-----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, Bjunugn876uYkT0iF+5hj0F3eOQodppr06yV2Cw4PkI7T6pGiOY6+k09hN23bk1Y /7rilZfBckBsh0nqKqpFwg== 0000030067-98-000002.txt : 19980330 0000030067-98-000002.hdr.sgml : 19980330 ACCESSION NUMBER: 0000030067-98-000002 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 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: SEC FILE NUMBER: 001-05642 FILM NUMBER: 98575306 BUSINESS ADDRESS: STREET 1: 11 STANWIX ST. STREET 2: 11TH FLOOR CITY: PITTSBURGH STATE: PA ZIP: 15222 BUSINESS PHONE: 412-995-5535 MAIL ADDRESS: STREET 1: 3600 ONE OLIVER PLAZA CITY: PITTSBURGH STATE: PA ZIP: 15222 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, 1997 Commission file number 1-5642 DRAVO CORPORATION A PENNSYLVANIA CORPORATION I.R.S. EMPLOYER IDENTIFICATION NUMBER 25-0447860 11 STANWIX STREET PITTSBURGH, PENNSYLVANIA 15222 TELEPHONE (412) 995-5500 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, 1998: 14,713,509 Aggregate market value of the voting stock held by non-affiliates of the Registrant as of March 20, 1998: $161,848,599 DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report to Shareholders for the year ended December 31, 1997 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 23, 1998 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 Transactions14 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 Registrant24 - 31 Table of Contents for documents filed herein as Exhibits 10, 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 11 Stanwix Street, Pittsburgh, Pennsylvania 15222, and its telephone number is 412-995-5500. As used herein, the term Dravo includes its consolidated subsidiaries unless otherwise indicated. Dravo is 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 & 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 Cinergy Corp. - each accounted for 10 percent or more of consolidated revenue in 1997. All reserves are located on properties physically accessible for purposes of mining and processing limestone into lime. Liabilities associated with non-natural resource businesses sold or disposed of in the late 1980s are presented as a component of discontinued operations in the financial statements. 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. With the completion of a fourth kiln at Maysville, Kentucky in 1997, annual quicklime capacity totals approximately 3,400,000 tons. The Maysville plant is a four kiln, 1,400,000 tons-per-year facility located along the Ohio River and produces a material marketed under the trade name Thiosorbic Lime. Thiosorbic Lime has a chemistry ideally suited for removing sulfur dioxide from power plant stack gases. Most 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 four kiln operation in excess of eighty years. Dravo Lime's Black River facility produces Thiosorbic quicklime, high calcium pebble and pulverized quicklime, and bulk and bagged hydrated lime. Located along the Ohio River at Butler, Kentucky, Black River has an annual quicklime capacity of 1,400,000 tons-per-year. Of that total, forty 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 current capacity, reserves are considered adequate to sustain production levels for more than seventy years. -3- Item 1. Business (continued) The company's Longview facility, located near Birmingham, Alabama, has three kilns that produce 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 has secured the necessary permits and plans to start construction of a fourth kiln at Longview in 1998. In early 1997, a number of land parcels adjacent to the Longview quarry were purchased that doubled limestone reserves. Recoverable reserves are estimated to last approximately forty-five 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. An aggregates processing plant at the Longview facility annually produces between 500,000 to 1,000,000 tons of aggregates. 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. A major aggregates company has the exclusive distributorship rights for certain aggregates by-products produced by the company. Dravo Lime products are distributed through quicklime distribution terminals located in Donora and Monaca, Pennsylvania; Porterfield, Ohio; Brunswick, Georgia; and Tampa, Fort Lauderdale, Jacksonville 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 flue gas treatment technologies give it certain competitive advantages. Dravo's research and development expenditures were $6.5 million in 1997 and $3.7 million in 1996. Expenditures in 1997 and 1996 included $4.2 million and $1.0 million, respectively, related to construction of the first commercial scale ThioClear flue gas desulfurization (FGD) system. ThioClear is a second generation proprietary FGD technology. The system's construction costs plus interest will be repaid to the company by the owner, AES Beaver Valley, Inc. Research and development spending in 1998 is expected to total $2.5 million. The company anticipates the research, much of which is being conducted jointly with utility customers, will lower both the capital and operating costs associated with flue gas treatment. 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 -4- Item 1. Business (continued) 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. 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. Dravo Corporation is a domestic natural resource business primarily involved in the production, processing and supply of lime for environmental, metallurgical, pulp & paper, municipal, construction and miscellaneous chemical and industrial applications as well as the development and marketing of related environmental technologies, products and services. Standards promulgated by the 1990 Clean Air Act Amendments bolstered Dravo's position as the world's leading producer of lime for FGD applications. Further information required by this item is incorporated by reference to the information set forth under the captions indicated below in the 1997 Annual Report to Shareholders which accompanies this report: Caption in Annual Report Page No. Results of Operations 13 - 15 Note 15: Research and Development 34 Employees at Year-End 37 -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 Jacksonville, Florida Leased Sanford, Florida Leased Tampa, Florida Owned/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, 1997 and tons mined by Dravo Lime in 1997. (Tons in millions) Recoverable 1997 Reserves Production
Underground mines 586.7 6.3 Quarries 67.8 1.4 654.5 7.7
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 27 and 28 of the 1997 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, 1997. -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 1997 Annual Report to Shareholders which accompanies this report: Caption in Annual Report Page No. Common Stock Market Price 16 Shareholders at year-end 37 Dividends 16, 37 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, 1997 issued preference and common shares were 218,386 and 15,103,249, respectively and there were 397,413 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 18,386 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 25 and 26 of the 1997 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 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 37 of the 1997 Annual Report to Shareholders which accompanies this report. Dravo has declared no common stock dividends in the five-year period ending December 31, 1997. 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 13 through 17 of the 1997 Annual Report to Shareholders which accompanies this report, to the information set forth under the caption Note 2: "Discontinued Operations" on page 25, Note 3: "Dispositions" on page 25, Note 7: "Commitments" on pages 26 and 27, Note 8: "Contingent Liabilities" on pages 27 and 28 and Note 13: "Income Taxes" on pages 33 and 34 in the Notes to Consolidated Financial Statements of the 1997 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 18 through 35, and the Independent Auditors' Report set forth on page 36 of the 1997 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 captions "Nominees For Terms To Expire in 2001", "Directors Whose Terms Expire in 2000" and "Directors Whose Terms Expire in 1999" in the Registrant's Proxy Statement for the Annual Meeting of Shareholders on April 23, 1998. The following information indicates the position and age at March 20, 1998 of the non-director executive officers of Dravo Corporation and their business experience during the last five years: Earl J. Bellisario, Age 48, Senior Vice President, Chief Financial Officer and Secretary since January, 1998; prior thereto Vice President, Chief Financial Officer & Secretary, Vikimatic Sales Inc. from September, 1996 to January, 1998. Prior thereto, Senior Vice President and Chief Financial Officer, Acme- Cleveland Corporation from May, 1992 to September, 1996. John R. Major, Age 53, Senior Vice President, Chief Operating Officer since November, 1997; prior thereto Vice President, Administration. Richard E. Redlinger, Age 46, Vice President, Corporate Development and Treasurer since July, 1995; prior thereto Vice President, Finance and Planning, Dravo Lime Company. Larry J. Walker, Age 45, Vice President and Controller since July, 1995; prior thereto, Controller. -13- Item 11. Executive Compensation Information required by this item is incorporated by reference to the information set forth under the captions "Compensation Committee Interlocks and Insider Participation," "Executive Officers' Compensation," "Options/SAR Grants In Last Fiscal Year," Aggregated Option/SAR Exercises In Last Fiscal Year And Fiscal Year-End Option/SAR Values," "Severance Arrangements," "Performance Graph" and "Executive Benefit Plan" in the Registrant's Proxy Statement for the Annual Meeting of Shareholders on April 23, 1998. 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 "Beneficial Security Ownership Of Directors And Executive Officers" and "Stock Ownership Of Certain Beneficial Owners" in the Registrant's Proxy Statement for the Annual Meeting of Shareholders on April 23, 1998. Item 13. Certain Relationships and Related Transactions Not applicable. -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 1997 Annual Report to Shareholders which accompanies this report. Description Page No. Consolidated Balance Sheets at December 31, 1997 and 1996 18, 19 Consolidated Statements of Earnings for the years ended December 31, 1997, 1996 and 1995 20 Consolidated Statements of Retained Earnings for the years ended December 31, 1997, 1996 and 1995 21 Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995 22, 23 Notes to Consolidated Financial Statements 24 - 35 Independent Auditors' Report 36 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 Registrant 24-31 Schedules other than those listed above have been omitted because they are either not applicable, immaterial or 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 American National Trust & Savings Association (successor by merger to 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) First Amendment 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 Fourth Amendment (see note below) 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: The Fourth Amendment to the Amended and Restated Revolving Credit Agreement was originally incorrectly designated as the Fifth Amendment. The numbering error was corrected in the Sixth Amendment dated July 31, 1997.) (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 Fifth Amendment (see note below) to the Amended and Restated Revolving Credit Agreement dated January 21, 1992 is incorporated by reference to Exhibit 4(xviii) of the December 31, 1996 Form 10-K of the Registrant. (Note: The Fifth Amendment to the Amended and Restated Revolving Credit Agreement was originally incorrectly designated as the Sixth Amendment. The numbering error was corrected in the Sixth Amendment dated July 31, 1997.) (xix) Amendment Agreement dated July 27, 1997 encompassing the Seventh Amendment to the Override Agreement dated January 21, 1992 and the Sixth Amendment to the Amended and Restated Revolving Credit Agreement dated January 21, 1992 is incorporated by reference to Exhibit 4(i) of the September 30, 1997 Form 10-Q of the Registrant. -19- Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (continued) (10) Material Contracts (All of the following, except item 10 (ix), 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. (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) 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) (x) Identical agreements dated September 15, 1997 between Dravo Corporation and Carl A. Gilbert, Marshall S. Johnson, John R. Major, James J. Puhala and Donald H. Stowe, Jr. are incorporated by reference to Exhibit 10(i) of the September 30, 1997 Form 10-Q of the Registrant. (xi) Agreement dated January 30, 1998 between Dravo Corporation and Earl J. Bellisario is filed herein under separate cover. (11) Statement Re Computation of Per Share Earnings filed under separate cover. (13) 1997 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 informational purposes 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, 1997. -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 27, 1998 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 27, 1998 /s/ EARL J. BELLISARIO Senior Vice President, Earl J. Bellisario Chief Financial Officer March 27, 1998 and Secretary /s/ LARRY J. WALKER Vice President and Larry J. Walker Controller March 27, 1998 *ARTHUR E. BYRNES Director March 27, 1998 Arthur E. Byrnes *JAMES C. HUNTINGTON, JR. Director March 27, 1998 James C. Huntington, Jr. *WILLIAM E. KASSLING Director March 27, 1998 William E. Kassling *PETER T. KROSS Director March 27, 1998 Peter T. Kross *WILLIAM G. ROTH Director March 27, 1998 William G. Roth *KONRAD M. WEIS Director March 27, 1998 Konrad M. Weis /s/ CARL A. GILBERT *By Carl A. Gilbert, Attorney-in-fact -22- INDEPENDENT AUDITORS' REPORT The Board of Directors and Shareholders Dravo Corporation: Under date of January 21, 1998, we reported on the consolidated balance sheets of Dravo Corporation and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of earnings, retained earnings, and cash flows for each of the years in the three-year period ended December 31, 1997, as contained in the 1997 annual report to shareholders. These consolidated financial statements and our report thereon are incorporated by reference in the annual report on Form 10-K for the year 1997. 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 21, 1998 -23- DRAVO CORPORATION (PARENT COMPANY) Schedule I - Condensed Financial Information of Registrant Balance Sheets
(In thousands) December 31, 1997 1996 ASSETS Current assets: Cash and cash equivalents $ 388 $ 1,390 Accounts receivable 883 517 Current income tax benefit from affiliates 3,999 6,104 Other current assets 306 183 Total current assets 5,576 8,194 Due from affiliates 21,387 23,094 Investments in affiliates 60,733 52,525 Deferred income tax benefit 34,654 29,718 Other assets 26,381 23,561 Property, plant and equipment 123 123 Less accumulated depreciation and amortization 123 123 Net property, plant and equipment -- -- Total assets $148,731 $137,092
See accompanying notes to financial statements. -25- DRAVO CORPORATION (PARENT COMPANY) Schedule 1 - Condensed Financial Information of Registrant Balance Sheets
(In thousands) December 31, 1997 1996 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable-trade $ 853 $ 1,038 Accrued retirement contribution -- 1,785 Net liabilities of discontinued operations3,613 6,299 Redeemable preference stock 5,000 -- Other current liabilities 812 637 Total current liabilities 10,278 9,759 Net liabilities of discontinued operations 5,401 6,786 Other liabilities 8,386 6,632 Redeemable preference stock: Par value $1, issued 200,000 shares: Series D, cumulative, convertible, exchangeable (entitled in liquidation to $20.0 million)15,000 20,000 Shareholders' equity: Preference stock, par value $1, authorized 1,878,870 shares: Series B, $2.475 cumulative, convertible, issued 18,386 and 20,386 shares (entitled in liquidation to $1.0 million and $1.1 million, respectively); 18 20 Series D, reported above Common stock, par value $1, authorized 35,000,000 shares; issued 15,103,249 and 15,096,817 shares 15,103 15,097 Other shareholders' equity 94,545 78,798 Total shareholders' equity 109,666 93,915 Total liabilities and shareholders' equity $148,731 $137,092
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) 1997 1996 1995 General and administrative expenses $ (464) $ (709) $ (961) Other expense -- (4) -- Interest expense (98) -- (9) Interest income -- 10 -- Loss before taxes and affiliate earnings (562) (703) (970) Income tax benefit 7,470 4,142 2,038 Earnings before affiliate earnings 6,908 3,439 1,068 Equity in affiliate earnings 8,208 10,689 9,913 Net earnings $15,116 $14,128 $10,981
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, 1997 1996 1995 Cash flows from operating activities: Net earnings $15,116 $ 14,128 $ 10,981 Adjustments to reconcile net earnings to net cash provided (used) by continuing operations activities: Depreciation and amortization -- 4 6 Loss on disposal of assets -- 4 -- Equity in earnings of affiliates (8,208) (10,689) (9,913) Changes in assets and liabilities: Decrease (increase) in accounts receivable (366) 362 726 Decrease (increase) in current income tax benefits 2,105 (1,381) (2,783) Decrease (increase) in other current assets (61) 318 1,151 Decrease (increase) in other assets 938 (1,991) (3,517) Decrease (increase) in deferred income taxes (4,936) (2,995) 9,689 Decrease in accounts payable and accrued expenses (1,734) (1,062) (1,404) Increase in other liabilities 1,754 342 390 Net cash provided (used) by continuing operations activities 4,608 (2,960) 5,326 Increase (decrease) in net liabilities of discontinued operations (4,071) 4,491 (13,099) Proceeds from repayment of notes receivable from sale of discontinued operations -- -- 2,200 Net cash provided (used) by discontinued operations activities (4,071) 4,491 (10,899) Net cash provided (used) by operating activities $ 537 $ 1,531 $(5,573)
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, 1997 1996 1995 Cash flows from investing activities: Increase (decrease) in advances from subsidiaries $1,707 $(98,140) $(77,757) Dividends received from affiliates -- 100,000 88,000 Other, net -- 1 -- Net cash provided by investing activities 1,707 1,861 10,243 Cash flows from financing activities: Proceeds from issuance of common stock -- 248 557 Purchase of treasury stock (729) -- (2,667) Dividends paid (2,517) (2,529) (2,535) Net cash used by financing activities (3,246) (2,281) (4,645) Net increase (decrease) in cash and cash equivalents (1,002) 1,111 25 Cash and cash equivalents at beginning of year 1,390 279 254 Cash and cash equivalents at end of year $ 388 $ 1,390 $ 279
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 14, and 16 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 1997, 1996 or 1995. The minimum future rentals under noncancelable operating leases and minimum future rental receipts from subleases to third parties as of December 31, 1997 are indicated in the table below. All of the $1.0 million net minimum payments were previously expensed in connection with discontinued operations.
(In thousands) 1998 $3,631 1999 -- 2000 -- 2001 -- 2002 -- After 2002 -- Total minimum payments required3,631 Less: Minimum sublease rental receipts (2,582) Net minimum payments $1,049
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 for the years ended December 31 are comprised of the following:
(In thousands) 1997 1996 1995 Benefit to offset tax liabilities of subsidiaries $ 2,534 $ 1,147 $ 11,727 Change in net deferred tax asset 4,936 2,995 (9,689) $ 7,470 $ 4,142 $ 2,038
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) 1997 1996 Deferred tax assets: Provision for discontinued operations $ 3,066 $ 4,580 Net operating loss carryforwards 59,024 62,808 Investment tax credit carryforwards 666 791 Alternative minimum tax credit 750 350 Other 3,553 371 Total gross deferred tax assets 67,059 68,900 Less valuation allowance 23,435 34,829 Net deferred tax assets after valuation allowance 43,624 34,071 Deferred tax liabilities: Pension accrual 8,970 4,353 Total gross deferred tax liabilities 8,970 4,353 Net deferred tax asset $34,654 $29,718
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 $98 million prior to the expiration of its net operating loss carryforwards. The company's cumulative taxable earnings for the past two years total $22.3 million. -30- Note 3: Dividends Cash dividends paid to the Registrant for the respective years ended December 31:
(In thousands) 1997 1996 1995 Consolidated affiliates $ -- $100,000 $ 88,000 50 percent or less owned companies accounted for by the equity method 647 1,090 916
-31- EXHIBITS Table of Contents Exhibit (Exhibit No.) Page No. 10. Material Contracts (xi) Agreement dated January 30, 1998 between Dravo Corporation and Earl J. Bellisario is filed herein under separate cover. (10)(xi) 1-5 11. Statement RE Computation of Per Share Earnings (11) 1 13. 1997 Annual Report (13) 13-37 21. Subsidiaries of the Registrant (21) 1 23. Consent of Experts and Counsel (23) 1 24. Powers of Attorney. Identical documents were signed by Arthur E. Byrnes, James C. Huntington, Jr., William E. Kassling, Peter T. Kross, William G. Roth and Konrad M. Weis. (24) 1 27. Financial Data Schedule (EDGAR filing only) (27) 1 -32- EX-11 2 EARNINGS PER SHARE Exhibit 11. Statement Re Computation of Per Share Earnings
($ in thousands, except per share amounts) Years ended December 31, 1997 1996 1995 Basic earnings per share: Net earnings $15,116 $14,128 $10,981 Deduct dividends on preferred stock 2,517 2,529 2,535 Net earnings applicable to common stock $12,599 $11,599 $ 8,446 Shares: Weighted average number of common shares outstanding 14,768 14,734 14,756 Basic earnings per share $ 0.85 $ 0.79 $ 0.57 Diluted earnings per share: Net earnings applicable to common stock $ 12,599 $ 11,599 $ 8,446 Shares: Weighted average number of common shares outstanding 14,768 14,734 14,756 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) 67 160 119 Weighted average number of shares outstanding, as adjusted 14,835 14,894 14,875 Diluted earnings per share $ 0.85 $ 0.78 $ 0.57
11-1 EX-13 3 1997 ANNUAL REPORT TO SHAREHOLDERS FINANCIAL REVIEW OVERVIEW Revenue and gross profit in 1997 exceeded 1996 levels as did net earnings. The net earnings improvement resulted from recording a tax benefit for tax net operating loss carryforwards. Mitigating this benefit were a major flood in the first quarter that disrupted shipments for an extended period and stopped the company from loading and its customers from unloading barges, overhead charges in the fourth quarter for severance costs associated with reducing executive staff size, expenses for an operations and financial review, and investment banking fees. Net earnings for the year were $15.1 million, or $0.85 per diluted share, compared to $14.1 million, or $0.78 per diluted share, in 1996. The tax benefit improved 1997's earnings per share by approximately $0.32 while the overhead charges reduced earnings per share by approximately $0.13. Earnings for 1995 were $11.0 million, or $0.57 per diluted share. During 1997, Dravo completed three major capital projects that position the company for future growth. Early in the year, 27 million tons of high-calcium reserves were acquired adjacent to the Longview plant in northern Alabama. In midyear, a new kiln at the Maysville plant in northern Kentucky started producing utility grade lime with annual capacity of 350,000 tons. A major refurbishing of an existing kiln at the Black River plant, also located in northern Kentucky, was completed near year-end. Production from the refurbished kiln will primarily supply the non-utility lime markets. RESULTS OF OPERATIONS CONTINUING OPERATIONS Revenue: Revenue of $162.5 million was $4.3 million higher than in 1996. Most of the increase was due to strong commercial market lime demand in the southeastern United States. Demand for precipitated calcium carbonate, a product derived from lime and used by the pulp & paper industry, was particularly strong. Utility lime sales were negatively affected by a lightning strike that severely damaged equipment at a major customer's generating station and impacted lime deliveries for several months. Revenue in 1996 was $12.1 million higher than 1995. As in 1997, much of the increase was attributable to higher sales in the southeast market region. Strong commercial demand, augmented by the sale of brokered lime 13-13 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 aggregate byproducts. 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 over-scrubbing due to a drop in the value of sulfur dioxide (SO2) emission allowances. Costs and Expenses: Gross profit of $40.8 million was up $867,000 from 1996 while 1996 was up $3.4 million over 1995. Gross profit margins in all three years were maintained at the 25 percent level despite less demand from utilities in 1997 and 1996 than required to maximize production and fully utilize the company's new utility lime kilns. Gross profit and margins were also suppressed by the need to purchase commercial-grade lime in the southeast region as demand surpassed production capacity. Selling expenses were $5.1 million, $4.6 million and $5.0 million in 1997, 1996 and 1995, respectively. Part of the increase in 1997 was for marketing of Sorbalit technology, a system for acid gas and air toxins removal for which the company is the exclusive North America licensee, and development costs for a proprietary nitrous oxide removal process. Selling expenses vary 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 15, Research and Development, in the Notes to Consolidated Financial Statements. General and administrative expenses were $2.3 million higher in 1997 than 1996. The increase was principally due to an accrual for severance costs associated with reducing executive staff size, consulting fees for an operations and financial review and expenses related to an investment banking review to explore merger and acquisition opportunities. General and administrative expenses were essentially unchanged in 1996 versus 1995. 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. Equity in earnings of joint ventures includes the company's share in three 50-percent owned joint ventures: a contract phosphate rock mining operation in Idaho, a small contract coke operation in Wyoming, and an activated carbon production plant in New York. 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 1997 compared to 1996 due to strong phosphate demand; however, a loss of $130,000 was recorded on the activated carbon venture that started operations in late 1997. Joint venture earnings were higher in 1996 than 1995 due to strong phosphate demand and a return to more normal maintenance expense. Other income (expense) includes the gain or loss on the disposal of property, plant and equipment. In 1997, 1996 and 1995, the amounts were insignificant. Interest income of $235,000 was $665,000 lower than in 1996. Last year's amount included interest on a refund received from a state taxing authority after the company filed amended tax returns based on a revised interpretation of the state tax code. Interest expense in 1997 was $7.0 million, $599,000 more than 1996, due to higher debt levels. Capital expenditures totaled $27.2 million and were partially funded by debt. Debt increased $14.4 million from year-end 1996 to year-end 1997. In 1996, interest expense increased $1.6 million from 1995, also because of higher debt levels. The proceeds from the sale of the assets of Dravo Basic Materials (DBM), the company's construction aggregates operation, 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 a $60 million expansion project at Black River. 13-14 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 tax net operating loss carryforwards (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. The company had NOLs of approximately $173 million at December 31, 1997. Management continually evaluates the recorded deferred tax valuation allowance and believes that, due to the large portion of revenue generated by long-term supply contracts and taxable income generated by the company since it started operating solely as a lime company three years ago, 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. As a result, the company reduced its valuation allowance in 1997 and recorded a net tax benefit of $4.1 million. The amount of the net deferred tax asset, $30 million, reflects that portion of the gross deferred tax asset that management believes, based on current income projections and tax preference item estimates, is more likely than not will be realized. The company's effective tax rate in the future will be partially determined by the amount actual taxable income differs from the taxable income level assumed in determining the net tax asset. The company anticipates an effective tax rate in 1998 of approximately 20 percent. The effective tax rate is used for financial reporting purposes only and will not affect actual taxes paid, which will remain low due to NOL utilization. The company's income tax expense was zero in 1996 because of 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. 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 Discontinued operations had a net cash outlay of $4.1 million in 1997 for non-cancelable leases, environmental, insurance, legal and other matters, all of which were covered by a previously established reserve. In 1996, the company collected a $7.3 million judgment and interest awarded by a Georgia court related to a contract dispute with a discontinued engineering subsidiary's subcontractor. 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 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 in 1996. The amended returns also generated a state tax NOL that can be used to shelter future taxable income. FINANCIAL POSITION AND LIQUIDITY Working capital at year-end 1997 was $3.9 million, down $4.6 million from December 31, 1996. In July 1997, the company converted $17.0 million of revolver debt, classified as long-term at year-end 1996, to a 5-year term note with quarterly principal payments of $850,000. In addition, $5.0 million of Series D Preference Stock is scheduled to be redeemed on October 1, 1998 and is now classified as a current liability. Long-term debt borrowed under the company's revolving credit/letter of credit facility increased primarily due to capital expenditures. 13-15 A $53.0 million revolving credit/letter of credit facility is provided by a consortium of lenders that includes Regions Bank of Alabama; 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, 1999, but includes renewal provisions. 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. 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 the revolving credit agreement. The company has sufficient funds and borrowing capacity to meet its anticipated operating and normal capital needs. A portion of a planned major expansion at Longview for a new kiln and ancillary equipment will require additional outside funding. 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 expected cash payments 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 December 31, 1995 exceeds $5.0 million plus 25 percent of net earnings available for common stock after December 31, 1995 less cumulative stock buy-backs after December 31, 1995. Net earnings exclude gains from the sale of capital assets, extraordinary gains and unremitted earnings of joint ventures. At December 31, 1997, assuming no other financial or debt covenant restrictions, common stock dividends were limited to $9.0 million. No dividends on common stock were declared. Annual dividends on the $12.35 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. 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 1997 and 1996 as reported for New York Stock Exchange composite transactions were: 1997 1996
Quarter High Low High Low First 14 1/8 10 1/8 13 3/4 11 1/4 Second 11 3/4 8 3/4 14 7/8 12 3/4 Third 11 15/16 10 14 5/8 12 Fourth 12 9/16 9 1/2 15 3/4 12 1/2
OUTLOOK Continuing operations: Dravo is highly leveraged, both operationally and financially. Operationally, maximizing output is critical while operating production facilities as efficiently as possible. To reach that goal, additional business must be booked that will fully utilize existing utility lime production capacity at the Maysville and Black River plants. A broad-based marketing program is aimed at making all coal-fired power plants in the market area served by the two northern Kentucky plants aware of the advantages of lime-based scrubbing. 13-16 Marketing efforts are directed at convincing potential customers that converting to a lime-based flue gas desulfurization (FGD) system is more economical than either burning low-sulfur coal or using a limestone or sodium-based FGD system to scrub stack gas emissions. And companies currently using lime-based FGD systems are being apprised of the reduction in scrubbing costs they will experience by converting to the company's proprietary Thioclear process. Since the late 1980s, the pulp & paper industry has significantly increased its consumption of lime. Lime is a raw material used in the production of precipitated calcium carbonate (PCC), an alkaline-based filler material used to produce white paper. The company recently renewed for 10 years a supply contract with a major precipitated calcium carbonate producer. Under the contract, the company will provide lime to PCC production plants throughout the southeast. This long-term supply agreement will provide the underpinning for adding a new 300,000-ton-per-year kiln and ancillary equipment at the company's Longview plant located near Birmingham, AL. Financially, the company's goal is to reduce its overall debt level. While significant parts of the major expansions completed at Black River and Maysville over the last four years were funded from operational cash flow, a portion was funded with debt. Debt and preferred stock issued in the late 1980s during the company's exit from various discontinued operations carry high interest and dividend rates. A management goal is to reduce this high cost debt as quickly as possible, either by making the required scheduled principal payments and mandatory preferred stock redemptions, or through a debt restructuring with less onerous interest rates. Various financial and process control software is used to manage and operate business operations. The company is addressing the year 2000 software compatibility issue and has already replaced numerous financial systems with year 2000 compliant software. While this issue will require significant time and effort, the expense is not expected to be material. In 1997, the company conducted an investment banking review of strategic alternatives for accelerating growth that included merger, acquisition or other opportunities advantageous to the interest of the company's shareholders. As previously reported, the review did not produce a transaction. The company is pursuing its long-term plan of internal expansion, development of new businesses based on proprietary technologies and selective merger and/or acquisition opportunities. In June 1997 Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS 130) was issued effective for fiscal years beginning after December 15, 1997. SFAS 130 requires the reporting by major component and as a single total the change in equity during the period from nonowner sources, such as minimum pension liability adjustments. Adoption of SFAS 130 will not impact the company's consolidated balance sheet, statement of earnings or cash flows, and any effect will be limited to the form and content of its disclosure. Discontinued operations: The company formerly operated a metal fabrication facility in Hastings, Nebraska. The federal Environmental Protection Agency (EPA) has notified the company it believes the company is a potentially responsible party (PRP) for the cleanup of soil and groundwater contamination at four Hastings area sub-sites. In January 1997, the company reached a monetary settlement with the EPA regarding one sub-site 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 cleanup 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. Forward-looking statements: 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 forecasting income levels, cash flows, the success 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. 13-17 DRAVO CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets
December 31, 1997 1996 (In thousands) ASSETS Current assets: Cash and cash equivalents $ 1,477 $ 1,600 Accounts receivable, net of allowance for uncollectibles of $612 and $176 24,995 23,265 Notes receivable (Note 14) 769 921 Inventories (Note 4) 17,434 16,481 Other current assets 980 751 Total current assets 45,655 43,018 Advances to and equity in joint ventures 2,450 2,093 Notes receivable (Note 14) 6,873 4,380 Other assets (Note 9) 27,627 25,066 Deferred income taxes (Note 13) 29,976 24,853 Property, plant and equipment: Land 16,871 7,480 Mine development 9,286 9,218 Building and improvements 17,699 13,147 Machinery and equipment 220,070 208,180 263,926 238,025 Less accumulated depreciation and amortization 121,277 112,026 Net property, plant and equipment 142,649 125,999 Total assets $255,230 $225,409
See accompanying notes to consolidated financial statements. 13-18 DRAVO CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets
December 31, 1997 1996 (In thousands, except share data) LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term notes (Notes 5 and 14)$ 9,736 $ 6,166 Accounts payable - trade 17,546 14,542 Accrued insurance 1,482 1,906 Accrued retirement contribution -- 1,785 Net liabilities of discontinued operations (Note 2) 3,613 6,299 Redeemable preference stock (Notes 6 and 14) 5,000 -- Other current liabilities 4,368 3,843 Total current liabilities 41,745 34,541 Long-term notes (Notes 5 and 14) 74,396 63,535 Other liabilities 9,022 6,632 Net liabilities of discontinued operations (Note 2) 5,401 6,786 Redeemable preference stock (Notes 6 and 14): Par value $1, issued 200,000 shares: Series D, $12.35 cumulative, convertible, exchangeable (entitled in liquidation to $20.0 million) 15,000 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 18,386 and 20,386 shares (entitled in liquidation to $1.0 million and $1.1 million, respectively); Series D, reported above 18 20 Common stock, par value $1, authorized 35,000,000 shares: issued 15,103,249 and 15,096,817 shares 15,103 15,097 Other capital 66,819 63,077 Retained earnings 32,662 20,063 Treasury stock at cost; 397,413 and 333,168 common shares (4,936) (4,342) Total shareholders' equity 109,666 93,915 Total liabilities and shareholders' equity $255,230 $225,409
See accompanying notes to consolidated financial statements. 13-19 DRAVO CORPORATION AND SUBSIDIARIES Consolidated Statements of Earnings
Years ended December 31, (In thousands, except per share data) 1997 1996 1995 Revenue $162,476 $158,133 $146,067 Cost of revenue 121,641 118,165 109,541 Gross profit 40,835 39,968 36,526 Selling expenses 5,147 4,560 5,009 General and administrative expenses 18,717 16,410 16,228 Earnings from operations 16,971 18,998 15,289 Other income (expense): Equity in earnings of joint ventures 740 710 572 Other income (expense) 122 (54) 182 Interest income 235 900 85 Interest expense ( 7,025) ( 6,426) (4,807) Net other expense ( 5,928) ( 4,870) (3,968) Earnings before taxes 11,043 14,128 11,321 Income tax expense (benefit) (Note 13) (4,073) -- 340 Net earnings 15,116 14,128 10,981 Preference dividends 2,517 2,529 2,535 Net earnings available for common stock $ 12,599 $ 11,599 $ 8,446 Weighted average shares outstanding: Basic 14,768 14,734 14,756 Diluted 14,835 14,894 14,875 Earnings per share: Basic $ 0.85 $ 0.79 $ 0.57 Diluted $ 0.85 $ 0.78 $ 0.57
See accompanying notes to consolidated financial statements. 13-20 DRAVO CORPORATION AND SUBSIDIARIES Consolidated Statements of Retained Earnings
Years ended December 31, (In thousands) 1997 1996 1995 Retained earnings at beginning of year $20,063 $ 8,464 $ 18 Net earnings 15,116 14,128 10,981 35,179 22,592 10,999 Dividends declared: Series B preference stock 47 59 65 Series D preference stock 2,470 2,470 2,470 2,517 2,529 2,535 Retained earnings at end of year $32,662 $20,063 $ 8,464
See accompanying notes to consolidated financial statements. 13-21 DRAVO CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows
Years ended December 31, (In thousands) 1997 1996 1995 Cash flows from operating activities: Net earnings $ 15,116 $ 14,128 $10,981 Adjustments to reconcile net earnings to net cash provided (used) by continuing operations activities: Depreciation and amortization 10,506 10,124 9,536 Increase in deferred income taxes (5,123) -- -- Loss (gain) on sale of assets (122) 54 (182) Equity in joint ventures (357) 373 70 Changes in assets and liabilities, net of effects from DBM disposition: Decrease (increase) in accounts receivable (1,730) 986 (4,113) Decrease (increase) in notes receivable (2,341) (507) 568 Increase in inventories (953) (2,287)(1,556) Decrease (increase) in other current assets (167) 638 745 Decrease (increase) in other assets 1,197 177 (5,150) Increase (decrease) in accounts payable and accrued expenses 1,016 (4,522)(27,142) Increase (decrease) in income taxes payable 365 (502) (144) Increase in other liabilities 2,390 342 390 Total adjustments 4,681 4,876 (26,978) Net cash provided (used) by continuing operations activities 19,797 19,004 (15,997) Increase (decrease) in net liabilities of discontinued operations (4,071) 4,491 (13,099) Proceeds from repayment of notes receivable from sale of discontinued operations -- -- 2,200 Net cash provided (used) by discontinued operations activities (4,071) 4,491 (10,899) Net cash provided (used) by operating activities $ 15,726 $ 23,495 $(26,896)
See accompanying notes to consolidated financial statements. 13-22 DRAVO CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows
Years ended December 31, (In thousands) 1997 1996 1995 Cash flows from investing activities: Proceeds from sale of assets $ 195 $ -- $120,867 Additions to property, plant and equipment (27,229) (20,009) (33,144) Other, net -- (1) 3 Net cash provided (used) by investing activities (27,034) (20,010) 87,726 Cash flows from financing activities: Net borrowing under revolving credit agreements 2,990 5,160 27,948 Principal payments under long-term notes (7,222) (6,123) (85,259) Proceeds from issuance of long-term notes 18,663 273 185 Proceeds from issuance of common stock -- 248 557 Purchase of treasury stock (729) -- (2,667) Dividends (2,517) (2,529) (2,535) Net cash provided (used) by financing activities 11,185 (2,971) (61,771) Net increase (decrease) in cash and cash equivalents (123) 514 (941) Cash and cash equivalents at beginning of year 1,600 1,086 2,027 Cash and cash equivalents at end of year $ 1,477 $ 1,600 $ 1,086 Supplemental disclosures of cash flow information: Cash paid during the year for: Interest (net of amount capitalized) $ 6,812 $ 6,492 $ 5,695 Income taxes 706 502 175
See accompanying notes to consolidated financial statements. 13-23 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 & 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 1997. 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 December 31, 1995 consolidated statement of cash flows includes cash received from the DBM transaction and the payment of retained obligations, primarily accounts payable. 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 that 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: In December 1997, the company adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS 128). SFAS 128 requires the presentation of basic and diluted earnings per share on financial statements issued for periods ending after December 15, 1997. SFAS 128 also requires restatement of all prior-period earnings per share data presented. Basic earnings per share is based on net earnings less preference dividends declared in the year (net earnings available to common stock), divided by the weighted average sum of common shares outstanding during the year. Diluted earnings per share is based on net earnings available to common stock, divided by the sum of the weighted average number of common shares outstanding during the year and common share equivalents, unless inclusion of common share equivalents would be anti-dilutive. Common share equivalents are calculated using the treasury stock method. Stock-based compensation: Stock-based compensation is accounted for using the intrinsic value approach as prescribed by Accounting Principles Board Opinion No. 25. Environmental Costs: Liabilities are recorded when environmental assessments or remedial efforts are probable and the costs can be reasonably estimated. Such estimates are adjusted, if necessary, as new remediation requirements are defined or as more information becomes available. 13-24 Note 2: Discontinued Operations 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 various discontinued businesses and are presented below:
(In thousands) 1997 1996 Current assets: Accounts and retainers receivable $ 209 $ 323 Total current assets 209 323 Other -- 309 Total assets $ 209 $ 632 Current liabilities: Accounts and retainers payable $ 135 $ 536 Accrued loss on leases 1,026 2,304 Environmental 981 1,855 Other 1,680 1,927 Total current liabilities 3,822 6,622 Accrued loss on leases -- 954 Environmental 1,286 423 Other 4,115 5,718 Total liabilities $ 9,223 $ 13,717 Net liabilities and accrued loss on leases of discontinued operations $ 9,014 $13,085
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 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 receivable was collected and a majority of the obligations were paid in 1995 as reflected in the statement of cash flows. Note 4: Inventories Inventories for the respective years ended December 31 are classified as follows:
(In thousands) 1997 1996 Finished goods $ 2,819 $ 2,586 Materials and supplies 14,615 13,895 Net inventories $17,434 $16,481
Note 5: Notes Payable Notes payable at December 31 include the following:
(In thousands) 1997 1996 Variable rate revolving line of credit $36,100 $33,110 11.21% notes, payable through 2002 29,856 35,828 Variable rate term note, payable through 2002 16,150 -- Other notes, payable through 2007 2,026 763 84,132 69,701 Deduct: Current portion of notes 9,736 6,166 Total long-term notes $74,396 $63,535
The variable rate revolving line of credit is a $53.0 million revolving credit/letter of credit facility with Regions Bank of Alabama; 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, 1999, but includes renewal provisions. The 11.21 percent term notes require quarterly interest payments and annual principal repayments in the amount of $6.0 million. 13-25 In 1997, the company converted $17.0 million borrowed under the line of credit to a 5-year variable rate term note. Principal payments of $850,000 are paid quarterly with interest equal to the Eurodollar rate plus 2 percent. Obligations under the revolving credit/letter of credit facility, the 11.21 percent term notes and the variable rate term note 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. At December 31, 1997, assuming no other financial or debt covenant restrictions, common stock dividends were limited to $9.0 million. No dividends on common stock were declared. Assets pledged under certain notes and leases had a book value of $150.2 million at December 31, 1997. Amounts payable on long-term debt, excluding the variable rate revolving line of credit, due in 1998 and thereafter are: 1998, $9.7 million; 1999, $9.7 million; 2000, $9.7 million; 2001, $9.6 million; 2002, $8.8 million; and after 2002, $0.5 million. Note 6: Redeemable Preference Stock The company has outstanding 200,000 shares of cumulative, convertible, exchangeable Series D Preference Stock. Cumulative annual dividends of $12.35 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, 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, is 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 October 1, 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 18,386 and 20,386 shares of cumulative, convertible Series B Preference Stock on December 31, 1997 and 1996, 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 1997, 1996 and 1995 was $3.3 million, $3.0 million and $3.1 million, respectively. The minimum gross rentals under non-cancelable operating leases for these years were $12.8 million, $12.4 million and $13.0 million, respectively. Of these amounts, $10.4 million, $10.2 million and $10.5 million in 1997, 1996 and 1995, 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, 1997 are indicated in the following table. Of the $9.1 million net minimum payments, $1.0 million relates to, and has been expensed as part of, discontinued operations. 13-26
Minimum Future Rentals and Rental Receipts (In thousands) 1998 $ 5,510 1999 1,859 2000 1,216 2001 658 2002 420 After 2002 2,270 Total minimum payments required 11,933 Less: Sublease rental receipts (2,834) Net minimum payments $ 9,099
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, 1997 and 1996, $2.1 million and $3.1 million, respectively, was borrowed under the agreement. Outstanding letters of credit totaled $4.8 million at December 31, 1997 and 1996. 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 cleanup 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). Regarding the first sub-site, 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 that resulted in a settlement among the EPA and the PRPs. Pursuant to the settlement, the company agreed to pay 14.33 percent of the EPA's past costs and the estimated costs of the cap and its maintenance. A Consent Decree incorporating the settlement and requiring the private parties to pay for, construct and maintain the cap is awaiting the approval of the United States Justice Department and ultimately the Federal District Court. 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 and matters covered by the settlement. 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. The EPA has conducted the remedial investigation for this sub-site. The company, along with some of the other PRPs, including the City of Hastings, is considering a proposal from the EPA to conduct the feasibility study. In 1997, the company and the other PRPs at this sub-site received a demand from the EPA that they pay the EPA's response costs at this sub-site through September 30, 1994. The company and some of the other PRPs, including the City of Hastings, intend to examine these costs to determine whether or not they are valid. 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. In 1997, the company and the other PRPs at this sub-site received a demand from the EPA that they pay the EPA's response costs at this sub-site through September 30, 1994. The company and some of the other PRPs intend to examine these costs to determine whether or not they are valid. 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. 13-27 The fourth sub-site is a former naval ammunition depot that 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 cleanup, the EPA is seeking a cleanup of area-wide contamination associated with all of the sub-sites in and around Hastings. 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 completed an area-wide remedial investigation and has asked the PRPs to agree to perform a feasibility study to determine whether institutional controls or another remedial alternative should be undertaken. The company, along with eight to ten other PRPs, is considering this proposal. An acceptable area-wide remediation plan could result in interim remedies at the sub-sites becoming final remedies. In 1997, the company and the other area-wide PRPs received a demand from the EPA that they pay the EPA's area-wide response costs through September 30, 1994. The company and some of the other area-wide PRPs intend to examine these costs to determine whether or not they are valid. 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. Estimated future cleanup costs at the third sub-site, including capital outlays and maintenance costs for soil and groundwater remediation of approximately $6.2 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 and a pro rata share of the EPA's past response costs. The company's estimated share of the costs is based on its assessment of the total cleanup 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 contributions 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, 1997 and 1996 to the amounts recognized in the company's balance sheets at December 31, 1997 and 1996, respectively: 13-28
1997 1996 Plans which Plans which Plans which Plans which have have have 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 benefit obligation: Vested employees $184,020 $ 3,862 $157,288 $24,628 Non-vested employees 535 -- 153 1,201 Accumulated benefit obligation 184,555 3,862 157,441 25,829 Effect of projected future salary increases 3,541 655 2,865 1,480 Total projected benefit obligation 188,096 4,517 160,306 27,309 Plan assets including fourth quarter contributions 194,256 80 157,442 19,720 Assets greater (less) than projected benefit obligation 6,160 (4,437) (2,864) (7,589) Unamortized net liability existing at transition date 232 5 -- 280 Unrecognized net loss from actuarial experience 19,989 44 27,275 4,622 Recognition of additional minimum liability -- -- -- (4,093) Prepaid (accrued) pension expense $ 26,381 $(4,388) $ 24,411 $(6,780) The company recognized a $312,000 charge in 1997 for pension curtailment and special termination benefits resulting from the termination of employment for certain executives and administrative employees. The components of 1997, 1996 and 1995 net periodic pension expense are as follows:
Years ended December 31, 1997 1996 1995 (In thousands) Service cost of benefits earned during the year $ 618 $ 670 $ 470 Interest cost on projected benefit obligation 14,406 15,098 14,356 Actual (return) loss on plan assets (38,346) 2,299 (52,972) Net amortization (deferral) 25,052 (16,430) 38,446 Curtailment and special termination benefits expense 312 -- -- Net pension expense for year $ 2,042 $ 1,637 $ 300 Expected long-term rate of return on assets used to determine net pension expense: Salary plan 8.5% 7.75% 9.0% Hourly plan 8.0% 7.75% 9.0%
The following assumptions were used for the valuation of the pension obligations as of September 30, 1997 and 1996 and December 31, 1995:
1997 1996 1995 Discount rate 7.25% 8.0% 7.25% 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. 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. 13-29 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 7.25 percent and a health care cost trend rate of 7.5 percent in 1998, gradually declining to 5.25 percent in 2001. An increase in the health care cost trend rate of 1 percent would increase the APBO at September 30, 1997 by $132,000 and the total service and interest rate components of the 1997 postretirement benefit cost by $10,000. Postretirement benefit cost for 1997, 1996 and 1995 includes the following components:
(In thousands) 1997 1996 1995 Service cost - benefits earned during the period $ 29 $ 31 $ 44 Interest cost on accumulated postretirement benefit obligation 1,509 1,516 2,683 Net amortization and deferral 1,097 1,192 1,705 Postretirement benefit cost $2,635 $2,739 $4,432
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, 1997 and 1996 to the amounts recognized in the company's balance sheets at December 31, 1997 and 1996, respectively:
(In thousands) 1997 1996 Accumulated postretirement benefit obligation: Retirees and related beneficiaries $ 18,082 $ 18,296 Other fully eligible participants 775 870 Other active participants not fully eligible 817 854 Accumulated postretirement benefit obligation 19,674 20,020 Fourth quarter cash flow (444) (232) Unrecognized transition obligation (12,675) (13,520) Unrecognized net loss ( 3,904) ( 4,468) Accrued postretirement benefit liability $ 2,651 $ 1,800
The company accrued $2.6 million and $1.3 million at December 31, 1997 and 1996, respectively, for the estimated cost of benefits to be provided to former or inactive employees, including their beneficiaries and covered dependents, after employment but before retirement. Postemployment benefit costs in 1997, 1996 and 1995 were $1.7 million, $300,000 and $300,000, respectively. The 1997 expense included $1.3 million for severance costs associated with reducing executive staff size. 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 separately 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. There were no performance shares outstanding at December 31, 1997 and 1996. 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. Stock option grants are accounted for using the intrinsic value approach; therefore no expense was recognized with respect to such options. As required by current accounting standards, an estimate of the fair value of stock options granted in 1997, 1996 and 1995 was made 13-30 using the Black-Scholes option pricing model. The Black-Scholes model requires the input of highly subjective assumptions, including stock price volatility, expected option life and forfeiture rates, all of which can materially affect the fair value estimates. The weighted average fair value estimates determined by the model and the assumptions used are presented below:
1997 1996 1995 Weighted average fair value $ 4.22 $ 5.17 $ 5.08 Risk-free interest rate 6.1% 6.6% 6.8% Expected dividend yield 0% 0% 0% Expected option life 6.0 6.0 6.0 Expected volatility 30.31% 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 the fair value estimates:
(In thousands, except per share data) 1997 1996 1995 Net income: As reported $15,116 $14,128 $10,981 Pro forma 14,817 13,129 9,844 Basic earnings per share: As reported $0.85 $0.79 $0.57 Pro forma $0.83 $0.72 $0.49 Diluted earnings per share: As reported $0.85 $0.78 $0.57 Pro forma $0.83 $0.71 $0.49
The following summary shows the changes in outstanding rights for the last three years: Exercise Price Weighted Average Shares Per Share Exercise Price
Outstanding at January 1, 1995 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 Granted 201,000 $9.69 - $10.19 $10.03 Forfeited (4,500) $14.81 - $16.94 $15.53 Expired (75,850) $11.88 - $19.31 $14.29 Outstanding at December 31, 1997 1,604,050 $ 5.94 - $16.94 $12.32
The outstanding stock options at December 31, 1997 have a weighted average contractual life of 4.8 years. Rights exercisable at December 31, 1997 1,403,050 $5.94 - $16.94 $12.64 Shares available for future grants at December 31, 1997 428,000 13-31 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, except share data) Stock Stock Capital Shares Balance, January 1, 1995 $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) Common shares issued through: Conversion of Series B preference stock (6,432) (2) 6 (4) Executive incentive compensation (4,755) 62 Directors' fees (6,000) (12) 74 Purchase of treasury shares (75,000) (730) Minimum pension liability adjustment 3,758 Balance, December 31, 1997 $18 $15,103 $66,819 $(4,936)
13-32 Note 13: Income Taxes Earnings before taxes and income tax expense (benefit) from continuing operations at December 31 are as follows:
(In thousands) 1997 1996 1995 Earnings before taxes $11,043 $14,128 $11,321 Current federal income taxes $ 747 $ -- $ -- Deferred federal income tax benefit (5,123) -- -- Current state income taxes 303 -- 340 Total $(4,073) $ -- $ 340
The actual income tax expense attributable to earnings before taxes differed from the amounts computed by applying the U. S. federal tax rate of 34 percent in 1997, 1996 and 1995 to pretax earnings as a result of the following:
(In thousands) 1997 1996 1995 Computed "expected" tax expense $ 3,753 $ 4,945 $ 3,849 Percentage depletion ( 767) ( 720) ( 992) State income taxes, net of federal income tax benefit 200 -- 224 Other items 44 553 51 Benefit of operating loss carryforwards (7,303) (4,778) (2,792) Income tax expense (benefit) $(4,073) $ -- $ 340
The significant components of the deferred income tax expense (benefit) attributable to earnings before taxes for the years ended December 31 are as follows:
(In thousands) 1997 1996 1995 Deferred tax expense (benefit)(exclusive of the effect of other component listed below) $ 6,271 $ 1,552 $(6,058) Increase (decrease) in balance of the valuation allowance for deferred tax assets (11,394) (1,552) 6,058 Total $(5,123) $ -- $ --
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:
1997 1996 Deferred tax assets: Provision for discontinued operations $ 3,294 $ 4,580 Accounts receivable, principally due to allowance for doubtful accounts 206 59 Inventories, principally due to additional costs inventoried for tax purposes pursuant to the Tax Reform Act of 1986 6 6 Compensated absences, principally due to accrual for financial reporting purposes 502 500 Net operating loss carryforwards (NOLs) 59,024 62,808 Investment tax credit carryforwards 666 976 Other 3,995 566 Alternative minimum tax credit 750 350 Total gross deferred tax assets 68,443 69,845 Less valuation allowance (23,435) (34,829) Net deferred tax assets 45,008 35,016 Deferred tax liabilities: Properties and equipment, principally due to depreciation 6,062 5,810 Pension accrual 8,970 4,353 Total gross deferred tax liabilities 15,032 10,163 Net deferred tax asset $ 29,976 $ 24,853
The net change in the total valuation allowance for the years ended December 31, 1997 and 1996 was a decrease of $11.4 million and $1.6 million, respectively. The company had NOLs of approximately $173 million at December 31, 1997 because of losses associated with discontinued businesses. These NOLs expire as follows:
(In thousands) 2003 $72,373 2004 38,856 2005 17,222 2006 6,471 2007 1,629 2008 15,031 2009 12,008 2010 9,973
13-33 The company has an alternative minimum tax credit carryforward of $750,000. This credit may be utilized to reduce the company's regular tax liability down to its alternative minimum tax liability in future tax years and has an unlimited life. Tax benefits of $666,000 for investment tax credits expiring in 1998 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. The company had NOLs of approximately $173 million at December 31, 1997. Management continually evaluates the recorded deferred tax valuation allowance and believes that, due to the large portion of revenue generated by long-term supply contracts and taxable income generated by the company since it started operating solely as a lime company three years ago, 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. As a result, the company reduced its valuation allowance in 1997 and recorded a net tax benefit of $4.1 million. The amount of the net deferred tax asset, $30 million, reflects that portion of the gross deferred tax asset that management believes, based on current income projections and tax preference item estimates, will more likely than not be realized. 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 $98 million prior to the expiration of the NOLs. The company's cumulative taxable earnings for the past two years total $22.3 million. Note 14: 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) 1997 1996 Carrying Fair Carrying Fair Value Value Value Value Notes payable $84,132 $85,036 $69,701 $70,623 Series D preference stock 20,000 22,561 20,000 22,533
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 15: Research and Development Research and development expense is reported in selling expenses and for the years ended December 31 is as follows:
(In thousands) 1997 1996 1995 Total research and development expense $6,538 $3,742 $3,558 Billings to third parties 4,605 1,784 1,255 Net research and development expense $1,933 $1,958 $2,303
13-34 Note 16: Interim Financial Information
(Unaudited, in millions, First Second Third Fourth except earnings per share) Quarter Quarter Quarter Quarter 1997 Revenue $37.6 $42.4 $41.0 $41.4 Gross profit 7.8 11.5 11.0 10.5 Earnings before taxes 1.1 4.6 3.9 1.4 Provision (benefit) for income taxes 0.1 0.3 0.1 (4.6) Net earnings $0.4 $3.7 $3.1 $5.4 Net earnings per share: Basic $0.03 $0.25 $0.21 $0.36 Diluted $0.03 $0.25 $0.21 $0.36 1996 Revenue $38.2 $39.3 $40.8 $39.8 Gross profit 9.7 9.3 10.6 10.4 Earnings before taxes 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: Basic $0.17 $0.19 $0.20 $0.22 Diluted $0.17 $0.19 $0.20 $0.22
13-35 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 auditors. As stated in their report, their audit was made in accordance with generally accepted auditing standards and included examining, on a test basis, evidence supporting the amounts and disclosures in 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 auditors subject to ratification by the shareholders. The Audit Committee meets periodically with management, the Director of Internal Audit 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 Audit 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, 1997 and 1996, and the related consolidated statements of earnings, retained earnings and cash flows for each of the years in the three-year period ended December 31, 1997. 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, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Pittsburgh, Pennsylvania January 21, 1998 13-36
Five-Year Summary Years ended December 31, 1997 1996 1995 1994 1993 ($ amounts in millions, except per share data) Summary of operations: Revenue $162.5 $158.1 $146.1 $278.1 $277.6 Gross profit 40.8 40.0 36.5 44.0 49.3 Interest expense 7.0 6.4 4.8 12.4 9.2 Depreciation expense 10.5 10.1 9.5 17.6 18.0 Earnings before taxes from continuing operation 11.0 14.1 11.3 5.5 10.5 Provision (benefit) for income taxes (4.1) -- 0.3 0.6 (24.6) Earnings from continuing operations 15.1 14.1 11.0 4.9 35.1 Loss from discontinued operations, net of income taxes -- -- -- (6.5) (35.3) Extraordinary item -- -- -- (7.5) -- Cumulative accounting change -- -- -- (1.4) -- Net earnings (loss) 15.1 14.1 11.0 (10.5) (0.2) Preferred dividends declared 2.5 2.5 2.5 2.5 2.6 Capital expenditures 27.2 20.0 33.1 44.8 13.6 Employees at year end 738 781 756 768 1,416 Summary of financial position: Total assets $255.2 $225.4 $213.3 $307.3 $272.1 Working capital 3.9 8.5 9.8 6.3 59.5 Long-term obligations and redeemable preference stock 94.4 83.5 84.3 62.4 108.5 Total debt and redeemable preference stock 104.1 89.7 90.4 147.5 113.0 Property, plant and equipment, net 142.6 126.0 116.2 93.5 110.0 Shareholders' equity 109.7 93.9 79.9 76.7 89.5 Per common share data: Earnings from continuing operations $ 0.85 $ 0.79 $ 0.57 $ 0.16 $ 2.20 Loss from discontinued operations -- -- -- (0.44) (2.38) Extraordinary item -- -- -- (0.51) -- Cumulative accounting change -- -- -- (0.09) -- Net earnings (loss) Basic 0.85 0.79 0.57 (0.88) (0.18) Diluted 0.85 0.78 0.57 (0.88) (0.18) Book value 7.39 6.29 5.33 5.06 6.15 Shareholders at year end 2,574 2,741 2,924 3,192 3,442 Mineral resources (in millions of tons): Proven and probable reserves Total reserves 654.5 623.7 522.2 502.1 1,121.2 Tons mined 7.7 7.6 7.1 23.2 22.8
13-37 Board of Directors Principal Executives Arthur E. Byrnes Carl A. Gilbert * Chairman of the Board President and Dravo Corporation Chief Executive Officer Carl A. Gilbert John R. Major * President and Chief Executive Officer, Senior Vice President, Dravo Corporation Chief Operating Officer James C. Huntington, Jr. Earl J. Bellisario * Retired Senior Vice President, Senior Vice President, American Standard, Inc. Chief Financial Officer and Secretary William E. Kassling Richard E. Redlinger Chairman, Chief Executive Officer Vice President, Corporate and President, Development and Treasurer Westinghouse Air Brake Company Peter T. Kross Larry J. Walker Senior Vice President, Vice President and Controller Everen Securities William G. Roth *Member of Retired Chairman, Management Executive Committee Dravo Corporation Konrad M. Weis Retired President and Chief Executive Officer, Bayer Corporation 13-38 EX-21 4 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 5 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 21, 1998 relating to the consolidated balance sheets of Dravo Corporation and subsidiaries as of December 31, 1997 and 1996 and the related consolidated statements of earnings, retained earnings, and cash flows and the related financial statement schedule for each of the years in the three-year period ended December 31, 1997 which reports appear in, or are incorporated by reference in, the December 31, 1997 annual report on Form 10-K of Dravo Corporation. /s/ KPMG PEAT MARWICK LLP Pittsburgh, Pennsylvania March 27, 1998 23-1 EX-24 6 POWERS OF ATTORNEY POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that the undersigned does hereby constitute and appoint Carl A. Gilbert and John R. Major, 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, 1997 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 22 day of January, 1998. /s/ ARTHUR E. BYRNES /s/ JAMES C. HUNTINGTON, JR. /s/ WILLIAM E. KASSLING /s/ PETER T. KROSS /s/ WILLIAM G. ROTH /s/ KONRAD M. WEIS 24-1 EX-27 7 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FORM DRAVO CORPORATION'S DECEMBER 31, 1997 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS 12-MOS DEC-31-1997 DEC-31-1996 DEC-31-1997 DEC-31-1996 1477 1600 0 0 26376 24362 612 176 17434 16481 45655 43018 263926 238025 121277 112026 255230 225409 41745 34541 0 0 15103 15097 15000 20000 18 20 94545 78798 255230 225409 162476 158133 162476 158133 121641 118165 121641 118165 0 0 0 0 7025 6426 11043 14128 (4073) 0 15116 14128 0 0 0 0 0 0 15116 14128 .85 .79 .85 .78
EX-10 8 EMPLOYMENT AGREEMENT Dravo Letterhead January 30, 1998 Mr. Earl J. Bellisario C/O Dravo Corporation 3600 One Oliver Plaza Pittsburgh, PA 15222 Dear Earl: To help ensure your continued dedication as an employee of Dravo Corporation (the "Company"), the Company desires to provide for, among other things, the payment of two years' compensation and benefits if your employment is terminated by the Company without cause. In exchange for this assurance, you are willing to agree to not compete with the Company for two years after the termination of your employment. The following sets forth the details of this agreement. 1. Salary and Benefit Continuation. The Company agrees that if your employment with the Company is terminated by the Company without cause, the Company will continue to pay your salary and provide for your benefits for two years following the date of termination as if you were still an employee of the Company (including for purposes of eligibility, coverage, vesting and benefit provisions under the Company's benefit plans) during that period. You are not required to mitigate this payment by seeking other employment and these amounts are payable to your estate if you die during the two year period. 2. Stock Options. The Company agrees that if your employment with the Company is terminated by the Company without cause, you will continue to hold all stock options and restricted stock held by you on the date of your termination as if you were an employee of the Company for two years thereafter, and at the end of that two year period, you will be deemed to have retired from the Company for purposes of the plans pursuant to which the stock options and restricted stock were issued. 3. SERP and EBP. The benefits credited to you under the Company's Supplemental Executive Retirement Plan (SERP) and the Executive Benefit Plan (EBP) (including any additional age and service credit by reason ofthe benefit continuation under paragraph 1 of this letter) shall be fully vested and nonforfeitable through the date of any adverse amendment or termination of those plans, provided, that you will not be entitled to any benefits under those plans if your employment is terminated by the Company for cause. In addition, your "retirement" under the EBP is deemed to be approved by the Board's Compensation Committee. The Company will pay benefits under the SERP and the EBP in accordance with the terms of those plans, but if your salary is continuing under paragraph 1 of this letter, the Company will begin to pay benefits under the SERP and EBP at the end of your two year salary continuation period. Further, if your salary is continuing under paragraph 1 of this letter, you may elect, during the first 12 months following your termination, to receive a lump sum of your SERP and EBP benefits at the end of your two-year salary continuation period. 10-1 4. Noncompete. You agree that for a period of two years after the termination of your employment with the Company for any reason, you will not have an ownership interest in or render services to (as an employee, consultant or otherwise), any company that is engaged in (a) the mining, production, marketing and sale of limestone or lime, including those companies listed on Exhibit A and their affiliates, or (b) in the research and development, marketing and sale of technologies for utilizing limestone or lime. The former restrictions will apply anywhere the Company is or is then contemplating doing business and the latter restrictions will apply throughout the world. You agree to notify the Company of any employment you take during that two year period and you agree that if you breach this paragraph, the Company can seek an injunction to prevent you from working at that job, cease the payment of any compensation and benefits under paragraph 1 and sue you for damages. During this two year period, you also agree not to solicit for hire any employees of the Company or its subsidiaries. 5. Definitions. For purposes of this letter, you may be terminated for "cause" only if the Board (nonemployee directors only) unanimously determines that you have (i) deliberately and intentionally engaged in gross misconduct that is intentionally and demonstrably harmful to the Company, or (ii) you have been convicted of a felony. Further, for purposes of this letter, you will be deemed to have been terminated by the Company without cause if you terminate your employment a reasonable time after and because (i) the Company takes action which results in a material and continuing diminution in your status as an officer of the Company, (ii) the Company requires you to relocate your office more than 30 miles, or (iii) the Company reduces your overall level of compensation (other than as part of a reduction applicable to all salaried employees of the Company generally), or (iv) a company that acquires the Company by merger, acquisition of assets or otherwise does not expressly assume the Company's obligations under this letter agreement at or prior to the closing of the transaction. 6. Disputes. Disputes under this letter agreement (other than the Company's enforcement of paragraph 4 in equity) will be resolved by submitting the matter to binding arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association in Pittsburgh, Pennsylvania. If you are required to bring or defend an action against the Company under this Agreement, the Company will pay your reasonable legal fees if you are successful. Before the Company is required to pay you any amounts under this letter agreement, the Company may require you to execute a reasonable release of any claims you may have against the Company (other than under this letter agreement). 7. Taxes. You will be responsible for the payment of all taxes on any payments you receive under this letter agreement, provided, that the Company will make you whole for taxes under Section 4999 of The Internal Revenue Code, or any successor provision, if any. 8. Summary. A summary of the compensation and benefits that are intended to be paid or provided to you under this letter agreement (which replaces the Change of Control Agreement to which you are currently a party) and under the Company's other benefit plans in certain circumstances is attached as Exhibit B. 10-2 The Company intends to be legally bound by this letter agreement. If you agree with the terms of this letter and intend to be legally bound by it, please sign this letter where indicated below and return it to me. The additional enclosed copy of this letter is for your files. Thank you for your continued service to Dravo. Very truly yours, DRAVO CORPORATION By: /s/ CARL A. GILBERT Carl A. Gilbert President & Chief Executive Officer Date: January 30, 1998 Accepted and Agreed: /s/ EARL J. BELLISARIO Earl J. Bellisario Date: January 30, 1998 10-3 EXHIBIT A AP Green Industries, Inc. Ash Grove Cement Co. Austin White Lime Co. Bellefonte Lime Company Blue Circle, Inc. Calco, Inc. Carmeuse (Marblehead Lime) Cheney Lime & Cement Co. Con Lime Inc. Continental Lime/Graybec Calc Inc. Cutler-Magner Co. Florida Lime Corp. GenLime Group, LP Global Stone Corp Greer Lime Co. Havelock Lime Co. Huron Lime Company Lee Lime Corp. Linwood Mining & Minerals Corp. Lhoist/Chemical Lime Co. LTV Steel Martin Marietta Materials, Inc. Mercer Lime & Stone Company Miller Minerals, Inc. Minerals Technology, Inc. Mississippi Lime Co. National Lime & Stone Company National Refractories & Minerals Corp. Pete Lien & Sons. Redland Redland Ohio Co. Redland Stone Products Co. Resco Products, Inc Rockwell Lime Co. Specialty Minerals, Inc. United States Lime & Minerals Co. USG Industries, Inc. Vulcan Materials Co. Western Lime Corp. W.S. Frey, Inc. 10-4 Earl J. Bellisario EXHIBIT B January 30, 1998 Separation Agreement Summary Page 5 Salary and Benefits Continuation Termination Termination by Termination Termination by Termination by Employee Employee Because Termination Company without by Company w/o Good Deemed to be by of Due to Cause for Cause Reason Company w/o Cause Disability Death (paragraph 5) Salary 2 years + None None 2 years + per EBP per EBP standard standard severance severance Bonus Prorate in year of None None* Prorate in year of Prorate in Prorate in year termination termination year of of death disability Health 2 yrs per company plan per company plan 2 yrs per company plan per company plan Benefits + company plan + company plan Life 2 years per company plan per company plan 2 years per company plan per company plan Insurance + company plan + company plan Perquisites 2 years None None 2 years None None 401(k) Plan 2 years None None 2 years None None (Co. Match) Qualified Pension Plan - Service Continuation 2 years None None 2 years None None SERP - - Vesting Vest Forfeit Vest Vest Vest Vest - Service Cont. 2 years N/A None 2 years None None - Lump Sum Option Yes N/A No Yes No No EBP - - Vesting Vest Forfeit Vest Vest Vest Vest - - Service Cont. 2 years N/A None 2 years None None - - Lump Sum Option Yes N/A No Yes No No Stock Options - Vested Retain Retain Retain Retain Retain Retain - Non-Vested Vest (over 2 years) Forfeit Forfeit Vest (over 2 years) Vest Vest - Exercise Term 5 years 90 days 90 days* 5 years 5 years 5 years
* If the employee is eligible to retire under the Company's pension plan as of the date of his termination then his termination will be considered a retirement for purposes of the annual incentive plan and stock option plan. 10-5 -----END PRIVACY-ENHANCED MESSAGE-----