-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, N54Ff2oeCL1baldPEYG+X0O6hM0Y9KChm4EZFo4lLwYV8EFxd9zKBb1SO7aNSpHx UtAPKpM3aAI0TGYKks2xbg== 0000030067-97-000002.txt : 19970329 0000030067-97-000002.hdr.sgml : 19970329 ACCESSION NUMBER: 0000030067-97-000002 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970328 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: DRAVO CORP CENTRAL INDEX KEY: 0000030067 STANDARD INDUSTRIAL CLASSIFICATION: MINING, QUARRYING OF NONMETALLIC MINERALS (NO FUELS) [1400] IRS NUMBER: 250447860 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-05642 FILM NUMBER: 97566240 BUSINESS ADDRESS: STREET 1: 3600 ONE OLIVER PLZ CITY: PITTSBURGH STATE: PA ZIP: 15222-2651 BUSINESS PHONE: 2054322651 MAIL ADDRESS: STREET 1: P O BOX 2068 CITY: MOBILE STATE: AL ZIP: 36652 10-K405 1 FORM 10-K SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 1996 Commission file number 1-5642 DRAVO CORPORATION A PENNSYLVANIA CORPORATION I.R.S. EMPLOYER IDENTIFICATION NUMBER 25-0447860 3600 ONE OLIVER PLAZA PITTSBURGH, PENNSYLVANIA 15222-2682 TELEPHONE (412) 566-3000 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: Title of Class: Registered: Common Stock, $1.00 Par Value New York Stock Exchange Preference Stock Purchase Rights New York Stock Exchange 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, and (2) has been subject to such filing requirements for the past 90 days. Yes XX . No_____. 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. XX Common shares outstanding as of March 20, 1997: 14,771,620 Aggregate market value of the voting stock held by non-affiliates of the Registrant as of March 20, 1997: $160,641,368 DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report to Shareholders for the year ended December 31, 1996 are incorporated by reference to the extent set forth in Parts I, II and IV of this Report. Portions of the Proxy Statement for Annual Meeting of Shareholders on April 24, 1997 are incorporated by reference to the extent set forth in Part III of this Report. TABLE OF CONTENTS Page PART I Item 1. Business 3 - 5 Item 2. Properties 6 Item 3. Legal Proceedings 7 Item 4. Submission of Matters to a Vote of Security Holders 7 PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matter 8 - 11 Item 6. Selected Financial Data 12 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 8. Financial Statements and Supplementary Data 12 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 12 PART III Item 10. Directors and Executive Officers of the Registrant 13 Item 11. Executive Compensation 14 Item 12. Security Ownership of Certain Beneficial Owners and Management 14 Item 13. Certain Relationships and Related Transactions 14 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K 15 - 21 Signatures 22 Independent Auditors' Report on Schedules 23 Schedule I. Condensed Financial Information of Registrant 24 - 31 Table of Contents for documents filed herein as Exhibits 4, 11, 13, 21, 23, 24 and 27 32 -2- PART I Item 1. Business (a) General Development of the Business Dravo Corporation (the Registrant or company) was incorporated in Pennsylvania in 1936 to consolidate several related corporations then operating various elements of a business started in 1891 by F. R. Dravo. Its corporate offices are located at 3600 One Oliver Plaza, Pittsburgh, Pennsylvania 15222-2682, and its telephone number is 412-566-3000. As used herein, the term Dravo includes its consolidated subsidiaries unless otherwise indicated. In December, 1987, Dravo's Board of Directors approved a major restructuring program which concentrated Dravo's future direction exclusively on opportunities involving its natural resources business. The plan included the sale or other disposition of the former Engineering and Construction segment, as well as the sale of the former Materials Handling and Systems segment approved earlier. All units scheduled for sale were sold by the end of 1989. The remainder of these businesses have been presented as discontinued operations in the financial statements. Late in 1994, the company sold substantially all the assets and certain liabilities of Dravo Basic Materials Company, its construction aggregates subsidiary, to Martin Marietta Materials, Inc. (Martin Marietta). As a result, Dravo is now primarily a lime company operating principally in the United States. Operations are carried on by a wholly-owned subsidiary, Dravo Lime Company (Dravo Lime). Activities include the production of lime for utility, metallurgical, pulp and paper, municipal, construction and miscellaneous chemical and industrial applications as well as the development and marketing of related environmental technologies, products and services. Three major utility companies with whom the company has long-term contracts - American Electric Power, Pennsylvania Power Company and Cincinnati Gas & Electric Company - each accounted for more than 10 percent of consolidated revenue in 1996. All reserves are located on properties physically accessible for purposes of mining and processing limestone into lime. Dravo Lime, one of the nation's largest lime producers, owns and operates three integrated lime production facilities, two in Kentucky and one in Alabama. In 1995 a two kiln expansion was completed at the Black River plant in Butler, Kentucky. With the Black River expansion on-line, Dravo Lime's annual quicklime capacity totals approximately three million tons. This capacity will further increase to slightly over 3,300,000 tons-per-year when a fourth 1,100 tons-per-day kiln now in the process of being constructed at Maysville, Kentucky is completed early in the second quarter of 1997. The Maysville plant, currently a three kiln, 1,050,000 tons-per- year facility, is located along the Ohio River and produces a material marketed under the trade name Thiosorbicr Lime that has a product chemistry ideally suited for removing sulfur dioxide from power plant stack gases. All of Maysville's output is committed under long-term contracts with utility companies in the Ohio Valley region. All contracts contain provisions for price escalation. Owned reserves at the Maysville site are recovered from a mine 950 feet underground and are considered adequate to sustain the future four kiln operation in excess of seventy-five years. -3- Item 1. Business (continued) Dravo Lime's Black River facility is an integrated Thiosorbicr quicklime, high calcium pebble and pulverized quicklime, and bulk and bagged hydrated lime facility. Located along the Ohio River at Butler, Kentucky, Black River has an annual quicklime capacity of 1,350,000 tons-per-year. Of that total, in excess of seventy percent is committed to utility companies and steel and paper customers under long-term contracts with price escalation provisions. Limestone reserves at Black River are recovered from a 600-feet-deep underground mine. At Black River's expanded rate of capacity, reserves are considered adequate to sustain production levels for more than seventy-five years. The company's Longview facility, located near Birmingham, Alabama, is an integrated facility as well that produces high calcium quicklime, and bulk and bagged hydrated lime from owned limestone reserves. At this plant, Dravo Lime also produces dolomitic quicklime from limestone purchased from a nearby dolomitic stone quarry. Due to its material handling and storage capabilities and its ability to produce high calcium and dolomitic lime, the Longview facility is able to custom blend quicklime to its customers' chemical specifications. Longview's annual lime production capacity is approximately 570,000 tons-per- year. The company is currently evaluating the possibility of building a fourth kiln at Longview. In early 1997, Dravo Lime purchased a number of land parcels adjacent to the Longview quarry that doubled its limestone reserves. Recoverable reserves are estimated to last approximately 40 years at the current quarry production rate. Although it will not be necessary until the distant future, Longview could be converted to an underground mine if a further extension of reserves is necessary. In conjunction with the sale of Dravo Basic Materials' assets to Martin Marietta, Dravo Lime entered into agreements appointing Martin Marietta the exclusive distributor of certain aggregate by- products. In 1995, an aggregates processing plant was constructed at the Longview facility that annually produces between 500,000 to 1,000,000 tons of aggregates for purchase by Martin Marietta. A benefit of this installation is to make a marketable by-product out of limestone that is chemically unsuitable for lime production, thereby reducing the cost Dravo Lime incurs to recover the high calcium limestone reserves that are beneath the aggregate quality material. Dravo Lime products are distributed through quicklime distribution terminals located in Aliquippa, Donora and Monaca, Pennsylvania; Porterfield, Ohio; Brunswick, Georgia; and Tampa, Fort Lauderdale and Sanford, Florida. At Baton Rouge, Louisiana, Dravo Lime owns and operates a lime hydration and bagging facility from which quicklime, and bulk and bagged hydrated lime products are distributed. (b) Competitive Conditions Dravo encounters competition at all its operations but believes that its experience, strategically located reserves and technical expertise in the flue gas desulfurization industry give it certain competitive advantages. -4- Item 1. Business (continued) Dravo's research and development expenditures were $3.7 million in 1996 and $3.6 million in 1995. Research and development spending in 1997 is expected to exceed $3.3 million. The company expects the research, much of which is being conducted jointly with utility customers, to lower both the capital and operating costs associated with flue gas desulfurization (FGD). A major advancement toward that goal was achieved with the development of a second generation, proprietary ThioClearr FGD technology. A commercial scale demonstration facility using this technology is currently being engineered and constructed at Applied Energy Services' Beaver Valley cogeneration facility in Monaca, Pennsylvania. Construction is expected to be completed in the second quarter of 1997. Other research projects are aimed at developing proprietary technologies for use in reducing stack gas emissions of combined SOx/NOx and air toxins while recovering and processing salable by-products. Dravo believes that in this field its long-term contracts, accumulated experience and technical skill represent significant competitive advantages. With the exception of its research and development capabilities, several firms with which Dravo competes have comparable resources and income. Dravo competes with other firms for qualified professional personnel, particularly those with technical skills. (c) Corporate Development Dravo's corporate development policy encompasses growth through investment in existing businesses, internal development and acquisition. The company announced in October 1996 that it was undertaking an investment banking review of strategic alternatives to accelerate growth and enhance shareholder value. Additionally, to the extent that business units no longer meet management's long-term profitability performance criteria and business strategies, or do not contribute significantly to corporate objectives, a policy of divestiture is followed. Continuing operations of Dravo Corporation, which are principally domestic in nature, function in one segment, a natural resource business, primarily involved in the production, processing and supply of lime for environmental, metallurgical, pulp and paper, municipal, construction and miscellaneous chemical and industrial applications as well as the development and marketing of related environmental technologies, products and services. Dravo's position as the world's leading producer of lime for flue gas desulfurization applications was enhanced by the passage of the 1990 Clean Air Act Amendments. Further information required by this item is incorporated by reference to the information set forth under the captions indicated below in the 1996 Annual Report to Shareholders which accompanies this report: Caption in Annual Report Page No. Results of Operations 12 - 14 Note 16: Research and Development 32 Employees at Year-End 35 -5- Item 2. Properties The following is a listing of principal offices, plants and mines currently used in operations: Use Location Owned or Leased Executive and general Pittsburgh, Pennsylvania Leased offices Production facilities Saginaw, Alabama Owned Butler, Kentucky Owned Maysville, Kentucky Owned Distribution sites Ft. Lauderdale, Florida Leased Tampa, Florida Owned/Leased Sanford, Florida Leased Brunswick, Georgia Owned/Leased Baton Rouge, Louisiana Owned Porterfield, Ohio Leased Donora, Pennsylvania Leased Monaca, Pennsylvania Owned/Leased The following table shows a summary of the company's reserves at December 31, 1996 and tons mined by Dravo Lime in 1996. (Tons in millions) Recoverable 1996 Reserves Production Underground Mines: Owned 592.6 6.2 Quarries: Owned (1) 31.1 1.4 623.7 7.6 (1) Does not include over 27 million tons of reserves purchased in early 1997. Additional information required by this item is incorporated by reference to the information set forth under Item 1(a) "General Development of the Business" on pages 3 through 5 of this Form 10- K. -6- Item 3. Legal Proceedings Information required by this item is incorporated by reference to the information set forth under the caption Note 8: "Contingent Liabilities" in the Notes to Consolidated Financial Statements on pages 25 and 26 of the 1996 Annual Report to Shareholders which accompanies this report. Item 4. Submission of Matters to a Vote of Security Holders There were no matters submitted to a vote of security holders for the three months ended December 31, 1996. -7- PART II Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters Information required by this item is incorporated by reference to the information set forth under the captions indicated below in the 1996 Annual Report to Shareholders which accompanies this report: Caption in Annual Report Page No. Common Stock Market Price 15 Shareholders at year-end 35 Dividends 14, 35 Description of Dravo Capital Stock General Under its Restated Articles of Incorporation ("the Articles"), as amended, Dravo is authorized to issue 1,878,870 shares of preference stock, par value $1.00 per share, and 35,000,000 shares of common stock, par value $1.00 per share. At December 31, 1996 issued preference and common shares were 220,386 and 15,096,817, respectively and there were 333,168 shares of common stock held in the treasury. Four series of preference stock have been established by resolutions of the Board of Directors: $2.20 Cumulative Convertible Series A Preference Stock ("Series A Preference Stock"), consisting of 26,817 shares, issued on September 1, 1970; $2.475 Cumulative Convertible Series B Preference Stock ("Series B Preference Stock"), consisting of 165,516 shares, issued on June 12, 1973; Series C Preference Stock consisting of 200,000 shares; and $12.35 Series D Cumulative Convertible Exchangeable Preference Stock ("Series D Preference Stock"), consisting of 200,000 shares, issued on September 21, 1988. All of the shares of Series A Preference Stock were converted into shares of common stock on April 2, 1978. Presently there are 20,386 shares of Series B Preference Stock and 200,000 shares of Series D Preference Stock issued and outstanding. No shares of Series C Preference Stock have been issued or are outstanding. The Board of Directors did not extend the rights to issue Series C stock, pursuant to the Shareholders' Rights Agreement, past the April 17, 1996 expiration date. Other series of preference stock may be created by resolution of the Board of Directors with such dividend, liquidation, redemption, sinking fund and conversion rights as shall be specified therein. Dividend Rights The holders of the preference stock are entitled to cumulative dividends, payable quarterly, which must be paid and the next quarterly dividend set apart before any dividends (except dividends in common stock or any other -8- Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters (continued) Dividend Rights (continued) stock ranking after the preference stocks as to dividends and assets) are declared, or paid, or monies set apart for the payment of dividends on any class of stock ranking after the preference stock as to dividends or assets. The rate of dividends payable upon the Series B Preference Stock is $2.475 per annum. The rate of dividends payable upon the Series D Preference Stock is 12.35 percent per annum or $12.35 per share, which rate shall be increased by 2 percent per annum if such dividends are not paid on any quarterly dividend payment date until accrued and unpaid dividends on the Series D Preference Stock are paid. The holders of the common stock are entitled to such dividends as may be declared by the Board of Directors out of assets properly available for that purpose. No common stock dividends have been declared since April, 1987. Other information required by this item is incorporated by reference to the information set forth under the caption "Note 5: Notes Payable", in the Notes to Consolidated Financial Statements on pages 24 and 25 of the 1996 Annual Report to Shareholders which accompanies this report. Voting Rights Each share of the common stock and the preference stock is entitled to one vote, which is cumulative in the election of directors. The Board of Directors is divided into three classes, and approximately one third of the directors are elected each year for three year terms. The effect of such classification of the Board is to increase the number of shares, voted cumulatively, necessary to elect directors. If dividends on the preference stock shall be unpaid or in arrears for six quarterly dividend periods, the holders of the preference stock voting as a class shall have the right to elect two additional directors. Liquidation Rights In the event of the voluntary or involuntary liquidation or dissolution of Dravo, or the sale or other disposition of substantially all of its assets, the holders of the Series B Preference Stock shall be entitled to receive the sum of $55 per share plus all accumulated and unpaid dividends thereon; and the holders of Series D Preference Stock shall be entitled to receive $100 per share plus all accumulated and unpaid dividends thereon. The holders of any other series of preference stock which may be issued shall be entitled to receive the amounts provided for in the resolutions creating such series. The holders of the common stock shall share ratably in the remaining assets, if any. -9- Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters (continued) No Preemptive Rights and Non-assessability No preemptive rights attach to the common stock or the preference stock. Neither the holders of the common stock nor the preference stock are liable to further calls or assessment by Dravo. Redemption and Sinking Fund Provisions There are no redemption provisions with respect to the common stock. The Series B Preference Stock may be redeemed, in whole or in part, at the option of Dravo, on not less than 60 days notice, on any quarterly dividend payment date by the payment of $55 per share and all accumulated and unpaid dividends to the redemption date. The Series D Preference Stock may be redeemed in whole or in part at the option of Dravo at any time after January 21, 1996, by the payment of $100 per share and all accumulated and unpaid dividends to the redemption date, so long as the current market price (as defined in the Certificate of Designations, Preferences and Rights for the Series D Preference Stock) of the common stock on the date the Board decides to redeem the shares is at least 175 percent of the then effective conversion price for the Series D Preference Stock. Commencing on the first quarterly dividend payment date after September 21, 1998 and annually thereafter, Dravo is required to redeem 50,000 shares of Series D Preference Stock in cash at the redemption price of $100 per share plus all accumulated and unpaid dividends. Dravo is also required (unless certain conditions are met) to redeem all of the then outstanding shares of Series D Preference Stock in cash at $100 per share plus all accumulated and unpaid dividends (a) if Dravo declares or pays or sets apart for payment any dividends or makes any other distribution in cash or other property on or in respect of the common stock or any other class or series of the capital stock of Dravo ranking junior to the Series D Preference Stock as to payment of dividends ("Junior Dividend Stock"), or sets apart money for any sinking fund or analogous fund for the redemption or purchase of any Junior Dividend Stock and (b) upon any merger or consolidation of Dravo if, in connection therewith, the holders of the common stock receive cash, debt instruments or preference stock of the surviving entity which ranks on a parity with or senior to the Series D Preference stock with respect to liquidation, dissolution or winding up or dividends. There are no sinking fund provisions with respect to the common stock, the Series B Preference Stock or the Series D Preference Stock. -10- Item 5. Market for the Registrant's Common Stock and Related Stockholder Matters (continued) Conversion The Series B Preference Stock is presently convertible at any time prior to redemption at the option of the holder into common stock on the basis of 3.216 shares of common stock for each share of Series B Preference Stock, subject to equitable adjustment in the event of certain changes affecting the common stock. The Series D Preference Stock is presently convertible at any time prior to redemption at the option of the holder into common stock on the basis of 8.0 shares of common stock for each share of Series D Preference Stock, subject to adjustment in the event of certain changes affecting the common stock. The Series D Preference Stock is convertible or exchangeable in whole at any time by Dravo for an equal face amount of Dravo Senior Subordinated Convertible Notes due September 21, 2001 containing the same conversion rights, transfer restrictions and other terms (other than voting rights) as the Series D Preference Stock. There are no conversion rights with respect to the common stock. Other Information Dravo may purchase shares of the Preference Stock whether or not any dividend arrearage shall exist with respect thereto, and may hold and dispose of such shares in such manner as it may elect. The holders of the preference stock who comply with applicable provisions of law and object to a merger or consolidation involving Dravo shall have all of the legal rights of objecting shareholders in a merger or consolidation whether or not they constitute a class otherwise entitled to such rights. The transfer agent and registrar for the common stock is Continental Stock Transfer & Trust Company, New York, NY. -11- Item 6. Selected Financial Data Information required by this item, with the exception of common stock dividends declared, is incorporated by reference to the information set forth under the caption "Five-Year Summary" on page 35 of the 1996 Annual Report to Shareholders which accompanies this report. Dravo has declared no common stock dividends in the five-year period ending December 31, 1996. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Information required by this item is incorporated by reference to the information set forth under the captions "Overview", "Results of Operations", "Financial Position and Liquidity" and "Outlook" on pages 12 through 15 of the 1996 Annual Report to Shareholders which accompanies this report, to the information set forth under the caption Note 2: "Discontinued Operations" on page 23, Note 3: "Dispositions" on pages 23 and 24, Note 7: "Commitments" on page 25, Note 8: "Contingent Liabilities" on pages 25 and 26, Note 13: "Income Taxes" on pages 31 and 32 and Note 14: "Extraordinary Item" on page 32 in the Notes to Consolidated Financial Statements of the 1996 Annual Report to Shareholders. Item 8. Financial Statements and Supplementary Data Information required by this item is incorporated by reference to the financial statements and notes thereto set forth on pages 16 through 33, and the Independent Auditors' Report set forth on page 34 of the 1996 Annual Report to Shareholders which accompanies this report. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable. -12- PART III Item 10. Directors and Executive Officers of the Registrant Information required by this Item as to Directors and nominees for Director is incorporated by reference to the information set forth under the caption "Information Concerning Directors and Nominees for Director" in the Registrant's Proxy Statement for the Annual Meeting of Shareholders on April 24, 1997. The following information indicates the position and age at March 22, 1997 of the non-director executive officers of Dravo Corporation and their business experience during the last five years: Marshall S. Johnson, Age 55, Vice President, Operations and Engineering since December, 1994; Vice President, Operations, Dravo Lime Company from April, 1992 to December 1994; prior thereto Regional Operations Manager, Dravo Lime Company. Ernest F. Ladd III, Age 56, Executive Vice President, Chief Financial Officer since December, 1994; Executive Vice President, Finance and Administration from December, 1989 to December, 1994. John R. Major, Age 52, Vice President, Administration since January, 1989. James J. Puhala, Age 54, Vice President, General Counsel and Secretary since September, 1987. Richard E. Redlinger, Age 45, Vice President, Corporate Development, and Treasurer since July, 1995; prior thereto Vice President, Finance and Planning, Dravo Lime Company. Donald H. Stowe, Jr., Age 45, Vice President Sales and Technology since December 1994; Executive Vice President, Sales and Technology, Dravo Lime Company from March, 1992 to December, 1994; prior thereto Sr. Vice President, Sales and Technology, Dravo Lime Company. Larry J. Walker, Age 44, Vice President and Controller since July, 1995; Controller since December, 1989. -13- Item 11. Executive Compensation Information required by this item is incorporated by reference to the information set forth under the caption "Executive Compensation" in the Registrant's Proxy Statement for the Annual Meeting of Shareholders on April 24, 1997. Item 12. Security Ownership of Certain Beneficial Owners and Management Information required by this item is incorporated by reference to the information set forth under the captions "Security Ownership of Certain Beneficial Owners" and "Ownership by Management of Equity Securities" in the Registrant's Proxy Statement for the Annual Meeting of Shareholders on April 24, 1997. Item 13. Certain Relationships and Related Transactions Information required by this item is incorporated by reference to the information set forth under the caption "Information Concerning Directors and Nominees for Director" in the Registrant's Proxy Statement for the Annual Meeting of Shareholders on April 24, 1997. -14- PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) 1. Financial Statements The following consolidated financial statements of the Registrant are filed pursuant to Item 8 of this Form 10-K and are incorporated herein by reference to the page numbers indicated below in the 1996 Annual Report to Shareholders which accompanies this report. Description Page No. Consolidated Balance Sheets at December 31, 1996 and 1995 16, 17 Consolidated Statements of Operations for the years ended December 31, 1996, 1995 and 1994 18 Consolidated Statements of Retained Earnings for the years ended December 31, 1996, 1995 and 1994 19 Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and 1994 20, 21 Notes to Consolidated Financial Statements 22 - 33 Independent Auditors' Report 34 2. Financial Statement Schedules The following financial statement schedules of the Registrant are required and are filed pursuant to this item in this Form 10-K. Schedule Page No. Independent Auditors' Report 23 Schedule I. Condensed Financial Information of 24 - 31 Registrant Schedules other than those listed above have been omitted because they are not applicable or because the required information is reported in the financial statements or notes. -15- Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (continued) (a) 3. Exhibits (3) Articles of Incorporation and By-laws (i) Articles of Amendment restating Dravo Corporation's Articles of Incorporation in their entirety and all subsequent amendments thereto including but not limited to the Statement with Respect to Shares of Dravo Corporation as filed with the Secretary of the Commonwealth of Pennsylvania on January 27, 1992 are incorporated by reference to Exhibit 3.1 of the February 12, 1992 Form 8-K of the Registrant. (ii) By-laws of the Registrant as amended are incorporated by reference to Exhibit 3 (ii) of the December 31, 1995 Form 10-K of the Registrant. (4) Instruments Defining the Rights of Security Holders, including Indentures (i) Articles of Amendment restating Dravo Corporation's Articles of Incorporation, described in Exhibit (3)(i) in this Form 10-K of the Registrant. (ii) Statement with Respect to Shares - Domestic Business Corporation amending Section 3(a) of the Certificate of Designations, Preferences and Rights of Series D Cumulative Convertible Exchangeable Preference Stock is incorporated by reference to exhibit (4) (ii) of the June 30, 1990 Form 10-Q of the Registrant. (iii) Form of indemnification agreement between Dravo Corporation and members of its Board of Directors incorporated by reference to Exhibit (10)(xvii) of the December 31, 1987 Form 10-K of the Registrant. (iv) Statement with respect to amended rules for Form S-8 is incorporated by reference to Exhibit (4)(x) of the December 31, 1990 Form 10-K of the Registrant. -16- Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (continued) (a) 3. Exhibits (continued) (4)(v) Credit and Note and Stock Purchase Agreement dated as of September 21, 1988 by and among Dravo Corporation, its wholly-owned subsidiaries, Dravo Lime Company and Dravo Basic Materials Company, Inc. and The Prudential Insurance Company of America and Prudential Interfunding Corp. is incorporated by reference to Exhibit (4)(i) of the September 27, 1988 Form 8-K of the Registrant and amendment dated March 13, 1990 to said agreement is incorporated by reference to Exhibit (4)(v) of the December 31, 1989 Form 10-K of the Registrant. (vi) Registration agreement dated as of September 21, 1988 between Dravo Corporation and The Prudential Insurance Company of America, is incorporated by reference to Exhibit (4)(vi) of the September 27, 1988 Form 8-K of the Registrant. (vii) (a) Revolving Line of Credit Agreement with all attendant schedules and exhibits dated as of September 20, 1990, by and among Dravo Corporation, Dravo Lime Company, Dravo Basic Materials Company, Inc., Regions Bank of Alabama (formerly First Alabama Bank), and PNC Bank, N. A. (formerly Pittsburgh National Bank) is incorporated by reference to Exhibit (4)(i) of the September 30, 1990 Form 10-Q of the Registrant. (b) Amendment dated September 20, 1990 to Credit and Note and Stock Purchase Agreement dated as of September 21, 1988 is incorporated by reference to Exhibit (4) (ii) of the September 30, 1990 Form 10-Q of the Registrant. (c) First amendment to the Companies' Pledge Agreement dated September 20, 1990 of the Credit and Note and Stock Purchase Agreement dated September 21, 1988 is incorporated by reference to Exhibit (4)(iii) of the September 30, 1990 Form 10-Q of the Registrant. (d) First amendment to the Second Intercreditor Agreement dated September 20, 1990 of the Credit and Note and Stock Purchase Agreement dated September 21, 1988 is incorporated by reference to Exhibit (4)(iv) of the September 30, 1990 Form 10-Q of the Registrant. (e) Intercreditor Agreement dated September 20, 1990 by and among The Prudential Insurance Company of America, Regions Bank of Alabama (formerly First Alabama Bank), PNC Bank, N. A. (formerly Pittsburgh National Bank), Mellon Bank, N. A., and the Royal Bank of Canada is incorporated by reference to Exhibit (4) (v) of the September 30, 1990 Form 10-Q of the Registrant. -17- Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (continued) (a) 3. Exhibits (continued) (4)(viii) Loan Agreement dated as of December 1, 1978 between Dravo Equipment Company and County of Harrison, Ohio. The Registrant hereby agrees to furnish to the Commission upon request a copy of the instrument listed under exhibit (4)(ix). The instrument does not authorize the issuance of securities in excess of 10 percent of total assets of the Registrant and its subsidiaries on a consolidated basis. (ix) Override Agreement, dated January 21, 1992, between Dravo Corporation, The Prudential Insurance Company of America, Regions Bank of Alabama (formerly First Alabama Bank), PNC Bank, N. A. (formerly Pittsburgh National Bank) and Bank of America Illinois (formerly Continental Bank, N. A.) is incorporated by reference to Exhibit 10.1 of the February 12, 1992 Form 8-K of the Registrant. (x) First Amendment, dated March 10, 1993, to the Override Agreement dated January 21, 1992 is incorporated by reference to Exhibit 4 (xi) of the December 31, 1992 Form 10-K of the Registrant. (xi) Second Amendment, dated March 7, 1994, to the Override Agreement dated January 21, 1992 is incorporated by reference to Exhibit 4 (xii) of the December 31, 1993 Form 10-K of the Registrant. (xii) First Amendment, dated March 7, 1994, to the Amended and Restated Revolving Credit Agreement dated January 21, 1992 is incorporated by reference to Exhibit 4 (xiii) of the December 31, 1993 Form 10-K of the Registrant. (xiii) Four copies of the First Amendment, (one each for The Prudential Insurance Company of America, Regions Bank of Alabama (formerly First Alabama Bank), PNC Bank, N.A. and Bank of America Illinois (formerly Continental Bank N.A.), dated March 7, 1994, to the Amended and Restated Revolving Credit Agreement dated January 21, 1992 are incorporated by reference to Exhibit 4 (xiv) of the December 31, 1993 Form 10-K of the Registrant. (xiv) Amendment Agreement dated August 1, 1994 encompassing the Third Amendment to the Override Agreement dated January 21, 1992 and the Second Amendment to the Amended and Restated Revolving Credit Agreement dated January 21, 1992 is incorporated by reference to the August 18, 1994 Form 8-K of the Registrant. -18- Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (continued) (a) 3. Exhibits (continued) (4)(xv) Amendment Agreement dated January 3, 1995 encompassing the Fourth Amendment to the Override Agreement dated January 21, 1992 and the Third Amendment to the Amended and Restated Revolving Credit Agreement dated January 21, 1992 is incorporated by reference to Exhibit 4 (xvii) of the December 31, 1994 Form 10-K of the Registrant. (xvi) Amendment Agreement dated December 31, 1995 encompassing the Fifth Amendment to the Override Agreement dated January 21, 1992 and the Fifth Amendment to the Amended and Restated Revolving Credit Agreement dated January 21, 1992 is incorporated by reference to Exhibit 4 (xvii) of the December 31, 1995 Form 10-K of the Registrant. (Note: There is no Fourth Amendment to the Amended and Restated Revolving Credit Agreement due to a numbering error.) (xvii) Amendment and Restatement of Articles IV, V, VI and Appendix A dated February 15, 1996 of the Override Agreement dated January 21, 1992 is incorporated by reference to Exhibit 4(xviii) of the December 31, 1995 Form 10-K of the Registrant. (xviii) Amendment Agreement dated June 28, 1996 encompassing the Sixth Amendment to the Amended and Restated Revolving Credit Agreement dated January 21, 1992 is filed herein under separate cover. (10) Material Contracts (All of the following, except item 10 (xiv), are Management Contracts or Compensatory Plans or Arrangements required to be filed as an Exhibit to this Form 10-K.) (i) Dravo Corporation Executive Death and Disability Income Executive Benefits Plan (now Executive Benefit Plan), approved by the Board of Directors on October 23, 1980, incorporated by reference to Exhibit 10 (i) of the December 31, 1980 Form 10-K of the Registrant, and amendment thereto dated July 1, 1984, incorporated by reference to Exhibit 10 (i) of the December 31, 1984 Form 10-K of the Registrant. (ii) Dravo Corporation Stock Option Plan of 1978, as amended, incorporated by reference to Exhibit 10 (vi) of the December 31, 1982 Form 10-K of the Registrant. (iii) Dravo Corporation Long-Term Incentive Award Plan of 1983, as amended, incorporated by reference to Exhibit 10 (iv) of the December 31, 1987 Form 10-K of the Registrant. -19- Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (continued) (a) 3. Exhibits (continued) (10)(iv) Dravo Corporation Employee Stock Option Plan of 1988, incorporated by reference to the Proxy Statement for the Annual Meeting of Shareholders on April 28, 1988. (v) Dravo Corporation Incentive Compensation Plan is incorporated by reference to Exhibit 10 (v) of the December 31, 1995 Form 10-K of the Registrant. (vi) Dravo Corporation Stock Option Plan of 1994, as amended December, 1995, is incorporated by reference to Exhibit 10 (vi) of the December 31, 1996 Form 10-K of the Registrant. (vii) Dravo Corporation Non-Employee Directors' Retainer Fee Plan, incorporated by reference to the Registrant's Registration Statement No. 333-01689 on Form S-8 dated March 13, 1996. (viii) Dravo Corporation Stock Incentive Compensation Plan, incorporated by reference to the Registrant's Registration Statement No. 333- 01691 on Form S-8 dated March 13, 1996. (ix) Agreement dated June 1, 1993 between Dravo Corporation and Ernest F. Ladd III is incorporated by reference to Exhibit 10 (viii) of the December 31, 1993 Form 10-K of the Registrant. (x) Agreement dated June 1, 1993 between Dravo Corporation and Carl A. Gilbert is incorporated by reference to Exhibit 10 (ix) of the December 31, 1993 Form 10-K of the Registrant. (xi) Agreement dated June 1, 1993 between Dravo Corporation and John R. Major is incorporated by reference to Exhibit 10 (xi) of the December 31, 1993 Form 10-K of the Registrant. (xii) Agreement dated June 1, 1993 between Dravo Corporation and James J. Puhala is incorporated by reference to Exhibit 10 (xii) of the December 31, 1995 Form 10-K of the Registrant. (xiii) Agreement dated January 1, 1995 between Dravo Corporation and Donald H. Stowe, Jr., is incorporated by reference to Exhibit 10 (xiii) of the December 31, 1995 Form 10-K of the Registrant. (xiv) Noncompetition and Nondisclosure Agreement dated January 3, 1995 by and among Dravo Corporation, Dravo Basic Materials Company, Inc., Dravo Lime Company and Martin Marietta Materials, Inc. is incorporated by reference to Exhibit 10.1 of the January 17, 1995 Form 8-K of the Registrant. -20- Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (continued) (a) 3. Exhibits (continued) (11) Statement Re Computation of Per Share Earnings filed under separate cover. (13) 1996 Annual Report to Shareholders attached to this report under separate cover. Except for the pages and information thereof expressly incorporated by reference in this Form 10-K, the Annual Report to Shareholders is provided solely for the information of the Securities and Exchange Commission and is not to be deemed "filed" as part of the Form 10-K. (21) Subsidiaries of the Registrant filed under separate cover. (23) Consent of Independent Auditors filed under separate cover. (24) Powers of Attorney are filed herein under separate cover. (b) Reports on Form 8-K There were no reports on Form 8-K for the three months ended December 31, 1996. -21- 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. DRAVO CORPORATION March 26, 1997 By:/s/ CARL A. GILBERT Carl A. Gilbert, President and Chief Executive Officer 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 date indicated. Signature Title Date /s/ CARL A. GILBERT President, Chief Executive Carl A. Gilbert Officer and Director March 26, 1997 /s/ ERNEST F. LADD III Executive Vice President, Ernest F. Ladd III Chief Financial Officer March 26, 1997 /s/ LARRY J. WALKER Vice President and Larry J. Walker Controller March 26, 1997 *ARTHUR E. BYRNES Director March 26, 1997 Arthur E. Byrnes *JAMES C. HUNTINGTON, JR. Director March 26, 1997 James C. Huntington, Jr. *WILLIAM E. KASSLING Director March 26, 1997 William E. Kassling *WILLIAM G. ROTH Director March 26, 1997 William G. Roth *KONRAD M. WEIS Director March 26, 1997 Konrad M. Weis /s/ ERNEST F. LADD III *By Ernest F. Ladd III, Attorney-in-fact -22- INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Dravo Corporation: Under date of January 22, 1997, we reported on the consolidated balance sheets of Dravo Corporation and subsidiaries as of December 31, 1996, and 1995, and the related consolidated statements of operations, retained earnings, and cash flows for each of the years in the three-year period ended December 31, 1996, as contained in the 1996 annual report to shareholders. As discussed in Note 10 to the consolidated financial statements, the company adopted the method of accounting for postemployment benefits prescribed by Statement of Financial Accounting Standards No. 112 in 1994. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the year 1996. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related financial statement schedule as listed in the accompanying index. The financial statement schedule is the responsibility of the company's management. Our responsibility is to express an opinion on the financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG PEAT MARWICK LLP Pittsburgh, Pennsylvania January 22, 1997 -23- DRAVO CORPORATION (PARENT COMPANY) Schedule I - Condensed Financial Information of Registrant Balance Sheets (In thousands) December 31,
1996 1995 ASSETS Current assets: Cash and cash equivalents $ 1,390 $ 279 Accounts receivable 517 879 Current income tax benefit from affiliates 6,104 4,724 Net assets of discontinued operations -- 923 Other current assets 183 434 Total current assets 8,194 7,239 Due from affiliates 23,094 -- Investments in affiliates 52,525 141,836 Deferred income tax benefit from affiliates 29,718 26,723 Other assets 23,561 19,532 Property, plant and equipment 123 6,832 Less accumulated depreciation and amortization 123 6,824 Net property, plant and equipment -- 8 Total assets $137,092 $195,338
See accompanying notes to financial statements. -24- DRAVO CORPORATION (PARENT COMPANY) Schedule I - Condensed Financial Information of Registrant Balance Sheets (In thousands) December 31, 1996 1995
LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable-trade $ 1,038 $ 1,566 Accrued retirement contribution 1,785 2,423 Net liabilities of discontinued operations 6,299 -- Other current liabilities 637 641 Total current liabilities 9,759 4,630 Advances from affiliates -- 75,046 Net liabilities of discontinued operations 6,786 9,517 Other liabilities 6,632 6,290 Redeemable preference stock: Par value $1, issued 200,000 shares: Series D, cumulative, convertible, exchangeable (entitled in liquidation to $20.0 million) 20,000 20,000 Shareholders' equity: Preference stock, par value $1, authorized 1,878,870 shares: Series B, $2.475 cumulative, convertible, issued 20,386 and 25,386 shares (entitled in liquidation to $1.1 million and $1.4 million); 20 25 Series D, reported above Common stock, par value $1, authorized 35,000,000 shares; issued 15,096,817 and 15,055,237 shares 15,097 15,055 Other shareholders' equity 78,798 64,775 Total shareholders' equity 93,915 79,855 Total liabilities and shareholders' equity $137,092 $195,338
See accompanying notes to financial statements. -25- DRAVO CORPORATION (PARENT COMPANY) Schedule I - Condensed Financial Information of Registrant Statements of Operations Years ended December 31, (In thousands) 1996 1995 1994
General and administrative expenses $ (709) $ (961) $ (1,433) Other expense (4) -- -- Interest expense -- (9) (16) Interest income 10 -- 9 Loss from continuing operations before taxes and affiliate earnings (703) (970) (1,440) Income tax benefit (provision) 4,142 2,038 (4,107) Earnings (loss) from continuing operations before affiliate earnings 3,439 1,068 (5,547) Equity in affiliate earnings 10,689 9,913 1,544 Earnings (loss) from continuing operations 14,128 10,981 (4,003) Loss from discontinued operations -- -- (6,554) Net earnings (loss) $14,12 8 $10,981 $(10,557)
See accompanying notes to financial statements. -26- DRAVO CORPORATION (PARENT COMPANY) Schedule I - Condensed Financial Information of Registrant Statements of Cash Flows
(In thousands) Years ended December 31, 1996 1995 1994 Cash flows from operating activities: Earnings (loss) from continuing operations $14,128 $ 10,981 $ (4,003) Adjustments to reconcile earnings (loss) from continuing operations to net cash provided (used) by continuing operations activities: Depreciation and amortization 4 6 9 Loss on disposal of assets 4 -- -- Equity in earnings of affiliates (10,689) (9,913) (1,544) Changes in assets and liabilities: Decrease (increase) in accounts receivable 362 726 (1,036) Decrease (increase) in current income tax benefits (1,381) (2,783) 2,542 Decrease (increase) in other current assets 318 1,151 (1,269) Increase in other assets (1,991) (3,517) (7,791) Decrease (increase) in deferred income taxes (2,995) 9,689 1,591 Increase (decrease) in accounts payable and accrued expenses (1,062) (1,404) 961 Increase in other liabilities 342 390 3,352 Net cash provided (used) by continuing operations activities (2,960) 5,326 (7,188) Loss from discontinued operations -- -- (6,554) Increase (decrease) in net liabilities of discontinued operations 4,491 (13,099) (4,592) Proceeds from repayment of notes receivable from sale of discontinued operations -- 2,200 1,600 Net cash provided (used) by discontinued operations activities 4,491 (10,899) (9,546) Net cash provided (used) by operating activities $ 1,531 $(5,573) $(16,734)
See accompanying notes to financial statements. -27- DRAVO CORPORATION (PARENT COMPANY) Schedule I - Condensed Financial Information of Registrant Statements of Cash Flows (In thousands) Years ended December 31, 1996 1995 1994
Cash flows from investing activities: Increase (decrease) in advances from subsidiaries $(98,140) $(77,757) $19,187 Dividends received from affiliates 100,000 88,000 -- Other, net 1 -- 266 Net cash provided (used) by investing activities 1,861 10,243 19,453 Cash flows from financing activities: Proceeds from issuance of common stock 248 557 42 Purchase of treasury stock -- (2,667) -- Dividends paid (2,529) (2,535) (2,544) Net cash used by financing activities (2,281) (4,645) (2,502) Net increase in cash and cash equivalents 1,111 25 217 Cash and cash equivalents at beginning of year 279 254 37 Cash and cash equivalents at end of year $ 1,390 $ 279 $ 254
See accompanying notes to financial statements. -28- DRAVO CORPORATION (PARENT COMPANY) Schedule I - Condensed Financial Information of Registrant Notes to Financial Statements Notes 1 through 3, 5 through 15, and 17 to Dravo Corporation's Consolidated Financial Statements have relevance to the parent company financial statements and should be read in conjunction therewith. Certain reclassifications of previously reported balances have been made to conform to the current year's presentation. Note 1: Commitments There was no continuing operations rental expense for 1996, 1995 or 1994. The minimum future rentals under noncancelable operating leases and minimum future rental receipts from subleases to third parties as of December 31, 1996 are indicated in the table below. Of the $4.0 million net minimum payments, $3.3 million has been expensed in connection with discontinued operations. (In thousands)
1997 $10,555 1998 3,561 1999 -- 2000 -- 2001 -- After 2001 -- Total minimum payments required 14,116 Less: Minimum sublease rental receipts (10,203) Net minimum payments $ 3,913
Note 2: Income Taxes Dravo Corporation files a consolidated federal income tax return which includes the parent and consolidated subsidiaries. Dravo Corporation parent company financial statements recognize current income tax benefits to the extent the benefits are offset by current income tax liabilities of the consolidated subsidiaries. Long-term deferred income tax benefits are recognized to the extent that it is more likely than not that the company will generate sufficient consolidated taxable income to utilize net operating loss carryforwards prior to their expiration. -29- Note 2: Income Taxes (continued) The income tax benefit (provision) for the years ended December 31 are comprised of the following: (In thousands) 1996 1995 1994
Provision to offset tax benefits of subsidiaries $ -- $ -- $ (4,107) Benefit to offset tax liabilities of subsidiaries 4,142 2,038 -- $ 4,142 $ 2,038 $ (4,107)
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31 are as follows: (In thousands)
1996 1995 Deferred tax assets: Provision for discontinued operations $ 4,580 $ 3,008 Net operating loss carryforwards 62,808 67,229 Investment tax credit carryforwards 791 1,411 Other 721 -- Total gross deferred tax assets 68,900 71,648 Less valuation allowance 34,829 36,381 Net deferred tax assets after valuation allowance 34,071 35,267 Deferred tax liabilities: Pension accrual 4,353 6,151 Other -- 2,393 Total gross deferred tax liabilities 4,353 8,544 Net deferred tax asset $29,718 $26,723
Management believes it is more likely than not that the net deferred tax asset will be realized through the reversal of temporary differences and through its subsidiaries future income. In order to fully realize the net deferred tax asset, the parent company and its subsidiaries will need to generate future taxable income of approximately $70.9 million prior to the expiration of its net operating loss carryforwards. There can be no assurance, however, that the parent, or its subsidiaries, will generate enough taxable income to realize the deferred tax asset prior to the NOLs expiring. -30- Note 3: Dividends Cash dividends paid to the Registrant for the respective years ended December 31: (In thousands)
1996 1995 1994 Consolidated affiliates $100,000 $88,000 $-0- 50 percent or less owned companies accounted for by the equity method 1,090 916 792
-31- EXHIBITS Table of Contents Exhibit (Exhibit No.) Page No. 4. Instruments Defining the Rights of Security Holders, Including Indentures (xviii) Amendment Agreement dated June 28, 1996 encompassing the Sixth Amendment to the Amended and Restated Revolving Credit Agreement. (4)(xviii)1-7 11. Statement RE Computation of Per Share Earnings (11) 1, 2 13. 1996 Annual Report (13) 12-35 21. Subsidiaries of the Registrant (21) 1 23. Consent of Experts and Counsel (23) 1 24. Powers of Attorney (24) 1-5 27. Financial Data Schedule (EDGAR filing only) (27) 1 -32- EX-4 2 AMENDMENT TO REVOLVING CREDIT AGREEMENT EXECUTION COPY AMENDMENT AGREEMENT THIS AMENDMENT AGREEMENT (this "Agreement" or this "Amendment"), dated as of June 28, 1996, is entered into by and among DRAVO CORPORATION, a Pennsylvania corporation ("Dravo"), DRAVO LIME COMPANY, a Delaware corporation ("Lime"), DRAVO BASIC MATERIALS COMPANY, INC., an Alabama corporation ("Basic", together with Lime referred to herein as the "Companies"), FIRST ALABAMA BANK, a subsidiary of Regions Financial Corporation ("FAB"), PNC BANK, NATIONAL ASSOCIATION (formerly known as Pittsburgh National Bank) ("PNC"), BANK OF AMERICA ILLINOIS (formerly known as Continental Bank and Continental Bank N.A.) ("BAI"), THE PRUDENTIAL INSURANCE COMPANY OF AMERICA (acting through Prudential Capital Group, "Prudential"; FAB, PNC, BAI and Prudential herein collectively referred to as "Lenders", and each a "Lender"), and FAB, as agent for the Lenders (in such capacity, together with its successors and assigns, the "Agent") and BAI, as documentation agent for the Lenders (in such capacity, together with its successors and assigns, the "Documentation Agent"). PRELIMINARY STATEMENTS (1) The Companies, Dravo and the Lenders have entered into an Override Agreement, dated as of January 21, 1992, as amended by the First Amendment to Override Agreement, dated March 10, 1993, the Second Amendment to Override Agreement, dated as of March 7, 1994, the Amendment Agreement, dated as of August 1, 1994, the Amendment Agreement, dated as of January 3, 1995, the Amendment Agreement, dated as of December 31, 1995 and the Amendment and Restatement of Articles IV, V and VI of the Override Agreement and Amendment and Restatement of Appendix A Definitions dated as of February 15, 1996 (as so amended and restated, the "Override Agreement"). In addition, the Companies, the Agent, the Documentation Agent and the Lenders have entered into an Amended and Restated Revolving Credit Agreement, dated as of January 21, 1992, as amended by the First Amendment to Amended and Restated Revolving Credit Agreement, dated as of March 7, 1994, by the Amendment Agreement dated as of August 1, 1994, the Amendment Agreement dated as of January 3, 1995, and the Amendment Agreement dated as of December 31, 1995 (as so amended, the "Revolving Credit Agreement"). Capitalized terms used but not defined herein shall have the meanings assigned to such terms in the Override Agreement. (2) The parties hereto desire to amend the Revolving Credit Agreement and certain other Operative Documents to extend the Maturity Date of the Revolving Line of Credit from July 31, 1997 to July 31, 1998, and to extend the availability of the Letters of Credit until July 31, 1998, among other things. NOW, THEREFORE, in consideration of the premises, the parties hereto agree as follows: 4(xviii) -1 ARTICLE I SIXTH AMENDMENT TO REVOLVING CREDIT AGREEMENT SECTION 1.01. Amendments to Revolving Credit Agreement. The Revolving Credit Agreement shall be, effective as of the date hereof and subject to the satisfaction of the conditions precedent set forth in Section 2.01 hereof, amended as follows: (a) The first sentence of Section 1.1(a) is amended by deleting the date "July 31, 1997" and substituting therefor the date "July 31, 1998." (b) The fourth sentence of Section 1.1(a) is amended by deleting the date "July 31, 1997" and substituting therefor the date "July 31, 1998." (c) Section 1.1(a) is further amended by the addition at the end thereof of the following: "Notwithstanding anything in this Agreement to the contrary, the maximum available Revolving Line of Credit, together with the Stated Amount of all outstanding Letters of Credit shall, as of August 1, 1997, and thereafter, be reduced from SIXTY FIVE MILLION DOLLARS ($65,000,000.00) to FORTY-EIGHT MILLION DOLLARS ($48,000,000.00), and, as of August 1, 1997, the maximum limitation for each Lender shown opposite the name of each Lender on Schedule I shall be reduced on a proportionate basis to the foregoing reduction in the maximum available Revolving Line of Credit, together with the Stated Amount of all outstanding Letters of Credit." (d) The first sentence of Section 1.1(b)(i) is amended by deleting "the Maturity Date" and substituting therefor "July 31, 1997." (e) The first sentence of Section 1.1(b)(iii) is amended by deleting "the Maturity Date" and substituting therefor "July 31, 1997." (f) Section 1.1(c) is amended by the addition at the end thereof of the following: "On July 31, 1997, the Revolving Notes shall be amended by Borrowers and each respective Lender to indicate the extension of the Maturity Date to July 31, 1998, and the reduction of the maximum available Revolving Line of Credit, together with the Stated Amount of all outstanding Letters of Credit, from $65,000,000.00 to $48,000,000.00." (g) The fourth sentence of Section 1.3 is amended by deleting the date "July 31, 1997" and substituting therefor the date "July 31, 1998." 4(xviii) -2 (h) Section 1.6 is amended by the addition of the following parenthetical immediately after the number "$65,000,000.00", to- wit: "($48,000,000.00 after July 31, 1997)" ARTICLE II CONDITIONS PRECEDENT SECTION 2.01. Conditions of Effectiveness. This Amendment shall become effective when, and only when, (a) the Agent shall have received counterparts of this Amendment executed by each of the parties hereto, (b) all accrued but unpaid interest, fees and expenses under the terms of the Revolving Credit Agreement, as amended hereby, and all outstanding fees and expenses of counsel to the Agent and the Lenders, shall have been paid in full to the extent due and payable after giving effect to this Amendment, (c) the Agent additionally shall have received all of the following documents, each (unless otherwise indicated) being dated the date of receipt thereof by the Agent (which date shall be the same for all such documents), in form and substance satisfactory to the Agent and the Lenders: (i) Copies of (A) all documents evidencing all requisite corporate action of each Dravo Party (including any and all resolutions of the Board of Directors of each Dravo Party) authorizing the execution, delivery and performance of this Amendment and the matters contemplated hereby and thereby, and (B) all documents evidencing all Governmental Approvals, if any, with respect to this Amendment and the matters contemplated hereby and thereby. (ii) A certificate of the Secretary or an Assistant Secretary of each Dravo Party certifying the names and true signatures of the officers authorized to sign this Amendment on behalf of such Dravo Party and any other documents to be delivered by such Dravo Party hereunder. (iii) Such other documents, instruments, approvals (and, if required by the Agent, certified duplicates of executed copies thereof) or opinions as the Agent or any Lender may reasonably request. (b) The representations and warranties contained herein shall be true on and as of the effective date hereof; there shall exist on the effective date hereof no Event of Default or Default; there shall exist no material adverse change in the financial condition, business operation or prospects of any Dravo Party or its Subsidiaries since December 31, 1995; and each Dravo Party shall have delivered to the Lenders an Officer's Certificate, dated as of the effective date hereof, to such effect. 4(xviii) -3 ARTICLE III REPRESENTATIONS AND WARRANTIES SECTION 3.01. Representations and Warranties of the Dravo Parties. (a) Each of the Dravo Parties hereby repeats and confirms each of the representations and warranties made by it in Article VII of the Override Agreement, as though made on and as of the date hereof, with each reference therein to "this Agreement", the "Operative Documents", "hereof", "hereunder", "thereof", "thereunder" and words of like import being deemed to be a reference to the Override Agreement and the Operative Documents, in each case as amended hereby. (b) Each of the Dravo Parties represents and warrants as follows: (i) Such Dravo Party and each of its Subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of the state of its incorporation and is duly qualified to do business in, and is in good standing in, all other jurisdictions where the nature of its business or the nature of property owned or used by it makes such qualification necessary. (ii) The execution, delivery and performance by such Dravo Party of this Amendment are within its corporate powers, have been duly authorized by all necessary corporate action and do not contravene (A) such Dravo Party's charter or bylaws, (B) law, or (C) any legal or contractual restriction binding on or affecting such Dravo Party; and such execution, delivery and performance do not or will not result in or require the creation of any Lien upon or with respect to any of its properties. (iii) No Governmental Approval is required for the due execution, delivery and performance by such Dravo Party of this Amendment, except for such Governmental Approvals as have been duly obtained or made and which are in full force and effect on the date hereof and not subject to appeal. (iv) This Amendment constitutes the legal, valid and binding obligations of such Dravo Party enforceable against such Dravo Party in accordance with its terms; subject to the qualifications, however, that the enforcement of the rights and remedies herein is subject to bankruptcy and other similar laws of general application affecting rights and remedies of creditors and that the remedy of specific performance or of injunctive relief is subject to the discretion of the court before which any proceedings therefor may be brought. (v) Except as set forth in the Form 10-K filed by Dravo with the Securities Exchange Commission for the year ended December 31, 1995, there 4(xviii) -4 are no pending or threatened actions, suits or proceedings affecting such Dravo Party or any of its Subsidiaries or the properties of such Dravo Party or any of its Subsidiaries before any court, governmental agency or arbitrator, that may, if adversely determined, materially adversely affect the financial condition, properties, business, operations or prospects of such Dravo Party and its Subsidiaries, considered as a whole, or affect the legality, validity or enforceability of the Override Agreement or any other Operative Document, in each case as amended by this Amendment. ARTICLE IV CONSENT OF GUARANTOR SECTION 4.01. Consent of Guarantor. Dravo, by its execution hereof, does hereby consent to and approve the terms of this Amendment and does hereby ratify and affirm its guaranty obligations in favor of Lenders. ARTICLE V MISCELLANEOUS SECTION 5.01. Reference to and Effect on the Operative Documents. (a) Upon the effectiveness of this Amendment, on and after the date hereof each reference in the Revolving Credit Agreement and the Override Agreement to "this Agreement", "hereunder", "hereof" or words of like import referring to the Revolving Credit Agreement and the Override Agreement, respectively, and each reference in the other Operative Documents to "the Revolving Credit Agreement", "the Override Agreement", "thereunder", "thereof" or words of like import referring to the Revolving Credit Agreement and the Override Agreement, shall mean and be a reference to the Revolving Credit Agreement and the Override Agreement, respectively, as amended hereby. (b) Except as specifically amended above, the Revolving Credit Agreement, the Override Agreement and the Notes, and all other Operative Documents, are and shall continue to be in full force and effect and are hereby in all respects ratified and confirmed. Without limiting the generality of the foregoing, the Security Documents and all of the Collateral described therein do and shall continue to secure the payment of all obligations of the Dravo Parties under the Revolving Credit Agreement, the Notes and the other Operative Documents, in each case as amended hereby. (c) The execution, delivery and effectiveness of this Amendment shall not, except as expressly provided herein, operate as a waiver of any right, power or remedy of any Lender or 4(xviii) -5 the Agent under any of the Operative Documents, nor constitute a waiver of any provision of any of the Operative Documents. SECTION 5.02. Costs and Expenses. The Dravo Parties jointly and severally agree to pay on demand all costs and expenses incurred by the Agent and the Lenders in connection with the preparation, execution and delivery of this Amendment and the other documents to be delivered hereunder and thereunder, including, without limitation, the reasonable fees and out-of- pocket expenses of counsel for the Agent and the Lenders with respect thereto and with respect to advising the Agent and the Lenders as to their rights and responsibilities under this Amendment. The Dravo Parties jointly and severally further agree to pay on demand all costs and expenses, if any (including, without limitation, reasonable counsel fees and expenses of counsel), incurred by the Agent and the Lenders in connection with the enforcement (whether through negotiations, legal proceedings or otherwise) of this Amendment, the Transaction Documents and the other documents to be delivered hereunder and thereunder, including, without limitation, counsel fees and expenses in connection with the enforcement of rights under this Section 5.02. SECTION 5.03. Execution in Counterparts. This Amendment may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute but one and the same instrument. SECTION 5.04. Governing Law. This Amendment shall be governed by, and construed in accordance with, the laws of the State of New York. [Signatures on Next Two Pages] 4(xviii) -6 IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed by their respective officers thereunto duly authorized, as of the date first above written. FIRST ALABAMA BANK, Individually and as Agent By: /s/ PETER P. GAILLARD Name: Peter P. Gaillard Title: Senior Vice Presiden PNC BANK, NATIONAL ASSOCIATION By: /s/ MICHAEL J. BEYER Name: Michael J. Beyer Title: Vice President BANK OF AMERICA ILLINOIS, Individually and as Documentation Agent By: /s/ MICHAEL J. MCKINNEY Name: Michael J. McKinney Title: Vice President THE PRUDENTIAL INSURANCE COMPANY OF AMERICA By: /s/ KEVIN J. KRASKA Name: Kevin J. Kraska Title: Vice President DRAVO CORPORATION By: /s/ ERNEST F. LADD III Name: Ernest F. Ladd III Title: Executive Vice President DRAVO LIME COMPANY By: /s/ ERNEST F. LADD III Name: Ernest F. Ladd III Title: Executive Vice President DRAVO BASIC MATERIALS COMPANY, INC. By: /s/ ERNEST F. LADD III Name: Ernest F. Ladd III Title: Executive Vice President 4(xviii) -7 EX-11 3 EARNINGS PER SHARE Exhibit 11. Statement Re Computation of Per Share Earnings ($ in thousands, except per share amounts) Years ended December 31, 1996 1995 1994
Primary Earnings: Earnings from continuing operations before extraordinary item $14,128 $10,981 $ 4,930 Deduct dividends on preferred stock 2,529 2,535 2,544 Earnings from continuing operations applicable to common stock 11,599 8,446 2,386 Loss from discontinued operations -- -- (6,554) Loss from extraordinary item -- -- (7,572) Cumulative accounting change -- -- (1,361) Net earnings (loss) applicable to common stock $11,599 $ 8,446 $(13,101) Shares: Weighted average number of common shares outstanding 14,735 14,756 14,859 Dilutive effect of outstanding options and rights (as determined by the application of the treasury stock method at the average market price for the year) 159 119 --(1) Weighted average number of shares outstanding, as adjusted 14,894 14,875 14,859 Primary earnings (loss) per share: Continuing operations $ 0.78 $ 0.57 $ 0.16 Discontinued operations -- -- (0.44) Extraordinary item -- -- (0.51) Cumulative accounting change -- -- (0.09) Net earnings (loss) per share $ 0.78 $ 0.57 $ (0.88) Fully Diluted Earnings: Net earnings (loss) $ 14,128 $ 10,981 $ (10,557) Deduct dividends on preferred stock (2) 2,529 2,535 2,544 Net earnings (loss) applicable to common stock $ 11,599 $ 8,446 $ (13,101) Shares: Weighted average number of common shares outstanding 14,735 14,756 14,859 Dilutive effect of outstanding options and rights (as determined by the application of the treasury stock method at the higher of the ending or average market price for the year) 190 119 --(1)
11-1 Exhibit 11. Statement Re Computation of Per Share Earnings (continued) ($ in thousands, except per share amounts) Years ended December 31, 1996 1995 1994
Fully Diluted (continued) Shares (continued): Shares issuable from assumed exercise of convertible preference stock (2) -- -- -- Weighted average number of shares outstanding, as adjusted 14,925 14,875 14,859 Fully diluted earnings (loss) per share: Continuing operations $ 0.78 $ 0.57 $ 0.16 Discontinued operations -- -- (0.44) Extraordinary item -- -- (0.51) Cumulative accounting change -- -- (0.09) Earnings (loss) per share $ 0.78 $ 0.57 $ (0.88) Additional Fully Diluted Computation (3) Earnings: Net earnings (loss) $14,128 $10,981 $ (10,557) Shares: Weighted average number of common shares outstanding 14,735 14,756 14,859 Dilutive effect of outstanding options and rights (as determined by the application of the treasury stock method at the higher of the ending or average market price for the year) 190 119 87 Shares issuable from assumed exercise of convertible preference stock 1,678 1,685 1,697 Weighted average number of shares outstanding, as adjusted 16,603 16,560 16,643 Fully diluted earnings (loss) per share $ 0.85 $ 0.66 $ (0.63)
(1) The inclusion of outstanding options and rights in this computation would have an anti-dilutive effect on earnings per share. (2) The inclusion of preference stock in the fully dilutive computation would have an anti-dilutive effect on earnings per share. (3) This calculation is submitted in accordance with Securities Exchange Act of 1934 Regulation S-K, paragraph 229.601 (b) (11) although it is contrary to paragraph 40 of APB Opinion No. 15 because it produces an anti-dilutive result in 1996, 1995 and 1994. 11-2 EX-13 4 1996 ANNUAL REPORT TO SHAREHOLDERS FINANCIAL REVIEW OVERVIEW By most measures, 1996 was a year of improvement for Dravo. Revenue, gross profit and net income were up 8 percent, 9 percent and 29 percent, respectively. Most of the problems experienced in 1995 during the startup of the $60-million Black River expansion project were resolved. Good progress was made on the construction of an additional kiln and related material handling equipment at the Maysville plant in northern Kentucky, with startup scheduled for the second quarter of 1997. Net cash provided by operating activities improved markedly due, in part, to one-time receipts from a lawsuit ruling, insurance settlements and a state tax refund. Also, in 1995, the company paid the liabilities, principally accounts payable, retained when it sold the assets of a major subsidiary. Earnings improved, but the improvement was smaller than anticipated. Earnings were constrained by a prolonged interruption in lime deliveries to a major customer and a reduction in demand for utility lime. Earnings for the year were $14.1 million, or $0.78 per share, compared to $11.0 million, or $0.57 per share, in 1995. In 1994, Dravo reported a net loss of $10.6 million, or $0.88 per share. A charge to discontinued operations of $6.5 million, or $0.44 per share, was recorded in 1994 for legal fees and to provide for the settlement of a lawsuit. Also, an extraordinary charge of $7.6 million, or $0.51 per share, was recorded to reflect the write- off of fees associated with debt instruments prepaid or substantially altered as a result of the sale of the assets of Dravo Basic Materials (DBM), the company's construction aggregates operations. A one-time charge of $1.4 million, or $0.09 per share, reflects the cumulative accounting effect of the adoption in 1994 of Statement of Financial Accounting Standards No. 112, "Employers Accounting for Postemployment Benefits." RESULTS OF OPERATIONS CONTINUING OPERATIONS Revenue: Most of the $12.1 million revenue increase over last year was attributable to higher sales in the southeast market region. The southeast market consists mostly of commercial accounts and is supplied primarily by the company's Longview facility located near Birmingham, Alabama. Strong commercial demand, augmented by the sale of brokered lime as demand exceeded production capacity, contributed to the revenue increase. Revenue also increased because a new aggregates plant, completed at Longview in late 1995, converts quarried limestone chemically unsuitable for lime production into crushed stone aggregates byproducts. Sales in the Ohio Valley area exceeded last year's results due to strong demand in the metallurgical market. Utility lime sales were dampened by prolonged delivery interruptions to a major utility customer caused by problems at the customer's generating station and by a reduction in the value of sulfur-dioxide (SO2)emission allowances. SO2 allowances, which are traded in the open market, are awarded to utility companies that exceed their mandated SO2 removal requirements. Inefficiencies in the allowance trading, a tendency by many utilities to "bank" earned credits for future use rather than trade them, and higher-than-anticipated levels of low-sulfur coal utilization all combined to cause a marked decline in allowance prices in 1996. The lower allowance prices made it less attractive for utility customers to fully utilize their flue gas desulfurization (FGD)systems and reduced their demand for lime used for SO2 removal. Revenue in 1995 was $146.1 million compared to $278.1 million in 1994, which included DBM for the entire year. Lime revenue in 1994 was $125.7 million. The increased lime revenue in 1995 was mainly due to first-year shipments to American Electric Power's Gavin Station under a 15-year supply contract. Shipments under a new supply agreement with the Henderson Municipal Power and Light Station operated by Big Rivers Electric Cooperative and strong spot market pricing in 1995 also contributed to the revenue increase. Costs and Expenses: Gross profit increased $3.4 million over 1995; however, profit margins remained essentially the same at 25 percent. Gross profit was affected by higher inventory costs as prolonged delivery interruptions to a major customer caused production inefficiencies and increased costs. The sale of brokered lime in the southeast market region also held down gross margins. Gross profit of $36.5 million was $7.5 million lower in 1995 than in 1994, which included DBM. Margins, however, were much improved: 25 percent in 1995 versus 16 percent in 1994. The improvement reflects the dilutive effect of the aggregates business on the company's margins before the divestiture. Gross margins on lime sales were slightly higher than 1994's pro forma results, but the increase was less than expected because of higher production costs related to the expansion project at Black River. Selling expense was modestly lower in 1996 than 1995. There was a significant drop from 1994 to 1995, due primarily to the DBM sale. Selling expense varies depending on research and development expense billed to third parties. These research activities involve a variety of lime-related technologies, with particular emphasis on air pollution control. Depending on the project, governmental agencies, public utilities or private groups may reimburse all or a portion of a project's costs. Third-party billings are treated as a reduction in costs. Research and development costs and billings to third parties are detailed in Note 16, Research and Development, in the Notes to Consolidated Financial Statements. 13-12 General and administrative expenses were essentially unchanged in 1996. A $1.3 million pension expense increase was more than offset by a $1.7 million drop in retiree medical costs. The company began participating in various Medicare HMOs in 1996 and fixed the amount it contributes toward the cost of retiree medical coverage. General and administrative expenses were $6.3 million lower in 1995 than 1994 due to personnel reductions following the DBM sale and consolidation of administrative functions. On a pro forma basis, administrative expenses were higher because of differences between actual experience and the assumptions used in preparing the pro forma analysis. Equity in earnings of joint ventures includes the company's share in two 50-percent owned joint ventures: a contract phosphate rock mining operation in Idaho and a small contract coke operation in Wyoming. The phosphate mining operation's profitability varies depending on mining conditions and the requirements of its single contract customer. Earnings from joint ventures were higher in 1996 due to strong phosphate demand and a return to more normal maintenance expense. Prior to 1995, the company also had a 50- percent share in a shell dredging operation. Earnings from joint ventures in 1995 were down $1.1 million from 1994 due to higher maintenance expense at the phosphate rock mining operation and the sale of the shell dredging operation as part of the DBM transaction. Other income (expense) includes the gain or loss on the sale or abandonment of property, plant and equipment. In 1996 and 1995, the amounts are insignificant. The $1.1 million gain in 1994 included the sale of the company's airplane, $324,000, and $487,000 from the sale, after accrued expenses, of DBM's assets. See Note 3, Dispositions, in the Notes to Consolidated Financial Statements for a further discussion of the latter transaction. Interest income was $815,000 higher than last year due to interest on a refund received from a state taxing authority after the company filed amended tax returns based on its current interpretation of the state tax code. The decline in interest income from 1994 to 1995 reflects the collection, early in 1995, of an interest-bearing note receivable. Interest expense increased $1.6 million because of higher debt levels in 1996 versus 1995. The proceeds from the DBM sale enabled the company to reduce debt, including amounts borrowed under a revolving line of credit, $85.5 million at the beginning of 1995. The revolver debt level subsequently increased throughout 1995 as the company satisfied retained DBM liabilities, principally accounts payable, and completed the Black River expansion project. Debt remained at the higher level in 1996 as cash flow was invested in $20.0 million of capital projects. Interest capitalized in 1996 and 1995 was $328,000 and $2.8 million, respectively. Interest expense of $4.8 million in 1995 was significantly lower than 1994's expense of $12.4 million. The reduction reflects the early 1995 prepayment of loans totaling $85.5 million from cash received from the DBM transaction. Lower interest rates also lowered expense. The company's income tax expense was zero in 1996 because of net operating loss carryforwards (NOLs) that sheltered the company's income from both federal and state income taxes. Income tax expense of $340,000 in 1995 was for estimated state income taxes. In 1994, income tax expense of $597,000 included an accrual of $300,000 for federal alternative minimum tax arising from the DBM assets sale. The company recorded a $24.9 million benefit for income taxes in 1994 under the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Management believes that, due to the large proportion of revenue generated by long-term supply contracts, income can be reasonably projected for purposes of determining whether the realization of the asset resulting from the use of NOLs in future years is more likely than not. The amount of the net deferred tax asset reflects that portion of the gross deferred tax asset that management believes, based on current projections and estimates, is more likely than not to be realized. After all NOLs have been recognized in the consolidated financial statements, the company's tax rate will return to a more normal, higher effective rate. In conjunction with the sale of DBM's assets, existing loan agreements were substantially altered. Also, while negotiating a $50 million financing agreement with Prudential Power Funding for the Black River expansion, the company purchased a call option that enabled it to prepay on May 17, 1995, without penalty, amounts outstanding under the financing agreement. With Prudential Power Funding's consent, the entire amount borrowed was prepaid. The fees associated with these agreements were written off as extraordinary items in 1994. Effects of inflation: Inflation rates have been low during the past three years and as a result have not affected the company's operations. In addition, Dravo Lime's long-term lime supply contracts provide for price increases for specific production expenses, such as labor, fuel and electricity. DISCONTINUED OPERATIONS The most significant event involving discontinued operations was the collection in 1996 of a $7.3 million judgment and interest awarded by a Georgia court related to a contract dispute with a discontinued engineering subsidiary's subcontractor. The judgment and interest were classified as a discontinued operations current receivable in the company's 1995 year-end 13-13 financial statements. Also in 1996, an issue with one of the company's insurance carriers regarding deductible limits on asbestos and other retroactive claim adjustments was resolved with the insurance carrier refunding $2.6 million in past payments. The discontinued operations provision was credited $1.1 million for the insurance refunds. The company received a $2.2 million refund from a state taxing authority in 1996 after the company filed amended income tax returns based on its current interpretation of the state tax code. The refund included $575,000 that was recorded as interest income. The original tax returns were filed on a separate basis and included only the results of entities that had operations in the state. These entities were, for the most part, profitable and paid income taxes. The amended tax returns were filed on a combined basis, which included an apportionment of the results of all the company's operations, including losses from discontinued operations. The amended returns reported tax losses instead of taxable income and resulted in the refund, of which $1.7 million was credited to the discontinued operations reserve. The amended returns also generated a state tax NOL that can be used to shelter future taxable income. In 1994, a previously established provision for discontinued operations was increased $6.6 million to cover legal fees related to an insurance claim and to provide for the settlement of a lawsuit. The insurance claim involves the company's assertion that it is entitled to a defense and indemnity under its insurance contracts for environmental clean-up costs in Hastings, NE. See Note 8, Contingent Liabilities, in the Notes to Consolidated Financial Statements for a further discussion of the Hastings matter. FINANCIAL POSITION AND LIQUIDITY The company's financial position improved over the past year. Long-term debt decreased by $757,000 and shareholders' equity increased by $14.1 million. The capitalization ratio, total debt divided by total debt and equity, decreased to 0.38 from 0.41. Additions to property, plant and equipment included capital expenditures of $20.0 million, of which $8.6 million was for the fourth kiln at Maysville. Net liabilities of discontinued operations increased $4.5 million, primarily due to the collection of the judgment, tax refund and insurance claims discussed above, offset by other previously reserved discontinued operations expenditures. The company has sufficient funds and borrowing capacity to meet its anticipated operating and capital needs. To minimize interest charges, cash balances are kept low through a banking arrangement that uses excess cash held in the company's accounts to reduce the amount of overnight borrowing on a revolving credit agreement. A $65 million revolving credit/letter of credit facility is provided by a consortium of lenders that includes Regions Bank of Alabama (formerly First Alabama Bank); PNC Bank, N.A.; and Bank of America Illinois. Interest on the revolver equals either the base lending rate of Regions Financial Corporation, Regions Bank of Alabama's parent, or, at the option of the company, the Eurodollar interest rate plus 2 percent. The facility expires July 31, 1998, but includes renewal provisions. Part of the line of credit is being used to finance construction of a new kiln and related material-handling equipment at the Maysville facility. On July 31, 1997, up to $17 million borrowed under the facility may be converted to a five-year term loan. Also on July 31, 1997, the amount available under the revolver will be reduced from $65 million to $48 million. Obligations under the revolving credit/letter of credit facility and senior term notes are secured by a pledge of the stock of Dravo Lime Company and Dravo Basic Materials Company along with Dravo Lime Company's accounts receivable and finished goods inventories. Additionally, certain contract rights, patents and mortgages on the company's Maysville, Black River and Longview plants have been pledged as collateral. The agreements contain uniform restrictive covenants that require the company to maintain minimum net worth levels and fixed charge ratios on a consolidated basis; restrict incurrence of debt, liens and lease obligations; restrict the sale of significant assets; and limit payment of dividends. These restrictions are not expected to have an adverse impact on the company's ability to meet its obligations. All known outstanding discontinued operations items have been classified as current or long-term based on the estimated timing of future cash receipts and disbursements. The remaining discontinued operations liabilities will not have a material adverse impact on liquidity, because cash payments needed to satisfy them are spread over several years. DIVIDENDS The company's loan agreement contains a covenant that limits common stock dividend payments. A common stock dividend may not be declared if that dividend plus all other common dividends paid after September 30, 1995, exceeds 25 percent of cumulative earnings from continuing operations after September 30, 1995. Cumulative earnings exclude gains from the sale of capital assets, extraordinary gains and unremitted earnings of joint ventures. At December 31, 1996, cumulative earnings since September 30, 1995 from which dividends could be declared totaled $16.9 million. No dividends on common stock were declared. Dividends on the $3.0875 cumulative, convertible, exchangeable, Series D Preference Stock and the $2.475 cumulative convertible Series B Preference Stock were declared quarterly throughout each of the last three years. All declared preference dividends have been paid on a timely basis. 13-14 COMMON STOCK MARKET PRICE The principal market on which Dravo's common stock is traded is the New York Stock Exchange under the symbol, DRV. The high and low common stock sales prices for each quarterly period in 1996 and 1995 as reported for New York Stock Exchange composite transactions were: 1996 1995
Quarter High Low High Low First 13 3/4 11 1/4 11 3/4 10 Second 14 7/8 12 3/4 14 3/4 10 1/4 Third 14 5/8 12 14 3/4 12 1/2 Fourth 15 3/4 12 1/2 13 5/8 11 1/2
OUTLOOK Continuing operations: Dravo Corporation's balance sheet, income and cash flow have greatly improved since the company's strategic direction was focused exclusively on its lime business two years ago. Investments continue to be made in property, plant and equipment to improve short-term performance and provide the mineral reserves and equipment necessary to sustain acceptable returns over the long term. A new Maysville kiln and ancillary equipment valued at $20 million is scheduled to start production in the second quarter of 1997. Early in 1997, more than 27 million tons of high calcium reserves adjacent to the Longview facility were purchased as a necessary first step in expanding production capacity in the southeastern market region. A major refurbishing of the largest of Black River's pre-expansion kilns is slated for 1997. This project will increase the kiln's throughput while also significantly improving its thermal efficiency. The company will continue to promote the commercialization of its proprietary lime-based environmental technologies. Currently being installed at the AES Beaver Valley Cogeneration Station in Monaca, PA, the first full-scale THIOCLEAR FGD system is scheduled to startup in the second quarter. This project is an important step toward providing the technical underpinning for an aggressive sales and marketing effort of the THIOCLEAR technology. Full-scale applications of Dravo technologies for producing commercial FGD system byproducts were announced in 1996, and others are under consideration. Process development work with significant commercial potential will be carried out during 1997 at Dravo's Miami Fort pilot plant facility in the area of combined sulfur dioxide and nitrogen oxides (SOx/NOx) removal in wet scrubbers. Other environmental technology markets in which the company will be active during 1997 include materials and systems for controlling air toxics emissions, and land applications of residual solids from lime-based FGD systems. Despite the considerable progress made in recent years, the company remains disproportionately small relative to the obligations left over from Dravo's earlier history as a diversified conglomerate. The company's size makes its quarter- to-quarter operating performance acutely susceptible to changes in production and sales volume, and with more than 60 percent of its capacity committed to a small number of utility customers, earnings are particularly sensitive to disruptions in utility operating rates. On a longer-term basis, however, utility operating rates are steadier and more dependable than those of most other industrial markets, thus the large portion of Dravo's backlog committed to utility customers represents one of the company's most favorable characteristics. Nevertheless, because of the company's short-term earnings sensitivity, it became apparent that the company needed to accelerate its growth plans. In response, management announced in October 1996 that it was undertaking an investment banking review of strategic alternatives for accelerating growth. If this process fails to present Dravo with merger, acquisition or other opportunities advantageous to the interest of the company's shareholders, management is fully prepared to aggressively pursue its business plan, and is confident that implementation of the plan will enhance shareholder value. Discontinued operations: The company formerly operated a metal fabrication facility in Hastings, NE. The federal Environmental Protection Agency (EPA) has notified the company it believes the company is a potentially responsible party (PRP) for the clean-up of soil and groundwater contamination at four sub-sites in the Hastings area. In January 1997, the company reached a monetary settlement with the EPA regarding one of the sub-sites in exchange for the EPA excluding the company from any further liability at that sub-site. See Note 8, Contingent Liabilities, in the Notes to Consolidated Financial Statements for further discussion of the company's estimate of total clean-up costs and its share of those costs. Management estimated the assets and liabilities associated with discontinued operations and believes the provision for losses on discontinued operations is adequate at this time. If these estimates are inaccurate or should other unforeseen developments occur, a future additional provision for discontinued operations could be required. Investors are cautioned that statements which relate to the future are, by their nature, uncertain and dependent upon numerous contingencies, any of which could cause actual results and events to differ materially from those indicated in such forward-looking statements. This is particularly true of efforts to commercially develop new technologies, and regarding estimates of the ultimate cost of environmental remediation, including participation in such costs by other PRPs. 13-15 DRAVO CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets December 31, 1996 1995 (In thousands)
ASSETS Current assets: Cash and cash equivalents $ 1,600 $ 1,086 Accounts receivable, net of allowance for uncollectibles of $176 and $934 23,265 24,251 Notes receivable (Note 15) 921 1,296 Inventories (Note 4) 16,481 14,194 Net assets of discontinued operations (Note 2) -- 923 Other current assets 751 1,322 Total current assets 43,018 43,072 Advances to and equity in joint ventures 2,093 2,466 Notes receivable (Note 15) 4,380 3,497 Other assets (Note 10) 25,066 23,205 Deferred income taxes (Note 13) 24,853 24,853 Property, plant and equipment: Land 7,480 6,164 Mine development 9,218 9,218 Building and improvements 13,147 11,562 Machinery and equipment 208,180 198,891 238,025 225,835 Less accumulated depreciation and amortization 112,026 109,667 Net property, plant and equipment 125,999 116,168 Total assets $225,409 $213,261
See accompanying notes to consolidated financial statements. 13-16 DRAVO CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets December 31, 1996 1995
(In thousands, except share amounts) LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term notes (Notes 5 and 15) $ 6,166 $ 6,099 Accounts payable - trade 14,542 17,969 Accrued insurance 1,906 1,639 Accrued retirement contribution 1,785 2,423 Net liabilities of discontinued operations (Note 2) 6,299 -- Other current liabilities 3,843 5,177 Total current liabilities 34,541 33,307 Long-term notes (Notes 5 and 15) 63,535 64,292 Other liabilities 6,632 6,290 Net liabilities of discontinued operations (Note 2) 6,786 9,517 Redeemable preference stock (Notes 6 and 15): Par value $1, issued 200,000 shares: Series D, $12.35 cumulative, convertible, exchangeable (entitled in liquidation to $20.0 million) 20,000 20,000 Shareholders' equity (Notes 6 and 12): Preference stock, par value $1, authorized 1,878,870 shares: Series B, $2.475 cumulative, convertible, issued 20,386 and 25,386 shares (entitled in liquidation to $1.1 million and $1.4 million); 20 25 Series D, reported above Common stock, par value $1, authorized 35,000,000 shares: issued 15,096,817 and 15,055,237 shares 15,097 15,055 Other capital 63,077 60,818 Retained earnings 20,063 8,464 Treasury stock at cost; 333,168 and 347,691 common shares (4,342) (4,507) Total shareholders' equity 93,915 79,855 Total liabilities and shareholders' equity $225,409 $213,261
See accompanying notes to consolidated financial statements. 13-17 DRAVO CORPORATION AND SUBSIDIARIES Consolidated Statements of Operations Years ended December 31, (In thousands, except per share data) 1996 1995 1994
Revenue $158,133 $146,067 $278,052 Cost of revenue 118,165 109,541 234,018 Gross profit 39,968 36,526 44,034 Selling expenses 4,560 5,009 7,116 General and administrative expenses 16,410 16,228 22,497 Earnings from operations 18,998 15,289 14,421 Other income (expense): Equity in earnings of joint ventures 710 572 1,672 Other income (expense) (54) 182 1,088 Interest income 900 85 754 Interest expense ( 6,426) ( 4,807) (12,408) Net other expense ( 4,870) ( 3,968) ( 8,894) Earnings before taxes from continuing operations 14,128 11,32 15,527 Income tax expense (Note 13) -- 340 597 Earnings from continuing operations 14,128 10,981 4,930 Loss on discontinued operations (Note 2) -- -- 6,554 Earnings (loss) before extraordinary item and cumulative accounting change 14,128 10,981 ( 1,624) Extraordinary item (Note 14) -- -- ( 7,572) Cumulative effect of accounting change (Note 10) -- -- ( 1,361) Net earnings (loss) 14,128 10,981 (10,557) Preference dividends 2,529 2,535 2,544 Net earnings (loss) available for common stock $ 11,599 $ 8,446 $ (13,101) Weighted average shares outstanding 14,894 14,875 14,859 Primary earnings (loss) per share Continuing operations $ 0.78 $ 0.57 $ 0.16 Discontinued operations -- -- ( 0.44) Extraordinary item -- -- ( 0.51) Cumulative effect of accounting change -- -- ( 0.09) Net earnings (loss) $ 0.78 $ 0.57 $ ( 0.88)
See accompanying notes to consolidated financial statements. 13-18 DRAVO CORPORATION AND SUBSIDIARIES Consolidated Statements of Retained Earnings Years ended December 31, (In thousands) 1996 1995 1994
Retained earnings at beginning of year $ 8,464 $ 18 $ 13,119 Net earnings (loss) 14,128 10,981 (10,557) 22,592 10,999 2,562 Dividends declared: Series B preference stock 59 65 74 Series D preference stock 2,470 2,470 2,470 2,529 2,535 2,544 Retained earnings at end of year $20,063 $ 8,464 $ 18
See accompanying notes to consolidated financial statements. 13-19 DRAVO CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, (In thousands) 1996 1995 1994
Cash flows from operating activities: Earnings from continuing operations $ 14,128 $ 10,981 $ 4,930 Adjustments to reconcile earnings from continuing operations to net cash provided (used) by continuing operations activities: Depreciation and amortization 10,124 9,536 17,626 Change in accounting principle -- -- (1,361) Loss (gain) on sale of assets 54 (182) (1,088) Equity in joint ventures 373 70 (116) Changes in assets and liabilities, net of effects from DBM disposition: Decrease (increase) in accounts receivable 986 (4,113) (143) Decrease (increase) in notes receivable (507) 568 464 Decrease (increase) in inventories (2,287) (1,556) 3,909 Decrease (increase) in other current assets 638 745 (869) Decrease (increase) in other assets 177 (5,150) (6,302) Increase (decrease) in accounts payable and accrued expenses (4,522) (27,142) 7,873 Increase (decrease) in income taxes payable (502) (144) 329 Increase in other liabilities 342 390 3,178 Total adjustments 4,876 (26,978) 23,500 Net cash provided (used) by continuing operations activities 19,004 (15,997) 28,430 Loss from discontinued operations -- -- (6,554) Increase (decrease) in net liabilities of discontinued operations 4,491 (13,099) (4,592) Proceeds from repayment of notes receivable from sale of discontinued operations -- 2,200 1,600 Net cash provided (used) by discontinued operations activities 4,491 (10,899) (9,546) Net cash used by extraordinary item -- -- (7,572) Net cash provided (used) by operating activities $ 23,495 $(26,896) $ 11,312
See accompanying notes to consolidated financial statements. 13-20 DRAVO CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows Years ended December 31, (In thousands) 1996 1995 1994
Cash flows from investing activities: Proceeds from sale of assets $ -- $ 120,867 $ 2,148 Additions to property, plant and equipment (20,009) ( 33,144) (44,757) Other, net (1) 3 509 Net cash provided (used) by investing activities (20,010) 87,726 (42,100) Cash flows from financing activities: Net borrowing under revolving credit agreements 5,160 27,948 19,300 Principal payments under long-term notes (6,123) (85,259) (4,736) Proceeds from issuance of long-term notes 273 185 19,945 Proceeds from issuance of common stock 248 557 42 Purchase of treasury stock -- (2,667) -- Dividends (2,529) (2,535) (2,544) Net cash provided (used) by financing activities (2,971) (61,771) 32,007 Net increase (decrease) in cash and cash equivalents 514 (941) 1,219 Cash and cash equivalents at beginning of year 1,086 2,027 808 Cash and cash equivalents at end of year $ 1,600 $ 1,086 $ 2,027 Supplemental disclosures of cash flow information: Cash paid (received) during the year for: Interest (net of amount capitalized) $ 6,492 $ 5,695 $ 12,408 Income taxes 502 175 (143)
See accompanying notes to consolidated financial statements. 13-21 DRAVO CORPORATION AND SUBSIDIARIES Notes to Consolidated Financial Statements Note 1: Summary of Significant Accounting Policies Description of Business: The consolidated financial statements include the accounts of Dravo Corporation and its majority-owned subsidiaries (the company). The principal subsidiary is Dravo Lime Company, one of the nation's largest lime producers. Lime is sold to electric utility companies under long-term contracts and to the pulp and paper, metals, chemicals, municipal and construction markets. Three major utility companies, with whom the company has long-term contracts, each accounted for more than 10 percent of consolidated revenue in 1996. The company completed a transaction on December 30, 1994 in which it sold substantially all the assets and certain liabilities of Dravo Basic Materials Company, Inc. (DBM), a former principal subsidiary. The assets and liabilities sold are removed from the company's December 31, 1996 and 1995 consolidated balance sheets. The December 31, 1994 consolidated statement of operations and consolidated statement of cash flows include the results of DBM for the entire year. Principles of Consolidation: Significant intercompany balances and transactions have been eliminated in the consolidation process. 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 amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents: For purposes of reporting cash flows, the company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Inventories: Inventories are valued at average production cost or market, whichever is lower. The cost of products produced includes raw materials, direct labor and operating overhead. Property, Plant, Equipment and Depreciation: Property, plant and equipment are stated at cost. Depreciation is computed using the straight-line method over estimated useful lives of 10 to 30 years for buildings and 3 to 30 years for machinery and equipment. Expenditures for maintenance and repairs which do not materially extend the lives of assets are expensed currently. The asset cost and accumulated depreciation are removed from the accounts for assets sold or retired, and any resulting gain or loss is included in other income and expense. Income Taxes: Deferred income taxes reflect the tax consequences on future years of differences between the tax bases of assets and liabilities and their financial reporting amounts. Future tax benefits, such as net operating loss carryforwards, are recognized to the extent that realization of such benefits are more likely than not. Earnings Per Share: Primary earnings per share are based on net earnings less preference dividends declared in the year, divided by the weighted average sum of common shares outstanding during the year and common share equivalents. Shares exercisable as employee stock options and stock appreciation rights are considered common share equivalents except when their inclusion would be anti-dilutive. Primary common share equivalents are calculated based on the average common stock price for the year. Fully diluted earnings per share are based on net earnings, divided by the sum of the weighted average number of common shares outstanding during the year, weighted average number of shares resulting from the assumed conversion of issued preference shares to common shares and common share equivalents. Fully diluted common share equivalents are calculated based on the higher of the average or ending common stock price for the year. Fully diluted earnings per share are anti-dilutive in 1996, 1995 and 1994 and are not presented. Stock-based compensation is accounted for using the intrinsic value approach as prescribed by Accounting Principles Board Opinion No. 25. 13-22 Note 2: Discontinued Operations An additional provision of $6.5 million was taken in 1994 for a previously established discontinued operations reserve. Part of the provision was for legal fees anticipated to pursue various lawsuits and claims, including the Hastings insurance litigation discussed in Note 8, Contingent Liabilities. The company received a refund from a state taxing authority in 1996 after filing amended tax returns based on its current interpretation of the state tax code. The original tax returns were filed on a separate basis and included only the results of entities that had operations in the state. Those entities were, for the most part, profitable and paid income taxes. The amended tax returns were filed on a combined basis, which included an apportionment of the results of all the company's operations, including losses from discontinued operations. The amended returns reported tax losses instead of taxable income and resulted in a $1.7 million refund, which was credited to the discontinued operations reserve. The company received cash proceeds of $2.2 million in 1995 and $1.6 million in 1994 from the repayment of notes received from the previous sales of discontinued businesses. The remaining discontinued operations' assets and liabilities for the respective years ended December 31 relate to non-cancelable leases, environmental, insurance, legal and other matters associated with exiting the engineering and construction business and are presented below: (In thousands) 1996 1995
Current assets: Accounts and retainers receivable $ 323 $ 122 Other -- 7,185 Total current assets 323 7,307 Accounts and retainers receivable -- 333 Other 309 309 Total assets $ 632 $ 7,949 Current liabilities: Accounts and retainers payable $ 536 $ 140 Accrued loss on leases 2,304 2,240 Other 3,782 4,004 Total current liabilities 6,622 6,384 Accrued loss on leases 954 3,328 Other 6,141 6,831 Total liabilities $ 13,717 $ 16,543 Net liabilities and accrued loss on leases of discontinued operations $(13,085) $( 8,594)
Note 3: Dispositions The company completed a transaction on December 30, 1994 in which it sold to Martin Marietta Materials, Inc. (Martin Marietta), effective January 3, 1995, substantially all the assets of its construction aggregates business. Assets sold included the assets, properties and leases of DBM, a wholly owned subsidiary of the company, and Atchafalaya Mining Company, Inc. (AMC), a wholly owned subsidiary of DBM, used in the production, marketing, distribution and sale of various aggregate products. Also sold was the capital stock of Dravo Bahama Rock Limited (DBR), a wholly owned foreign subsidiary of DBM. The company, DBM and AMC retained substantially all obligations and liabilities which arose from, or in connection with, operations prior to the sales transaction. After expenses, a net pre-tax gain of $487,000 was recorded as other income. The assets and liabilities sold to Martin Marietta were removed from the company's December 31, 1994 balance sheet, and a corresponding receivable from the sale of DBM of $120.5 million was recorded. The December 31, 1994 consolidated statement of operations includes the results of DBM for the entire year. The following pro forma consolidated statement of operations presents the results of operations assuming the disposition of DBM had been completed as of the beginning of 1994. Adjustments have been made to exclude the results of DBM, to decrease interest expense for loans prepaid in early 1995 from the sale proceeds, and to record interest income at overnight investment rates for cash assumed to have been received in excess of liabilities paid. Pro forma data is provided for comparative purposes only and does not purport to be indicative of the results which actually would have been obtained if the disposition had taken place prior to the pro forma dates. 13-23 Note 3: Dispositions (continued) (In thousands, except per share data)
1996 1995 1994 Actual Actual Pro forma (Unaudited) Revenue $ 158,133 $ 146,067 $ 125,661 Cost of revenue 118,165 109,541 94,859 Gross profit 39,968 36,526 30,802 Selling expenses 4,560 5,009 4,530 General and administrative expenses 16,410 16,228 12,872 Earnings from operations 18,998 15,289 13,400 Other income (expense): Equity in earnings of joint ventures 710 572 1,115 Other income (expense) (54) 182 199 Interest income 900 85 1,727 Interest expense (6,426) (4,807) (5,717) Net other expense (4,870) (3,968) (2,676) Earnings before taxes from continuing operations 14,128 11,321 10,724 Income tax expense -- 340 489 Earnings from continuing operations $ 14,128 $ 10,981 $ 10,235 Earnings per share, continuing operations $ 0.78 $ 0.57 $ 0.52
Note 4: Inventories Inventories for the respective years ended December 31 are classified as follows: (In thousands) 1996 1995
Finished goods $ 2,586 $ 1,677 Materials and supplies 13,895 12,517 Net inventories $16,481 $14,194
Note 5: Notes Payable Notes payable at December 31 include the following: (In thousands) 1996 1995
Variable rate revolving line of credit $33,110 $27,950 11.21% notes, payable through 2002 35,828 41,800 Other notes, payable through 2005 763 641 69,701 70,391 Deduct: Current portion of notes 6,166 6,099 Total long-term notes $63,535 $64,292
The variable rate revolving line of credit is a $65.0 million revolving credit/letter of credit facility with Regions Bank of Alabama (formerly First Alabama Bank); PNC Bank, N.A.; and Bank of America Illinois. Interest on the revolver equals either the base lending rate of Regions Financial Corporation, Regions Bank of Alabama's parent, or, at the option of the company, the Eurodollar interest rate plus 2 percent. The facility expires July 31, 1998, but includes renewal provisions. The company used a portion of the line of credit to finance construction of a new kiln and related material-handling equipment at its Maysville facility. On July 31, 1997, up to $17.0 million borrowed under the facility may be converted to a five-year term loan. Also on July 31, 1997, the amount available under the revolver will be reduced from $65.0 million to $48.0 million. Note 5: Notes Payable (continued) The 11.21 percent term notes require quarterly interest payments and annual principal repayments in the amount of $6.0 million. Obligations under the revolving credit/letter of credit facility and the 11.21 percent term notes are secured by a pledge of the stock of Dravo Lime Company and Dravo Basic Materials Company along with Dravo Lime Company's accounts receivable and finished goods inventories. Additionally, certain contract rights, patents and mortgages on the company's Maysville, Black River and Longview plants have been pledged as collateral. The agreements contain uniform restrictive covenants that require the company to maintain minimum net worth levels and fixed charge ratios on a consolidated basis; restrict incurrence of debt, liens and lease obligations; restrict the sale of significant assets; and limit payment of dividends. The company may not declare a common stock dividend if that dividend plus all other common dividends paid after September 30, 1995, exceed 25 percent of cumulative earnings from continuing operations after September 30, 1995. Cumulative earnings exclude gains from the sale of capital assets, extraordinary gains and unremitted earnings of joint ventures. At December 31, 1996, cumulative earnings since September 30, 1995 from which dividends could be declared totaled $16.9 million. No dividends on common stock were declared. Assets pledged under certain notes and leases had a book value of $141.7 million at December 31, 1996. Amounts payable on long-term debt, excluding the variable rate revolving line of credit, due in 1997 and thereafter are: 1997, $6.2 million; 1998, $6.2 million; 1999, $6.1 million; 2000, $6.0 million; 2001, $6.0 million; and after 2001, $6.1 million. 13-24 Note 6: Redeemable Preference Stock The company has outstanding 200,000 shares of cumulative, convertible, exchangeable Series D Preference Stock. Cumulative dividends of $3.0875 per share are payable quarterly. Each share of preference stock may be converted, at the option of the holder, into 8.0 shares of common stock. The stock is also exchangeable, at the option of the company, for 12.35 percent Senior Subordinated Convertible Notes due September 21, 2001. The 12.35 percent Senior Subordinated Notes would contain the same conversion rights, restrictions and other terms as the preference stock. The company may redeem the Series D Preference Stock, in whole or in part, after January 21, 1996, for $100 per share plus accrued dividends, provided that the market price of common stock as of the date of the decision to redeem the shares, as defined in the Certificate of Designations, Preferences and Rights for the Series D Preference Stock, shall be at least equal to 175 percent of the conversion price for the preference stock. Mandatory annual redemption of the lesser of 50,000 shares or the number of shares then outstanding begins September 21, 1998, at $100 per share plus accrued dividends. In the event of liquidation of the company, the holders of outstanding Series D Preference Stock shall be entitled to receive a distribution of $100 per share plus all accumulated and unpaid dividends. The company had outstanding 20,386 and 25,386 shares of cumulative, convertible Series B Preference Stock on December 31, 1996 and 1995, respectively. Cumulative annual dividends of $2.475 per share are payable quarterly. Each share of Series B Preference Stock may be converted at the option of the holder to 3.216 shares of common stock. In the event of the company's liquidation, the holders of the Series B Preference Stock are entitled to $55 per share plus all accumulated and unpaid dividends. Note 7: Commitments Total rental expense for 1996, 1995, and 1994 was $3.0 million, $3.1 million and $35.2 million, respectively. The 1994 amount includes Dravo Basic Materials rental expense. The minimum gross rentals under non-cancelable operating leases for these years were $12.4 million, $13.0 million and $17.3 million, respectively. Of these amounts, $10.2 million, $10.5 million and $10.5 million in 1996, 1995 and 1994, respectively, were provided for in the discontinued operations provision. The minimum future rentals under non-cancelable operating leases and future rental receipts from subleases to third parties as of December 31, 1996 are indicated in the following table. Of the $6.9 million net minimum payments, $3.3 million relates to, and has been expensed as part of, discontinued operations. Minimum Future Rentals and Rental Receipts (In thousands)
1997 $ 12,487 1998 4,193 1999 312 2000 74 2001 49 After 2001 -- Total minimum payments required 17,115 Less: Sublease rental receipts (10,203) Net minimum payments $ 6,912
A joint venture phosphate mining operation, in which the company is a 50-percent partner, has credit available under a bank loan agreement for equipment purchases. The company would be required to repay the entire loan in the event of a failure of both the joint venture and the other partner. At December 31, 1996 and 1995, $3.1 million and $4.6 million, respectively, was borrowed under the agreement. At December 31, 1996 and 1995, the company had outstanding letters of credit totaling $4.8 million and $5.0 million, respectively. Note 8: Contingent Liabilities The company has been notified by the federal Environmental Protection Agency (EPA) that the EPA believes the company is a potentially responsible party (PRP) for the clean-up of soil and groundwater contamination at four sub-sites in Hastings, NE. The Hastings site is one of the EPA's priority sites for taking remedial action under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA). The company participated in an EPA-initiated allocation proceeding for a municipal landfill sub-site to allocate shares of liability for past response costs and costs of a proposed cap of the landfill. As part of this proceeding, the allocator conducted a mediation session which resulted in a settlement among the EPA and the PRPs. Pursuant to the settlement, the company agreed to pay $702,000, or 14.33 percent of the $4.9 million past costs and estimated source control costs for this sub-site. In exchange, the company received contribution protection against third-party claims as well as a covenant from the EPA not to sue for its past and future response costs at this sub-site. 13-25 The company has also been notified by the EPA that the EPA considers it a PRP at another municipal landfill in Hastings. At least three other parties (including the City of Hastings) are considered by the EPA to be PRPs at this second sub-site. At this sub-site, the company has concluded that the City of Hastings is primarily responsible for proper closure of the landfill and the remediation of any release of hazardous substances. In January, 1994, the EPA invited the company and the other PRPs to make an offer to conduct a remedial investigation and feasibility study (RI/FS) of this sub-site and stated that the EPA was in the process of preparing a work plan for the RI/FS. None of the PRPs has volunteered to undertake the RI/FS. With respect to the third sub-site, the company and two other PRPs have been served with administrative orders directing them to undertake soil remediation and interim groundwater remediation at that sub-site. The company is currently complying with these orders while reserving its right to seek reimbursement from the United States for its costs if it is determined it is not liable for response costs or if it is required to incur costs because of arbitrary, capricious or unreasonable requirements imposed by the EPA. The EPA has taken no legal action with respect to its demand that the company and the other PRPs pay its past response costs. A total of five parties have been named by the EPA as PRPs at this sub- site, but two of them have been granted de minimis status. The company believes other persons should also be named as PRPs. The fourth sub-site is a former naval ammunition depot which was subsequently converted to an industrial park. The company and its predecessor owned and operated a manufacturing facility in this industrial park. To date, the company's investigation indicates that it did not cause the release of hazardous substances at this sub-site during the time it owned and operated the facility. The United States has undertaken to conduct the remediation of this sub-site. In addition to sub-site clean-up, the EPA is seeking a clean-up of area-wide contamination associated with all of the sub-sites in and around Hastings, NE. The company, along with other Hastings PRPs, has recommended that the EPA adopt institutional controls as the area-wide remedy in Hastings. The EPA has indicated some interest in this proposal but has decided to first conduct an area-wide remedial investigation before choosing a remedy. On August 10, 1992, the company filed suit in the Alabama District Court against its primary liability insurance carriers and one of its predecessor's insurers, seeking a declaratory judgment that the company is entitled to a defense and indemnity under its contracts of insurance (including certain excess policies provided by one of the primary carriers) with regard to the third Hastings sub-site. On motion of the defendant insurance carriers, the suit was transferred to the District Court for the Western District of Pennsylvania on October 31, 1996. The company has settled the claim against its predecessor's insurer, but the case against the company's insurers is still in litigation. An award of punitive damages is also being sought against the company's insurers for their bad faith in failing to investigate the company's claim and/or denying the company's claim. The company has notified its primary and excess general liability carrier, as well as the excess carrier of its predecessor, of the receipt of its notice of potential liability at the second and fourth sub-sites. Note 8: Contingent Liabilities (continued) Estimated total clean-up costs, including capital outlays and future maintenance costs for soil and groundwater remediation of approximately $14 million, are based on independent engineering studies. Included in the discontinued operations provision is the company's estimate that it will participate in 33 percent of these remediation costs. The company's estimated share of the costs is based on its assessment of the total clean-up costs, its potential exposure, and the viability of other named PRPs. These estimates are, by their nature, uncertain and dependent upon numerous factors, any of which could cause actual results to differ materially from projected amounts. Other claims and assertions made against the company will be resolved, in the opinion of management, without material additional charges to earnings. Note 9: Retirement Plans The company has several defined benefit plans covering substantially all employees. Benefits for the salaried plan are based on salary and years of service, while hourly plans are based on negotiated benefits and years of service. The company's funding policy is to make such contributions as are necessary to provide assets sufficient to meet the benefits to be paid to plan members in accordance with the requirements of the Employee Retirement Income Security Act of 1974. Plan assets are composed primarily of government securities and corporate debt and equities. In 1996, the company changed the date it measures plan assets and obligations to September 30. The following table reconciles the plans' funded status as of September 30, 1996 and December 31, 1995 to the amounts recognized in the company's balance sheets at December 31, 1996 and 1995, respectively: 13-26 1996 1995 Plans which have Plans which have Plans which have Plans which have funded assets accumulated funded assets accumulated in excess of benefit in excess of benefit accumulated obligations accumulated obligations benefit in excess of benefit in excess of (In thousands) obligations funded assets obligations funded assets
Actuarial present value of projected benefit obligation: Vested employees $157,288 $24,628 $179,649 $27,100 Non-vested employees 153 1,201 277 855 Accumulated benefit obligation 157,441 25,829 179,926 27,955 Effect of projected future salary increases 2,865 1,480 3,264 1,410 Total projected benefit obligation 160,306 27,309 183,190 29,365 Plan assets including fourth quarter contributions 157,442 19,720 182,661 19,555 Assets less than projected benefit obligation (2,864) (7,589) (529) (9,810) Unamortized net liability existing at transition date -- 280 -- 325 Unrecognized net loss from actuarial experience 27,275 4,622 22,450 7,187 Recognition of additional minimum liability -- (4,093) -- (6,175) Prepaid (accrued) pension expense $ 24,411 $(6,780) $ 21,921 $(8,473)
Note 9: Retirement Plans (continued) The sale of Dravo Basic Materials' assets resulted in the termination of employment for essentially all Dravo Basic Materials employees and certain executive and administrative employees of a subsidiary company. As a result, the company recognized a charge in 1994 for pension curtailment and special termination benefits expense. The components of 1996, 1995 and 1994 net periodic pension expense are as follows: Years ended December 31, 1996 1995 1994
(In thousands) Service cost of benefits earned during the year $ 670 $ 470 $ 1,023 Interest cost on projected benefit obligation 15,098 14,356 13,981 Actual (return) loss on plan assets 2,299 (52,972) 14,570 Net amortization (deferral) (16,430) 38,446 (29,521) Curtailment and special termination benefits expense -- -- 921 Net pension expense for year $ 1,637 $ 300 $ 974
Expected long-term rate of return on assets used to determine net pension expense 7.75% 9.0% 8.0% The following assumptions were used for the valuation of the pension obligations as of September 30, 1996 and December 31, 1995 and 1994:
1996 1995 1994 Discount rate 8.0% 7.25% 8.55% Rate of increase in compensation levels 5.0% 5.0% 5.0%
Note 10: Postretirement and Postemployment Benefits The company provides health care and life insurance benefits for retired employees. Employees may become eligible for certain benefits if they meet eligibility qualifications while working for the company. The company participates in various Medicare HMOs. Retirees have the option of joining a Medicare HMO or selecting other health care plans; however, the company contributes a fixed amount toward the cost of the coverage regardless of the plan selected. 13-27 The company accrues for the expected cost of providing postretirement benefits to the employee and the employee's beneficiaries and covered dependents during the years of employment service. Expense in 1994 included a $471,000 curtailment loss resulting from the termination of essentially all Dravo Basic Materials employees and certain executive and administrative employees of a subsidiary company due to the Dravo Basic Materials asset sale. No funds are segregated for future postretirement obligations. The company is amortizing its accumulated postretirement benefit obligation (APBO) over a 20-year period. The APBO was calculated using a discount rate of 8.0 percent and a health care cost trend rate of 8.25 percent in 1997, gradually declining to 6.0 percent in 2001. An increase in the health care cost trend rate of 1 percent would increase the APBO at September 30, 1996, by $126,000 and the total service and interest rate components of the 1996 postretirement benefit cost by $10,000. Postretirement benefit cost for 1996, 1995 and 1994 includes the following components: Note 10: Postretirement and Postemployment Benefits (continued) (In thousands) 1996 1995 1994
Service cost - benefits earned during the period $ 31 $ 44 $ 105 Interest cost on accumulated postretirement benefit obligation 1,516 2,683 2,659 Net amortization and deferral 1,192 1,705 1,789 Curtailment loss -- -- 471 Postretirement benefit cost $2,739 $4,432 $5,024
In 1996, the company changed the date it measures plan obligations to September 30. The following table reconciles the plans' funded status as of September 30, 1996 and December 31, 1995 to the amounts recognized in the company's balance sheets at December 31, 1996 and 1995, respectively: (In thousands) 1996 1995
Accumulated postretirement benefit obligation: Retirees and related beneficiaries $ 18,296 $ 21,505 Other fully eligible participants 870 1,284 Other active participants not fully eligible 854 866 Accumulated postretirement benefit obligation: 20,020 23,655 Fourth quarter cash flow (232) -- Unrecognized transition obligation (13,520) (15,122) Unrecognized net loss ( 4,468) ( 6,536) Accrued postretirement benefit liability $ 1,800 $ 1,997
The company adopted the provisions of Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits" (SFAS 112) effective January 1, 1994. SFAS 112 requires accrual of the estimated cost of benefits provided by the employer to former or inactive employees, including their beneficiaries and covered dependents, after employment but before retirement. A charge of $1.4 million was recorded in the first quarter as a cumulative effect for a change in accounting principle to recognize the company's estimated liability for postemployment benefits covered by SFAS 112. 13-28 Note 11: Stock Options, Stock Appreciation Rights and Performance Shares The company has awarded to executives and key employees common stock options and stock appreciation rights (collectively, rights) under four plans: the 1978 Plan, the 1983 Plan, the 1988 Plan and the 1994 Plan. Under the 1988 and 1994 Plans, options may be granted either alone or in tandem with related stock appreciation rights, or stock appreciation rights may be granted separately. The 1983 Plan provided for the granting of options, stock appreciation rights (either separate or in tandem with a related option) and performance shares. The price of stock options and the basis of stock appreciation rights so granted is the average of the company's high and low market prices on the grant date. Rights cannot be exercised until one year after the grant date and expire 10 years from date of grant. No additional grants can be made from the 1978 or 1983 Plans, both of which have expired. There were no performance shares outstanding at December 31, 1996 and 1995. Any incremental value of stock appreciation rights and performance shares granted is recognized as expense, while a decline in the market value of the stock is recognized as a reduction in expense to the extent previously recognized. There was no change in the incremental value during the last three years. Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123) requires financial statements for fiscal years beginning after December 15, 1995 to estimate the fair value of stock-based compensation awarded to employees in 1995 and thereafter. SFAS 123 allows companies to choose between continuing to account for stock-based awards using the intrinsic value, as prescribed by Accounting Principles Board Opinion No. 25 (APB 25), or the fair value. The company applies APB 25 and related Interpretations in accounting for options. The fair value of each stock option grant awarded in 1996 and 1995 was estimated on the date of grant using the Black-Scholes option pricing model. The weighted average fair values determined by the model and assumptions used are presented below: 1996 1995
Weighted average fair value $ 5.17 $ 5.08 Risk-free interest rate 6.6% 6.8% Expected dividend yield 0% 0% Expected option life 6.0 6.0 Expected volatility 23.96% 23.96%
The table below shows the pro forma amounts for income and earnings per share at December 31 assuming compensation expense had been recorded at fair value: (In thousands, except per share data)
1996 1995 Net income As reported $14,128 $10,981 Pro forma 13,129 9,844 Earnings per share As reported $0.78 $0.57 Pro forma $0.71 $0.49
13-29 Note 11: Stock Options, Stock Appreciation Rights and Performance Shares (continued) The following summary shows the changes in outstanding rights for the last three years: Weighted Exercise Price Average Shares Per Share Exercise Price
Outstanding at January 1, 1994 1,298,950 $ 5.94 - $19.31 $12.60 Granted 12,000 $11.69 $11.69 Exercised (11,300) $ 7.94 - 11.25 $ 9.78 Expired (13,100) $11.25 $11.25 Outstanding at December 31, 1994 1,286,550 $ 5.94 - $19.31 $12.63 Granted 417,500 $10.69 - $14.06 $12.92 Exercised ( 59,750) $ 5.94 - $11.88 $ 9.26 Forfeited (144,700) $10.25 - $19.31 $13.80 Expired ( 27,050) $14.38 $14.38 Outstanding at December 31, 1995 1,472,550 $ 5.94 - $19.31 $12.70 Granted 63,500 $13.12 - $13.56 $13.18 Exercised (25,500) $ 5.94 - $11.88 $ 9.72 Forfeited (27,150) $10.25 - $19.31 $14.84 Outstanding at December 31, 1996 1,483,400 $ 5.94 - $19.31 $12.74 The outstanding stock options at December 31, 1996 have an estimated weighted average contractual life of 4.8 years. Rights exercisable at December 31, 1996 1,419,900 $5.94 - $19.31 $12.72 Shares available for future grants at December 31, 1996 624,500
Note 12: Shareholders' Equity Components of shareholders' equity at December 31 (except retained earnings, which is set forth in the Consolidated Statements of Retained Earnings) are presented below: Preference Common Other Treasury (In thousands) Stock Stock Capital Shares
Balance, January 1, 1994 $32 $14,968 $63,260 $(1,840) Common shares issued through: Conversion of Series B Preference stock (12,864) (4) 13 (9) Common stock options exercised (5,151) 5 37 Minimum pension liability adjustment 266 Balance, December 31, 1994 $28 $14,986 $63,554 $(1,840) Common shares issued through: Conversion of Series B Preference stock (9,648) (3) 9 (6) Common stock options exercised (59,750) 60 496 Purchase of treasury shares (228,470) (2,667) Minimum pension liability adjustment (3,226) Balance, December 31, 1995 $25 $15,055 $60,818 $(4,507) Common shares issued through: Conversion of Series B Preference stock (16,080) (5) 16 (11) Common stock options exercised (25,500) 26 222 Executive incentive compensation (9,523) (5) 113 Directors' fees (5,000) 15 52 Minimum pension liability adjustment 2,038 Balance, December 31, 1996 $20 $15,097 $63,077 $(4,342)
13-30 Note 13: Income Taxes Income before taxes and provisions for income tax expense from continuing operations at December 31 are: (In thousands) 1996 1995 1994
Income before taxes $14,128 $11,321 $5,527 Current federal income taxes $ -- $ -- $ 350 Deferred federal income taxes -- -- -- Current state income taxes -- 340 247 Total $ 0 $ 340 $ 597
The actual income tax expense attributable to earnings from continuing operations differed from the amounts computed by applying the U. S. federal tax rate of 35 percent in 1996 and 34 percent in 1995 and 1994 to pretax earnings from continuing operations as a result of the following: (In thousands) 1996 1995 1994
Computed "expected" tax expense $ 4,945 $ 3,849 $ 1,879 Alternative minimum tax -- -- 300 Percentage depletion ( 720) ( 992) (1,880) State income taxes, net of federal income tax benefit -- 224 163 Other items 553 51 135 Benefit of operating loss carryforwards (4,778) (2,792) -- Provision for income tax $ 0 $ 340 $ 597
Note 13: Income Taxes (continued) The significant components of the deferred income tax expense (benefit) attributable to income from continuing operations for the years ended December 31 are as follows: (In thousands) 1996 1995 1994
Deferred tax expense (benefit)(exclusive of the effect of other component listed below) $ 1,552 $(6,058) $ 1,340 Increase (decrease) in balance of the valuation allowance for deferred tax assets (1,552) 6,058 (1,340) Total $ -- $ -- $ --
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31 are as follows: 1996 1995
Deferred tax assets: Provision for discontinued operations $ 4,580 $ 3,008 Accounts receivable, principally due to allowance for doubtful accounts 59 302 Inventories, principally due to additional costs inventoried for tax purposes pursuant to the Tax Reform Act of 1986 6 19 Compensated absences, principally due to accrual for financial reporting purposes 500 500 Net operating loss carryforwards 62,808 67,229 Investment tax credit carryforwards 976 1,722 Other 916 1,022 Total gross deferred tax assets 69,845 73,802 Less valuation allowance (34,829) (36,381) Net deferred tax assets 35,016 37,421 Deferred tax liabilities: Properties and equipment, principally due to depreciation 5,810 6,417 Pension accrual 4,353 6,151 Total gross deferred tax liabilities 10,163 12,568 Net deferred tax asset $ 24,853 $ 24,853
Note 13: Income Taxes (continued) The net change in the total valuation allowance for the years ended December 31, 1996 and 1995 was a decrease of $1.6 million and an increase of $6.1 million, respectively. The company had NOLs of approximately $179.5 million at December 31, 1996, because of losses associated with discontinued businesses. These NOLs expire as follows: (In thousands)
2002 $ 1,601 2003 76,662 2004 38,856 2005 17,222 2006 6,471 2007 1,629 2008 15,031 2009 12,008 2010 9,973
13-31 Tax benefits of $1.0 million for investment tax credits expiring in 1997 and later are also being carried forward. Current accounting standards require that deferred income taxes reflect the tax consequences on future years of differences between the tax bases of assets and liabilities and their bases for financial reporting purposes. In addition, future tax benefits, such as NOLs, are required to be recognized to the extent that realization of such benefits is more likely than not. A valuation allowance is established for those benefits that do not meet the more likely than not criteria. Note 13: Income Taxes (continued) In assessing the valuation allowance established at December 31, 1996 and 1995, estimates were made as to the potential financial impact on the company should resolution of the remaining substantive uncertainty associated with discontinued operations substantially exceed management's estimates. The uncertainty involves the Hastings, Nebraska, environmental matter and is discussed more fully in Note 8, Contingent Liabilities. Management's position is to vigorously pursue its claims against other PRPs and to contest the liability for environmental clean- up. In determining the appropriate valuation allowance, however, management has used the upper limit of the potential financial impact estimated for this matter. Also, operating profits were lower than forecasted in 1996 primarily due to operational difficulties and higher-than-expected expenses at Black River. Management believes that the company will generate sufficient future taxable income to realize the entire deferred tax asset prior to expiration of any NOLs and that the realization of a $24.9 million net deferred tax asset is more likely than not. Income projections for the contract lime business are based on historical information adjusted for contract terms. In order to fully realize the net deferred tax asset, the company will need to generate future taxable income of approximately $70.9 million prior to the expiration of the NOLs. Historically, Dravo Lime's cumulative taxable earnings for the past five years total $61.5 million. There can be no assurance, however, that the company will generate enough taxable income to realize the deferred tax asset prior to the NOLs expiring. Note 14: Extraordinary Item In conjunction with the sale of DBMs' assets, existing loan agreements were substantially altered, including a $35 million reduction in the amount available under a revolving credit facility. Also, while negotiating a financing agreement with Prudential Power Funding for the Black River expansion, the company purchased a call option that enabled it to prepay on May 17, 1995, without penalty, amounts outstanding under the financing agreement. Cash received from the Dravo Basic Materials asset sale equaling the outstanding principal on the Prudential Power Funding facility, interest through May 16, 1995 and an exit fee was placed in escrow. With Prudential Power Funding's consent, the entire amount borrowed was prepaid. The fees associated with these agreements were written off as an extraordinary item in 1994. Note 15: Fair Value of Financial Instruments The fair value of financial instruments without extended maturities equals their carrying values. The estimated fair value of financial instruments with extended maturities at December 31 is presented below: (In thousands)
1996 1995 Carrying Fair Carrying Fair Value Value Value Value Notes payable $69,701 $70,623 $70,391 $72,124 Series D Preference Stock 20,000 22,533 20,000 23,242
The carrying amounts of notes receivable approximate fair value. The fair value of notes payable and the Series D Preference Stock is based upon the amount of future cash flows associated with each instrument discounted using the company's estimated borrowing rate for similar debt instruments of comparable maturity. The Preference Stock fair value also includes an estimated factor to value the conversion feature. Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Note 16: Research and Development Research and development activity for the years ended December 31 is as follows: (In thousands) 1996 1995 1994
Total research and development expense $3,742 $3,558 $4,393 Billings to third parties 1,784 1,255 2,361 Net research and development expense $1,958 $2,303 $2,032
13-32 Note 17: Interim Financial Information (Unaudited, in millions, First Second Third Fourth except earnings per share) Quarter Quarter Quarter Quarter
1996 Revenue $38.2 $39.3 $40.8 $39.8 Gross profit 9.7 9.3 10.6 10.4 Earnings before taxes from continuing operations 3.2 3.6 3.7 3.6 Provision (benefit) for income taxes 0.1 0.1 0.1 (0.3) Net earnings 3.1 3.5 3.6 3.9 Net earnings per share 0.17 0.19 0.20 0.22 1995 Revenue $33.9 $35.7 $37.8 $38.6 Gross profit 8.7 9.5 9.5 8.8 Earnings before taxes from continuing operations 2.7 2.9 3.1 2.6 Provision (benefit) for income taxes 0.2 0.2 0.2 (0.3) Net earnings 2.5 2.7 2.9 2.9 Net earnings per share 0.13 0.14 0.15 0.15
13-33 Management's Report The consolidated financial statements and other financial information appearing in this Annual Report were prepared by the management of Dravo Corporation, which is responsible for their integrity and objectivity. These financial statements have been prepared in conformity with generally accepted accounting principles and include amounts that are based on informed judgments and estimates of the expected effects of events and transactions. Dravo maintains a system of internal controls to provide reasonable assurance as to the reliability of the financial records and the protection of assets. This internal control system is supported by careful selection and training of qualified personnel, and a broad program of internal audits. In addition, the company's business ethics policy requires employees to maintain the highest level of ethical standards in the conduct of the company's business, and their compliance is regularly monitored. The company's financial statements have been audited by KPMG Peat Marwick LLP, independent certified public accountants. As stated in their report, their audit was made in accordance with generally accepted auditing standards and included such study and evaluation of the company's system of internal accounting controls as they considered necessary to determine the nature, timing and extent of the auditing procedures required for expressing an opinion on the company's financial statements. The Board of Directors, acting through its Audit Committee composed exclusively of outside directors, reviews and monitors the company's financial reports and accounting practices. The Board of Directors, upon the recommendation of the Audit Committee, appoints the independent certified public accountants subject to ratification by the shareholders. The Audit Committee meets periodically with management, the Director of Internal Auditor and the independent auditors. These meetings include discussions of internal accounting control, results of audit work and the quality of financial reporting. Financial management as well as the Director of Internal Auditor and independent auditors have full and free access to the Audit Committee. Independent Auditors' Report The Board of Directors and Shareholders Dravo Corporation: We have audited the accompanying consolidated balance sheets of Dravo Corporation and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of operations, retained earnings and cash flows for each of the years in the three-year period ended December 31, 1996. 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 financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Dravo Corporation and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. As discussed in Note 10 to the consolidated financial statements, the company adopted the method of accounting for postemployment benefits prescribed by Statement of Financial Accounting Standards No. 112 in 1994. KPMG Peat Marwick LLP Pittsburgh, Pennsylvania January 22, 1997 13-34 Five-Year Summary Years ended December 31, 1996 1995 1994 1993 1992
($ Amounts in millions, except per share data) Summary of operations: Revenue $158.1 $146.1 $278.1 $277.6 $273.0 Gross profit 40.0 36.5 44.0 49.3 51.7 Interest expense 6.4 4.8 12.4 9.2 10.5 Depreciation expense 10.1 9.5 17.6 18.0 18.6 Earnings before taxes from continuing operations 14.1 11.3 5.5 10.5 12.7 Provision (benefit) for income taxes -- 0.3 0.6 (24.6) 2.4 Earnings from continuing operations 14.1 11.0 4.9 35.1 10.3 Loss from discontinued operations, net of income taxes -- -- (6.5) (35.3) -- Extraordinary item -- -- (7.5) -- 1.6 Cumulative accounting change -- -- (1.4) -- -- Net earnings (loss) 14.1 11.0 (10.5) (0.2) 11.9 Preferred dividends declared 2.5 2.5 2.5 2.6 2.6 Capital expenditures 20.0 33.1 44.8 13.6 8.5 Employees at year end 781 756 768 1,416 1,421 Summary of financial position: Total assets $225.4 $213.3 $307.3 $272.1 $268.5 Working capital 8.5 9.8 6.3 59.5 60.1 Long-term obligations and redeemable preference stock 83.5 84.3 62.4 108.5 108.1 Total debt and redeemable preference stock 89.7 90.4 147.5 113.0 112.8 Property, plant and equipment, net 126.0 116.2 93.5 110.0 114.9 Shareholders' equity 93.9 79.9 76.7 89.5 95.0 Per common share data: Earnings from continuing operations $ 0.78 $ 0.57 $ 0.16 $ 2.20 $ 0.52 Loss from discontinued operations -- -- (0.44) (2.38) -- Extraordinary item -- -- (0.51) -- 0.11 Cumulative accounting change -- -- (0.09) -- -- Net earnings (loss) 0.78 0.57 (0.88) (0.18) 0.63 Book value 6.29 5.33 5.06 6.15 6.27 Shareholders at year end 2,741 2,924 3,192 3,442 3,376 Mineral resources (in millions of tons): Proven and probable reserves Total reserves 623.7 522.2 502.1 1,121.2 1,142.1 Tons mined 7.6 7.1 23.2 22.8 25.4
13-35 EX-21 5 SUBSIDIARIES OF THE REGISTRANT Exhibit 21. Subsidiaries of the Registrant
Percentage State or country of voting in which securities incorporated owned Registrant: Dravo Corporation Pennsylvania -- Subsidiaries of Dravo Corporation: Dravo Basic Materials Company, Inc. Alabama 100% Dravo Equipment Delaware 100 Dravo Lime Company Delaware 100 Princeton Ridge, Inc. New Jersey 100 Subsidiary of Dravo Basic Materials Company, Inc.: Dravo Natural Resources Company Delaware 50 Subsidiary of Dravo Lime Company: Dravo Natural Resources Company Delaware 50
21-1 EX-23 6 ACCOUNTANTS'S CONSENT Exhibit 23. Consents of Experts and Counsel CONSENT OF INDEPENDENT AUDITORS The Board of Directors Dravo Corporation: We consent to incorporation by reference in registration statements Nos. 33-23632, 2-84462, 2-64137, 33-54179, 333-01689, 333-01691 and 333-07537 on Form S-8, No. 33-17356 on Form S-3, Amendment No. 1 to No. 2-87555 on Form S-8/S-3, and No. 2-71993 on Form S-16 amended by Form S-3 of Dravo Corporation, of our reports dated January 22, 1997 relating to the consolidated balance sheets of Dravo Corporation and subsidiaries as of December 31, 1996 and 1995 and the related consolidated statements of operations, retained earnings, and cash flows and related schedule for each of the years in the three-year period ended December 31, 1996 which reports appear in, or are incorporated by reference in, the December 31, 1996 annual report on Form 10-K of Dravo Corporation. Our reports refer to the adoption of the methods of accounting for postemployment benefits prescribed by Statements of Financial Accounting Standards No. 112. /s/ KPMG PEAT MARWICK LLP Pittsburgh, Pennsylvania March 26, 1997 23-1 EX-24 7 POWERS OF ATTORNEY POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned does hereby constitute and appoint Carl A. Gilbert, Ernest F. Ladd III and James J. Puhala, and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him in his name, place and stead, in any and all capacities (including his capacity as a director and/or officer of Dravo Corporation), to sign the Form 10-K Annual Report of Dravo Corporation for the year ended December 31, 1996 and any and all amendments thereto, and to file the same, with all exhibits thereto, and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that attorneys-in-fact and agents or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. WITNESS the due execution hereof this 23 day of January, 1997. /s/ ARTHUR E. BYRNES 24-1 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned does hereby constitute and appoint Carl A. Gilbert, Ernest F. Ladd III and James J. Puhala, and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him in his name, place and stead, in any and all capacities (including his capacity as a director and/or officer of Dravo Corporation), to sign the Form 10-K Annual Report of Dravo Corporation for the year ended December 31, 1996 and any and all amendments thereto, and to file the same, with all exhibits thereto, and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that attorneys-in-fact and agents or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. WITNESS the due execution hereof this 23 day of January, 1997. /s/ JAMES C. HUNTINGTON, JR. 24-2 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned does hereby constitute and appoint Carl A. Gilbert, Ernest F. Ladd III and James J. Puhala, and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him in his name, place and stead, in any and all capacities (including his capacity as a director and/or officer of Dravo Corporation), to sign the Form 10-K Annual Report of Dravo Corporation for the year ended December 31, 1996 and any and all amendments thereto, and to file the same, with all exhibits thereto, and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that attorneys-in-fact and agents or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. WITNESS the due execution hereof this 23 day of January, 1997. /s/ WILLIAM E. KASSLING 24-3 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned does hereby constitute and appoint Carl A. Gilbert, Ernest F. Ladd III and James J. Puhala, and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him in his name, place and stead, in any and all capacities (including his capacity as a director and/or officer of Dravo Corporation), to sign the Form 10-K Annual Report of Dravo Corporation for the year ended December 31, 1996 and any and all amendments thereto, and to file the same, with all exhibits thereto, and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that attorneys-in-fact and agents or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. WITNESS the due execution hereof this 23 day of January, 1997. /s/ WILLIAM G. ROTH 24-4 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned does hereby constitute and appoint Carl A. Gilbert, Ernest F. Ladd III and James J. Puhala, and each of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him in his name, place and stead, in any and all capacities (including his capacity as a director and/or officer of Dravo Corporation), to sign the Form 10-K Annual Report of Dravo Corporation for the year ended December 31, 1996 and any and all amendments thereto, and to file the same, with all exhibits thereto, and all other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all that attorneys-in-fact and agents or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. WITNESS the due execution hereof this 23 day of January, 1997. /s/ KONRAD M. WEIS 24-5 EX-27 8 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM DRAVO CORPORATION'S DECEMBER 31, 1996 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS DEC-31-1996 DEC-31-1996 1600 0 24362 176 16481 43018 238025 112026 225409 34541 0 15097 20000 20 78798 225409 158133 158133 118165 118165 0 0 6426 14128 0 14128 0 0 0 14128 .78 0
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