SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
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:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ----------------------
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 New York Stock Exchange, Inc.
Convertible Series D
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, 1996 the number of shares of common stock
outstanding was 17.3 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, Inc. was approximately $509.5 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, 1995
are incorporated by reference into Part III.
<PAGE>
TABLE OF CONTENTS
PAGE
PART I ----
Item 1. Business........................................................... 1
General........................................................ 1
Industry ...................................................... 1
Business Strategy.............................................. 1
Cement Operations.............................................. 2
Concrete Products Operations................................... 8
Environmental Matters.......................................... 10
Employees...................................................... 14
Segment Information............................................ 14
Item 2. Properties......................................................... 15
Item 3. Legal Proceedings.................................................. 15
Item 4. Submission of Matters to a Vote of Security Holders................ 18
PART II
Item 5. Market for Registrant's Common Equity and Related Security Holder
Matters....................................................... 19
Item 6. Selected Financial Data............................................ 20
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 21
Item 8. Financial Statements and Supplementary Data........................ 39
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................ 74
PART III
Item 10. Directors and Executive Officers of the Registrant................. 74
Item 11. Executive Compensation............................................. 74
Item 12. Security Ownership of Certain Beneficial Owners and Management..... 74
Item 13. Certain Relationships and Related Transactions..................... 74
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.... 74
<PAGE>
PART I
ITEM 1. BUSINESS.
GENERAL
Southdown, Inc. (Southdown or the Company) was organized in
Louisiana in 1930 and maintains its principal executive offices at 1200 Smith
Street, Suite 2400, Houston, Texas 77002-4486, telephone (713) 650-6200.
Substantially all of Southdown's cement and concrete products operations are
conducted at the parent company level. Unless the context indicates to the
contrary, the terms "Southdown" and the "Company" as used herein should be
understood to include subsidiaries of Southdown and predecessor corporations.
The Company is one of the leading cement and ready-mixed concrete
companies in the United States. The Company operates eight manufacturing
facilities and seven quarrying sites and utilizes a network of 19 cement storage
and distribution terminals for the production, importation and distribution of
portland and masonry cements, primarily in the Ohio valley and the southwestern
and southeastern regions of the United States. The Company is also vertically
integrated in the regional vicinity of its two largest cement plants, with
ready-mixed concrete operations serving markets in Florida and southern
California.
INDUSTRY
Demand for cement is highly cyclical and derived from the demand for
concrete products which, in turn, is dependent on the demand for construction.
According to estimates of the Portland Cement Association (PCA), the industry's
leading trade organization, the three construction sectors that are the major
components of cement consumption are (i) public works or infrastructure
construction, (ii) commercial and industrial construction and (iii) residential
construction, which comprised 51%, 25% and 24%, respectively, of U.S. cement
consumption for construction in 1994, the most recent period for which such data
are available. Construction spending and cement consumption have historically
fluctuated widely. The construction sector, and hence demand for cement and
concrete, is affected by the general condition of the economy and prevailing
interest rates, and can exhibit substantial variations in activity across the
country as a result of the differing cycles and structures of regional
economies. The impact on the Company of regional construction cycles may be
mitigated to some degree by its geographic diversification. Because of the high
fixed-cost nature of the business, however, the overall profitability of cement
manufacturers, including the Company, is sensitive to minor variations in sales
volumes and small shifts in the balance between supply and demand. The Company's
business is seasonal to the extent that construction activity tends to diminish
during the winter months and other periods of inclement weather.
BUSINESS STRATEGY
To enhance profitability and return on investment, the Company
intends to continue to focus on its core business in the areas of internal
growth, improving productivity and enhancing the Company's market position. The
Company plans to take advantage of opportunities for internal growth through the
modernization and expansion of its existing cement plants. A capital project to
upgrade the Company's Ohio cement plant is currently underway and should be
completed in 1997. This project is expected to modernize the manufacturing
facilities, enhance productivity and efficiency, lower storage and handling
costs and add approximately 10% more cement capacity at the plant. In the
Company's two largest
1
markets, Florida and southern California, the Company has sought to improve its
market position through the recent acquisition of additional cement terminals
and ready-mixed concrete operations in Florida and additional ready-mixed
concrete operations in southern California. The Company also may evaluate other
acquisitions that could improve its competitive position and increase
profitability. Further, in an effort to increase the demand for cement and
concrete, the Company is taking a leadership role in the industry's development
of new promotional programs to increase concrete's market share relative to
other building products. In addition, the Company will continue to pursue
antidumping actions, if necessary, to prevent unfairly priced foreign cement
from adversely impacting the Company's markets.
CEMENT OPERATIONS
COMPANY OPERATIONS
Cement is the basic binding agent for concrete, a primary
construction material. The Company's cement products are produced primarily from
raw materials found at or near the Company's plant locations. Depending upon the
process at individual plants, production of one ton of finished product consumes
approximately 1.6 tons of raw material. The principal raw material used in the
production of portland cement is calcium carbonate found in the form of
limestone. The Company's total estimated recoverable reserves of limestone are
approximately 820 million tons located on approximately 20,000 acres, most of
which are owned by the Company in fee. Other raw materials, used in
substantially smaller portions than limestone, include sand, iron ore or other
iron bearing materials, clay and gypsum. When not found in adequate amounts in
the Company's quarries, these materials are currently available for purchase
from outside suppliers at acceptable prices.
The manufacture of portland cement primarily involves the crushing,
grinding and blending of limestone and other raw materials into a chemically
proportioned mixture which is then processed in a rotary kiln at extremely high
temperatures to produce an intermediate product known as clinker. The clinker is
cooled and interground with a small amount of gypsum to produce finished cement.
As fuel is a major component in the cost of producing clinker, most modern
cement plants, including seven of the eight plants operated by the Company,
incorporate the more fuel efficient "dry process" technology. In
preheater/precalciner kilns, the most modern application of this technology, the
raw materials are processed through a preheater tower that utilizes hot exhaust
gases from the kiln to effect partial calcination of the raw materials before
they enter the rotary kiln. At present, kilns utilizing some variation of the
dry process manufacturing technology comprise approximately 95% of the Company's
clinker capacity. Only the smallest plant, which represents the remaining 5% of
the Company's capacity, uses the less fuel efficient "wet process" technology.
In contrast, based on 1994 data, the most current information available, the PCA
estimates 28% of the cement industry's capacity overall utilized "wet process"
technology.
The Company's cement production facilities are located in
California, Florida, Kentucky, Ohio, Tennessee, Texas, Colorado and
Pennsylvania. These plants have a combined cement manufacturing capacity of
approximately 6.5 million short tons (6.2 million short tons, excluding the
joint venture interests of others). All of the facilities are wholly-owned
except for the Kentucky and Pennsylvania plants. These two plants are owned by
Kosmos Cement Company (Kosmos Cement), a joint venture owned 75% by the Company
and 25% by Lone Star Cement, Inc., a subsidiary of Lone Star Industries, Inc.
(Lone Star). The Company is the operator of all eight plants, including the two
joint venture plants.
2
The following table sets forth certain information regarding the
Company's cement plants at December 31, 1995.
<TABLE>
<CAPTION>
RATED
NO. CLINKER ANNUAL KILN ESTIMATED
OF MANUFACTURING CLINKER/CEMENT DEDICATION LIFE OF
PLANT LOCATION KILNS PROCESS CAPACITY DATES LIMESTONE RESERVES
(IN 000 TONS)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Victorville, California 2 Preheater/precalciner 1,550/1,650 1985 100+ years
Long dry kiln 1965
Brooksville, Florida 2 Preheater 1,200/1,320 1976, 1982 90+ years
Kosmosdale, Kentucky(1) 1 Preheater 700/735 1974 100+ years(2)
Fairborn, Ohio 1 Preheater 610/680 1974 45+ years
Knoxville, Tennessee 1 Preheater/precalciner 600/650 1979 65+ years
Odessa, Texas 2 Preheater 550/600 1978 100+ years
Long dry kiln 1959
Lyons, Colorado 1 Preheater/precalciner 450/475 1980 25+ years
Pittsburgh, Pennsylvania(1) 1 Wet 360/400 1962 30 years(3)
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Owned by Kosmos Cement. The Company operates the joint venture's plants,
sales offices and terminals.
(2) Limestone is barged from a quarry located approximately 30 miles from the
plant facility. In 1995 the Company acquired additional reserves adjacent
to the existing quarry.
(3) During 1995 the Company sold its high-cost underground limestone quarry
used previously as the source of limestone and contracted for a long-term
supply agreement with an independent third party to provide limestone for
this plant.
As a result of increased uptime and higher demand, the ratio of actual
clinker production to rated kiln capacity was 98% in 1995 compared with 93% in
1994 and 94% in 1993. During each of the past three years, the Company has also
purchased cement from others for resale. In 1995, 7.5% of the cement sold by the
Company was acquired from third parties compared with 5.9% in 1994 and 5.5% in
1993.
During 1995 the Company shipped approximately 6.1 million tons of cement
compared with 6.2 million tons of cement each year in both 1994 and 1993. New
construction activity, at least in some regions, began to rebound in 1993 from a
two and one-half year slump. During 1994 construction activity continued to
recover in most regions of the country, including southern California, which had
a small improvement over 1993. The 1994 recovery resulted in spot shortages in
several market areas and rising sales prices in most regions. During 1995 higher
sales prices and continued strong demand resulted in further improvement in the
industry. As a consequence of these improvements, the Company's cement segment
sales and earnings followed a pattern of growth during this three year period.
Although industry capacity has remained relatively stable in recent years,
according to the PCA total U.S. clinker capacity at the end of 1994, the most
recent data available, had declined by 8.0 million tons or 8% from its peak in
1975. During 1995 several companies, including the Company, announced or began
capital projects to enhance the productivity and incrementally expand the
capacity of existing cement manufacturing facilities.
3
COMPETITION
On the basis of statistics published by the PCA, the Company believes that,
as of the end of 1994, the most recent period for which such data is available,
it ranked third in total active cement manufacturing capacity among the 47
cement producers in the U.S. as set forth in the following table:
U.S. CLINKER (1)
CAPACITY PERCENT OF
RANK (000 TONS) U.S. INDUSTRY COMPANY NAME
---- ---------- ------------- -------------------------------------------
1 11,096 13.4% Holnam, Inc.
2 6,484 7.8 Lafarge Corporation
3 5,784 7.0 Southdown, Inc.
4 5,460 6.6 CBR-HCI Construction Materials Corporation
5 5,216 6.3 Ash Grove Cement Company
6 4,299 5.2 Blue Circle Inc.
7 4,201 5.1 Essroc Corporation
8 3,927 4.7 Lone Star Industries, Inc.
9 3,638 4.4 Medusa Cement Company
10 3,236 3.9 California Portland Cement Company
-------- ----
53,341 64.4 Total Top Ten
29,613 35.6 Others
-------- ----
82,954 100.0% Total Industry
======== =====
Source: Portland Cement Association, adjusted for recent transactions. Clinker
capacity for joint venture operations is based on each company's
ownership interest.
(1) In general, one ton of clinker will produce approximately 1.05 tons of
cement although this conversion varies depending on the type of cement
being produced and other factors.
Because the cost of transporting cement is high relative to the value of
the product, cement markets are generally regional. No one cement company has a
distribution of plants extensive enough to serve all markets. The majority of
the Company's cement sales are made directly to users of portland and masonry
cements, generally within a radius of 200 miles of each plant. However, access
to water transport, which is generally less expensive than overland shipping,
can effectively expand the market area of a particular production facility. The
cement industry is extremely competitive as a result of multiple domestic
suppliers and, beginning in the 1980s, the importation of foreign cement through
4
various terminal operations. The following table presents information regarding
the market area served by each of the Company's plants and Company's estimates
of the number of competitors serving the same market area.
<TABLE>
<CAPTION>
PLANT LOCATION PRINCIPAL MARKET AREA SERVED NUMBER OF MAJOR COMPETITORS
- ------------------------------------ -----------------------------------------------------------------------------------------------
<S> <C> <C>
Victorville, California Southern California, western Arizona and Six cement producers and four import
southern Nevada facilities
Brooksville, Florida Florida Four cement producers and eight
import facilities
Kosmosdale, Kentucky Kentucky, West Virginia and portions of Nine cement producers
Ohio, Indiana and Tennessee
Fairborn, Ohio Central and southern Ohio, eastern and Nine cement producers
southern Indiana and northern and central
Kentucky
Knoxville, Tennessee Eastern Tennessee, North Carolina, and Ten cement producers and an import
portions of Kentucky, Virginia, South facility
Carolina, Georgia and Alabama
Odessa, Texas Eastern New Mexico, Texas Panhandle Twelve cement producers and an
and west Texas, western Oklahoma, import facility
southeastern Colorado and southwestern
Kansas
Lyons, Colorado Northern and central Colorado and Four cement producers
southeastern Wyoming
Pittsburgh, Western Pennsylvania and portions of Four cement producers
Pennsylvania West Virginia and Ohio
</TABLE>
Cement is a homogeneous commodity that is manufactured to meet
standardized technical specifications and is marketed primarily in bulk
quantities without special packaging or labeling. Only bagged cement, a much
smaller percentage of cement sales volume, is differentiated by brand name. The
Company's bagged cement products are marketed under the "Victor," "Miami," "El
Toro," "Mountain," "Broco," "Kosmos," "Dixie" and "Southdown" labels. The
Company also manufactures limited amounts of premium priced, specialty cement
products.
Because of the commodity nature of the product, competition among
suppliers of cement is based primarily on price, with consistency of quality and
service to customers being of lesser significance. Price competition among
individual producers and suppliers of cement within a marketing area is intense
because of the fungible nature of the product. The overall demand for cement is
relatively price inelastic, however, since cement represents only a small
portion of total construction costs and cement has few substitutes in many
applications.
Except with respect to certain major construction projects, it is not
common in the industry to enter into long-term sales contracts. During the past
few years, however, the Company has entered into several large volume sales
contracts with other cement manufacturers or distributors. Assuming these
contracts represented only incremental sales (i.e., that fixed costs were fully
covered by other production), in 1993 they accounted for approximately 25% of
the Cement segment's operating earnings, while in 1995 such contracts
represented only 10% of the segment's operating earnings.
The primary end-users of cement in each of the Company's regional
markets include numerous small and sometimes one or more large ready-mixed
concrete companies. Because of
5
the Company's vertical integration, approximately 37%, 41% and 37%,
respectively, of the cement sold by the Company's Florida plant in the years
ended December 31, 1995, 1994 and 1993 was sold to the Company's Florida
ready-mixed concrete operations. Approximately 14%, 15% and 15%, respectively,
of the cement sold by the Company's California plant in the years ended December
31, 1995, 1994 and 1993 was sold to the Company's California ready-mixed
concrete operations. Other principal customers are manufacturers of concrete
products such as blocks, roof tiles, pipes and prefabricated building
components. Sales are also made to building materials dealers, other cement
manufacturers, construction contractors and, in some regions, oil well cementing
companies. During the years ended December 31, 1995, 1994 and 1993 approximately
57%, 47% and 52%, respectively, of the Company's Texas plant's cement sales
volume consisted of sales to oil well cementing companies. No one customer
represents 10% or more of the Company's consolidated revenues.
The Company's sales efforts are concentrated in its eight sales offices. In
addition, the Company utilizes a network of cement terminals which serves to
broaden the Company's marketing area. These cement sales offices and cement
terminals are located as follows:
CEMENT SALES OFFICES CEMENT TERMINALS
------------------------- ------------------------
STATE CITY STATE CITY
----- ---- ----- ----
California West Covina California La Mirada
Colorado Denver Colorado Florence
Florida Brooksville Florida Jacksonville
Kentucky Kosmosdale(1) Florida Miami (2)
Ohio Fairborn Florida Palm Beach
Pennsylvania Pittsburgh(1) Florida Pensacola
Tennessee Knoxville Florida Tallahassee
Texas Odessa Florida Tampa
Georgia Atlanta
Kentucky Lexington(1)
North Carolina Castle Hayne
North Carolina Statesville
North Carolina Wilmington
Ohio Cincinnati(1)
Tennessee Grey Station
Tennessee Kingsport
Texas Amarillo
West Virginia Charleston(1)
West Virginia Huntington(1)
- ---------------
(1) Owned by Kosmos Cement. The Company operates the joint venture's plants,
sales offices and terminals.
(2) Acquired in August, 1995.
IMPORT COMPETITION - Historically, cement imports have increased during
peak demand periods to supplement U.S. production. During the 1980s, however,
competition from imported cement in most coastal and border areas grew
significantly. According to the PCA, U.S. consumption of foreign cement
increased from approximately 4% of total U.S. consumption in 1982 to a peak of
approximately 20% in 1987. The large volume of low priced imported cement
depressed cement prices during a period of strong growth in cement consumption.
In response to the surge of unfairly priced imports, groups of industry
participants, including the Company, filed antidumping petitions (i) in 1989
against imports from Mexico, (ii) in 1990 against imports from Japan and (iii)
in 1991 against imports from Venezuela. The International Trade
6
Commission (ITC) and the Department of Commerce (DOC) made affirmative final
determinations against both cement and clinker from Mexico and Japan.
Antidumping orders were imposed against Mexican cement and clinker and Japanese
cement and clinker in 1990 and 1991, respectively. In addition, in February
1992, the DOC suspended antidumping and countervailing duty investigations of
cement and clinker from Venezuela, based upon (i) the Venezuelan cement
producers' agreement to revise their prices to eliminate the dumping of gray
portland cement and clinker from Venezuela into the U.S., and (ii) the
Venezuelan government's agreement not to subsidize the Venezuelan cement
producers.
As a result of these orders, importers must tender antidumping duty cash
deposits to the U.S. Customs Service with each entry of cement or clinker from
Mexico or Japan equal to the customs value of the cement times the cash deposit
rate applicable to the exporter. For example, the antidumping duty cash deposit
rate for Cemex, the principal Mexican exporter, as of February 16, 1996 was 62%.
The antidumping orders and suspension agreement were largely responsible for a
reversal in the influx of cement imports in the 1990s. Primarily as a
consequence of the antidumping duty cash deposits, imports declined to 8% of
U.S. consumption in 1992. Onoda, the principal Japanese exporter at the time the
antidumping order was entered, has sold virtually no Japanese cement in the
Company's regional markets since that time.
The dumping margins and resulting rates of antidumping duty cash
deposits are subject to annual review by the DOC. In the case of Japan, the
dumping margins are subject to appeal to the U.S. Court of International Trade
(CIT) and the U.S. Court of Appeals for the Federal Circuit (CAFC). In the case
of Mexico, the dumping margins are subject to appeal either to the CIT and CAFC
or to bi- national dispute panels under the North American Free Trade Agreement
(NAFTA). The determination of the current cash deposit rate for Onoda is pending
on appeal before the CIT. In addition, the underlying injury determinations by
the ITC against Mexico and Japan have been appealed by the foreign producers.
The ITC determination against Japanese cement and clinker remains in effect
pending appeal before the CIT. The ITC's material injury determination against
Mexican cement was affirmed by both the CIT and the CAFC. The Mexican
government, however, challenged the ITC's injury determination under the General
Agreement on Tariffs and Trade (GATT). A dispute resolution panel of GATT
recommended in July 1992 that the antidumping order be vacated and that all
duties collected under the order be returned. Under GATT rules, the Antidumping
Code Committee, of which the U.S. is a member, must unanimously adopt the
panel's recommendation before it becomes a binding GATT obligation. The U.S. has
refused to endorse the GATT panel ruling.
Pursuant to the Uruguay Round Agreement, the GATT and the GATT
Antidumping Code were superseded on January 1, 1995 by a new GATT, which will be
administered by the newly created World Trade Organization (WTO). 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. However, new legislation passed by the U.S. Congress in December 1994
requires the initiation of "sunset" reviews of the antidumping orders against
Mexico and Japan and the suspension agreement with Venezuela prior to January
2000 to determine whether these antidumping orders and the suspension agreement
should terminate or remain in effect.
NAFTA has thus far had no material adverse effect on the antidumping
duty cash deposit rates imposed on gray portland cement and clinker imported
from Mexico. Certain appeals which previously would have been brought before the
CIT will now be heard by a bi-national panel of Mexican and U.S. citizens under
NAFTA. A severe economic crisis in Mexico resulted in devaluations of the
Mexican
7
peso in late 1994 and early 1995. Because of the retroactive nature of
administrative reviews, however, the impact on the calculation of antidumping
duty cash deposit rates resulting from the devaluation of the Mexican peso, if
any, will not be realized until some future period. A substantial reduction or
elimination of the existing antidumping duties as a result of GATT, NAFTA,
currency devaluation or any other reason, or an influx of low-priced cement from
countries not subject to antidumping orders, could materially adversely affect
the Company's results of operations.
U.S. imports of foreign cement once again increased in 1993 as U.S. cement
consumption began its recovery. The PCA has estimated that imports represented
approximately 16% of U.S. consumption in 1995 as compared with approximately 13%
in 1994 and 9% in 1993. During this recent period of strong demand, however, the
prices of cement imports have risen and, unlike the imports during the 1980s,
current imports are primarily playing a supplementary rather than a disruptive
role. Recent imports of foreign cement are primarily by domestic producers in
response to cement demand in excess of the domestic supply. The Company owns or
leases a total of three cement terminals located at seaports and capable of
receiving imported cement. To supplement its production capacity, the Company
sought to meet excess demand with limited purchases of imported cement in 1993
and 1994 and increased purchases of imported cement in 1995. Purchases of
imported cement in 1996, however, are expected to be significantly lower than in
1995 as the Company replaces higher cost, low margin imported cement with its
own production.
RESOURCE RECOVERY
As fuel is one of the largest variable costs in the manufacture of cement,
many members of the cement industry have investigated the use of alternative
sources of fuel as a means of mitigating this cost factor. The Company initially
tested substituting liquid hazardous waste derived fuel (HWDF) for a portion of
the fossil fuel requirements at its Ohio cement plant in 1987. Between mid-1990
and late 1994, the Company acquired a total of seven facilities to process
hazardous wastes into liquid and solid HWDF for introduction into the Company's
permitted cement kilns and the permitted kilns of other cement manufacturers.
The anticipated benefits of this arrangement failed to materialize, however, and
late in 1994, the Company determined it would discontinue that business. During
April 1995, the Company sold all the outstanding shares of stock of its
remaining hazardous waste processing facilities and, the Company ceased burning
HWDF as of April 22, 1995. (See also Notes 3 and 18 of Notes to Consolidated
Financial Statements.)
As of December 31, 1995, permit modifications were in hand or in process to
allow for the burning of tires or other non-hazardous waste materials at five of
the Company's cement plants. The Company may use tires and other non-hazardous
industrial waste materials as fuel supplements where permitted to do so and when
it is economically attractive to do so.
CONCRETE PRODUCTS
COMPANY OPERATIONS
Ready-mixed concrete is a versatile, low-cost building material used in
almost all construction applications. Concrete is produced in batch plants by
mixing stone, sand, water and admixtures with cement, the basic binding agent,
and is transported to the customer's jobsite in mixer trucks. The Company has
vertically integrated its operations in the regional vicinity of its two largest
cement plants,
8
which are located in Florida and in southern California. The Company believes
that vertical integration into ready-mixed concrete and concrete products
enhances its overall competitive position in these markets, where most cement
producers are vertically integrated. The Company continued to increase its
vertical integration in southern California with the May 1995 acquisition of
City Concrete Products, Inc.
The Company, doing business in southern California as Transit Mixed
Concrete Company (Transmix) and through its subsidiaries, is a major producer of
ready-mixed concrete in that area and is also a supplier of aggregate in
southern California. Transmix and the Company's subsidiaries in California sell
concrete primarily to commercial and industrial builders, as well as contractors
on public construction projects. The Company, doing business as Florida Mining &
Materials Concrete Corp. (Florida Mining), is a major producer and supplier of
ready-mixed concrete and concrete masonry in Florida. Florida Mining's sales
include a high percentage of sales to residential builders. The Company's
estimate of its combined annual concrete production capacity is in excess of 5.0
million cubic yards.
The Company's Concrete Products segment operates a combined total of
approximately 600 ready-mixed concrete trucks, approximately 80 batch plants, 13
concrete block plants and, in California, two aggregate quarries, one of which
is under a long-term lease. The Company's concrete products operations in
California and Florida each purchase most of their cement from the Company's
cement plant in California and Florida, respectively. The southern California
concrete products operations extract sand and gravel for use in its operations
primarily from the two California aggregate quarries. The Company presently
purchases sand and gravel for use in its Florida ready-mixed concrete operations
under an aggregate supply contract. Alternative supplies of cement and aggregate
are readily available from other sources, if necessary.
COMPETITION
The demand for concrete products is derived from the demand for
construction. The construction sector is subject to the vagaries of weather
conditions, the availability of financing at reasonable interest rates and
overall fluctuations in regional economies, which tend to be cyclical. The
burden of relatively high fixed costs results in a disproportionate impact on
profits from only minor variations in sales volume. Seasonal factors are not as
significant in the market areas served by the Company's concrete products
businesses as in some markets, but construction activity tends to diminish
during prolonged periods of inclement weather. In 1995 Company sales volumes
were 3.4 million cubic yards of ready- mixed concrete and approximately 1.4
million tons of aggregate. In 1994 and 1993 ready-mixed concrete sales volumes
totaled approximately 3.5 million cubic yards and 3.3 million cubic yards,
respectively, while sales volumes for the Company's southern California
aggregate operations were approximately 1.0 million tons and 870,000 tons of
aggregates, respectively.
Competition within each market includes numerous small and several large
ready-mixed operators. Competition for sales volume is strong, and is based
primarily on price, with consistency of quality and service to customers being
of lesser significance. In Florida, Florida Mining's principal competitors
include Tarmac Florida, Inc., Rinker Materials Corp. and Florida Rock
Industries, Inc. In California, the Company's principal competitors include
United Ready-Mixed Concrete Co. Inc., A&A Ready-Mixed Concrete, Inc. and
Catalina Pacific Concrete, Inc. and, for aggregate, CalMat Co.
9
ENVIRONMENTAL MATTERS
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. 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 and
elsewhere. In the past, the Company disposed of various materials, including
used refractory brick and other products used in its cement manufacturing and
concrete products operations, in onsite and offsite facilities. Some of these
materials, if discarded today, might be classified as hazardous wastes. Some
examples of such materials are the trace metals present in cement kiln dust
(CKD), chromium present in refractory brick formerly widely used to line cement
kilns and general purpose solvents.
The Federal Water Pollution Control Act, commonly known as the Clean Water
Act, provides comprehensive federal regulation of various sources of water
pollution. The Clean Air Act Amendments of 1990 provided comprehensive federal
regulation of various 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. As mandated by the Clean Air Act, beginning in late 1995 the
Company commenced submitting permit applications and paying annual permit fees
for its cement manufacturing plants. In addition, the U.S. Environmental
Protection Agency (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 disadvantage with respect to
its competitors. To the contrary, given the age, condition, design and other
features of the Company's cement manufacturing facilities, these more stringent
standards may enhance the Company's competitive position compared with its
competitors' plants. 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 or operated the disposal site
or facility at the time of disposal and subsequent owners or operators. Federal
and state regulations also hold owners or operators of hazardous waste
facilities liable for all costs of closure and post- closure monitoring and
maintenance of these facilities upon cessation of operations.
Management believes that the Company's current procedures and practices for
handling and management of materials are generally 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. Owners and
operators of industrial facilities may be subject to fines or other actions
imposed
10
by the U.S. EPA and corresponding state regulatory agencies for violations of
laws or regulations relating to hazardous substances. The Company has incurred
fines imposed by various environmental regulatory agencies in the past.
Several of the Company's previously and currently owned facilities at
several locations have become 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.
While some of these Superfund matters have been settled for de minimis amounts,
others are in their preliminary stages and final results may not be determined
for years. Based on the information the Company has developed to date, the
Company has no reason to believe it will be required to spend significant sums
with regard to these locations either individually or in the aggregate. However,
until it is determined what, if any, contribution the Company made to these
locations and, until all environmental studies, investigations, remediation work
and negotiations with or litigation against potential sources of recovery have
been completed, it is impossible to determine the ultimate cost of resolving
these environmental matters.
CEMENT KILN DUST - The regulatory status of CKD is governed by the Bevill
amendment, enacted by Congress as part of the Solid Waste Disposal Act
Amendments of 1980. Under the Bevill amendment, CKD, along with several other
low hazard, high volume wastes identified by Congress, was excluded from
regulation as hazardous waste under the Resource Conservation and Recovery Act
(RCRA), Subtitle C, pending completion of a study and recommendations to
Congress by the U.S. EPA. The U.S. EPA's Report to Congress on CKD was made in
December 1993, hearings were held on February 15, 1994 and, on January 31, 1995,
the U.S. EPA issued its decision on the regulatory status of CKD. Although the
U.S. EPA determined further regulation of CKD was necessary, the agency stated
that it found no evidence of risks associated with the use of cement products
and that it believes most secondary uses of CKD do not present significant risks
to people or the environment. The U.S. EPA has initiated a rulemaking process,
which is estimated to take at least until 1997, in order to develop specially
tailored CKD management standards. CKD will not be regulated as a RCRA hazardous
waste and the Bevill amendment exemption will remain in effect, until the
issuance of new CKD management standards. A change in the status of CKD may
require the cement industry to develop new methods for handling this high
volume, low toxicity waste.
For many years, the Company placed CKD in depleted quarries or other
locations at its plant sites and elsewhere. CKD that is infused with water may
produce a leachate with an alkalinity high enough to be classified as hazardous
and may also leach certain 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. In late July 1991, the Company submitted
to the Ohio Environmental Protection Agency for evaluation an initial
remediation study indicating the potential extent and nature of a remediation
problem at an inactive CKD disposal site in Ohio. Over the period from mid-1991
through the end of 1995, as information became available, the Company has
recorded charges aggregating approximately $13.3 million relating to such site.
The Company has expended a total of approximately $12 million of the reserved
amount on remediation of the site through January 31, 1996 and anticipates
completion of the current phase of the project by the second quarter of 1996.
This current phase consists primarily of development of a report which will
recommend, as a final remedial action for the site, ground water monitoring and
leachate collection and treatment activities that will continue for some period
into the future. The unexpended portion of the total accrued liability is
intended to cover these activities. While the Company has no reason to believe
that significant
11
additional sums will be required to complete the remediation of this site, it
remains at least reasonably possible that the Company may be required to incur
additional costs on the project. Until the regulatory agency renders a final
decision, the Company is unable to determine what additional costs, if any, may
be incurred on the project.
On a voluntary basis, 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. The Company believes that USX is a responsible party because it
owned and operated the larger of the two sites (USX Site) at the time of
disposal of the hazardous substances, arranged for the disposal of the hazardous
substances and transported the hazardous substances to the USX Site. Therefore,
based on the advice of counsel, the Company believes there is a reasonable basis
for the apportionment of cleanup costs relating to the USX 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 USX Site and is potentially liable under CERCLA only because of
its current ownership of the USX Site.
On September 24, 1993, the Company filed a complaint against USX, alleging
that USX is a potentially responsible party under CERCLA and under applicable
Ohio law, and therefore jointly and severally liable for costs associated with
cleanup of the USX Site. (See also Item 3. "Legal Proceedings" - (b).) The
Company and USX have held settlement discussions with respect to this matter
and, in late September 1995, the Company and USX entered into a partial
settlement agreement wherein the Company dismissed its claim for response costs
incurred prior to September 29, 1995 and USX agreed to pay the Company a
specified amount representing half of certain costs already incurred by the
Company at the USX Site. The Company and USX are jointly funding the initial
project of a phased approach to investigating and remediating the problems at
the USX Site. The court granted a jointly requested stay of litigation until
October 6, 1995 and has subsequently extended the previously ordered stay of
proceedings until April 3, 1996.
Based on the limited information available, the Company has received two
preliminary estimates of the potential magnitude of the remediation costs for
the USX Site, $8 million and $32 million, depending on the assumptions used. No
regulatory agency has directly asserted a claim against the Company as the owner
of the USX Site requiring it to remediate the property, and no cleanup of the
USX Site has yet been initiated. 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. The Company intends to vigorously pursue its right to contribution from
USX for cleanup costs under CERCLA and Ohio law.
No substantial investigative work has been undertaken at the Company's
other CKD sites in Ohio. Although data necessary to enable the Company to
estimate additional remediation costs are not available, the Company
acknowledges that it is at least reasonably possible the ultimate cost to
remediate the CKD disposal problem in Ohio could be significantly more than the
amounts reserved.
Several of the Company's other inactive CKD disposal sites around the
country are under study to determine if remedial action is required and, if so,
the extent of 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.
12
CONCRETE PRODUCTS - As with the cement operations, certain of the concrete
products operations are presently the subject of various local, state and
federal environmental proceedings and inquiries. The Company, along with other
entities with activities and operations in the San Gabriel basin in the vicinity
of Azusa, California, has received notices of potential responsibility and
requests for information by the U.S. EPA. The Company presently leases and
operates a quarry in the vicinity of Azusa which the Company sold, together with
a related landfill, to a subsidiary of Browning-Ferris Industries, Inc. (BFI) in
1987.
In February 1994, the Company learned that the U.S. EPA made public a
Feasibility Study and Proposed Plan for taking interim groundwater remedial
actions in the Baldwin Park Operable Unit located in the San Gabriel basin, and
indicated its intent to issue (i) a Record of Decision (ROD) regarding the
proposed plan and (ii) special notice letters requiring certain of the Baldwin
Park PRPs to make a good faith offer to perform the actions described in the
Plan and the ROD. In early January 1995, the U.S. EPA issued "pre-special
notice" letters to the sixteen companies it viewed as most responsible for
paying the costs of clean-up. A number of other parties, including the Company,
received "no action" letters from the U.S. EPA in January 1995 advising that,
based on the information available, the U.S. EPA did not intend to pursue these
other parties for environmental liabilities associated with the operation of the
aggregate or ready-mixed concrete operations at the Azusa site. The U.S. EPA has
agreed to hold issuance of special notice letters in abeyance while a coalition
of PRPs pursues efforts to implement a cost effective response to water quality
concerns in the Baldwin Park Operable Unit in conjunction with water purveyors,
water producers and local government agencies.
BFI is contractually obligated to indemnify the Company for any
environmental liability arising from the Company's prior ownership of the land
comprising its current aggregate and ready-mixed plant and the landfill site.
BFI is also contractually obligated to indemnify the Company for any
environmental liability arising from the Company's operation of the Azusa
landfill prior to the sale of the property and the landfill operations to BFI in
1987. The Company has formally requested that BFI indemnify and defend the
Company with respect to these matters.
On November 17, 1992, Region IV of the U.S. EPA advised the Company of
certain alleged violations of the National Pollutant Discharge Elimination
System (NPDES) permit issued under the Clean Water Act to a ready-mixed concrete
facility operated by the Company in Tallahassee, Florida. (See also Item 3.
"Legal Proceedings" - (d), and Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Environmental Matters".)
RECURRING COSTS OF ENVIRONMENTAL COMPLIANCE
The Company's compliance with the exacting requirements and varying
interpretations of applicable laws and regulations related to the protection of
human health and the environment requires substantial expenditures and
significant amounts of management time and energy. Although the Company does not
maintain records that segregate such costs from the other costs of on-going
operations, management believes recurring environmental compliance costs are a
material component of total costs.
Compliance activities include, among others, the following: (i) maintenance
of an in-house staff of professional and support personnel for permitting,
compliance, monitoring and reporting; (ii) use of outside attorneys and other
consultants to assist in defining and interpreting environmental laws and
13
regulations, demonstrating compliance therewith, and defending against
enforcement actions related thereto; (iii) proper selection of various raw
materials, fuels and other materials utilized in the Company's manufacturing
operations in order to ensure compliance with environmental requirements; (iv)
operation and maintenance of a wide variety of emissions control equipment as
well as development and implementation of procedures to minimize discharges to
the environment; (v) operation and maintenance of a variety of means to monitor
emissions and comply with stringent recordkeeping and reporting requirements;
and (vi) appropriate handling and disposal of any wastes, including hazardous
wastes, if any, which may result from the Company's operations.
In addition to current period expenses, the Company typically spends
several million dollars a year on capital projects related to environmental
compliance. Approximately $5.4 million, 7% of the budgeted 1996 capital
expenditures, is 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,
the Company considers this dedication of resources to be an integral part of its
business. As a consequence, management does not believe that environmental
compliance expenditures place the Company at a competitive disadvantage with
respect to other companies engaged in similar lines of business operating in the
U.S.
EMPLOYEES
As of December 31, 1995, the Company employed approximately 2,500 persons,
including approximately 1,100 in the cement manufacturing operations, 1,300 in
the concrete products operations and the remainder in the corporate office.
Approximately 36% of the employees are represented by collective bargaining
units, primarily the International Brotherhood of Boilermakers for the cement
plants and the International Brotherhood of Teamsters at the Company's unionized
concrete products operations in California. Collective bargaining agreements are
in effect at all the Company's cement plants, except for the non-union facility
located in Florida. Collective bargaining agreements are also in effect with all
but one of the Teamster local unions at the southern California ready-mixed
operations. Members of the International Union of Operating Engineers (Operating
Engineers) struck the concrete products industry in California beginning in the
third quarter of 1995. The Operating Engineers represented a small number of the
Company's unionized concrete products employees in California. The Operating
Engineers have filed unfair labor practices complaints with the National Labor
Relations Board against the Company and others in the industry and those charges
are pending. The Company has replaced the 63 individuals at its ready-mixed
concrete and aggregate operations who refused to return to work.
SEGMENT INFORMATION
Revenues and earnings before interest expense and income taxes contributed
by each of the Company's industry segments during the periods indicated as well
as identifiable assets, depreciation, depletion and amortization and capital
expenditures by segment are presented in Note 4 of Notes to Consolidated
Financial Statements, which is incorporated herein by this reference.
14
ITEM 2. PROPERTIES
The material appearing under Item 1 herein is incorporated hereunder by
reference, pursuant to Rule 12b-23. The Company's ownership interest in five
cement manufacturing facilities and the Company's joint venture interest in
Kosmos Cement Company, a Kentucky general partnership, are pledged as security
for long-term debt. (See also Note 12 of Notes to Consolidated Financial
Statements.)
ITEM 3. LEGAL PROCEEDINGS
(a) In early March 1994, the Company and a number of other cement producers
and industry associations received requests for information (Civil Investigative
Demand or CID) relating to the period from 1991 to April 1994 from the Antitrust
Division of the U.S. Department of Justice (DOJ). The Company produced documents
and answered certain interrogatories in response to the CID. The Company was
advised on November 10, 1995 that the DOJ has terminated its civil investigation
of the Company and others in the cement industry.
(b) The Company owns two inactive CKD disposal sites in Ohio that were
formerly owned by a division of USX Corporation (USX). In late July 1993, a
citizens environmental group brought suit in U.S. District Court for the
Southern District of Ohio, Western Division (Greene Environmental Coalition,
Inc. (GEC) v. Southdown, Inc., Case No. C-3-93-270) alleging the Company is in
violation of the Clean Water Act by virtue of the discharge of pollutants in
connection with the runoff of stormwater and groundwater from the larger of
these two sites (USX Site) and is seeking injunctive relief, unspecified civil
penalties and attorney's fees, including expert witness fees (GEC case). In
December 1994, GEC agreed to a separate out-of-court settlement which included a
cash payment by the Company to GEC and a covenant by the Company not to store,
burn or dispose of hazardous wastes at the Ohio cement plant. As a result of the
settlement, the GEC case has been stayed until January 3, 1997 pending possible
resolution.
In September 1993, the Company filed a complaint against USX alleging that
with respect to the USX Site, USX is a potentially responsible party under
CERCLA and therefore jointly and severally liable for costs associated with
cleanup of the USX Site. (Southdown, Inc. v. USX Corporation, Case No.
C-3-93-354, U.S. District Court, Southern District of Ohio Western Division)
(USX Case). In late September 1995, the Company and USX entered into a partial
settlement agreement wherein the Company dismissed its claim for response costs
incurred prior to September 29, 1995 and USX agreed to pay the Company a
specified amount representing half of certain costs already incurred by the
Company at the USX Site. The Company and USX are jointly funding the initial
project of a phased approach to investigating and remediating the problems at
the USX Site. The court granted a jointly requested stay of litigation until
October 6, 1995 and has subsequently extended the previously ordered stay of
proceedings until April 3, 1996.
(c) On September 27, 1993, the U.S. EPA issued a Complaint and Compliance
Order (Complaint) (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)
related 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
15
that certain 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 Complaint 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 was hazardous waste.
The Company engaged counsel to respond to the U.S. EPA Complaint and, after
reviewing the Complaint and the Company's compliance with the relevant
regulations, presented what the Company believed to be substantial mitigating
factors to the interpretations and allegations contained in the Complaint.
Following several months of extensive settlement negotiations with U.S. EPA, a
final agreement between the parties was reached in December 1995 which
stipulated the payment by the Company of a $117,350 penalty and withdrawal by
the U.S. EPA of the proposed requirement for closure of the Company's storage
silos. The Company paid the penalty on February 6, 1996. All of the Company's
obligations have been met and this matter is now closed.
(d) On November 17, 1992, Region IV of the U.S. EPA advised the Company of
certain alleged violations of the National Pollution Discharge Elimination
System (NPDES) permit issued to a ready- mixed concrete facility operated by the
Company in Tallahassee, Florida. The letter requested that Company
representatives attend a meeting on December 15, 1992 to show cause why an
enforcement action should not be commenced on account of the alleged violations.
U.S. EPA officials indicated at the meeting that they would evaluate the
information provided by the Company and would determine what, if any,
enforcement action they believe is warranted. The Company voluntarily terminated
operations at the facility in the Spring of 1993 and, in October 1993, the
property was sold.
Although the Company no longer owns the property involved in the alleged
violation, on September 13, 1994, the United States Department of Justice,
acting on behalf of U.S. EPA, brought an action against the Company in the
United States District Court for the Northern District of Florida alleging NPDES
Clean Water Act violations and seeking the statutory maximum penalty of $25,000
per day of violation. Discovery in preparation for potential trial is in
progress. However, the parties continue to engage in negotiations to settle this
matter. The court has rescinded a tentative trial date of March 12, 1996 to
allow for discovery and settlement negotiations to proceed. The court has
ordered a June 6, 1996 deadline for closure of discovery. The Department of
Justice has asserted that it believes a penalty in excess of one million dollars
is appropriate. The Company and its counsel believe that a substantially lower
aggregate penalty, if any, is appropriate.
(e) In March 1991, Southdown Environmental Systems, Inc. (SES) received
notice that the U.S. EPA had initiated an enforcement action under RCRA against
the previous owners of an Avalon, Texas treatment storage and disposal facility,
which SES acquired from Browning Ferris Industries, Inc. (BFI) in 1990. In its
complaint, the U.S. EPA has alleged that the entity failed to file appropriate
reports with the Texas Water Commission in advance of importing foreign waste
materials for processing at the facility. The U.S. EPA is seeking a civil
penalty of $229,500 based on alleged violations occurring as a result of
practices of the predecessor owners which were discontinued in 1989. Pursuant to
the purchase agreement between SES and BFI, BFI agreed to indemnify the Company
against environmental damages originating prior to SES's acquisition of the
processing facilities. The Company has notified BFI that it intends to exercise
its indemnification rights with respect to any damages arising from the U.S. EPA
action. While BFI acknowledges certain liabilities under the indemnification
provisions of the purchase agreement, BFI contends that the predecessor owners
also bear liability. The Company and BFI have engaged joint counsel to contest
the proposed penalty and
16
pursue indemnities given in favor of BFI by these previous owners. Joint counsel
has filed an original answer and request for hearing with the U.S. EPA. In its
answer, the Company and BFI have asserted numerous legal and factual defenses,
including that the regulations allegedly violated are inapplicable to the given
circumstances. In late January, 1996 the Company and BFI submitted a settlement
offer to the U.S. EPA but, as of February 16, 1996 no response has been
received.
(f) 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 $4.2 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. In mid-1994, Murphy notified the
Company that it had settled with the DOE by agreeing to pay $10.7 million and
that it would contact the Company later concerning the Company's alleged share
of this amount. The Company advised Murphy that it does not accept liability for
any portion of the settlement amount paid to the DOE other than its pro rata
share of attorney's fees, which the Company has paid. On April 10, 1995, Murphy
filed a complaint against the Company in the U.S. District Court for the
Southern District of Texas, Houston Division (Murphy Exploration & Production
Company v. Southdown, Inc. - Case No. H-95-1049) alleging that the Company is
liable for the Company's pro rata share of the $10.7 million payment made to the
DOE by Murphy in its capacity as operator of the property. Murphy alleges this
amount is $634,487 plus interest from October 15, 1994 and also seeks attorney's
fees. Both Murphy and the Company have filed motions for partial summary
judgment in this matter. The trial court has not ruled on those motions as of
February 16, 1996. The case is set for trial during September, 1996.
(g) In late 1988, Southern Prestressed, Inc. (SPI), a wholly owned
subsidiary of Lohja, Inc., was designated the Buyer in an Agreement for Sale of
Properties (Agreement) whereby certain prestressed concrete product plants owned
and operated by the Company were acquired. On June 30, 1995, SPI filed suit
against the Company (Southern Prestressed, Inc. v. Florida Mining & Materials
Concrete Corp. and Southdown, Inc., Case No. C95-2217, Thirteenth Judicial
Circuit Court, Hillsborough County, Florida) alleging environmental
contamination at certain of the facilities SPI acquired from the Company and
seeking compensation under the indemnification provisions of the Agreement.
(h) In Jack Blair, et al. vs. Ideal Basic Industries, Inc., United Cement,
Lime, Gypsum and Allied Workers International Union, and Dixie Cement Company
(Chancery Court of Knox County, Tennessee, No. 03A1-CH-00029), the plaintiffs
are fifteen former employees of Ideal Basic Industries, Inc. (Ideal), and the
defendants are Ideal, Dixie Cement Company (Dixie) (a subsidiary of Moore
McCormack Resources Inc. which was acquired by the Company in 1988), and the
United Cement, Lime, Gypsum and Allied Workers International Union (Union). The
plaintiff's claims arise out of a December 1983 transaction in which Dixie
purchased a cement plant from Ideal. Among other things, the plaintiffs allege
that they were not hired by Dixie because of their ages, that their retirements
were not voluntary because they were induced to retire through factual
misrepresentations made by Ideal
17
employees, allegedly acting as agents of Dixie, as to their retirement benefits
and Dixie's plans to rehire former Ideal employees, and that Dixie induced Ideal
to breach its collective bargaining agreement with the Union. Dixie has assumed
the defense of Ideal with respect to the claim under Section 301 of the National
Labor Relations Act based on the indemnification provision of the agreement
pursuant to which the Knoxville plant was acquired. The plaintiffs are seeking
compensatory damages (including back pay and benefits), liquidated damages
(under the federal age discrimination statute), punitive damages, treble damages
(under the same statute prohibiting interference with contracts), interest and
attorney's fees.
In December 1992, the trial court granted summary judgment in favor of
Dixie on all claims against Dixie. However, in November 1994, the Tennessee
Court of Appeals reversed the summary judgment order, and remanded the case to
the trial court. In January 1995, Dixie filed an application for an appeal by
permission to the Supreme Court of Tennessee. In early May 1995, the Supreme
Court of Tennessee denied Dixie's application and returned the case to the
Chancery Court of Knox County, Tennessee for trial.
On August 28, 1995, after a hearing in the Chancery Court of Knox County,
Tennessee, the Chancery Court granted Dixie's motion to reopen discovery as to
all issues, including damages issues, ordered Plaintiffs to respond to
outstanding discovery requests within thirty days thereafter, and denied the
motion of Ideal seeking reconsideration of the Court's July 7, 1992 order
setting aside a summary judgment order previously entered in favor of Ideal. On
November 13, 1995 the Court heard argument on a motion by the Union seeking to
dismiss the Plaintiffs' state law claims against the Union, but has not yet
ruled on that motion. Discovery has recommenced and depositions of the
Plaintiffs are expected to be taken after Plaintiffs have complied with written
discovery obligations as to the damages issues. At the hearing on August 28,
1995, the Court indicated that the case would be tried in the fall of 1996;
however, the parties have not received notice of a specific trial date.
(i) The information appearing under Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Known Events, Trends
and Uncertainties - Environmental Matters" is incorporated hereunder by
reference, pursuant to Rule 12b-23.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted to a vote of security holders during
the quarter ended December 31, 1995.
18
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SECURITY HOLDER
MATTERS.
MARKET PRICES AND DIVIDENDS ON COMMON STOCK AND SHAREHOLDER INFORMATION
The Company's Common Stock is traded on the New York Stock Exchange
(Symbol: SDW). The following table sets forth the high and low sales prices of
the stock for the indicated periods as reported by the NYSE.
FISCAL YEAR 1995 HIGH LOW DIVIDEND
- ---------------- ------ ------ ---------
First Quarter, ended March 1995 $17.25 $11.50 *
Second Quarter, ended June 1995 20.75 17.00 *
Third Quarter, ended September 1995 21.75 16.50 *
Fourth Quarter, ended December 1995 19.75 14.25 *
FISCAL YEAR 1994 HIGH LOW DIVIDEND
- ---------------- ------ ------ --------
First Quarter, ended March 1994 $30.25 $22.88 *
Second Quarter, ended June 1994 27.25 19.38 *
Third Quarter, ended September 1994 22.00 19.38 *
Fourth Quarter, ended December 1994 20.75 14.25 *
- --------------
* On January 25, 1996 the Board of Directors approved the payment of a $0.10
per share quarterly dividend on the Company's Common Stock payable on March
1, 1996. The Common Stock dividend had been suspended since April 1991.
For certain information describing the Company's capital stock, rights plan
and change in control provisions, see Note 19 of Notes to Consolidated Financial
Statements.
On January 31, 1996 there were 1,746 holders of record of the Company's
Common Stock. On January 31, 1996, the closing price of the stock was $21.375.
19
ITEM 6. SELECTED FINANCIAL DATA.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, (IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
----------------------------------------------------------------------------
1995 1994 1993 1992 1991
-------------- --------------- ----------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Revenues $ 596.1 $ 560.3 $ 507.7 $ 463.1 $ 468.2
============== =============== =========== ============== ============
Earnings (loss) from continuing operations......... $ 47.5 $ 30.1 $ 3.6 $ (16.9) $ (40.0)(2)
Loss from discontinued environmental services
operations, net of income taxes (1).............. - (5.9) (3.6) (24.5) (3.2)
Loss on disposition of discontinued environmental..
services operations, net of income taxes (1)..... - (21.6) - - -
Gain on disposition of discontinued oil and gas....
operations, net of income taxes.................. - - - 0.8(3) -
Extraordinary charge, net of income taxes (4)...... - - (1.0) - (1.4)
Cumulative effect of change in accounting
principle, net of income taxes (5)............... - - (48.5) - -
-------------- --------------- ----------- -------------- ------------
Net earnings (loss)................................ $ 47.5 $ 2.6 $ (49.5) $ (40.6) $ (44.6)
============== =============== =========== ============== ============
Primary earnings (loss) per share -
Continuing operations............................ $ 2.15 $ 1.20 $ (0.09) $ (1.29) $ (2.67)
Loss from discontinued environmental services
operations, net of income taxes (1)........... - (0.34) (0.21) (1.45) (0.19)
Loss on disposition of discontinued environmental
services operations, net of income taxes (1).. - (1.26) - - -
Gain on disposition of discontinued oil and gas
operations, net of income taxes............... - - - 0.05(3) -
Extraordinary charge, net of income taxes (4).... - - (0.06) - (0.08)
Cumulative effect of change in accounting
principle, net of income taxes (5)............ - - (2.86) - -
-------------- --------------- ----------- -------------- ------------
Net earnings (loss).............................. $ 2.15 $ (0.40) $ (3.22) $ (2.69) $ (2.94)
============== =============== =========== ============== ============
Fully diluted earnings (loss) per share -
Continuing operations............................ $ 2.02 $ 1.20 $ (0.09) $ (1.29) $ (2.67)
Loss from discontinued environmental services
operations, net of income taxes (1)........... - (0.34) (0.21) (1.45) (0.19)
Loss on disposition of discontinued environmental
services operations, net of income taxes (1).. - (1.26) - - -
Gain on disposition of discontinued oil and gas
operations, net of income taxes............... - - - 0.05(3) -
Extraordinary charge, net of income taxes (4).... - - (0.06) - (0.08)
Cumulative effect of change in accounting
principle, net of income taxes (5)............ - - (2.86) - -
-------------- --------------- ----------- -------------- ------------
Net earnings (loss).............................. $ 2.02 $ (0.40) $ (3.22) $ (2.69) $ (2.94)
============== =============== =========== ============== ============
Total assets....................................... $ 875.5 $ 881.0 $ 907.0 $ 921.5 $ 986.1
============== =============== =========== ============== ============
Capital expenditures (6)........................... $ 32.9 $ 28.8 $ 13.4 $ 7.7 $ 20.6
============== =============== =========== ============== ============
Depreciation, depletion and amortization (7)....... $ 42.9 $ 42.8 $ 41.3 $ 45.4 $ 45.2
============== =============== =========== ============== ============
Total debt......................................... $ 175.2 $ 186.1 $ 293.9 $ 314.8 $ 332.7
============== =============== =========== ============== ============
Shareholders' equity............................... $ 375.0 $ 337.1 $ 262.2 $ 316.4 $ 362.0
============== =============== =========== ============== ============
Ratio of debt to total capitalization (8).......... $ 31.8% $ 35.6% 52.9% 49.9% 47.9%
============== =============== =========== ============== ============
Cash dividends paid per share of
common stock..................................... $ - $ - $ - $ - $ 0.125
============== =============== =========== ============== ============
</TABLE>
- ---------------------
(1) In November 1994 the Company decided to exit the environmental services
business and these business activities are presented as discontinued
operations for years 1991 through 1994. (See also Note 3 of Notes to
Consolidated Financial Statements.)
(2) Includes $16 million equity in pretax loss of unconsolidated joint venture.
(3) Final portion of the Company's gain realized in conjunction with the 1989
sale of the Company's oil and gas operations.
(4) Premium on early extinguishment of debt.
(5) Cumulative after-tax effect of change in accounting for initial obligation
for estimated postretirement health care benefits as required by adoption
of Statement of Financial Accounting Standards No. 106 effective January 1,
1993. (See Note 17 of Notes to Consolidated Financial Statements.)
(6) Excluding acquisition expenditures of $12.6 million, $16.1 million, $2.9
million in years 1995, 1994 and 1993, respectively. There were no
acquisition expenditures in 1992 and 1991.
(7) Includes amortization of debt issuance costs.
(8) Total capitalization represents the sum of the book value of total debt and
shareholders' equity.
Management's Discussion and Analysis of Financial Condition and Results of
Operations related to this information appears on Page 21 of this report.
20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
YEARS ENDED DECEMBER 31,
------------------------------------
1995 1994 1993
------ ------ ------
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
Revenues................................ $596.1 $560.3 $507.7
====== ====== ======
Costs and expenses...................... $492.8 $484.5 $460.3
====== ====== ======
Operating earnings (1).................. $ 97.5 $ 71.7 $ 44.3
====== ====== ======
Interest expense........................ $(26.7) $(27.7) $(39.3)
====== ====== ======
Income tax expense...................... $(23.3) $(13.9) $ (1.4)
====== ====== ======
Earnings from continuing operations..... $ 47.5 $ 30.1 $ 3.6
====== ====== ======
Net earnings (loss)..................... $ 47.5 $ 2.6 $(49.5)
====== ====== ======
Fully diluted earnings (loss) per share
Continuing operations................ $ 2.02 $ 1.20 $ (0.09)
====== ====== ======
Net earnings (loss).................. $ 2.02 $ (0.40) $ (3.22)
====== ====== ======
(1) Continuing operations before interest and income tax expense.
CONSOLIDATED EARNINGS
1995 COMPARED WITH 1994 - Net earnings for 1995 were $47.5 million or $2.02
per share, fully diluted, compared with $2.6 million, a loss of $0.40 per share,
in the prior year, including a net after tax loss from the discontinued
environmental services operation of $27.5 million, $1.60 per share. Consolidated
revenues in 1995 were 6% higher than 1994 because of higher average per unit
sales prices. The year-over-year improvement in pre-tax earnings resulted from a
24% increase in cement earnings, a 14% reduction in corporate expenses and a 4%
reduction in interest expense. The Cement segment benefited from a 9%
improvement in average sales prices, partly offset by a 3% decrease in sales
volume and higher unit cost of sales. Excluding the 1994 gains on the sale of
surplus used mixer trucks, operating earnings reported by the Concrete Products
segment for 1995 were approximately the same as compared with the prior year
period. General and administrative expenses in 1995 were lower than in the prior
year primarily because of a $3.3 million reduction in post-retirement benefits
expense. The reduction of interest expense primarily reflects the early
retirement of $90 million of the Company's 12% Senior Subordinated Notes Due
1997 (12% Notes) during 1994.
The Company's effective tax rate, which includes state taxes, was lower
than the federal statutory rate for 1995 and 1994 primarily because of the
favorable impact of permanent differences related to statutory depletion in
excess of cost depletion applicable to the Company's limestone mining
operations. The 1995 effective rate was higher than the 1994 effective rate
primarily because of the smaller relative benefit of statutory depletion in 1995
compared with the higher 1995 pretax income.
21
1994 COMPARED WITH 1993 - Net earnings for 1994 were $2.6 million compared
with a net loss of $49.5 million in 1993. Earnings from continuing operations
for 1994 were $30.1 million compared with $3.6 million for the prior year. The
loss from discontinued operations was $27.5 million in 1994, including a $21.6
million provision for the disposition of discontinued operations, compared with
a loss from discontinued operations of $3.6 million in 1993. Per share results
for 1994 were a loss of $0.40 per share, primary and fully diluted, compared
with a loss of $3.22 per share in the prior year, which included the $48.5
million, $2.86 per share, initial charge related to the 1993 adoption of new
accounting rules for postretirement benefits, Statement of Financial Accounting
Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions" (SFAS No. 106).
Consolidated revenues in 1994 increased 10% over the prior year period
primarily because of improvements in sales volumes and prices from the Concrete
Products segment and improved prices in the Cement segment. The year-over-year
improvement in net earnings resulted from an 11% increase in Cement segment
operating earnings, a $10.9 million improvement in the results reported by the
Concrete Products segment, a 9% reduction in corporate expenses and a 30%
reduction in interest expense. The Cement segment benefited from an 8%
improvement in the weighted average sales price. The Concrete Products segment
achieved a significant improvement primarily as a result of a substantial upturn
in the Florida operations. The Company's California concrete products operating
results in 1994 included $1.7 million in gains realized from sales of surplus
used ready-mixed concrete mixer trucks.
General and administrative expenses declined in 1994 because 1993 included
a $2.5 million charge to accrue benefits under SFAS No. 106, while additional
accruals have not been necessary subsequent to the July 1, 1993 effective date
of the Company's amended postretirement benefits plan. Miscellaneous income in
1994 included the realization of a $4.8 million gain contingency stemming from
the 1988 acquisition of Moore McCormack Resources, Inc. (Moore McCormack) and a
$2 million charge to increase the estimated liability for remediation of an
inactive cement kiln dust (CKD) disposal site, while the 1993 period included a
$3 million CKD remediation charge. The reduction in interest expense reflects
the early retirement of the Company's 12% Notes. The effective tax benefit rate
for 1993 was higher than the statutory rate because of the interaction of an
increase in the corporate federal income tax rate, permanent differences between
book and tax loss for the year and a state income tax benefit.
22
SEGMENT OPERATING EARNINGS YEARS ENDED DECEMBER 31,
-------------------------------------
1995 1994 1993
--------- --------- ---------
(IN MILLIONS)
REVENUES
Cement .............................. $ 419.1 $ 397.5 $ 369.5
Concrete Products ................... 219.2 208.1 176.3
Intersegment sales .................. (42.2) (45.3) (38.1)
--------- --------- ---------
$ 596.1 $ 560.3 $ 507.7
========= ========= =========
OPERATING EARNINGS (LOSS):
Cement .............................. $ 112.7 $ 91.2 $ 81.9
Concrete Products ................... 7.9 9.3 (1.6)
Corporate overhead
General and administrative ......... (21.6) (25.1) (28.9)
Depreciation, depletion and
amortization ...................... (4.2) (5.0) (4.3)
Miscellaneous income (losses) ...... 2.7 1.3 (2.8)
--------- --------- ---------
$ 97.5 71.7 $ 44.3
========= ========= =========
CEMENT - Operating earnings for 1995 were $112.7 million compared with
$91.2 million in the prior year. Despite higher unit cost of sales and lower
sales volumes, operating earnings improved because of a $4.92 per ton increase
in average cement sales prices reflecting increases in all the Company's market
areas since mid-1994. The 3% reduction in sales volume primarily reflects the
impact of inclement weather in several market areas, most notably Ohio, Colorado
and southern California. Even though manufacturing costs per ton during 1995
were 2% lower than the prior year, unit cost of sales was higher. The increase
in unit cost of sales reflects: (i) a 24% increase in outside purchases of
higher cost finished cement for which the Company contracted when it believed
that demand at various cement plants and sales terminals would be higher, and
(ii) higher terminal operating costs in the Company's Florida market area where
an additional terminal was acquired in late 1994. The segment's operating
results for 1995 were also impacted by a $1 million charge related to a
litigation settlement. Operating earnings for 1994 were $91.2 million compared
with $81.9 million in the prior year. Despite higher per unit operating costs,
1994 operating earnings improved over the prior year primarily because of a
$4.18 per ton increase in average cement sales prices.
During the past few years, the Company entered into several large
volume sales contracts with other cement manufacturers or distributors. Assuming
these contracts represented only incremental sales (i.e., that fixed costs were
fully covered by other production), in 1993 they accounted for approximately 25%
of the Cement segment's operating earnings, while in 1995 such contracts
represented only 10% of the segment's operating earnings. The Company believes
that a large portion of the volumes covered by these contracts in 1995 could be
replaced by direct sales to cement consumers in the Company's existing markets.
23
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:
1995 1994 1993
--------- --------- ---------
Tons of cement sold (in thousands) ...... 6,058 6,218 6,196
========= ========= =========
Weighted average per ton data:
Sales price (net of freight) ........ $ 60.69 $ 55.77 $ 51.59
Manufacturing and other plant
operating costs(1) ................ 41.97 40.95 38.57
--------- --------- ---------
Margin .............................. $ 18.72 $ 14.82 $ 13.02
========= ========= =========
- --------------
(1) Includes fixed and variable manufacturing costs, selling expenses, cost of
purchased cement, plant general and administrative costs, other plant
overhead and miscellaneous costs.
The increase in the average sales price per ton compared with the prior
years reflects a general firming of cement prices throughout the industry and
the realization of price increases implemented at the Company's cement plants
during the three years ended December 31, 1995. Operating costs per ton
increased in 1995 primarily because of an increase in outside purchases of
higher cost finished cement. The increase in operating cost per ton for 1994
resulted from higher maintenance and repair costs at several manufacturing
facilities.
CONCRETE PRODUCTS - The Concrete Products segment's operating earnings for
1995 were $7.9 million compared with $9.3 million in the prior year. Higher
ready-mixed concrete sales prices attributable to price increases implemented in
Florida during the previous twelve months were offset by lower sales volumes of
ready-mixed concrete and higher operating costs. The decline in ready-mixed
sales volumes reflects strike related problems in California and, in Florida, a
decline in residential construction as well as abnormally heavy rainfall in much
of the market area. Operating costs were higher because of: (i) lower volumes
which resulted in fixed costs being spread over fewer units; (ii) higher priced
raw materials (primarily the increases in cement prices which are discussed
under "Cement" above) and; (iii) costs associated with an industry-wide labor
strike in California.
The Concrete Products segment's operating earnings for 1994 were $9.3
million compared with a $1.6 million operating loss reported in the prior year.
Revenues increased 18% over the prior year as sales volumes and prices from all
of the product lines showed improvement. Results from the southern California
operation improved $3.7 million primarily because of $1.7 million in gains
realized on sales of used mixer trucks and higher ready-mixed concrete sales
prices. Florida's operating results increased by approximately $7.2 million
compared with the prior year reflecting higher sales volumes and sales prices
from the ready-mixed concrete operation as well as continuing improvement from
the block, resale and flyash operations. Ready-mixed concrete sales volumes and
prices in the Florida market area improved in 1994 by 9% and 8%, respectively,
reflecting the economic recovery in that region. The increase in the weighted
average sales price per yard for 1994 compared with 1993 reflects higher sales
prices in both the Company's Florida and southern California markets. The
increase in the weighted average operating costs per yard for 1994 compared with
1993 is attributable primarily to the higher cost of cement in Florida.
24
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:
1995 1994 1993
------- -------- -------
Cubic yards of ready-mixed concrete
sold (in thousands) 3,442 3,530 3,274
======= ======== =======
Weighted average per cubic yard data:
Sales price $51.34 $ 47.76 $ 43.86
Operating costs (1) 50.75 47.32 45.48
------- -------- -------
Margins $ 0.59 $ 0.44 $ (1.62)
======= ======== ========
- ------------
(1) Includes variable and fixed plant costs, delivery, selling, general and
administrative and miscellaneous operating costs, but excluding the $1.7
million gain realized on the sale of trucks during 1994.
While most of the revenues for the segment are generated by ready-mixed
concrete operations, the concrete products segment operations also include the
manufacture and sale of concrete block, the sale of masonry contractors'
supplies, the mining and sale of aggregate to third parties in southern
California and, in Florida, the sale of flyash. These collateral operations
contributed approximately $6.0 million each year in both 1995 and 1994 and $3.7
million to this segment's operating results in 1993.
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. General and administrative expenses in 1995 reflect
the favorable impact of a further reduction in the long-term liability for post
retirement benefits. The reduction is the result of a revision to actuarial
assumptions used to compute the liability in order to (i) take into account the
higher interest rates in effect at the beginning of the 1995 measurement period,
(ii) factor in the Company's lower than expected claims experience and (iii)
conform the long-term post retirement benefits contractually proffered to the
Company's unionized cement plant workers with those benefits available to the
rest of the Company's employees. Corporate general and administrative expenses
for 1994 were substantially below the prior year primarily because 1993 included
a $2.5 million charge to accrue the estimated postretirement health care benefit
calculated under SFAS No. 106. Corporate general and administrative expense in
1994 also benefited from a $1 million increase in the pension credit.
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 income of $2.7 million in
1995, a net income of $1.3 million in 1994 and a net loss of $2.8 million in
1993. Miscellaneous income in 1995 included a $1.3 million gain realized on the
sale of a surplus limestone mine in West Virginia and a $1.6 million charge to
increase the estimated liability to remediate an inactive CKD disposal site
referred to previously. Miscellaneous income in 1994 included a $4.8 million
gain stemming from the Moore McCormack acquisition, charges totaling $1.7
million in
25
conjunction with the disposition of lawsuits and a $2 million charge to
increase the estimated liability to remediate the inactive CKD disposal site.
Miscellaneous income (loss) in 1993 included a $3 million charge for estimated
remediation costs for the inactive CKD disposal site, a $1.7 million charge for
proxy contest fees and expenses and 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.
DISCONTINUED OPERATIONS - In November 1994 the Company decided to
discontinue its environmental services business and recorded an after-tax charge
of $21.6 million or $1.26 per share to reflect the difference between the book
value of this line of business' assets and the estimated proceeds from asset
sales, as well as the costs to exit the business and estimated losses to be
incurred prior to the sale of assets. The charge as well as the results from the
environmental services business are shown in the Company's financial statements
as discontinued operations, net of income tax effect, for years 1994 and prior.
The loss from operations of the discontinued environmental services business was
$5.9 million in 1994 and $3.6 million in 1993.
LIQUIDITY AND CAPITAL RESOURCES
YEARS ENDED DECEMBER 31,
-------------------------
1995 1994 1993
------ ------ ------
(IN MILLIONS)
Cash and cash equivalents............ $ 7.7 $ 7.4 $ 7.4
====== ====== ======
Working capital...................... $ 81.8 $ 79.5 $ 62.9
====== ====== ======
Net cash provided by operating
activities....................... $ 65.4 $ 86.8 $ 53.1
====== ====== ======
Net cash used in investing activities $ 37.6 $ 50.5 $ 19.0
====== ====== ======
Net cash used in financing activities $ 27.5 $ 36.3 $ 39.2
====== ====== ======
Total assets......................... $875.5 $881.0 $907.0
====== ====== ======
Total debt........................... $175.2 $186.1 $293.9
====== ====== ======
Capital expenditures................. $ 32.9 $ 28.8 $ 13.4
====== ====== ======
Capital acquisitions................. $ 12.6 $ 16.1 $ 2.9
====== ====== ======
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.
In 1995, internally generated funds from operations were utilized to (i) fund
working capital requirements, including the build-up of inventories, (ii) invest
approximately $32.9 million in plant, property and equipment, (iii) acquire
additional ready-mixed concrete operations in Florida and in southern California
for a total of $12.6 million; (iv) reduce long-term debt and (v) pay dividends
on preferred stock. The Company's capital expenditures for 1995 were
approximately $33 million, approximately $25 million for the Cement segment and
$7 million for the Concrete Products segment. The Cement segment capital
expenditures were less than anticipated at the beginning of 1995 primarily
because of delays encountered in the permitting and engineering phases of the
announced project to modernize and expand the Company's Ohio plant now expected
to be completed in 1997. Internally generated cash flow from operations,
borrowings under its revolving credit facility
26
and the net proceeds from the sale of a new issue of preferred stock were
utilized to meet all of the Company's cash requirements for the year ended
December 31, 1994. Such cash flow was utilized to: (i) invest approximately
$44.7 million in property, plant and equipment additions and acquisitions; (ii)
reduce debt by approximately $111.6 million and (iii) pay dividends on preferred
stock.
On November 3, 1995, the Company entered into a new restated revolving
credit facility (Revolving Credit Facility) with the same banks as in its
previous revolving credit facility. The Revolving Credit Facility, at $200
million, remains the same size as the previous revolving credit facility, but
(i) extends the maturity to October 30, 2000, (ii) provides the Company with
enhanced flexibility under certain restrictive covenants and (iii) allows the
Company to redeem or repurchase subordinated debt and capital stock within
certain limits. The Company's ownership interest in five cement manufacturing
facilities and the Company's joint venture interest in Kosmos Cement are pledged
to secure the Revolving Credit Facility.
Prior to February 1996, the Company's borrowing capacity under its
Revolving Credit Facility was restricted to the extent of $17.4 million for
potential funding of obligations under an agreement between the Company and the
U.S. Maritime Administration (MARAD) related to certain shipping operations
owned previously by Moore McCormack. Certain of the Company's contingent
obligations to MARAD and the restriction on the Company's borrowing capacity
under the Revolving Credit Facility, were terminated pursuant to February 13,
1996 agreements by and among the Company, MARAD and the successor company to the
shipping operations. The terms of the Revolving Credit Facility also permit the
issuance of standby letters of credit up to a maximum of $95 million in lieu of
borrowings. At February 16, 1996, $15.0 million of borrowings and $60.5 million
of letters of credit were outstanding under the Revolving Credit Facility,
leaving $124.5 million of unused and unrestricted capacity.
Early in 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.
The net proceeds were used to prepay a promissory note and to reduce borrowings
under the Company's revolving credit facility. In 1994 there were only $3.6
million in net borrowings on the Company's revolving credit facility.
TENDER OFFER FOR 14% NOTES
On February 14, 1996, the Company commenced a tender offer (Offer) to
purchase for cash its 14% Senior Subordinated Notes due 2001 Series B (14%
Notes) of which $125 million in principal amount are outstanding. The Offer is
conditioned on, among other things, the availability to the Company of funds
from a private placement of new subordinated notes and, if necessary, borrowings
under the Revolving Credit Facility sufficient to pay the aggregate purchase
price and all related costs and expenses of the Offer on terms and conditions
satisfactory to the Company, in its sole discretion, and other customary
conditions. The Offer will expire at midnight, New York City time, on March 13,
1996, unless extended by the Company. Any 14% Notes not tendered to and
purchased by the Company pursuant to the Offer will remain outstanding. The
Company may, after the Offer, acquire or otherwise retire any remaining 14%
Notes. Additionally, pursuant to the existing terms of the 14% Notes, at any
time on or after October 15, 1996, the 14% Notes may be redeemed at the option
of the Company, in whole or in part, at 105.25% of the principal amount thereof,
declining ratably to par on and after October 15, 1999. While the Company
currently anticipates that any 14% Notes remaining outstanding after the Offer
will be redeemed or otherwise retired, there can be no assurances as to which,
if any, of its alternatives with respect to any remaining 14% Notes the Company
may pursue. The premium
27
and unamortized debt issuance costs associated with the repurchase and
retirement prior to maturity of the 14% Notes, net of income tax, will be
recorded as an extraordinary charge in the period in which the 14% Notes are
retired.
CASH FLOWS
OPERATING ACTIVITIES - Cash provided by operating activities in 1995 was
$65.4 million. Cash provided by operating activities in 1994 was $86.8 million.
In spite of a large net loss, cash provided by operating activities was $53.1
million for 1993. The decline in cash provided by operating activities in 1995
resulted from (i) payments made to exit the environmental services business,
(ii) the timing of payments on normal trade and other obligations and (iii) the
increase in cement and clinker inventory levels. The increase in 1994 compared
with 1993 was attributable to higher earnings from operations in 1994, partially
offset by Federal income tax refunds received in 1993. During 1993 the Company
received a $15.7 million Federal income tax refund from the carryback to prior
years of the 1992 tax loss.
INVESTING ACTIVITIES - Net cash used in 1995 investing activities was $37.6
million including acquisitions of $12.6 million and $32.9 million of additions
to property, plant and equipment. Investing activities in 1994 included
approximately $28.6 million of capital expenditures. In December 1994 the
Company acquired a cement import terminal in Florida along with certain working
capital items for approximately $16 million in cash. In addition to routine
capital expenditures, investing activities in 1993 included the acquisition of
five ready-mixed batch plants, one aggregate quarry and one block plant for $2.9
million in cash plus the forgiveness of debt owed to the Company and the
assumption of certain liabilities.
FINANCING ACTIVITIES - Net cash used in financing activities in 1995 was
$27.5 million in order to reduce long-term debt by $12.7 million and pay
dividends on preferred stock. During 1994 the Company realized approximately $83
million in net proceeds from the sale of a new series of preferred stock which
was used to prepay an $18 million promissory note and to reduce borrowings under
the Company's revolving credit facility. The Company had used borrowings under
its revolving credit facility to redeem $90 million of the Company's 12% Notes.
Funds provided by operating activities were utilized to reduce long-term debt by
$25.4 million and to pay dividends during 1993.
CHANGES IN FINANCIAL CONDITION
The change in the financial condition of the Company between December 31,
1994 and December 31, 1995 reflects cash provided by operating activities
primarily to fund working capital requirements, make capital expenditures and to
reduce outstanding long-term debt. Accounts and notes receivable decreased
reflecting the sale of the Company's remaining hazardous waste processing
facilities. The increase in inventories reflects both the seasonal build-up in
cement and clinker inventories in preparation for annual maintenance shutdowns
scheduled for the first and second quarters of the year and the less than
anticipated cement sales volumes because of inclement weather in several market
areas. The decrease in deferred income taxes reflects the realization of
temporary differences related to the disposition of the Environmental Services
segment and the reduction of net operating loss carryforwards. The increase in
other long-term assets reflects notes received as partial consideration in
connection with the sale of the Company's remaining hazardous waste processing
facilities. The decline in assets held for sale reflects the sale of the
remaining hazardous waste processing facilities. Accounts payable and accrued
liabilities decreased because of payments made as a result of exiting the
28
environmental services business and the timing of payments on normal trade and
other obligations. Other liabilities and deferred credits decreased because of
payments made on certain retained liabilities related to shipping operations
formerly owned by Moore McCormack.
CAPITAL EXPENDITURES
The Company invested $32.9 million in property, plant and equipment in 1995
including approximately $25.1 million for the Cement operations and $6.7 million
for Concrete Products. The Company's 1996 planned capital expenditures are
approximately $75 million to $80 million, of which $65 million to $70 million is
allocated for the Cement segment and $10 million for the Concrete Products
segment.
Capital expenditures during 1995 amounted to $25.1 million for the Cement
segment compared with $16.8 million and $8.5 million in 1994 and 1993,
respectively. While the Company had been somewhat capital constrained for
several years in the past, improved cash flow from operations enabled the
Company to significantly increase its capital expenditure budget in 1995 in
order to achieve process enhancements which are expected to yield improvements
in efficiency and productivity. The Company's initially planned capital
expenditures for 1995 were approximately $64 million, including $51.5 million
for the Cement segment. However, delays encountered in the permitting and
engineering phases of the announced modernization and expansion project at the
Company's Ohio plant resulted in a large part of these planned expenditures
being carried over to 1996. The budgeted Cement segment 1996 capital outlays of
approximately $65 million to $70 million include $30 million representing a
portion of the total cost to modernize and expand the Company's Ohio plant. An
additional $15 million is estimated to be spent in 1997 to complete the Ohio
plant project. The Company believes its expected cash flow from operating
activities will be sufficient to fund these capital expenditures. If necessary,
the Company has sufficient borrowing capacity available under its Revolving
Credit Facility to supplement these expected future operating cash flows.
Capital expenditures during 1995 amounted to $6.7 million for the Concrete
Products segment, compared with $9.4 million and $3.5 million in 1994 and 1993,
respectively. Capital expenditures in 1995 were primarily designed to further
increase labor productivity, improve equipment availability and increase plant
production rates. In most instances new mobile equipment is being leased instead
of purchased. Capital outlays for the Concrete Products segment in 1996 have
been budgeted at approximately $10 million, including approximately $6 million
in plant expansion, equipment replacement and modernization, $0.9 million in
quarry development, $1.4 million related to compliance with environmental
regulations and the balance for general purchases.
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 Company believes recurring environmental
compliance costs are a material component of total operating costs and, while
the Clean Air Act Amendments of 1990 will likely result in increased capital and
operational expenses for the Company in the future, these amounts are not
presently determinable. Regulatory changes, enforcement activities or other
factors could alter environmental compliance costs 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. Management, however, has no reason to believe that the Company
would
29
be placed at a competitive disadvantage with respect to other companies engaged
in similar lines of business operating in the U.S.
KNOWN EVENTS, TRENDS AND UNCERTAINTIES
ENVIRONMENTAL MATTERS
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 presently designated as
hazardous substances. Some examples of such materials are the trace metals
present in CKD, chromium present in refractory brick formerly widely used to
line cement kilns and general purpose solvents. The cement and concrete products
industries, including the operations of the Company, are regulated by various
federal, state and local laws and regulations pertaining to the protection of
human health and the environment. Environmental laws can be broadly categorized
into two types: (a) pollution control laws, for example the Resource
Conservation and Recovery Act (RCRA) and the Hazardous and Solid Waste
Amendments of 1984 (HSWA), the Federal Water Pollution Control Act and the Clean
Air Act; and (b) pollution clean up laws, for example the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980 (CERCLA) and the
Superfund Amendments and Reauthorization Act of 1986 (SARA).
RCRA regulates the generation, transportation, storage, treatment and
disposal of hazardous waste, hazardous waste being defined as either (a) a
substance exhibiting any one of four characteristics: toxicity, corrosivity,
reactivity or ignitability, or (b) any substance specifically "listed" as a
hazardous waste. RCRA and HSWA are intended to provide comprehensive regulation
of hazardous waste "from cradle to grave" and provide the procedural
requirements for implementing corrective action for releases to the environment.
The Federal Water Pollution Control Act, commonly known as the Clean Water Act,
provides comprehensive federal regulation of all sources of water pollution.
The Clean Air Act Amendments of 1990 provided comprehensive federal
regulation of all major sources of air pollution and established a new federal
operating permit and fee program for virtually all significant 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. As mandated by the Clean Air Act, beginning in late
1995 the Company commenced submitting permit applications and paying annual
permit fees for its cement manufacturing plants. In addition, the U.S.
Environmental Protection Agency (U.S. EPA) is developing air toxics regulations
for a broad spectrum of industrial sectors, including portland cement
manufacturing. The 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 disadvantage with
respect to its competitors. To the contrary, these more stringent standards may
enhance the Company's competitive position, given the age, condition, design and
other features of the Company's cement manufacturing facilities compared with
its competitors' plants.
CERCLA, as amended by 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
30
hazardous substances. Among those who may be held jointly and severally liable
are those who generated the substances, those who arranged for disposal, those
who owned or operated the disposal site or facility at the time of disposal
and subsequent owners or operators. Although there is a right of private
action under CERCLA, in general this liability is imposed in a series of
governmental proceedings initiated by the identification of a site for initial
listing as a "Superfund site" on the National Priorities List or a similar
state list and the identification of potentially responsible parties who may
be liable for cleanup costs. Certain of the Company's disposal sites in
Victorville, California and Fairborn, Ohio are in the preliminary stages of
evaluation for inclusion on the National Priorities List compiled under the
U.S. EPA's Comprehensive Environmental Response, Compensation and Liability
Information System (CERCLIS). Inclusion in CERCLIS is designation for further
evaluation only and not a determination of liability or a finding that any
response action is necessary.
Several of the Company's previously and currently owned facilities
at several locations have become 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. While some of these matters have been settled for de minimis
amounts, others are in their preliminary stages and final results may not be
determined for years. Based on the information the Company has developed to
date, the Company has no reason to believe it will be required to spend
significant sums with regard to these locations either individually or in the
aggregate. However, until it is determined what, if any, contribution the
Company made to these locations and until all environmental studies,
investigations, remediation work and negotiations with or litigation against
potential sources of recovery have been completed, it is impossible to
determine the ultimate cost of resolving these environmental matters.
CEMENT KILN DUST - Under the Bevill amendment enacted as part of the
Solid Waste Disposal Act Amendments of 1980, CKD is currently exempt from
management as a hazardous waste, except CKD that is produced by kilns burning
hazardous waste derived fuel (HWDF) and which fails to meet certain criteria.
On January 31, 1995, the U.S. EPA issued its decision that further regulation
of CKD was necessary, even though the agency stated that it found no evidence
of risks associated with the use of cement products and that the agency
believes most secondary uses of CKD do not present significant risks to people
or the environment. The U.S. EPA has initiated a rulemaking process, which is
estimated to take at least until 1997, in order to develop specially tailored
CKD management standards. The Bevill amendment exemption will remain in effect
until the issuance of new CKD management standards. A change in the status of
CKD may require the cement industry to develop new methods for handling this
high volume, low toxicity waste.
CKD that is infused with water may produce a leachate with an
alkalinity high enough to be classified as hazardous and may also leach
certain hazardous trace metals present therein. Several of the Company's
inactive CKD disposal sites around the country have been under investigation
by the Company to determine if remedial action is required and, if so, the
extent of remedial action required. The Company has recorded charges totaling
approximately $13.3 million as the estimated remediation cost for one inactive
CKD disposal site in Ohio. Approximately $12 million of the reserved amount
had been expended through December 31, 1995.
On a voluntary basis, 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. The Company believes that USX is a
responsible party because
31
it owned and operated the larger of the two sites (USX Site) at the time of
disposal of the hazardous substances, arranged for the disposal of the
hazardous substances, transported the hazardous substances to the USX Site
and, therefore, that USX bears substantially all of the liability for cleanup
costs. On September 24, 1993, the Company filed a complaint against USX,
alleging that USX is a potentially responsible party under CERCLA and under
applicable Ohio law, and therefore, jointly and severally liable for costs
associated with cleanup of the USX Site. The Company and USX have held
settlement discussions with respect to this matter and are currently jointly
funding the initial project of a phased approach to investigating and
remediating the problems at the USX Site.
Based on the limited information available, the Company has received
two preliminary estimates of the potential magnitude of the remediation costs
for the USX Site, $8 million and $32 million, depending on the assumptions
used. No regulatory agency has directly asserted a claim against the Company
as the owner of the USX Site requiring it to remediate the property, and no
cleanup of the USX Site has yet been initiated. 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.
No substantial investigative work has been undertaken at the
Company's other CKD sites in Ohio. Although data necessary to enable the
Company to estimate additional remediation costs are not available, the
Company acknowledges it is at least reasonably possible that the ultimate cost
to remediate the CKD disposal problem in Ohio could be significantly more than
the amounts reserved.
Several of the Company's other inactive CKD disposal sites around
the country are under study to determine if remedial action is required and,
if so, the extent of remedial action necessary. 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.
OTHER CONTINGENCIES
STATUS OF ADDITIONAL SOURCES OF CEMENT SUPPLY - Historically, during
peak demand periods for cement, imports have also increased. During the 1980s,
imported cement flooded U.S. markets, causing prices to fall despite strong
growth in cement consumption. In response to the surge of unfairly priced
imports, groups of industry participants, including the Company, filed
antidumping petitions against imports from Mexico in 1989, against imports
from Japan in 1990 and against imports from Venezuela in 1991. The
International Trade Commission (ITC) and the Department of Commerce (DOC) made
affirmative final determinations against both cement and clinker from Mexico
and Japan. Antidumping orders were imposed against Mexican cement and clinker
in August 1990 and against Japanese cement and clinker in April 1991. In
addition, in February 1992, the DOC suspended antidumping and countervailing
duty investigations of cement and clinker from Venezuela, based upon (i) the
Venezuelan cement producers agreement to revise their prices to eliminate the
dumping of gray portland cement and clinker from Venezuela into the U.S., and
(ii) the Venezuelan government's agreement not to subsidize the Venezuelan
cement producers. The antidumping orders and suspension agreement were largely
responsible for a reversal in the influx of cement imports in the early 1990s.
U.S. imports of foreign cement once again began increasing in 1993 as U.S.
cement consumption began its recovery. During this recent period of strong
demand, however, the prices of cement imports have risen and, unlike the
imports of the 1980s, current imports are primarily playing a supplementary,
rather than a disruptive role.
32
In the case of Japan, the dumping margins and resulting rates of
antidumping duty cash deposits are subject to annual review by the DOC and
appeal to the U.S. Court of International Trade (CIT) and the U.S. Court of
Appeals for the Federal Circuit (CAFC). In the case of Mexico, dumping margins
are appealed either to the CIT or CAFC or to a bi-national dispute panel under
the North American Free Trade Agreement (NAFTA). Pursuant to the Uruguay Round
Agreement, the General Agreement on Tariffs and Trade (GATT) and the GATT
Antidumping Code were superseded on January 1, 1995 by a new GATT, which will
be administered by the newly created World Trade Organization (WTO). 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. New legislation passed by the U.S. Congress in December 1994,
however, requires the initiation of "sunset" reviews of the antidumping orders
against Mexico and Japan and the suspension agreement with Venezuela prior to
January 2000 to determine whether these antidumping orders and the suspension
agreement should terminate or remain in effect.
NAFTA has thus far had no material adverse effect on the antidumping
duty cash deposit rates imposed on gray portland cement and clinker imported
from Mexico. Certain appeals which previously would have been brought before
the CIT will now be heard by a bi-national panel of Mexican and U.S. citizens
under NAFTA. A severe economic crisis in Mexico resulted in devaluations of
the Mexican peso in late 1994 and early 1995. Because of the retroactive
nature of administrative reviews, however, the impact on the calculation of
antidumping duty cash deposit rates resulting from the devaluation of the
peso, if any, will not be realized until some future period. A substantial
reduction or elimination of the existing antidumping duties as a result of
GATT, NAFTA, currency devaluation or any other reason, or an influx of
low-priced cement from countries not subject to antidumping orders, could
materially adversely affect the Company's results of operations.
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 primarily 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 1995 and $2.5 million in fiscal
1994.
RESTRUCTURED ACCOUNTS RECEIVABLE - Historically, 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 recent years, particularly in the
southern California market area where many of the Company's customers have
been adversely affected by the prolonged recession in the construction
industry in that region. Three such customers were indebted to the Company at
December 31, 1995 in the amount of $13.9 million. A substantial portion of the
$13.9 million in receivables is collateralized, but there can be no assurance
given as to the adequacy of this collateral.
In February 1995, one of the three customers filed for protection
under Chapter 11 of the United States Bankruptcy Code and the Company is
presently evaluating its options for collection of outstanding balances. Also
in February 1995, a second of these three customers restructured its debt
which resulted in the Company becoming a secured creditor. In August 1995, the
third customer of this group restructured its debt with the Company resulting
in an extension of the maturity date of the note until August 1997.
33
In the opinion of management, the Company is adequately reserved for
credit risks related to these and its other potentially uncollectible
receivables. However, the Company continues to assess its allowance for
doubtful accounts and may increase or decrease its periodic provision as
additional information regarding the collectibility of these and other
accounts becomes available.
CLAIMS FOR INDEMNIFICATION - Prior to the sale of the Company's then
oil and gas subsidiary, Pelto Oil Company (Pelto) in 1989 to Energy
Development Corporation (EDC), Pelto entered into certain gas settlement
agreements, including one with Tennessee Gas Pipeline Company (Tennessee Gas).
The Minerals Management Service (MMS) of the Department of the Interior has
reviewed the 1988 agreement Pelto entered into with Tennessee Gas to determine
whether a payment to Pelto thereunder is associated with Federal or Indian
leases and whether, in its view, any additional royalties may be due as a
result of that payment. By letter dated October 18, 1995, the MMS' Houston
Compliance Division advised EDC that it had determined preliminarily that a
lump sum payment made by Tennessee Gas to Pelto was, for several alleged
reasons, royalty bearing. The letter advised EDC of a preliminary
determination of underpayment of royalties in the amount of $1.35 million
attributable to these proceeds. In late October 1995, 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.
In 1994, the Company timely filed its notice of appeal and its
statement of reasons supporting its appeal regarding an earlier similar MMS
determination of royalty underpayment, in an amount unspecified, with respect
to a separate $5.9 million gas settlement payment from Transcontinental Gas
Pipe Line Corporation (Transco) to Pelto. EDC is also seeking indemnification
from the Company on the Transco matter.
The MMS' position is based in large part on views articulated in its
industry wide May 3, 1993 "Dear Payor" letter (Dear Payor letter). In the Dear
Payor letter, the MMS set forth its views on, among other things, whether
royalty was due on payments received by gas producers from pipelines in
resolution of take or pay claims and contract buy out or buy down claims. In
an unrelated case, a U.S. District Court Judge ruled in June 1995 in favor of
the Department of Interior's royalty claim on the lump sum payment received by
an unrelated gas producer for settling its contract claims with a gas
purchaser. While the U.S. District Court Judge's opinion has been appealed,
the opinion as it stands may undercut certain defenses of other gas producers
to MMS' royalty initiatives. The Company disagrees with MMS' preliminary
determinations, however, if the determinations as to the two payments to Pelto
are ultimately upheld, the Company could have liability for royalties on those
sums, plus late payment charges. Such expenditures would result in a charge to
discontinued operations.
DISCONTINUED ENVIRONMENTAL SERVICES SEGMENT - The Company has both
given environmental and other indemnifications to and received environmental
and other indemnifications from others for properties previously owned
although some courts have held that indemnification for such environmental
liabilities is unenforceable. No estimate of the extent of contamination,
remediation cost or recoverability of cost from prior owners, if any, is
presently available regarding these 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 fixed costs of the cement industry, profitability is sensitive to minor
variation in sales volumes and slight shifts in the balance of supply and
demand, which are driven by general macroeconomic variables. To the extent
construction activity will be
34
affected by fluctuations in mortgage rates, the availability of bank credit,
political and economic developments in Mexico and Canada and domestic
political decisions to commit government resources for public construction
projects such as roads, bridges, airports and similar infrastructure projects,
the cement and concrete products industry will be impacted. Because
transportation costs are high relative to the value of the product, cement
markets are generally regional.
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 2.8% through October 1995 (the latest data available), 2.7%
in 1994 and 2.6% in 1993. The impact of inflation and changing prices on the
Company's net sales and revenues and on income from continuing operations,
however, has been significant as a general firming of cement and concrete
prices throughout the industry during the three years ended December 31, 1995
has enabled the Company to increase its per unit profit margin in each
successive year.
IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS
In March 1995 the Financial Accounting Standards Board (FASB) issued
Statement No. 121 "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" (SFAS No. 121). SFAS No. 121, which is
effective for fiscal years beginning after December 15, 1995, requires that
certain long-lived assets and intangibles be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. The Company is not aware of any events or
changes in circumstances that will result in a material effect on its
financial statements upon the Company's 1996 adoption of SFAS No. 121.
In October 1995 the FASB issued Statement No. 123 "Accounting for
Stock-Based Compensation" (SFAS No. 123). SFAS No. 123, which is also effective
for fiscal years beginning after December 15, 1995, allows companies either to
continue to measure compensation cost based on the method prescribed by
Accounting Principles Board Opinion No. 25 (APB No. 25) or adopt a "fair value"
method of accounting for all employee stock-based compensation. The Company has
elected to continue utilizing the accounting for stock issued to employees
prescribed by APB No. 25 and, therefore, the required adoption of SFAS No. 123
will have no impact on the financial position or results of operations of the
Company.
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
Items 1, 3 and 7 of this document include forward looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended,
and Section 21E of the Securities Exchange Act of 1934, as amended. Although
the Company believes that the expectations reflected in such forward looking
statements are based upon reasonable assumptions, it can give no assurance
that its expectations will be achieved. Important factors that could cause
actual results to differ materially from the Company's expectations are
disclosed in conjunction with the forward looking statements included herein
(Cautionary Disclosures). Subsequent written and oral forward looking
statements attributable to the Company or persons acting on its behalf are
expressly qualified in their entirety by the Cautionary Disclosures.
35
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
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 winter
months and other periods of inclement weather. The following tables set forth
certain unaudited selected quarterly financial data for each of the last two
years:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
-----------------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Revenues........................... $ 119.1 $ 155.0 $ 170.4 $ 151.6
================= ================= ================= =================
Gross profit (1)................... $ 23.9 $ 38.4 $ 46.3 $ 43.6
================= ================= ================= =================
Earnings from operations before
interest and income taxes........ $ 10.3 $ 24.7 $ 31.2 $ 31.3
================= ================= ================= =================
Net earnings....................... $ 2.5 $ 12.0 $ 16.5 $ 16.5
================= ================= ================= =================
Earnings per share:
Primary.......................... $ 0.01 $ 0.54 $ 0.80 $ 0.80
================= ================= ================= =================
Fully diluted.................... $ 0.01 $ 0.51 $ 0.70 $ 0.70
================= ================= ================= =================
</TABLE>
- ---------------
(1) Gross profit is revenues less operating expense and depreciation expense
relating to cost of sales. Depreciation expense relating to cost of sales
was $8.8 million, $8.6 million, $9.1 million and $9.1 million in each of
the quarterly periods of 1995, respectively.
For interim reporting purposes, the Company previously charged cost
of goods sold for its cement manufacturing operations on the basis of
predetermined standard cost estimates established by management. The Company
deferred as a charge or credit to inventory any difference between actual
manufacturing costs and the standard. At year-end, any difference remaining
between the result at standard cost and actual cost was charged or credited to
cost of goods sold. In the fourth quarter of 1995, the Company changed the
method of accounting for its Cement segment cost of goods sold in interim
periods to reflect actual costs on a quarterly basis rather than a standard
cost. Management believes that the change, which was recorded as if it
occurred at the beginning of fiscal year 1995, is preferable, as the new
accounting method is consistent with the predominant method used by the
Company's publicly-traded industry peers. Because any difference remaining
between the results at standard cost and actual cost was always charged or
credited to cost of goods sold at the end of each year, there is no cumulative
effect of this change in accounting method. In 1995, however, as a result of
the fourth quarter decision to change accounting methods, quarterly results as
presented above differ from amounts previously reported on the Form 10-Q for
each of the first three quarters of the year. The effect of the change on the
fourth quarter of 1995 was to increase net earnings by $3.2 million, and
primary and fully diluted earnings per share by $.18 and $.14, respectively. A
reconciliation of earnings from operations before interest and taxes, net
income and earnings per share to amounts previously reported for the first
three quarters follows:
36
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
------------------------------------------------------------------------
CUMULATIVE
NINE MONTHS
FIRST SECOND THIRD SEPTEMBER 30,
QUARTER QUARTER QUARTER 1995
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Contributions to earnings (loss) from operations
before interest and taxes
Cement segment as previously reported............ $ 21.6 $ 30.2 $ 32.7 $ 84.5
Adjustment for standard cost..................... (5.2) (2.5) 3.0 (4.7)
--------------- --------------- --------------- ---------------
Cement segment as presented above................ 16.4 27.7 35.7 79.8
Other segments as previously reported............ (6.1) (3.0) (4.5) (13.6)
--------------- --------------- --------------- ---------------
Earnings from operations as presented above.......... $ 10.3 $ 24.7 $ 31.2 $ 66.2
=============== =============== =============== ===============
Net earnings as previously reported.................. $ 6.1 $ 13.6 $ 14.5 $ 34.2
Adjustment for standard cost..................... (3.6) (1.6) 2.0 (3.2)
--------------- --------------- --------------- ---------------
Net earnings as presented above...................... $ 2.5 $ 12.0 $ 16.5 $ 31.0
=============== =============== =============== ===============
Earnings per share:
Primary
As previously reported........................... $ 0.21 $ 0.63 $ 0.68 $ 1.53
Adjustment for standard cost..................... (0.20) (0.09) 0.12 (0.18)
--------------- --------------- --------------- ---------------
As presented above............................... $ 0.01 $ 0.54 $ 0.80 $ 1.35
=============== =============== =============== ==============
Fully diluted
As previously reported........................... $ 0.21 $ 0.58 $ 0.62 $ 1.46
Adjustment for standard cost..................... (0.20) (0.07) 0.08 (0.15)
--------------- --------------- --------------- ---------------
As presented above............................... $ 0.01 $ 0.51 $ 0.70 $ 1.31
=============== =============== =============== ==============
</TABLE>
37
<PAGE>
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Revenues (1)....................................... $ 111.4 $ 149.4 $ 158.2 $ 141.3
=============== =============== =============== ===============
Gross profit (2)................................... $ 22.6 $ 38.1 $ 33.4 $ 34.7
=============== =============== =============== ===============
Earnings from continuing operations before
interest and income taxes (1)..................... $ 6.9 $ 25.3 $ 18.6 $ 20.9
=============== =============== =============== ===============
Earnings (loss) from continuing operations (1)..... $ (1.3) $ 12.1 $ 8.6 $ 10.7
Loss from discontinued operations,
net of income taxes............................... (0.9) (1.1) (2.1) (1.8)
Loss on disposition of discontinued operations,
net of income taxes............................... - - - (21.6)
--------------- --------------- --------------- ---------------
Net earnings (loss)....................... $ (2.2) $ 11.0 $ 6.5 $ (12.7)
=============== =============== =============== ===============
Earnings per share:
Primary -
Earnings (loss) from continuing operations........ $ (0.20) $ 0.54 $ 0.35 $ 0.48
Loss from discontinued operations,
net of income taxes............................ (0.05) (0.06) (0.12) (0.10)
Loss on disposition of discontinued operations,
net of income taxes............................ - - - (1.25)
--------------- --------------- --------------- ---------------
Net earnings (loss)....................... $ (0.25) $ 0.48 $ 0.23 $ (0.87)
=============== =============== =============== ===============
Fully diluted -
Earnings (loss) from continuing operations........ $ (0.20) $ 0.51 $ 0.35 $ 0.48
Loss from discontinued operations,
net of income taxes............................ (0.05) (0.05) (0.12) (0.10)
Loss on disposition of discontinued operations,
net of income taxes............................ - - - (1.25)
--------------- --------------- --------------- ---------------
Net earnings (loss)....................... $ (0.25) $ 0.46 $ 0.23 $ (0.87)
=============== =============== =============== ===============
</TABLE>
Proforma quarterly amounts for the year 1994, assuming the new
interim accounting method for cement manufacturing operations cost of goods sold
was applied retroactively to January 1, 1994, are presented below.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
------------------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Earnings from continuing operations before
interest and income taxes (1)............... $ 1.6 $ 22.8 $ 21.9 $ 25.4
=============== =============== =============== ===============
Earnings (loss) from continuing operations... $ (4.9) $ 10.5 $ 10.6 $ 13.9
=============== =============== =============== ===============
Net earnings (loss).......................... $ (5.8) $ 9.4 $ 8.5 $ (9.5)
=============== =============== =============== ===============
Earnings per share:
Primary -
Earnings (loss) from continuing operations.. $ (0.41) $ 0.46 $ 0.46 $ 0.66
=============== =============== =============== ===============
Net earnings (loss)......................... $ (0.46) $ 0.40 $ 0.34 $ (0.69)
=============== =============== =============== ===============
Fully diluted -
Earnings (loss) from continuing operations.. $ (0.41) $ 0.43 $ 0.46 $ 0.66
=============== =============== =============== ===============
Net earnings (loss)......................... $ (0.46) $ 0.38 $ 0.34 $ (0.69)
=============== =============== =============== ===============
</TABLE>
- ---------------
(1) Excludes revenues and earnings of the discontinued environmental services
segment.
(2) Gross profit is revenues less operating expense and depreciation expense
relating to cost of sales. Depreciation expense relating to cost of sales
was $8.3 million, $8.1 million, $8.0 million and $8.4 million in each of
the quarterly periods of 1994, respectively.
38
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS
PAGE
Statement of Consolidated Earnings for the years ended
December 31, 1995, 1994 and 1993............................ 40
Consolidated Balance Sheet as of December 31, 1995 and 1994.......... 41
Statement of Consolidated Cash Flows for the years ended
December 31, 1995, 1994 and 1993............................ 42
Statement of Consolidated Shareholders' Equity for the years ended
December 31, 1995, 1994 and 1993............................ 43
Notes to Consolidated Financial Statements........................... 44
Independent Auditors' Report......................................... 73
39
<PAGE>
SOUTHDOWN, INC. AND SUBSIDIARY COMPANIES
STATEMENT OF CONSOLIDATED EARNINGS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
----------------------------------------------
1995 1994 1993
---------- ---------- ----------
<S> <C> <C> <C>
Revenues ............................................................... $ 596.1 $ 560.3 $ 507.7
---------- ---------- ----------
Costs and expenses:
Operating .......................................................... 408.3 399.3 364.8
Depreciation, depletion and amortization .............................. 40.3 39.4 38.5
Selling and marketing ................................................. 15.0 13.6 14.0
General and administrative ............................................ 34.6 37.8 40.1
Other expense (income), net ........................................... (5.4) (5.6) 2.9
---------- ---------- ----------
492.8 484.5 460.3
Minority interest in earnings of consolidated
joint venture (Note 14) ............................................... 5.8 4.1 3.1
---------- ---------- ----------
498.6 488.6 463.4
---------- ---------- ----------
Operating earnings ..................................................... 97.5 71.7 44.3
Interest, net of amounts capitalized ................................... (26.7) (27.7) (39.3)
---------- ---------- ----------
Earnings from continuing operations before income
taxes, extraordinary charge and cumulative effect of a
change in accounting principle ........................................ 70.8 44.0 5.0
Federal and state income tax expense (Note 13) ......................... (23.3) (13.9) (1.4)
---------- ---------- ----------
Earnings from continuing operations before
extraordinary charge and cumulative effect of a change
in accounting principle ............................................... 47.5 30.1 3.6
Loss from discontinued operations, net of income
taxes (Note 3) ........................................................ -- (5.9) (3.6)
Loss on disposition of discontinued operations, net of
income taxes (Note 3) ................................................. -- (21.6) --
Extraordinary charge, net of income taxes (Note 12) .................... -- -- (1.0)
Cumulative effect of a change in accounting
principle, net of income taxes (Note 17) .............................. -- -- (48.5)
---------- ---------- ----------
Net earnings (loss) .................................................... $ 47.5 $ 2.6 $ (49.5)
Dividends on preferred stock ........................................... (9.8) (9.4) (5.0)
---------- ---------- ----------
Earnings (loss) attributable to common stock ........................... $ 37.7 $ (6.8) $ (54.5)
========== ========== ==========
Earnings (loss) per share (Notes 19, 20 and Exhibit 11):
Primary
Earnings (loss) from continuing operations ............................ $ 2.15 $ 1.20 $ (0.09)
Loss from discontinued operations, net of
income taxes (Note 3) .............................................. -- (0.34) (0.21)
Loss on disposition of discontinued operations, net of
income taxes (Note 3) .............................................. -- (1.26) --
Extraordinary charge, net of income taxes (Note 12) ................... -- -- (0.06)
Cumulative effect of a change in accounting
principle, net of income taxes (Note 17) ........................... -- -- (2.86)
---------- ---------- ----------
Net earnings (loss) ............................................. $ 2.15 $ (0.40) $ (3.22)
========== ========== ==========
Fully diluted
Earnings (loss) from continuing operations ............................ $ 2.02 $ 1.20 $ (0.09)
Loss from discontinued operations, net of
income taxes (Note 3) .............................................. -- (0.34) (0.21)
Loss on disposition of discontinued operations, net of
income taxes (Note 3) .............................................. -- (1.26) --
Extraordinary charge, net of income taxes (Note 12) ................... -- -- (0.06)
Cumulative effect of a change in accounting
principle, net of income taxes (Note 17) ........................... -- -- (2.86)
---------- ---------- ----------
Net earnings (loss) ............................................. $ 2.02 $ (0.40) $ (3.22)
========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements
40
<PAGE>
SOUTHDOWN, INC. AND SUBSIDIARY COMPANIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
(IN MILLIONS)
----------------------------
1995 1994
--------- ---------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (Note 5) ........................................ $ 7.7 $ 7.4
Accounts and notes receivable, net (Note 6) ............................... 68.9 73.0
Inventories (Note 7) ...................................................... 69.6 54.0
Deferred income taxes (Note 13) ........................................... 11.7 26.5
Assets held for sale (Note 3) ............................................. -- 13.2
Prepaid expenses and other ................................................ 3.3 3.5
--------- ---------
Total current assets ................................................... 161.2 177.6
Property, plant and equipment, net (Note 8) .................................. 565.4 560.2
Goodwill ..................................................................... 79.3 78.6
Other long-term assets (Notes 9 and 16) ...................................... 69.6 64.6
--------- ---------
$ 875.5 $ 881.0
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt (Notes 11 and 12) .................... $ 0.7 $ 0.3
Accounts payable and accrued liabilities (Note 10) ........................ 78.7 97.8
--------- ---------
Total current liabilities .............................................. 79.4 98.1
Long-term debt (Notes 11 and 12) ............................................. 174.5 185.8
Deferred income taxes (Note 13) .............................................. 116.9 122.7
Minority interest in consolidated joint venture (Note 14) .................... 30.9 28.9
Long-term portion of postretirement benefit obligation (Note 17) ............. 76.8 82.0
Other long-term liabilities and deferred credits (Note 15) ................... 22.0 26.4
--------- ---------
500.5 543.9
--------- ---------
Commitments and contingent liabilities (Notes 15, 16, 17 and 18)
Shareholders' equity (Notes 19 and 20):
Preferred stock, $.05 par value, 10,000,000 shares authorized:
$.70 Cumulative Convertible Series A, 1,994,000 shares
issued and outstanding ................................................ 19.9 19.9
$3.75 Convertible Exchangeable Series B, 914,000
and 917,000 shares issued and outstanding ............................. 45.7 45.8
$2.875 Cumulative Convertible Series D, 1,725,000 shares
issued and outstanding ................................................ 86.3 86.3
Common stock, $1.25 par value, 40,000,000 shares authorized,
17,286,000 and 17,266,000 shares issued and outstanding ................ 21.6 21.6
Capital in excess of par value ............................................ 127.0 126.6
Reinvested earnings ....................................................... 74.5 36.9
--------- ---------
375.0 337.1
--------- ---------
$ 875.5 $ 881.0
========= =========
</TABLE>
See Notes to Consolidated Financial Statements
41
<PAGE>
SOUTHDOWN, INC. AND SUBSIDIARY COMPANIES
STATEMENT OF CONSOLIDATED CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
(IN MILLIONS)
-------------------------------------------
1995 1994 1993
-------- -------- -------
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Earnings from continuing operations .................................. $ 47.5 $ 30.1 $ 3.6
Adjustments to reconcile earnings from continuing
operations to net cash provided by (used in)
operating activities:
Depreciation, depletion and amortization ........................ 40.3 39.4 38.5
Deferred income tax expense (benefit) ........................... 15.5 6.8 (0.6)
Amortization of debt issuance costs ............................. 2.6 3.4 2.8
Minority interest in earnings of consolidated
joint venture ................................................ 5.8 4.1 3.1
Gain on sale of assets .......................................... (1.5) (1.2) --
Changes in operating assets and liabilities
Decrease in accounts and notes receivable .................... 9.8 7.9 8.0
(Increase) decrease in inventories ........................... (15.5) 0.1 3.7
(Increase) decrease in prepaid expenses and other ............ 0.4 -- (0.4)
(Increase) in other long-term assets ......................... (1.7) (2.0) (1.6)
Increase (decrease) in accounts payable and
accrued liabilities ........................................ (24.7) 3.5 (3.8)
Increase (decrease) in other long-term liabilities
and deferred credits ....................................... (10.4) 0.5 (1.7)
Net cash provided by (used in) discontinued operations ............... (2.7) (5.8) 1.5
-------- -------- -------
Net cash provided by operating activities ............................. 65.4 86.8 53.1
-------- -------- -------
INVESTING ACTIVITIES:
Additions to property, plant and equipment ........................... (32.9) (28.6) (13.4)
Acquisitions, net of cash acquired ................................... (12.6) (16.1) (2.9)
Proceeds from asset sales ............................................ 7.0 3.7 0.7
Other ................................................................ (0.3) (2.4) 0.7
Net cash provided by (used in) discontinued operations ............... 1.2 (7.1) (4.1)
-------- -------- -------
Net cash used in investing activities ................................. (37.6) (50.5) (19.0)
-------- -------- -------
FINANCING ACTIVITIES:
Additions to long-term debt (Note 12) ................................ -- 3.6 --
Reductions in long-term debt (Note 12) ............................... (12.7) (111.6) (25.4)
Proceeds from sale of preferred stock ................................ -- 86.3 --
Dividends (Note 19) .................................................. (9.8) (6.5) (5.0)
Distributions to minority interest ................................... (3.8) (3.8) (4.3)
Securities issuance costs ............................................ (1.2) (4.3) (3.5)
Premium on early extinguishment of debt (Note 12) .................... -- -- (1.0)
-------- -------- -------
Net cash used in financing activities ................................. (27.5) (36.3) (39.2)
-------- -------- -------
Net increase (decrease) in cash and cash equivalents .................. 0.3 -- (5.1)
Cash and cash equivalents at the beginning of the year ................ 7.4 7.4 12.5
-------- -------- -------
Cash and cash equivalents at the end of the year ...................... $ 7.7 $ 7.4 $ 7.4
======== ======== =======
</TABLE>
See Notes to Consolidated Financial Statements
42
<PAGE>
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, 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
Net earnings.................................. - - - - - 2.6
Issuance of Series D Preferred Stock.......... 1.7 86.3 - - - -
Dividends on preferred stock.................. - - - - - (9.4)
Issuance expenses of capital stock............ - - - - (4.0) -
Exercise of stock options..................... - - 0.2 0.2 (0.2) (1.6)
Tax benefit from exercise of stock options.... - - - - 1.8 -
Other......................................... (0.1) (2.2) 0.1 0.1 1.4 (0.1)
--------- --------- --------- --------- --------- -------
Balance at December 31, 1994................... 4.6 $ 152.0 17.3 $ 21.6 $ 126.6 $ 36.9
Net earnings.................................. - - - - - 47.5
Dividends on preferred stock.................. - - - - - (9.8)
Exercise of stock options..................... - - - - 0.2 (0.1)
Tax benefit from exercise of stock options.... - - - - 0.1 -
Other......................................... - (0.1) - - 0.1 -
--------- --------- --------- --------- --------- -------
Balance at December 31, 1995................... 4.6 $ 151.9 17.3 $ 21.6 $ 127.0 $ 74.5
========= ========= ========= ========= ========= =======
</TABLE>
See Notes to Consolidated Financial Statements
43
<PAGE>
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 operates eight
manufacturing facilities and seven quarrying sites and utilizes a network of 19
cement storage and distribution terminals for the production, importation and
distribution of portland and masonry cements, primarily in the Ohio valley and
the southwestern and southeastern regions of the United States. The Company is
also vertically integrated in the regional vicinity of its two largest cement
plants, with ready-mixed concrete operations serving markets in Florida and
southern California. For information regarding the relative importance of the
Company's business segments see Note 4 of Notes to Consolidated Financial
Statements. Beginning in mid-1990, through the fourth quarter of 1994, the
Company was also engaged in the environmental services business, which involved
the collection and processing of hazardous waste into hazardous waste derived
fuel (HWDF) that, together with tires and other waste materials, were utilized
in certain of the Company's cement kilns as supplements to conventional fuels.
The environmental services business was discontinued in the fourth quarter of
1994. (See also Note 3 of Notes to Consolidated Financial Statements.)
USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
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 $12.1 million in 1995,
$300,000 in 1994 and $2.8 million in 1993. In addition, the Company paid a
$7.6 million tax assessment in January 1995 as a result of an Internal Revenue
Service audit of prior year federal income tax returns. During 1993 the
Company received a $15.7 million federal income tax refund from the carryback
of tax losses. Interest paid, net of amounts capitalized was $24.3 million,
$26.6 million and $36.4 million in 1995, 1994 and 1993, respectively. Interest
capitalized was $1.5 million, $2.0 million and $700,000 in 1995, 1994 and
1993, respectively. Noncash investing activities in 1995 included (i) the
assumption of $4.1 million in liabilities as partial consideration for the
acquisition of six ready-mixed concrete batch plants and (ii) the receipt of
$8.4 million in notes receivable as partial consideration in connection with
the sale of the Company's remaining hazardous waste processing facilities.
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 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 batch plants and one
aggregate quarry. In conjunction with the $48.5 million noncash charge in 1993
for the cumulative effect of a change in accounting
44
principle, the Company also recorded a charge to deferred income taxes of
$25.9 million and a credit to postretirement benefit obligations of $74.4
million.
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. (See also
Notes 2 and 7 of Notes to Consolidated Financial Statements.)
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. On average, buildings and
improvements are depreciated based on a 50 year life; machinery and equipment
are depreciated over estimated useful lives ranging from ten to 35 years;
office furniture, fixtures and equipment over lives ranging from five to ten
years and mobile equipment over lives ranging from four to 25 years. Depletion
of 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. (See also Note 8 of Notes
to Consolidated Financial Statements.)
ENVIRONMENTAL EXPENDITURES - 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.
(See also Note 18 of Notes to Consolidated Financial Statements.)
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 $2.7 million, $2.5
million and $2.4 million in 1995, 1994 and 1993, respectively. Accumulated
amortization of goodwill was $16.5 million and $13.8 million as of December
31, 1995 and 1994, respectively. The Company utilizes estimates of
undiscounted future cash flows of the acquired operations to evaluate any
possible impairment of the related goodwill.
INCOME RECOGNITION ON IMPAIRED LOANS - Interest income is recognized
on impaired loans using a combination of the cost recovery and the cash basis
methods. The Company recognized no material amounts of interest income on
impaired loans during the years ended December 31, 1995 and 1994 and
recognized approximately $700,000 of such interest income in 1993.
45
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 subject to an impairment valuation based on the likelihood of
realization. There was no cumulative effect on the Company's consolidated
financial statements resulting from the adoption of SFAS No. 109. (See also Note
13 of Notes to Consolidated Financial Statements.)
NOTE 2 - CHANGE IN INTERIM PERIOD ACCOUNTING METHOD:
For interim reporting purposes, the Company previously charged cost
of goods sold for its cement manufacturing operations on the basis of
predetermined standard cost estimates established by management. The Company
deferred as a charge or credit to inventory any difference between actual
manufacturing costs and the standard. At year-end, any difference remaining
between the result at standard cost and actual cost was charged or credited to
cost of goods sold. In the fourth quarter of 1995, the Company changed the
method of accounting for its Cement segment cost of goods sold in interim
periods to reflect actual costs on a quarterly basis rather than a standard
cost. Management believes that the change, which has been recorded as if it
occurred at the beginning of fiscal year 1995, is preferable as the new method
is consistent with the predominant method used by the Company's
publicly-traded industry peers. Because any difference remaining between the
results at standard cost and actual cost was always charged or credited to
cost of goods sold at the end of each year, there is no cumulative effect of
this change in accounting method. In 1995, as a result of the fourth quarter
change in accounting method, quarterly results differ from amounts previously
reported on the Forms 10-Q for each of the first three quarters of the year. A
reconciliation of earnings from operations before interest and taxes, net
income and earnings per share to amounts previously reported is presented
under the caption "Selected Quarterly Financial Data".
NOTE 3 - DISCONTINUED ENVIRONMENTAL SERVICES SEGMENT:
During the fourth quarter of 1994, the Company adopted a formal plan
to exit the environmental services business and recorded a $21.6 million
charge to earnings to reflect (i) the difference between the book value of the
environmental services assets and the estimated proceeds from the disposal of
those assets and (ii) the estimated losses to be incurred prior to the sale of
the assets and other direct costs of exiting the business. During April 1995,
the Company sold all the outstanding shares of stock of its remaining
hazardous waste processing facilities for a combination of $11.8 million in
cash and notes plus certain working capital items. The Company remains
contingently liable for certain environmental remediation issues, known and
unknown, under the indemnification provisions of the sales agreements. (See
also Notes 15 and 18 of Notes to Consolidated Financial Statements.)
46
NOTE 4 - 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)
-------------------------------------------------
1995 1994 1993
------------- -------------- --------------
<S> <C> <C> <C>
Contributions to revenues:
Cement..................................... $ 419.1 $ 397.5 $ 369.5
Concrete Products.......................... 219.2 208.1 176.3
Intersegment sales......................... (42.2) (45.3) (38.1)
------------- -------------- --------------
$ 596.1 $ 560.3 $ 507.7
============= ============== ==============
Contributions to operating earnings (loss):
Cement..................................... $ 112.7 $ 91.2 $ 81.9
Concrete Products.......................... 7.9 9.3 (1.6)
Corporate overhead
General and administrative................ (21.6) (25.1) (28.9)
Depreciation, depletion and amortization.. (4.2) (5.0) (4.3)
Miscellaneous income (losses)............. 2.7 1.3 (2.8)
------------- -------------- --------------
$ 97.5 $ 71.7 $ 44.3
============= ============== ==============
Identifiable assets, end of year
Cement..................................... $ 606.7 $ 596.1 $ 591.6
Concrete Products.......................... 145.4 130.3 128.0
Discontinued Environmental Services........ - 19.1 39.6
Other...................................... 123.4 135.5 147.8
------------- -------------- --------------
$ 875.5 $ 881.0 $ 907.0
============= ============== ==============
Depreciation, depletion and amortization
Cement..................................... $ 27.1 $ 25.8 $ 25.9
Concrete Products.......................... 9.0 8.7 8.3
Other...................................... 6.8 8.3 7.1
------------- -------------- --------------
$ 42.9 $ 42.8 $ 41.3
============= ============== ==============
Capital expenditures:
Cement..................................... $ 25.1 $ 16.8 $ 8.5
Concrete Products.......................... 6.7 9.4 3.5
Other...................................... 1.1 2.6 1.4
------------- -------------- --------------
$ 32.9 $ 28.8 $ 13.4
============= ============== ==============
</TABLE>
The Cement segment includes the operations of seven quarrying sites,
eight manufacturing facilities and a network of 19 cement storage and
distribution terminals for the production, importation 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. Corporate overhead is
generally not allocated to the operating segments. 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
Florida concrete products operations and the Company's southern California
cement manufacturing plant and the related California concrete products
operations. Intersegment sales are accounted for at prices which approximate
market prices and are eliminated for purposes of preparing consolidated
financial statements. Capital expenditures
47
shown above exclude capital acquisitions of $12.6 million, $16.1 million and
$2.9 million, respectively, for the years ended December 31, 1995, 1994 and
1993.
NOTE 5 - CASH AND CASH EQUIVALENTS:
DECEMBER 31,
(IN MILLIONS)
---------------------------
1995 1994
------------ -----------
Cash on hand and demand deposits.............. $ 5.7 $ 4.5
Commercial paper, certificates of deposit
and repurchase agreements - at cost, which
approximates market value................... 2.0 2.9
------------ -----------
$ 7.7 $ 7.4
============ ===========
There is no requirement for the Company to maintain compensating
balances under any of the agreements with the Company's lending banks.
NOTE 6 - ACCOUNTS AND NOTES RECEIVABLE:
DECEMBER 31,
(IN MILLIONS)
----------------------------
1995 1994
------------ ------------
Trade accounts and notes receivable.. $ 72.7 $ 76.9
Allowance for doubtful accounts...... (8.8) (7.2)
------------ ------------
63.9 69.7
Other receivables.................... 5.0 3.3
------------ -----------
$ 68.9 $ 73.0
============ ===========
SIGNIFICANT GROUP CONCENTRATIONS OF CREDIT RISK - A 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, other cement manufacturers, construction
contractors and, particularly from the Texas plant, oil well cementing
companies. During the years ended December 31, 1995, 1994 and 1993
approximately 57%, 47% and 52%, respectively, of the Texas plant's cement
sales volume consisted of oil well cement sales and the balance represented
sales to local construction markets. Approximately 14%, 15% and 15%,
respectively, of the cement sold by the Company's California plant in the
years ended December 31, 1995, 1994 and 1993 was sold to the Company's
ready-mixed concrete operations in California and approximately 37%, 41% and
37%, respectively, of the cement sold by the Florida plant in the years ended
December 31, 1995, 1994 and 1993 was sold to the Company's Florida concrete
products operations. The Company is a major producer of ready-mixed concrete
in southern California, and a major producer and supplier of such products
throughout Florida. There were no sales to any single third-party customer
which aggregated in excess of 10% of consolidated revenues for 1995, 1994 or
1993.
48
An analysis of the activity in the allowance for doubtful accounts
follows:
YEARS ENDED DECEMBER 31,
(IN MILLIONS)
------------------------------------------
1995 1994 1993
----------- ------------ ------------
Beginning balance............. $ 7.2 $ 7.0 $ 6.2
Additions charged to expense.. 3.6 4.8 4.3
Accounts written off.......... (2.2) (5.3) (3.6)
Recoveries.................... 0.2 0.7 0.1
----------- ------------ ------------
Ending balance................ $ 8.8 $ 7.2 $ 7.0
=========== ============ ============
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 and 1994,
particularly in the southern California market area where many of the
Company's customers have been adversely affected by the prolonged recession in
the construction industry in that region. Three such customers were indebted
to the Company at December 31, 1995 in the amount of $13.9 million. At
December 31, 1995, the related allowance for doubtful accounts attributable to
the receivables of these three customers aggregated $5.8 million.
In February 1995, one of the three customers filed for protection
under Chapter 11 of the United States Bankruptcy Code and the Company is
presently evaluating its options for collection of outstanding balances. Also
in February 1995, a second of these three customers restructured its debt
which resulted in the Company becoming a secured creditor. In August 1995, the
third customer of this group restructured its debt with the Company resulting
in an extension of the maturity date of the note until August 1997.
In the opinion of management, the Company is adequately reserved for
credit risks related to these and its other potentially uncollectible
receivables. However, the Company continues to assess its allowance for
doubtful accounts and may increase or decrease its periodic provision as
additional information regarding the collectibility of these and other
accounts becomes available.
NOTE 7 - INVENTORIES:
DECEMBER 31,
(IN MILLIONS)
---------------------------
1995 1994
------------ -----------
Finished goods............... $ 18.6 $ 15.1
Work in process.............. 14.6 6.5
Raw materials................ 6.5 4.6
Parts and supplies........... 29.9 27.8
------------ -----------
$ 69.6 $ 54.0
============ ===========
Inventories valued on the LIFO method were $30.4 million at December
31, 1995 and $19.2 million at December 31, 1994 compared with current costs of
$39.1 million and $27.5 million, respectively.
49
NOTE 8 - PROPERTY, PLANT AND EQUIPMENT:
DECEMBER 31,
(IN MILLIONS)
----------------------------
1995 1994
------------ ------------
Land (at cost):
Cement................................. $ 32.4 $ 31.8
Concrete Products...................... 24.8 22.1
Corporate and other.................... 2.6 0.4
------------ -----------
59.8 54.3
------------ -----------
Plant and Equipment (at cost):
Cement................................. 713.7 697.1
Concrete Products...................... 106.2 97.8
Corporate and other.................... 15.7 17.0
------------ -----------
835.6 811.9
------------ -----------
Less accumulated depreciation, depletion
and amortization (330.0) (306.0)
------------ ------------
$ 565.4 $ 560.2
============ ===========
NOTE 9 - OTHER LONG-TERM ASSETS:
DECEMBER 31,
(IN MILLIONS)
---------------------------
1995 1994
------------ -----------
Prepaid pension costs (Note 16)..................... $ 25.1 $ 23.4
Long-term trade and other receivables............... 21.0 15.3
Unamortized debt issuance costs (1)................. 6.4 7.5
Land held for sale (2).............................. 7.2 7.3
Net present value of purchased supply contracts (3). 4.9 5.4
Other............................................... 5.0 5.7
------------ -----------
$ 69.6 $ 64.6
============ ===========
- -------------
(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 1999 and 2004, respectively, were
acquired in conjunction with the purchase of Moore McCormack Resources,
Inc. (Moore McCormack) in 1988. The supply contracts were recorded at
their net present values at the date of acquisition and are being
amortized over the respective lives of the contracts.
50
NOTE 10 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES:
DECEMBER 31,
(IN MILLIONS)
----------------
1995 1994
------ ------
Trade accounts payable...................................... $24.3 $ 28.4
Accrued compensation and benefits........................... 15.2 16.4
Accrued liabilities, trade.................................. 12.9 14.4
Accrued interest payable.................................... 4.2 4.4
Accrued taxes, other........................................ 3.5 3.8
Accrued environmental remediation costs..................... 3.4 4.2
Current portion of postretirement benefit obligation........ 3.0 3.0
Accrued dividends on preferred stock........................ 3.0 3.0
Current portion of liabilities for discontinued operations.. 1.0 2.2
Accrued loss contingencies on discontinued environmental
services segment.......................................... 1.1 6.3
Income tax liability........................................ - 4.7
Other accrued liabilities................................... 7.1 7.0
------ ------
$78.7 $ 97.8
====== ======
NOTE 11 - DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS:
Except for long-term debt, the carrying amounts of the Company's
assets and liabilities which are considered to be financial instruments
approximate their value. The estimated fair value amounts for the Company's
long-term debt as of December 31, 1995 and 1994 have been determined by the
Company using appropriate valuation methodologies and information available to
management at that time. Considerable judgment is required in developing these
estimates 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. The fair value of the Company's long-term debt was
estimated based on the quoted market prices for similar issues or on the
current rates available to the Company for debt with similar terms and
remaining maturities.
DECEMBER 31,
(IN MILLIONS)
---------------------------------------------------------
1995 1994
-------------------------- --------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
---------- ----------- ---------- -----------
Long-term debt... $ 175.2 $ 190.5 $ 186.1 $ 200.5
========== =========== ========== ===========
The Company held no derivative financial instruments as of December
31, 1995 or 1994.
51
NOTE 12 - LONG-TERM DEBT:
DECEMBER 31,
(IN MILLIONS)
-------------------------
1995 1994
------------ ----------
Senior debt:
Revolving credit facility......................... $ 11.3 $ 22.6
Industrial development and pollution control bonds 39.3 40.0
Other............................................. 2.4 1.6
Subordinated debt:
14% senior subordinated notes..................... 122.2 121.9
------------ ----------
175.2 186.1
Less current maturities............................. (0.7) (0.3)
------------ ----------
$ 174.5 $ 185.8
============ ==========
REVOLVING CREDIT FACILITY - On November 3, 1995, the Company entered
into a new restated revolving credit facility (Revolving Credit Facility) 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. The Company's
ownership interest in five cement manufacturing facilities and the Company's
joint venture interest in Kosmos Cement Company, a Kentucky general
partnership, are pledged to secure the revolving credit facility.
The Revolving Credit Facility remains at $200 million, the same size
as the Company's previous revolving credit facility, but (i) extends the
maturity to October 30, 2000, (ii) provides the Company with enhanced
flexibility under certain restrictive covenants and (iii) allows the Company
to redeem or repurchase subordinated debt and capital stock within certain
limits. The Revolving Credit Facility also permits the issuance of standby
letters of credit up to a maximum of $95 million in lieu of borrowings. The
Revolving Credit Facility contains various negative and affirmative covenants
and cross default provisions and customary conditions to borrowing. Borrowings
under the Revolving Credit Facility bear interest at margins either at or
above a prime rate or above LIBOR as selected by the Company from
time-to-time. At December 31, 1995, the interest rate under the Revolving
Credit Facility was approximately 7.2%. As of December 31, 1995, there were
$11.3 million of borrowings and $60.5 million in letters of credit outstanding
under the Revolving Credit Facility and $17.4 million reserved under a
Keepwell Agreement leaving $110.8 million of unused capacity.
Prior to February 1996, the Company's borrowing capacity under its
Revolving Credit Facility was restricted to the extent of $17.4 million for
potential funding of obligations under a Keepwell Agreement between the
Company and the U.S. Maritime Administration (MARAD) related to certain
shipping operations owned previously by Moore McCormack. Certain of the
Company's contingent obligations to MARAD and the restriction on the Company's
borrowing capacity under the Revolving Credit Facility were terminated
pursuant to February 13, 1996 agreements by and among the Company, MARAD and
the successor company to the shipping operations.
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
52
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 Revolving Credit Facility or by liens on the pollution
control equipment.
12% SENIOR SUBORDINATED NOTES - On January 5, 1994 the Company
borrowed $47 million under its revolving credit facility to redeem $45 million
principal amount of 12% Notes due in 1997 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 redeemed the remaining $45 million outstanding principal amount of 12%
Notes at par on May 1, 1994 with borrowings under the Company's 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. 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 (14% Notes) pursuant to a Registration Rights Agreement entered into
at the time of the private placement. The 14% 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 14% Notes and such Indenture are
substantially identical to those of the Notes and the original indenture. The
14% Notes pay interest semiannually, mature on October 15, 2001 and are
noncallable until October 15, 1996, after which the 14% 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 14% 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 also Note 19 of
Notes to Consolidated Financial Statements.) The Warrants expire on October
31, 1996.
On February 14, 1996, the Company commenced a tender offer (Offer) to
purchase its 14% Notes for cash. The Offer is conditioned on, among other
things, the availability to the Company of funds from a private placement of
new subordinated notes and, if necessary, borrowings under the Revolving
Credit Facility sufficient to pay the aggregate purchase price and all related
costs and expenses of the Offer on terms and conditions satisfactory to the
Company, in its sole discretion, and other customary conditions. The
consideration offered for the 14% Notes is the greater of (i) 109% of the
aggregate principal amount, or (ii) a price calculated from a yield to October
15, 1996 (the
53
earliest date on which the 14% Notes can be redeemed) equal to the sum of (a)
the yield on a specified treasury note (Reference Security) based on the bid
price for the Reference Security on February 28, 1996 plus (b) 50 basis
points, plus, in either case (i) or (ii), accrued and unpaid interest up to
the payment date for the Offer. The Offer will expire at midnight, New York
City time, on March 13, 1996, unless extended by the Company. Any 14% Notes
not tendered to and purchased by the Company pursuant to the Offer will remain
outstanding and would rank PARI PASSU with the new notes. The Company may,
after the Offer, acquire or otherwise retire any remaining 14% Notes. While
the Company currently anticipates that any 14% Notes remaining outstanding
after the Offer will be redeemed or otherwise retired, there can be no
assurances as to which, if any, of its alternatives with respect to any
remaining 14% Notes the Company may pursue. The premium and unamortized debt
issuance costs associated with the repurchase and retirement prior to maturity
of the 14% Notes, net of income tax, will be recorded as an extraordinary
charge in the period in which the 14% Notes are retired.
ANNUAL AGGREGATE MATURITIES OF LONG-TERM DEBT - The approximate
aggregate payments due in future years on long-term debt as of December 31,
1995 are as follows:
(IN MILLIONS)
1996 .................................. $ 0.7
1997 .................................. 1.4
1998 .................................. 26.9
1999 .................................. 0.1
2000 .................................. 0.1
Thereafter ............................ 146.0
---------
$ 175.2
NOTE 13 - INCOME TAXES:
The Company adopted 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. Under the requirements
of SFAS No. 109, the Company recorded a charge of approximately $2.5 million in
1993 to recognize the increase in the deferred tax liability as a result of a
one percent increase in the maximum federal income tax rate for corporations.
54
The following table provides a breakdown of the current and deferred
components of the provisions for federal and state income taxes attributable
to the earnings 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)
-------------------------------------------------
1995 1994 1993
------------- -------------- --------------
<S> <C> <C> <C>
Federal income tax expense:
Current............................ $ 6.9 $ 6.2 $ .8
Deferred........................... 14.5 6.4 .9
State income tax expense (benefit):
Current............................ .9 .9 .2
Deferred........................... 1.0 .4 (.5)
------------- -------------- --------------
$ 23.3 $ 13.9 $ 1.4
============= ============== ==============
</TABLE>
The tax benefit allocated to the loss from discontinued operations
was $3.0 million and $1.7 million for the years ended December 31, 1994 and
1993, respectively. The tax benefit allocated to the loss on disposition of
discontinued operations was $9.8 million for the year ended December 31, 1994.
A reconciliation between the income tax expense recognized in the
Company's Statement of Consolidated Earnings and the income tax expense
computed by applying the statutory federal income tax rate to the earnings
from continuing operations before income taxes and before extraordinary charge
and the cumulative effect of a change in accounting principle follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, (IN MILLIONS)
-----------------------------------------------------------------------------
1995 1994 1993
---------------------- ---------------------- ---------------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- -------- -------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C>
Earnings from continuing operations
before income taxes and before the
extraordinary charge and the effect
of a change in accounting principle ........... $ 70.8 -- $ 44.0 -- $ 5.0 --
======== ======== ========
Income tax expense
computed at statutory rate ..................... $ 24.8 35.0% $ 15.4 35.0% $ 1.7 35.0%
Benefit of statutory depletion .................. (4.0) (5.6) (3.6) (8.2) (3.4) (68.9)
Cumulative effect of increase in
statutory rate ................................ -- -- -- -- 2.5 50.4
Effect of non-deductible goodwill ............... 0.7 1.0 0.7 1.6 0.7 13.8
Effect of state income tax
expense (benefit) .......................... 1.3 1.8 0.8 1.9 (0.2) (4.9)
Other ........................................... 0.5 0.7 0.6 1.3 0.1 3.2
-------- -------- -------- -------- -------- -------
$ 23.3 32.9% $ 13.9 31.6% $ 1.4 28.6%
======== ======== ======== ======== ======== =======
</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 bases of assets and
liabilities and their reported
55
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.
Significant components of the Company's net deferred tax liability as
of December 31, 1995 and 1994 were as follows:
YEARS ENDED DECEMBER 31,
(IN MILLIONS)
------------------------
1995 1994
---------- ---------
Deferred tax liabilities:
Differences between book and tax bases of
property, plant and equipment........ $ 151.4 $ 151.3
Assets of overfunded pension plan......... 9.6 9.0
Other..................................... 14.3 15.5
---------- ---------
175.3 175.8
---------- ---------
Deferred tax assets:
Postretirement benefit obligation......... 30.6 32.5
Reserves not currently deductible......... 14.6 21.8
Deferred state income taxes............... 6.2 5.8
Operating loss carryforwards.............. 4.7 11.8
Tax credit carryforwards.................. 5.0 7.1
AMT credit carryforwards.................. 14.1 5.7
Other..................................... - 0.4
---------- ---------
75.2 85.1
Valuation allowance....................... (5.1) (5.5)
---------- ----------
70.1 79.6
---------- ---------
Net deferred tax liability.................... $ 105.2 $ 96.2
========== =========
The Company has provided a valuation allowance of $5.1 million
against deferred tax assets recorded as of December 31, 1995. As of December
31, 1994 the valuation allowance was $5.5 million. The decrease is
attributable to the anticipated use on the 1995 federal income tax return of
investment tax credits acquired in prior business combinations and for which
no tax benefit was recognized at the time of acquisition. Accordingly, in 1995
goodwill has been reduced by $0.4 million. The remaining valuation allowance
will be allocated to reduce goodwill and other noncurrent intangible assets in
future periods if realization of tax credit and net operating loss
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 net deferred
income tax liability the tax benefits related to net operating loss
carryforwards of $13.2 million after valuation allowance of $0.1 million, net
investment tax credit carryforwards of $5.0 million offset by a valuation
allowance of $5.0 million and an alternative minimum tax carryforward of $14.1
million. If not used, the net operating loss and investment tax credit
carryforwards will expire between 1998 and 2007 and between 1996 and 2005,
respectively.
56
The consolidated federal income tax returns of the Company have been
examined through 1992 and various state income tax returns are presently under
examination. In the opinion of management, adequate provision has been made at
December 31, 1995 for income taxes that might be due as a result of these
audits and any resulting assessments will have no material effect on the
Company's consolidated earnings.
NOTE 14 - MINORITY INTEREST IN CONSOLIDATED JOINT VENTURE:
Kosmos Cement Company (Kosmos Cement) 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 operated
and 75% owned by the Company. The Company's Consolidated Balance Sheet
includes 100% of the assets and liabilities of Kosmos Cement. Lone Star's 25%
interest in Kosmos Cement 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 15 - OTHER LONG-TERM LIABILITIES AND DEFERRED CREDITS:
DECEMBER 31,
(IN MILLIONS)
---------------------------
1995 1994
------------ -----------
Accrued loss contingencies on discontinued
environmental services segment............... $ 4.4 $ 5.4
Estimated liabilities of discontinued Moore
McCormack operations........................ 4.4 8.1
Deferred payment obligation..................... 7.7 7.7
Supplemental pension liabilities................ 3.5 3.9
Other........................................... 2.0 1.3
------------ -----------
$ 22.0 $ 26.4
============ ===========
DISCONTINUED ENVIRONMENTAL SERVICES SEGMENT - The Company is
contingently liable for certain environmental issues under the indemnification
provisions of sales agreements associated with the discontinued environmental
services operations. (See Note 3 of Notes to Consolidated Financial
Statements.)
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 that had been previously discontinued by Moore McCormack. As of
December 31, 1995 and 1994 such estimated liabilities totaled $5.4 million and
$10.3 million, respectively, $1.0 million and $2.2 million of which were
included in current liabilities in 1995 and 1994, respectively.
In conjunction with the Company's acquisition of Moore McCormack,
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. There
were no outstanding advances under the Keepwell Agreement as of December 31,
1995 and 1994. The Company's contingent obligation to MARAD had declined to
$17.4 million as of
57
December 31, 1995. The Keepwell Agreement, as well as the associated
restriction on the Company's borrowing capacity, was terminated pursuant to
February 1996 agreements by and among the Company, MARAD and the successor
company to the shipping operations.
DEFERRED PAYMENT OBLIGATION - In connection with the July 1990
purchase of a hazardous waste processing facility from an affiliate of
Browning-Ferris Industries, Inc. (BFI), the Company assumed a conditional
payment obligation payable to the former shareholders of the BFI subsidiary.
SUPPLEMENTAL PENSION LIABILITIES - A small number of former employees
and retirees of the Company are eligible for payments under supplemental
pension agreements. Under such arrangements, the present value of probable
future cash outlays was accrued during the expected service life of the
employee and charged to earnings for financial reporting purposes.
NOTE 16 - PENSION PLANS:
The Company has a defined benefit pension plan covering substantially
all 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,
prior to December 31, 1994, a collectively bargained Company-sponsored plan
providing a flat dollar benefit for each year of service. Effective December
31, 1994, the collectively bargained Company-sponsored plan was merged into
the Company's defined benefit plan. The Company's policy is to fund its
pension plan in accordance with sound actuarial principles.
The funded status of the Company's pension plan is based on a
comparison of the market value of the plan's 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 1995, 8.5% in 1994 and 7.5% in 1993. The rate of
increase in future compensation levels used in determining the actuarial
present value of the projected benefit obligation was 4.5% in 1995 and 4% in
both 1994 and 1993. The expected long-term rate of return on assets was 8.5%
in all three years ended 1995. 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 8 to 13 years for 1995 and over periods of 9 to
14 years for both 1994 and 1993 which approximated the estimated average
remaining service periods of employees expected to receive benefits under the
plan.
The Company recognized pension income of approximately $1.6 million,
$2.6 million and $1.6 million in 1995, 1994 and 1993, respectively, under such
Company-sponsored plans. In addition to the Company-sponsored plan, 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 $1.6 million in
1995, $1.9 million in 1994 and $1.8 million in 1993.
58
The pension plan's assets exceeded the accumulated benefit obligation
as of both December 31, 1995 and 1994 . The following table sets forth
information regarding the plan's funded status and amounts recognized in the
Company's Consolidated Balance Sheet at December 31, 1995 and 1994:
DECEMBER 31,
(IN MILLIONS)
----------------------------
1995 1994
------------ ------------
Actuarial present value of accumulated benefit
obligations:
Vested portion.............................. $ (107.6) $ (94.7)
Nonvested portion........................... (2.3) (2.3)
------------ ------------
Accumulated benefit obligation................. (109.9) (97.0)
Effect of estimated future pay increases....... (8.4) (5.8)
------------ ------------
Projected benefit obligation................... (118.3) (102.8)
Plan assets at fair value, primarily debt
and equity securities(1)..................... 173.8 144.3
------------ -----------
Overfunded status.............................. 55.5 41.5
Unrecognized net gain.......................... (33.6) (21.6)
Unrecognized prior service cost................ 3.4 3.8
Unrecognized net asset......................... (0.2) (0.3)
------------ ------------
Prepaid pension costs $ 25.1 $ 23.4
============ ============
- -----------------
(1) Plan assets include 449,000 shares of the Company's Series A Preferred
Stock.
The components of net periodic pension cost included in the results
of operations for the years ended December 31, 1995, 1994 and 1993 under
Company-sponsored plans were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
(IN MILLIONS)
-------------------------------------------------
1995 1994 1993
------------- -------------- --------------
<S> <C> <C> <C>
Service cost..................... $ 2.0 $ 2.2 $ 2.1
Interest cost on projected
benefit obligation............. 8.5 8.0 8.1
Actual return on assets.......... (38.3) (3.4) (21.4)
Asset (loss) gain deferred....... 26.5 (9.0) 10.1
Amortization of unrecognized -
Net gain....................... (0.6) (0.7) (0.6)
Prior service cost............. 0.4 0.4 0.2
Net asset...................... (0.1) (0.1) (0.1)
------------- -------------- --------------
Net pension income............... $ (1.6) $ (2.6) $ (1.6)
============= ============== ==============
</TABLE>
DIRECTORS PENSION PLAN - The Company also has an unfunded defined
benefit pension plan covering the members of its Board of Directors who have
five years of service and are not participants in any of the Company's
qualified pension plans. Eligible directors are entitled to a monthly benefit
equal to two-thirds of their average monthly fee. The benefit is payable over
a number of months equal to such director's service on the Board. During 1995,
the Company included in expense $100,000 to provide for benefits accrued under
the plan.
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
59
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 $1.9 million each year in 1995 and 1994
and $1.7 million in 1993, in matching contributions that were charged to
compensation expense and invested in the Company's common stock.
NOTE 17 - 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 sixty-five years of age or older 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. Effective January 1, 1993, the Company adopted 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 $2.5 million representing the estimated cost of postretirement
health care benefits in excess of claims incurred. Effective with the third
quarter of 1993, the Company amended its plan for postretirement health care
benefits which had the effect of reducing the estimated liability for such
costs by approximately $47 million. As required by SFAS No. 106, the $47
million reduction is being amortized over the average remaining service life
to full eligibility for benefits of the Company's active employees. The
remaining average service life to full eligibility for the Company's active
employees is 14 years. These changes have eliminated the charge incurred in
the first half of 1993.
60
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, 1995 and
1994.
DECEMBER 31,
(IN MILLIONS)
-----------------------
1995 1994
-------- -------
Accumulated postretirement benefit obligation (APBO)
Retirees....................................... $ 28.1 $ 34.3
Fully eligible active plan participants........ .8 2.4
Other active plan participants................. 2.2 6.8
-------- -------
31.1 43.5
Plan assets at fair value - -
-------- -------
Accumulated postretirement benefit obligation....... 31.1 43.5
Unrecognized prior service credit................... 31.0 33.4
Unrecognized net gain............................... 17.7 8.1
-------- -------
Accrued postretirement benefit costs................ $ 79.8 $ 85.0
======== =======
The components of net periodic postretirement benefit costs included
in the results of operations for the three years ended December 31, 1995 were
as follows:
YEARS ENDED DECEMBER 31
(IN MILLIONS)
----------------------------------------------
1995 1994 1993
---------- ---------- ----------
Service cost $ 0.3 $ 0.7 $ 1.9
Interest cost on APBO 2.4 3.3 5.2
Amortization of unrecognized
prior service
credit and net gain (4.7) (2.7) (1.4)
---------- ---------- ----------
$ (2.0) $ 1.3 $ 5.7
========== ========== ==========
The assumed health care cost trend rate used in measuring the
accumulated postretirement benefit obligation as of December 31, 1995 was 9.0%
for general health care and prescription drugs decreasing each successive year
until it reaches 6% in 2004 and thereafter. As of December 31, 1994 and 1993
the cost trend used was 9.5% for general health care and 14% for prescription
drugs, decreasing each successive year until each reaches 6% in 2017 and
thereafter. The health care cost 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, 1995 and net
periodic postretirement health care cost by approximately 5.2% and 4.2%,
respectively. The assumed discount rates used in determining the APBO were
7.5% as of December 31, 1995 and as of December 31, 1994 and 1993, 8.5% and
7.5%, respectively.
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 paid for active employees and their dependents were $8.2
million, $9.8 million and $12.3 million in 1995, 1994 and 1993, respectively.
For retirees and their dependents these costs were $3.2 million in 1995, $3.1
million in 1994 and $3.2 million in 1993.
61
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 paid for life insurance benefits for employees were approximately
$896,000 in 1995, $584,000 in 1994 and $984,000 in 1993. The costs of
providing such benefits for retired employees were de minimis in each of the
three years in the period ended December 31, 1995.
NOTE 18 - COMMITMENTS AND CONTINGENT LIABILITIES:
OPERATING LEASES - Rental expense covering manufacturing,
transportation and certain other facilities and equipment for the years 1995,
1994 and 1993 aggregated $14.0 million, $11.9 million and $9.9 million,
respectively. Minimum annual rental commitments as of December 31, 1995 under
noncancelable leases are set forth as follows:
(IN MILLIONS)
------------------------------------------------
MANUFACTURING
MOBILE EQUIPMENT
EQUIPMENT AND OTHER TOTAL
------------ ------------- -------------
1996 $ 6.9 $ 3.0 $ 9.9
1997 6.1 2.3 8.4
1998 5.5 2.2 7.7
1999 4.8 0.7 5.5
2000 3.1 0.5 3.6
Thereafter 1.9 2.6 4.5
------------- -------------- -------------
$ 28.3 $ 11.3 $ 39.6
============= ============== =============
ENVIRONMENTAL MATTERS - Industrial operations have been conducted at
some of the Company's 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, contain chemical elements or compounds that are designated as
hazardous substances. All of these activities are regulated by federal, state
and local laws and regulations pertaining to the protection of human health
and the environment. 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, if discarded
today, might be categorized as hazardous wastes.
Remediation under environmental clean-up rules can be costly. 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 substances. Among those who may be
held jointly and severally liable are those who generated the hazardous
substances, those who arranged for disposal of the hazardous substances, those
who owned or operated the disposal site or facility at the time of disposal,
and subsequent owners and operators. With regard to the discontinued
environmental services business, 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. No estimate of the extent of contamination,
remediation cost or recoverability of cost from prior owners, if any, is
presently available regarding these discontinued operations.
62
While the Company's facilities at several locations are the subject
of various local, state and federal environmental proceedings and inquiries,
most of these investigations are in their preliminary stages and final results
may not be determined for years. In certain instances, the Company has been
named as one of several potentially responsible parties (PRP) charged with
remediation activities related to various alleged CERCLA violations. Despite
the fact current law imposes joint and several liability on all parties at any
Superfund site, the Company's accrual for estimated liability in these
instances reflects only the Company's expected share based on the Company's
assessment of its proportionate volumetric contribution to the waste material,
whether responsibility is being disputed, the terms of any existing
agreements, the solvency of other parties and experience regarding similar
matters. The Company is also involved in remedial response and voluntary
environmental cleanup expenditures as to a number of other sites which are not
the subject of any Superfund law proceeding or investigation by federal, state
or local agencies. All environmental accruals have been recorded without
giving effect to any possible future recoveries from insurance or other third
parties.
The Company bases its estimates of environmental liabilities on the
nature or extent of contamination, methods of remediation required, existing
technology, presently enacted laws and regulations and prior Company
experience in remediation of contaminated sites. Accrued liabilities
specifically related to environmental matters were, in the aggregate, $3.4
million, $4.2 million and $8.8 million at December 31, 1995, 1994 and 1993,
respectively. Additional amounts related to closure, remediation and other
environmental related liabilities were included in the charge accrued in
conjunction with the 1994 loss on disposal of the discontinued environmental
services operations. Cash expenditures often lag by a number of years the
period in which an accrual is recorded. However, because of uncertainties
inherent in remediation activities and technologies, regulatory
interpretations and the allocation of costs among various other parties, the
Company is unable to accurately estimate the cost that might ultimately be
incurred by the Company to resolve these environmental issues. Until all
environmental studies, investigations, remediation work and negotiations with
or litigation against potential sources of recovery have been completed, there
is at least a reasonable possibility, however, that amounts in excess of the
accruals may be incurred.
Additions to and expenditures charged against the Company's
environmental accruals related to continuing operations during the past three
years were as follows:
YEARS ENDED DECEMBER 31,
(IN MILLIONS)
------------------------------------------
1995 1994 1993
---------- ----------- ----------
Beginning balance $ 4.2 $ 8.8 $ 6.6
Expense provisions 1.7 2.9 4.5
Expenditures (2.5) (7.5) (2.3)
---------- ----------- ----------
Ending balance $ 3.4 $ 4.2 $ 8.8
========== =========== =========
Based solely upon the information the Company has developed to date,
which is subject to change as additional information becomes available,
management of the Company believes that known matters can be successfully
resolved in cooperation with local, state and federal regulating agencies.
However, because the Company's results of operations vary considerably with
construction activity and other factors, it is, at least reasonably 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.
63
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 CKD disposal sites near the Company's Ohio cement plant have been
under investigation by the Company 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 has recorded charges to the environmental accruals
above totaling $13.3 million through the end of 1995 as the estimated
remediation cost for the site, increasing the initial estimates as additional
information became known. While the Company has no reason to believe that
significant additional sums will be required to complete the remediation of
this site, it remains at least reasonably possible the Company may be required
to incur additional costs on the project. Until the regulatory agency renders
a final decision on the site, the Company is unable to determine what
additional costs, if any, may be incurred on the project.
On a voluntary basis, 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. The Company believes that USX is a
responsible party because it owned and operated the larger of the two sites
(USX Site) at the time of disposal of the hazardous substances, arranged for
the disposal of the hazardous substances and transported the hazardous
substances to the USX Site. Therefore, based on the advice of counsel, the
Company believes there is a reasonable basis for the apportionment of cleanup
costs relating to the USX 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 USX Site and
is potentially liable under CERCLA only because of its current ownership of
the USX Site.
On September 24, 1993, the Company filed a complaint against USX,
alleging that USX is a potentially responsible party under CERCLA and under
applicable Ohio law, and therefore jointly and severally liable for costs
associated with cleanup of the USX Site. The Company and USX have held
settlement discussions with respect to this matter and, in late September
1995, the Company and USX entered into a partial settlement agreement wherein
the Company dismissed its claim for response costs incurred prior to September
29, 1995 and USX agreed to pay the Company a specified amount representing
half of certain costs already incurred by the Company at the USX Site. The
Company and USX are jointly funding the initial project of a phased approach
to investigating and remediating the problems at the USX Site. The court
granted a jointly requested stay of litigation until October 6, 1995 and has
subsequently extended the previously ordered stay of proceedings until April
3, 1996.
Based on the limited information available, the Company has
received two preliminary estimates of the potential magnitude of the
remediation costs for the USX Site, $8 million and $32 million, depending on
the assumptions used. No regulatory agency has directly asserted a claim
against the Company as the owner of the USX Site requiring it to remediate the
property, and no cleanup of the USX Site has yet been initiated. 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
64
determination is within the sole discretion of the court. The Company intends
to vigorously pursue its right to contribution from USX for cleanup costs
under CERCLA and Ohio law.
No substantial investigative work has been undertaken at the
Company's other CKD sites in Ohio. Although data necessary to enable the
Company to estimate additional remediation costs are not available, the
Company acknowledges that it is at least reasonably possible the ultimate cost
to remediate the CKD disposal problem in Ohio could be significantly more than
the amounts reserved.
Several of the Company's other inactive CKD disposal sites around the
country are under study to determine if remedial action is required and, if
so, the extent of 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.
CLAIMS FOR INDEMNIFICATION - Prior to the sale of the Company's then
oil and gas subsidiary, Pelto Oil Company (Pelto) in 1989 to Energy
Development Corporation (EDC), Pelto entered into certain gas settlement
agreements, including one with Tennessee Gas Pipeline Company (Tennessee Gas).
The Minerals Management Service (MMS) of the Department of the Interior has
reviewed the 1988 agreement Pelto entered into with Tennessee Gas to determine
whether a payment to Pelto thereunder is associated with Federal or Indian
leases and whether, in its view, any additional royalties may be due as a
result of that payment. By letter dated October 18, 1995, the MMS' Houston
Compliance Division advised EDC that it had determined preliminarily that a
lump sum payment made by Tennessee Gas to Pelto was, for several alleged
reasons, royalty bearing. The letter advised EDC of a preliminary
determination of underpayment of royalties in the amount of $1.35 million
attributable to these proceeds. In late October 1995, 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 MMS' position is
based in large part on views articulated in its industry wide May 3, 1993
"Dear Payor" letter (Dear Payor letter). In the Dear Payor letter, the MMS set
forth its views on, among other things, whether royalty was due on payments
received by gas producers from pipelines in resolution of take or pay claims
and contract buy out and buy down claims.
In 1994, the Company timely filed its notice of appeal and its
statement of reasons supporting its appeal regarding an earlier similar MMS
determination of royalty underpayment, in an amount unspecified, with respect
to a separate $5.9 million gas settlement payment from Transcontinental Gas
Pipe Line Corporation (Transco) to Pelto. EDC is also seeking indemnification
from the Company on the Transco matter.
On June 14, 1995, in an unrelated case, Independent Petroleum
Association of America v. Babbitt (the IPAA case), a United States District
Court Judge upheld the Department of Interior's claim for royalty, based on
MMS' Dear Payor letter, on the lump sum payment received by an unrelated gas
producer for settling its contract claims with a gas purchaser. The Judge's
opinion in the IPAA case may undercut defenses of other gas producers to MMS'
royalty initiatives, including those involving the Company, to the extent such
defenses are based upon the argument that the Dear Payor letter was legally
deficient. The U.S. District Court Judge's opinion has been appealed.
These claims by the MMS are part of an industry-wide effort by the
MMS to seek royalties on most take-or-pay settlements received by gas
producers in the late 1980s. Pelto is merely one of
65
many producers facing these types of claims by the MMS. While, the Company
disagrees with both MMS determinations, if the determinations as to the two
payments to Pelto are ultimately upheld, the Company could have liability for
royalties on those sums, plus late payment charges. Such expenditures would
result in a charge to discontinued operations.
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. However, because the Company's results of
operations vary considerably with construction activity and other factors, it
is at least reasonably possible that future charges for contingencies could,
depending on their timing and magnitude, have a material adverse impact on the
Company's results of operations in a particular period.
NOTE 19 - CAPITAL STOCK AND 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, 1995, 17,286,000 shares of Common Stock were issued
and outstanding and held of record by approximately 1,755 shareholders, and
approximately 9.3 million shares were reserved for future issuance upon
exercise of options granted under employee benefit plans or warrants or upon
conversion of convertible securities. On January 25, 1996, the Company
declared a dividend of $.10 per share of Common Stock, payable on March 1,
1996. No Common Stock dividends had been paid since 1991.
WARRANTS TO PURCHASE COMMON STOCK
In October 1991, the Company issued and sold an aggregate of
1,250,000 Warrants pursuant to the terms of a Warrant Agreement dated as of
October 31, 1991. Chemical Shareholder Services Group, Inc. is 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. In order to
minimize the dilutive effect of the exercise of Warrants, the Company may
acquire outstanding Warrants from time-to-time, or may use proceeds received
from the exercise of Warrants to purchase shares of Common Stock.
66
RIGHTS
On March 4, 1991, 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 to 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.
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
67
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 - In 1987, the Company issued 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, any Series C Preferred Stock that may be issued and the
Series D Preferred Stock with respect to dividends and assets. As of December
31, 1995, 1,994,000 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 entitles the
holders of a majority thereof to elect two directors if dividends are in
arrears 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
68
holder's shares of Series A Preferred Stock without the payment of any
redemption premium. The Company has reserved 997,000 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 - In 1988, the Company issued 960,000
shares of Preferred Stock, $3.75 Convertible Exchangeable Series B (Series B
Preferred Stock). The Series B Preferred Stock is junior to the Series A
Preferred Stock, senior to any Series C Preferred Stock that may be issued and
PARI PASSU to the Series D Preferred Stock with respect to dividends and
assets. As of December 31, 1995, 914,360 shares of Series B Preferred Stock
were issued and outstanding. All such shares are fully paid and nonassessable.
Dividends accrued or paid on the Series B Preferred Stock amounted to
approximately $3.4 million in 1995, $3.4 million in 1994 and $3.6 million in
1993.
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
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 the Series B Preferred
Stock have certain class voting rights. The Company has reserved 2,285,900
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 Revolving Credit Facility
restricts the Company's ability to exchange the Series B Preferred Stock for
the Debentures.
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, 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 - In 1994, the Company issued 1,725,000
shares of Preferred Stock, $2.875 Cumulative Convertible Series D (Series D
Preferred Stock). With respect to dividends and assets, 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 and are outstanding. Dividends paid or accrued on the
Series D Preferred Stock were $5.0 million in 1995 and $4.6 million in 1994.
69
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
stated 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.
EARNINGS PER SHARE
Earnings used to compute primary per share earnings in each of the
three years ended 1995 were net of preferred stock dividends of approximately
$9.8 million in 1995, $9.4 million in 1994 and $5.0 million in 1993. Primary
earnings per share were computed using average number of shares, dilutive
options and warrants outstanding in 1995 and 1994 and using the average number
of shares of common stock outstanding for 1993. Additionally, the effect of an
assumed conversion of the Series A, Series B, and in 1994, Series D Preferred
Stock referred to above was anti-dilutive and, therefore, fully diluted
earnings per share for 1994 and 1993 are the same as primary earnings per
share. Fully diluted earnings for 1995 assume the conversion of all shares of
preferred stock to common stock.
NOTE 20 - 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 were initially available for
grant to directors of the Company who are not employed by the Company or any
of the Company's subsidiaries. Of this total, 130,000 options had been awarded
as of December 31, 1995. 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
70
the grant. Options granted under the 1991 Directors' Plan are exercisable at
the fair market value of the stock at the date of grant and expire not more
than ten years from the date of grant. Unoptioned shares available for grant
as of December 31, 1995 under the 1991 Director's Plan were 20,000.
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 1,231,200 options had been awarded
as of December 31, 1995. As provided in the 1989 Plan, the Employee
Compensation and Benefits Committee of the Board of Directors may determine to
permit any option granted hereunder to be exercisable immediately upon the
date of grant or at any time thereafter; provided, however, that no option
granted hereunder may be exercised within the first six months after the date
of grant except in the event of the death or disability of the optionee.
Options granted under the 1989 Plan are exercisable at the fair market value
of the stock at the date of grant and expire not more than ten years from the
date of grant. Unoptioned shares available for grant as of December 31, 1995
under the 1989 Plan were 768,800.
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 1,812,022 shares had been awarded as of December
31, 1995. The Employee Compensation and Benefits Committee of the Board of
Directors may determine to permit any option granted hereunder to be
exercisable immediately upon the date of grant or at any time thereafter;
provided, however, that no option granted hereunder may be exercised within
the first six months after the date of grant except in the event of the death
or disability of the optionee. Options granted under the 1987 Plan are
exercisable at the fair market value of the stock at the date of grant and
expire not more than ten years from the date of grant. Unoptioned shares
available for grant as of December 31, 1995 under the 1987 Plan were 187,978.
Information with respect to the Company's stock option plans is as
follows:
SHARES AVERAGE
OPTIONS UNDER OPTION
EXERCISABLE OPTION PRICE
------------- ------------ -----------
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
============= ===========
Granted..................... 280,000 26.25
Exercised................... (545,129) 16.32
Canceled.................... (37,200) 16.37
--------------
Balance, December 31, 1994.. 743,993 1,103,693 $ 19.03
============= ===========
Granted..................... 182,800 20.27
Exercised................... (43,000) 14.21
Canceled.................... (26,000) 21.30
--------------
Balance, December 31, 1995.. 846,293 1,217,493 $ 19.34
============= ============== ===========
71
NOTE 21 - ISSUANCE OF NEW ACCOUNTING PRINCIPLE:
The Financial Accounting Standards Board issued Statement No. 123,
"Accounting for Stock Based Compensation," (SFAS No. 123) in October 1995.
SFAS No. 123, which is effective for fiscal years beginning after December 15,
1995, allows companies either to (i) continue to measure compensation cost
based on the "intrinsic value" method prescribed by Accounting Principles
Board Opinion No. 25 (ABP No. 25) or (ii) adopt a "fair value" method of
accounting for all employee stock-based compensation; provided, however, that
in either case companies will be required to significantly expand disclosures
related to stock-based employee compensation arrangements (including the pro
forma amount of net income and earnings per share as if the new "fair value"
method were adopted, for those companies choosing to retain the "intrinsic
value" method of APB No. 25.) The accounting requirements for companies
choosing to adopt SFAS No. 123 apply to all stock-based awards granted,
modified or settled in cash in fiscal years beginning after December 15, 1995.
The pro forma disclosure requirements for companies electing to continue to
apply APB No. 25 include, for comparative purposes, the effects of all
stock-based awards granted in fiscal years beginning after December 15, 1994.
The Company has elected to continue utilizing the accounting for stock issued
to employees prescribed by APB No. 25 and therefore the impact on the Company
of this change in accounting principle will be only to increase its disclosure
requirements.
72
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, 1995 and 1994, and the related
statements of consolidated earnings, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1995. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the 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, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period
ended December 31, 1995 in conformity with generally accepted accounting
principles.
As discussed in Notes 13 and 17 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 LLP
Houston, Texas
February 14, 1996
73
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Item will be included in a
definitive proxy statement, pursuant to Regulation 14A, to be filed not later
than 120 days after the close of the Company's fiscal year. Such information
is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item will be included in a
definitive proxy statement, pursuant to Regulation 14A, to be filed not later
than 120 days after the close of the Company's fiscal year. Such information
is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information required by this Item will be included in a
definitive proxy statement, pursuant to Regulation 14A, to be filed not later
than 120 days after the close of the Company's fiscal year. Such information
is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item will be included in a
definitive proxy statement, pursuant to Regulation 14A, to be filed not later
than 120 days after the close of the Company's fiscal year. Such information
is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.
(a) 1. FINANCIAL STATEMENTS
Item 8 of this report lists certain consolidated
financial statements and supplementary data of
the Company and its subsidiaries.
2. FINANCIAL STATEMENT SCHEDULES
No schedules are included because they are not
applicable or the required information is shown
in the financial statements or notes thereto.
74
3. Exhibits
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF EXHIBIT PAGE
<S> <C> <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 - incorporated by reference
from Exhibit 3.2 to the Company's Annual Report on Form 10-K for
the fiscal year ended
December 31, 1993 ......................................................................................
3.3 Bylaws of the Company amended as of February 15, 1995 -
incorporated by reference from Exhibit 3.1 to the Company's
Quarterly Report on Form 10-Q
for the quarter ended March 31, 1995 ...................................................................
4.1 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.....................................................................
4.2 Warrant Agreement dated as of October 31, 1991 between the
Company and Chemical Shareholder Services Group, Inc. (formerly
Texas Commerce Bank, National Association) 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................................................................................
4.3 Rights Agreement dated as of March 4, 1991 between the Company and
Chemical Shareholder Services Group, Inc. (formerly Texas Commerce Bank
National Association ) as Rights Agent - incorporated by reference from
Exhibit A to the Company's Current Report on Form 8-K dated March 4,
1991....................................................................................................
4.4 Description of Capital Stock - incorporated by reference from
Exhibit 4.6 to the Company's Annual Report on Form 10-K for the
fiscal year ended
December 31, 1993.......................................................................................
4.5 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......................................................
75
+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..........................................
+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) James L. Persky........................June 1, 1988
(c) Dennis M. Thies........................June 1, 1988
(d) J. Bruce Tompkins..................November 1, 1989
(e) 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 10.20 to the Company's
Annual Report on Form 10-K
for the fiscal year ended December 31, 1991 ............................................................
76
+10.9 Southdown, Inc. Pension Plan as adopted on May 19, 1994 - incorporated by
reference from Exhibit 99.1 to the Company's Quarterly Report on Form 10-Q
for the quarter ended June 30, 1994.....................................................................
+10.10 Southdown, Inc. Retirement Savings Plan as amended and restated on July 1,
1990 - incorporated by reference from Exhibit 99.2 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1994.......................................
+10.11 Southdown, Inc. Directors' Retirement Plan - incorporated by reference from
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1995 ...................................................................................
10.12 Third Amended and Restated Credit Agreement as of November 3,
1995 among the Company; Wells Fargo Bank, N.A.; 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 to
Exhibit 99.1 to the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1995 ..................................................
10.13 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........................................................................
*10.14 Agreement dated August 16, 1993, as amended November 16, 1995, by and
between the Company and the United Paperworkers International Union.....................................
10.15 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.................................
10.16 Agreement dated as of December 15, 1993 between Kosmos Cement
Company and International Brotherhood of Boilermakers, Cement,
Lime, Gypsum and Allied Workers Division Lodge D-592 -
incorporated by reference from Exhibit 99.4 to the Company's
Quarterly Report on Form 10-Q for the quarter
ended March 31, 1994....................................................................................
77
10.17 Agreement dated March 1, 1994 by and between the Southwestern
Portland Cement and the International Brotherhood of
Boilermakers, Cement, Lime, Gypsum and Allied Workers Division,
Local Lodge No. D357 - incorporated by reference from Exhibit
10.21 to the Company's Annual Report on Form
10-K for the fiscal year ended December 31,1994 ........................................................
10.18 Agreement dated July 31, 1994 by and between the Southwestern
Portland Cement Company (Odessa Plant) and the United Cement,
Lime, Gypsum and Allied Workers Division, Boilermakers
International Union, A.F.L.-C.I.O., Local No. D476 - incorporated
by reference from Exhibit 10.22 to the Company's Annual Report on
Form 10-K for the fiscal year ended December
31, 1994 ...............................................................................................
10.19 Agreement dated October 27, 1995 by and between the Company and
Teamster Local No. 420, 495, 692 and 986 C - incorporated by
reference from Exhibit 99.3 to the Company's Quarterly Report on
Form 10-Q for the
quarter ended September 30, 1995 .......................................................................
10.20 Agreement dated March 1, 1995 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 99.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1995 ......................................
10.21 Agreement dated June 21, 1995 by and between the Company and the
International Union of Operating Engineers, Local Union No. 9 - incorporated
by reference from Exhibit 99.2 to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1995 ..........................................................
*11 Statement of computation of per share earnings..........................................................
*18 Letter regarding change in accounting principles..................................................
*21 Significant Subsidiaries of Southdown, Inc. as of December 31, 1995.....................................
*23 Consent of independent auditors.........................................................................
*27 Financial Data Schedule ................................................................................
</TABLE>
- --------------------
* Filed herewith
+ 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, 1995.
78
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 CLARENCE C. COMER
Clarence C. Comer
President and Chief Executive Officer
Date: February 27, 1996
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934,
THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
SIGNATURES POSITIONS DATE
CLARENCE C. COMER President, Chief Executive Officer February 27, 1996
Clarence C. Comer and Director (Principal Executive
Officer)
JAMES L. PERSKY Executive Vice President - Finance February 27, 1996
James L. Persky and Administration (Principal
Financial Officer)
ALLAN KORSAKOV Corporate Controller (Principal February 27, 1996
Allan Korsakov Accounting Officer)
W. J. CONWAY Director February 27, 1996
W. J. Conway
KILLIAN L. HUGER JR. Director February 27, 1996
Killian L. Huger Jr.
MICHAEL A. NICOLAIS Director February 27, 1996
Michael A. Nicolais
FRANK J. RYAN Director February 27, 1996
Frank J. Ryan
ROBERT J. SLATER Director February 27, 1996
Robert J. Slater
RONALD N. TUTOR Director February 27, 1996
Ronald N. Tutor
V. H. VAN HORN III Director February 27, 1996
V. H. Van Horn III
STEVEN B. WOLITZER Director February 27, 1996
Steven B. Wolitzer
79
AMENDMENTS TO 1993 COLLECTIVE BARGAINING AGREEMENT
The following amendments to the 1993 Collective Bargaining Agreement
between the United Paperworkers International Union, Local 30049 and
Southdown, Inc. were agreed to on November 16, 1995.
Wages: August 16, 1998 August 16, 1999 August 16, 2000
3% 2.5% 2.5%
Contract Expiration Date: August 16, 2001
Dental Plan: Company will switch to the Plan proposed by the
Union called Plan 64. Will attempt to make the switch
1-1-96 depending upon exit from the current plan and
acceptance by new plan as assisted by John Morales.
Appendix B: Changed as attached.
12-hour Shifts: Will work out a cost-neutral system that
either party could terminate with 30 days notice.
Job Classification Upgrades:
From To
------ -------
Vactor Operator 13.57 14.01
Track Handyman 14.01 14.67
General Maintenance A 16.54 17.00
Machinist A 16.54 17.38
Welder Layout 16.54 17.38
Maintenance Leadman 17.34 18.21
These upgrades will take affect the 1st payroll week in
1996, if ratified.
On 8/19/93, the parties have tentatively agreed to the following:
NOTE: It is understood that this, with the previous tentatively agreed
upon items constitutes the entire package and contingent upon
ratification.
As amended on November 16, 1995.
APPENDIX B
ACTIVE EMPLOYEE MEDICAL
All employees covered by the Contract will be placed in the TakeCare
HMO, that was previously discussed. The Company will pay the entire
cost of the HMO and dental coverage for the first two years of the
Contract. In the third year, and all subsequent years, on a monthly
basis, employees will bear the first $40. ($20 for single employees)
on any increase in the HMO premium.
ACTIVE EMPLOYEES WHO RETIRE DURING THE TERM OF THE AGREEMENT
Eligibility will be age 62 and 15 years of service. The Company s cost
will be frozen at the 1993 level, but will increase by an amount equal
to the rise in the Los Angeles area CPI, up to a maximum of 4% per
year. Employees who have achieved 30 years of service prior to August
16, 1998 will be eligible for retiree medical, provided they retire by
August 16, 1998. Retirees will be allowed to continue in the HMO if
the HMO allows them to have retiree medical. Retirees' medical will
change to conform to any changes in the HMO during the term of the
Contract.
Retirees who move out of the HMO coverage area would have the Company
post retirement indemnity plan under the same terms and conditions as
other retirees covered by the indemnity plan.
PENSION
The Victorville Hourly Pension Plan will be merged into the Southdown
Salaried Pension Plan. Any employee retiring during the term of the
Agreement will have his or her pension calculations made under both
plans and receive the higher amount. From August 16, 1993 through
August 16, 1999, employees will continue to accrue service under the
hourly plan. The pension factor under the hourly plan will be
increased $.50 per year from August 16, 1993 through August 16, 1998.
At the end of that 5 year period the flat rate amount would be $25.00
per month for each year of service. Notwithstanding the foregoing, a
flat rate of $25.00 per month for each year of service will be used
for pension calculations for any employee who attains 30 years of
credited service and retires within the 5 year period beginning August
16, 1993. On August 17, 1998, the pension factor under the hourly plan
will be increased $5.00 to a flat rate of $30.00 per month for each
year of service. For the purpose of calculating yearly salary under
the Salaried Pension Plan the gainsharing bonus will be included.
LIFE INSURANCE
The Company will provide life insurance coverage at no cost to
the employee. An employee's life insurance is an amount equal to
twice (2X) his/her base hourly rate multiplied by 2,080 hours.
ACCIDENTAL DEATH AND DISMEMBERMENT
The Company will provide accidental death and dismemberment benefit at
no cost to the employee. An employee's accidental death and
dismemberment benefit is an amount equal to twice (2X) his/her base
hourly rate multiplied by 2,080 hours.
SOUTHDOWN, INC. RETIREMENT SAVINGS PLAN {401(K)}
On a voluntary participation basis, the Company will provide the
Southdown, Inc. Retirement Savings Plan and all amendments thereto
during the life of this Agreement on the same basis the Plan is
provided to all other Southdown, Inc. employees.
LONG TERM DISABILITY
On a voluntary participation basis, the Company will provide access to
long term disability insurance, and all amendments thereto during the
life of this Agreement.
As discussed during Labor Contract extension talks in November 1995,
the Company agreed to the following exceptions to Appendix B of the
Labor Agreement:
Exception No. 1:
If any of the following employees elect to retire on the date they
attain 30 years of service as indicated below, they will be credited
with a full 30 years of service under the hourly pension plan.
Mart C. Simmons 08-26-99
James W. Sommerville 11-04-99
Patrick L. Epplett 08-28-99
Augustine S. Reyes 11-13-99
Rodrigo Sanchez 09-23-99
Robert J. Langel 11-17-99
Lynn C. Boyd 10-06-99
Wesley T. Osip 11-25-99
Nicholas L. Berkey 10-07-99
James A. Stefanski 12-03-99
Ernest M. Corral 10-08-99
Jose R. Ontiveros 01-12-00
Robert F. Berry, Jr. 10-20-99
If any of the above employees retire on a date other than that
indicated above their pension will be calculated in accordance with
Appendix B.
Exception No. 2:
Notwithstanding the provisions of the Pension paragraph in Appendix B,
any employee who retires between January 1, 1996 and August 16, 1998
will have the benefit of a $27.00 per month pension factor used for
calculation of the hourly pension plan.
This exception does not apply to a vested pension for an employee who
quits during this period.
IN WITNESS WHEREOF, this Amendment to the Agreement between the
parties, has been executed by their duly authorized representatives on
this 18th day of December, 1995.
UNITED PAPERWORKERS
INTERNATIONAL UNION SOUTHDOWN, INC.
By:___________________________ BY: _________________________
Jack W. Hammond, Jr. Bernard M. Reuland
By:___________________________ BY: _________________________
Martin L. Wilkes Michael A. Yannone
By:___________________________ BY: _________________________
Manuel J. Cordero Gregg W. St. Clair
By:___________________________ BY: _________________________
Kenneth D. Crawford Yselle A. Thomas
By:___________________________
Dale L. Nelson
By:___________________________
Albert E. St. John
EXHIBIT 11
SOUTHDOWN, INC. AND SUBSIDIARIES
STATEMENT OF COMPUTATION OF PER SHARE EARNINGS
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
-------------------------------------------
1995 1994 1993
--------- --------- ----------
<S> <C> <C> <C>
Earnings (loss) for primary earnings per share:
Earnings from continuing operations before
preferred stock dividends ............................................... $ 47.5 $ 30.1 $ 3.6
Preferred stock dividends ................................................. (9.8) (9.4) (5.0)
--------- --------- ---------
Earnings (loss) from continuing operations ................................ 37.7 20.7 (1.4)
Loss from discontinued operations, net of income taxes .................... -- (5.9) (3.6)
Loss on disposition of discontinued operations,
net of income taxes ..................................................... -- (21.6) --
--------- --------- ---------
Earnings (loss) before cumulative effect of a change in
accounting principle and extraordinary charge ........................... 37.7 (6.8) (5.0)
Extraordinary charge, net of income taxes ................................. -- -- (1.0)
Cumulative effect of a change in accounting
principle, net of income taxes .......................................... -- -- (48.5)
--------- --------- ---------
Net earnings (loss) for primary earnings per share ........................... $ 37.7 $ (6.8) $ (54.5)
========= ========= =========
Earnings (loss) for fully diluted earnings per share:
Earnings from continuing operations before
preferred stock dividends ............................................... $ 47.5 $ 30.1 $ 3.6
Antidilutive preferred stock dividends .................................... -- (9.4) (5.0)
--------- --------- ---------
Earnings (loss) from continuing operations ................................ 47.5 20.7 (1.4)
Loss from discontinued operations, net of income taxes .................... -- (5.9) (3.6)
Loss on disposition of discontinued operations,
net of income taxes ..................................................... -- (21.6) --
--------- --------- ---------
Earnings (loss) before cumulative effect of a change in
accounting principle and extraordinary charge ........................... 47.5 (6.8) (5.0)
Extraordinary charge, net of income taxes ................................. -- -- (1.0)
Cumulative effect of a change in accounting
principle, net of income taxes .......................................... -- -- (48.5)
--------- --------- ---------
Net earnings (loss) for fully diluted earnings per share ..................... $ 47.5 $ (6.8) $ (54.5)
========= ========= =========
Average shares outstanding:
Common stock .............................................................. 17.3 17.2 17.0
Common stock equivalents from assumed
exercise of stock options and warrants
(treasury stock method) .............................................. 0.2 0.5 0.2
--------- --------- ---------
Total for primary earnings per share ...................................... 17.5 17.7 17.2
Other potentially dilutive securities:
- additional common stock equivalent from assumed
exercise of stock options and warrants at ending
market price ............................................................ 0.1 -- 0.6
- assumed conversion of Series A convertible
preferred stock at one-half share of common stock ....................... 1.0 1.0 1.0
- assumed conversion of Series B convertible
preferred stock at 2.5 shares of common stock ........................... 2.3 2.3 2.4
- assumed conversion of the Series D convertible
preferred stock at 1.51 shares of common stock .......................... 2.6 2.4 --
--------- --------- ---------
Total for fully diluted earnings per share ................................... 23.5 23.4 21.2
Less:Antidilutive securities
Stock options and warrants ......................................... -- (0.5) (0.8)
Series A preferred stock ........................................... -- (1.0) (1.0)
Series B preferred stock ........................................... -- (2.3) (2.4)
Series D preferred stock ........................................... -- (2.4) --
--------- --------- ---------
23.5 17.2 17.0
========= ========= =========
Per share earnings (loss):
Primary
Earnings (loss) from continuing operations ................................ $ 2.15 $ 1.20 $ (0.09)
Loss from discontinued operations, net of
income taxes ............................................................ -- (0.34) (0.21)
Loss on disposition of discontinued operations, net of
income taxes ............................................................ -- (1.26) --
Extraordinary charge, net of income taxes ................................. -- -- (0.06)
Cumulative effect of a change in accounting
principle, net of income taxes .......................................... -- -- (2.86)
--------- --------- ---------
$ 2.15 $ (0.40) $ (3.22)
========= ========= =========
Fully diluted
Earnings (loss) from continuing operations ................................ $ 2.02 $ 1.20 $ (0.09)
Loss from discontinued operations, net of
income taxes ............................................................ -- (0.34) (0.21)
Loss on disposition of discontinued operations, net of
income taxes ............................................................ -- (1.26) --
Extraordinary charge, net of income taxes ................................. -- -- (0.06)
Cumulative effect of a change in accounting
principle, net of income taxes .......................................... -- -- (2.86)
--------- --------- ---------
$ 2.02 $ (0.40) $ (3.22)
========= ========= =========
</TABLE>
EXHIBIT 18
February 14, 1996
Board of Directors
Southdown, Inc.
Houston, Texas
Dear Sirs:
We have audited the consolidated financial statements of Southdown, Inc. as of
December 31, 1995 and 1994, and for each of the three years in the period ended
December 31, 1995, included in your Annual Report on Form 10-K to the Securities
and Exchange Commission and have issued our report thereon dated February 14,
1996. Note 2 to such consolidated financial statements contains a description of
your change during the year ended December 31, 1995 in the method of accounting
for your cement segment cost of goods sold in interim periods to reflect actual
costs incurred on a quarterly basis rather than standard cost. In our judgment,
such change is to an alternative accounting principle that is preferable under
the circumstances.
Yours truly,
DELOITTE & TOUCHE LLP
Houston, Texas
EXHIBIT 21
SIGNIFICANT SUBSIDIARIES OF SOUTHDOWN, INC.
AS OF DECEMBER 31, 1995
STATE OF
SUBSIDIARY* ORGANIZATION
----------- ------------
Kosmos Cement Company (a partnership)................................. Kentucky
- -------------------
* Kosmos Cement Company conducts business under its name.
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statement No.
33-23328 on Form S-8, Registration Statement No. 33-35011 on Form S-8,
Registration No. 33-45144 on Form S-8, Registration Statement No. 33-22553 on
Form S-3, Registration Statement No. 33-16517 on Form S-3, Registration
Statement No. 33-39698 on Form S-3, Registration Statement No. 33-45371 on Form
S-3 and Registration Statement No. 33-45373 on Form S-3 of our report dated
February 14, 1996 on the consolidated financial statements of Southdown, Inc.
and subsidiary companies appearing in this Annual Report on Form 10-K for the
year ended December 31, 1995.
DELOITTE & TOUCHE LLP
Houston, Texas
February 27, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's consolidated balance sheet as of December 31, 1995 and the
related statement of consolidated earnings and is qualified in its
entirety by reference to such statements.
</LEGEND>
<MULTIPLIER> 1,000,000
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<CASH> 8
<SECURITIES> 0
<RECEIVABLES> 78
<ALLOWANCES> 9
<INVENTORY> 70
<CURRENT-ASSETS> 161
<PP&E> 895
<DEPRECIATION> 330
<TOTAL-ASSETS> 876
<CURRENT-LIABILITIES> 79
<BONDS> 175
<COMMON> 22
0
152
<OTHER-SE> 202
<TOTAL-LIABILITY-AND-EQUITY> 876
<SALES> 596
<TOTAL-REVENUES> 596
<CGS> 444
<TOTAL-COSTS> 499
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27
<INCOME-PRETAX> 71
<INCOME-TAX> 23
<INCOME-CONTINUING> 48
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 48
<EPS-PRIMARY> 2.15
<EPS-DILUTED> 2.02
</TABLE>
