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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from _____ to _______
Commission file number 1-1274-2
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MEDUSA CORPORATION
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(Exact name of registrant as specified in its charter)
OHIO 34-0394630
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3008 MONTICELLO BLVD., CLEVELAND HTS., OHIO 44118
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (216) 371-4000
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common shares without par value New York Stock Exchange
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Securities registered pursuant to Section 12 (G) of the Act:
None
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. [x]
As of February 27, 1998, the number of shares of common stock outstanding was
16,671,699. As of such date, the aggregate value of voting stock held by
nonaffiliates, based upon the closing price of these shares on the New York
Stock Exchange, Inc. was approximately $722,338,200.
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PART I
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Item 1. BUSINESS
GENERAL
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The company operates in three business segments. The company's Cement Group
produces and sells gray portland cement and masonry cement. Its Aggregates Group
mines, processes and sells construction aggregates, home and garden and
industrial limestone products. Its James H. Drew Corporation subsidiary provides
construction services for highway safety. The company's operations are conducted
principally in the eastern half of the United States. See additional information
relating to financial and operating data on a segment basis contained in Part
II, Item 8.
The company's business is seasonal, particularly in northern markets, with
stronger sales during the spring, summer and fall and lower sales during the
winter. Additional information relating to the company's quarterly results is
contained in Part II, Item 8.
FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. These forward-looking statements are based on
current expectations, estimates and projections concerning the general state of
the economy and the industry and market conditions in certain geographical
locations in which the company operates. These statements are not guarantees of
future performance and involve certain risks, uncertainties and assumptions
which are difficult to predict. Therefore, actual results and outcomes may
differ materially from what is expressed or forecasted in such forward-looking
statements. The company undertakes no obligation to update publicly any
forward-looking statements as a result of new information, future events or
other factors.
THE CEMENT GROUP
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CEMENT INDUSTRY OVERVIEW
Portland cement is the essential binding material used in making concrete, which
is widely used in residential and non-residential construction and in public
works and infrastructure projects. Cement is sold primarily in bulk form to
producers of ready-mix concrete and manufacturers of concrete products.
Cement is made in a multi-stage process that begins with the crushing, grinding
and mixing of calcium carbonate (usually in the form of quarried limestone),
sand, alumina, iron oxide and other materials. This raw materials mixture is
then reacted in rotary kilns at extremely high temperatures. The resulting
marble-size pellet material (called "clinker") is cooled and ground with a small
amount of gypsum to produce cement having the consistency of fine powder.
There are two basic methods of clinker production. The older "wet" process
involves mixing the raw materials with water to form a slurry that is reacted in
the kiln. This process involves the use of a large amount of fuel, but enables
the raw materials to be handled and mixed easily. In the more fuel-efficient
"dry" process, the slurrying step is eliminated and clinker is produced by
reacting only the dry raw materials. Even more fuel-efficient processes involve
preheater and preheater/precalciner techniques that recycle excess heat from the
kiln to either preheat or to enhance chemical reaction of the raw materials
prior to their
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PART I
Item 1. BUSINESS (continued)
introduction into the kiln. The company estimates that, in general, the energy
consumed to produce cement from a dry process preheater/precalciner kiln is
approximately 40% less than a wet process kiln. All the company's kilns use the
dry process.
Based on the most current data available from the U. S. Geological Survey
Department, the average price of a ton of portland cement in 1997, F.O.B. the
point of sale, was $59.69. Cement markets tend to be regional because of the low
price of cement relative to its weight, making cost of transportation an
important factor in the industry. The company estimates that the approximate
distance that one ton of cement can be transported for the same relative cost is
500 miles by water vessel, 60 miles by rail and 20 miles by truck. As a result,
cement plants whose products can be transported only by truck or rail tend to
serve relatively small geographic markets (typically not in excess of a 200 mile
radius of the plant), while plants with access to water transportation are able
to efficiently serve considerably larger geographic markets. The market served
by a cement plant may be extended through the use of distribution terminals to
which cement is transferred in bulk and inventoried for sale to customers in
surrounding areas.
DEMAND
Demand for cement is correlated to cyclical construction activity, which, in
turn, is influenced largely by national and regional economic conditions,
including (particularly in the case of residential construction) prevailing
interest rates. In addition, levels of government spending on infrastructure
improvement affect cement consumption. Demand for cement has traditionally been
seasonal, particularly in northern markets where inclement weather affects
construction activity. According to the Portland Cement Association ("PCA"),
total annual cement consumption (i.e.: the total demand for both portland and
masonry cements) in the United States over the past 20 years has ranged from a
low of 66 million tons in 1982 to a high of 106 million tons in 1997, generally
corresponding to the prevailing economic conditions and construction activity.
Portland cement consumption in the United States in 1997 was about 102 million
tons, of which approximately 21% was used in residential construction, 24% in
non-residential construction, and the remainder in public construction, such as
infrastructure.
The company believes increased government spending on infrastructure improvement
should have a favorable impact on future cement demand. Enactment of the
Intermodal Surface Transportation Efficiency Act of 1991 (ISTEA), which
authorized the appropriation of federal funds primarily for construction and
improvement of highways, bridges and mass transit systems, reflected
Congressional recognition of the need for national infrastructure repair and
replacement. Future demand for cement for infrastructure improvement will depend
on the level of funding made available for such purpose by federal, state and
local governments. ISTEA expired in 1997 and legislation is currently before the
Congress to enact similar legislation for the 1998-2003 period at higher levels
of spending.
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PART I
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Item l. BUSINESS (continued)
SUPPLY
According to current statistics published by the PCA, United States clinker
production capacity decreased from 91.1 million tons to 83.1 million tons, or by
approximately 8%, from 1975 to 1995. Statistics published by the U. S.
Geological Survey Department and the PCA indicate that from 1975 to 1995 the
number of cement companies operating in the United States has dropped from 57 to
46, and in 1995 the 10 largest of such companies accounted for approximately 59%
of total United States production capacity for clinker. The company believes
that domestic production will remain inadequate to meet demand going into the
next century. With an approximate 18.5 million ton shortfall between supply and
demand, imports will continue to be needed to supplement domestic demand. That
shortfall, the company believes, is due principally to the unfair dumping of
imports into the United States during the 1980's, when the domestic industry was
forced to divest itself of a significant portion of its capacity. Presently,
with the dumping duties imposed against offenders by the International Trade
Commission in 1990 and 1991, the United States industry is becoming healthier
and is now able to afford to reinvest in itself. However, because of the extent
of capital investment required and the long lead times associated with
establishing new or re-opening closed facilities, the company only expects about
7 million tons of incremental domestic cement production capacity will be added
over the next three to five years unless cement prices increase significantly on
a sustained basis over current levels.
Imports of cement and clinker, which have had the most impact on markets along
coastal and southern border areas of the United States, with ripple effects
elsewhere, have varied from a high of 19% of total United States consumption in
1987 to a low of 8% in 1992, to an estimated 18% in 1997, according to the
latest U. S. Geological Survey Department figures. Factors influencing imports
have included the effect of anti-dumping actions brought against several foreign
importers, which resulted in the imposition of substantial duties on cement and
clinker imports from various countries beginning in 1990, changes in domestic
and foreign demand and rising ocean shipping rates. Increased ownership of
import facilities by domestic producers has also contributed to a more orderly
flow of imports into the United States. Cement production is capital-intensive
and involves high fixed costs. As a result, plant capacity utilization levels
are an important measure of a plant's profitability, since incremental sales
volumes tend to generate increasing profit margins. The PCA has estimated that
total United States cement plant capacity utilization was 96.0% for 1997.
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PART I
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Item l. BUSINESS (continued)
PRICE TRENDS
Due to the lack of product differentiation, competition in the cement industry
is based largely on price. Service and location of plants and terminals are also
competitive factors. Notwithstanding favorable construction activity during the
1980's, cement prices remained relatively low due to the impact of lower-priced
imported cement. Until 1993, United States portland cement prices remained flat
due to the downturn in general economic conditions and consequent declines in
construction activity. However, gradual improvement in the United States
economy, coupled with reduced domestic production capacity, have led to supply
and demand relationships more favorable to cement producers, resulting in
increased cement prices. In 1996, heavy demand coupled with limited domestic
supply enabled the company to increase prices by 5% over 1995 levels. Then in
1997, with continued strong demand, price increases that were effective April 1,
1997, and April 1, 1996, allowed the company's average price of cement to rise
2% over 1996. The company expects these favorable market conditions to continue
in 1998 and has announced cement price increases of up to $4.00 per ton in its
northern market and up to $3.00 per ton in its southern markets, effective April
1, 1998.
GENERAL
As the economy experienced its sixth consecutive year of expansion in 1997 that
featured modest growth and low inflation, the current construction cycle
followed in tandem. The housing sector retained its resiliency due to steadily
falling mortgage rates, high levels of consumer confidence and favorable
demographics. Nonresidential building (retail, industrial and office building)
continued to show strength reflected by lower vacancy rates and public
construction remained at historical high levels.
Modest increases in all three construction sectors last year resulted in the
fourth consecutive year of record-setting cement consumption in the United
States, estimated at about 102 million short tons compared to 100 million short
tons in 1996. Cement supply was adequate to meet domestic requirements, as U.S.
plants again operated at near capacity and imports were readily available (up
almost 21% over 1996 levels) to supplement domestic production shortfalls.
The construction outlook for 1998 is encouraging. With economic expansion
expected to extend for its seventh consecutive year and with very few signs of
overbuilding, the company expects construction activity to remain at or near
current high levels. Housing should reflect a modest decline, reflecting a
slight slowdown in the economy and some abatement to pent-up demand. However,
low vacancy rates and favorable demographic trends should translate into
increased activity for office building and institutional construction.
The company is optimistic that new highway legislation (ISTEA) will be passed
this year which will authorize high levels of funding compared to the former
bill (on average $20.5 billion annually). The pending House highway measure
calls for 33% increase in funding over the expired levels, compared to a 20%
funding increase from a comparable Senate measure. Highway and bridge building
activity is the largest segment of public construction, which accounts for more
than 50% of total domestic cement demand.
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PART I
Item 1. BUSINESS (continued)
As U.S. construction markets remain at lofty heights, cement consumption should
remain close to its record levels of the past four years. In spite of plant
expansions expected to come on line over the next several years, cement industry
fundamentals are not expected to change very much. Demand is expected to remain
at high levels and domestic production will still be inadequate to meet
consumption requirements, which generates additional pricing and profit
potential.
In an effort to satisfy the strong product demand, our four cement plants
achieved a 94.3% capacity utilization in 1997. The company's focused business
strategy enables the company to position itself to capitalize upon favorable
market conditions. The principal elements of this strategy are: a concentration
on its core business, a constant drive to lower operating costs, centralization
of pricing decisions and the maintenance of a lean management organization. In
furtherance of that strategy, the company realized the benefits from the
completion in 1997 of several projects designed to incrementally increase cement
capacity, as its Clinchfield, Charlevoix and Demopolis plants had record
production years.
OPERATIONS
The company ranks eighth in capacity among all United States cement companies
and fourth in capacity among those domestically owned. The company's cement
operations serve markets in portions of the Great Lakes, the Southeast and the
Western Pennsylvania/Northeastern Ohio portions of the United States.
REGIONAL MARKETS
Great Lakes. The Great Lakes regional market, consisting of portions of
Michigan, Wisconsin, Ohio, Illinois, Indiana and Ontario, is served by the
company's Charlevoix plant and its distribution network of nine terminals, eight
of which are water-based. The water-based terminals provide a very low cost
alternative versus rail and/or trucking costs. Demand in the Great Lakes region
has been steady, with very little new production capacity added in recent years.
Management believes that the Charlevoix plant is among the lowest cost cement
production facilities in the Great Lakes region. This is due to its use of a
single modern preheater/precalciner kiln which provides significant energy
savings over other dry and wet process kilns. In 1995, Charlevoix implemented an
artificial intelligence kiln control system and an automated process control
instrumentation system to enhance productivity and reduce operating costs. The
layout of the plant also results in an efficient utilization of manpower.
Charlevoix's deep-water shipping location and water-based terminals enable about
90% of cement produced to be shipped by water, the lowest cost method of
long-distance distribution, via the Medusa Conquest or the Medusa Challenger.
These company owned vessels have a combined capacity of 20,000 tons per load.
Southeast. The company has two plants and ten terminals in the Southeast
regional market: the Clinchfield, Georgia plant, acquired from Penn Dixie
Corporation and extensively rebuilt in 1972, and the Demopolis, Alabama plant,
built in 1977. The Demopolis plant serves water-based terminals in Chattanooga,
Tennessee and Decatur, Alabama with up to six river barges.
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PART I
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Item l. BUSINESS (continued)
Together, the two plants also serve eight rail/truck terminals in Alabama,
Florida and Georgia. The two plants have benefited from the 1996 completion of
the cement terminal in Forest Park, Georgia. Since the plants are located 240
miles apart, a number of marketing and manufacturing synergies exist, including
the ability to alternatively ship to eight terminals, to specialize in certain
cement products and packaging, and to rationalize distribution in what are the
two plants' overlapping markets.
Largely because both the Demopolis and Clinchfield plants operate
energy-efficient preheater kilns, management believes that they are among the
lowest cost production facilities in the region. In 1997, the Demopolis plant
burned waste derived liquid fuel (WDLF) for about 35% of its current fuel needs.
The Clinchfield plant burns waste whole tires as an alternative kiln fuel and
has been able to reduce its coal usage by up to 20%.
In 1997, the company began a $56.0 million dollar modernization and expansion
project at its Clinchfield plant and related distribution facilities. The
project is expected to increase clinker capacity by 175,000 tons to 760,000 tons
annually and lower cash costs at the plant by more than 20%. Project completion
is targeted for early 1999, with full production anticipated in mid-1999. The
project includes two new distribution terminals to accommodate the additional
tonnage. The terminals are expected to be operational in late 1998.
Western Pennsylvania/Northeastern Ohio. Significant steps were taken in 1996 to
improve the long-term profitability of the company's Wampum plant, located
between Pittsburgh, Pennsylvania and Youngstown, Ohio, serving markets as far
east in Pennsylvania as State College, as far south as Wheeling, West Virginia,
and as far west in Ohio as Columbus and Toledo. The Wampum plant services its
Columbus terminal by both rail and truck. A new three-year labor agreement that
contained a reduction-in-force agreement allows for lower cost quarry stripping
and stone hauling. The quarry operation was combined with the company's West
Pittsburg aggregate operation allowing for further work force reductions,
reduced capital spending, quarry development costs and better utilization of the
dragline. This 40-cubic yard dragline was placed in service in April 1994 and
replaced two smaller less efficient units. Demand in this region continues to
grow slowly. Supply has remained relatively constant, with no new plants or
major capacity expansions having occurred in the last six years or expected by
management in the foreseeable future.
Management believes that the Wampum plant's three dry kilns give it an operating
cost advantage over its wet process competitors in the region. The Wampum plant
also had the advantage in 1997 of obtaining about 17% of its coal needs from its
nearby limestone quarry which contains coal reserves. Since 1985, the Wampum
plant has burned WDLF, supplying about 33% of its fuel needs in 1997.
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PART I
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Item l. BUSINESS (continued)
ENERGY
Cement manufacturing is an energy intensive process, using fuel to fire kilns
and electricity to grind raw materials into kiln fuel and clinker into finished
cement. The company has been an innovator in burning alternative fuels, such as
WDLF and whole tires at its plants as a coal replacement. The company has burned
whole tires at its Clinchfield plant since 1990. The company has entered into
arrangements with independent contractors (which, in turn, contract with
suppliers of alternative fuel) which allow the company to reduce its energy
costs by receiving WDLF either at a profit through tipping fees or at a nominal
charge. In 1985, at its Wampum cement plant, the company became one of the first
such facilities to burn WDLF. The company also burns WDLF at its Demopolis
plant. The favorable economics of burning WDLF are significantly influenced by
the tipping fees and the cost of environmental regulation, which has been
increasing. The company is constantly evaluating the potential for and use of
alternative fuels in its ongoing effort to help conserve scarce natural
resources, utilize waste in a productive manner and reduce materials that might
otherwise take up valuable space in landfills. The company will use alternative
fuels where it is environmentally and economically prudent and provided it
continues to permit the company to maintain the safe and profitable operation of
its facilities. The company also seeks to minimize its energy costs by running
its grinding mills, whenever possible, during off-peak demand periods.
RAW MATERIALS
The principal raw materials used by the company in the manufacture of cement are
limestone or other calcareous materials, clay or shale, sand, iron ore, and
gypsum. Owned reserves of limestone and clay or shale are available at or near
all of the company's cement plants, while other raw materials are readily
available for local purchase by the company at all of its plant locations.
CUSTOMERS AND MARKETING
The company's cement operations have over 1,400 customers which are primarily
ready-mix concrete dealers. No single customer accounts for more than 4% of
total consolidated sales. The company's marketing efforts are focused on
maximizing profitability, rather than market share. This sales strategy is
facilitated by the company's policy that pricing decisions (including the
decision whether to meet lower competitive prices) are made only in the
company's Cleveland headquarters. Further, decisions whether to extend credit
are made centrally by financial management. Sales personnel are critical in
developing and maintaining relationships with, and providing technical
assistance to, customers. They also facilitate production planning by meeting
with customers regularly to discuss future requirements. Distribution management
plays a critical role in helping to maximize production output and shipment
volumes.
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PART I
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Item l. BUSINESS (continued)
COMPETITION
Generally, market conditions in the cement industry are cyclical and highly
price-competitive. Because there is generally no product differentiation, cement
is marketed as a commodity, with price as the principal method of competition.
To some extent, factors other than price, such as service, delivery time and
proximity to the customer, are competitively important. The number and size of
the company's competitors differ from market area to market area. The company
estimates that it competes with 28 cement manufacturers in its overall market
areas and between 5 and 10 producers within each sales region. Competitors
include domestic and foreign producers and importers. Because cement has a low
value-to-weight ratio, cement companies with access to water-based
transportation have a significant advantage in shipping over land-locked plants
and terminals.
THE AGGREGATES GROUP
The Aggregates Group mines, processes, packages and sells three types of
product: construction aggregates, home and garden products, and industrial
limestone. In 1997 and 1998, the company has taken steps that will give it a
significant added presence in the home and garden and industrial limestone
markets in the eastern half of the United States.
In January 1997, the company acquired Lime Crest Corporation, who's operations
include a quarry, processing facility and pelletizing plant in Sparta, New
Jersey and a quarry in Franklin, New Jersey. Products include construction
aggregates, bulk and packaged agricultural limestone, decorative stone, washed
sand, water conditioning products and industrial fillers.
In August 1997, the company acquired White Stone Company of Southwest Virginia,
an industrial limestone and aggregates producer with operations in Castlewood,
Virginia and a limestone pelletizing plant in Paradise, Pennsylvania. Products
include home and garden pelletized limestone and gypsum, pulverized limestone,
Micro-pellet limestone and gypsum, industrial limestone and construction
aggregates.
In October 1997, the company acquired Lee Lime Corporation, a producer of
limestone, quicklime, hydrated lime and packaged cement mixes based in Lee,
Massachusetts. Products include home and garden and other industrial,
construction and agricultural limestone.
In January 1998, the company acquired Commonwealth Stone, a producer of crushed
stone in Bowling Green, Kentucky. Operations include a 200 acre quarry that
produces about 400,000 tons of construction aggregates per year.
The combination of these newly acquired operations with the company's previously
owned nine crushed stone plants (in Bardstown, Butler, North and South Bowling
Green and Hartford, Kentucky; Columbia, Missouri; Lenoir, North Carolina; and
West Pittsburg, Pennsylvania) and the company's high calcium limestone operation
in Thomasville, Pennsylvania have measurably increased the market presence in
each of the Aggregates Group's three lines of business. The company now expects
the Aggregates Group will represent approximately one-quarter of Medusa's future
consolidated sales.
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PART I
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Item l. BUSINESS (continued)
CONSTRUCTION AGGREGATES
The company expects that approximately 45% of Aggregates Group future sales will
be in the construction aggregates product line. These operations mine, crush,
screen, and sell various sizes of aggregates to the construction industry,
primarily concrete for use in asphalt and concrete applications, such as roads,
base material, drainage blankets, erosion control and other applications. The
company estimates its annual capacity at about 7 million tons. Construction
aggregates are marketed as commodities and as such pricing is the principal
method of competition. Most aggregates are sold within a radius of 35 miles from
the plant and are shipped to the customer by truck. The company estimates that
it has approximately a 20% market share of the estimated $200 million combined
market size it serves. The company's construction aggregates business has
approximately 3,000 customers. The company believes that it is the among the
low-cost producers in its primary markets. The company maintains its low-cost
position through cost-improving plant and quarry modifications and through other
continuous cost improvement programs.
HOME AND GARDEN
The company expects that approximately 40% of the Aggregates Group future sales
will be in the home and garden product line. The current operations mine,
process, package and distribute to both consumer and commercial markets
throughout the eastern half of the U.S. Over 150 products for lawn care,
gardening, landscaping and do-it-yourself construction are shipped directly to
over 3,500 retail garden centers and home improvement outlets. Commercial
markets including golf course, lawn care, grounds maintenance, water
conditioning, and agriculture are served with over 60 specialty products.
Limestone is applied to lawns and crop fields to correct soil acidity primarily
in states east of the Mississippi river, where soil acidity is a problem. The
company believes it has approximately a 38% share of the pelletized limestone
market it serves. The company estimates that its three pelletizing operations
have combined annual capacity of over 200,000 tons. Other core products include
pelletized gypsum, hydrated lime, white marble chips, natural colored
landscaping stone, and packaged concrete mixes. The U.S. lawn and garden
industry reached $76 billion sales at retail in 1997 and expects growth to
continue at approximately 7-10% on average annually.
INDUSTRIAL LIMESTONE
The company expects that approximately 15% of the Aggregates Group future sales
will be in the industrial limestone product line. Chemical grade limestone is
sold to industrial customers for use in the manufacture of white cement, to
supply calcium for livestock and poultry feeds, and to neutralize acidic soil
for more efficient crop growth. White stone is pulverized to a fine powder and
used in joint compounds, caulk, carpet padding, floor tile, paints, plastics and
paper. Limestone not meeting chemical and color specifications is reduced to
powder and sold as filler to manufacturers of asphalt shingles.
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PART I
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Item l. BUSINESS (continued)
RESERVES
Plant by plant, and at current construction aggregates production levels, 95% of
the company's various mineral reserves will last from 10 years to over 50 years,
while 5% will last less than 10 years. At current limestone production levels
almost 100% of the company's various mineral reserves will last from 30 years to
over 100 years.
HIGHWAY SAFETY CONSTRUCTION
The James H. Drew Corporation ("Drew"), a wholly-owned subsidiary of the
company, operates generally in the mid-western states installing highway safety
systems such as guard rails, traffic signals, signs, and highway lighting.
Although Drew functions primarily as a subcontractor to paving and bridge
contractors, approximately 30% of its work is bid directly to state highway
departments and municipalities.
BACKLOG
Management does not believe that backlog is material to an understanding of
Medusa's business, because long-term contracts generally comprise only a small
portion of total sales.
EMPLOYEES
As of December 31, 1997, the company had about 1,300 employees. The company's
business is seasonal and employment therefore declines from August 31 to
December 31 of each year. Most of the company's hourly employees in its cement
operations are represented by labor unions. Labor agreements with the local
union of the United Cement, Lime, Gypsum and Allied Workers Division
(International Brotherhood of Boilermakers, Iron Ship Builders, Blacksmiths,
Forgers and Helpers, AFL-CIO) covering the hourly workers at the Clinchfield and
Charlevoix plants expire on April 30, 1998. Management anticipates orderly
negotiations resulting in a new collective bargaining agreement by the
expiration date noted above. Contracts with the locals of the same union
covering the hourly workers at the Wampum plant expire on April 30, 1999, at the
Demopolis plant expire on April 30, 2000 and at the Lee plant expire on May 31,
1999. The contract with the United Steel Workers of America Local #13051-7
covering the Thomasville hourly employees expires on April 30, 2000.
ENVIRONMENTAL MATTERS
See "Environmental Matters" in Part II, Item 7 "Management's Discussion and
Analysis of Results of Operations and Financial Condition" below.
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PART I
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Item 2. PROPERTIES
Medusa's principal physical properties are utilized by its Cement and Aggregates
Groups.
Cement operations consist of four cement plants and a total of 20 distribution
terminals. All four of the company's plants are fully integrated, from limestone
mining through bulk cement production, and all possess at least 50 years of
limestone reserves. The annual rated cement and clinker capacities of Medusa as
of February 28, 1998, are shown in the following table:
Regional Capacity in Tons
Market Plant Location Clinker Cement Kiln Type
- ----------- -------------- -------- ------ ---------
Great Lakes Charlevoix, Michigan 1,426,000 1,500,000 Preheater/precalciner
Southeast Demopolis, Alabama 824,000 868,000 Preheater
Southeast Clinchfield, Georgia 620,000 809,000 Preheater
W. PA/N.E. OH Wampum, Pennsylvania 750,000 750,000 Long-Dry
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3,620,000 3,927,000
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"Annual rated capacity" is defined as the annual output of cement or clinker
theoretically to be achieved from full operation of a facility after giving
consideration to such factors as down-time for regular maintenance, location and
climatic conditions bearing upon the number of days per year during which the
particular plant may be expected to operate, and actual historical performance.
Cement plant capacities are evaluated periodically taking into account actual
experience in producing cement, plant modifications and innovations, and other
factors.
The company's cement plants, as a group, operated at 94.3% of annual rated
clinker capacity in 1997 (93.7% in 1996).
The Wampum and Clinchfield cement manufacturing plants are equipped to ship
products by either rail or truck. The Charlevoix plant can ship products by
water or truck. The Demopolis plant can ship products by water, rail or truck.
The plants are well maintained and in good operating condition. There have been
no physical changes in quarrying techniques over the past several years, nor is
it anticipated that there will be any changes which would materially affect the
cost of production. All plants operate their own quarries, located adjacent to
each of the plants.
The Aggregates Group primary facilities consist of quarries, crushing,
processing, pelletizing, packaging, storage and warehousing facilities. Location
and further description of these facilities is included in Item 1.
During 1997, the company operated at 43 total locations in 16 states and Canada.
Property, including those described above, is as follows:
Number of buildings 339
Square feet of buildings 1,726,720
Total acreage 16,321
Of the total acreage above, approximately 958 acres are leased.
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Item 3. LEGAL PROCEEDINGS
See "Environmental Matters" section under Part II, Item 7. "Management's
Discussion of Results of Operations and Financial Condition" below.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of security holders during the fourth
quarter of 1997.
PART II
-------
Item 5. MARKET FOR REGISTRANT'S COMMON SHARES AND RELATED
STOCKHOLDER MATTERS
New York Stock Exchange Composite Price Per Share Dividends Per Share
- ----------------------------------------------------------------------- ----------------------------------
1997 1996 1997 1996
- ----------------------------------------------------------------------- -----------------------------------
HIGH LOW High Low
1st 41 1/8 33 1/4 31 1/4 25 1/4 $ .15 $ .15
2nd 41 35 1/4 31 1/4 28 1/4 .15 .15
3rd 50 1/2 38 3/8 32 5/8 27 1/4 .15 .15
4th 48 15/16 35 9/16 35 1/8 30 5/8 .15 .15
------- ------
$ .60 $ .60
The number of shareholders of record is 4,439 as of February 27, 1998. On
February 23, 1998, the Board of Directors announced a quarterly dividend of $.15
per common share.
13
14
Item 6. SELECTED FINANCIAL DATA
Five-year summary of financial data as of and for the Year Ended December 31:
1997 1996 1995 1994 1993
- ------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data, percents and ratios)
NET SALES $375,958 $323,377 $293,327 $276,293 $248,038
OPERATING PROFIT 85,007 81,579 69,390 52,107 33,141
NET INTEREST EXPENSE (1,318) (2,519) (5,350) (6,264) (5,916)
MISCELLANEOUS 147 145 (193) (6) (500)
-------- -------- -------- -------- --------
INCOME BEFORE PROVISION FOR
TAXES 83,836 79,205 63,847 45,837 26,725
INCOME TAXES 26,807 24,945 20,635 15,957 8,526
-------- -------- -------- -------- --------
INCOME BEFORE EXTRAORDINARY
ITEM AND A CHANGE IN
ACCOUNTING PRINCIPLE 57,029 54,260 43,212 29,880 18,199
EXTRAORDINARY ITEM, NOTE H (1996),
CUMULATIVE EFFECT OF A CHANGE
IN ACCOUNTING FOR
INCOME TAXES(1993) - (1,770) - - 711
-------- -------- -------- -------- --------
NET INCOME $ 57,029 $ 52,490 $ 43,212 $ 29,880 $ 18,910
- ------------------------------------------------------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE:
BASIC $3.44 $3.38(A) $2.70 $1.83 $1.12(B)
DILUTED $3.41 $3.15(A) $2.54 $1.76 $1.09(B)
- ------------------------------------------------------------------------------------------------------------------------------
AVERAGE COMMON SHARES OUTSTANDING
BASIC 16,579 16,054 16,018 16,334 16,268
DILUTED 16,723 17,894 17,960 18,215 16,677
- ------------------------------------------------------------------------------------------------------------------------------
OTHER FINANCIAL INFORMATION
Capital expenditures $ 24,560 19,806 $ 25,345 $ 14,694 $ 15,372
Payments for businesses
acquired 30,204 - - - 50,511
Depreciation and amortization 18,153 13,354 14,772 13,369 11,625
Total assets 306,513 223,446 219,578 218,600 204,177
Interest-bearing debt 36,242 4,125 61,665 96,300 96,300
Shareholders' equity 190,676 153,970 95,548 59,973 51,477
Capital employed 226,918 158,095 157,213 156,273 147,777
Return on average capital
employed 30% 33%(C) 28% 20% 16%(C)
Current ratio 1.7 2.6 2.8 1.5 3.2
- ------------------------------------------------------------------------------------------------------------------------------
<FN>
- -----------------
(A) Excluding ($.11) basic, ($.10) 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).
14
15
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
YEAR 1997 COMPARED WITH 1996
Net sales for the year ended December 31, 1997, increased to $375.9 million from
$323.4 million in 1996. Cement net sales rose 7% over last year on 5% unit
volume increases and price increases implemented in April of 1997 and 1996 which
resulted in 2% higher cement prices over 1996. Charlevoix and Wampum volume rose
8.7% and 8.2%, respectively, while Demopolis' and Clinchfield's volumes remained
flat. These increases are chiefly attributed to the record U.S. demand as it
affected the company's markets.
Aggregate's Group net sales for the year rose 71% over 1996. Approximately 58%
of the increase is due to three acquisitions made during the year. Including the
acquisitions, unit volume increased 39% with a 23% unit price increase. Without
the acquisitions sales increased 13% over 1996 with a 14% increase in volume and
flat prices.
Overall, cost of sales increased from year to year due to variable costs of
increased sales.
Cost of sales as a percent of sales rose from 62.2% in 1996 to 63.2% in 1997.
This increase is due primarily to the fourth quarter approximately $4 million
pretax ($2.7 million after tax) charge related to environmental matters at the
Charlevoix, Michigan cement plant. This was partially offset by increased cement
volumes and prices and the continued high capacity utilization of 94.3% in 1997
compared to 93.7% in 1996.
Selling and administrative expense as a percent of sales increased to 9.3% from
8.5% in 1996. Of this $7.6 million increase over 1996, $3.1 million is due to
higher restricted stock award vesting and related benefits in 1997 than in 1996.
Additional personnel due to the acquisitions, higher salaries, related personnel
costs and outside service costs and other inflationary pressures caused the
remaining increase.
Depreciation and amortization expense increased $4.8 million to $18.2 million
from $13.4 million in 1996. The increase related primarily to additional
amortization of goodwill and property depreciation due to the acquisitions made
in 1997. Increased capital spending added to this number.
As a result of the above factors operating profit increased to $85.0 million for
1997 compared with $81.6 million for 1996.
Interest income decreased $1 million resulting from lower average cash and
short-term investment balances as well as lower overall interest rates.
Interest expense of $1.5 million decreased $2.2 million from $3.7 million in
1996 due to the redemption of the 6% convertible subordinated notes on December
2, 1996.
The company's effective tax rate of 32.0% for 1997 was lower than the federal
statutory rate of 35.0% primarily due to percentage depletion deductions.
Per share amounts are all presented on a diluted basis, and for 1996, after the
extraordinary charge. Net income for 1997 of $57.0 million, or $ 3.41 per common
share, compares with a net income of $52.5 million, or $3.05 per common share in
1996.
15
16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION (continued)
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 capacity utilization of 93.7% in 1996 compared to 92.3% 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.
Selling and administrative expense as a percent of sales increased to 8.5% 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.
Depreciation and amortization expense decreased $1.4 million to $13.4 million
from $14.8 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.
Operating profit for 1996 of $81.6 million compares with $69.4 million in 1995.
Interest income decreased $1.1 million resulting from lower average cash and
short-term investment balances as well as lower overall interest rates. 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 redemption of the 6% convertible subordinated notes
on December 2, 1996.
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.
Net income for 1996 of $52.5 million, or $3.05 per common share, compares with a
net income of $43.2 million, or $2.54 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
16
17
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION (continued)
improvements and operating costs. Capital expenditures for environmental
compliance were $1.6 million in 1997 and $1.2 million in 1996, and are estimated
to be $4.4 million in 1998.
CEMENT KILN DUST
Cement kiln dust ("CKD"), a by-product of cement manufacturing, is currently
excluded from federal regulation as a hazardous waste under the "Bevill
Amendment" to the Resource Conservation and Recovery Act of 1976 ("RCRA"). CKD
is collected in air pollution control devices, and is usually stored at plant
sites. In December 1993, the U.S. Environmental Protection Agency ("EPA") issued
a Report to Congress on CKD in which the EPA concluded that the risks associated
with CKD management are generally low, but that there is potential under certain
circumstances for CKD to pose a danger to human health and the environment. The
EPA reported that until new regulations are promulgated, CKD will remain exempt
from regulation as a hazardous waste by virtue of the Bevill Amendment. Though
the EPA originally intended to conduct a typical rule-making process which would
involve information gathering, eventually followed by the development of a
proposed rule and the promulgation of a final rule, the EPA is now believed to
be considering two alternatives to the full rule-making process. Under the first
alternative, a state with a federally-approved hazardous waste program would be
able to oversee the management of CKD on a site-by-site basis, either through
regulation, permit, or enforceable agreement. The second alternative would be to
create federal rules that would set contingent "tailored management standards"
for CKD to meet before being exempt from Subtitle C of RCRA. The company
believes it to be unlikely at this time that the EPA will create "management
standards" under Subtitle C, which would be more stringent than contingent
"tailored management standards". Key components of tailored management
conditions would be based on the design of the waste management unit, dust
control practices, and other factors. The process is expected to take at least
two years to complete. The company has concluded that based upon current
regulation that CKD regulation is unlikely to have a material effect on the
operations of the Demopolis, Alabama; Clinchfield, Georgia; or Wampum,
Pennsylvania plants. However, the company can be expected to incur some
additional capital costs and operational expenses related to management of CKD
at Demopolis and Wampum, which could be material if the EPA ultimately decided
to create federal rules under Subtitle C of RCRA.
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 landfill. The company is also
investigating potential contamination associated with past disposal of CKD. Nine
separate CKD piles have been identified on site. During 1997, the company
proposed construction of a new landfill for the disposal of CKD generated in the
future and for the disposal of CKD piles 6 and 7. This landfill would also be
constructed to cover existing CKD pile 9 and to serve as a cap and remedy for
that CKD pile. Public notice of this proposed plan was issued in December 1997.
It is expected that final approval for the construction of this landfill will be
issued by MDEQ in 1998. The company's environmental consultant has estimated
that construction of the landfill will cost in excess of $2 million. The company
has also submitted plans to MDEQ concerning the remediation of CKD piles 1, 2,
3, 4, 5 and 8. These plans are currently under review by MDEQ. Total costs
associated with these plans are estimated to be in the range of $4 million to $9
million. An investigation continues with respect to piles 4 and 5 and further
field investigation will be conducted in early 1998.
17
18
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION (continued)
CLEAN AIR ACT
The Clean Air Act Amendments of 1990 provided comprehensive federal regulation
of various sources of air pollutants, and established a new federal operating
permit and fee program for virtually all manufacturing operations. In addition,
the EPA is developing air toxics regulations for a broad spectrum of industries,
including portland cement manufacturing. The EPA has indicated that new maximum
available control technology ("MACT") standards could require significant
reduction of air pollutants below existing levels prevalent in the cement
industry. Although it is possible that compliance with the new standards could
entail significant expenditures by the company, management has no reason to
believe that these new standards would place the company at a disadvantage with
respect to its competitors.
BIF COMPLIANCE
The company currently operates two U.S. cement plants using waste - derived
liquid fuels (Wampum, Pennsylvania and Demopolis, Alabama) ("WDLF") that are
subject to emission limits and other requirements under RCRA and the Boiler and
Industrial Furnaces ("BIF") regulations promulgated under RCRA. The BIF
regulations are applicable to plants operating under "interim status" during the
RCRA Part B permitting process. The company's two BIF cement plants have
submitted formal Part B permit applications, which is the first step in the
permitting process. Both plants could conduct trial burns in 1998, which is the
second step in establishing permit limitations for incorporation into a draft of
the final Part B permit. Proposed Part B permits will be subject to public
hearing and comments, which would not be expected to occur before 1999. The BIF
regulations are extremely complex, and certain provisions have been subject to
varying interpretations. Pursuant to the BIF regulations, the company is
required to perform periodic BIF compliance tests and submit certificates of
compliance which are subject to monitoring and review by the EPA. The company
believes its certificates of compliance are substantially in compliance with the
BIF regulations. However, there can be no assurance that upon EPA's review of
the submissions, the EPA would concur with the company and not require a new BIF
test or levy fines for non-compliance. There can be no assurance that the
results of future BIF tests will be successful or that future certificates of
compliance will provide favorable operating parameters for burning WDLF. Should
the company fail a BIF test, it could continue to utilize WDLF for a total of
720 hours, including hours spent conducting a new BIF test.
PENNSYLVANIA EPA
On May 27, 1997, the company's Wampum, Pennsylvania cement plant received a
Notice of Violation ("NOV") from the EPA, Region III. The NOV alleges violations
intermittently since July 1, 1995 of opacity emission limitations under
Pennsylvania and federal law from emissions by the gravel bed filter and the
main kiln stack, as well as violations of fugitive air emission requirements
under Pennsylvania and federal law since at least March 25, 1997. In accordance
with its operating permit the company maintains continuous opacity monitors
which record opacity data from the plant's air emissions sources. These data are
submitted to the Pennsylvania Department of Environmental Protection ("PADEP")
on a quarterly basis. As provided by PADEP policy, the company is penalized by
PADEP for violations of opacity emission limitations detected by the continuous
opacity monitors. The company previously paid penalties totaling $212,175 to
PADEP for the opacity violations alleged by EPA in its May 27, 1997 NOV. At a
meeting in June 1997, the company advised representatives of EPA and PADEP that
it had implemented changes in March 1997 to improve control of opacity emissions
from the gravel bed filter, and that it plans to replace the electrostatic
precipitator ("ESP") for kilns 1 and 2 in early 1998 to improve control of
opacity emissions from the main kiln stack. The company preliminarily estimates
that the replacement
18
19
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (continued)
of the ESP will cost between $2.5 million and $3.5 million. The company is
unable to predict what penalties or other compliance measures EPA may seek for
the alleged violations.
On February 19, 1998, the company's Wampum, Pennsylvania plant received a second
NOV from EPA. The February 19, 1998 NOV alleges violations of Pennsylvania and
federal law between December 28, 1996 and November 21, 1997, relating to a
condition in the plant's air quality plan approval requiring automatic cessation
of flow of waste-derived liquid fuel upon exceeding certain opacity levels. The
interlock system which changes fuel sources is a computerized system. The
firmware installed for the company in December of 1996 to calculate opacity
emissions for purposes of the automatic cut-off was improperly configured so
that the cut-off would not operate to change fuel sources at the specified
opacity level. The firmware has been reconfigured to operate in accordance with
the opacity level specified by PADEP. The NOV also alleges that the company is
using an incorrect opacity level cut-off for this interlock system. On November
14, 1996, in response to a request from the company, PADEP issued a letter which
stated a change to the opacity level specified in the plant's plan approval
waste fuel cut-off condition. EPA's NOV alleges that PADEP's action did not
modify the company's plan approval condition, and that the company is obligated
to comply with the opacity level stated in the plant's original plan approval.
The company is formulating a response to EPA's February 19, 1998 NOV. The NOV
did not make a demand for any civil penalties, however it indicated that such
penalties were available. At this time, the company is unable to predict what
penalties or other compliance measures EPA may seek for the violations alleged
in the NOV. Therefore the company cannot estimate the final cost, but the
company does not believe at this time that it will have a material impact on the
company's results of operations.
ACQUISITIONS
During 1997, the company assumed $6.6 million in estimated environmental
liabilities related to three acquisitions during 1997. The liabilities relate to
estimated environmental cleanup, containment and compliance matters including
waste lime, coal ash and kiln brick issues, wetland considerations, underground
and above ground storage tank removal and other environmental matters related to
the acquired properties.
GENERAL COMPLIANCE
The company believes that it is in material compliance with environmental laws.
There can be no assurance, however, that a review of the company's past, present
or future operations by courts or federal, state, or local regulatory
authorities will not result in determinations that could have a material adverse
effect on the company's financial condition or results of operations. In
addition, the company cannot predict what environmental laws will be enacted or
adopted in the future or how such future environmental laws will be administered
or interpreted with respect to the company's historic or current actions. As a
result of the foregoing uncertainties, the company cannot determine at this time
if capital expenditures and other remedial actions that the company in the
future may be required to implement will have a material effect on its
operations, financial condition or liquidity. However, with respect to current
known environmental contingencies, the company has accrued for estimated
probable liabilities and does not believe that the ultimate resolution of these
matters will have a material effect on its operations, financial condition or
liquidity. See Note J to Notes to Consolidated Financial Statements.
PENDING MERGER
On March 17, 1998, the company entered into a definitive agreement to merge with
Southdown, Inc. ("Southdown"), a publicly held corporation with its headquarters
located in Houston, Texas whose primary lines of business are the production and
sale of portland cement and concrete.
19
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION (continued)
The agreement specifies, among other things, that Southdown will exchange .88 of
its common shares for each share of the company's common shares in an exchange
that is expected to be tax-free for income tax purposes. Based on the closing
prices of Southdown and the company's common stock on Tuesday, March 17, 1998,
the transaction results in an implied value for the company's common stock of
$61.22 per share and a 17% premium for the company's common shares. On that
basis, the total value of the proposed transaction is $1.0 billion. It is
expected that the merger will be accounted for as a pooling of interests. See
Note Q "Pending Merger" in the Notes to Consolidated Financial Statements.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the company had $13.8 million of cash and short-term
investments. The company has available an unsecured $180.0 million five-year
revolving credit facility for short-term working capital needs that expires
December 31, 2002, and unsecured bank lines of credit totaling $25.0 million. At
December 31, 1997, no amounts were outstanding under any of these facilities.
On December 31, 1997 and 1996, the company had no short-term borrowings
outstanding from its Revolving Credit Agreement. Current portions of long-term
debt totaled $12.1 million and $41,000 at December 31, 1997 and 1996,
respectively.
Working capital at December 31, 1997, decreased $20.6 million from December 31,
1996, due principally to an increase in the current maturity of long term debt
and various accruals and accounts payable. Increases in receivable and inventory
balances were offset by an $11.2 million reduction in cash balances which is
principally related to the acquisitions made for cash in 1997. 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 1.7:1 at December 31, 1997, and 2.6:1 at December 31,
1996.
Capital expenditures for 1997 were $24.6 million compared with $19.8 million for
1996. The continued high level of expenditures relate primarily to capital
improvements to maintain current capacities of facilities, environmental
compliance, enhance productivity and reduce operating costs. The company
announced in the third quarter that it is starting a $56 million expansion
project at the Clinchfield, Georgia cement plant and related distribution
facilities. The full effects of the modernization will begin to be realized in
the second half of 1999. Funding for the project is expected to be generated
from internally generated cash or the existing credit facilities.
On March 17, 1998, the company signed a definitive agreement with Southdown
Corporation, a Houston, Texas based cement company, under which the companies
will merge in a stock-for-stock transaction. Refer to Note Q "Pending Merger" in
the Notes to Consolidated Financial Statements.
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 500,288 shares for $19.2 million during
1997. Effective as of March 17, 1998, the company has terminated all prior share
repurchase authorities.
As a result of a 1996 conversion, the company is reliant on packaged software
products for its financial and other systems. The company has in place software
or has plans to update to newer versions of these software products in 1998,
that are believed to be year 2000 compliant. In addition, the company is
actively
20
21
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION (continued)
engaged with vendors, customers and financial institutions in assessing any
problems that might occur in this area. The third-party cost of upgrading to
year 2000 compliant versions of its software and hardware is included either in
software maintenance contracts with these vendors, which is an ongoing cost of
doing business, or is part of an ongoing program of hardware replacement. The
company does not anticipate significant incremental cost as a result of year
2000 compliance at the present time.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Financial Section
Consolidated Statements of Income for the years ended December 31, 1997, 1996
and 1995
Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended December 31, 1997,
1996 and 1995
Consolidated Statements of Shareholders' Equity for the years ended December 31,
1997, 1996 and 1995
Notes to Consolidated Financial Statements:
Note A - Summary of Significant Accounting Policies........26
Note B - Acquisitions......................................28
Note C - Inventories.......................................28
Note D - Property, Plant and Equipment - At Cost...........28
Note E - Other Current Assets..............................29
Note F - Other Assets......................................29
Note G - Other Accrued Liabilities.........................29
Note H - Short- And Long-Term Financing....................29
Note I - Leases............................................30
Note J - Environmental Matters.............................31
Note K - Postretirement Health Benefits....................31
Note L - Income Taxes......................................32
Note M - Pensions and Employee Benefit Plans...............33
Note N - Stock-Based Compensation Plans....................35
Note O - Segment Data......................................37
Note P - Earnings Per Share................................38
Note Q - Pending Merger....................................39
Note R - Subsequent Event..................................39
Note S - Quarterly Results (Unaudited).....................39
Management's Responsibility for Financial Reporting........40
Independent Auditors' Report...............................41
21
22
MEDUSA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1997 1996 1995
------ -------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
NET SALES $ 375,958 $ 323,377 $ 293,327
COSTS AND EXPENSES:
Cost of sales 237,720 200,999 184,997
Selling and administrative expense 35,078 27,445 24,168
Depreciation and amortization 18,153 13,354 14,772
--------- --------- ---------
290,951 241,798 223,937
--------- --------- ---------
OPERATING PROFIT 85,007 81,579 69,390
OTHER INCOME (EXPENSE):
Interest income 164 1,155 2,225
Interest expense (1,482) (3,674) (7,575)
Miscellaneous-net 147 145 (193)
--------- --------- ---------
(1,171) (2,374) (5,543)
INCOME BEFORE TAXES AND EXTRAORDINARY ITEM 83,836 79,205 63,847
PROVISION FOR INCOME TAXES 26,807 24,945 20,635
--------- --------- ---------
INCOME BEFORE EXTRAORDINARY ITEM 57,029 54,260 43,212
EXTRAORDINARY ITEM, LESS APPLICABLE
INCOME TAX REDUCTION (NOTE H) -- (1,770) --
--------- --------- ---------
NET INCOME $ 57,029 $ 52,490 $ 43,212
---------
- ------------------------------------------------------------------------------------
NET INCOME PER COMMON SHARE:
BASIC:
Income before extraordinary item $ 3.44 $ 3.38 $ 2.70
Extraordinary item -- (.11) --
--------- --------- ---------
$ 3.44 $ 3.27 $ 2.70
========= ========= =========
DILUTED:
Income before extraordinary item $ 3.41 $ 3.15 $ 2.54
Extraordinary item -- (.10) --
--------- --------- ---------
$ 3.41 $ 3.05 $ 2.54
========= ========= =========
AVERAGE COMMON SHARES OUTSTANDING:
Basic 16,579 16,054 16,018
Diluted 16,723 17,894 17,960
See Notes to Consolidated Financial Statements
22
23
MEDUSA CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1997 1996
--------- -------
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
CURRENT ASSETS:
Cash and short-term investments $ 13,813 $ 25,045
Accounts receivable, less allowances
of $1,095 ($351 in 1996) 32,786 28,708
Inventories 33,013 31,177
Other current assets 5,908 4,490
--------- ---------
TOTAL CURRENT ASSETS 85,520 89,420
PROPERTY, PLANT AND EQUIPMENT 161,473 125,729
GOODWILL 45,488 2,676
OTHER ASSETS 14,032 5,621
--------- ---------
TOTAL ASSETS $ 306,513 $ 223,446
- ----------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 12,134 $ 41
Accounts payable 16,348 15,575
Accrued compensation and payroll taxes 8,198 7,014
Other accrued liabilities 14,380 9,247
Income taxes payable 337 2,728
--------- ---------
TOTAL CURRENT LIABILITIES 51,397 34,605
LONG-TERM DEBT 24,108 4,084
ACCRUED POSTRETIREMENT HEALTH BENEFIT COST 28,450 27,760
RESERVES AND OTHER LIABILITIES 11,882 2,745
ACCRUED PENSION LIABILITY 0 282
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-16,664,949 shares (16,924,006 in 1996) 1 1
Paid in capital 72,077 57,159
Retained earnings 186,921 140,124
Unvested restricted common shares (28) (39)
Unearned restricted common shares (8,835) (7,516)
Currency translation adjustment (1,167) (930)
--------- ---------
248,969 188,799
Less Cost of Treasury Shares-1,960,807 shares
(1,367,440 shares in 1996) (58,293) (34,829)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 190,676 153,970
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 306,513 $ 223,446
See Notes to Consolidated Financial Statements
23
24
MEDUSA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
(IN THOUSANDS)
---------------------------------------------
1997 1996 1995
-------- -------- ------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 57,029 $ 52,490 $ 43,212
Adjustments to reconcile net income to net
cash provided from operating activities:
Depreciation and amortization 18,153 13,354 14,772
Noncash selling and administrative charges 2,007 898 676
Provision (benefit) for deferred income
taxes 1,218 10 (944)
Postretirement health benefit cost 288 232 222
Loss (gain) on sale of capital assets 48 (181) (33)
Accounts receivable 118 (7,298) 2,626
Inventories and other current assets (24) (1,800) (7,793)
Accounts payable and other current
liabilities (2,988) 2,998 220
Other assets (2,297) 1,841 (231)
Accrued pension, reserves and other
liabilities 3,340 1,368 (46)
-------- -------- --------
NET CASH PROVIDED FROM OPERATING
ACTIVITIES 76,892 63,912 52,681
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (24,560) (19,806) (25,345)
Payments for businesses acquired (30,204) - -
Proceeds from sale of capital assets 380 239 359
-------- -------- --------
NET CASH USED BY INVESTING ACTIVITIES: (54,384) (19,567) (24,986)
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury shares (19,233) (13,599) (1,878)
Dividends paid (10,232) (9,881) (8,152)
Stock options exercised 1,708 1,882 1,649
Proceeds from issuance of long-term debt - - 365
Payments on long-term debt (5,983) (30,868) (35,000)
-------- -------- --------
NET CASH USED BY
FINANCING ACTIVITIES (33,740) (52,466) (43,016)
-------- -------- --------
DECREASE IN CASH AND SHORT-TERM
INVESTMENTS (11,232) (8,121) (15,321)
CASH AND SHORT-TERM INVESTMENTS AT
BEGINNING OF YEAR 25,045 33,166 48,487
-------- -------- --------
CASH AND SHORT-TERM INVESTMENTS AT END OF YEAR $ 13,813 $ 25,045 $ 33,166
- -------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest (net of $26 capitalized
in 1995) $ 1,002 $ 4,064 $ 7,566
Income taxes 27,543 24,707 20,896
See Notes to Consolidated Financial Statements
24
25
MEDUSA CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
----------------------------------------------------------------------------------
UNVESTED UNEARNED
RESTRICTED RESTRICTED
COMMON PAID IN RETAINED COMMON COMMON
SHARES CAPITAL EARNINGS SHARES SHARES
BALANCE AT JANUARY 1, 1995 $ 1 $19,724 $62,455 $ (26) $(3,511)
Net income 43,212
Dividends paid-$.50 per
common share (8,152)
Issuance of 117,940 restricted
common shares 2,851 (120) (2,731)
Exercise of 149,417 stock options 2,000
Acquisition of 82,402 treasury shares
Retirement of 35,697 treasury shares (1,142)
Amortization for vesting of
restricted common shares 106 570
Currency translation adjustment
------- ------- ------- ------- -------
BALANCE AT DECEMBER 31, 1995 1 23,433 97,515 (40) (5,672)
Net income 52,490
Dividends paid-$.60 per
common share (9,881)
Issuance of 95,080 restricted
common shares 2,741 (119) (2,622)
Exercise of 225,537 stock options 4,313
Acquisition of 454,693 treasury shares
Conversion of subordinated notes
to 805,161 common shares 26,672
Amortization for vesting of
restricted common shares 120 778
Currency translation adjustment
------- ------- ------- ------- -------
BALANCE AT DECEMBER 31, 1996 1 57,159 140,124 (39) (7,516)
Net income 57,029
Income tax benefit from stock option
exercise 5,664
Dividends paid-$.60 per
common share (10,232)
Issuance of 108,120 restricted
common shares 3,985 (113) (3,872)
Exercise of 251,350 stock options 5,939
Acquisition of 500,288 treasury shares
Forfeiture of 25,160 restricted
common shares (670) 670
Amortization for vesting of
restricted common shares 124 1,883
Currency translation adjustment
------- ------- ------- ------- -------
BALANCE AT DECEMBER 31, 1997 $ 1 $72,077 $186,921 $ (28) $ (8,835)
(IN THOUSANDS, EXCEPT SHARE DATA)
--------------------------------------------------
CURRENCY TOTAL
TRANSLATION TREASURY SHAREHOLDERS'
ADJUSTMENT SHARES EQUITY
BALANCE AT JANUARY 1, 1995 $(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
Exercise of 149,417 stock options (494) 1,506
Acquisition of 82,402 treasury shares (1,878) (1,878)
Retirement of 35,697 treasury shares 1,142
Amortization for vesting of
restricted common shares 676
Currency translation adjustment 211 211
------- -------- --------
BALANCE AT DECEMBER 31, 1995 (890) (18,799) 95,548
Net income 52,490
Dividends paid-$.60 per
common share (9,881)
Issuance of 95,080 restricted
common shares
Exercise of 225,537 stock options (2,431) 1,882
Acquisition of 454,693 treasury shares (13,599) (13,599)
Conversion of subordinated notes
to 805,161 common shares 26,672
Amortization for vesting of
restricted common shares 898
Currency translation adjustment (40) (40)
------- -------- --------
BALANCE AT DECEMBER 31, 1996 (930) (34,829) 153,970
Net income 57,029
Income tax benefit from stock option
exercise 5,664
Dividends paid-$.60 per
common share (10,232)
Issuance of 108,120 restricted
common shares
Exercise of 251,350 stock options (4,231) 1,708
Acquisition of 500,288 treasury shares (19,233) (19,233)
Forfeiture of 25,160 restricted
common shares
Amortization for vesting of
restricted common shares 2,007
Currency translation adjustment (237) (237)
------- --------- --------
BALANCE AT DECEMBER 31, 1997 $ (1,167) $ (58,293) $190,676
See Notes to Consolidated Financial Statements.
25
26
MEDUSA CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 stated at the lower of cost or market. Cost is determined by the
following methods: (1) cement, aggregate quarries, highway safety and
construction, LIFO; (2) home & garden and industrial minerals, FIFO. 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.
GOODWILL
Goodwill, which represents the cost of purchased companies in excess of the fair
value of their net assets at dates of acquisition, is being amortized on the
straight-line method over a period of 40 years. This period was selected based
upon the expected lives of the mineral reserve quarries which are integral to
each of the acquired businesses. Accumulated amortization was $12.7 million,
$12.0 million and $11.9 million at December 31, 1997, 1996 and 1995,
respectively.
The company regularly reviews the carrying value of long-lived assets, certain
identifiable intangibles and goodwill related to those assets to determine if
any impairment has occurred requiring financial adjustment.
NET INCOME PER SHARE
The company adopted Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS No. 128"). All prior-period earnings per share data
presented has been restated to conform with the provisions of SFAS 128. Basic
net income per share is computed by dividing net income by the weighted average
number of common shares outstanding during the period. Diluted net income per
share is computed based on the weighted average number of common shares and
equivalent common shares outstanding during the period.
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.
26
27
The company estimates its quarries' end-of-life-cycle closing costs and
amortizes them based on actual annual stone production over the quarries' total
estimated stone reserves.
ENVIRONMENTAL MATTERS
The company's policy is to accrue environmental and related costs of a
non-capital nature when it is both probable that a liability has been incurred
and the amount can be reasonably estimated, whether or not a claim has been
asserted or this coincides with the completion of a remediation
investigation/feasibility study or the company's commitment to a formal plan of
action. If an amount is likely to fall within a range and no amount within the
range can be determined to be the better estimate, the minimum amount of the
range is recorded. No discounting is applied in the recording of these
liabilities and estimates are revised as additional information becomes known.
Expenditures that relate to an existing condition caused by past operations, and
which do not contribute to current or future revenue generation, are expensed.
Environmental expenditures that extend the life, increase the capacity, improve
the safety or efficiency of property owned by the company, mitigate or prevent
environmental contamination that has yet to occur, or that are incurred in
anticipation of a sale of property are capitalized.
RECENTLY ISSUED ACCOUNTING STANDARDS
In July 1997, the Financial Accounting Standards Board ("FASB") issued SFAS No.
130, "Reporting Comprehensive Income" which establishes standards for reporting
and presentation of comprehensive income and its components in a full set of
general-purpose financial statements. This statement requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is presented with
the same prominence as other financial statements. The standard requires that
companies (i) classify terms of other comprehensive income by their nature in a
financial statement and (ii) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of the statement of financial condition. The
statement is effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comprehensive purposes is required.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits," which standardizes the disclosures
for pensions and other postretirement benefits to the extent practicable,
requires additional information on changes in the benefit obligations and fair
values of plan assets that will facilitate financial analysis, and eliminates
certain disclosures that are no longer useful as they were when SFAS No. 87,
"Employers' Accounting for Pensions," SFAS No. 88, "Employers" Accounting for
Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits," and SFAS 106, "Employers Accounting for Postretirement
benefits Other than Pensions," were issued. SFAS No. 132 suggests combined
formats for presentation of pension and other postretirement benefit
disclosures. The statement does not change the measurement or recognition of
those plans. It is effective for fiscal years beginning after December 15, 1997.
Restatements of disclosures for earlier periods provided for comparative
purposes is required.
The company has not completed its process of evaluating the impact that will
result from adopting either standard and therefore is unable to disclose the
impact that adopting them will have on its financial position and results of
operations when such statements are adopted.
27
28
NOTE B-ACQUISITIONS
During 1997, the company completed two cash acquisitions at a cost of $30.2
million, net of cash and liabilities assumed of $19.4 million. In January 1997
the company acquired Lime Crest Corporation, a leading producer of home and
garden products, industrial limestone and construction aggregates based in
Sparta, New Jersey. In October 1997 the company acquired Lee Lime Corporation, a
producer of limestone, quicklime, hydrated lime, packaged cement mixes and a
leading producer of home and garden products based in Lee, Massachusetts.
In August, 1997 the company purchased all of the capital stock of White Stone
Company ("Castlewood") of Southwest Virginia as specified in the purchase
agreement for $30.0 million. In consideration of the purchase price as well as
an election by the company to step up the basis of the assets acquired for
income tax purposes, the company assumed liabilities and issued notes to the
seller shareholders for $31.5 million.
Net liabilities assumed were as follows:
Fair value of assets acquired: $ 34,716
Notes issued to seller shareholders 31,528
--------
Net liabilities assumed $ 3,188
========
Castlewood is a producer of industrial limestone and aggregates in Castlewood,
Virginia with a limestone pelletizing plant in Paradise, Pennsylvania.
All acquisitions were accounted for by the purchase method. The purchase prices
have been allocated to assets acquired and liabilities assumed based on fair
market value at the dates of acquisition and certain amounts estimated are
subject to revision. The results of operations for all acquisitions have been
included in the financial statements from their respective dates of purchase.
On an unaudited proforma basis, assuming the company had completed the three
acquisitions as of the beginning of 1996, net sales for 1997 and 1996 would have
increased $20.3 million and $36.1 million, respectively, whereas net income and
net income per Common Share would not have been significantly different from
reported amounts for either period.
NOTE C-INVENTORIES At December 31 (in thousands):
1997 1996
- ---------------------------------------------------------
Finished goods $16,555 $13,594
Work in process 1,644 3,424
Raw materials 1,366 1,124
Supplies 13,448 13,035
------- -------
$33,013 $31,177
Use of the first-in, first-out (FIFO) cost method would have increased
inventories from the amounts reported at December 31 by $7,595,000 in 1997 and
$7,590,000 in 1996.
NOTE D-PROPERTY, PLANT AND EQUIPMENT-AT COST
At December 31 (in thousands):
1997 1996
- --------------------------------------------------------------------------------
Land $ 16,237 $ 10,989
Buildings and improvements 39,151 22,169
Machinery and equipment 364,554 343,028
--------- ---------
419,942 376,186
Less accumulated depreciation (258,469) (250,457)
--------- ---------
$ 161,473 $ 125,729
28
29
NOTE E-OTHER CURRENT ASSETS
At December 31 (in thousands):
1997 1996
- -------------------------------------------------------------------------------
Prepaid deferred taxes $ 3,957 $ 2,816
Prepaid insurance 651 654
Other 1,300 1,020
-------- --------
$ 5,908 $ 4,490
NOTE F-OTHER ASSETS
At December 31 (in thousands):
1997 1996
- --------------------------------------------------------------------------------
Refundable income taxes $ 5,227 $ -
Deferred income taxes 4,458 2,390
Prepaid pension 997 294
Pension intangible asset - 903
Other 3,350 2,034
-------- --------
$ 14,032 $ 5,621
NOTE G-OTHER ACCRUED LIABILITIES
At December 31 (in thousands):
1997 1996
- --------------------------------------------------------------------------------
Accrued retrospective
general and liability insurance $ 2,472 $ 2,368
Accrued environmental 2,102 301
Taxes other than income 1,496 699
Current portion postretirement
health benefit cost 1,255 1,110
Accrued employee medical
insurance 1,005 1,108
Billings in excess of cost 988 277
Accrued interest payable 709 229
Other 4,353 3,155
-------- --------
$ 14,380 $ 9,247
NOTE H-SHORT AND LONG-TERM FINANCING
The company has an unsecured $180 million Revolving Credit Agreement
("Revolver") with four banks that expires on December 31, 2002. The Revolver has
a commitment fee of .125% to .35% per annum on the unused portion. The Revolver
has performance-based pricing which provides the company with reduced interest
rates and commitment fees upon achievement of certain financial performance
targets. On January 15, 1998, the company used proceeds of $20 million under
this facility for payment of notes payable to third parties. This amount has
been classified as long-term because it is not expected to be repaid during
1998. The company also has unsecured bank lines of credit totaling $25.0
million. At December 31, 1997, no amount was outstanding under any of these
credit facilities.
The Revolver contains certain covenants which, among other things, require
maintenance of certain specified ratios of current assets to liabilities,
interest coverage and debt to total capital. At December 31, 1997 the company
was in compliance with all covenants.
29
30
The company has available bank stand-by letter of credit facilities of $10.0
million of which $7.6 million was being utilized at December 31, 1997. These
facilities bear a 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. Long-term debt consists of the following
at December 31 (in thousands):
1997 1996
- --------------------------------------------------------------------------------
Notes payable to third parties,
principal and interest due
January 15, 1998, interest at 6.15% $31,528 $ -
Capitalized leases 3,800 3,800
Other 914 325
------- -------
36,242 4,125
Less current portion (12,134) (41)
------- -------
$24,108 $ 4,084
The notes payable to third parties represent debt incurred in connection with
the purchase of White Stone Company of Southwest Virginia. These notes were
backed by a bank letter of credit which bears a commitment fee of .35% per
annum. These notes were paid in full at maturity.
The company redeemed its 6% convertible subordinated notes ("Notes") effective
December 2, 1996. Note holders converted $26.7 million in Notes into 805,161
common shares, with the balance 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 average interest rate on all borrowings was 6.5% in 1997, 6.7% in 1996 and,
7.5% in 1995.
NOTE I-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, 1997 (in thousands):
CAPITAL OPERATING
LEASES LEASES
- -----------------------------------------------------------
1998 $ 181 $ 1,725
1999 181 1,568
2000 181 979
2001 181 842
2002 181 827
Thereafter 4,508 9,155
------- -------
Total minimum
lease payments 5,413 $15,096
=======
Less interest (1,613)
Present value of
future minimum
lease payments $ 3,800
30
31
The costs of assets capitalized under leases at December 31 are as follows (in
thousands):
1997 1996
- -------------------------------------------------------------------------------
Machinery and equipment $ 4,035 $ 4,035
Less accumulated
depreciation (2,571) (1,880)
------- -------
$ 1,464 $ 2,155
The weighted average interest rate for capital leases was 4.43% in 1997.
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, 1997, the minimum
required level of net worth under these covenants was $25.0 million.
Rental expense was $2,134,000, $1,942,000, and $1,828,000 for 1997, 1996 and
1995, respectively.
NOTE J-ENVIRONMENTAL MATTERS
At December 31 (in thousands):
1997 1996
- ------------------------------------------------------------------------------------------
Accrued estimated environmental liability $ 9,795 $ 770
Other 2,087 1,975
-------- --------
$ 11,882 $ 2,745
Accrued liabilities specifically related to environmental matters were $11.6
million and $1.1 million at December 31, 1997 and 1996.
In December 1997, the company accrued $4.0 million for environmental matters
principally related to cement kiln dust ("CKD") at its Charlevoix Plant. The
accruals relate to various noncapital costs associated with nine separate CKD
piles including costs for the operation and maintenance of monitoring wells,
ground water monitoring and recovery, capping and maintenance of the cap. Costs
associated with the design and licensing of an on-site landfill will be
capitalized as incurred.
Additionally, the company assumed $6.6 million in estimated environmental
liabilities related to its three acquisitions during 1997. The liabilities
relate to estimated environmental cleanup, containment and compliance matters
including waste lime, coal ash and kiln brick issues, wetland considerations,
underground and above ground storage tank removal and other environmental
matters related to the acquired properties.
Until all environmental studies, investigations, remediation work and
negotiations with or litigation against potential sources of recovery have been
completed and reviewed by regulatory authorities, however, the ultimate cost
that might be incurred by the company to resolve these environmental issues can
not be assured.
NOTE K-POSTRETIREMENT HEALTH BENEFITS
The company provides substantially all employees with health care and life
insurance benefits upon retirement through unfunded defined benefit plans.
31
32
The net periodic postretirement benefit cost was as follows (in thousands):
1997 1996 1995
- -------------------------------------------------------------------------------
Service cost $ 510 $ 539 $ 422
Interest cost on accumulated
postretirement benefit
obligation 1,555 1,495 1,583
Net amortization (523) (521) (702)
------- ------ ------
Net periodic postretirement
benefit cost $1,542 $1,513 $1,303
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):
1997 1996
- -------------------------------------------------------------------------------
Accumulated Postretirement
Benefit Obligation:
Retirees $10,816 $10,670
Eligible active plan
participants 4,931 4,229
Other active plan
participants 7,317 6,795
------- -------
23,064 21,694
Unrecognized net gain 6,641 7,176
------- -------
29,705 28,870
Less current portion (1,255) (1,110)
------- -------
Accrued Postretirement Health
Benefit Cost $28,450 $27,760
In 1997 and 1996, the cost of benefits was assumed to increase by 9.5% initially
and then decrease gradually to 5% by 2002 and remain at that level thereafter.
In 1995, 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, 1997 by approximately $2.8 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 7.0%
in 1997 (7.25% in 1996 and 7.25% in 1995).
NOTE L-INCOME TAXES
A reconciliation between the statutory federal income tax rate and the company's
effective income tax rate is as follows:
1997 1996 1995
- -------------------------------------------------------------------------------
Statutory rate 35.0% 35.0% 35.0%
State income tax, net of
federal income tax benefits 2.5 2.6 3.7
Percentage depletion (6.3) (5.8) (5.6)
Tax exempt interest (.1) (.1) (.2)
Other .9 (.2) (.6)
---- ---- ----
Effective rate 32.0% 31.5% 32.3%
Components of the provision for income taxes were as follows (in thousands):
1997 1996 1995
- --------------------------------------------------------------------------------
Deferred income tax
expense (benefit) $ 1,218 $ 10 $ (944)
Current income tax
expense 25,589 24,935 21,579
------- ------- -------
$26,807 $24,945 $20,635
32
33
The tax benefit for income tax deductions that differ from compensation expense
under the company's stock plans of $5.7 million in 1997 was credited to
additional paid-in capital.
The income tax provisions include state income tax provisions of $3,383,000,
$3,260,000 and $3,720,000 for 1997, 1996 and 1995, respectively.
Components of the net deferred tax assets shown in the company's balance sheets
at December 31 were as follows (in thousands):
1997 1996
- ----------------------------------------------------------------------------------------
Net book value of fixed assets
in excess of tax basis $(7,897) $(11,484)
Financial reporting accrual
for postretirement health benefits 9,331 11,707
Other financial reporting
accruals 5,406 4,010
Other taxable temporary
differences (1,004) (636)
Other deductible temporary
differences 2,579 1,609
------- --------
$ 8,415 $ 5,206
NOTE M-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):
1997 1996 1995
- ----------------------------------------------------------------------------
Service cost-benefits
earned during the year $ 1,206 $ 1,193 $ 929
Interest cost on projected
benefit obligation 2,420 2,287 2,059
Actual return on plan
assets (7,020) (4,792) (4,983)
Curtailment effect of early
retirement incentive -- 339 --
Net amortization and
deferral 4,585 2,699 3,225
------- ------- -------
Net periodic pension cost $ 1,191 $ 1,726 $ 1,230
33
34
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):
1997 1996
- ------------------------------------------------------------------------------------------
OVER- Over- Under-
FUNDED* FUNDED* FUNDED*
- ------------------------------------------------------------------------------------------
Actuarial present value of benefit obligations:
Vested $ 30,407 $ 10,239 $ 14,987
Nonvested 5,094 686 4,048
-------- -------- --------
Accumulated benefit
obligation 35,501 10,925 19,035
Effect of future pay
increases 3,895 3,440 --
-------- -------- --------
Projected benefit
obligation 39,396 14,365 19,035
Plan assets at fair
value 42,826 13,862 18,754
-------- -------- --------
Projected benefit
obligation less than
(in excess of) plan assets 3,430 (503) (281)
Unrecognized net (gain)
loss on assets (4,011) 531 (1,146)
Unrecognized net (asset)
obligation 447 (65) 622
Unrecognized prior service
cost 1,131 331 1,427
Additional minimum
liability -- -- (903)
-------- -------- --------
Net recorded pension
asset (liability) $ 997 $ 294 $ (281)
*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.
As of December 31, 1997 the company combined its various defined benefit pension
plans into a single plan.
Non-cash decreases of $903,000 and $1,359,000 to the pension intangible asset
and accrued pension liability were required to adjust the additional minimum
liability in 1997 and 1996, respectively.
Assumptions used as of December 31 were:
1997 1996 1995
- ------------------------------------------------------------------------------------------------
Discount rate 7.00% 7.25% 7.25%
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, 1997 and 1996, 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 $104,000, $102,000, and
$105,000 for 1997, 1996 and 1995, respectively.
Under the company's 401(k) savings plan, the company made contributions of
$484,000, $483,000 and $492,000 for 1997, 1996, and 1995, respectively.
34
35
NOTE N-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 as all
stock options are granted at the current market price, no compensation expense
is recognized for the company's stock options. Compensation expense recognized
for its employee restricted stock awards was $4.1 million in 1997 and $1.2
million in 1996. The pro forma net income and earnings per share listed below
reflect the impact of measuring compensation expense for options granted in
1997, 1996 and 1995 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.
1997 1996 1995
- --------------------------------------------------------------------------------
Net income As reported $ 57,029 $ 52,490 $43,212
Pro forma 55,531 51,453 42,735
Basic net income per share
As reported $ 3.44 $ 3.27 $ 2.70
Proforma 3.35 3.18 $ 2.67
Diluted net income per share
As reported $ 3.41 $ 3.05 $ 2.54
Proforma 3.32 3.01 $ 2.51
The weighted-average fair value of options granted was $11.12, $7.90 and $6.58
per share in 1997, 1996 and 1995, respectively. This estimate was based on using
the Black-Scholes multiple option-pricing model with the following
weighted-average assumptions:
1997 1996 1995
- --------------------------------------------------------------------------------
Dividend yield 1.64% 2.36% 2.46%
Volatility 25.89% 31.79% 31.79%
Risk-free interest rates 6.69% 6.43% 6.35%
Expected lives in years 5.18 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:
1997 1996 1995
- ---------------------------------------------------------------------------------
NUMBER WEIGHTED Number Weighted Number Weighted
OF AVERAGE of Average of Average
SHARES PRICE Shares Price Shares Price
(000) (000) (000)
- ---------------------------------------------------------------------------------
Outstanding at
January 1 625 $25.54 615 $21.69 549 $18.15
Granted 308 36.70 263 28.81 247 24.38
Exercised (251) 23.63 (225) 19.14 (149) 13.39
Canceled (47) 32.36 (28) 23.20 (32) 20.40
---- ---- ----
Outstanding at
December 31 635 $31.21 625 $25.54 615 $21.69
Options
exercisable at
December 31 186 $26.17 206 $22.20 240 $18.42
35
36
A summary of information regarding stock options outstanding December 31, 1997
follows:
Options Outstanding Options Exercisable
- ------------------------------------------------------- --------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise of Shares Contractual Exercise of Shares Exercise
PRICES (000) LIFE PRICE (000) PRICE
- -------------------------------------------------------- ------------------
$36.38-$45.16 282 9.33 $36.73 - -
$24.25-$28.81 339 6.12 $27.24 172 $27.00
$16.08 14 .36 $16.08 14 $16.08
The restricted stock award plan provides for awards of common stock to officers
subject to resale restrictions. The restrictions on outstanding awards are
scheduled to lapse upon the achievement of certain performance objectives. The
company awarded 105,000, 91,000 and 88,000 shares in 1997, 1996 and 1995,
respectively. For both the stock options and restricted stock, as of December
31, 1997, 466,767 shares were available for future awards.
The exercise of stock options which have been granted under the company's stock
option plan and the vesting of restricted stock give rise to compensation which
is deductible by the company and includable in the taxable income of the
applicable employees for federal and state income tax purposes. Such
compensation is not recognized as an expense for financial accounting purposes
and the related tax benefit of $5.7 million was taken directly to additional
paid-in capital in 1997.
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 3,120, 4,080 and
5,120 shares in 1997, 1996 and 1995, respectively.
36
37
NOTE O-SEGMENT DATA
In 1997, the company elected early adoption of Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS No. 131"). Under SFAS No. 131 disclosed segment information
is based on the way management organizes its segments within the enterprise for
making operating decisions and assessing performance.
Cement Aggregates
Group Group Drew Total
- ---------------------------------------------------------------------------------
1997
Net sales $276,618 $ 75,854 $23,486 $375,958
Depreciation/
amortization 12,285 3,815 356 16,456
Operating profit 77,791 11,165 1,418 90,374
Segment assets 181,473 107,927 10,595 299,995
Expenditures for
segment assets 16,075 5,347 711 22,133
1996
Net sales $258,555 $ 44,323 $20,499 $323,377
Depreciation/
amortization 10,878 1,737 322 12,937
Operating profit 75,487 7,189 916 83,592
Segment assets 181,028 27,545 7,564 216,137
Expenditures for
segment assets 13,599 3,568 814 17,981
1995
Net sales $233,755 $ 41,876 $17,696 $293,327
Depreciation/
amortization 10,862 3,423 231 14,516
Operating profit 64,690 5,607 693 70,990
Segment assets 181,603 24,146 7,431 213,180
Expenditures for
segment assets 18,139 3,990 201 22,330
Medusa Corporation has three segments: Cement Group, Aggregates Group and J. H.
Drew Corporation ("Drew"). The Cement Group produces cements for construction
applications. The Aggregates Group produces construction aggregates, home and
garden and industrial limestone products. Drew provides highway safety
construction services. The segments are identified based on the separate markets
served and the distinct operations required to service the markets.
1997 1996 1995
- ------------------------------------------------------------------------------------------------------
Profit or Loss
Total operating profit
for reportable segments $ 90,374 $ 83,592 $ 70,990
Non-allocated corporate
expenses (5,367) (2,013) (1,599)
Non-operating income
(expense) - primarily
interest expense (1,171) (2,374) (5,544)
--------- --------- ---------
Income before income taxes
and extraordinary items $ 83,836 $ 79,205 $ 63,847
========= ========= =========
Assets
Total assets for reportable
segments $ 299,995 $ 216,137 $ 213,180
Unallocated assets(a) 6,518 7,309 6,398
--------- --------- ---------
Total Assets $ 306,513 $ 223,446 $ 219,578
========= ========= =========
37
38
Other Significant items
Segment expenditures for
assets $ 22,133 $ 17,981 $ 22,330
Corporate expenditures
for assets 2,427 1,825 3,015
--------- --------- ---------
Total $ 24,560 $ 19,806 $ 25,345
========= ========= =========
Segment depreciation/
amortization $ 16,456 $ 12,937 $ 14,516
Corporate depreciation/
amortization 1,697 417 256
--------- --------- ---------
Total $ 18,153 $ 13,354 $ 14,772
========= ========= =========
(a) Unallocated assets are the corporate headquarters assets
NOTE P-EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share.
1997 1996 1995
- -------------------------------------------------------------------------------
BASIC EPS
Earnings:
Income before
extraordinary item $57,029 $ 54,260 $43,212
Extraordinary item -- (1,770) --
------- -------- -------
Net income 57,029 52,490 43,212
Shares:
Weighted average number
of common shares outstanding 16,579 16,054 16,018
------- -------- -------
Basic EPS:
Before extraordinary item $ 3.44 $ 3.38 $ 2.70
Extraordinary item -- (.11) --
------- -------- -------
Basic EPS $ 3.44 $ 3.27 $ 2.70
DILUTED EPS
Earnings:
Income before
extraordinary item $57,029 $ 54,260 $43,212
Extraordinary item -- (1,770) --
Interest on convertible
subordinated notes,
net of taxes -- 2,137 2,336
------- -------- -------
Net income available to
common shareholders $57,029 $ 54,627 $45,548
Shares:
Weighted average number
of common shares outstanding 16,579 16,054 16,018
Dilutive Effect of
Potential Common Stock:
Stock options 129 91 84
Restricted stock 15 162 122
Convertible notes -- 1,587 1,736
------- -------- -------
Weighted average number of
common shares after
dilutive effects 16,723 17,894 17,960
------- -------- -------
Diluted EPS:
Before extraordinary item $ 3.41 $ 3.15 $ 2.54
Extraordinary item -- (.10) --
------- -------- -------
Diluted EPS $ 3.41 $ 3.05 $ 2.54
38
39
NOTE Q - PENDING MERGER
On March 17, 1998, the company entered into a definitive agreement to merge with
Southdown Corporation ("Southdown"), a publicly held corporation with its
headquarters located in Houston, Texas whose primary lines of business are the
production and sale of portland cement and concrete.
The agreement specifies, among other things, that Southdown will exchange .88 of
its shares for each share of the company in an exchange that is expected to be
tax-free for income tax purposes. It is expected that the merger will be
accounted for as a pooling of interests. The transaction is subject to
shareholder approval by both companies.
The following unaudited pro forma data summarizes the combined operating results
of the company and Southdown as if the merger had occurred at the beginning of
the periods presented.
UNAUDITED PRO FORMA
- ------------------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------
(In millions, except per share data)
Revenue $1,095.2 $ 987.8 $ 889.4
Net income 153.7 125.5 90.7
Net income per common share:
Basic 4.10 3.64 2.58
Diluted 3.94 3.21 2.37
Average shares outstanding (1):
Basic 36.9 32.4 31.4
Diluted 39.0 39.8 39.2
(1) The pro forma weighted average common shares outstanding have been
computed based on the total of the weighted average common shares outstanding of
the company and Southdown (adjusted to equivalent shares of Southdown assumed to
be issued in the pooling) for all periods presented.
NOTE R - SUBSEQUENT EVENT
On February 19, 1998, the company's Wampum, Pennsylvania plant received a second
NOV from the EPA alleging violations of Pennsylvania and federal law between
December 28, 1996 and November 21, 1997, relating to a condition in the plant's
air quality plan approval requiring automatic cessation of flow of waste-derived
liquid fuel upon exceeding certain opacity levels. The company is formulating a
response to this notice. The NOV did not make a demand for any civil penalties,
however it indicated that such penalties were available. At this time, the
company is unable to predict what penalties or other compliance measures EPA may
seek for the violations alleged in the NOV. Therefore the company cannot
estimate the final cost, but the company does not believe at this time that it
will have a material impact on the company's results of operations.
39
40
NOTE S - QUARTERLY RESULTS (UNAUDITED)
Summarized quarterly financial results for 1997 and 1996 appear in the table
below (in thousands, except per share amounts):
Earnings Per Share
Net Gross Net --------------------------
Sales Profit Income Basic Diluted
- ---------------------------------------------------------------------------------------------------------
1997
1ST $ 56,839 $ 9,615 $ 1,832 $ .11 $ .11
2ND 103,185 38,608 18,308 1.10 1.09
3RD 117,068 43,034 23,746 1.44 1.42
4TH 98,866 30,853 13,143 .80 .79
------- -------- -------- -------- --------
$375,958 $122,110 $ 57,029 $ 3.44 $ 3.41
- ---------------------------------------------------------------------------------------------------------
Earnings Per Share
Net Gross Net --------------------------
Sales Profit Income Basic Diluted
- ---------------------------------------------------------------------------------------------------------
1996
1st $ 45,073 $ 7,999 $ 1,192 $ .07 $ (a)
2nd 85,995 29,489 14,969 .93 .86
3rd 109,295 39,259 22,094 1.39 1.27
4th 83,014 31,378 16,005(b) .99(b) .93(b)
-------- -------- -------- -------- --------
$323,377 $108,125 $ 54,260(b) $ 3.38(b) $ 3.15(b)
- ---------------------------------------------------------------------------------------------------------
(a) Anti-dilutive
(b) Before an extraordinary charge, net of income taxes, of $1,770 or, $(.11)
and $(.10) basic and diluted per share, respectively.
The company's business is highly seasonal and particularly sensitive to weather
conditions. Quarter results are not indicative of annual results.
40
41
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 following 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
41
42
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, 1997 and 1996
and the related consolidated statements of income, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. Our
audits also included the financial statement schedule listed in the Index at
Item 14. These financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on the financial statements and the financial statement schedule 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, 1997
and 1996 and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly in all material respects the
information set forth therein.
/s/ Deloitte & Touche LLP
Cleveland Ohio
January 26, 1998
(March 18, 1998 as to notes Q and R)
42
43
Item 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
--------
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) Identification of Directors
The respective ages, positions and periods of service as Directors of the
Company, business experience during the past five years and directorships in
other companies are set forth below:
MONE ANATHAN, III
Age 58; Director since 1992; former President of Filene's Basement
Corp., Wellesley, MA (retailer), 1984 to 1997. Other Directorships:
Filene's Basement Corp., Crane Co., Brookstone, Inc.
E. THAYER BIGELOW, JR.
Age 56; Director since 1988; Chief Executive Officer, Courtroom
Television Network, New York, NY, an affiliate of Time Warner
Entertainment LP, 1997 to present; President and Chief Executive
Officer, Time Warner Cable Programming, Inc., Stamford, CT, a
subsidiary of Time Warner Entertainment LP (basic cable television
program services), 1991 to 1997. Other Directorships: Crane Co., Lord
Abbett Mutual Funds.
R. S. EVANS
Age 54; Director since 1979; Chairman and Chief Executive Officer of
the Company, 1987 to present; Chairman and Chief Executive Officer of
Crane Co., Stamford, CT (diversified manufacturer of engineered
products and an affiliate of the Company), 1984 to present; President
of Crane Co., 1987 to 1991 and 1992 to 1995. Other Directorships:
Crane Co., Fansteel Inc., HBD Industries, Inc.
RICHARD S. FORTE
Age 53; Director since 1988; Chairman, Forte Cashmere Company, Inc.,
Woonsocket, RI (processor and dealer of luxury natural fibers), 1987
to present; President of Forte Cashmere Company, Inc.,
Woonsocket, RI, 1992 to 1996; President, Dawson Forte Cashmere Co.,
1997 to present. Other Directorships: Crane Co., Wilmington Research &
Development Corporation.
DORSEY R. GARDNER
Age 55; Director since 1989; President, Kelso Management Company,
Inc., Boston, MA. (investment management). Other Directorships: Crane
Co., Filene's Basement Corp., Medicus Systems Corp.
JEAN GAULIN
Age 55; Director since 1995; Vice Chairman, President and Chief
Operating Officer of Ultramar Diamond Shamrock Corporation, San
Antonio, TX (petroleum refining and marketing), 1996 to present;
Chairman and Chief Executive Officer of Ultramar Corporation,
Greenwich, CT, 1992 to 1996; Chief Executive Officer of Ultramar PLC
and President, Chief Executive Officer and Chairman of American
Ultramar Limited, 1989 to 1992. Other Directorships: Ultramar Diamond
Shamrock Corporation, Crane Co., Quebec Telephone.
43
44
PART III
Item 10. (a)IDENTIFICATION OF DIRECTORS (continued)
DWIGHT C. MINTON
Age 63; Director since 1988; Chairman of the Board, Church & Dwight
Co., Inc., Princeton, NJ (manufacturer of consumer and specialty
products). Other Directorships: Church & Dwight Co., Inc., Crane Co.
CHARLES J. QUEENAN, JR.
Age 67; Director since 1988; Senior Counsel, Kirkpatrick & Lockhart
LLP, Pittsburgh, PA (attorneys-at-law). Other Directorships: Crane
Co., Allegheny Teledyne Incorporated.
GEORGE E. UDING, JR.
Age 66; Director since 1993; President and Chief Operating Officer of
the Company, 1994 to present; Consultant, 1992 to 1993; Senior Vice
President, ESSROC Corporation through 1991.
BORIS YAVITZ
Age 74; Director since 1988; Principal, Lear, Yavitz & Associates
(consultants); Paul Garrett Professor Emeritus of Public Policy and
Business Responsibility and Dean Emeritus, Columbia University
Graduate School of Business, New York, NY. Other Directorships: Crane
Co., Israel Discount Bank of New York.
44
45
Item 10. (b)IDENTIFICATION OF EXECUTIVE OFFICERS
The executive officers of the registrant are as follows:
Robert S. Evans Chairman and Chief Chairman & Chief Executive 54
Executive Officer Officer of the company
since 1988: Chairman and Chief
Executive Officer, Crane Co.
(diversified manufacturer of
engineered products).
George E. Uding, President and Chief President and Chief Operating 66
Jr. Operating Officer Officer of the company since
1994; former Senior Vice
President, Essroc Corporation
(producer of cement).
Robert J. Kane Senior Vice Senior Vice President of the 48
President Company and President of Medusa
Cement Group since 1994;
previously Vice President of the
company and President of Medusa
Aggregates Group; Vice-President
and Controller of Medusa
Aggregates Company, a subsidiary
Robert D. Vilsack Vice President Vice President, Secretary 37
Secretary and and General Counsel of the
General Counsel company since 1997; former Vice
President, General Counsel
and Secretary - Figgie
International (manufacturer
of diversified products).
Dennis R. Knight Vice President Vice President of the company; 52
and President of Medusa
Aggregates group since 1994;
former Regional Vice President -
General Manager Vulcan Materials
(Wisconsin, Indiana, Central
Illinois and Iowa) (aggregates).
R. Breck Denny Vice President Vice President-Finance and 49
Finance and Treasurer (Chief Financial
Treasurer Officer) of the company since
1994; previously Director of
Strategic Planning, Medusa
Corporation; former Vice
President - Advisory, Mergers
and Acquisitions, J.P. Morgan
(investment banking).
45
46
Item 10. (b)IDENTIFICATION OF EXECUTIVE OFFICERS (continued)
Alan E. Redeker Vice President Vice President of the company 54
and Vice President
Manufacturing, Medusa Cement
Company, a division since 1994;
former General Manager of
Northern California operations of
Associated Concrete Products
and held various positions at
Kaiser Cement Corporation (producer
of cement).
Richard A. Brown Vice President Vice President - Human 50
Resources of the company since
1994; previously Director of
Human Resources, Medusa
Corporation; former Vice
President-Human Resources and
Corporate Services, Pioneer-
Standard Electronics, Inc.
(manufacturer of electric components).
All executive officers serve at the pleasure of the Board of Directors with no
fixed term of office.
Item 11. EXECUTIVE COMPENSATION
COMPENSATION OF DIRECTORS
The Company's standard retainer payable to each non-employee Director is $15,000
per annum. Pursuant to the Company's 1988 Non-Employee Director Restricted Stock
Plan, non-employee Directors are awarded Common Shares with a fair market value
equal to the annual retainer. All Directors who are not full-time employees of
the Company, of which there are currently eight, are eligible to participate in
the 1988 Non-Employee Director Restricted Stock Plan. Once awarded, the Common
Shares are subject to forfeiture if the Director ceases to remain a Director
until the Company's next annual meeting of shareholders, except in the case of
death, permanent disability or change in control, and may not be sold for a
period of five years thereafter. In April of 1997, each non-employee Director
received 390 restricted Common Shares pursuant to the 1988 Non-Employee Director
Restricted Stock Plan. Non-employee Directors also receive $250 for each Board
of Directors meeting attended. Further, non-employee Directors who are members
of Committees of the Board of Directors receive $250 for each Committee meeting
attended.
46
47
Item 11. EXECUTIVE COMPENSATION (continued)
The table below shows information concerning annual and long-term compensation
earned during the last three fiscal years by the Chief Executive Officer and the
four other most highly compensated executive officers as of the end of fiscal
year 1997 and one former executive officer (the "Named Executive Officers"):
Long-term Compensation
----------------------
Annual Compensation Awards Payouts
-------------------- ---------- -------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Securities
NAME AND PRINCIPAL Other Annual Underlying All Other
- ------------------ Compensation Restricted Stock Options/ LTIP Compensation
POSITION YEAR SALARY($) BONUS($) ($)(1) AWARDS($)(2) SAR'S(#) PAYOUTS($)(3) ($)(4)
- --------- ---- ---------- --------- --------- ------------ -------- ------------- - ------
R. S. Evans 1997 $285,000 $163,445 $690,106 $92,647 30,000 $844,960 $10,000
Chairman of the Board & 1996 275,000 211,971 342,660 63,762 30,000 323,438 10,000
Chief Executive Officer 1995 250,000 139,466 397,117 59,816 30,000 275,625 8,047
George E. Uding, Jr. 1997 345,000 197,854 345,712 163,324(5) 30,000 379,409 6,707
President & 1996 330,000 254,366 237,124 97,224(5) 30,000 -0- 10,000
Chief Operating Officer 1995 300,000 167,360 169,764 99,182(5) 30,000 -0- 7,536
Robert J. Kane 1997 169,000 96,920 336,222 16,987 15,000 368,993 9,019
Senior Vice President 1996 162,000 124,870 239,258 10,833 15,000 107,813 7,454
1995 155,000 86,469 157,339 10,116 15,000 91,875 5,395
R. Breck Denny 1997 163,020 93,490 161,344 29,282 13,500 177,075 8,711
Vice President-Finance 1996 156,750 120,824 47,693 21,177 13,500 -0- 7,213
and Treasurer 1995 150,000 83,680 37,626 19,817 12,000 -0- -0-
Dennis R. Knight 1997 138,060 79,176 155,938 27,536 15,000 171,136 3,832
Vice President 1996 132,750 98,109 -0- 20,198 12,000 -0- 5,942
1995 127,000 70,849 -0- 17,331 12,000 -0- -0-
John P. Siegfried(6) 1997 128,608 66,380 261,850 80,280 12,000 287,372 4,750
Vice President, Secretary 1996 135,000 104,059 203,986 50,912 12,000 107,813 6,226
and General Counsel 1995 130,000 72,522 173,326 47,385 12,000 91,875 5,527
(1) With respect to 1997, this column reflects tax gross-up payments payable in
cash when established performance targets with respect to performance
restricted shares ("Performance Restricted Shares") are achieved as of an
established test date and the restrictions on such Performance Restricted
Shares lapse. With respect to fiscal years 1996 and 1995, this amount also
includes non-preferential dividends paid on Performance Restricted Shares
for which the restrictions had not lapsed.
(2) This column reflects the value of Supplemental Executive Retirement Plan
("SERP-Equivalent") shares awarded to each Named Executive Officer as of
the date of grant. The SERP equivalent shares are actuarially-determined
time-vested restricted shares.
47
48
Item 11. EXECUTIVE COMPENSATION (continued)
(3) This column reflects the value (as of the vesting date) of the
Performance Restricted Shares which vested during the fiscal year as a
result of the attainment of the established performance targets. As of
December 31, 1997, the aggregate number of unvested Performance
Restricted Shares and the value of such shares held by the Named
Executive Officers were as follows: Mr. Evans, 80,672 shares having a
market value of $3,368,056; Mr. Uding, 88,400 shares having a market
value of $3,690,700; Mr. Kane, 35,988 shares having a market value of
$1,502,499; Mr. Denny, 27,471 shares having a market value of
$1,146,914; Mr. Knight, 27,619 shares having a market value of
$1,153,093; and Mr. Siegfried, -0-.
(4) All Other Compensation reported in column (i) includes; a) amounts
contributed by the Company as matching contributions for fiscal 1997
for the Named Executive Officers, except for Mr. Evans, under the
401(k) Plan, and b) the non-qualified matching contributions made by
the Company in fiscal 1997 for the benefit of Messrs. Evans, Uding,
Kane, Denny, Knight and Siegfried of $10,000, $1,957, $4,269, $3,961,
$1,374 and $-0-, respectively.
(5) Under the terms of the plan, Mr. Uding's SERP-Equivalent share
restrictions immediately lapsed upon award because he had attained
age 62.
(6) Mr. Siegfried retired from the Company on December 1, 1997.
STOCK OPTION GRANTS IN LAST FISCAL YEAR:
The table below shows all individual grants of stock options to the Named
Executive Officers during the fiscal year ended December 31, 1997:
(a) (b) (c) (d) (e) (f)
Number of
Securities % of Total
Underlying Options/SAR's (1)
Options/ Granted to Exercise or Grant Date
SAR's(1) Employees in FISCAL Base Price Expiration Present VALUE
Name (#)Granted Year ($/Sh)(2) Date ($)(3)
---- ---------- ---- ---------- ---- ------
R. S. Evans................. 30,000 10.2% $36.375 04/21/2007 $464,700
George E. Uding, Jr. 30,000 10.2% 36.375 04/21/2007 464,700
Robert J. Kane.............. 15,000 5.1% 36.375 04/21/2007 232,350
R. Breck Denny.............. 13,500 4.6% 36.375 04/21/2007 209,115
Dennis R. Knight............ 15,000 5.1% 36.375 04/21/2007 232,350
John P. Siegfried........... 12,000 4.1% 36.375 04/21/2007 185,880
48
49
Item 11. EXECUTIVE COMPENSATION (continued)
(1) Since fiscal 1990, the Company has not granted any stock appreciation
rights (SAR's).
(2) All Stock Options were granted with an exercise price equal to the fair
market value of the Common Shares on the date of grant. Options granted
become exercisable 50% one year, 75% two years and 100% three years
after grant and, unless exercised, expire ten years after grant. Except
with respect to senior executive officers (the Chairman and the
President), whose awards continue to vest and be exercisable on a
post-employment basis for the balance of the vesting period or exercise
period), if employment terminates, the participant may exercise his or
her Stock Options only to the extent they could have been exercised on
the date the participant's employment terminated and within three
months thereafter. In the event a participant's employment terminates
by reason of death, retirement, permanent disability or change in
control, Stock Options become fully vested and exercisable in
accordance with their terms. The exercise price may be paid by delivery
of Common Shares owned by the participant for more than six months and
the participant's income tax obligations related to exercise may be
satisfied by surrender of Common Shares held previously or received
upon exercise, subject to certain conditions.
(3) The Stock Options were valued using the Black-Scholes method which
indicated a value of $15.49 per option. The assumptions used were:
Volatility .259, Risk-Free Interest Rate 6.87% based on the Bear,
Stearns & Co.'s Treasury Strip Rate Maturing May 2007; Dividend Yield
1.65% and a ten-year time of exercise. Since the actual value, if any,
which an optionee may realize depends on the excess of the stock price
over the exercise price on the date the option is exercised, there is
no assurance that the value will be at or near the value estimated
using the Black-Scholes method.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table provides information with respect to Stock
Options exercised by the Named Executive Officers during 1997 under the 1991
LTIP and the value of unexercised in-the-money Stock Options held at
December 31, 1997:
(a) (b) (c) (d) (e)
Value of Unexercised
Number of Securities In-the-Money Options/ SAR's
Underlying Unexercised (1) at DECEMBER 31,
Options/SAR's (1) at -------------
Shares Acquired December 31, 1997(#) 1997($)(3)
On Exercise Value Realized -------------------- ----------
(#) ($)(2) Exercisable Unexercisable Exercisable Unexercisable
--- ---- ---- ------- ----------- ------------- ----------- -------------
NAME
R. S. Evans.............. 52,500 $1,324,456 15,000 52,500 $194,062 $485,624
George E. Uding, Jr. 30,000 574,453 15,000 52,500 194,062 485,624
Robert J. Kane........... 17,250 343,969 -0- 26,250 -0- 242,812
R. Breck Denny........... 8,250 144,492 9,750 23,250 139,453 212,015
Dennis R. Knight......... 9,000 116,437 2,250 24,000 34,594 244,969
John P. Siegfried........ 17,625 352,477 -0- -0- -0- -0-
49
50
Item 11. EXECUTIVE COMPENSATION (continued)
(1) Since fiscal 1990, the Company has not granted any stock appreciation
rights (SAR's).
(2) Since fiscal 1995, no Named Executive Officer has received any value
from any exercise of an SAR.
(3) The fair market value (the average of the high and low prices on the
New York Stock Exchange Composite Transactions Tape) of one Medusa
Corporation Common Share on December 31, 1997 was $41.75. The value is
calculated by determining the difference between the option exercise
price and $41.75, multiplied by the number of shares of Common Stock
underlying the options.
50
51
Item 11. EXECUTIVE COMPENSATION (continued)
LONG-TERM INCENTIVE PLAN AWARDS IN LAST FISCAL YEAR
The table below shows information with respect to Performance Restricted
Shares awarded pursuant to the 1991 LTIP to the Named Executive Officers during
the fiscal year ended December 31, 1997:
(a) (b) (c)
Number Of Shares, Units Performance Or
Or Other Other Period Until
Name Rights (#)(1) Maturation Or Payout (2)
---- ----------------------- ------------------------
R. S. Evans ........................ 17,453 20% per year;
from 4/22/98 to 4/21/02
George E. Uding, Jr. 15,510 20% per year;
from 4/22/98 to 4/21/02
Robert J. Kane ..................... 9,533 20% per year;
from 4/22/98 to 4/21/02
R. Breck Denny ..................... 8,195 20% per year;
from 4/22/98 to 4/21/02
Dennis R. Knight.................... 9,243 20% per year,
from 4/22/98 to 4/21/02
John P. Siegfried .................. 5,793 20% per year;
from 4/22/98 to 4/21/02
<FN>
- --------------
(1) This column reflects Performance Restricted Share awards. The fair market
value (the average of the high and low prices on the New York Stock
Exchange Composite Transactions Tape) of one Common Share on the April 21,
1997 award date (the "Award Date") was $36.375.
(2) A 20% portion of the Performance Restricted Share award is tested annually
during the 5-year restriction period on each anniversary of the Award Date
(each, a "Test Date"). In order for the share restrictions to fully lapse,
two requirements must be met: (i) the value of one Common Share (adjusted
for stock distributions, but not reflecting dividends) may not decline from
the Award Date to a Test Date; and (ii) the Common Share growth rate must
meet or exceed 110% of the growth rate of the Cement Industry Peer Group,
when measured from the Award Date to a Test Date. There is also a provision
for "Partial Lapses" with respect to proportionate amounts of the shares in
10% increments, if more than 101%, but less than 110%, of the growth rate
performance objective is attained (i.e., a 101% growth rate causes the
restrictions to lapse with respect to 10% of the shares, etc.). If, when
tested, the restrictions on all or part of a 20% portion of the award fail
to lapse, then such portion or portions are not forfeited until they are
retested, as applicable, during the 5-year restriction period. Upon the
lapse of restrictions on Performance Restricted Shares, the participant
will receive a tax gross-up payable in cash. During the performance period,
the Performance Restricted Shares may be voted and pay non-preferential
dividends to the participant.
51
52
Item 11. EXECUTIVE COMPENSATION (continued)
RETIREMENT BENEFITS
The Medusa Corporation Pension Plan for Certain Covered Employees (the "Pension
Plan") is a defined benefit pension plan. The amount of contribution with
respect to a specified person is not, and cannot be, individually calculated.
Benefits under the Pension Plan are based on the participant's base salary, but
excludes annual and long-term incentive compensation and commissions and
reflects credited years of service up to a maximum of 35 years of service. The
table below sets forth estimated annual benefits under the Pension Plan which
are payable to an employee upon normal retirement in 1998 at age 65 with
selected periods of service and assumes payments are made on a straight life
annuity basis:
PENSION PLAN TABLE
Estimated Annual Benefits upon Retirement in 1998
REMUNERATION with Years of Service Indicated(1)
------------- ---------------------------------------------------------------------------------------------------------
5 YEARS 10 YEARS 15 YEARS 20 YEARS 25 YEARS 30 YEARS 35 YEARS
------- -------- -------- -------- -------- -------- --------
$100,000 $ 6,720 $13,440 $20,160 $26,880 $ 33,600 $ 40,320 $ 47,040
125,000 8,416 16,833 25,249 33,665 42,082 50,498 58,915
150,000 10,113 20,225 30,338 40,451 50,564 60,676 70,789
175,000 11,809 23,618 35,427 47,237 59,046 70,855 82,664
200,000 13,506 27,011 40,517 54,022 67,528 81,034 94,539
225,000 15,202 30,404 45,606 60,808 76,010 91,212 106,414
250,000 16,898 33,797 50,695 67,594 84,492 101,391 118,289
- --------------
(1) The amounts shown exclude any benefits under the Pension Plan provided
solely through optional employee contributions. In accordance with
amendments to the Internal Revenue Code (the "Code") made by the Tax
Reform Act of 1986 and the Omnibus Budget Reconciliation Act of 1993
("OBRA"), the maximum amount of compensation which may be included in
the determination of any participant's benefit under the Pension Plan
in 1998 is $160,000 and the maximum annual benefit payable under the
Pension Plan in 1998 is $130,000. However, these limitations may not
reduce a participant's accrued benefit under the Pension Plan below
such participant's accrued benefit under the Pension Plan as of
December 31, 1988.
The above table covers all of the Named Executive Officers, other executive
officers and other salaried employees on a non-contributory basis. The Pension
Plan also provides for the payment of benefits to an employee's surviving spouse
or other beneficiary and various other optional methods of payment. The
calculation of retirement benefits under the Pension Plan is based upon average
earnings for the highest five consecutive years in the ten years preceding
retirement. The benefits listed in the above table are not subject to any
deductions for Social Security or other offset amounts. As of March 2, 1998, the
years of credited service for the Named Executive Officers are as follows:
Messrs. Evans, Uding, Kane, Denny and Knight were: 10, 4, 18, 3 and 3 years,
respectively. Mr. Siegfried retired from the Company on December 1, 1997.
52
53
Item 11. EXECUTIVE COMPENSATION (continued)
In fiscal 1995, the Board of Directors approved a SERP-Equivalent Plan for
executive officers. The value of the SERP-Equivalent Plan awards to the Named
Executive Officers in fiscal 1997 are set forth in the restricted stock award
column of the Annual Compensation table. As stated below in its report, the
Board of Directors or the Organization and Compensation Committee, as
applicable, has annually awarded a comparable number of restricted shares to the
executive officers. From fiscal 1991 through fiscal 1994, these awards were
solely Performance Restricted Shares. However, beginning in fiscal 1995 and
continuing in fiscal 1997, an actuarially-based number of shares were
"carved-out" from the restricted share award and restricted for a period of five
years, or until the participant reaches age 62, whichever occurs sooner. The
SERP-Equivalent Plan awards are designed to supplement the Company qualified
pension plan by providing the maximum pension benefit at 15 rather than 35 years
of service, and are based upon Annual Incentive Plan (the "AIP") compensation in
addition to base salary. In fiscal 1997, the balance of the 1991 LTIP awards to
the Named Executive Officers were in Performance Restricted Shares or Stock
Options (see "Stock Option Grants in Last Fiscal Year").
SEVERANCE AGREEMENTS
The Company has special termination agreements with each of its
executive officers including the Named Executive Officers (other than Mr.
Siegfried who retired on December 1, 1997). Prior to a change of control of
the Company, the beneficiaries are employees at will and as such may be
discharged without being entitled to contractual benefits (change of control
includes tender offers and certain other change of control transactions). The
agreements provide for a lump sum cash payment of three times the amount of the
employee's annual base salary and a pro-rata portion of any annual incentive
compensation from the previous year if: (a) within two years from the date of a
change of control such employee is terminated without cause by the Company; (b)
within such two-year period such employee terminates his or her employment for
good reason; or (c) at the end of a one-year period from the date of a change
of control such employee terminates his or her employment within a 30-day
period for any reason. All of the agreements provide for reimbursement of the
employee on an after-tax basis in the event excise taxes are imposed on
employee benefits under Section 4999 of the Code, irrespective of whether such
benefits are paid by reason of the agreement or otherwise.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table shows information with respect to the only persons
(including any group) known to the Company to beneficially own five
percent or more of the Common Shares outstanding at March 2, 1998:
Number Of Percent
Name And Address Common Shares Of Class
---------------- -------------- ---------
FMR Corp.
82 Devonshire St.
Boston, MA 02109.......................... 2,191,804 (1) 13.0%
The Crane Fund
100 First Stamford Place
Stamford, CT 06902........................ 1,560,370 (2) 9.3%
53
54
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(continued)
(1) As reported in a Schedule 13G/A received by the Company on March 2,
1998 from FMR Corp. ("FMR"). FMR filed the Schedule 13G/A for certain
affiliates, Fidelity Management & Research Company, Fidelity Management
Trust Company, Fidelity Magellan Fund and Fidelity International
Limited, which entities are the beneficial owners of the Common Shares.
In the Schedule 13G/A, FMR and its principals indicated that they had
filed on a voluntary basis and disclaimed that they were a "group" and
thus, that their shares did not need to be aggregated for purposes of
Section 13(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act").
(2) As reported in a Schedule 13D received by the Company on October 31,
1988. The Crane Fund is a charitable trust managed by trustees
appointed by the Board of Directors of Crane Co. On March 2, 1998, the
trustees of The Crane Fund were G. A. Dickoff, A. I. duPont, R. B.
Phillips, M. L. Raithel and D. S. Smith, all of whom are officers of
Crane Co. Pursuant to the trust instrument, Common Shares held by such
trust shall be voted by the trustees as directed by the Board of
Directors of Crane Co., the distribution of the income of the trust for
its charitable purposes is subject to the control of the Crane Co.
Board of Directors, and Common Shares may be sold by the trustees only
upon the direction of the Crane Co. Board of Directors acting by a
two-thirds vote. Messrs. Anathan, Forte, Gardner, Gaulin, Evans,
Minton, Bigelow, Queenan and Yavitz, directors of the Company, are also
directors of Crane Co. and collectively represent 100% of the current
directors of Crane Co.. None of the trustees of The Crane Fund,
Directors of Crane Co. or Directors or Nominees for Director of the
Company have any direct beneficial interest in, and all disclaim
beneficial ownership of, Common Shares held by The Crane Fund.
54
55
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(continued)
The following table shows beneficial ownership, reported to the Company as of
March 2, 1998 (except as otherwise noted below), of Common Shares by each
Director, nominee for Director and each Executive Officer named in the Summary
Compensation Table (which includes one former Executive Officer) and, as a
group, of such persons and other executive officers:
Common Percent
Name Shares(1)(2) Of
---- ------------ ---------
CLASS(2)(3)
Mone Anathan, III................................ 3,490 *
E. Thayer Bigelow, Jr. .......................... 7,859 *
R. S. Evans...................................... 741,061 (4)(5)(6) 4.4%
Richard S. Forte................................. 8,424 *
Dorsey R. Gardner................................ 5,342 *
Jean Gaulin ..................................... 3,040 *
Dwight C. Minton................................. 9,047 *
Charles J. Queenan, Jr. ......................... 17,175 *
George E. Uding, Jr. ............................ 161,452 (5)(6) *
Boris Yavitz..................................... 12,115 *
Robert J. Kane................................... 131,965 (5)(6) *
R. Breck Denny................................... 54,658 (5)(6) *
Dennis R. Knight................................. 42,621 (5)(6) *
John P. Siegfried................................ 82,516 (5)(6)(7) *
*
All of the above and other
executive officers as a group 1,404,313 (5)(6) 8.4%
(18 persons).....................................
<FN>
- -----------------------------------
(1) Each person has sole voting and investment power with respect to the Common
Shares listed, unless otherwise indicated. Includes Common Shares held
jointly, or in other capacities, as to which, in some cases, beneficial
ownership is disclaimed.
(2) The number of Common Shares owned by each person, or by the group, has been
adjusted and the percentage owned (where such percentage exceeds 1.0%) has
been computed in accordance with Rule 13d-3(d)(1) of the Securities
Exchange Act.
(3) An asterisk indicates ownership of less than 1.0%.
(4) The shareholdings shown in the above table include 77,200 Common Shares
owned by The Evans Family Foundation, as to which Mr. Evans disclaims
beneficial ownership.
(5) The shareholdings shown in the above table include Common Shares held under
the Medusa Corporation Savings and Investment Plan (the "401(k) Plan") for
Messrs. Evans, Uding, Kane, Denny, Knight, Siegfried and all executive
officers as a group, which are -0-, 1,004, 1,344, 383, 281, 3,450 and
10,794 Common Shares, respectively.
55
56
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(continued)
(6) The shareholdings shown in the above table include Common Shares
subject to non-qualified stock options ("Stock Options") exercisable
within 60 days of March 2, 1998 by Messrs. Evans, Uding, Kane, Denny,
Knight, Siegfried and all executive officers as a group, which are
30,000, 30,000, 7,500, 16,500, 9,750, 0 and 130,875 Common Shares,
respectively.
(7) Mr. Siegfried retired from the Company on December 1, 1997, and the
amount indicated represents his beneficial ownership as of that date.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The law firm of Kirkpatrick & Lockhart LLP, of which Mr. Queenan is Senior
Counsel, furnished legal services to the Company in fiscal 1997. Such legal fees
did not exceed five percent of the gross revenues of Kirkpatrick & Lockhart LLP
in 1997. Apart from the director compensation arrangements, which Mr. Queenan
received, he did not personally receive any fees for legal services which
Kirkpatrick & Lockhart LLP provided to the Company in fiscal 1997.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
PAGE
(a) 1. Financial Statements and Schedules
Item 8 of this report lists certain consolidated financial statements
and supplementary data of the company and its subsidiaries.
2. Financial Statement Schedules
Schedule II Valuation and Qualifying Accounts..................57
All other statements and schedules for which provision is made in the
applicable regulations of the Securities and Exchange Commission have been
omitted because they are not required under related instructions or are
inapplicable, or the information is shown in the consolidated financial
statements and related financial review.
56
57
MEDUSA CORPORATION AND SUBSIDIARIES
SCHEDULE II- VALUATION AND QUALIFYING ACCOUNTS
YEARS ENDED DECEMBER 31,
Balance at Additions (deductions) Balance at
beginning charged (credited) to (deductions)- end of
Description Of Year Costs And Expenses Additions Year
- ----------- ------- ------------------ -------------- ----------
1997
Deducted from Asset Accounts:
Allowances for Doubtful
Accounts $ 350,640 $ 36,694 (A) $ 937,318 (D) $ 1,095,341
(269,869)(C)
40,558 (F)
Reserve for Policy
Adjustments 822,624 775,154 0 1,597,778
Environmental Reserves:
Current 301,000 115,000 894,160 (H) 2,101,160
791,000 (D)
Long-term 770,481 4,386,628 (276,477)(G) 9,795,472
(894,160)(H)
5,809,000 (D)
---------- ---------- ---------- -----------
TOTAL $2,244,745 $5,313,476 $7,031,530 $14,589,751
========== ========== ========== ===========
1996
Deducted from Asset Accounts:
Allowances for Doubtful
Accounts $ 351,257 $ 141,090 (A) $ (141,707) (E) $ 350,640
Reserve for Cash Discounts 185,408 0 (185,408) (B) 0
Reserve for Policy
Adjustments 72,033 750,591 0 822,624
Environmental Reserves:
Current 301,000 301,000
Long-term 808,060 180,000 (217,579) (G) 770,481
---------- ---------- ---------- -----------
TOTAL $1,717,758 $1,071,681 $ (544,694) $ 2,244,745
========== ========== ========== ===========
1995
Deducted from Asset Accounts:
Allowances for Doubtful
Accounts $ 228,503 $ 122,754 (A) $ 0 $ 351,257
Reserve for Cash Discounts 209,570 (24,162) 0 185,408
Reserve for Policy
Adjustments 80,719 (8,686) 0 72,033
Environmental Reserves:
Current 417,000 (116,000) (G) 301,000
Long-term 1,041,339 150,000 (383,279) (G) 808,060
--------- --------- ---------- -----------
TOTAL $1,977,131 $ 239,906 $ (499,279) $ 1,717,758
========= ========= ========== ===========
Note A - Additional reserve based on receivable balance.
Note B - Adjust company receivables to net vs. gross.
Note C - Portion of reserve no longer considered necessary.
Note D - Reserves acquired at time of acquisition of Sparta, Whitestone and
Lee Lime.
Note E - Receivable written off to reserve
Note F - Miscellaneous adjustments
Note G - Charges against reserve
Note H - Reclassification
57
58
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(continued)
(a) 1. Financial Statements and Schedules (continued)
3. Exhibits
Exhibit
NUMBER DESCRIPTION OF EXHIBIT
3.1 Articles of Incorporation of Medusa Corporation -
incorporated by reference from Exhibit 3.1 to the
company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1988
3.2 Proposed Form of Amended and Restated Articles of Incorpora-
tion of Medusa Corporation - incorporated by reference from
Exhibit 3.2 to the company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1988
3.3 Regulations of Medusa Corporation - incorporated by
reference from Exhibit 3.3 to the company's Annual Report on
Form 10-K for the fiscal year ended December 31, 1988
3.4 Proposed Form of Amended and Restated Regulations of Medusa
Corporation - incorporated by reference from Exhibit 3.4 to
the company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1988
10.1 Proposed Form of Right Agreement - incorporated by reference
from Exhibit 10.1 to the company's Annual Report on Form
10-K for the fiscal year ended December 31, 1988
10.3 Proposed Form of Medusa 1988 Restricted Stock Award Plan -
incorporated by reference from Exhibit 10.3 to the company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1988
10.5 Form of Employment Agreement between Medusa Corporation and
certain of its officers (R. S. Evans, G. E. Uding) -
incorporated by reference from Exhibit 10.3 to the company's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1988
10.6 Form of Employment Agreement between Medusa Corporation and
certain of its officers (R. J. Kane, R. B. Denny, D. Knight)
- incorporated by reference from Exhibit 10.6 to the
company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1988
10.9 Form of Indemnification Agreement between Medusa Corporation
and its directors and certain of its officers - incorporated
by reference from Exhibit 10.9 to the company's Annual
Report on Form 10-K for the fiscal year ended December 31,
1988
58
59
Exhibit
Number Description Of Exhibit
- ------ ----------------------
11.1 Medusa Corporation 1991 Long-Term Incentive Plan -
incorporated by reference from Amendment to Form S-8 filed
February, 1996, Registration No. 33-46182
11.2 Medusa Corporation 1991 Long-Term Incentive Plan -
incorporated by reference from Form S-8 filed June 13, 1997,
Registration No. 333-29173
*12 Amended and Restated Revolving Credit Agreement, dated as of
January 27, 1993 and as amended and restated as of December
15, 1995, between the company and KeyBank National
Association, Amendment No. 1 dated as of December 16, 1996
and Amendment No. 2 dated as of December 17, 1997
13 Agreement and Plan of Merger dated as of March 17, 1998
between Medusa Corporation, Bedrock Merger Corp., and
Southdown, Inc. - incorporated by reference from Exhibit 2.1
to the company's Reports on Form 8-K filed March 24, 1998
*21 Subsidiaries of the Registrant
*23 Consent of independent auditors
Financial Data Schedules Restated
------------------------ ---------
*27.1 Fiscal year end 1997 No
*27.2 Fiscal year end 1995 Yes
*27.3 Fiscal year end 1996 and Quarters 1,2,3 of 1996 Yes
*27.4 Quarters 1, 2, 3 of 1997 Yes
99.1 Press release dated March 18, 1998 - incorporated by
reference to Form 8-K filed March 24, 1998
Registration No. 001 - 01274
*99.2 Shareholders' Letter dated March 25, 1998
- ---------------------
* Filed herewith
(b) Reports on Form 8-K
No Reports on Form 8-K were filed during last quarter of 1997.
60
PART IV
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act
of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
MEDUSA CORPORATION
(Registrant)
ROBERT S. EVANS
Robert S. Evans
Chairman, Chief Executive
Officer and a Director
Date MARCH 23,1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
-OFFICERS-
R. BRECK DENNY GEORGE E. UDING, JR. EDWARD A. DOLES
R. Breck Denny George E. Uding, Jr. Edward A. Doles
Vice President-Finance President, and Chief Corporate Controller
and Treasurer Operating Officer and a
Director
Date March 23, 1998 Date March 23,1998 Date March 23, 1998
----------------- -------------------- ---------------
-DIRECTORS-
Mone Anathan, III E. Thayer Bigelow, Jr. Richard S. Forte'
- -------------------- ----------------------- ------------------
Mone Anathan, III E. Thayer Bigelow, Jr. Richard S. Forte'
Date MARCH 23, 1998 Date MARCH 23, 1998 Date MARCH 23, 1998
--------------- --------------- ---------------
Dorsey R. Gardner
- -------------------- ----------------------- ------------------
Dorsey R. Gardner Jean Gaulin Dwight C. Minton
Date March 23, 1998 Date March 23, 1998 Date March 23, 1998
--------------- --------------- ---------------
Charles J. Queenan, Jr.
- -------------------- -----------------------
Charles J. Queenan, Jr. Boris Yavitz
Date March 23 , 1998 Date March 23, 1998
---------------- ---------------