<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1993
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM ____________________ TO _________________
COMMISSION FILE NUMBER 1-6117
SOUTHDOWN, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
LOUISIANA 72-0296500
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
1200 SMITH STREET
SUITE 2400
HOUSTON, TEXAS 77002-4486
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 650-6200
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
<S> <C>
Common Stock, par value $1.25 per share New York Stock Exchange, Inc.
Preferred Stock Purchase Rights New York Stock Exchange, Inc.
Preferred Stock, $2.875 Cumulative Convertible Series D New York Stock Exchange, Inc.
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K 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/
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 ___
As of January 31, 1994 the number of shares of common stock outstanding
was 17.1 million. As of such date, the aggregate market value of voting stock
held by nonaffiliates, based upon the closing price of these shares on the New
York Stock Exchange, was approximately $626.4 million.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive annual proxy statement to be
filed within 120 days of the Registrant's fiscal year ended December 31, 1993
are incorporated by reference into Part III.
<PAGE> 2
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1993 1992 1991
------- ------- -------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues $544.8 $507.4 $506.9
======== ======== ========
Costs and expenses $499.8 $500.0 $520.8
======== ======== ========
Write-down of environmental
services assets $3.1 $21.4 -
======== ======== ========
Operating earnings (loss) $39.0 $(16.6) $(15.7)
======== ======== ========
Equity in net loss of unconsolidated - - $16.0
joint venture
======== ======== ========
Interest expense $39.3 $45.0 $40.7
======== ======== ========
Income tax benefit $0.3 $20.2 $29.2
======== ======== ========
Net loss per share $(3.22) $(2.69) $(2.94)
======== ======== ========
</TABLE>
CONSOLIDATED EARNINGS
1993 compared with 1992
Operating earnings for the year ended December 31, 1993 were $39
million compared with an operating loss of $16.6 million for the prior year.
The years ended December 31, 1993 and 1992 include write-downs of $3.1 million
and $21.4 million, respectively, to adjust the carrying value of certain
environmental services assets. Including a $48.5 million, $2.86 per share,
first quarter charge related to adoption of Statement of Financial Accounting
Standards No. 106, "Employers' Accounting for Postretirement Benefits Other
Than Pensions" (SFAS No. 106) and a $1 million redemption premium (net of tax)
resulting from the early retirement of $45 million of 12% Senior Subordinated
Notes, the net loss for the year ended December 31, 1993 was $49.5 million,
$3.22 per share, primary and fully diluted. The net loss for the prior year
period was $40.6 million, $2.69 per share, primary and fully diluted, including
an $800,000 after-tax gain on discontinued operations, $0.05 per share fully
diluted.
Consolidated revenues in 1993 increased 7% over the prior year
primarily because of improvements in sales volumes and sales prices from the
Cement and Concrete Products operating segments. Excluding the write-down of
environmental services assets in both years, 1993 operating earnings increased
$37.3 million over the prior year. This increase was attributable to
improvements in each of the operating segments because of: (i) improved sales
volumes and operating margins from the Cement and Concrete Products operations;
(ii) the sale or prior year classification as "Held for Sale" of four hazardous
waste processing facilities that generated operating losses in the prior year
and (iii) improved operating results from the remaining waste processors. The
current year included (i) a $3 million charge to increase the estimated
liability for remediation of an inactive cement kiln dust (CKD)
29
<PAGE> 3
disposal site; (ii) a $1.7 million charge for proxy contest fees and expenses
and (iii) a $1.2 million gain from the sale of the Company's right to receive
its portion of the settlement of bankruptcy claims against LTV Corporation.
The prior year included (i) a $3.6 million charge related to remediation of the
inactive CKD disposal site previously mentioned; (ii) $1.1 million in charges
to decontaminate hazardous waste processing equipment and incinerate waste
contaminated with polychlorinated byphenyls (PCB), which was accepted and
processed in error at two of the Company's hazardous waste processors; (iii) a
$3.0 million charge to record the loss realized upon closing of the final phase
of the Florida aggregate operation sale; (iv) an $853,000 charge for unpaid use
taxes and penalty and interest due thereon; (v) a $2.7 million gain recognized
on the sale of a cement terminal and (vi) a $2.7 million gain representing a
fee earned for approval of a non-affiliated debt refinancing.
Although 1993 revenues increased 7% over 1992, operating costs
increased only approximately 1% because of a favorable impact of continued cost
savings measures and because of the elimination of operating costs attributable
to the four hazardous waste processing facilities which were sold or classified
as "Held for Sale" by the end of 1992.
Depreciation, depletion and amortization for 1993 declined compared
with the prior year because of the 1992 write-down of certain goodwill and
non-compete contracts and the decision to lease, rather than purchase, new
mobile equipment. Primarily because of cost reduction measures imposed during
1993, general and administrative expenses for the year ended December 31, 1993
decreased by $5 million despite a $2.5 million charge to accrue the estimated
cost of providing postretirement health care benefits in excess of claims
incurred as required by the 1993 adoption of SFAS No. 106.
Interest expense for the year ended December 31, 1993 was $5.7 million
lower than the prior year primarily because of lower outstanding debt.
The effective rate of the tax benefit on the operating loss for 1993
was 100% because of the interaction of the increase of corporate federal income
tax rate, permanent differences between book and tax loss for the year and
state income tax benefit. (See Note 12 of Notes to Consolidated Financial
Statements.)
The $48.5 million charge as a result of the adoption of SFAS No. 106
is reported as the "Cumulative effect of a change in accounting principle", and
represents the estimated liability based on benefit plans in effect at January
1, 1993 for postretirement benefits, other than pensions, attributable to
employee services provided in prior years. (See Notes 2 and 16 of Notes to
Consolidated Financial Statements.)
1992 compared with 1991
Operating earnings for the year ended December 31, 1992 were $4.8
million, excluding the $21.4 million write-down of certain environmental
services assets, compared with an operating loss of $15.7 million in the prior
year. The net loss for 1992 was $40.6 million, $2.69 per share fully diluted,
compared with a 1991 net loss of $44.6 million, $2.94 per share. Both years
had a number of significant, miscellaneous items. The 1992 write-down of
environmental services assets consisted primarily of the difference between the
book value and the estimated fair value of the four of the Company's six
hazardous waste processors to be sold, estimated losses related to such assets
until sold and the write-off of capitalized environmental permitting costs
deemed not to be recoverable. (See Note
30
<PAGE> 4
18 of Notes to Consolidated Financial Statements.) Significant miscellaneous
items included in 1992 results are described in detail above. In the third
quarter of 1992, the Company also recognized an $800,000 after-tax gain on
discontinued operations, $0.05 per share fully diluted, resulting from
recognition of the final portion of the gain deferred from the 1989 sale of the
Company's oil and gas operations. The 1991 operating loss included a number of
significant, miscellaneous charges including: (i) a $5.9 million write-down of
the Florida aggregate operations in connection with the sale of those
operations; (ii) a $3.1 million charge to establish a reserve for estimated
remediation costs of the previously discussed inactive CKD site in Ohio; (iii)
a $1.1 million charge representing the estimated loss on a reverse interest
rate swap transaction and (iv) a $3.6 million charge to increase the allowance
for doubtful accounts. In 1991 the Company also recorded a $12.3 million
pretax write-off of the Company's remaining investment in a thermal
distillation joint venture. The write-down of the environmental services
assets in 1992 resulted in an after-tax charge of $1.01 per share in 1992
compared with the $0.47 per share charge in 1991 as a result of the write-off
of the investment in the joint venture. Also included in 1991 was a $1.4
million after-tax extraordinary charge for the prepayment penalty on the early
retirement of certain debt.
Consolidated revenues in 1992 were essentially the same as revenues in
the prior year. A 3% increase in Cement segment revenues and an 18% increase
in Environmental Services segment revenues were offset by a 13% decline in
Concrete Products segment revenues. Lower Concrete Products revenues resulted
from declining ready-mixed concrete sales volume and prices in the face of the
ongoing recession in the southern California construction industry. An
increase in Florida ready-mixed concrete revenues was offset by the loss of
revenues from the two Florida aggregate operations sold in late 1991.
Consolidated operating earnings in 1992, excluding the $21.4 million
write-down of environmental services assets, improved significantly over the
prior year as a strong recovery in Cement segment earnings and reduced losses
from the Concrete Products segment more than offset increased losses
experienced by the Environmental Services segment. The improvement in Cement
segment earnings resulted from the favorable impact of increased margins and
higher sales volume. Margins increased despite lower average cement sales
prices because of lower operating costs reflecting the impact of a cost
reduction program, as well as the positive impact of spreading fixed costs over
higher production levels needed to fulfill sales demand. Losses in the
Concrete Products segment were lower because the decline in southern California
sales volume was offset by improved margins in the Florida ready-mixed concrete
operations. The Environmental Services segment, excluding the write-down of
certain assets, experienced increased operating losses in 1992 primarily
because of: (i) losses incurred at the Spring Grove, Ohio facility subsequent
to its acquisition in January 1992; (ii) special charges incurred to
decontaminate equipment and incinerate PCB contaminated wastes that were
accepted and processed in error; (iii) lower sales volume and throughput of
liquid hazardous waste derived fuels (HWDF); (iv) higher operating costs in the
Environmental Services segment generally, and (v) higher sales and marketing
expenses incurred as a result of the development of a larger sales force for
the segment.
Interest expense in 1992 increased $4.3 million compared with 1991
primarily because of higher borrowing costs resulting from the issuance of $125
million of 14% Senior Subordinated Notes in late 1991, partially offset by
lower interest rates on the Company's variable rate debt.
The estimated effective income tax rate of 33% for 1992 reflected the
impact of permanent differences between book income and taxable income for the
year. The estimated effective tax rate of
31
<PAGE> 5
40% for 1991 was higher than the statutory rate because of the nature of the
permanent differences which resulted in an increase in the effective rate of
the tax benefit associated with the loss for that year.
SEGMENT OPERATING EARNINGS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1993 1992 1991
-------- -------- --------
(IN MILLIONS)
<S> <C> <C> <C>
REVENUES:
Cement $370.9 $339.5 $328.4
Concrete Products 176.3 158.1 181.1
Environmental Services 36.1 43.4 36.8
Intersegment sales (39.0) (34.3) (41.1)
Other 0.5 0.7 1.7
-------- -------- --------
$544.8 $507.4 $506.9
======== ======== ========
OPERATING EARNINGS (LOSS):
Cement $81.9 $62.6 $44.9
Concrete Products (1.6) (11.6) (12.7)
Environmental Services (2.2) (10.6) (4.4)
Write-down of environmental
services assets (3.1) (21.4) -
Corporate
General and administrative (28.9) (32.7) (34.1)
Depreciation, depletion and (4.3) (4.4) (4.3)
Miscellaneous income (losses) (2.8) 1.5 (5.1)
-------- -------- --------
$39.0 $(16.6) $(15.7)
======== ======== ========
</TABLE>
Cement - Operating earnings for the year ended December 31, 1993 were
$81.9 million on revenues of $370.9 million compared with operating earnings
and revenues of $62.6 million and $339.5 million, respectively, in the prior
year. Operating results improved over the prior year primarily as a result of
a 7% increase in sales volumes and a 27% improvement in margins. The Company
realized price increases in most of the Company's cement markets throughout the
year resulting in a 3% improvement in the average price per ton on a
year-to-year comparison and a 6% increase in average price per ton on a
year-end to year-end comparison. The average operating cost per ton in 1993
declined approximately 3% from 1992 as the segment's cost reduction program
produced additional savings in 1993 operating costs compared with the prior
year. Improvements in operating earnings over the prior year were realized at
six of the Company's cement plants. Operating earnings declined at the
Pittsburgh and Knoxville plants primarily because of higher operating costs
resulting from longer than expected maintenance shutdowns and various other
operating problems during the year.
As a result of successful antidumping petitions filed by a group of
domestic cement producers, including the Company, cement imports into the U.S.
have declined significantly over the past several years. Consequently, the
Company has, in some instances, been able to sell cement to customers who
32
<PAGE> 6
previously bought cement imported from outside the U.S. During the past
several years, the Company has contracted to sell cement for up to fifteen
months under large volume sales contracts with as many as six other cement
manufacturers or distributors. Some of the contracts have take-or-pay
provisions. In exchange for guarantees of minimum annual sales volumes, these
contracts generally provide for lower sales prices than the Company's customary
sales arrangements. In 1993 and 1992 these contracts, assuming they
represented only incremental sales (i.e., that fixed costs were fully covered
by other sales), accounted for approximately 25% and 31% of the Cement
segment's operating earnings, respectively. For 1994 and beyond, the Company
has renegotiated certain of these contracts, providing for, among other things,
similar minimum annual sales volumes, price escalation clauses and, in one
instance, a multi-year term. The loss of a significant portion of the sales
from these large volume contracts would have a material adverse effect on the
Company's results of operations although the Company believes that at least a
portion of the volumes covered by these contracts could be replaced by direct
sales to cement consumers in the Company's existing markets.
Cement segment operating earnings for the year ended December 31, 1992
were $62.6 million compared with $44.9 million in the prior year. Earnings
improved primarily because of an 8% increase in sales volume compared with the
prior year and because of increased margins resulting from lower unit costs.
Unit costs declined in 1992 primarily because of cost saving measures and
higher volumes over which to spread fixed costs. The year ended December 31,
1991 included a special one-time $3.6 million Cement segment charge to increase
the allowance for doubtful accounts while 1992 included an $853,000 charge for
prior year unpaid use taxes and related penalties.
Cement segment revenues were $339.5 million and $328.4 million in 1992
and 1991, respectively. The increase in 1992 revenues over the prior year
resulted from the previously mentioned 8% increase in sales volume, but was
partially offset by a $2.28 per ton decline in average selling prices from 1991
levels. An increase in large volume, lower-priced shipments combined with
competitive price reductions was largely responsible for the 1992 decline in
average selling prices. Cement segment operating earnings improved in 1992
because of the increase in sales volume and because of the improvement in
margins. Sales volumes increased at six of the eight cement plants with only
the Pittsburgh, Pennsylvania and Fairborn, Ohio plants registering decreases
from 1991. The Lyons, Colorado cement plant experienced a 38% increase in
sales volume as the effects of airport construction and an improving regional
economy resulted in increased 1992 demand. Only the Lyons, Colorado and
Pittsburgh, Pennsylvania cement plants reported an increase in 1992 average
selling prices over 1991. Margins improved, however, because of the better
than 9% decrease in unit operating costs.
Sales volumes and average unit prices, manufacturing and other plant
operating costs and margins relating to cement plant operations for the past
three years appear in the table below:
<TABLE>
<CAPTION>
1993 1992 1991
---------- ---------- ---------
<S> <C> <C> <C>
Tons of cement sold (in thousands) 6,196 5,788 5,340
========== ========== =========
Weighted average per ton data:
Sales price (net of freight) $ 51.59 $ 49.98 $ 52.26
Manufacturing and other plant operating costs1 38.57 39.70 2 43.72
---------- ---------- ---------
Margin $ 13.02 $ 10.28 $ 8.54
========== ========== =========
</TABLE>
--------------
(1) Includes fixed and variable manufacturing costs, selling
expenses, plant general and administrative costs, other plant
overhead and miscellaneous costs.
(2) Excludes the effect of an $853,000 charge for unpaid use taxes
related to prior years.
33
<PAGE> 7
Operating costs per ton have declined in each of the last two years
compared with the prior year primarily because of the favorable impact of: (i)
higher sales volume and higher production levels which resulted in fixed costs
being spread over more units and (ii) the effect of a cost reduction program.
Clinker production increased 3% in 1993 compared with the prior year and 9% in
1992 from 1991 levels in response to increased sales demand.
The increase in the average sales price per ton for 1993 compared with
the prior year reflects a general firming of cement prices throughout the
industry and at least the partial realization of price increases implemented at
most of the Company's cement plants during 1993. The average sales price per
ton was lower for 1992 compared with 1991 because of an increase in the
proportion of large volume, lower-priced shipments to total sales combined with
the impact of other competitive price concessions granted during a recessionary
period.
Concrete Products Operations - The concrete products segment's
operating loss for 1993 improved to $1.6 million from the $11.6 million loss
reported in the prior year. Revenues increased approximately 12% over the
prior year primarily because of higher sales volumes and prices from the
Florida concrete products operation.
In spite of lower sales prices and unusual, extremely heavy rains
during the first two months of 1993, the operating loss for the southern
California ready-mixed concrete operation declined significantly because cost
reduction measures were successful. Results also improved from higher
aggregates sales volumes and prices. Operating results for the Florida
ready-mixed concrete operation improved because of a 4% increase in the average
sales price per cubic yard combined with higher operating earnings from the
concrete block, resale and fly ash operations. The period-to-period comparison
was also aided by the late 1992 sale of certain Florida aggregate operations
which lost $1.7 million in the course of that year.
The operating loss for 1992 was $11.6 million compared with $12.7
million in 1991. Revenues in 1992 decreased $23 million compared with 1991.
The smaller loss in 1992 compared with 1991 was the result of improved concrete
prices in Florida which more than offset lower volumes and prices in southern
California which continued to worsen as the California economy stagnated. The
13% decline in ready-mixed concrete sales volume was responsible for the
decrease in 1992 revenues compared with 1991. The majority of the decline
occurred as a result of the slumping southern California market.
Sales volumes, average unit prices and cost data and margins relating
to the Company's ready-mixed concrete operations for the past three years
appear in the following table:
<TABLE>
<CAPTION>
1993 1992 1991
---------- ---------- ---------
<S> <C> <C> <C>
Cubic yards of ready-mixed concrete
sold (in thousands) 3,274 3,038 3,488
========== ========== =========
Weighted average per cubic yard data:
Sales price $ 43.86 $ 43.13 $ 42.97
Operating costs1 45.48 46.66 46.69
---------- ---------- ---------
Margins $ (1.62) $ (3.53) $ (3.72)
========== ========== =========
</TABLE>
--------------
(1) Includes variable and fixed plant costs, delivery, selling,
general and administrative and miscellaneous operating costs.
34
<PAGE> 8
The increase in the weighted average sales price per yard for the year
ended December 31, 1993 compared with the 1992 period reflects higher sales
prices in the Company's Florida market partially offset by lower prices in the
Company's southern California market. The decrease in the weighted average
operating costs per yard for the year ended December 31, 1993 compared with the
1992 periods is attributable to lower material costs and the implementation of
an automated truck-tracking system which has resulted in increased productivity
for the southern California operation.
Effective September 30, 1991, the Company sold its construction
aggregates businesses in Hernando and Polk Counties, Florida to Vulcan/ICA
distribution Company (Vulcan/ICA) for $17 million. The Company also agreed to
sell, subject to the satisfaction of certain conditions, its one remaining
Florida aggregate quarry, located in Charlotte County. The Company recorded
charges totaling $8.9 million 1991 and $3 million in the fourth quarter of 1992
when the sale of the Charlotte County property was concluded. The charges
represent (i) the difference in the selling price and the book value and (ii)
the accrual of certain transaction costs and contingencies. In conjunction
with these sales, the parties entered into a long-term supply contract under
which the Company's ready-mixed concrete operations in Florida purchase their
requirements for aggregates from Vulcan/ICA.
The operating results of the Company's aggregate operations have been
included for financial reporting purposes in the concrete products segment. As
a result of the 1991 and 1992 sales of the Florida aggregate operations,
operating results have been affected by the difference in the costs to produce
these aggregates and the price paid by the Company's Florida ready-mixed
concrete operations to purchase aggregates from Vulcan/ICA under the long-term
supply contract.
Environmental Services - Excluding a $3.1 million write-down of certain
assets in 1993 and a $21.4 million write-down in 1992, the Environmental
Services segment reported an operating loss of approximately $2.2 million for
the year ended December 31, 1993 compared with a loss of $10.6 million in the
prior year. Segment operating losses improved in 1993 because: (i) the prior
year included $4.9 million in operating losses from four hazardous waste
processing facilities which were sold or reclassified as "held for sale" by the
end of 1992; (ii) the prior year period included $1.1 million in charges
related to decontamination of equipment and incineration of pcb contaminated
wastes that were accepted and processed in error; (iii) improved operating
results from the Tennessee, Alabama and California hazardous waste processing
facilities and (iv) a $2.4 million decline in 1993 amortization costs as a
result of the fourth quarter 1992 write-down.
In addition to the operating loss, ses recognized a $3.1 million
charge in the fourth quarter of 1993 to reflect a revised estimate of the fair
value of its Illinois TSD facility after trying unsuccessfully for a year to
sell the facility. In January 1994 the Company negotiated a letter of intent
for a proposed sale of this facility that would generate neither a gain or a
loss.
Operating results for 1992, excluding a $21.4 million write-down of
certain environmental services assets, were a $10.6 million loss compared with
a 1991 operating loss of $4.4 million. Revenues in 1992 increased to $43.4
million from $36.8 million in 1991. Although income from the burning of HWDF
increased in 1992 by $400,000 compared with 1991 and segment revenues increased
18% over 1991, segment losses increased as a result of: (i) losses incurred at
the Spring Grove, Ohio facility subsequent to its acquisition in January 1992;
(ii) a $1.1 million decontamination and incineration charge mentioned
previously; (iii) lower sales volume and throughput of liquid HWDF, and higher
operating
35
<PAGE> 9
costs in the environmental services segment generally and (iv) higher sales and
marketing expenses incurred to create a larger sales force.
Corporate Overhead - Corporate general and administrative costs
consist primarily of costs attributable to the Company's Houston, Texas office
which are not generally allocated to the business segments. In contrast, the
cost caption "general and administrative" as it appears on the Company's
statement of consolidated earnings includes not only general and administrative
expenses incurred at the Company's corporate office, but also amounts incurred
at the Company's various operating locations. Since 1990 the Company has
pursued centralization of general and administrative functions where
practicable and has significantly expanded the level of support provided to its
operating locations from the corporate office. The large increase in corporate
expenses, which includes the establishment of a corporate office environmental
services support staff, has been partially offset by lower general and
administrative expenses at other operating levels as certain functions were
transferred to the corporate office or eliminated entirely.
Excluding the $2.5 million charge accrued as a result of the adoption
of SFAS No. 106, Corporate general and administrative expenses were $26.4
million for the year ended December 31, 1993 compared with $32.7 million in
1992. General and administrative expenses during 1993 were lower than the
prior year for almost all cost categories as a result of cost reduction
measures imposed during 1993. Corporate general and administrative expenses
for 1992 were $32.7 million compared with $34.1 million in 1991 primarily
because of a $1.4 million credit to pension expense in 1992.
Miscellaneous income (losses) - Miscellaneous income (losses) includes
interest income on invested funds as well as miscellaneous other income and
expense items. Miscellaneous income (losses) was a net loss of $2.8 million in
1993, a net $1.5 million of income in 1992 and a net loss of $5.1 million in
1991. Miscellaneous income (loss) in 1993 included: (i) a $3 million charge
for estimated remediation costs for an inactive CKD disposal site; (ii) a $1.7
million charge for proxy contest fees and expenses and (iii) a $1.2 million
gain from the sale of the Company's right to receive its portion of the
settlement of bankruptcy claims against ltv corporation. Miscellaneous income
(loss) in 1992 included: (i) a $3.6 million charge for estimated remediation
costs for the previously mentioned CKD disposal site; (ii) a $3 million
write-down of the Florida aggregate operation; (iii) a $2.7 million gain
recognized on the sale of a cement terminal and (iv) a $2.7 million gain
representing a fee earned for approval of a non-affiliated debt refinancing.
Miscellaneous income (loss) in 1991 included: (i) a $5.9 million write-down
of the Florida aggregate operations; (ii) a $3.1 million charge to remediate
the previously mentioned CKD disposal site and (iii) $1.6 million gain
recognized on the sale of a cement terminal.
36
<PAGE> 10
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
1993 1992 1991
---------- --------- ----------
(IN MILLIONS)
<S> <C> <C> <C>
Cash and cash equivalents $7.4 $12.5 $14.6
========== ========== ==========
Working capital $55.1 $83.8 $89.5
========== ========== ==========
Net cash provided by operating activities $54.7 $33.7 $9.7
========== ========== ==========
Net cash used in investing activities $(20.6) $(10.0) $(7.3)
========== ========== ==========
Net cash used in financing activities $(39.2) $(25.8) $(6.2)
========== ========== ==========
Total assets $907.0 $921.5 $986.1
========== ========== ==========
Total debt $293.9 $314.8 $332.7
========== ========== ==========
Capital expenditures $24.4 $17.4 $31.0
========== ========== ==========
</TABLE>
The Company's short-term liquidity needs have generally been satisfied
by: (i) internally generated cash flow from operations, (ii) borrowings under
the Company's revolving credit facility or (iii) a combination of these two
sources. Internally generated cash flow from operations, a $15.7 million
federal income tax refund from the carryback to prior years of the 1992 tax
loss and $7.6 million in cash generated from asset sales, were utilized to meet
all of the Company's cash requirements for the year ended December 31, 1993.
Such cash flow was utilized to: (i) invest approximately $24 million in
property, plant and equipment; (ii) reduce long-term debt by approximately $25
million and (iii) pay dividends on preferred stock. Although effective January
1, 1993 the Company adopted an accrual basis of accounting for postretirement
health care benefit costs as required by SFAS No. 106, The Company continues to
pay for such costs as incurred. During 1992 the Company generated
approximately $10 million in miscellaneous asset sales to supplement cash flow
and received an $18.7 million federal income tax refund.
On November 19, 1993, the Company entered into a $200 million restated
Revolving Credit Facility (Restated Revolving Credit Facility) with a group of
eight commercial banks. The Restated Revolving Credit Facility includes $20
million of borrowing capacity that is restricted solely for potential funding
of obligations under an agreement between the Company and the U.S. Maritime
Administration related to certain shipping operations owned previously by Moore
McCormack Resources, Inc. (Moore McCormack), an entity acquired by the Company
in 1988. (See Notes 11 and 14 of Notes to consolidated Financial Statements.)
The facility also includes the issuance of standby letters of credit up to a
maximum of $95 million. The Restated Revolving Credit Facility remains the
same size as a previously existing revolving credit facility between the
Company and its lending banks but (i) extends the maturity of the facility to
November 1996 and (ii) provides the Company with enhanced flexibility under the
restrictive covenants. Substantially all of the Company's assets remain
pledged to secure this facility. At January 31, 1994, $24 million of letters
of credit and $75 million of borrowings, excluding any amounts restricted for
funding the maritime obligations, were available for the Company's use under
the Restated Revolving Credit Facility.
In late January 1994 the Company realized approximately $83 million in
net proceeds from the sale of 1,725,000 shares of a new issue of preferred
stock. (See Note 21 of Notes to Consolidated
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Financial Statements.) The net proceeds were used to prepay an $18 million
promissory note due in March 1994 and to reduce borrowings under the Company's
Restated Revolving Credit Facility, $47 million of which was incurred in early
January 1994 to redeem $45 million principal amount of the Company's 12% Senior
Subordinated Notes Due 1997 (12% Notes). The Company intends to prepay the
remaining $45 million outstanding principal amount of the 12% Notes as promptly
as practicable after May 1, 1994 with additional borrowings under the restated
revolving credit facility. The prepayment of the promissory note enabled the
Company to retire a like amount letter of credit which had served as collateral
for the promissory note. In addition, the Company is actively considering
calling for redemption all of the outstanding shares of its Series B Preferred
Stock at the redemption price of $50.00 Per share plus accrued and unpaid
dividends to the redemption date. Each share of Series B Preferred Stock is
convertible into 2.5 Shares of the Company's common stock (equivalent to a
conversion price of $20.00 Per share of common stock).
The Company's earnings typically follow the cyclical activity of the
construction industry. The Company's earnings have been negatively impacted
since mid-1990 because of the severe downturn in construction activity in most
of the Company's market areas through 1991 and, in southern California through
1992. Construction activity, at least in some regions of the country, began to
give indications of a slight rebound in 1993.
CASH FLOWS
Operating Activities - In spite of the large net losses, cash provided
by operating activities was $54.7 million for 1993 and, $33.7 million for 1992,
compared with $9.7 million in 1991. The increase was attributable to large
non-cash charges and federal income tax refunds in 1993 and 1992. During 1993
the Company received a $15.7 million federal income tax refund from the
carryback to prior years of the 1992 tax loss. During 1992 the Company
received an $18.7 million income tax refund from the carryback to prior years
of the 1991 tax loss.
Investing Activities - In addition to routine capital expenditures,
investing activities in 1993 included $7.6 million in net cash proceeds from
the sale of miscellaneous assets and two hazardous waste processors. Investing
activities in 1992 included $9.8 million in net cash proceeds from the sale of
miscellaneous assets, including the last of the Florida aggregate operations,
compared with $23.7 million of miscellaneous asset sales in 1991.
Approximately $17.4 million was invested in capital expenditures during 1992
compared with a 1991 investment of $30 million in capital expenditures and $6.2
million invested in a thermal distillation joint venture.
Financing Activities - Funds provided by operating activities were
utilized to reduce long-term debt by $25.4 million and to pay dividends during
1993. In spite of adverse economic conditions, the Company was able to achieve
an almost $18 million net reduction in long-term debt in 1992. During 1991,
the Company issued $125 million in 14% Senior Subordinated Notes to refinance
$77 million of senior secured notes and reduce borrowings utilized under the
Company's 1991 credit facility for capital expenditures, scheduled debt
repayments, dividends and redemption of $6 million of redeemable preferred
stock.
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CHANGES IN FINANCIAL CONDITION
The change in financial condition of the Company between December 31,
1992 and December 31, 1993 reflects the utilization of the federal income tax
refund of $15.7 million and cash provided by operating activities to primarily
reduce outstanding long-term debt and to fund capital expenditures. The
improved demand for cement and related products in 1993 has resulted in a
decrease in inventories. The increase in the current deferred income tax asset
reflects the expected utilization of net operating loss carryforwards in 1994.
The decline in prepaid expenses and other current assets reflects the 1993 sale
of two hazardous waste processing facilities which had been classified as
current assets held for sale. Current maturities of long-term debt increased
because of the reclassification of the final scheduled payment of $18 million
on a promissory note due on March 31, 1994. Accounts payable and accrued
liabilities increased because of the timing of payments on normal trade and
other obligations including the aforementioned increase in the estimated
liability for remediation of an inactive CKD disposal site. The large decrease
in the deferred income tax liability and reinvested earnings and the large
increase in the long-term portion of postretirement benefit obligation reflects
the recording of the initial liability for postretirement benefits and the
associated charges to income and deferred income taxes as a result of the
Company's adoption of SFAS No. 106 effective January 1, 1993. (See Note 2 of
Notes to Consolidated Financial Statements.) The decrease in other long-term
liabilities and deferred credits reflects payments made in accordance with
estimated liabilities on the Moore McCormack discontinued operations.
CAPITAL EXPENDITURES
The Company invested $24.4 million in property, plant and equipment in
1993 including approximately $8.5 million for the Cement operations, $3.5
million for Concrete Products and $11.0 million for Environmental Services. In
addition to the Concrete Products segment's 1993 capital budget, $2.9 million
was expended as partial consideration for the acquisition of five ready-mixed
concrete batch plants and one aggregate quarry in 1993. In 1992, the Company
invested approximately $17.4 million in property, plant and equipment. The
Company's 1994 planned capital expenditures are approximately $42 million, of
which $17.5 million is allocated for the Cement segment, $11.1 million for the
Concrete Products segment and $10.4 million for the Environmental Services
segment. The balance of the 1994 capital expenditures budget has been
allocated primarily for computer related hardware and software costs.
Capital expenditures in the Cement and Concrete Products segments were
held to maintenance and strategic necessity levels during 1992 and 1993. The
Cement segment's estimated capital budget for 1994 provides for high priority
expenditures. The Concrete Products segment's estimated capital budget for
1994 includes approximately $2.5 million for mobile equipment and approximately
$8 million for batch plant improvements and equipment, including approximately
$3 million of expenditures related to environmental compliance. The
Environmental Services segment's capital budget for 1994 includes approximately
$4.6 million allocated for improvements and completion of the expansion of one
of the existing TSD facilities to provide increased production capabilities,
and approximately $1.4 million in capital projects related to compliance with
environmental regulations.
While the Company commits substantial resources to complying with the
laws and regulations concerning the protection of human health and the
environment, management does not believe these expenditures have placed the
Company at a competitive disadvantage. The amounts expended by the Company on
its facilities for compliance with laws relating to human health and the
environment did not have a material impact on the consolidated financial
position of the Company in 1993, and the Company
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does not currently expect the rate of such expenditures to increase
significantly during the ensuing two fiscal years. However, regulatory
changes, enforcement activities or other factors could alter this expectation
at any time. Future changes in regulatory requirements related to the
protection of human health and the environment may require the Company and
others engaged in industry to modify various facilities and alter methods of
operations at costs that may be substantial.
KNOWN EVENTS, TRENDS AND UNCERTAINTIES
Environmental Matters
The Company is subject to extensive Federal, state and local air,
water and other environmental laws and regulations. These constantly changing
laws regulate the discharge of materials into the environment and may require
the Company to remove or mitigate the environmental effects of the disposal or
release of certain substances at the Company's various operating facilities.
Industrial operations have been conducted at some of the Company's cement
manufacturing facilities for almost 100 years. Many of the raw materials,
products and by-products associated with the operation of any industrial
facility, including those for the production of cement or concrete products,
may contain chemical elements or compounds that are designated as hazardous
substances. Owners and operators of industrial facilities and those who
handle, store or dispose of hazardous substances may be subject to fines or
other actions imposed by the U.S. Environmental Protection Agency (U.S. EPA)
and corresponding state regulatory agencies for violations of laws or
regulations relating to those substances.
Hazardous waste processing facilities and the cement plants that burn
HWDF, by definition, involve materials that have been designated as hazardous
wastes. The Company's utilization of HWDF in some of its cement kilns has
necessitated the familiarization of its work force with the more exacting
requirements of applicable environmental laws and regulations with respect to
human health and the environment. The failure to observe the exacting
requirements of these laws and regulations could jeopardize the Company's
hazardous waste management permits and, under certain circumstances, expose the
Company to significant liabilities and costs of cleaning up releases of
hazardous wastes into the environment or claims by employees or others alleging
exposure to toxic or hazardous substances. The Company has incurred fines
imposed by various environmental regulatory agencies in the past.
The Comprehensive Environmental Response, Compensation, and Liability
Act of 1980 (CERCLA), as amended by the Superfund Amendments and
Reauthorization Act of 1986 (SARA), as well as analogous laws in certain
states, create joint and several liability for the cost of cleaning up or
correcting releases to the environment of designated hazardous substances.
Among those who may be held jointly and severally liable are those who
generated the waste, those who arranged for disposal, those who owned the
disposal site or facility at the time of disposal and current owners.
Management believes that the Company's current procedures and
practices for handling and management of materials are consistent with industry
standards and legal requirements and that appropriate precautions are taken to
protect employees and others from harmful exposure to hazardous materials.
However, because of the complexity of operations and legal requirements, there
can be no assurance that past or future operations will not result in
operational errors, violations, remediation liabilities or claims by employees
or others alleging exposure to toxic or hazardous materials. Whenever it is
determined that an environmental liability is both probable and reasonably
estimatable, at least within a reasonable range of estimates, an appropriate
charge and estimated liability are accrued. Such estimates are revised
periodically as additional information becomes known. Actual costs incurred in
future periods
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may vary from these estimates and there can be no assurances that additional
accrual amounts will not be required in the future.
The Clean Air Act Amendments of 1990 provided comprehensive federal
regulation of all sources of air pollution and established a new federal
operating permit and fee program for virtually all manufacturing operations.
The Clean Air Act Amendments will likely result in increased capital and
operational expenses for the Company in the future, the amounts of which are
not presently determinable. By 1995, the Company's U.S. operations will have
to submit detailed permit applications and pay recurring permit fees. In
addition, the U.S. EPA is developing air toxics regulations for a broad
spectrum of industrial sectors, including portland cement manufacturing. U.S.
EPA has indicated that the new maximum available control technology standards
could require significant reduction of air pollutants below existing levels
prevalent in the industry. Management has no reason to believe, however, that
these new standards would place the Company at a competitve disadvantage.
The Federal Water Pollution Control Act, commonly known as the Clean
Water Act (Clean Water Act), provides comprehensive federal regulation of all
sources of water pollution. In September 1992 the Company filed a number of
applications under the Clean Water Act for National Pollutant Discharge
Elimination System (NPDES) stormwater permits. The Company now believes that
some of its existing NPDES permits or pending applications relating to its
cement plants and raw materials quarries may not cover all process water and
stormwater discharges. Legal counsel has advised the Company, based upon its
preliminary review of the matter, that while the Clean Water Act authorizes,
among other remedies, the imposition of civil penalties of up to $25,000 per
day for unpermitted discharges of pollutants to the waters of the United
States, several factors may mitigate against the impositions of substantial
fines. First, the Company is moving forward as expeditiously as practicable to
correct all NPDES permitting deficiencies. Second, some of the permitting
issues arise from mere technical deficiencies in permit applications or from
changes in discharge patterns after submission of permit applications. In each
such case, legal counsel believes that such deficiencies are neither unusual
nor difficult to rectify. Finally, some of the deficiencies relate to
questions of the scope of the Clean Water Act's jurisdiction that are, at best,
unclear.
Under the Bevill amendment, CKD is currently exempt from management as
a hazardous waste, except CKD which is produced by kilns burning HWDF and which
fails to meet certain criteria. In December 1993, as required by the Bevill
amendment, the U.S. EPA issued a Report to Congress on CKD (CKD Report) and
hearings were held on February 15, 1994. A change in the status of CKD would
require the cement industry to develop new methods for handling this high
volume, low toxicity waste. Although not presently classified as a hazardous
waste, CKD that comes in contact with water may produce a leachate with an
alkalinity high enough to be classified as hazardous and may also leach the
hazardous trace metals present therein. Leaching has led to the classification
of at least three CKD disposal sites of other companies as federal Superfund
sites. Several of the Company's inactive CKD disposal sites around the country
are under study to determine if remedial action is required and, if so, the
extent of any such remedial action required. These studies may take some time
to complete. Thereafter, remediation plans, if required, will have to be
devised and implemented, which could take several additional years.
An inactive CKD disposal site in Ohio is currently under investigation
by the Company and state environmental agencies to determine appropriate
remedial action required at the site and the Company has recorded charges
aggregating $9.7 million as the total estimated cost to remediate this site.
Approximately $2.6 million of the reserved amount had been expended through
December 31, 1993 with
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the balance to be spent by early or mid-1995. The Company believes it
currently has sufficient cash flow from current operating activities or
borrowing capacity under its Restated Revolving Credit Facility to fund this
remediation.
The Company also owns two inactive CKD disposal sites in Ohio that
were formerly owned by a division of USX Corporation (USX). In September 1993,
the Company filed a complaint against USX alleging that with respect to the
larger of these two sites (the Site), USX is a potentially responsible party
and therefore jointly and severally liable for costs associated with cleanup of
the Site. (Southdown, Inc. v. USX Corporation, Case No. C-3-93-354, U.S.
District Court, Southern District of Ohio Western Division) USX answered the
complaint in November 1993 by filing a motion to dismiss the lawsuit. Based on
the limited information available as of December 31, 1993 the Company has
received two preliminary engineering estimates of the potential magnitude of
the remediation costs for the Site, $8 million and $32 million, depending on
the assumptions used. Counsel to the Company on the USX matter has advised
that it believes USX should not prevail on its motion to dismiss and that it
appears there is a reasonable basis for the apportionment of cleanup costs
relating to the Site between the Company and USX, with USX shouldering
substantially all of the cleanup costs because, based on the facts known at
this time, the Company itself disposed of no CKD at the Site and is potentially
liable under CERCLA because of its current ownership of the Site. These
determinations, however, are preliminary, and are based only upon facts
available to the Company prior to any discovery.
No substantial investigative work has been undertaken at other CKD
sites in Ohio. Although data necessary to enable the Company to estimate total
remediation costs is not available, the Company acknowledges that the ultimate
cost to remediate the CKD disposal problem in Ohio could be significantly more
than the amounts reserved.
As a result of an aggressive inspection and enforcement initiative
targeting combustion industry facilities, the Company was among a group of
owners and operators of 28 boilers and industrial furnaces, including several
other major cement manufacturers, from which the U.S. EPA is seeking over
$19.8 million in penalties. On September 27, 1993, the U.S. EPA issued a
Complaint and Compliance Order (Order) (United States Environmental Protection
Agency, Region 5 v. Southdown, Inc. d/b/a Southwestern Portland Cement -
Docket No. VW 27-93) alleging certain violations of the Resource Conservation
and Recovery Act (RCRA) applicable to the burning or processing of hazardous
waste in an industrial furnace. The alleged violations included, among others,
exceedence of certified feed rates for total hazardous waste at the Company's
Ohio cement manufacturing facility, failure to demonstrate that CKD generated
at the facility is excluded from the definition of hazardous waste and storage
at the facility without a permit of CKD alleged to be hazardous by virtue of
that failure to demonstrate its exclusion from the definition. The Order
proposed the assessment of a civil penalty in the amount of $1.1 million and
closure of certain storage silos containing the CKD that allegedly is hazardous
waste.
The Company has engaged counsel to respond to the U.S. EPA Order and
believes, after reviewing the complaint and the Company's compliance with the
applicable regulations, there are substantial mitigating factors to the
interpretations and allegations contained in the Order. The Company believes,
based on the information currently available, the Order can be resolved without
material adverse effect on the consolidated financial condition of the Company.
The Company recorded loss reserves for pre-acquisition contingencies
in conjunction with its acquisition of the hazardous waste processing
facilities and received certain indemnifications for environmental matters from
the former owners. However, there can be no assurance that such reserves
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and indemnifications will be adequate to cover all potential environmental
losses that may occur with respect to these acquired entities. To the extent
that reserves were not established, are insufficient, or recovery under
indemnifications are not realizable, remediation amounts are charged to
expense.
While the Company's facilities at several locations are presently the
subject of various local, state and federal environmental proceedings and
inquiries, including being named a potentially responsible party (PRP) with
regard to Superfund sites, primarily at several locations to which they are
alleged to have shipped materials for disposal, most of these matters are in
their preliminary stages and final results may not be determined for years.
Management of the Company believes, however, based solely upon the information
the Company has developed to date, that known matters can be successfully
resolved in cooperation with local, state and federal agencies without having a
material adverse effect, either individually or in the aggregate, upon the
consolidated financial statements of the Company. However, because the
Company's results of operations vary considerably with construction activity
and other factors, it is possible that future charges for environmental
contingencies could, depending on their timing and magnitude, have a material
adverse impact on the Company's results of operations in a particular period.
Until all environmental studies, investigations, remediation work and
negotiations with potential sources of recovery have been completed, however,
it is impossible to determine the ultimate cost of resolving these
environmental issues.
In forming its belief with respect to the impact of these matters on
its consolidated financial statements, the Company considers, among other
things, the nature of the matters, the likelihood that a future event or events
will confirm the loss, impairment or the incurrence of a liability, the
response of environmental authorities to date and the experience of the Company
and others with the response of environmental authorities to similar matters.
The Company further evaluates various engineering, operational and other
options which might be available to address these matters. Estimates of the
future cost of environmental issues, however, are necessarily imprecise as a
result of numerous uncertainties including, among others, the impact of new
laws and regulations and the availability of new technologies. With respect to
matters which require fixed or reasonably determinable expenditures by the
Company, the Company also considers the period of time over which those
expenditures might be made. Independently of the evaluation of any
liabilities, the Company also considers whether such matters are within the
scope of contractual indemnities provided by others, the applicability of
insurance coverage or other potential recoveries from third parties, whether
such potential sources of recovery could be considered probable of realization
and, if so, how those indemnities would impact any cost to the Company.
The Company's assessment is reviewed as additional information becomes
available.
Other Contingencies
Status of Additional Sources of Cement Supply - The supply of cement
in the U.S. has declined in recent years primarily because of a decrease in the
volume of imported cement entering the country. During the 1980s, imported
cement flooded U.S. markets, causing prices to fall despite strong growth in
cement consumption. This situation has substantially changed as evidenced by
the reduction in imported cement to an estimated 8% of total U.S. consumption
in 1992 according to the Portland Cement Association, as compared with an
estimated 17% of total U.S. consumption in 1989. This decline is largely the
result of successful antidumping actions filed against importers from Mexico,
Japan and Venezuela. With respect to the California, Florida and Texas
markets, the antidumping suits have provided an opportunity during the current
recession for domestic producers to displace large volumes of imported cement.
A group of domestic cement producers, including the Company, filed
antidumping petitions which have resulted in the imposition of significant
antidumping duty cash deposits on cement imported from Mexico and Japan. In
addition, the U.S. Department of Commerce has signed an agreement with
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Venezuelan cement producers, which is designed to eliminate the dumping of gray
portland cement from Venezuela into Florida and the United States generally.
The antidumping duties are subject to annual review by the Department of
Commerce and appeal to the U.S. Court of International Trade.
Effective July 15, 1995, the Anti-dumping Code of the General
Agreement on Tariffs and Trade will be substantially altered pursuant to the
recently completed Uruguay Round of multilateral trade negotiations. The new
Code applies to investigations initiated after July 1995 and to administrative
reviews of outstanding orders that are initiated after July 1995. If Congress
passes legislation to approve and implement the Uruguay Round agreement,
changes will necessarily be made to U.S. antidumping law. While the
antidumping orders outstanding against cement and clinker from Mexico and Japan
and the suspension agreement on cement and clinker from Venezuela will remain
in force, the new Code will require the initiation of "sunset" reviews of the
antidumping orders against Mexico and Japan prior to July 2000 to determine
whether they should terminate or remain in effect, unless an earlier date is
mandated by Congress. Under the new Code, it could be more difficult to obtain
antidumping duties against other countries. A substantial reduction or
elimination of the existing antidumping duties could adversely affect the
Company's results of operations.
The Company does not believe that the North American Free Trade
Agreement will have a material adverse effect on the existing antidumping
duties.
Discontinued Moore McCormack Operations - In conjunction with the
acquisition of Moore McCormack in 1988, the Company assumed certain liabilities
for operations that Moore McCormack had previously discontinued. These
liabilities, some of which are contingent, represent guarantees and
undertakings related to Moore McCormack's divestiture of certain businesses in
1986 and 1987. Payments relating to liabilities from these discontinued
operations were $2.4 million in 1993, $2.5 million in 1992 and $2.4 million in
1991. The Company is either a guarantor or directly liable under certain
charter hire debt agreements totaling approximately $11 million at December 31,
1993, declining by approximately $4 million per year thereafter through
February 1997. Although the estimated liability under these guaranties has
been included in the liability for discontinued Moore McCormack operations,
enforcement of the guaranty, while not resulting in a charge to earnings, would
result in a substantial cash outlay by the Company. However, the Company
believes it currently has sufficient borrowing capacity under its Restated
Revolving Credit Facility to fund these guaranties, if required, as well as
meet its other borrowing needs for the foreseeable future.
The Company's Restated Revolving Credit Facility includes $20 million
of borrowing capacity that is reserved solely for potential funding of
obligations under a Keepwell Agreement between the Company and MARAD related to
certain Great Lakes shipping operations owned previously by Moore McCormack.
During the second quarter of 1993, the Great Lakes shipping operation sold its
right to receive its portion of the settlement of bankruptcy claims against LTV
Corporation, which has been operating under the protection of Chapter 11 of the
United States Bankruptcy Code since July 17, 1986, and received approximately
$14 million in gross proceeds before expenses and taxes. The net proceeds of
approximately $9 million are available and required to be used to fund the
Great Lakes shipping operation's cash flow deficiencies before the Keepwell is
utilized for such purposes.
Restructured Accounts Receivable - For many years, the Company has
from time-to-time offered extended credit terms to certain of its customers,
including converting trade receivables into longer term notes receivable. This
practice became more prevalent during 1992 and continued during 1993,
particularly in the southern California market area where many of the Company's
customers have been
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adversely affected by the prolonged recession in the construction industry in
that region. A group of five such customers were indebted to the Company at
December 31, 1993 in the amount of $20.6 million. All of the notes and a
portion of the accounts receivable, approximately 78% of the $20.6 million, are
collateralized.
During 1993, two of these customers defaulted on the payment terms of
their notes. The Company restructured its agreement with one of the defaulting
customers late in the second quarter of 1993 and that customer was in
compliance with the terms of the restructured agreement as of December 31,
1993. The Company has stopped selling cement on credit to the other customer
in default and is presently evaluating its options for collection of
outstanding balances. A third customer in this group, while not in default on
its note, had difficulty in maintaining prompt payment for its cement purchases
and restructuring discussions were commenced in late 1993. The Company is
contractually committed to supply up to 90% of the cement requirements of one
of the three non-defaulting customers on extended credit terms, provided this
customer remains current with respect to both current purchases and payments on
its note.
During the final quarter of 1993, the Company purchased most of the
ready-mixed concrete and aggregate assets of two other customers then in
default for forgiveness of a total of approximately $9.2 million owed the
Company, assumption of certain liabilities and other consideration. The
Company realized no gain or loss on either of these transactions. In January
1994, the Company made a preliminary purchase proposal to acquire certain
ready-mixed concrete and aggregate assets of the customer with which it was
engaged in restructuring discussions. The proposal included, as partial
consideration for the acquisition, forgiveness of the $5.8 million owed the
Company as of December 31, 1993.
In the opinion of management, the Company is adequately reserved for
credit risks related to its potentially uncollectible receivables. However,
the Company continues to assess its allowance for doubtful accounts and may
increase or decrease its periodic provision for doubtful accounts as additional
information regarding the collectibility of these and other accounts becomes
available.
Claims for Indemnification - In late August 1993 the Company was
notified by Energy Development Corporation (EDC), the 1989 purchaser of the
common stock of the Company's then oil and gas subsidiary, Pelto Oil Company
(Pelto), that EDC was exercising its indemnification rights under the 1989
stock purchase agreement with respect to a Department of Energy (DOE) Remedial
Order regarding the audit of crude oil produced and sold during the period
September 1973 through January 1981 from an offshore, federal waters field in
which the Company's oil and gas subsidiary owned an interest. The DOE alleged
certain price overcharges and sought to recover a total of $68 million in
principal and interest from Murphy Oil Corporation (Murphy), as operator of the
property. Murphy estimated the Company's share of this total to be
approximately $4 million. On January 24, 1994 the presiding Administrative Law
Judge at the Federal Energy Regulatory Commission (FERC) rendered a favorable
decision for Murphy, materially reducing the amount it potentially owed to the
DOE. This decision also had the effect of precluding the DOE from recovering
from Murphy for any alleged overcharges attributable to Pelto's "in-kind"
production. Murphy has indicated that if the FERC adopts the Administrative
Law Judge's opinion, Pelto will not owe anything to Murphy as a result of the
DOE's claim, other than its pro rata share of attorneys' fees. The Company
cannot assess the likelihood that the DOE would seek to recover sums from Pelto
directly due to Pelto's "in-kind" production, but the Company believes, based
on advice of counsel, that, if it did, any such claim by the DOE would be
barred by limitations.
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Prior to the sale of Pelto in 1989, Pelto entered into certain gas
settlement agreements, including one with Transcontinental Gas Pipe Line
Corporation (Transco). The Minerals Management Service (MMS) of the Department
of the Interior has reviewed the agreement entered into with Transco in 1988 to
determine whether a payment to Pelto thereunder is associated with Federal or
Indian leases and whether, in their view, any additional royalties may be due
as a result of that payment. MMS has advised EDC of a preliminary royalty
underpayment determination resulting from its review, and that MMS proposes to
direct EDC to compute any gas royalties attributable to what MMS characterizes
as a "contract buydown". This does not constitute a final action by MMS; its
stated purpose is to give an opportunity to comment or provide additional
documentation that would refute or alter MMS's preliminary determination. In
late December 1993, the Company was notified by EDC that EDC was exercising its
indemnification rights under the 1989 stock purchase agreement for Pelto with
respect to this matter. The Company is unable to determine what liability it
may have, if any, with respect to this matter, but should the Company be
required to make any payments to the MMS, such expenditures would result in a
charge to discontinued operations.
Macroeconomic Factors - The demand for cement and concrete products is
derived from construction activity which, in turn, is a function of general
economic conditions over which the Company has no control. As a result of the
high operating leverage of the cement industry, profitability is very sensitive
to slight shifts in the balance of supply and demand, which are driven by
general macroeconomic variables. A significant portion of cement and concrete
consumption is for public construction projects including roads, bridges,
airports and similar projects. In the event major construction projects to
repair and replace large parts of the national infrastructure are undertaken
over the next decade, the cement and concrete products industry should benefit.
New construction activities stagnated as the U.S. economy entered a
recession in early-to-mid 1990 and, as a consequence, the Company's sales and
earnings declined from the previous cyclical peak in 1989. Construction
activity in some regions rebounded slightly in 1993. Because transportation
costs are high relative to the value of the product, cement markets are
generally regional. Any improvement in operating earnings will be aided by the
recovery of the regional economies in which the Company operates. Florida, the
Company's second largest market area, experienced an upturn in prices and sales
volume as demand improved somewhat in 1993. Southern California, the Company's
largest market area, showed little or no improvement in 1993. Potential
benefits of any increase in infrastructure spending are dependent upon the
extent to which such expenditures may occur within the market areas served by
the Company's plants and facilities and, therefore, cannot be estimated at this
time.
In January 1994, Los Angeles, California and the surrounding environs
experienced a major earthquake. Although neither the Company's cement plant in
Victorville, California nor the Company's concrete products facilities in
Orange and Los Angeles Counties suffered any significant amounts of damage,
commerce and transportation in the area have been disrupted.
Changes in Accounting Principle
Postretirement benefits - Effective January 1, 1993 the Company
adopted Statement of Financial Accounting Standards No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions" (SFAS No. 106) and
recorded a $48.5 million after-tax, non-cash charge which represented the
estimated initial liability for postretirement benefits attributable to
employee services provided prior to 1993. SFAS No. 106 requires the Company to
accrue the estimated cost of retiree benefit payments as the employee provides
services to the Company. The Company previously expensed the cost of these
46
<PAGE> 20
benefits as claims were incurred and continues to pay for postretirement
benefit costs as incurred. (See Note 2 of Notes to Consolidated Financial
Statements.)
Postemployment benefits - In November 1992 the Financial Accounting
Standards Board issued a Statement of Financial Accounting Standards No. 112,
"Employers' Accounting for Postemployment Benefits" (SFAS No. 112), which
requires that the cost of benefits provided to employees after employment, but
before retirement, be recognized in the financial statements on an accrual
basis. The required date of adoption of this new accounting standard was
January 1, 1994. The impact of SFAS No. 112 on the Company did not result in a
material charge to earnings.
INFLATION AND CHANGING PRICES
Inflation has become less of a factor in the U. S. economy as the rate
of increase has moderated during the last several years. The Consumer Price
Index rose 2.6% in 1993, 2.9% in 1992 and 3.1% in 1991. Prices of materials
and services have remained relatively stable over the three-year period.
Strict cost control and improving productivity also minimize the impact of
inflation.
47
<PAGE> 21
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
The following tables set forth certain unaudited selected quarterly
financial data for each of the last three years:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1993
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
---------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues $ 106.1 $ 144.4 $ 156.1 $ 138.2
=========== ============ ============ ============
Earnings before interest, income taxes,
extraordinary charge and cumulative
effect of a change in accounting principle $ 3.2 $ 14.3 $ 11.4 $ 10.1
=========== ============ ============ ============
Earnings (loss) before extraordinary charge
and cumulative effect of a change in
accounting principle $ (4.4) $ 2.6 $ 1.5 $ 0.3
Extraordinary charge, net of tax benefit 1 - - - (1.0)
Cumulative effect of a change in
accounting principle 2 (48.5) - - -
----------- ------------ ------------ ------------
Net earnings (loss) $ (52.9) $ 2.6 $ 1.5 $ (0.7)
=========== ============ ============ ============
Earnings (loss) per share:
Primary -
Loss from continuing operations $ (0.34) $ 0.08 $ 0.01 $ (0.05)
Extraordinary charge, net of tax benefit 1 - - - (0.06)
Cumulative effect of a change in
accounting principle 2 (2.86) - - -
------------ ------------ ------------ ------------
Net earnings (loss) $ (3.20) $ 0.08 $ 0.01 $ (0.11)
============ ============ ============ ============
Fully diluted -
Loss from continuing operations $ (0.34) $ 0.08 $ 0.01 $ (0.05)
Extraordinary charge, net of tax benefit 1 - - - (0.06)
Cumulative effect of a change in
accounting principle 2 (2.86) - - -
------------ ------------ ------------ ------------
Net earnings (loss) $ (3.20) $ 0.08 $ 0.01 $ (0.11)
============ ============ ============ ============
</TABLE>
- - ---------------
(1) Prepayment penalty on early retirement of $45 million of 12% Senior
Subordinated Notes.
(2) Cumulative after-tax effect of change in accounting principle for initial
obligation for estimated postretirement health care benefits as required
by adoption of SFAS No. 106 effective January 1, 1993.
48
<PAGE> 22
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1992
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
---------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues $ 107.6 $ 136.5 $ 139.2 $ 124.1
============ ============ ============ =============
Earnings (loss) from continuing operations
before interest and income taxes $ (0.1) $ 0.0 $ 9.5 $ (26.0)
============ ============ ============ =============
Loss from continuing operations $ (7.4) $ (7.0) $ (0.5) $ (26.5)
Gain on discontinued operations, net
of income taxes 1 - - 0.8 -
------------ ------------ ------------ -------------
Net loss $ (7.4) $ (7.0) $ 0.3 $ (26.5)
============ ============ ============ =============
Earnings (loss) per share:
Primary -
Loss from continuing operations $ (0.51) $ (0.49) $ (0.10) $ (1.64)
Gain on discontinued operations, net
of income taxes 1 - - 0.05 -
------------ ------------ ------------ -------------
Net loss $ (0.51) $ (0.49) $ (0.05) $ (1.64)
============ ============ ============ =============
Fully diluted -
Loss from continuing operations $ (0.51) $ (0.49) $ (0.10) $ (1.64)
Gain on discontinued operations, net
of income taxes 1 - - 0.05 -
------------ ------------ ------------ -------------
Net loss $ (0.51) $ (0.49) $ (0.05) $ (1.64)
============ ============ ============ =============
</TABLE>
(1) Final portion of the gain deferred from the 1989 sale of the Company's oil
and gas operations.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1991
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
---------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues $ 103.9 $ 137.4 $ 141.3 $ 124.3
============ ============ ============ =============
Earnings (loss) from continuing operations
before equity in net loss of unconsolidated
joint venture, interest and income taxes $ (2.0) $ 8.0 $ (4.8) $ (16.9)
============ ============ ============ =============
Loss from continuing operations $ (7.5) $ (2.2) $ (9.7) $ (23.8)
Extraordinary charge, net of tax benefit 1 - - - (1.4)
============ ============ ============ =============
Net loss $ (7.5) $ (2.2) $ (9.7) $ (25.2)
============ ============ ============ =============
Loss per share:
Primary
Loss from continuing operations $ (0.52) $ (0.21) $ (0.65) $ (1.48)
Extraordinary charge, net of tax benefit 1 - - - (0.08)
------------ ------------ ------------ -------------
Net loss $ (0.52) $ (0.21) $ (0.65) $ (1.56)
============ ============ ============ =============
Fully diluted
Loss from continuing operations $ (0.52) $ (0.21) $ (0.65) $ (1.48)
Extraordinary charge, net of tax benefit 1 - - - (0.08)
============ ============ ============ =============
Net loss $ (0.52) $ (0.21) $ (0.65) $ (1.56)
============ ============ ============ =============
</TABLE>
(1) Represents prepayment penalty on early retirement of Senior Secured Notes,
net of income tax effect.
49
<PAGE> 23
The businesses of the Company's Cement and Concrete Products segments
are seasonal to the extent that construction activity and hence, the demand for
cement and concrete products, tends to diminish during the first and fourth
calendar quarters of each year because of inclement weather conditions.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
<TABLE>
<CAPTION>
INDEX TO FINANCIAL STATEMENTS
PAGE
----
<S> <C>
Statement of Consolidated Earnings for the years ended
December 31, 1993, 1992 and 1991 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Consolidated Balance Sheet as of December 31, 1993 and 1992 . . . . . . . . . . . . . . . . . . . 52
Statement of Consolidated Cash Flows for the years ended
December 31, 1993, 1992 and 1991 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Statement of Consolidated Shareholders' Equity for the years ended
December 31, 1993, 1992 and 1991 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82
</TABLE>
50
<PAGE> 24
SOUTHDOWN, INC. AND SUBSIDIARY COMPANIES
STATEMENT OF CONSOLIDATED EARNINGS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
---------------------------------------
1993 1992 1991
------------ ------------ ------------
<S> <C> <C> <C>
Revenues $ 544.8 $ 507.4 $ 506.9
------------ ------------- -------------
Costs and expenses:
Operating 391.7 390.0 397.5
Depreciation, depletion and amortization 41.9 48.5 47.4
Selling and marketing 18.6 17.9 16.4
General and administrative 42.1 47.1 54.3
Other expense (income), net 5.5 (3.5) 5.2
------------ ------------- -------------
499.8 500.0 520.8
Write-down of environmental services assets (Note 18) 3.1 21.4 -
Minority interest in earnings of consolidated
joint venture (Note 13) 2.9 2.6 1.8
------------ ------------- -------------
505.8 524.0 522.6
------------ ------------- -------------
Operating earnings (loss) 39.0 (16.6) (15.7)
Equity in net loss of unconsolidated joint
venture (Note 19) - - (16.0)
Interest, net of amounts capitalized (39.3) (45.0) (40.7)
------------ ------------- -------------
Loss from continuing operations before income taxes,
extraordinary charge and cumulative effect of a
change in accounting principle (0.3) (61.6) (72.4)
Federal and state income tax benefit (Note 12) 0.3 20.2 29.2
------------ ------------- -------------
Loss from continuing operations before extraordinary
charge and cumulative effect of a change in
accounting principle - (41.4) (43.2)
Gain on discontinued operations, net of income
taxes (Note 20) - 0.8 -
Extraordinary charge, net of tax benefit (Note 11) (1.0) - (1.4)
Cumulative effect of a change in accounting
principle (Note 2) (48.5) - -
------------ ------------- -------------
Net loss $ (49.5) $ (40.6) $ (44.6)
Dividends on preferred stock (5.0) (5.0) (5.1)
------------ ------------- -------------
Loss attributable to common stock $ (54.5) $ (45.6) $ (49.7)
------------ ------------- -------------
Loss per share (Notes 21, 22 and Exhibit 11):
Loss from continuing operations $ (0.30) $ (2.74) $ (2.86)
Gain on discontinued operations, net of income
taxes (Note 20) - 0.05 -
Extraordinary charge, net of tax benefit (Note 11) (0.06) - (0.08)
Cumulative effect of a change in accounting
principle (Note 2) (2.86) - -
------------ ------------- -------------
Net loss $ (3.22) $ (2.69) $ (2.94)
============ ============= =============
</TABLE>
See Notes to Consolidated Financial Statements
51
<PAGE> 25
SOUTHDOWN, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS)
-------------------------------
1993 1992
------------- ------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents (Note 4) $ 7.4 $ 12.5
Accounts and notes receivable, net (Note 5) 75.7 85.2
Inventories (Note 6) 54.7 58.6
Deferred income taxes (Note 12) 25.5 10.9
Prepaid expenses and other 3.6 14.6
------------- ------------
Total current assets 166.9 181.8
Property, plant and equipment, net (Note 7) 593.2 592.9
Goodwill 74.5 74.6
Other long-term assets (Notes 8 and 15) 72.4 72.2
------------- ------------
$ 907.0 $ 921.5
============= ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt (Notes 10 and 11) $ 19.9 $ 8.3
Accounts payable and accrued liabilities (Note 9) 91.9 89.7
------------- ------------
Total current liabilities 111.8 98.0
Long-term debt (Notes 10 and 11) 274.0 306.5
Deferred income taxes (Note 12) 127.6 141.6
Minority interest in consolidated joint venture (Note 13) 28.8 31.0
Long-term portion of postretirement benefit obligation (Note 16) 83.8 5.3
Other long-term liabilities and deferred credits (Note 14) 18.8 22.7
------------- ------------
644.8 605.1
------------- ------------
Commitments and contingent liabilities (Notes 10, 14, 15, 16 and 17)
Shareholders' equity (Notes 21 and 22):
Preferred stock, $.05 par value, 10,000,000 shares authorized:
$ .70 Cumulative Convertible Series A, 1,999,000 shares
issued and outstanding 20.0 20.0
$3.75 Convertible Exchangeable Series B, 960,000 shares
issued, 959,000 shares outstanding 47.9 47.9
Common stock, $1.25 par value, 40,000,000 shares authorized,
17,046,000 and 16,945,000 shares issued and outstanding 21.3 21.2
Capital in excess of par value 127.6 126.6
Reinvested earnings 45.4 100.7
------------- ------------
262.2 316.4
------------- ------------
$ 907.0 $ 921.5
============= ============
</TABLE>
See Notes to Consolidated Financial Statements
52
<PAGE> 26
SOUTHDOWN, INC. AND SUBSIDIARY COMPANIES
STATEMENT OF CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
(IN MILLIONS)
--------------------------------------------------
1993 1992 1991
------------ ------------- -------------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Loss before extraordinary item $ (48.5) $ (40.6) $ (43.2)
Adjustments to reconcile earnings from continuing
operations to net cash provided by (used in)
operating activities:
Cumulative effect of a change in accounting principle 48.5 - -
Depreciation, depletion and amortization 41.9 48.5 47.4
Deferred income tax benefit (1.7) (4.7) (13.3)
Amortization of debt issuance costs 2.8 3.6 2.8
Minority interest in earnings of consolidated
joint venture 2.9 2.6 1.8
Write-down of environmental services assets 3.1 21.4 -
Equity in net loss of unconsolidated joint venture - - 16.0
(Gain) loss on sale of assets - (1.2) 5.2
Changes in operating assets and liabilities
(Increase) decrease in accounts and notes receivable 8.0 (7.0) (13.4)
Decrease in inventories 4.2 2.4 6.1
(Increase) decrease in prepaid expenses and other (0.4) 14.3 (1.2)
Increase (decrease) in accounts payable and
accrued liabilities (3.2) (2.6) 5.9
Increase (decrease) in income taxes payable (1.2) (0.5) 4.0
Decrease in other long-term liabilities and
deferred credits (1.7) (2.5) (8.4)
------------ ------------- -------------
Net cash provided by operating activities 54.7 33.7 9.7
------------ ------------- -------------
INVESTING ACTIVITIES:
Additions to property, plant and equipment (24.4) (17.4) (30.0)
Acquisitions, net of cash acquired (2.9) (4.9) -
Proceeds from asset sales 7.6 9.8 23.7
Investment in unconsolidated joint venture (Note 19) - - (6.2)
Other (0.9) 2.5 5.2
------------ ------------- -------------
Net cash used in investing activities (20.6) (10.0) (7.3)
------------ ------------- -------------
FINANCING ACTIVITIES:
Additions to long-term debt (Note 11) - 0.5 121.2
Reductions in long-term debt (Note 11) (25.4) (18.4) (106.8)
Reduction in preferred stock subject to mandatory
redemption (Note 21) - - (6.0)
Issuance of warrants (Note 21) - - 3.8
Dividends (Note 21) (5.0) (5.0) (7.3)
Distributions to minority interest (4.3) (2.0) (1.5)
Debt issuance costs (3.5) (0.9) (8.2)
Premium on early extinguishment of debt (Note 11) (1.0) - (1.4)
------------ ------------- -------------
Net cash used in financing activities (39.2) (25.8) (6.2)
------------ ------------- -------------
Net decrease in cash and cash equivalents (5.1) (2.1) (3.8)
Cash and cash equivalents at the beginning of the year 12.5 14.6 18.4
------------ ------------- -------------
Cash and cash equivalents at the end of the year $ 7.4 $ 12.5 $ 14.6
============ ============= =============
</TABLE>
See Notes to Consolidated Financial Statements
53
<PAGE> 27
SOUTHDOWN, INC. AND SUBSIDIARY COMPANIES
STATEMENT OF CONSOLIDATED SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
IN MILLIONS)
-----------------------------------------------------------------------------
PREFERRED STOCK COMMON STOCK CAPITAL
--------------- ------------ IN EXCESS OF REINVESTED
SHARES AMOUNT SHARES AMOUNT PAR VALUE EARNINGS
--------- --------- --------- --------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1990 3.0 $ 67.9 16.9 $ 21.2 $ 122.8 $ 198.2
Net loss - - - - - (44.6)
Cash dividends paid on common stock -
$0.125 per share 1 - - - - - (2.2)
Dividends on preferred stock - - - - - (5.1)
Issuance of warrants - - - - 3.8 -
-------- ------- ------ ------- -------- --------
Balance at December 31, 1991 3.0 67.9 16.9 21.2 126.6 146.3
Net loss - - - - - (40.6)
Dividends on preferred stock - - - - - (5.0)
-------- ------- ------ ------- -------- --------
Balance at December 31, 1992 3.0 67.9 16.9 21.2 126.6 100.7
Net loss - - - - - (49.5)
Dividends on preferred stock - - - - - (5.0)
Exercise of stock options - - 0.1 0.1 (0.1) (0.8)
Tax benefit from exercise of stock options - - - - 1.1 -
-------- ------- ------ ------- -------- --------
Balance at December 31, 1993 3.0 $ 67.9 17.0 $ 21.3 $ 127.6 $ 45.4
======== ======= ====== ======= ======== ========
</TABLE>
- - ------------------
(1) On April 25, 1991, the Board of Directors s spended the dividend on the
Company's Common Stock.
See Notes to Consolidated Financial Statements
54
<PAGE> 28
SOUTHDOWN, INC. AND SUBSIDIARY COMPANIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES:
Southdown, Inc. (Southdown or the Company) engages in the production
and marketing of cement and concrete products. The Company also engages in the
processing, treatment and disposal of hazardous wastes. The operations of the
hazardous waste processing facilities are conducted through Southdown
Environmental Systems, Inc., a wholly-owned subsidiary of the Company, and
several indirect wholly-owned subsidiaries.
Consolidation - The consolidated financial statements of the Company
include the accounts of its divisions, its wholly-owned subsidiaries and its
majority-owned joint venture after elimination of significant intercompany
transactions and balances. Certain data for prior years have been reclassified
for purposes of comparison.
Statement of Consolidated Cash Flows Supplemental Disclosures - For
purposes of the Statement of Consolidated Cash Flows, short-term investments
which have an original maturity of three months or less are considered cash
equivalents. Cash payments for income taxes totaled $2.8 million in 1993,
$200,000 in 1992 and $1.7 million in 1991. During 1993 and 1992 the Company
received a $15.7 million and an $18.7 million federal income tax refund,
respectively, from the carryback to prior years of the previous year's tax
losses. Interest paid, net of amounts capitalized in years 1993 and 1991, was
$36.4 million, $40.4 million and $38.5 million in 1993, 1992 and 1991,
respectively. The $48.5 million noncash charge for the cumulative effect of a
change in accounting principle also resulted in a charge to deferred income
taxes of $25.9 million and a credit to postretirement benefit obligations of
$74.4 million. Noncash investing activities in 1993 included the sale of a
hazardous waste processing facility for preferred stock which the Company
valued at $4.8 million (see Note 18 of Notes to Consolidated Financial
Statements) and the exchange of $9.2 million in accounts and notes receivable
and the assumption of $6.8 million in liabilities as partial consideration for
the acquisition from the debtors of five ready-mixed concrete products batch
plants and one aggregate quarry. Noncash investing activities in 1992 included
receipt of a $1.9 million note as partial consideration for the sale of all of
the common stock of a hazardous waste processor sold effective June 30, 1992
and the assumption of $1.1 million of noncash liabilities in the January 1992
acquisition of a hazardous waste processor. Noncash investing activities in
1991 included an accrual for the acquisition of a seventh hazardous waste
processing facility (also referred to as treatment, storage and disposal (TSD)
facilities or simply, as TSDs) for $4.4 million effective January 1, 1992 and
an additional $1 million of acquisitions for notes.
Inventories - Inventories are valued at the lower of cost (which
includes material, labor and manufacturing overhead) or market. The valuation
of cement inventories is determined on the last-in, first-out (LIFO) method.
The valuation of the remaining inventories, primarily parts and supplies, is
determined on the first-in, first-out (FIFO) or average cost method.
Property, Plant and Equipment - The Company capitalizes all direct and
certain indirect expenditures incurred in conjunction with the acquisition or
construction of major facilities. Depreciation and amortization of these
capitalized costs commence when the completed facility is placed in service.
Depreciation and amortization of property, plant and equipment are computed
primarily on a straight-line basis over estimated useful lives of the related
assets, ranging from three to fifty years. Depletion of
55
<PAGE> 29
mineral rights is computed on the units-of-production method. Certain costs
and expenses associated with the acquisitions of various facilities have been
capitalized and are being amortized over the estimated useful lives of the
related assets. Gain or loss is generally reflected in earnings upon the
retirement or sale of property, plant and equipment.
Environmental Expenditures - Environmental expenditures that relate to
current operations are expensed or capitalized as appropriate. 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. Expenditures that relate to an existing
condition caused by past operations, and which do not contribute to current or
future revenue generation, are expensed. The Company's policy is to accrue
environmental and clean-up 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 this coincides with the completion of a
remediation investigation/feasibility study or the Company's commitment to a
formal plan of action. Such estimates are revised as additional information
becomes known.
Goodwill - The excess of cost over the fair value of net assets of
businesses acquired is amortized on a straight-line basis over periods ranging
from 15 to 40 years. Such amortization amounted to $2.4 million, $3.3 million
and $3.1 million in 1993, 1992 and 1991, respectively. In addition, goodwill
was further reduced by approximately $12.3 million in the fourth quarter of
1992 in conjunction with the pending and proposed disposition of certain TSD
facilities. (See Note 18 of Notes to Consolidated Financial Statements.)
Accumulated amortization of goodwill was $12.9 million and $10.5 million as of
December 31, 1993 and 1992, respectively.
Income Taxes - In computing its federal and state income tax
liabilities, the Company uses accelerated depreciation and deducts currently
certain expenditures that are capitalized for financial reporting purposes.
Deferred income taxes are provided on these and other temporary differences
between the tax bases of assets and liabilities and their bases for financial
statement purposes. Investment tax credit carryforwards are accounted for
under the flow-through method and, accordingly, reduce federal income taxes in
the years in which their utilization is assured.
Effective January 1, 1993, the Company revised its method of
accounting for income taxes to conform to Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109). SFAS No. 109
requires recognition of deferred tax assets for all existing potential future
tax benefits and then subjection of these deferred tax assets to an impairment
valuation based on the likelihood of realization. (See Note 2 of Notes to
Consolidated Financial Statements.)
Interim Periods - For its cement manufacturing operations, the Company
utilizes a standard manufacturing cost to identify favorable or unfavorable
variances from predetermined cost estimates established by management. For
interim reporting purposes, the Company charges cost of goods sold on the basis
of such estimated costs for the year deferring as a charge or credit to
inventory any difference between actual manufacturing costs and the standard.
At year-end, any variation between the result at standard cost and actual cost
is charged or credited to cost of goods sold.
56
<PAGE> 30
NOTE 2 - CHANGES IN ACCOUNTING PRINCIPLES:
Postretirement benefits - Postretirement benefits other than pensions
(postretirement benefits) currently provided by the Company to its eligible
retirees consist primarily of health care and life insurance benefits. In
certain instances, retirees under the age of sixty-five and their dependents
are offered health care benefits which are essentially the same as benefits
available to active employees. However, benefit payments for covered retirees
over the age of sixty-five are reduced to the extent that such benefits are
paid by Medicare. Most of the Company's health care benefits are self-insured
and administered on cost plus fee arrangements with a major insurance company
or provided through health maintenance organizations. Generally life insurance
benefits for retired employees are reduced over a number of years from the date
of retirement to a specified minimum level.
Effective January 1, 1993 the Company adopted Statement of Financial
Accounting Standards No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions" (SFAS No. 106) and recorded a $48.5 million
after-tax, non-cash charge which represented the initial estimated liability
for postretirement benefits attributable to employee services provided prior to
1993. SFAS No. 106 requires the Company to accrue the estimated cost of
retiree benefit payments as the employee provides services to the Company. The
Company previously expensed the cost of these benefits as claims were incurred,
and it continues to pay for postretirement benefit costs as incurred.
General and administrative expenses for 1993 included a charge of
approximately $1.8 million in each of the first two quarters of the year ($3.5
million in the aggregate) representing the estimated cost of postretirement
health care benefits in excess of claims incurred. The Company amended its
plan for postretirement health care benefits in the latter part of the second
quarter. Effective with the third quarter of 1993, the Company's accrual for
estimated future postretirement benefit costs was reduced by approximately $47
million under the amended plan which the Company will amortize over the 16
years remaining average service life of its active employees as required by
SFAS No. 106. These changes have eliminated the quarterly charge of
approximately $1.8 million as incurred in each of the first and second quarters
of 1993.
Income Taxes - The Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes" (SFAS No. 109) effective
January 1, 1993. SFAS No. 109 supersedes SFAS No. 96, "Accounting for Income
Taxes" which was adopted by the Company in 1988. There was no cumulative
effect on the Company's financial statements resulting from the adoption of
SFAS No. 109. In early August 1993, the President signed into law a bill that
includes, among other provisions, a one percent increase in the maximum federal
income tax rate for corporations retroactive to January 1, 1993. Under the
requirements of SFAS No. 109, the Company recorded a charge of approximately
$2.2 million in the third quarter of 1993 to recognize the increase in the
deferred tax liability as a result of the change in the corporate income tax
rate.
57
<PAGE> 31
NOTE 3 - BUSINESS SEGMENT INFORMATION:
Operating results and certain other financial data for the Company's
principal business segments for and at the end of each year presented are as
follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
----------------------------------------
1993 1992 1991
----------- ----------- -----------
<S> <C> <C> <C>
Contributions to revenues:
Cement $ 370.9 $ 339.5 $ 328.4
Concrete Products 176.3 158.1 181.1
Environmental Services 36.1 43.4 36.8
Intersegment sales (39.0) (34.3) (41.1)
Other 0.5 0.7 1.7
----------- ----------- -----------
$ 544.8 $ 507.4 $ 506.9
=========== =========== ===========
Contributions to operating earnings (loss):
Cement $ 81.9 $ 62.6 $ 44.9
Concrete Products (1.6) (11.6) (12.7)
Environmental Services (2.2) (10.6) (4.4)
Write-down of certain environmental
services assets (3.1) (21.4) -
Corporate
General and administrative (28.9) (32.7) (34.1)
Depreciation, depletion and amortization (4.3) (4.4) (4.3)
Miscellaneous income (losses) (2.8) 1.5 (5.1)
----------- ----------- -----------
$ 39.0 $ (16.6) $ (15.7)
=========== =========== ===========
Identifiable assets, end of year:
Cement $ 591.6 $ 610.4 $ 626.9
Concrete Products 128.0 112.6 133.3
Environmental Services 39.6 41.8 42.0
Other 147.8 156.7 183.9
----------- ----------- -----------
$ 907.0 $ 921.5 $ 986.1
=========== =========== ===========
Depreciation, depletion and amortization:
Cement $ 25.9 $ 27.7 $ 27.2
Concrete Products 8.3 9.7 10.9
Environmental Services 3.4 6.7 5.0
Other 7.1 8.0 7.1
----------- ----------- -----------
$ 44.7 $ 52.1 $ 50.2
=========== =========== ===========
Capital expenditures:
Cement $ 8.5 $ 4.9 $ 13.0
Concrete Products 3.5 1.5 5.2
Environmental Services 11.0 9.7 10.4
Other 1.4 1.3 2.4
----------- ----------- -----------
$ 24.4 $ 17.4 $ 31.0
=========== =========== ===========
</TABLE>
The Cement segment includes the operations of eight quarrying and
manufacturing facilities and a network of 17 terminals for the production and
distribution of portland and masonry cement. The Concrete Products segment
includes primarily the production and sale of ready-mixed concrete, and to a
lesser extent, the sale of construction aggregate and concrete block. The
Environmental Services segment includes the results from collection, treatment
and processing of hazardous wastes and burning of hazardous waste derived fuel
(HWDF). No allocation of corporate overhead is made to the operating segments.
Substantially all of the Company's operations are conducted in the United
States. Intersegment sales occur primarily between the Company's Florida
cement manufacturing plant and the
58
<PAGE> 32
Florida concrete products operations and the Company's southern California
cement manufacturing plant and the related concrete operations. Intersegment
sales are accounted for at prices which approximate market prices and are
eliminated for purposes of preparing consolidated financial statements.
Capital expenditures shown above for 1993 for the Concrete Products segment
exclude $14.6 million in property, plant and equipment additions resulting from
the purchase of five ready-mixed concrete batch plants and one aggregate quarry
during the year. Capital expenditures shown above for the Environmental
Services segment exclude $2.5 million in 1991 which was accrued as property,
plant and equipment in conjunction with the $4.9 million acquisition of a
seventh TSD completed in January 1992.
NOTE 4 - CASH AND CASH EQUIVALENTS:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS)
-----------------------
1993 1992
---------- ---------
<S> <C> <C>
Cash on hand and demand deposits $ 4.4 $ 3.2
Commercial paper, certificates of deposit
and repurchase agreements - at cost, which
approximates market value 3.0 9.3
---------- ---------
$ 7.4 $ 12.5
========== =========
</TABLE>
There is no requirement for the Company to maintain compensating
balances under any of the agreements with the Company's lending banks.
NOTE 5 - ACCOUNTS AND NOTES RECEIVABLE:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS)
-----------------------
1993 1992
---------- ---------
<S> <C> <C>
Trade accounts and notes receivable $ 80.0 $ 72.5
Allowance for doubtful accounts (7.0) (6.2)
---------- ---------
73.0 66.3
Federal income tax receivables - 14.9
Other receivables 2.7 4.0
---------- ---------
$ 75.7 $ 85.2
========== =========
</TABLE>
Significant Group Concentrations of Credit Risk - The majority of the
Company's receivables are from users of portland cement, such as ready-mixed
concrete producers and manufacturers of concrete products such as blocks, roof
tile, pipe and prefabricated building components. Sales are also made to
building materials dealers, construction contractors and, particularly from the
Odessa plant, oil well cementing companies. During 1993, 1992 and 1991
approximately 52%, 49% and 50%, respectively, of the Odessa plant's cement
sales volume consisted of oil well cement and the balance represented sales to
local construction markets. Approximately 15%, 13% and 21% of the cement sold
by the Company's Victorville, California plant in 1993, 1992 and 1991,
respectively, was sold to the Company's ready-mixed concrete operations in
California and approximately 37%, 42% and 52% of the cement sold by the
Brooksville, Florida plant in 1993, 1992 and 1991, respectively, was sold to
the Company's Florida concrete products operations. The Company is a major
producer of ready-mixed concrete in the southern California counties of Los
Angeles and Orange and a major producer and supplier of such products
throughout Florida and southeastern Georgia. There were no sales to any single
third-party customer which aggregated in excess of 10% of consolidated revenues
for 1993, 1992 or 1991.
59
<PAGE> 33
Because both Florida and southern California were experiencing an
economic downturn and a significant slowing of new construction activities, the
Company recorded a supplemental $3.6 million charge to earnings in 1991 to
increase its allowance for doubtful accounts in addition to the Company's
customary provision. The Company has and may continue to offer extended credit
terms to certain of its customers, including converting certain trade
receivables into collateralized, interest-bearing notes receivable. This
practice became more prevalent during 1992 in southern California where many of
the Company's customers have been adversely affected by the severe recession in
the construction industry in that region. A group of five such customers were
indebted to the Company at December 31, 1993 for a total of $20.6 million, of
which $5.2 million was included in current accounts and notes receivable with
the balance in long-term assets. All of the notes and a portion of the
accounts receivable, approximately 78% of the $20.6 million, are collateralized
primarily by real and personal property of the businesses and, for certain
receivables, by a personal guaranty of the owners. During 1993 approximately
$788,000 in interest income, the majority of which has been collected, was
recognized on these notes. The five customers purchased a total of
approximately 252,000 tons of cement from the Company during 1993. During 1993
two of the customers defaulted in the payment terms of their notes. The
Company restructured its agreement with one of the defaulting customers in the
second quarter of 1993 and that customer was in compliance with the terms of
the restructured agreement as of December 31, 1993. The Company has stopped
selling cement on credit to the other customer in default and is presently
evaluating its options for collection of outstanding balances. A third
customer in this group, while not in default on its note, had difficulty in
maintaining prompt payment for its cement purchases and restructuring
discussions were commenced in late 1993. The Company is contractually
committed to supply up to 90% of the cement requirements of one of the two
non-defaulting customers on extended credit terms, provided this customer
remains current with respect to both current purchases and payments on its
note.
During the final quarter of 1993, the Company purchased most of the
primary ready-mixed concrete and aggregate assets of two other customers then
in default for forgiveness of a total of approximately $9.2 million owed the
Company, assumption of certain liabilities and other consideration. The
Company realized no gain or loss on either of these transactions. In January
1994, the Company made a preliminary purchase proposal to acquire certain
ready-mixed concrete and aggregate assets of the customer with which it was
engaged in restructuring discussions. The proposal included, as partial
consideration for the acquisition, forgiveness of the $5.8 million owed the
Company as of December 31, 1993.
NOTE 6 - INVENTORIES:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS)
-----------------------
1993 1992
---------- ---------
<S> <C> <C>
Finished goods $ 15.4 $ 14.7
Work in process 7.0 9.4
Raw materials 6.0 7.3
Parts and supplies 26.3 27.2
---------- ---------
$ 54.7 $ 58.6
========== =========
</TABLE>
60
<PAGE> 34
Inventories valued on the LIFO method were $20.4 million at December
31, 1993 and $22.8 million at December 31, 1992 compared with current costs of
$28.3 million and $32.2 million, respectively.
NOTE 7 - PROPERTY, PLANT AND EQUIPMENT:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS)
-----------------------
1993 1992
---------- ---------
<S> <C> <C>
Land (at cost):
Cement $ 31.0 $ 31.0
Concrete Products 22.1 19.0
Environmental Services 3.8 3.2
Corporate and other 0.4 0.4
---------- ---------
57.3 53.6
---------- ---------
Plant and equipment (at cost):
Cement 665.6 658.0
Concrete Products 94.8 82.5
Environmental Services 34.7 21.6
Corporate and other 17.7 18.3
---------- ---------
812.8 780.4
---------- ---------
Less accumulated depreciation, depletion
and amortization (276.9) (241.1)
---------- ---------
$ 593.2 $ 592.9
---------- ---------
</TABLE>
NOTE 8 - OTHER LONG-TERM ASSETS:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS)
-----------------------
1993 1992
---------- ---------
<S> <C> <C>
Prepaid pension costs (Note 15) $ 20.8 $ 19.2
Long-term trade receivables (Note 5) 20.6 23.1
Unamortized debt issuance costs 1 10.1 10.2
Land held for sale 2 7.9 8.3
Net present value of purchased supply contracts 3 5.9 6.4
Other 7.1 5.0
---------- ---------
$ 72.4 $ 72.2
========== =========
</TABLE>
- - ---------------------
(1) Costs and expenses associated with the issuance of certain of the
Company's senior debt and senior subordinated
notes. Debt issuance costs are being amortized over the
respective terms of the debt.
(2) Includes various non-income producing real estate parcels offered
for sale.
(3) Two contracts to supply flyash through 1997 and 1999,
respectively, were acquired in conjunction with the Moore
McCormack Resources, Inc. purchase in 1988. The supply contracts
were recorded at their net present values at the date of
acquisitiion and are being amortized over the respective lives
of the contracts.
61
<PAGE> 35
NOTE 9 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS)
-----------------------
1993 1992
---------- ---------
<S> <C> <C>
Trade accounts payable $ 23.4 $ 22.3
Accrued liabilities, trade 14.8 11.9
Accrued compensation and benefits 12.7 12.2
Deferred payment obligation 8.8 9.0
Current portion of pre-acquisition contingencies 2.5 6.7
Accrued interest payable 6.7 6.5
Accrued taxes, other 3.5 3.7
Current portion of liabilities for discontinued operations 2.2 2.2
Accrued environmental remediation costs 9.6 4.2
Accrued loss contingencies on aggregate facilities 0.7 3.7
Current portion of postretirement benefit obligation 3.0 -
Other accrued liabilities 4.0 7.3
---------- ---------
$ 91.9 $ 89.7
========== =========
</TABLE>
NOTE 10 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value amounts for all financial instruments have
been determined by the Company using appropriate valuation methodologies and
information available to management as of December 31, 1993 and 1992.
Considerable judgment is required in developing these estimates, however, and
accordingly no assurance can be given that the estimated values presented
herein are indicative of the amounts that would be realized in a free market
exchange.
Except for the following, the carrying amounts of the Company's assets
and liabilities which are considered to be financial instruments approximate
their value:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS)
-----------------------------------------------
1993 1992
--------------------- ----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------- ----------- ------- -----------
<S> <C> <C> <C> <C>
Long-term debt $ 293.9 $ 318.7 $ 314.8 $ 308.2
Unrealized loss on interest
rate swap agreement - (0.2) - (1.0)
</TABLE>
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments as of December 31, 1993 and 1992
for which it is practicable to estimate that value:
Long-term debt - The fair value of the Company's long-term debt was
estimated based on the quoted market prices for the same or similar issues or
on the current rates available to the Company for debt with similar terms and
remaining maturities.
Interest rate swap agreements - The fair value of the interest rate
swap was the amount at which it could be settled based on estimates obtained
from dealers.
62
<PAGE> 36
NOTE 11 - LONG-TERM DEBT:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS)
-----------------------
1993 1992
---------- ---------
<S> <C> <C>
Senior debt:
Revolving credit facility $ 19.0 $ 32.0
Promissory note 18.0 22.5
Industrial development and pollution control bonds 41.0 41.3
9% bank note 1.5 4.4
Other 2.7 3.2
Subordinated debt:
12% senior subordinated notes 90.0 90.0
14% senior subordinated notes 121.7 121.4
---------- ---------
293.9 314.8
Less current maturities (19.9) (8.3)
---------- ---------
$ 274.0 $ 306.5
========== =========
</TABLE>
Restated Revolving Credit Facility - The Company's primary revolving
credit facility is with Wells Fargo Bank, N.A., in its individual capacity and
as agent; Societe Generale, Southwest Agency; Credit Suisse; Caisse Nationale
De Credit Agricole; an affiliate of Canadian Imperial Bank of Commerce; Banque
Paribas; The Bank of Nova Scotia and The First National Bank of Boston.
Substantially all of the Company's assets are pledged to secure the revolving
credit facility.
On November 19, 1993, the Company and its lending banks entered into a
$200 million Restated Revolving Credit Facility (Restated Revolving Credit
Facility). This facility includes the issuance of standby letters of credit up
to a maximum of $95 million and also includes $20 million of borrowing capacity
that is reserved solely for potential funding obligations under a Keepwell
Agreement with the U.S. Maritime Administration (MARAD). (See Note 14 of Notes
to Consolidated Financial Statements.) The Restated Revolving Credit Facility
remains the same size as the previously existing revolving credit facility and
matures in November 1996. The Restated Revolving Credit Facility contains
various negative and affirmative covenants and cross-default provisions and
customary conditions to borrowing. Borrowings under the Restated Revolving
Credit Facility bear interest at margins above either a prime rate or LIBOR as
selected by the Company from time to time. On December 31, 1993, the interest
rate under the Restated Revolving Credit Facility was approximately 6.0%.
As of December 31, 1993, there were $19 million of borrowings and $71
million in letters of credit outstanding under the Restated Revolving Credit
Facility leaving $90 million of unused capacity, excluding the $20 million
reserved under the Keepwell Agreement. On January 5, 1994 the Company borrowed
$47 million under the Restated Revolving Credit Facility to redeem $45 million
principal amount of 12% Senior Subordinated Notes Due 1997 (12% Notes) and to
pay the redemption premium and accrued interest thereon. On January 27, 1994
the Company used approximately $65 million of the proceeds of a January 27,
1994 sale of Series D Preferred Stock to reduce borrowings under the Restated
Revolving Credit Facility. (See Note 21 of Notes to Consolidated Financial
Statements.) The Company intends to use the Restated Revolving Credit Facility
to redeem at par the remaining $45 million outstanding principal amount of 12%
Notes as promptly as practicable after May 1, 1994.
63
<PAGE> 37
Promissory Note - The promissory note for $18 million as of December
31, 1993 was payable on March 31, 1994 with interest at margins above either a
prime rate basis or a Eurodollar rate basis as selected by the Company from
time-to-time and secured by an irrevocable letter of credit issued under the
Restated Revolving Credit Facility. The face amount of the letter of credit
reduces ratably with the promissory note balance. On January 27, 1994 the
note was prepaid without penalty using a portion of the proceeds from the
Company's sale of the Series D Preferred Stock. (See Note 21 of Notes to
Consolidated Financial Statements.)
Industrial Development and Pollution Control Bonds - The industrial
development and pollution control bonds were issued by various state or local
financing authorities and are due on various dates through the year 2006. The
obligations bear interest, which is nontaxable to the payees, at varying rates
ranging from approximately 50% of the prevailing prime rate to 5.5%. The
obligations are secured by irrevocable letters of credit issued under the
Restated Revolving Credit Facility or by liens on the pollution control
equipment.
9% Bank Note - The 9% bank note included in current maturities of
long-term debt at December 31, 1993 was payable to a commercial bank by a
subsidiary of the Company and unconditionally guaranteed by the Company. The
note was paid in full as scheduled in early January 1994.
12% Senior Subordinated Notes - As of December 31, 1993 long-term debt
included $90 million principal amount of 12% Notes due in 1997, but redeemable
at the option of the Company, in whole or in part, at redemption prices (plus
accrued interest to the date of redemption) equal to 101.714% of the principal
amount through April 30, 1994 and 100% of the principal amount thereafter. On
January 5, 1994 the Company borrowed $47 million under the Restated Revolving
Credit Facility to redeem $45 million principal amount of 12% Notes and to pay
the redemption premium and accrued interest thereon. The Company recorded a
$1.6 million extraordinary charge ($1.0 million net of tax) as of December 31,
1993 to reflect the redemption premium on the early extinguishment of the debt.
The Company intends to redeem at par the remaining $45 million outstanding
principal amount of 12% Notes as promptly as practicable after May 1, 1994 with
borrowings under the Restated Revolving Credit Facility.
14% Senior Subordinated Notes - On October 31, 1991, the Company
issued an aggregate of $125 million principal amount of 14% Senior Subordinated
Notes due 2001 (Notes) and warrants to purchase 1,250,000 shares of the
Company's Common Stock (Warrants) in a private placement transaction. The net
proceeds of the offering were used to repay certain other Company notes in full
and the balance of the proceeds was used to reduce borrowings outstanding under
the Company's then existing revolving credit facility.
The Notes were issued pursuant to an Indenture dated as of October 15,
1991 between the Company and State Street Bank and Trust Company of
Connecticut, National Association, as Trustee. Pursuant to a Registration
Rights Agreement entered into at the time of the private placement, during 1992
all of the Notes were exchanged in a registered exchange offer for $125 million
aggregate principal amount of the Company's 14% Senior Subordinated Notes Due
2001, Series B (Series B Notes). The Series B Notes were also issued under an
indenture dated as of October 15, 1991 between the Company and State Street
Bank and Trust Company of Connecticut, National Association, as Trustee,
(Indenture) and the terms of the Series B Notes and such Indenture are
substantially identical to those of the Notes and the original indenture. The
Series B Notes pay
64
<PAGE> 38
interest semiannually, mature in ten years and are noncallable for five years,
after which the Series B Notes are callable at the option of the Company, in
whole or in part, at any time upon thirty days' notice at 105.25% of the
principal amount, declining ratably to par on or after October 15, 1999. The
Series B Notes are subordinate in right of payment to all existing and future
senior debt, as defined, of the Company, rank on a parity with all existing and
future senior subordinated debt, as defined, of the Company, and rank senior to
all other existing and future subordinated debt of the Company. The Indenture
includes affirmative and negative covenants which in certain instances
restrict, among other things, incurrence of additional indebtedness, certain
sales of assets and subsidiary stock, certain mergers and consolidations and
dividends and distributions. Each Warrant is initially exercisable for one
share of Common Stock of the Company at a price of $16.00, subject to certain
anti-dilution adjustments. (See Note 21 of Notes to Consolidated Financial
Statements.) The Warrants expire on October 31, 1996.
Annual Aggregate Maturities of Long-term Debt - The approximate
aggregate payments due in future years on long-term debt as of December 31,
1993 are as follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
-------------
<S> <C>
1994 $ 19.9
1995 1.2
1996 20.2
1997 91.3
1998 26.8
Thereafter 134.5
---------
$ 293.9
=========
</TABLE>
Interest Rate Hedging Transactions - In March 1989, the Company
entered into an interest rate hedging transaction with two commercial banks
based on $100 million of notional principal amount that limited the Company's
exposure to LIBOR interest rate fluctuations through the termination of the
agreement in March 1992.
The Company entered into an interest rate swap agreement with a
commercial bank in January 1988 which, in effect, converted the interest rate
on the $18 million promissory note referred to under "Promissory Note" above
from a floating rate to a fixed rate of 9.225% through March 31, 1992 and
9.35% thereafter. The notional principal amount, which was $18 million and
$22.5 million at December 31, 1993 and 1992, respectively, reduces ratably with
the promissory note balance. The net gain or loss from the exchange of
interest payments is included in interest expense. The Company recorded $1
million, $2.2 million and $2.8 million of interest expense in 1993, 1992 and
1991, respectively, as a result of these two agreements.
65
<PAGE> 39
NOTE 12 - INCOME TAXES:
The following table provides a breakdown of the current and deferred
components of the provisions for federal and state income taxes attributable to
the loss from continuing operations before income taxes and before
extraordinary charges and the cumulative effect of a change in accounting
principle.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
(IN MILLIONS)
----------------------------------------
1993 1992 1991
----------- ----------- -----------
<S> <C> <C> <C>
Federal income tax expense (benefit):
Current $ .2 $ (15.5) $ (16.9)
Deferred (.2) (4.6) (11.6)
State income tax expense (benefit):
Current .2 - 1.0
Deferred (.5) (0.1) (1.7)
----------- ----------- -----------
$ (.3) $ (20.2) $ (29.2)
=========== =========== ===========
</TABLE>
A reconciliation between the income tax benefit recognized in the
Company's Statement of Consolidated Earnings and the income tax benefit
computed by applying the statutory federal income tax rate to the loss from
continuing operations before income taxes and before extraordinary charges and
the cumulative effect of a change in accounting principle follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, (IN MILLIONS)
------------------------------------------------------------
1993 1992 1991
-------------------- ----------------- -------------------
AMOUNT % AMOUNT % AMOUNT %
--------- --------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Loss from continuing operations
before income taxes and
before the cumulative
effect of a change in accounting
principle and extraordinary
charge $ .3 100.0 $ 61.6 100.0 $ 72.4 100.0
------- --------- ------- ----- ------- ------
Income tax benefit computed
at statutory rate $ (.1) (35.0) $(20.9) (34.0) $(24.6) (34.0)
Benefit of statutory depletion (3.3) (1,100.0) (2.6) (4.2) (1.7) (2.3)
Cumulative effect of increase in
statutory rate 2.5 835.0 - - - -
Effect of non-deductibility of
goodwill .8 266.7 4.1 6.7 1.0 1.4
Reversal of alternative minimum
tax accrual - - - - (3.3) (4.6)
State income tax benefit (.2) (66.7) (0.1) (0.2) (0.5) (0.7)
Other - - (0.7) (1.1) (0.1) (0.1)
------- --------- ------- ------- ------- ------
$ (.3) (100.0) $(20.2) (32.8) $(29.2) (40.3)
======= ========= ======= ======= ======= ======
</TABLE>
The provision for deferred income taxes is based on the liability
method prescribed by SFAS No. 109, and represents the change in the Company's
deferred income tax liability during each year, including the effect of any
enacted tax rate changes. A deferred income tax liability or asset is
recognized for temporary differences between the tax basis of assets and
liabilities and their reported amounts in the financial statements that will
result in net taxable or deductible amounts in future years as well as the
recognition, in certain instances, of the tax effects of operating loss and tax
credit carryforwards.
66
<PAGE> 40
Significant components of the Company's net deferred tax liability as
of December 31, 1993 were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------
1993 1992
----------- -----------
(IN MILLIONS)
<S> <C> <C>
Deferred tax liabilities:
Differences between book and tax basis of
property, plant and equipment $ 153.7 $ 150.0
Assets of overfunded pension plan 8.0 7.2
----------- -----------
161.7 157.2
----------- -----------
Deferred tax assets:
Postretirement benefit obligation 30.0 -
Other reserves not currently deductible 15.9 12.5
Deferred state income taxes 6.0 6.9
Operating loss carryforwards 15.5 17.9
Tax credit carryforwards 9.6 8.6
Other 3.6 1.6
----------- -----------
80.6 47.5
Valuation allowance (21.0) (21.0)
----------- -----------
59.6 26.5
----------- -----------
Net deferred tax liability $ 102.1 $ 130.7
=========== ===========
</TABLE>
The Company has provided a valuation allowance of $21.0 million
against deferred tax assets recorded as of December 31, 1993. There was no
change in the valuation allowance for the year ended December 31, 1993.
Approximately $5.5 million of the valuation allowance will be allocated to
reduce goodwill and other noncurrent intangible assets in future periods if
realization of tax credit carryforwards acquired as a result of business
combinations that occurred in prior years becomes more likely than not.
The Company has included in its calculation of the deferred income tax
liability the tax benefits of net operating loss carryforwards of $44.2
million, net investment tax credit carryforwards after valuation allowance of
$2.6 million and an alternative minimum tax carryforward of $1.5 million. If
not used, the net operating loss and investment tax credit carryforwards will
expire between 1998 and 2007 and between 1994 and 2005, respectively.
The consolidated federal income tax returns of the Company and Moore
McCormack Resources, Inc. (Moore McCormack) for years 1988 through 1992 and
various state income tax returns are presently under examination. In the
opinion of management, adequate provision has been made for income taxes that
might be due as a result of these audits.
NOTE 13 - MINORITY INTEREST IN CONSOLIDATED JOINT VENTURE:
Kosmos Cement Company (Kosmos) is a partnership which includes a
cement plant located in Kosmosdale, Kentucky and a cement plant located near
Pittsburgh, Pennsylvania along with related terminals and facilities. The
partnership is 25% owned by Lone Star Cement, Inc. (Lone Star) and
67
<PAGE> 41
operated and 75% owned by the Company. The Company's Consolidated Balance
Sheet includes 100% of the assets and liabilities of Kosmos. Lone Star's 25%
interest in Kosmos and the earnings therefrom have been reflected as "Minority
interest in consolidated joint venture" and "Minority interest in earnings of
consolidated joint venture" on the Company's Consolidated Balance Sheet and
Statement of Consolidated Earnings, respectively.
NOTE 14 - OTHER LONG-TERM LIABILITIES AND DEFERRED CREDITS:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS)
-----------------------
1993 1992
---------- ---------
<S> <C> <C>
Estimated liabilities of discontinued Moore McCormack
operations $ 12.9 $ 16.3
Supplemental pension liabilities 4.3 3.2
Other 1.6 3.2
---------- ---------
$ 18.8 $ 22.7
========== =========
</TABLE>
Discontinued Moore McCormack Operations - As part of the acquisition
of Moore McCormack in 1988, the Company assumed certain fixed and contingent
liabilities pursuant to certain guarantees and undertakings related to
operations previously discontinued by Moore McCormack. As of December 31, 1993
and 1992 such estimated liabilities totaled $15.1 million and $18.5 million,
respectively, $2.2 million of which were included in current liabilities in
both years.
In conjunction with the acquisition, Southdown assumed an obligation
to MARAD under a Keepwell Agreement whereby the Company would keep up to $20
million available under its revolving credit facility for cash flow
deficiencies of the former Moore McCormack shipping operations equal to certain
of Moore McCormack's obligations to MARAD. Since that time, the shipping
operations have required only seasonal advances from time-to-time under the
Keepwell Agreement. There were no outstanding advances under the Keepwell
Agreement as of December 31, 1993 and 1992. The Company's contingent
obligation to MARAD declines to under $20 million in 1994 and by approximately
$2.5 million annually thereafter.
Supplemental Pension Liabilities - In order to provide additional
retirement benefits and incentives for certain employees to remain with the
Company, the Company has entered into supplemental pension agreements with
those individuals. The present value of probable future cash outlays is
accrued during the expected service life of the employee and charged to
earnings for financial reporting purposes.
NOTE 15 - PENSION PLANS:
The Company has a defined benefit pension plan covering substantially
all salaried employees. The benefits are based on years of service and the
employee's compensation and are integrated with Social Security. The Company's
union employees are covered by either a multi- employer plan, a salaried plan,
or a collectively bargained Company-sponsored plan providing a flat dollar
benefit for each year of service. The Company's policy is to fund its pension
plans in accordance with sound actuarial principles.
Under rules promulgated by the Financial Accounting Standards Board
and adopted by the Company in 1987, the funded status of the Company's pension
plans is based on a comparison of the
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<PAGE> 42
market value of the plans' assets at the end of the year with actuarial
estimates of the projected benefit obligation. The assumed weighted average
discount rate used to measure the projected benefit obligation was 7.5% in 1993
and 8.5% in 1992 and 1991. The rate of increase in future compensation levels
used in determining the actuarial present value of the projected benefit
obligation was 4% in 1993 and 5.5% in 1992 and 1991. The expected long-term
rate of return on assets was 8.5% in 1993, 1992 and 1991. Differences in
estimates used and actual experience along with changes in assumptions from
year-to-year are included in net deferred gains or losses. The Company
amortizes the unrecognized net gains or losses whenever such amount exceeds 10%
of the greater of the projected benefit obligation or the market value of plan
assets. The unrecognized net obligation or net asset, unrecognized net gain or
loss and prior service costs were amortized over periods of 9 to 14 years for
1993, over periods of 10 to 16 years for 1992 and over periods of 9 to 15 years
for 1991 which approximated the estimated average remaining service periods of
employees expected to receive benefits under the plans.
The Company recognized pension income of approximately $1.6 million in
1993, pension income of $1.4 million in 1992 and pension expense of $500,000 in
1991 under such Company-sponsored plans. In addition to Company-sponsored
plans, certain union employees of the Company's concrete operations in southern
California and the Colorado cement operations are covered under multi-employer
defined benefit plans administered by the respective unions. Amounts
contributed to the multi-employer plans and included in pension expense were
$1.8 million in 1993 and 1992 and $2.4 million in 1991.
As of December 31, 1993 and 1992 there were no pension plans in which
the accumulated benefit obligation exceeded plan assets. The following table
sets forth information regarding the plans' funded status and amounts
recognized in the Company's Consolidated Balance Sheet at December 31, 1993 and
1992:
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS)
-----------------------
1993 1992
---------- ---------
<S> <C> <C>
Actuarial present value of accumulated
benefit obligations:
Vested portion $ (100.2) $ (90.9)
Nonvested portion (3.1) (2.6)
---------- ---------
Accumulated benefit obligation (103.3) (93.5)
Effect of estimated future pay increases (4.9) (6.2)
---------- ---------
Projected benefit obligation (108.2) (99.7)
Plan assets at fair value, primarily debt
and equity securities 1 149.5 136.0
---------- ---------
Overfunded status 41.3 36.3
Unrecognized net gain (22.3) (18.8)
Unrecognized prior service cost 2.2 2.3
Unrecognized net asset (0.4) (0.6)
---------- ---------
Prepaid pension costs $ 20.8 $ 19.2
----------------- ========== =========
</TABLE>
(1) Plan assets include 449,000 shares of the Company's Series A
Preferred Stock.
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<PAGE> 43
The components of net periodic pension cost included in the results of
operations for the years ended December 31, 1993, 1992 and 1991 under
Company-sponsored plans were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
(IN MILLIONS)
----------------------------------------
1993 1992 1991
----------- ----------- -----------
<S> <C> <C> <C>
Service cost $ 2.1 $ 2.2 $ 2.2
Interest cost on projected benefit obligation 8.1 8.0 8.1
Actual (return) loss on assets (21.4) (11.0) (24.1)
Asset gain (loss) deferred 10.1 (0.2) 14.3
Amortization of unrecognized -
Net gain (0.6) (0.4) -
Prior service cost 0.2 0.2 0.2
Net asset (0.1) (0.2) (0.2)
----------- ----------- -----------
Net pension (income) expense $ (1.6) $ (1.4) $ 0.5
=========== =========== ===========
</TABLE>
Retirement Savings Plan - The Company maintains a retirement savings
plan (Savings Plan) in which substantially all employees are eligible to
participate. The Savings Plan is designed to qualify under Sections 401(a) and
401(k) of the Internal Revenue Code of 1986 (Code). Under the Savings Plan, a
participating employee may elect to defer taxation on a portion of his or her
eligible earnings up to a maximum amount defined by the Code, by directing the
Company to contribute such earnings to the Savings Plan on the employee's
behalf. A participating employee may also make after-tax contributions to the
Savings Plan. The Company contributes an amount to the Savings Plan equal to
50% of an employee's contributions, subject to certain limitations. The
Company's matching contributions are invested solely in its common stock
acquired in open market purchases. All employee contributions and Company
matching contributions are fully vested when made. Amounts held by the Savings
Plan for the account of a participating employee are distributable as a
lump-sum upon termination of employment for any reason. Subject to certain
conditions and restrictions, a participating employee may receive a
distribution or a loan of a portion of his account balance while employed by
the Company. The Company contributed $1.7 million in 1993 and $1.6 million
each year in 1992 and 1991, in matching contributions that were charged to
compensation expense and invested in the Company's common stock.
NOTE 16 - HEALTH CARE AND LIFE INSURANCE BENEFITS:
The Company offers health care benefits to active employees and their
dependents. Certain retirees under the age of sixty-five and their dependents
are also offered health care benefits which are essentially the same as
benefits available to active employees. However, benefit payments for covered
retirees over the age of sixty-five are reduced by benefits paid by Medicare.
Postretirement benefits currently provided by the Company to its
eligible retirees consist primarily of medical and life insurance benefits.
Through December 31, 1992 the Company accounted for postretirement benefits as
costs were incurred. In December 1990, the Financial Accounting Standards
Board issued SFAS No. 106, establishing a new standard for accounting for
postretirement benefits. Under this new accounting standard, companies are
required to recognize the full liability for postretirement benefits in their
financial statements by the date the employee is eligible to receive the
benefits.
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<PAGE> 44
The new standard, which the Company adopted as of January 1, 1993,
required immediate recognition of an initial liability for postretirement
benefits attributable to employee services provided in years prior to 1993 and,
thereafter, the annual cost of the actuarially determined benefit attributable
to employee service in the current year. (See Note 2 of Notes to Consolidated
Financial Statements.)
The following table sets forth the Company's accumulated postretirement
benefit obligation, none of which has been funded, reconciled with the amount
shown in the Company's balance sheet at December 31, 1993.
<TABLE>
<S> <C>
Accumulated postretirement benefit obligation (APBO)
Retirees $ 36.6
Fully eligible active plan participants 2.3
Other active plan participants 6.8
--------
45.7
Plan assets at fair value -
--------
Accumulated postretirement benefit obligation 45.7
Unrecognized net gain 41.1
--------
Accrued postretirement benefit costs $ 86.8
========
</TABLE>
The components of net periodic postretirement benefit costs included
in the results of operations for the year ended December 31, 1993 were as
follows:
<TABLE>
<S> <C>
Service cost $ 1.9
Interest cost on APBO 5.2
Amortization of unrecognized net gain (1.4)
--------
$ 5.7
========
</TABLE>
The assumed health care cost trend rate used in measuring the
accumulated postretirement benefit obligation as of December 31, 1993 was 9.5%
for general health care and 14% for prescription drugs in 1994, decreasing each
successive year until it reaches 6% in 2017 and thereafter. The health care
trend rate assumption has a significant effect on the amount of the obligation
and periodic cost reported. For example, a one-percentage-point increase in
the assumed health care cost trend rate for each year would increase the APBO
as of December 31, 1993 and net periodic postretirement health care cost by
approximately 7%. The assumed discount rate used in determining the APBO was
7.5%.
Most of the Company's health care benefits are self-insured and
administered on cost plus fee arrangements with a major insurance company or
provided through health maintenance organizations. Claims, premiums and
administrative costs incurred for active employees and their dependents were
$12.3 million, $9.9 million and $10.3 million in 1993, 1992 and 1991,
respectively. For retirees and their dependents these costs were $3.2 million
in 1993 and $2.3 million in 1992 and 1991. In 1993, expenses recognized under
SFAS No. 106 include a net charge of $2.5 million to accrue estimated
postretirement health care benefits in excess of claims incurred.
The Company provides life insurance benefits to its active and retired
employees. Generally, life insurance benefits for retired employees are
reduced over a number of years from the date of retirement to a minimum level.
Costs accrued or paid for life insurance benefits for both active and retired
employees were approximately $984,000 in 1993, $732,000 in 1992 and $800,000 in
1991.
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<PAGE> 45
The costs of providing such benefits for retired employees were approximately
$35,000 in 1993, $41,000 in 1992 and $39,000 in 1991.
In 1990, the Company established a Voluntary Employee Beneficiary
Association (VEBA) to fund its health care benefit payments to employees,
retirees and their dependents. As a result, the Company made annual
contributions to a tax-exempt irrevocable trust established to make such
benefit payments. The Company made payments to the trust of $15.5 million in
1991. No such payments were made in 1992 or 1993.
NOTE 17 - COMMITMENTS AND CONTINGENT LIABILITIES:
Operating Leases - Rental expense covering manufacturing,
transportation and certain other facilities and equipment for the years 1993,
1992 and 1991 aggregated $9.9 million, $9.2 million and $7.9 million,
respectively. Minimum annual rental commitments as of December 31, 1993 under
noncancellable leases are set forth as follows:
<TABLE>
<CAPTION>
(IN MILLIONS)
----------------------------------------
MANUFACTURING
MOBILE EQUIPMENT
EQUIPMENT AND OTHER TOTAL
----------- ----------- -----------
<S> <C> <C> <C>
1994 $ 3.7 $ 2.5 $ 6.2
1995 3.2 2.0 5.2
1996 2.6 1.9 4.5
1997 1.4 1.8 3.2
1998 0.8 1.7 2.5
Thereafter 0.6 2.5 3.1
----------- ----------- -----------
$ 12.3 $ 12.4 $ 24.7
=========== =========== ===========
</TABLE>
Environmental Matters - Many of the raw materials, products and
by-products associated with the operation of any industrial facility, including
those for the production of cement or concrete products, contain chemical
elements or compounds that are designated as hazardous substances. In
addition, the Company has entered the environmental services business. All of
these activities are regulated by federal, state and local laws and regulations
pertaining to human health and the environment.
Federal environmental laws as well as analogous laws in certain
states, create joint and several liability for the cost of cleaning up or
correcting releases into the environment of designated hazardous wastes. Among
those who may be held jointly and severally liable are those who generated the
hazardous waste, those who arranged for disposal of the hazardous wastes, those
who owned the disposal site or facility at the time of disposal, and current
owners. The Company has both given indemnification to and received
indemnification from others for properties previously owned although some
courts have held that indemnification for such environmental liabilities is
unenforceable. Industrial operations have been conducted at some of the
Company's facilities for almost 100 years. In the past, the Company disposed
of various materials, both onsite and offsite, in a manner which would not be
permitted under current environmental regulations. Certain of these materials
are today categorized as hazardous wastes when discarded. The Company's cement
kilns that burn hazardous waste, as well as its TSD facilities, are subject to
extensive federal, state and local environmental laws and regulations and may
be required to clean up onsite waste disposal areas
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<PAGE> 46
under the Resource Conservation and Recovery Act (RCRA)'s corrective action
program. Such clean-ups can be costly.
While the Company's facilities at several locations are the subject of
various local, state and federal environmental proceedings and inquiries,
including being named a potentially responsible party (PRP) at several of its
locations, most of these investigations are in their preliminary stages and
final results may not be determined for years. Management of the Company
believes, however, based solely upon the preliminary information the Company
has developed to date, that known matters can be successfully resolved in
cooperation with the local, state and federal regulating agencies and that the
ultimate resolution of these matters will not have a material adverse effect
upon the consolidated financial statements of the Company. However, because the
Company's results of operations vary considerably with construction activity
and other factors, it is possible that future charges for environmental
contingencies could, depending on their timing and magnitude, have a material
adverse impact on the Company's results of operations in a particular period.
Until all environmental studies and investigations have been completed,
however, it is impossible to determine the ultimate costs of resolving these
environmental issues. In conjunction with the acquisition of the TSD
facilities, the Company established pre-acquisition contingency reserves which,
in the opinion of management, are sufficient to cover the costs of correcting
any known pre-acquisition environmental deficiencies at these facilities.
There can be no assurances, however, that such reserves are adequate to allow
for any unknown conditions that may exist.
CKD Remediation in Ohio - As discussed in more detail under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" under the caption "Liquidity and Capital Resources - Known Events,
Trends and Uncertainties - Environmental Matters", three of a number of
inactive cement kiln dust (CKD) disposal sites near the Company's Fairborn,
Ohio cement plant have been under investigation by the Company, as well as in
some cases by federal and state environmental agencies, to determine if
remedial action is required at any or all of these sites.
The Company as well as state environmental agencies have conducted
investigations to determine appropriate remedial action required at an inactive
CKD disposal site in Ohio. Based on various remediation investigations,
hydrogeological analyses and feasibility studies performed in prior years, the
Company had recorded charges totaling $6.7 million through the end of 1992 as
the estimated remediation cost for the site, increasing the initial estimates
as additional information became known. In October 1993, the Company received
a consulting report proposing additional refinements of earlier estimates which
increased the total estimated cost to remediate this site from $6.7 million to
$9.7 million. Accordingly, the Company recorded an additional $3 million
charge in the third quarter of 1993 to recognize the change in the estimate.
On a voluntary basis, without administrative or legal action being
taken, the Company is also investigating two other inactive Ohio CKD disposal
sites. The two additional sites in question were part of a cement
manufacturing facility that was owned and operated by a now dissolved cement
company from 1924 to 1945 and by a division of USX Corporation (USX) from 1945
to 1975. On September 24, 1993, the Company filed a complaint (Complaint)
against USX, alleging that USX is a PRP under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980 (CERCLA) and under applicable
Ohio law, and therefore jointly and severally liable for costs associated with
cleanup of the larger of the two sites (Site). USX answered the complaint in
November 1993 by filing a motion to dismiss the lawsuit. Based on advice of
counsel, the Company believes that USX should not prevail on its motion to
dismiss the lawsuit. Based on the limited information available as of December
31, 1993, the Company has received two preliminary engineering estimates of the
potential magnitude of the remediation costs for the Site, $8 million and $32
million, depending on the assumptions used.
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<PAGE> 47
The Company intends to vigorously pursue its right to contribution
from USX for cleanup costs under CERCLA and Ohio law. Based upon the advice of
counsel, the Company believes that USX is a responsible party because it owned
and operated the site at the time of disposal of the hazardous substance,
arranged for the disposal of the hazardous substance and transported the
hazardous substance to the Site. Therefore, counsel to the Company has advised
that it appears there is a reasonable basis for the apportionment of cleanup
costs relating to the Site between the Company and USX, with USX shouldering
substantially all of the cleanup costs because, based on the facts known at
this time, the Company itself disposed of no CKD at the Site and is potentially
liable under CERCLA because of its current ownership of the Site. These
determinations, however, are preliminary, and are based only upon facts
available to the Company prior to any discovery.
Under CERCLA and applicable Ohio law a court generally applies
equitable principles in determining the amount of contribution which a
potentially responsible party must provide with respect to a cleanup of
hazardous substances and such determination is within the sole discretion of
the court. In addition, no regulatory agency has directly asserted a claim
against the Company as the owner of the Site requiring it to remediate the
property, and no cleanup of the Site has yet been initiated.
Other - The Company has certain other commitments and contingent
liabilities incurred in the ordinary course of business which, in the judgment
of management, will not result in losses which would materially affect its
consolidated financial position.
NOTE 18 - WRITE-DOWN OF CERTAIN ENVIRONMENTAL ASSETS:
The Company entered the environmental services business in June 1989
with the signing of an agreement involving as co- participants Browning-Ferris
Industries, Inc. (BFI) and Cadence Chemical Resources (Cadence). The Company
significantly expanded its commitment to the recovery of the energy value in
organic hazardous wastes beginning in mid-1990 with the acquisition of a total
of seven facilities to process hazardous wastes into liquid and solid hazardous
waste derived fuels (HWDF) for introduction into permitted cement kilns as a
partial substitute for conventional fuels.
Contrary to management's expectations, however, the Company
experienced start-up losses totaling approximately $16 million, exclusive of
write-downs, in its first two and one-half years in the business. Accordingly,
the Company restructured this business in late 1992, narrowing its focus by
selling, or planning to sell, all but two of its TSD processing facilities.
The Tennessee facility, one of those being retained, is being upgraded and
expanded to provide increased capacity for blending HWDF. As of December 31,
1993, the Company had sold three of its original seven TSDs and is continuing
efforts to sell two additional TSDs. After trying unsuccessfully to sell its
Alsip, Illinois facility for almost a year the Company recorded a $3.1 million
pretax charge in the fourth quarter of 1993 to record an estimated $1 million
in remediation costs at that facility and to write down the Illinois TSD held
for sale to reflect the Company's revised estimate of net realizable value of
that facility. In January 1994 the Company negotiated a letter of intent for a
proposed sale of this facility that would generate neither a gain or a loss.
In 1992 the Company recorded a $21.4 million pretax charge to write down the
difference between book value, including intangible assets, and the estimated
realizable value of the TSDs, net of operating losses expected to occur prior
to disposition, and to expense the non- recoverable portion of previously
deferred environmental permitting costs incurred in the development of the
environmental services business.
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<PAGE> 48
NOTE 19 - UNCONSOLIDATED JOINT VENTURE
In August 1990, the Company contributed to Southdown Thermal Dynamics
(STD), a Texas general partnership, in exchange for a 50% partnership interest,
the two thermal distillation processing units and certain associated assets it
had acquired from BFI in conjunction with SES's purchase of the TSDs in June
1990. STD was established to construct and operate thermal distillation units
for onsite treatment and remediation of refinery and other organic waste
streams. Because STD was unable to establish the commercial viability of the
process without substantial additional funding and because of the Company's
capital commitments in its other businesses, the Company notified its joint
venture partner in early August 1991 of the Company's intent to dispose of its
interest in this joint venture. On January 6, 1992 a subsidiary of the Company
sold its interest in the partnership to an affiliate of the other 50% partner
for a note which was later exchanged for a replacement note which on November
18, 1992 was, in turn, forgiven in exchange for an indemnification and hold
harmless agreement with a third party. The Company accounted for STD under the
equity method as an unconsolidated joint venture and, as of December 31, 1991
wrote off its remaining capitalized investment in the joint venture with a
$12.3 million pretax charge to earnings recognized in the final quarter of
1991.
NOTE 20 - DISCONTINUED OPERATIONS:
In connection with the 1989 sale of the Company's oil and gas
operations, the Company deferred recognition of a portion of its realized gain
until certain potential loss contingencies were resolved. Upon expiration of
the contingency period in 1992, the Company recognized an additional gain on
the sale of the Company's discontinued oil and gas operations of approximately
$1.4 million, $800,000, net of income taxes.
In late August 1993 the Company was notified by Energy Development
Corporation (EDC), the 1989 purchaser of the common stock of the Company's then
oil and gas subsidiary, Pelto Oil Company (Pelto), that EDC was exercising its
indemnification rights under the 1989 stock purchase agreement with respect to
a Department of Energy (DOE) Remedial Order regarding the audit of crude oil
produced and sold during the period September 1973 through January 1981 from an
offshore, federal waters field known as Ship Shoal Block 113 Unit./South Pelto
20 of which the Company's oil and gas subsidiary was part owner. The DOE has
alleged certain price overcharges and is seeking to recover a total of $68
million dollars in principal and interest from Murphy Oil Company (Murphy), as
operator of the property. Murphy estimated the Company's share of this total
to be approximately $4 million. On January 24, 1994 the presiding
Administrative Law Judge at the Federal Energy Regulatory Commission (FERC)
rendered a favorable decision for Murphy, materially reducing the amount it
potentially owed to the DOE. This decision also had the effect of precluding
the DOE from recovering from Murphy for any alleged overcharges attributable to
Pelto's "in-kind" production. Murphy has indicated that if the FERC adopts the
Administrative Law Judge's opinion, Pelto will not owe anything to Murphy as a
result of the DOE's claim, other than its pro rata share of attorneys' fees.
The Company cannot assess the likelihood that the DOE would seek to recover
sums from Pelto directly due to Pelto's "in-kind" production, but the Company
believes, based on advice of counsel, that, if it did, any such claim by the
DOE would be barred by limitations.
Prior to the sale of Pelto in 1989, Pelto entered into certain gas
settlement agreements, including one with Transcontinental Gas Pipe Line
Corporation (Transco). The Minerals
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<PAGE> 49
Management Service (MMS) of the Department of the Interior has reviewed the
agreement entered into with Transco in 1988 to determine whether a payment to
Pelto thereunder is associated with federal or Indian leases and whether, in
their view, any additional royalties may be due as a result of that payment.
MMS has advised EDC of a preliminary royalty underpayment determination
resulting from its review, and that MMS proposes to direct EDC to compute any
gas royalties attributable to what MMS characterizes as a "contract buydown".
This does not constitute a final action by MMS; its stated purpose is to give
an opportunity to comment or provide additional documentation that would refute
or alter MMS's preliminary determination. In late December 1993, the Company
was notified by EDC that EDC was exercising its indemnification rights under
the 1989 stock purchase agreement for Pelto with respect to this matter. The
Company is unable to determine what liability it may have, if any, with respect
to this matter, but should the Company be required to make any payments to the
MMS, such expenditures would result in a charge to discontinued operations.
NOTE 21 - EARNINGS PER SHARE AND CAPITAL STOCK:
EARNINGS PER SHARE
Earnings used to compute primary per share earnings in 1993, 1992 and
1991 were net of preferred stock dividends of approximately $5.0 million, $5.0
million and $5.1 million, respectively. Primary earnings per share were
computed using the average number of shares of common stock for 1993, 1992 and
1991. Because of the net losses in 1991 through 1993, the effect of an assumed
conversion of the Series A and Series B Preferred Stock referred to below was
anti-dilutive and, therefore, fully diluted earnings per share for those years
is the same as primary earnings per share.
The authorized capital stock of Southdown comprises 40,000,000 shares
of Common Stock, $1.25 par value (Common Stock), and 10,000,000 shares of
Preferred Stock, $.05 par value (the Preferred Stock). Chemical Shareholder
Services Group, Inc., a subsidiary of Chemical Banking Corporation, serves as
the registrar and transfer agent for the Common Stock, the Series B Preferred
Stock and the Series D Preferred Stock described below and as Warrant Agent and
Rights Agent for the Warrants and Rights, respectively. The Company serves as
the registrar and transfer agent for the Series A Preferred Stock.
COMMON STOCK
At December 31, 1993, 17,045,809 shares of Common Stock were issued
and outstanding and held of record by approximately 1,956 shareholders, and
approximately 7.6 million shares were reserved for future issuance upon
exercise of options granted under employee benefit plans or warrants or upon
conversion of convertible securities. Approximately 2.6 million more shares
were subsequently reserved in January 1994 for issuance upon conversion of the
Series D Preferred Stock. On April 25, 1991 the Board of Directors suspended
the dividend on the Company's Common Stock.
WARRANTS TO PURCHASE COMMON STOCK
In October 1991, the Company issued and sold an aggregate of
1,250,000 Warrants to purchase Common Stock (the Warrants) pursuant to the
terms of a Warrant Agreement dated as of October 31, 1991 (the Warrant
Agreement), between the Company and First City, Texas - Houston,
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<PAGE> 50
N.A., as Warrant Agent. Chemical Shareholder Services Group, Inc. is now the
Warrant Agent. Each Warrant entitles the holder to purchase one share of
Common Stock at a price of $16 per share, subject to adjustment in certain
circumstances, until 5:00 p.m. New York City on October 31, 1996. The number
and kind of securities purchasable upon exercise of the Warrants are subject to
adjustment from time-to-time upon the occurrence of certain reclassifications,
mergers or consolidations, stock splits, stock dividends, certain other
distributions and events and certain issuances or sales of Common Stock at
prices less than market value (as defined in the Warrant Agreement). In lieu
of an adjustment to the number of shares of Common Stock issuable pursuant to
the exercise of the Warrants, the Company may elect to issue additional
Warrants.
RIGHTS
On March 4, 1991, the Board of Directors of the Company declared a
dividend of one right to purchase preferred stock (Right) for each outstanding
share of the Company's Common Stock, to shareholders of record at the close of
business on March 14, 1991. Each Right entitles the registered holder to
purchase from the Company a unit consisting of one one-hundredth of a share (a
Unit) of Preferred Stock, Cumulative Junior Participating Series C, par value
$.05 per share (the Series C Preferred Stock), at a purchase price of $60 per
Unit, subject the adjustment (the Purchase Price). The description and terms
of the Rights are set forth in a Rights Agreement dated as of March 4, 1991
(the Rights Agreement) between the Company and First City, Texas-Houston, N.A.,
as Rights Agent. Chemical Shareholders Services Group, Inc. now serves as
Rights Agent.
The Rights are attached to all certificates representing outstanding
shares of Common Stock, and no separate certificates for the Rights have been
distributed. The Rights will separate from the Common Stock and a
"Distribution Date" will occur upon the earlier of (i) ten days following a
public announcement that a person or group of affiliated or associated persons
(an Acquiring Person) has acquired, or obtained the right to acquire,
beneficial ownership of 15% or more of the outstanding shares of Common Stock
(the date of the announcement being the Stock Acquisition Date), or (ii) ten
business days (or such later date as may be determined by the Company's Board
of Directors before the Distribution Date occurs) following the commencement of
a tender offer or exchange offer that would result in a person's becoming an
Acquiring Person.
The Rights are not exercisable until the Distribution Date and will
expire at the close of business on March 14, 2001, unless earlier redeemed or
exchanged by the Company as described below. In the Rights Agreement, the
Company has generally agreed to use its best efforts to cause the securities of
the Company issuable pursuant to the exercise of Rights to be registered under
the Securities Act, as soon as practicable after the Rights become exercisable,
and to take such action as may be necessary to ensure compliance with
applicable state securities laws.
In the event (a Flip-In Event) that a person becomes an Acquiring
Person (except pursuant to certain Permitted Offers as defined in the Rights
Agreement) each Right will then entitle the holder to receive, upon exercise of
such Right, a number of shares of Common Stock (or, in certain circumstances,
cash, property or other securities of the Company) having a Current Market
Price (as defined in the Rights Agreement) equal to two times the exercise
price of the Right. Notwithstanding the foregoing, all Rights that are, or
under certain circumstances were, beneficially owned by any Acquiring Person
(or by certain related parties) will be null and void. The Purchase Price
payable, and the number of Units, or other securities or property issuable,
upon exercise of the Rights are subject to adjustment from time-to-time to
prevent dilution.
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<PAGE> 51
For example, at an exercise of $60 per Right, each Right not owned by
an Acquiring Person (or by certain related parties) following an event set
forth in the preceding paragraph would entitle its holder to purchase $120
worth of Common Stock (or other consideration, as noted above), based upon its
then Current Market Price, for $60. Assuming that the Common Stock had a
Current Market Price of $15 per share at such time, the holder of each valid
Right would be entitled to purchase 8 shares of Common Stock for $60.
In the event (a Flip-Over Event) that, at any time on or after the
Stock Acquisition Date, (i) the Company is acquired in a merger or other
business combination transaction (other than a specified type of merger that
follows a Permitted Offer), or (ii) 50% or more of the Company's assets or
earnings power is sold or transferred, each holder of a Right (except Rights
that previously have been voided as set forth above) shall thereafter have the
right to receive, upon exercise, a number of shares of common stock of the
acquiring company (or in certain cases its controlling person) having a Current
Market Price equal to two times the exercise price of the Right.
At any time until ten days following a Stock Acquisition Date, the
Company may redeem the Rights in whole, but not in part, at a price of $.01 per
Right, payable, at the option of the Company, in cash, shares of Common Stock
or such other consideration as the Board of Directors may determine.
The provisions of the Rights and the Rights Agreement may in some
cases discourage or make more difficult the acquisition of control of the
Company by means of a tender offer, open market purchase or similar means.
These provisions are intended to discourage, or may have the effect of
discouraging, partial tender offers, front-end loaded two-tier tender offers
and certain other types of coercive takeover tactics and inadequate takeover
bids and to encourage persons seeking to acquire control of the Company first
to negotiate with the Company. The Company believes that these provisions,
which are similar to those of many other publicly held companies, provide
benefits by enhancing the Company's potential ability to negotiate with the
proponent of any unfriendly or unsolicited proposal to take over or restructure
the Company that outweigh the disadvantages of discouraging such proposals
because, among other things, negotiation of such proposals could result in an
improvement in their terms.
PREFERRED STOCK
The Board of Directors is authorized to designate series of Preferred
Stock and fix the powers, preferences and rights of the shares of such series
and the qualifications, limitations or restrictions thereon.
Series A Preferred Stock - Pursuant to the terms of the Restated
Articles of Incorporation (Restated Articles), the Board of Directors has
created a series of Preferred Stock consisting of 1,999,998 shares of Preferred
Stock, $.70 Cumulative Convertible Series A (Series A Preferred Stock). The
Series A Preferred Stock is senior to the Series B Preferred Stock with respect
to dividends and assets. As of December 31, 1993, 1,999,000 shares of Series A
Preferred Stock were issued and outstanding. All such shares are fully paid
and nonassessable.
The Series A Preferred Stock (a) has a stated value and liquidation
preference of $10 per share, plus accrued and unpaid dividends, (b) carries a
cumulative dividend of $.70 per year, payable quarterly, and entitle the
holders of a majority thereof to elect two directors if dividends are in
arrears
78
<PAGE> 52
for at least 540 days, (c) is initially convertible into one-half of a share of
Common Stock for each share of Series A Preferred Stock, subject to adjustment,
(d) is redeemable at the option of the Company at 120% of the $10 stated value
thereof (declining to 100% of the stated value after April 30, 1997) plus
accrued and unpaid dividends, and (e) is entitled to one vote per share, voting
as a class with the Common Stock and any other capital stock of the Company
entitled to vote, on all matters submitted to shareholders. In addition, the
holders of Series A Preferred Stock have certain class voting rights, including
the right to approve certain mergers, consolidations and sales of assets;
however, if a holder of Series A Preferred Stock does not grant a proxy to the
Board of Directors to vote in favor of any such merger, consolidation or sales
of assets, the Company may redeem such holder's shares of Series A Preferred
Stock without the payment of any redemption premium. The Company has reserved
999,500 shares of Common Stock for issuance upon conversion of the Series A
Preferred Stock. Dividends paid on the Series A Preferred Stock amounted to
approximately $1.4 million in each of the last three years.
Series B Preferred Stock- Pursuant to the terms of the Restated
Articles, the Board of Directors has created a series of Preferred Stock
consisting of 960,000 shares of Preferred Stock, $3.75 Convertible Exchangeable
Series B (the "Series B Preferred Stock"). The Series B Preferred Stock is
junior to the Series A Preferred Stock with respect to dividends and assets.
As of December 31, 1993, 959,000 shares of Series B Preferred Stock were issued
and outstanding. All such shares are fully paid and nonassessable. Dividends
paid on the Series B Preferred Stock amounted to approximately $3.6 million in
each of the last three years.
The Series B Preferred Stock (a) has a stated value and liquidation
preference of $50 per share, plus accrued and unpaid dividends, (b) carries a
cumulative dividend of $3.75 per year, payable semi-annually, and entitles the
holders of a majority thereof to elect two directors if dividends are in
arrears for at least 180 days, (c) is initially convertible into two and
one-half shares of Common Stock for each share of Series B Preferred Stock,
subject to adjustment, (d) is redeemable at the option of the Company at 100%
of the $50 stated value thereof plus accrued and unpaid dividends, and (e) is
entitle to one vote per share, voting as a class with the Common Stock and any
other capital stock of the Company entitled to vote, on all matters submitted
to shareholders. In addition, the holders of the Series B Preferred Stock have
certain class voting rights. The Company has reserved 2,397,500 shares of
Common Stock for issuance upon conversion of the Series B Preferred Stock. In
addition, the Series B Preferred Stock is exchangeable, in whole but not in
part, at the option of the Company at any time for the Company's 7 1/2%
Convertible Subordinated Debentures Due 2013 (the "Debentures") at a rate of
$50 in principal amount of Debentures per share of Series B Preferred Stock,
provided that all dividends on the Series B Preferred Stock have been paid
through the date of such exchange. The Company's Restated Revolving Credit
Facility requires the Company to obtain the consent of the lenders thereunder
as a condition to the exchange of the Series B Preferred Stock for the
Debentures.
In addition, the Company is actively considering calling for
redemption all of the oustanding shares of its Series B Preferred Stock at the
redemption price of $50.00 per share plus accrued and unpaid dividends to the
redemption date. Each share of Series B Preferred Stock is convertible into
2.5 shares of the Company's common stock (equivalent to a conversion price of
$20.00 per share of common stock).
Series C Preferred Stock - In connection with the distribution of the
Rights on March 14, 1991, the Board of Directors of the Company authorized
400,000 shares of Series C Preferred Stock,
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<PAGE> 53
none of which are outstanding. The Series C Preferred Stock would be issued
only upon the exercise of Rights and only if the Rights were exercised. The
Rights are not exercisable as of the date hereof. See "-- Rights". If issued,
the Series C preferred Stock would be junior to the Series A Preferred Stock,
the Series B Preferred Stock and the Series D Preferred Stock with respect to
dividends and assets.
Series D Preferred Stock - Pursuant to the terms of the Restated
Articles, the Board of Directors in 1994 authorized creation of a series of
Preferred Stock consisting of 1,725,000 shares of Preferred Stock, $2.875
Cumulative Convertible Series D. The Series D Preferred Stock ranks junior to
the Series A Preferred Stock, pari passu with the Series B Preferred Stock, and
will be senior to any Series C Preferred Stock that may be issued. A total of
1,725,000 shares of Series D Preferred Stock were sold on January 27, 1994.
Dividends on the Series D Preferred Stock will be approximately $5 million per
year.
The Series D Preferred Stock (a) has a stated value and liquidation
preference of $50 per share, plus accrued and unpaid dividends, (b) carries a
cumulative annual dividend of $2.875 per share, payable quarterly, and entitles
the holders thereof, voting together as a single class with all other series or
classes of preferred stock which are pari passu with the Series D Preferred
Stock as to dividends and which specifically state that they shall vote with
the Series D Preferred Stock in such a case (which does not include the Series
A Preferred Stock, the Series B Preferred Stock or, if any is issued, the
Series C Preferred Stock), to elect two directors if dividends are in arrears
for at least six quarterly dividend periods, (c) is initially convertible into
1.511 shares of Common Stock for each share of Series D Preferred Stock,
subject to adjustment, (d) may be converted at the option of the Company, in
whole but not in part, at any time on and after January 27, 1997 and until
January 27, 2001, if for at least 20 trading days within a period of 30
consecutive trading days, including the last trading day of such 30 trading day
period, the closing price of the Common Stock equals or exceeds 130% of the
conversion price, into 1.511 shares of Common Stock, subject to adjustment, (e)
is redeemable at the option of the Company at 100% of the started value thereof
plus accrued and unpaid dividend on and after January 27, 2001, and (f) is
entitled to one vote per share, voting as a class with the Common Stock and any
other capital stock of the Company entitled to vote, on all matters submitted
to shareholders. In addition, the Series D Preferred Stock has certain class
voting rights. The Company has initially reserved 2,606,475 shares of Common
Stock for issuance upon conversion of the Series D Preferred Stock.
NOTE 22 - STOCK OPTION AND INCENTIVE PLANS:
1991 Directors' Plan - Under the 1991 Nonqualified Stock Option Plan
for Non-Employee Directors (1991 Directors' Plan), options for a total of up to
150,000 shares of the Company's common stock are available for grant to
directors of the Company who are not employed by the Company or any of the
Company's subsidiaries. In 1991, the Board of Directors awarded to each of the
Company's five non-employee directors an option to purchase 10,000 shares of
the Company's common stock in the future. Newly elected non-employee directors
shall be automatically granted an option to acquire 10,000 shares of the
Company's common stock upon the date of a director's election to the Board of
Directors. An additional option to acquire 5,000 shares of the Company's
common stock shall be awarded to each non-employee director on the date of the
annual meeting of shareholders at which the non-employee director is reelected
to serve an additional three-year term. As provided in the 1991 Directors'
Plan, options vest immediately to the extent of 25% of the total options and an
additional 25% on each of the first through the third anniversaries from the
date of the
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<PAGE> 54
grant. Options granted under the 1991 Directors' Plan expire not more than ten
years from the date of grant. Unoptioned shares available for grant as of
December 31, 1993 under the 1991 Director's Plan were 45,000.
1989 Plan - Under the 1989 Stock Option Plan (1989 Plan) for officers
and certain key employees of the Company and its subsidiaries, options for a
total of up to 2,000,000 shares of the Company's common stock were initially
available for award of which 869,800 options had been awarded as of December
31, 1993. As provided in the 1989 Plan, 20% of the options vest 90 days after
the date of grant and an additional 20% vest on each of the first through the
fourth anniversaries from the date of grant. Options granted under the 1989
Plan expire not more than ten years from the date of grant. Unoptioned shares
available for grant as of December 31, 1993 under the 1989 Plan were 1,130,200.
1987 Plan - Under the 1987 Stock Option Plan (1987 Plan) for officers
and certain key employees of the Company and its subsidiaries, a total of up to
2,000,000 shares of the Company's common stock were initially available for
award of which 1,798,822 shares had been awarded as of December 31, 1992. As
provided in the 1987 Plan, options vest immediately upon grant to the extent of
40% of the total. An additional 30% of the options vest on each of the first
and second anniversaries from the date of grant. Options granted under the
1987 Plan expire not more than ten years from the date of grant. Unoptioned
shares available for grant as of December 31, 1993 under the 1987 Plan were
201,178.
Information with respect to the Company's stock option plans is as
follows:
<TABLE>
<CAPTION>
SHARES AVERAGE
OPTIONS UNDER OPTION
EXERCISABLE OPTION PRICE
----------- ------ -----
<S> <C> <C> <C>
Balance, December 31, 1990 1,158,841 1,415,741 $ 20.99
=========== ===========
Granted 386,000 14.76
Exercised (21,040) 15.41
Canceled (239,500) 23.57
---------------------------------------------------------------------------------------------
Balance, December 31, 1991 1,151,301 1,541,201 19.12
=========== ===========
Granted 472,500 14.02
Exercised - -
Canceled (163,000) 24.60
---------------------------------------------------------------------------------------------
Balance, December 31, 1992 1,118,151 1,850,701 17.20
=========== ===========
Granted 122,105 13.37
Exercised (442,110) 15.83
Canceled (124,674) 19.71
---------------------------------------------------------------------------------------------
Balance, December 31, 1993 1,188,622 1,406,022 $ 17.25
=========== ========== ===========
</TABLE>
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INDEPENDENT AUDITORS' REPORT
TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF SOUTHDOWN, INC.
Southdown, Inc.
Houston, Texas
We have audited the accompanying consolidated balance sheet of
Southdown, Inc. and subsidiary companies as of December 31, 1993 and 1992, and
the related statements of consolidated earnings, shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1993. Our
audits also included the consolidated financial statement schedules listed in
the "Index to Other Required Schedules". These consolidated financial
statements and consolidated financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these consolidated financial statements and consolidated
financial statement schedules 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 consolidated financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall consolidated 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 Southdown, Inc. and
subsidiary companies as of December 31, 1993 and 1992, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1993 in conformity with generally accepted accounting principles.
Also, in our opinion, such consolidated financial statement schedules, 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.
As discussed in Note 2 of Notes to Consolidated Financial Statements,
the Company changed its method of accounting for postretirement benefits other
than pensions and income taxes effective January 1, 1993 to conform with
Statements of Financial Accounting Standards No. 106 and 109, respectively.
DELOITTE & TOUCHE
Houston, Texas
January 27, 1994
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<PAGE> 56
P A R T I V
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
8-K.
(a) 1. and 2. FINANCIAL STATEMENTS AND FINANCIAL STATEMENT
SCHEDULES
Item 8 of this report lists certain consolidated
financial statements and supplementary data of the
Company and its subsidiaries. For other required
schedules, see "Index to Other Required Schedules" on
Page S-1 of this document.
3. Exhibits
83
<PAGE> 57
<TABLE>
<CAPTION>
SEQUENTIALLY
NUMBERED
NUMBER DESCRIPTION OF EXHIBIT PAGE
------ ---------------------- ----
<S> <C>
3.1 Restated Articles of Incorporation of the Company, as amended through January 24, 1994 - incorporated by
reference from Exhibit 4.1 to the Company's Current Report on Form 8-K dated December 21, 1993 . . . . .
* 3.2 Articles of Amendment to the Restated Articles of Incorporation of the Company dated January 25, 1994 . .
3.3 Bylaws of the Company amended as of April 20, 1993 - incorporated by reference from Exhibit 99.2 to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1993 . . . . . . . . . . . . . .
4.1 Indenture dated as of May 1, 1987 between the Company and Texas Commerce Bank National Association, as
Trustee - incorporated by reference from Exhibit 4.1 to the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 1991 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.2 First Supplemental Indenture dated October 31, 1991, supplementing the Indenture dated as of May 1, 1987
between the Company and Texas Commerce Bank National Association - incorporated by reference from Exhibit
4.5 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1991 . . . . . .
4.3 Indenture dated as of October 15, 1991 between the Company and State Street Bank and Trust Company of
Connecticut, National Association, as Trustee as amended by First Supplemental Indenture dated as of
December 10, 1993 - incorporated by reference from Exhibit 4.3 to the Company's Current Report on Form 8-K
dated December 21, 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
4.4 Warrant Agreement dated as of October 31, 1991 between the Company and Texas Commerce Bank, National
Association (formerly First City, Texas - Houston, N.A.) as Warrant Agent - incorporated by reference from
Exhibit 4.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1991 . .
4.5 Rights Agreement dated as of March 4, 1991 between the Company and Texas Commerce Bank National Association
(formerly First City, Texas - Houston, N.A.) as Rights Agent - incorporated by reference from Exhibit A to
the Company's Current Report on Form 8-K dated March 4, 1991 . . . . . . . . . . . . . . . . . . . . . .
* 4.6 Description of Capital Stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
</TABLE>
84
<PAGE> 58
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBIT PAGE
------ ---------------------- ----
<S> <C>
4.7 Registration Rights and Lock Up Agreement dated November 22, 1993 among the Company, Richard C. Blum &
Associates, Inc. and The Carpenters Pension Trust for Southern California - incorporated by reference to
Exhibit 4.2 to the Current Report on Form 8-K dated December 21, 1993 . . . . . . . . . . . . . . . . . .
4.8 Certain instruments defining the rights of holders of long-term debt instruments representing less than 10%
of the consolidated assets of the Company have not been filed as exhibits to this report. The Company
agrees to furnish a copy of any such instrument to the Commission upon request . . . . . . . . . . . . . .
+10.1 1987 Stock Option Plan of Southdown, Inc. - incorporated by reference from Exhibit 10.3 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1992 . . . . . . . . . . . . . . . . . .
+10.2 Form of Nonqualified Stock Option Agreement - incorporated by reference from Exhibit 10.4 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1992 . . . . . . . . . . . . . . . . . .
+10.3 1989 Stock Option Plan of Southdown, Inc. - incorporated by reference from Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1993 . . . . . . . . . . . . . . . . . . . .
+10.4 1991 Nonqualified Stock Option Plan for Non-Employee Directors of the Company and form of related Stock
Option Agreement of the Company - incorporated by reference from Exhibit 28.1 to the Company Registration
Statement on Form S-8 dated January 17, 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
+10.5 Special Severance Program dated May 18, 1989 - incorporated by reference from Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1993 . . . . . . . . . . . . . . . . . . . .
+10.6 Form of Supplemental Pension Agreement and amendment to Supplemental Pension Agreement - incorporated by
reference from Exhibit 10.3 to the Company's Quarterly Report for the quarter ended June 30, 1993 . . . .
</TABLE>
85
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<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBIT PAGE
------ ---------------------- ----
<S> <C>
+10.7 Employment Agreements and form of Amendment to Employment Agreements between the Company and certain
executive officers, as more specifically described below:
Date of
Name of Officer Employment Agreement
--------------- --------------------
(a) Clarence C. Comer June 1, 1988
(b) Edgar J. Marston III June 1, 1988
(c) James L. Persky June 1, 1988
(d) Dennis M. Thies June 1, 1988
(e) J. Bruce Tompkins November 1, 1989
(f) Joseph W. Devine August 13, 1990
(g) Eugene P. Martineau March 23, 1992
- incorporated by reference from Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the quarter
ended June 30, 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
+10.8 Discretionary Bonus Program for Senior Executive Officers - incorporated by reference from Exhibit 10.21 to
the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1992 . . . . . . . . . .
10.9 Second Amended and Restated Credit Agreement as of November 19, 1993 among the Company; Wells Fargo Bank,
N.A. (in its individual capacity and as agent); Societe Generale, Southwest Agency; Credit Suisse; Caisse
National De Credit Agricole; Banque Paribas; CIBC, Inc.; The Bank of Nova Scotia and the First National Bank
of Boston - incorporated by reference from Exhibit 10.1 to the Company's Current Report on Form 8-K dated
December 21, 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.10 Promissory Note dated April 3, 1984 executed by Southwestern Cement Enterprises, Inc. in favor of Martin
Marietta Corporation - incorporated by reference from Exhibit 10.12 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31, 1989 . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.11 Agreement dated as of June 19, 1989 by and among BFI Environmental Systems, Inc., Cadence Chemical
Resources, Inc. and the Company - incorporated by reference from Exhibit 10.5 to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1993 . . . . . . . . . . . . . . . . . . . . . . . . .
10.12 Licensing and Supply Agreement dated as of June 19, 1989 by and between Cadence Chemical Resources, Inc. and
the Company - incorporated by reference from Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q for
the quarter ended June 30, 1993 [Portions of this exhibit are subject to an order of the Securities and
Exchange Commission granting the Company's application for confidential treatment pursuant to Rule 24b-2]
</TABLE>
86
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<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBIT PAGE
------ ---------------------- ----
<S> <C>
10.13 Purchase Agreement dated May 23, 1990 by and among Southdown, Inc., Browning-Ferris Industries, Inc. and
Cecos International, Inc. - incorporated by reference from Exhibit 28.3 to the Company's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1990 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.14 First Amendment to Purchase Agreement dated May 23, 1990 by and among Southdown, Inc., Browning-Ferris
Industries, Inc. and Cecos International, Inc. - incorporated by reference from Exhibit 28.4 to the
Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 1990 . . . . . . . . . . . . . . .
10.15 Agreement dated September 24, 1990 by and between a wholly-owned subsidiary of the Company and Torco Oil
Company - incorporated by reference from Exhibit 28.6 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1990 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.16 Agreement and First Amendment to Agreement dated October 1, 1990 by and between a wholly-owned subsidiary of
the Company and Torco Oil Company - incorporated by reference from Exhibit 28.6 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1990 . . . . . . . . . . . . . . . . . . . . . . .
10.17 Agreement dated September 21, 1990 by and between a wholly-owned subsidiary of the Company and Leslie S.
Allen - incorporated by reference from Exhibit 28.8 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1990 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.18 Agreement and First Amendment to Agreement dated September 28, 1990 by and between a wholly-owned subsidiary
of the Company and Leslie S. Allen - incorporated by reference from Exhibit 28.9 to the Company's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1990 . . . . . . . . . . . . . . . . . . . . . . .
10.19 Agreement dated May 1, 1989 by and between a wholly-owned subsidiary of the Company and the International
Union of Operating Engineers, Local Union No. 12 - incorporated by reference from Exhibit 28.2 to the
Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1990 . . . . . . . . . . . . .
10.20 Agreement dated June 20, 1990 by and between a wholly-owned subsidiary of the Company and the International
Union of Operating Engineers, Local Union No. 9 - incorporated by reference from Exhibit 28.3 to the
Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1990 . . . . . . . . . . . . .
</TABLE>
87
<PAGE> 61
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBIT PAGE
------ ---------------------- ----
<S> <C>
10.21 Agreement Number One dated as of March 18, 1992 and June 5, 1992 to Agreement dated June 20, 1990 by and
between a wholly-owned subsidiary of the Company and the International Union of Operating Engineers, Local
Union No. 9 incorporated by reference from Exhibit 10.34 to the Company's Annual Report of Form 10-K for the
fiscal year ended December 31, 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.22 Agreement dated July 31, 1990 by and between a wholly-owned subsidiary of the Company, United Cement Lime,
Gypsum and Allied Workers Division, Boilermakers International Union, A.F.L. - C.I.O. and Local Union No.
D476 -incorporated by reference from Exhibit 28.4 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1990 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.23 Agreement dated August 16, 1990 by and between a wholly-owned subsidiary of the Company, Local Union No. 49
and Independent Workers of North America -incorporated by reference from Exhibit 28.5 to the Company's
Quarterly Report on Form 10-Q for the quarter ended September 30, 1990 . . . . . . . . . . . . . . . . . .
10.24 Agreement dated June, 1991 by and between the Southwestern Portland Cement Company and the International
Brotherhood of Boilermakers, Cement, Lime, Gypsum, and Allied Workers Division, Local Lodge No. D357 -
incorporated by reference from Exhibit 28.1 to the Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 1991 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.25 Agreement dated March 26, 1991 by and between the Company and Cement, Lime and Gypsum Worker's Division,
Boilermaker's Union, Local Lodge No. D140 - incorporated by reference from Exhibit 28.2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1991 . . . . . . . . . . . . . . . . . . . .
10.26 Agreement dated May 1, 1993 by and between Kosmos Cement Company and the International Brotherhood of
Boilermakers, Cement, Lime, Gypsum and Allied Workers Division Local Lodge No. D595 - incorporated by
reference from Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended September
30, 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.27 Agreement dated July 31, 1991 by and between the Company and the United Cement, Lime, Gypsum and Allied
Worker's Division, Boilermaker's International Union, A.F.L. - C.I.O., Local No. D476 - incorporated by
reference from Exhibit 28.4 to the Company's Quarterly Report on Form 10-Q for the quarter ended June 30,
1991 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
* 10.28 Agreement dated August 16, 1993 by and between the Company and the United Paperworkers International Union
</TABLE>
88
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<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBIT PAGE
------ ---------------------- ----
<S> <C>
10.29 Agreement dated as of February 19, 1991, between the Registrant and Southcoast Capital Corporation -
incorporated by reference from Exhibit 28.1 to the Company's Registration Statement on Form S-3 dated April
1, 1991 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.30 Settlement Agreement dated April 16, 1993, among the Company, Richard C. Blum & Associates, Inc. and the
Carpenters Pension Trust for Southern California - incorporated by reference from Exhibit 10.1 to the
Company's Quarterly Report of Form 10-Q for the quarter ended March 31, 1993 . . . . . . . . . . . . . . .
*11 Statement of computation of per share earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
*22 Significant Subsidiaries of Southdown, Inc. as of December 31, 1993 . . . . . . . . . . . . . . . . . . .
**23 Consent of independent auditors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
</TABLE>
- - --------------------
* Filed with the Form 10-K.
** Filed with the Form 10-K/A.
+ Compensatory plan or management agreement.
(b) REPORTS ON FORM 8-K.
No reports on Form 8-K were filed during the quarter ended December
31, 1993.
On January 4, 1994 a Current Report on Form 8-K was filed relating
to (i) two inactive cement kiln dust disposal sites owned by the
Company and (ii) a claim for indemnification by Energy Development
Corporation.
89
<PAGE> 63
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
SOUTHDOWN, INC.
(Registrant)
By JAMES L. PERSKY
-----------------------------------
James L. Persky
Senior Vice President -- Finance
(Principal Financial Officer)
Date: May 11, 1994
By ALLAN KORSAKOV
-----------------------------------
Allan Korsakov
Corporate Controller
(Principal Accounting Officer)
Date: May 11, 1994
90
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the use in this Form 10-K/A of Southdown, Inc. of our report
dated January 27, 1994.
Deloitte & Touche
Houston, Texas
May 11, 1994
