EX-13 2 0002.txt 2000 ANNUAL REPORT THE MONARCH CEMENT COMPANY March 12, 2001 ANNUAL REPORT TO STOCKHOLDERS The year 2000 was a challenging year for Monarch and its subsidiaries. The Company established a new record for clinker production made possible through equipment upgrades completed in recent years. Production records should continue to grow as the Company completes other phases of its modernization and expansion program. The increased clinker production, coupled with a reduction in the utilization of foreign clinker, resulted in an increase in operating profit for the cement segment. During 2000, the Company also continued upgrading facilities in the ready-mixed concrete and sundry building materials segment. Expansion of this segment's operations to utilize its concrete products in various construction projects resulted in an increase in net sales; however, unusual expenses in these construction projects resulted in higher production costs as a percent of sales. Additional expenses incurred in the installation and start-up of the upgraded facilities further reduced operating profits. On a consolidated basis, the Company's net sales and cost of sales increased approximately 7% and 11%, respectively, resulting in an 8% decrease in gross profit from operations. As we look ahead to 2001, we see signs of weakening in the commercial and residential markets. Since these are the primary markets for the Company's ready-mixed concrete and sundry building materials segment, we foresee a slight downturn in volume of sales for this segment. However, early indicators show that demand for cement in the public market is projected to increase in 2001. Utilizing funding available through the Federal Transportation Equity Act for the 21st Century (TEA-21), Kansas is actively upgrading its highways and bridges. Overall, the five-year forecast for cement sales continues to be strong. For the last several years Monarch has basically been in a sold-out position. The Company has depended on clinker purchased from foreign markets to supplement its production in order to fulfill its customers' cement requirements. Monarch's expansion project is in full swing and on schedule and should allow the Company to replace higher priced foreign clinker with internally produced clinker. The new 90 ton-per-hour finish mill and one of the precalciners and clinker coolers should be operational by early fall 2001. The second precalciner and clinker cooler are scheduled for completion by the summer of 2002. Although there is a learning curve associated with operating new equipment and attendant start-up costs involved, efforts are underway to bring this equipment on line as efficiently as possible. Monarch employees are already participating in specialized training to operate and maintain this new equipment. We look forward to having these facilities fully operational and realizing the benefits that can be achieved through both the additional production capacity and this new technology. Through a joint effort of our employees and the numerous contractors on site, we continue to strive to maximize production and minimize downtime. We wish to take this opportunity to express our appreciation to our employees for their extra efforts and cooperation during these busy times. We thank our customers for their continued confidence in the quality of our product and our ability to service their needs. Most importantly, we thank our Heavenly Father, because without his blessings and support, we would not have achieved the results displayed in this report and could not meet the challenges of the years to come. We wish to invite you, our stockholders, to attend Monarch's annual meeting to be held at 2:00 p.m. on April 11, 2001 in the corporate office, Humboldt, Kansas. Thank you for your support throughout the years and God Bless. WALTER H. WULF WALTER H. WULF, JR. Chairman of the Board President and Vice Chairman of the Board THE MONARCH CEMENT COMPANY AND SUBSIDIARIES SELECTED FINANCIAL DATA FOR THE FIVE YEARS ENDED DECEMBER 31, 2000 (Dollar amounts in thousands except per share data)
2000 1999 1998 1997 1996 Net sales . . . . . . . . . $117,050 $109,476 $99,495 $91,820 $86,733 Net income. . . . . . . . . $ 10,499 $9,654 $9,653 $10,103 $10,546 Net income per share. . . . $2.55 $2.32 $2.30 $2.40 $2.50 Total assets. . . . . . . . $ 96,232 $89,991 $84,882 $76,233 $68,648 Long-term obligations . . . $ - $ - $ - $ - $ - Cash dividends declared per share . . . . . . . . $.78 $.74 $.68 $.60 $.52 Stockholders' investment per shar . . . . . . . . $18.36 $16.75 $15.35 $13.68 $11.73
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Liquidity At December 31, 2000, current assets of The Monarch Cement Company and Subsidiaries (the Company) exceeded current liabilities by $32,951,014 resulting in a current ratio of 4.24 to 1. The Company's cash needs in 2000 were satisfied by cash generated from operations and utilization of cash and short-term investments of approximately $8,600,000. In January 2001, the Company entered into an unsecured credit commitment with the Bank of Oklahoma N.A. This commitment consists of a $30,000,000 advancing term loan maturing December 31, 2005 and a $5,000,000 line of credit maturing December 31, 2002 with floating interest rates based on Chase Manhattan Bank prime rate less 1.25%. The Company believes its internal and external capital resources are adequate to meet its foreseeable capital expenditure requirements and liquidity needs. Capital Resources During 2000, the Company invested $18,627,165 in property, plant and equipment. The Company regularly has capital expenditures of $8,000,000 to $10,000,000 per year in keeping its equipment and facilities in good operating condition. Due to recent and projected market demands, the Company has been aggressively updating its equipment to improve efficiency and increase capacity. As a result, the Company's 2000 expenditures exceeded the amount normally spent on capital expenditures. The Company plans to continue its modernization and expansion program during the year 2001 and future years. Construction of a new 90 ton-per-hour finish mill at an estimated cost of $17 million is underway and expected to be completed by late summer. Contracts have been let for the installation of the two precalciners and clinker coolers at an estimated cost of $26 million. It is anticipated that one precalciner and clinker cooler will be operational by the summer of 2001 and the second by the summer of 2002. Upon completion, it is projected that this expansion will allow the Company to produce in excess of one million tons of cement per year. The Company will also invest in other miscellaneous equipment and facility improvements in both the cement and ready-mixed concrete segments in 2001. It is expected that the Company's capital expenditures will approximate $35,000,000 during 2001. Results of Operations General--For the last five years, demand for cement in the Company's market has been excellent. During this period, the Company sold the entire cement production capacity of its Humboldt plant. Plant modifications completed in recent years increased the production capacity of the Humboldt plant and improved its efficiency. These favorable market conditions and the Company's increased production capacity are the primary factors that have led to the Company's improved profitability in recent years. The Company's ready-mixed concrete operations experienced a decrease in profitability during 2000 after increasing profitability during both 1999 and 1998. During 2000, the segment was adversely affected by volume declines in some market areas, additional expenses incurred in the process of upgrading facilities and weather delays creating unusual expenses in the production and installation of concrete products. The increased profitability in 1999 and 1998 were primarily due to improvements in ready-mixed concrete prices. Efficiencies realized through increased sales volume also added to 1999's profitability. These factors vary from local market to local market and from year to year, and no one factor or local market accounts for a significant portion of the change in profitability during the three-year period. 2000 Compared to 1999--The Company's 2000 net sales and cost of sales increased approximately 7% and 11%, respectively; however, gross profit from operations decreased 8%. Cement sales were excellent during both 2000 and 1999. Although this segment experienced a decrease in net sales to unaffiliated companies, increased production and lower production costs combined to substantially reduce the cement segment cost of sales and increase its income from operations by approximately 14%. During 2000, the Company once again increased its level of clinker production, exceeding the previous record set in 1999. In addition, the Company reduced its purchases of clinker from foreign markets during 2000 as compared to 1999, further reducing the segment's cost of sales and increasing its gross profit margin. Supplies and maintenance costs also decreased compared to 1999 when costs were up due to additional maintenance on equipment that had produced at maximum levels over extended periods. During these same periods, the Company's ready-mixed concrete and sundry building materials segment increased its net sales by approximately 15%. Expansion of this segment's operations to utilize its concrete products in various construction projects provided the majority of the increase in net sales. Expenses related to these construction projects also increased production costs as a percent of sales. The net sales increase generated by sales of additional concrete products was partially offset by decreases in ready-mixed concrete sales volume in several market areas. As expected, those market areas with declining sales experienced a reduction in gross profit due to fixed costs being spread over fewer units. These factors, combined with additional expenses incurred in the process of upgrading some of the Company's ready-mixed concrete facilities and weather delays creating unusual expenses in the production and installation of concrete products, resulted in a loss from operations compared to income from operations in 1999. Selling, general and administrative expenses increased 18% during 2000. Overall increases in health care costs, liability insurance, legal and professional expenses and payroll contributed to this increase. The increase in "Other, net" during 2000 as compared to 1999 was due primarily to the sale of investment securities and the allocation of net losses of subsidiaries to minority interest. Income taxes for the year 2000 decreased compared to 1999 due to an increase in depletion as a percent of consolidated taxable income and a reduction in state income taxes. 1999 Compared to 1998--The Company's 1999 net sales increased approximately 10% primarily as a result of an increase in the volume of cement and ready-mixed concrete sold and a moderate increase in the product prices. The increase in volume in the ready-mixed concrete segments resulted in a more favorable contribution to income for that segment. The Company's cost of sales increased 12% for 1999 as compared to 1998 primarily due to the increase in volume sold. Supplies and maintenance costs in the cement manufacturing segment increased as a result of the additional cost of maintaining equipment over long periods of maximized production. Modernization in recent years allowed the Company to increase clinker production during 1999. The Company also increased its purchases of clinker from foreign markets during 1999 in order to meet the anticipated demands for cement. Higher costs associated with cement produced from purchased clinker contributed to the increase in the Company's cost of sales and the reduction in gross profit margin. Although purchased clinker reduced the Company's gross profit margin, such purchases enabled the Company to meet the service demands of its customer base in both the cement and ready-mixed concrete markets. Selling, general and administrative expenses increased 10% during 1999. Overall increases in health care costs, sales volume based association dues, legal and professional expenses and payroll contributed to this increase. The decrease in "Other, net" during 1999 as compared to 1998 was due primarily to the reduction in interest income. Increased capital expenditures during 1999 reduced the amount of funds available for investment in short-term securities. This reduction in investments resulted in a decrease in interest income during 1999 as compared to 1998. 1998 Compared to 1997--The Company's 1998 net sales increased approximately 8% primarily as a result of an increase in the volume of cement sold and a slight increase in the product prices. The Company's cost of sales increased 11% for 1998 as compared to 1997. Modernization of one of the cement kilns and major maintenance on related equipment reduced the Company's clinker production during the second quarter of 1998. To help offset the reduction in clinker produced and to meet the anticipated demand for cement, the Company purchased additional clinker from foreign markets. Higher costs associated with cement produced from purchased clinker increased the Company's cost of sales and reduced its gross profit margin to 21% for 1998 as compared to 23% for 1997. Although purchased clinker reduced the Company's gross profit margin, such purchases enabled the Company to meet the service demands of its customer base in both the cement and ready-mixed concrete markets. Forward-Looking Statements--Certain statements in Management's Discussion and Analysis of Financial Condition and Results of Operations and elsewhere in this Annual Report and Form 10-K report filed with the Securities and Exchange Commission, constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements involve known and unknown risks, uncertainties, and other factors that may affect the actual results, performance or achievements expressed or implied by such forward-looking statements. Such factors include, among others: general economic and business conditions; competition; raw material and other operating costs; costs of capital equipment; changes in business strategy or expansion plans; and demand for the Company's products. Inflation--Inflation directly affects the Company's operating costs. The manufacture of cement requires the use of a significant amount of energy. The Company burns primarily solid fuels, such as coal and petroleum coke, in its kilns. The Company does not anticipate a significant increase above the rate of inflation in the cost of these solid fuels, or in the electricity required to operate its cement manufacturing equipment. The Company also uses natural gas. In recent months, the increase in natural gas prices has exceeded the rate of inflation creating an above average increase in manufacturing costs. The Company continues to explore methods to minimize its dependence on natural gas. Prices of the specialized replacement parts and equipment the Company must continually purchase tend to increase directly with the rate of inflation causing manufacturing costs to increase. The manufacture of cement requires a significant investment in property, plant and equipment and a trained workforce to operate and maintain this equipment. These costs do not materially vary with the level of production. As a result, by operating at or near capacity, regardless of demand, companies can reduce per unit production costs. The continual need to control production costs encourages overproduction during periods of reduced demand. DESCRIPTION OF THE BUSINESS The Monarch Cement Company (Monarch) was organized as a corporation under the laws of the State of Kansas in 1913 and has been principally engaged, throughout its history, in the manufacture and sale of portland cement. The manufacture of portland cement by Monarch involves the quarrying of clay and limestone and the crushing, drying and blending of these raw materials into the proper chemical ratio. The raw materials are then heated in kilns to 2800o Fahrenheit at which time chemical reactions occur forming a new compound called clinker. After the addition of a small amount of gypsum, the clinker is ground into a very fine powder that is known as portland cement. The term "portland cement" is not a brand name but is a term that distinguishes cement manufactured by this chemical process from natural cement, which is no longer widely used. Portland cement is the basic material used in the production of ready-mixed concrete that is used in highway, bridge and building construction where strength and durability are primary requirements. The Company is also in the ready-mixed concrete, concrete products and sundry building materials business. Ready-mixed concrete is manufactured by combining aggregates with portland cement, water and chemical admixtures in batch plants. It is then loaded into mixer trucks and mixed in transit to the construction site where it is placed by the contractor. LINES OF BUSINESS The Company is engaged in the manufacture and sale of the principal types of portland cement and ready-mixed concrete and sundry building materials. The portland cement products are sold under the "MONARCH" brand name. The marketing area for Monarch's products, which is limited by the relatively high cost of transporting cement, consists primarily of the State of Kansas, the State of Iowa, southeast Nebraska, western Missouri, northwest Arkansas and northern Oklahoma. Included within this area are the metropolitan markets of Des Moines, Iowa; Kansas City, Missouri; Springfield, Missouri; Wichita, Kansas; Omaha, Nebraska; Lincoln, Nebraska and Tulsa, Oklahoma. Sales are made primarily to contractors, ready-mixed concrete plants, concrete products plants, building materials dealers and governmental agencies. Companies controlled by Monarch sell ready-mixed concrete, concrete products and sundry building materials in metropolitan areas within Monarch's primary market. Monarch cement is delivered either in bulk or in paper bags. The cement is distributed both by truck and rail, either common or private carrier. The following table sets forth for the last three fiscal years of the Company the percentage of total sales to unaffiliated customers (1) by the manufacture and sale of portland cement and (2) by the sale of ready-mixed concrete and sundry building materials:
Total Sales December 31, 2000 1999 1998 Portland Cement . . . . . . . . . 40.4% 44.8% 43.9% Ready-Mixed Concrete and Sundry Building Materials . . . 59.6% 55.2% 56.1% 100.0% 100.0% 100.0%
STOCK MARKET AND DIVIDEND DATA On March 1, 2001, Monarch's stock was held by approximately 700 record holders. Monarch is the transfer agent for Monarch's stock which is traded on the over-the-counter market. Over-the-counter market quotations reflect interdealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions. Following is a schedule of the range of high and low bid quotations of Monarch's stock as reported by Fahnestock & Co. Inc. and dividends declared for each quarter of its two latest fiscal years:
2000 1999 Price Dividends Price Dividends Quarter Low High Declared Low High Declared First $17.625 $20.625 $ - $19.00 $22.50 $ - Second $16.500 $19.750 $.19 $19.00 $22.00 $.18 Third $17.125 $19.000 $.19 $20.00 $22.00 $.18 Fourth $17.500 $18.500 $.40* $20.00 $21.00 $.38* *Reflects declaration of two $.20 and $.19 dividends payable in the first quarter of 2001 and 2000, respectively.
ARTHUR ANDERSEN REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of The Monarch Cement Company: We have audited the accompanying consolidated balance sheets of The Monarch Cement Company (a Kansas Corporation) and Subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of income, comprehensive income, stockholders' investment and cash flows for each of the three years in the period ended December 31, 2000. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. 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 financial statements referred to above present fairly, in all material respects, the financial position of The Monarch Cement Company and Subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN LLP Kansas City, Missouri, February 16, 2001 THE MONARCH CEMENT COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2000 AND 1999
ASSETS 2 0 0 0 1 9 9 9 CURRENT ASSETS: Cash and cash equivalents $ 9,451,281 $ 4,782,168 Short-term investments, at cost which approximates market 2,543,286 15,834,044 Receivables, less allowances of $375,000 in 2000 and $409,000 in 1999 for doubtful accounts 8,430,945 9,850,345 Inventories, priced at cost which is not in excess of market- Cost determined by last-in, first-out method- Finished cement $ 3,675,351 $ 3,224,596 Work in process 4,373,014 2,763,016 Building products 1,250,120 1,226,697 Cost determined by first-in, first-out method- Fuel, gypsum, paper sacks and other 2,268,434 2,566,098 Cost determined by average method- Operating and maintenance supplies 9,458,554 7,609,733 Total inventories $21,025,473 $17,390,140 Refundable federal and state income taxes 1,200,000 166,900 Deferred income taxes 415,000 415,000 Prepaid expenses 63,031 34,855 Total current assets $43,129,016 $48,473,452 PROPERTY, PLANT AND EQUIPMENT, at cost, less accumulated depreciation and depletion of $83,666,552 in 2000 and $78,397,517 in 1999 45,809,748 34,166,683 DEFERRED INCOME TAXES 2,430,000 1,750,000 OTHER ASSETS 4,862,955 5,601,246 $96,231,719 $89,991,381 LIABILITIES AND STOCKHOLDERS' INVESTMENT CURRENT LIABILITIES: Accounts payable $ 5,452,004 $ 5,041,988 Accrued liabilities- Federal and state income taxes 128,979 275,083 Dividends 1,640,358 1,570,498 Compensation and benefits 2,007,394 885,500 Miscellaneous taxes 500,334 445,377 Other 448,933 419,042 Total current liabilities $10,178,002 $ 8,637,488 ACCRUED POSTRETIREMENT BENEFITS 8,397,620 9,368,746 MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 2,346,663 2,765,235 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' INVESTMENT: Capital Stock, par value $2.50 per share- Authorized 10,000,000 shares, Issued 2,312,547 shares at December 31, 2000 and 2,285,678 shares at December 31, 1999 $ 5,781,368 $ 5,714,195 Class B Capital Stock, par value $2.50 per share-Authorized 10,000,000 shares, Issued 1,788,349 shares at December 31, 2000 and 1,846,836 shares at December 31, 1999 4,470,872 4,617,090 Retained Earnings 64,117,194 57,308,627 Accumulated other comprehensive income 940,000 1,580,000 Total stockholders' investment $75,309,434 $69,219,912 $96,231,719 $89,991,381 The accompanying notes are an integral part of these consolidated balance sheets.
THE MONARCH CEMENT COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2 0 0 0 1 9 9 9 1 9 9 8 NET SALES $117,049,788 $109,475,532 $99,494,758 COST OF SALES 97,040,783 87,686,175 78,349,584 Gross profit from operations $ 20,009,005 $ 21,789,357 $21,145,174 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 8,754,637 7,428,497 6,725,013 Income from operations $ 11,254,368 $ 14,360,860 $14,420,161 OTHER INCOME (EXPENSE): Interest income $ 883,114 $ 1,028,727 $ 1,222,052 Other, net 2,861,868 (435,158) (389,405) $ 3,744,982 $ 593,569 $ 832,647 INCOME BEFORE PROVISION FOR INCOME TAXES $ 14,999,350 $ 14,954,429 $15,252,808 PR0VISION FOR INCOME TAXES 4,500,000 5,300,000 5,600,000 NET INCOME $ 10,499,350 $ 9,654,429 $ 9,652,808 Basic earnings per share $2.55 $2.32 $2.30 The accompanying notes are an integral part of these consolidated statements.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2 0 0 0 1 9 9 9 1 9 9 8 NET INCOME $ 10,499,350 $ 9,654,429 $ 9,652,808 UNREALIZED APPRECIATION (DEPRECIATION) ON AVAILABLE FOR SALE SECURITIES (Net of deferred tax (benefit) expense of $(425,000), $(400,000) and $350,000 for 2000, 1999 and 1998, respectively) (640,000) (620,000) 540,000 COMPREHENSIVE INCOME $ 9,859,350 $ 9,034,429 $10,192,808 The accompanying notes are an integral part of these consolidated statements.
THE MONARCH CEMENT COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' INVESTMENT FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
Accum- Class B lated Other Stock- Capital Capital Retained Treasury Comprehen- holders' Stock Stock Earnings Stock sive Income Investment Balance at 1/1/1998 $5,732,227 $4,807,058 $45,486,139 $ - $1,660,000 $57,685,424 Net income - - 9,652,808 - - 9,652,808 Dividends declared ($.68 per share) - - (2,849,221) - - (2,849,221) Transfer of shares 88,691 (88,691) - - - - Purchase of treasury stock - - - (893,247) - (893,247) Retirement of treasury stock (95,795) - (797,452) 893,247 - - Accumulated other comprehensive income - - - - 540,000 540,000 Balance at 12/31/1998 $5,725,123 $4,718,367 $51,492,274 $ - $2,200,000 $64,135,764 Net income - - 9,654,429 - - 9,654,429 Dividends declared ($.74 per share) - - (3,066,148) - - (3,066,148) Transfer of shares 101,277 (101,277) - - - - Purchase of treasury stock - - - (884,133) - (884,133) Retirement of treasury stock (112,205) - (771,928) 884,133 - - Accumulated other comprehensive income - - - - (620,000) (620,000) Balance at 12/31/1999 $5,714,195 $4,617,090 $57,308,627 $ - $1,580,000 $69,219,912 Net income - - 10,499,350 - - 10,499,350 Dividends declared ($.78 per share) - - (3,201,569) - - (3,201,569) Transfer of shares 146,218 (146,218) - - - - Purchase of treasury stock - - - (568,259) - (568,259) Retirement of treasury stock (79,045) - (489,214) 568,259 - - Accumulated other comprehensive income - - - - (640,000) (640,000) Balance at 12/31/2000 $5,781,368 $4,470,872 $64,117,194 $ - $ 940,000 $75,309,434 The accompanying notes are an integral part of these consolidated statements.
THE MONARCH CEMENT COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2 0 0 0 1 9 9 9 1 9 9 8 OPERATING ACTIVITIES: Net income $ 10,499,350 $ 9,654,429 $ 9,652,808 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and depletion 6,754,783 6,025,901 5,564,672 Gain on disposal of assets (63,379) (67,332) (119,398) Realized gain on sale of other investments (2,382,261) - - Change in assets and liabilities: Receivables, net 1,419,400 674,824 (2,552,470) Inventories (3,635,333) (3,885,150) (2,198,752) Refundable federal and state income taxes (1,033,100) (152,849) 207,021 Prepaid expenses (28,176) 10,429 (17,363) Deferred income taxes (680,000) (365,000) 425,000 Other assets 422,326 18,239 (508,570) Long-term notes receivable - - (750) Accounts payable and accrued liabilities 335,654 (133,153) 2,166,077 Accrued postretirement expense 163,874 (251,507) (218,652) Accrued pension expense (175,159) (50,276) (270,908) Minority interest in earnings of subsidiaries (408,744) 534,013 558,627 Net cash provided by operating activities $ 11,189,235 $ 12,012,568 $ 12,687,342 INVESTING ACTIVITIES: Acquisition of property, plant and equipment $(18,627,165) $(10,847,723) $ (9,519,155) Proceeds from disposals of property, plant and equipment 302,437 94,758 219,366 Payment for purchases of equity investments (1,039,456) (733,336) (517,939) Proceeds from disposals of equity investments 3,263,100 - - Decrease in short-term investments, net 13,290,758 4,025,252 1,070,827 Net cash used for investing activities $ (2,810,326) $ (7,461,049) $ (8,746,901) FINANCING ACTIVITIES: Subsidiaries' dividends paid to minority interest $ (9,828) $ (140,379) $ (191,450) Cash dividends (3,131,709) (2,999,634) (2,694,266) Purchase of treasury stock (568,259) (884,133) (893,247) Net cash used for financing activities $ (3,709,796) $ (4,024,146) $ (3,778,963) Net Increase in Cash and Cash Equivalents $ 4,669,113 $ 527,373 $ 161,478 Cash and Cash Equivalents, beginning of year 4,782,168 4,254,795 4,093,317 Cash and Cash Equivalents, end of year $ 9,451,281 $ 4,782,168 $ 4,254,795 The accompanying notes are an integral part of these consolidated statements.
THE MONARCH CEMENT COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2000, 1999 AND 1998 (1) SUMMARY OF ACCOUNTING POLICIES (a) Description of Business--The Monarch Cement Company (Monarch) is principally engaged in the manufacture and sale of portland cement. The marketing area for Monarch's products consists primarily of the State of Kansas, the State of Iowa, southeast Nebraska, western Missouri, northwest Arkansas and northern Oklahoma. Sales are made primarily to contractors, ready-mixed concrete plants, concrete products plants, building materials dealers and governmental agencies. Companies controlled by Monarch sell ready-mixed concrete, concrete products and sundry building materials in metropolitan areas within Monarch's marketing area. Monarch has direct control of certain operating companies that have been deemed to be subsidiaries within the meaning of generally accepted accounting principles and the rules and regulations of the Securities and Exchange Commission. Accordingly, the financial statements of such companies have been consolidated with Monarch's financial statements. All significant intercompany transactions have been eliminated in consolidation. Minority interests in net income (loss) have been recorded as reductions or increases in other income in the accompanying statements of income. The minority interests in net income (loss) were $(408,744), $534,014 and $558,627 during 2000, 1999 and 1998, respectively. (b) Use of Estimates--The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (c) Inventories--Inventories of finished cement, work in process and building products are priced by the last-in, first-out (LIFO) method. Under the average cost method of accounting (which approximates current cost), these inventories would have been $1,362,000, $2,351,000 and $2,061,000 higher than those reported at December 31, 2000, 1999 and 1998, respectively. The cost of manufactured items includes all material, labor, factory overhead and production-related administrative overhead required in their production. Other inventories are purchased from outside suppliers. Fuel and other materials are priced by the first-in, first-out (FIFO) method while operating and maintenance supplies are priced by the average cost method. (d) Property, Plant and Equipment--Depreciation of property, plant and equipment is provided by charges to operations over the estimated useful lives of the assets using primarily the declining balance method. Depletion rates for quarry lands are designed to amortize the cost over the estimated recoverable reserves. Expenditures for improvements that significantly increase the assets' useful lives are capitalized while maintenance and repairs are charged to expense as incurred. (e) Earnings per Share--Basic earnings per share is based on the weighted average common shares outstanding during each year. Dilutive earnings per share is based on the weighted average common and common equivalent shares outstanding each year. Monarch has no common stock equivalents and therefore, does not report dilutive earnings per share. The weighted average number of shares outstanding was 4,113,984 in 2000, 4,154,426 in 1999 and 4,198,333 in 1998. (f) Comprehensive Income--Comprehensive income is composed of two subsets; net income and other comprehensive income. Included in other comprehensive income for the Company is unrealized appreciation (depreciation) for securities classified as available-for-sale, net of deferred income tax. (g) Statements of Cash Flows--The Company considers overnight cash investments to be cash equivalents. All other highly liquid short-term investments, generally with an original maturity of six months or less, are considered short-term investments. Interest and income taxes paid during each of the three years for the period ended December 31, are as follows:
2000 1999 1998 Interest paid $ 7,076 $ 1,313 $ 1,517 Income taxes paid $5,935,016 $6,094,546 $4,624,633
(2) PROPERTY, PLANT AND EQUIPMENT Property, plant and equipment at December 31, 2000 and 1999 consisted of:
Depreciation Lives (Years) 2000 1999 Quarry lands $ 1,220,514 $ 753,769 Mill site and buildings 12 - 50 18,922,096 17,041,461 Machinery and equipment 5 - 25 70,561,855 68,499,398 Transportation equipment 3 - 12 24,261,907 21,471,094 Office furniture and fixtures 5 - 20 925,516 901,002 Office and other buildings 10 - 30 2,751,097 2,479,774 Construction in process 10,833,315 1,417,702 $129,476,300 $112,564,200 Less--Accumulated depreciation and depletion 83,666,552 78,397,517 $ 45,809,748 $ 34,166,683
(3) Investments The Company's short-term investments consist of corporate commercial paper with maturities of six months or less and have been classified as held- to-maturity. The amortized cost, which approximates market value, is reflected in the balance sheet. Other assets includes equity securities which have been classified as available-for-sale. Realized gains are computed using the specific identification method. The equity investment results for the years ended December 31, 2000, 1999 and 1998 are as follows:
2000 1999 1998 Fair value of investments $3,700,000 $4,605,000 $4,890,000 Cost of investments 2,135,000 1,975,000 1,240,000 Fair value in excess of cost $1,565,000 $2,630,000 $3,650,000 Unrealized gain recorded in equity $ 940,000 $1,580,000 $2,200,000 Deferred income taxes 625,000 1,050,000 1,450,000 $1,565,000 $2,630,000 $3,650,000 Proceeds from sale of securities $3,263,100 $ - $ - Realized gains $2,382,261 $ - $ -
(4) INCOME TAXES The components of the provision for federal and state income taxes in the accompanying consolidated statements of income are as follows:
2000 1999 1998 Current provision for income tax: Federal $4,425,000 $4,435,000 $4,480,000 State 330,000 830,000 1,045,000 $4,755,000 $5,265,000 $5,525,000 Deferred provision for income tax: Federal $ (135,000) $ 30,000 $ 60,000 State (120,000) 5,000 15,000 $ (255,000) $ 35,000 $ 75,000 Provision for income taxes $4,500,000 $5,300,000 $5,600,000
The provision for federal and state income taxes in the accompanying consolidated statements of income differs from the amount computed at the federal statutory income tax rate as follows:
2000 1999 1998 Provision for federal taxes at statutory rates $5,150,000 $5,134,000 $5,238,000 State income taxes, net of federal tax benefit 137,000 543,000 680,000 Percentage depletion (697,000) (591,000) (546,000) Minority interest in consolidated income (loss) (163,000) 214,000 223,000 Other, net 73,000 - 5,000 Provision for income taxes $4,500,000 $5,300,000 $5,600,000
The tax effect of significant temporary differences representing deferred tax assets and (liabilities) are as follows:
2000 1999 Current: Reserve for bad debts $ 150,000 $ 165,000 Vacation 265,000 250,000 Net current deferred tax assets $ 415,000 $ 415,000 Noncurrent: Depreciation $ (450,000) $ (620,000) Postretirement benefits 3,815,000 3,745,000 Pension (405,000) (335,000) Unrealized holding gains (625,000) (1,050,000) Other, net 95,000 10,000 Net long-term deferred tax assets $ 2,430,000 $ 1,750,000
(5) POSTRETIREMENT BENEFITS Monarch provides certain postretirement health care, accident and life insurance benefits to all retired employees who, as of their retirement date, have completed ten or more years of credited service under the pension plans. These benefits are self-insured by Monarch and are paid out of Monarch's general assets. Following is a reconciliation of benefit obligations and funded status as of December 31, 2000 and 1999:
2000 1999 Reconciliation of benefit obligation Accumulated postretirement benefit obligation at beginning of year $ 9,298,360 $ 9,983,477 Service cost 108,040 99,410 Interest cost 895,420 697,195 Actuarial (gain) loss 3,532,357 (578,176) Benefits and expenses paid (906,723) (903,546) Accumulated postretirement benefit obligation at end of year $ 12,927,454 $ 9,298,360 Funded status $(12,927,454) $ (9,298,360) Unrecognized actuarial (gain) loss 3,394,834 (70,386) Accrued benefit cost $ (9,532,620) $ (9,368,746)
The assumed annual rate of increase in the per capita cost of covered health care benefits was 7% for 2000, 4% for 1999 and 5% for 1998. This rate is assumed to decrease 1% per year to an ultimate rate of 4%.
2000 1999 1998 Components of net periodic benefit cost Service cost $ 108,040 $ 99,410 $ 85,689 Interest cost 895,420 697,195 687,667 Unrecognized net (gain) loss 67,136 - - Net periodic benefit cost $1,070,596 $ 796,605 $ 773,356 Weighted-average assumptions as of December 31 Discount rate 7.50% 8.00% 7.00%
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects:
1% Increase 1% Decrease Effect on net periodic benefit cost $ 218,282 $ (98,492) Effect on postretirement benefit obligation 1,374,189 (1,113,274)
(6) PENSION PLANS Monarch has defined benefit pension plans covering substantially all permanent employees. Plans covering staff (salaried) employees provide pension benefits that are based on years of service and the employee's last sixty calendar months of earnings or the highest five consecutive calendar years of earnings out of the last ten calendar years of service, whichever is greater. Plans covering production (hourly) employees provide benefits of stated amounts for each year of service. Generally, Monarch's funding policy is to contribute annually the maximum amount that can be deducted for federal income tax purposes. Contributions are intended to provide for benefits attributed to service to date and for those expected to be earned in the future. The assets of the plans are primarily equities, bonds and government securities. Following is a reconciliation of benefit obligations, plan assets and funded status as of December 31, 2000 and 1999:
2000 1999 Reconciliation of projected benefit obligation Projected benefit obligation at beginning of year $20,989,864 $22,492,790 Service cost 293,441 342,594 Interest cost 1,617,150 1,559,670 Actuarial (gain) loss 734,549 (1,819,259) Plan amendment - 37,715 Benefits paid and expenses (1,647,532) (1,623,646) Projected benefit obligation at end of year $21,987,472 $20,989,864 Reconciliation of fair value of plan assets Fair value of plan assets at beginning of year $24,096,707 $25,761,275 Actual return on plan assets 2,334,054 (40,922) Benefits paid and expenses (1,647,532) (1,623,646) Fair value of plan assets at end of year $24,783,229 $24,096,707 Funded status $ 2,795,757 $ 3,106,843 Unrecognized net actuarial loss (2,250,731) (2,794,255) Unrecognized transitional obligation 14,342 24,209 Unrecognized prior service cost 459,982 507,394 Prepaid benefit cost $ 1,019,350 $ 844,191
The following table presents the components of net periodic pension cost as of December 31, 2000, 1999 and 1998:
2000 1999 1998 Service cost $ 293,441 $ 342,594 $ 324,782 Interest cost 1,617,150 1,559,670 1,518,426 Expected return on plan assets (2,095,648) (2,245,751) (2,229,872) Amortization of transitional obligation 9,867 9,863 9,863 Amortization of prior service cost 47,412 45,130 45,130 Recognized net actuarial gain (47,381) (31,967) (104,537) Net periodic pension (income) $ (175,159) $ (320,461) $ (436,208)
The weighted average assumptions used to determine net pension cost and benefit obligations as of December 31 are as follows:
2000 1999 1998 Discount rate 7.50% 8.00% 7.00% Expected return on plan assets 9.00% 9.00% 9.00% Rate of compensation increase (Staff plan only) 4.50% 4.50% 4.50%
(7) COMMITMENTS AND CONTINGENCIES According to various agreements with certain minority stockholders of subsidiaries, under specified circumstances, the Company is obligated to acquire certain minority shares, if requested to do so, at a value that approximates the minority interest on the Balance Sheet. (8) STOCKHOLDERS' INVESTMENT Class B Capital Stock has supervoting rights of ten votes per share and restricted transferability. Class B Capital Stock is convertible at all times into Capital Stock on a share-for-share basis. Capital Stock has only one vote per share and is freely transferable. (9) BUSINESS SEGMENTS The Company groups its operations into two business segments - cement manufacturing and the sale of ready-mixed concrete and sundry building materials. The Company's business segments are separate business units that offer different products. The accounting policies for each segment are the same as those described in the summary of significant accounting policies. Following is information for each segment for the years ended December 31, 2000, 1999 and 1998:
Ready-Mixed Concrete Cement and Sundry Adjustments FOR THE YEAR ENDED Manu- Building and DECEMBER 31, 2000: facturing Materials Eliminations Consolidated Sales to unaffiliated customers $47,289,360 $69,760,428 $ - $117,049,788 Intersegment sales 9,265,934 5,192 (9,271,126) - Total net sales $56,555,294 $69,765,620 $ (9,271,126) $117,049,788 Income (loss) from operations $13,019,516 $(1,765,148) $ 11,254,368 Other income, net 3,744,982 Income before income taxes $ 14,999,350 Identifiable assets at December 31, 2000 $47,123,981 $28,205,216 $ 75,329,197 Corporate assets 20,902,522 Total assets at December 31, 2000 $ 96,231,719 FOR THE YEAR ENDED DECEMBER 31, 1999: Sales to unaffiliated customers $48,995,241 $60,480,291 $ - $109,475,532 Intersegment sales 7,690,066 697,177 (8,387,243) - Total net sales $56,685,307 $61,177,468 $ (8,387,243) $109,475,532 Income from operations $11,406,669 $ 2,954,191 $ 14,360,860 Other income, net 593,569 Income before income taxes $ 14,954,429 Identifiable assets at December 31, 1999 $36,252,363 $25,189,660 $ 61,442,023 Corporate assets 28,549,358 Total assets at December 31, 1999 $ 89,991,381 FOR THE YEAR ENDED DECEMBER 31, 1998: Sales to unaffiliated customers $43,726,111 $55,768,647 $ - $99,494,758 Intersegment sales 8,191,578 407,764 (8,599,342) - Total net sales $51,917,689 $56,176,411 $ (8,599,342) $99,494,758 Income from operations $12,019,185 $ 2,400,976 $14,420,161 Other income, net 832,647 Income before income taxes $15,252,808 Identifiable assets at December 31, 1998 $33,384,302 $20,063,428 $53,447,730 Corporate assets 31,434,291 Total assets at December 31, 1998 $84,882,021
Total sales by segment before adjustments and eliminations includes both sales to unaffiliated customers (as reported in the Company's consolidated statements of income, comprehensive income and stockholders' investment) and intersegment sales. Intersegment sales are accounted for by the same method as sales to unaffiliated customers. Income from operations is total net sales less operating expenses. In computing income from operations, none of the following items have been added or deducted: general corporate income and expenses, interest expense and income taxes. Depreciation for cement manufacturing and ready-mixed concrete, respectively, was: $2,571,183 and $4,183,600 in 2000; $2,951,294 and $3,074,607 in 1999; and $2,924,251 and $2,640,421 in 1998. Capital expenditures for cement manufacturing and ready-mixed concrete, respectively, including capital assets of businesses acquired were: $11,051,905 and $7,575,260 in 2000; $2,749,880 and $8,097,843 in 1999; and $4,966,346 and $4,552,809 in 1998. Identifiable assets by segment are those assets that are used in the Company's operations in each industry. During 2000, 1999 and 1998, there were no sales to any one customer in excess of 10% of consolidated net sales. (10) Quarterly Financial Information (Unaudited)
First Second Third Fourth Quarter Quarter Quarter Quarter 2000 Net sales $22,388,688 $34,257,052 $37,481,924 $22,922,124 Income from operations 1,575,353 5,280,529 5,545,759 (1,147,273) Net income 1,066,777 3,472,159 3,739,286 2,221,128 Basic earnings per share $.26 $.84 $.91 $.54 1999 Net sales $18,271,807 $28,094,077 $36,025,222 $27,084,426 Income from operations 828 851 3,617,387 6,352,281 3,562,341 Net income 578,473 2,380,638 4,061,319 2,633,999 Basic earnings per share $.14 $.57 $.98 $.63
CORPORATE INFORMATION CORPORATE OFFICE DIRECTORS 449 1200 Street Jack R. Callahan P.O. Box 1000 Retired President, The Monarch Humboldt, KS 66748 Cement Company Phone: (620) 473-2222 Fax: (620) 473-2447 Ronald E. Callaway Retired transport truck driver Agricultural Carriers, Inc. AUDITORS Arthur Andersen LLP David L. Deffner Kansas City, Missouri Professor of Music, American River College ANNUAL MEETING Robert M. Kissick The annual meeting of the Chairman, Hydraulic Power Systems, Inc. stockholders of The Monarch Cement Company is held the Gayle C. McMillen second Wednesday in April of Music Instructor, Salina School each year at the Company's District corporate offices. Richard N. Nixon Shareholder in law firm of Stinson, TRANSFER AGENT AND REGISTRAR Mag & Fizzell, P.C. The Monarch Cement Company P.O. Box 1000 Byron J. Radcliff Humboldt, KS 66748-1000 Rancher Byron K. Radcliff STOCK TRADING INFORMATION Owner/Manager, Radcliff Ranch Trading Symbol: MCEM Over-the-Counter Market Michael R. Wachter Civil Engineer and Director of Operations, Concrete Technology Corp. INVESTOR RELATIONS Inquiries may be directed to Walter H. Wulf Lyndell G. Mosley, Chief Financial Chairman of the Board Officer and Assistant Secretary- Treasurer, at the corporate Walter H. Wulf, Jr. address shown above. President and Vice Chairman of the Board FORM 10-K Officers The Company's Annual Report on *Walter H. Wulf Form 10-K, as filed with the Chairman of the Board Securities and Exchange Commission, is available without charge upon Walter H. Wulf, Jr. written request to Lyndell G. President and Vice Chairman Mosley at the corporate office. of the Board The Company's financial *Robert M. Kissick information is also available Vice President from the SEC at their EDGAR internet address *Byron K. Radcliff (http://www.sec.gov). Secretary and Treasurer Lyndell G. Mosley Chief Financial Officer and Assistant Secretary-Treasurer Debra P. Roe Principal Accounting Officer and Assistant Secretary-Treasurer *Not active in the daily affairs of the Company.