff
STOCK TRADING INFORMATION Owner/Manager, Radcliff Ranch
Trading Symbol: MCEM
Over-the-Counter Market Michael R. Wachter
Civil Engineer and Director of
Operations, Concrete Technology Corp.
INVESTOR RELATIONS
Inquiries may be directed to Walter H. Wulf
Lyndell G. Mosley, Chief Financial Chairman of the Board
Officer and Assistant Secretary-
Treasurer, at the corporate Walter H. Wulf, Jr.
address shown above. President and Vice Chairman
of the Board
FORM 10-K Officers
The Company's Annual Report on Walter H. Wulf
Form 10-K, as filed with the Chairman of the Board
Securities and Exchange Commission,
is available without charge upon Walter H. Wulf, Jr.
written request to Lyndell G. President and Vice Chairman
Mosley at the corporate office. of the Board
The Company's financial Robert M. Kissick
information is also available Vice President*
from the SEC at their EDGAR
internet address Karl Callaway
(http://www.sec.gov). Secretary*
Byron K. Radcliff
Treasurer*
Lyndell G. Mosley
Chief Financial Officer and
Assistant Secretary-Treasurer
*Not active in the daily affairs
of the Company.