10-Q 1 edg503.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended September 30, 2005, or [ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _________________ to ___________________. Commission file number: 0-2757 THE MONARCH CEMENT COMPANY (Exact name of registrant as specified in its charter) KANSAS 48-0340590___ (state or other jurisdiction of (I.R.S. employer incorporation or organization) identification no.) P.O. BOX 1000, HUMBOLDT, KANSAS 66748-0900 (address of principal executive offices) (zip code) Registrant's telephone number, including area code: (620) 473-2222 (former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES [X] NO [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES [ ] NO [X} As of November 4, 2005, there were 2,463,126 shares of Capital Stock, par value $2.50 per share outstanding and 1,563,832 shares of Class B Capital Stock, par value $2.50 per share outstanding. PART I - FINANCIAL INFORMATION The condensed consolidated financial statements included in this report have been prepared by our Company without audit. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. Our Company believes that the disclosures are adequate to make the information presented not misleading. The accompanying consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair statement of the results of operations for the interim periods presented. Those adjustments consist only of normal, recurring adjustments. The condensed consolidated balance sheet of the Company as of December 31, 2004 has been derived from the audited consolidated balance sheet of the Company as of that date. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Company's most recent annual report on Form 10-K for 2004 filed with the Securities & Exchange Commission. The results of operations for the period are not necessarily indicative of the results to be expected for the full year. Item 1. Financial Statements THE MONARCH CEMENT COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS September 30, 2005 and December 31, 2004
ASSETS 2 0 0 5 2 0 0 4 (Unaudited) CURRENT ASSETS: Cash and cash equivalents $ 2,858,523 $ 4,999,253 Receivables, less allowances of $710,000 in 2005 and $727,000 in 2004 for doubtful accounts 18,812,394 13,523,816 Inventories, priced at cost which is not in excess of market- Finished cement $ 2,808,374 $ 2,679,506 Work in process 1,260,260 1,456,854 Building products 3,902,603 3,391,901 Fuel, gypsum, paper sacks and other 3,168,757 2,919,528 Operating and maintenance supplies 8,975,240 7,500,453 Total inventories $ 20,115,234 $ 17,948,242 Refundable federal and state income taxes - 812,807 Deferred income taxes 686,000 686,000 Prepaid expenses 511,432 170,236 Total current assets $ 42,983,583 $ 38,140,354 PROPERTY, PLANT AND EQUIPMENT, at cost, less accumulated depreciation and depletion of $118,676,760 in 2005 and $113,663,839 in 2004 82,548,485 79,948,242 DEFERRED INCOME TAXES 1,495,000 1,965,000 INVESTMENTS 13,804,631 13,620,501 OTHER ASSETS 1,322,364 1,526,069 $142,154,063 $135,200,166 LIABILITIES AND STOCKHOLDERS' INVESTMENT CURRENT LIABILITIES: Accounts payable $ 7,282,352 $ 5,686,857 Line of credit payable - 981,667 Current portion of advancing term loan 2,091,274 2,021,503 Accrued liabilities 5,714,506 5,659,437 Total current liabilities $ 15,088,132 $ 14,349,464 LONG-TERM DEBT 22,412,645 24,119,115 ACCRUED POSTRETIREMENT BENEFITS 11,353,956 10,128,039 ACCRUED PENSION EXPENSE 1,608,164 1,238,027 MINORITY INTEREST IN CONSOLIDATED SUBSIDIARIES 1,396,701 1,349,566 STOCKHOLDERS' INVESTMENT: Capital stock, par value $2.50 per share, 1 vote per share - Authorized 10,000,000 shares, Issued 2,463,126 shares at 9/30/2005 and 2,406,197 shares at 12/31/2004 $ 6,157,815 $ 6,015,493 Class B capital stock, par value $2.50 per share, supervoting rights of ten votes per share, restricted transferability, convertible at all times into Capital Stock on a share-for-share basis - Authorized 10,000,000 shares, Issued 1,563,832 shares at 9/30/2005 and 1,620,761 shares at 12/31/2004 3,909,580 4,051,902 Retained earnings 76,257,070 70,528,560 Accumulated other comprehensive income 3,970,000 3,420,000 Total stockholders' investment $ 90,294,465 $ 84,015,955 $142,154,063 $135,200,166 See notes to condensed consolidated financial statements
THE MONARCH CEMENT COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS For the Three Months and the Nine Months Ended September 30, 2005 and 2004 (Unaudited)
For the Three Months Ended For the Nine Months Ended September 30, September 30, September 30, September 30, 2005 2004 2005 2004 NET SALES $41,855,661 $44,365,950 $103,668,803 $112,745,787 COST OF SALES 31,219,787 38,331,126 83,360,136 98,693,562 Gross profit from operations $10,635,874 $ 6,034,824 $ 20,308,667 $ 14,052,225 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 3,156,193 2,799,342 9,248,656 8,926,379 Income from operations $ 7,479,681 $ 3,235,482 $ 11,060,011 $ 5,125,846 OTHER INCOME (EXPENSE): Interest income $ 104,400 $ 109,861 $ 240,919 $ 249,728 Interest expense (361,208) (227,597) (1,111,801) (628,265) Other, net 25,936 122,403 650,164 521,770 $ (230,872) $ 4,667 $ (220,718) $ 143,233 Income before taxes on income $ 7,248,809 $ 3,240,149 $10,839,293 $ 5,269,079 PROVISION FOR TAXES ON INCOME 2,320,000 975,000 3,500,000 1,575,000 NET INCOME $ 4,928,809 $ 2,265,149 $ 7,339,293 $ 3,694,079 RETAINED EARNINGS, beg. of period 72,133,652 71,804,461 70,528,560 71,180,923 Less cash dividends 805,391 805,391 1,610,783 1,610,783 RETAINED EARNINGS, end of period $76,257,070 $73,264,219 $76,257,070 $73,264,219 Basic earnings per share $1.22 $.56 $1.82 $.92 Cash dividends per share $.20 $.20 $.40 $.40
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the Three Months and the Nine Months Ended September 30, 2005 and 2004 (Unaudited)
For the Three Months Ended For the Nine Months Ended September 30, September 30, September 30, September 30, 2005 2004 2005 2004 NET INCOME $ 4,928,809 $ 2,265,149 $ 7,339,293 $ 3,694,079 UNREALIZED APPRECIATION ON AVAILABLE FOR SALE SECURITIES (Net of deferred tax expense of $760,000, $200,000, $535,000 and $1,000,000, respectively) 1,140,000 250,000 800,000 1,550,000 LESS: RECLASSIFICATION ADJUSTMENT FOR REALIZED GAINS INCLUDED IN NET INCOME (net of deferred tax expense of $-0-, $-0-, $155,000, and $-0-, respectively) - - 230,000 - COMPREHENSIVE INCOME $ 6,068,809 $ 2,515,149 $ 7,909,293 $ 5,244,079 See notes to condensed consolidated financial statements
THE MONARCH CEMENT COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the Nine Months Ended September 30, 2005 and 2004 (Unaudited)
2005 2004 OPERATING ACTIVITIES: Net income $ 7,339,293 $ 3,694,079 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation, depletion and amortization 7,915,693 7,549,649 Minority interest in earnings (losses) of subsidiaries 47,135 (19,955) Deferred income taxes, long term - 25 Gain on disposal of assets (175,133) (278,708) Realized gain on sale of other investments (384,375) (33,741) Change in assets and liabilities: Receivables, net (5,288,578) (9,832,497) Inventories (2,166,992) (1,856,272) Refundable federal and state income taxes 812,807 - Prepaid expenses (341,196) (295,764) Other assets 14,015 13,317 Accounts payable and accrued liabilities 2,476,162 5,247,612 Accrued postretirement benefits 1,225,917 682,668 Accrued pension expense 370,137 265,648 Net cash provided by operating activities $ 11,844,885 $ 5,136,061 INVESTING ACTIVITIES: Acquisition of property, plant and equipment $ (9,619,372) $(10,183,300) Proceeds from disposals of property, plant and equipment 428,843 579,157 Payment for purchases of equity investments - (589,871) Proceeds from disposals of equity investments 1,150,245 320,967 Purchases of subsidiaries' stock (105,400) (119,000) Net cash used for investing activities $ (8,145,684) $ (9,992,047) FINANCING ACTIVITIES: Increase (decrease) in line of credit, net $ (981,667) $ 8,898,814 Payments on bank loans (1,386,595) (2,527,258) Payments on other long-term debt (250,103) (178,523) Cash dividends paid (3,221,566) (3,221,566) Net cash provided by (used for) financing activities $ (5,839,931) $ 2,971,467 Net decrease in cash and cash equivalents $ (2,140,730) $ (1,884,519) CASH AND CASH EQUIVALENTS, beginning of year 4,999,253 5,438,018 CASH AND CASH EQUIVALENTS, end of period $ 2,858,523 $ 3,553,499 Interest paid, net of amount capitalized $1,147,528 $ 644,995 Income taxes paid, net of refunds $1,072,548 $1,915,998 Capital equipment additions included in accounts payable $ 785,185 $ - See notes to condensed consolidated financial statements
THE MONARCH CEMENT COMPANY AND SUBSIDIARIES NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2005 and 2004 (Unaudited), and December 31, 2004 1. For a summary of accounting policies, the reader should refer to Note 1 of the consolidated financial statements included in our Company's most recent annual report on Form 10-K. 2. Basic earnings per share of capital stock has been calculated based on the weighted average shares outstanding during each of the reporting periods. The weighted average number of shares outstanding was 4,026,958 in the third quarter of 2005 and 2004 and in the first nine months of 2005 and 2004. The Company has no common stock equivalents and therefore, does not report diluted earnings per share. 3. Our Company groups its operations into two lines of business - Cement Business and Ready-Mixed Concrete Business. The "Cement Business" refers to our manufacture and sale of cement and "Ready-Mixed Concrete Business" refers to our ready-mixed concrete, concrete products and sundry building materials business. Following is condensed information for each segment for the periods indicated (in thousands):
Three Months Ended Nine Months Ended 9/30/05 9/30/04 9/30/05 9/30/04 Sales to Unaffiliated Customers Cement Business $20,656 $17,709 $47,060 $39,805 Ready-Mixed Concrete Business 21,200 26,657 56,609 72,941 Intersegment Sales Cement Business 3,870 3,224 9,915 8,254 Ready-Mixed Concrete Business - - - - Operating Income (Loss) Cement Business 6,891 2,921 12,456 5,957 Ready-Mixed Concrete Business 589 315 (1,396) (831) Capital Expenditures Cement Business 846 2,610 5,450 5,274 Ready-Mixed Concrete Business 815 1,699 4,169 4,909 Balance as of 9/30/05 12/31/04 Identifiable Assets Cement Business $83,871 $76,018 Ready-Mixed Concrete Business 38,116 35,572 Corporate Assets 20,167 23,610
4. The Company records revenue from the sale of cement, ready-mixed concrete, concrete products and sundry building materials when the products are delivered to the customers. Concrete products are also sold through long- term construction contracts. Revenues for those contracts are recognized on the percentage-of-completion method based on the costs incurred relative to total estimated costs. Full provision is made for any anticipated losses. Billings for long-term construction contracts are rendered monthly, including the amount of retainage withheld by the customer until contract completion. Retainages are included in accounts receivable and are generally due within one year. 5. The Company includes the (gain) loss on disposal of assets in cost of sales. 6. The Company considers all production and shipping costs, (gain) loss on disposal of assets, inbound freight charges, purchasing and receiving costs, inspection costs, warehousing costs, and internal transfer costs as cost of sales. Selling, general and administrative expenses consists of sales personnel salaries and expenses, promotional costs, accounting personnel salaries and expenses, director and administrative officer salaries and expenses, legal and professional expenses, and other expenses related to overall corporate costs. 7. The Company's buildings, machinery and equipment are depreciated using double declining balance depreciation. The Company switches to straight line depreciation once it exceeds the amount computed under the double declining balance method until the asset is fully depreciated. We do not depreciate construction in process. 8. The following table presents the components of net periodic pension and postretirement costs for the nine months ended September 30, 2005 and 2004:
Pension Benefits Other Benefits 2005 2004 2005 2004 Service cost $ 384,251 $ 343,290 $ 447,577 $ 319,570 Interest cost 1,260,414 1,221,443 1,227,500 876,397 Expected return on plan assets (1,404,376) (1,373,429) - - Amortization of prior service costs 56,306 56,069 - - Recognized net actuarial gain 73,542 18,275 - - Unrecognized net loss - - 449,739 321,112 Net periodic pension expense $ 370,137 $ 265,648 $2,124,816 $1,517,079
The following table presents the components of net periodic pension and postretirement costs for the three months ended September 30, 2005 and 2004:
Pension Benefits Other Benefits 2005 2004 2005 2004 Service cost $128,418 $113,312 $170,492 $106,531 Interest cost 421,235 402,322 467,581 292,167 Expected return on plan assets (469,348) (453,337) - - Amortization of prior service costs 18,818 18,507 - - Recognized net actuarial gain 24,578 6,033 - - Unrecognized net loss - - 171,315 107,045 Net periodic pension expense $123,701 $ 86,837 $809,388 $505,743
Monarch expects to contribute approximately $600,000 to the pension fund in the last quarter of 2005. The other benefits consist of postretirement benefits that are self-insured by Monarch and are paid out of Monarch's general assets. As previously disclosed in our financial statements for the year ended December 31, 2004, Monarch expected to contribute approximately $1,000,000 to this plan in 2005. As of September 30, 2005, we have contributed about $900,000 and anticipate contributing an additional $300,000 to this plan in 2005 for a total of $1,200,000. 9. The Company is subject to claims and lawsuits that arise primarily in the ordinary course of business. It is the opinion of management that the disposition or ultimate resolutions of such claims or lawsuits will not have a material adverse effect on the consolidated financial position of the Company. THE MONARCH CEMENT COMPANY AND SUBSIDIARIES Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS Certain statements under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations," and elsewhere in this Form 10-Q report filed with the Securities and Exchange Commission, constitute "forward-looking statements". Except for historical information, the statements made in this report are forward-looking statements that involve risks and uncertainties. You can identify these statements by forward-looking words such as "should", "expect", "anticipate", "believe", "intend", "may", "hope", "forecast" or similar words. In particular, statements with respect to variations in future demand for our products in our market area, the timing, scope, cost and benefits of our proposed and recently completed capital improvements and expansion plans, including the resulting increase in production capacity, our forecasted cement sales, and our anticipated increase in solid fuels and electricity required to operate our facilities and equipment are all forward-looking statements. You should be aware that 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; * demand for our Company's products; * cyclical and seasonal nature of our business; * the affect weather has on our business; * the affect of environmental and other government regulation; and * the affect of federal and state funding on demand for our products. RESULTS OF OPERATIONS-CRITICAL ACCOUNTING POLICIES Reference is made to the Management's Discussion and Analysis of Financial Condition and Results of Operations - Accounting Policies incorporated herein by reference to Item 7 of the Company's Annual Report on Form 10-K for the year ended December 31, 2004 for accounting policies which are considered by management to be critical to an understanding of the Company's financial statements. RESULTS OF OPERATIONS-OVERVIEW Our products are used in residential, commercial and governmental construction. In 2004, and continuing in 2005, we experienced the return of increased demand for our products. The combination of residential, commercial and governmental construction activities resulted in the need for increased production to meet our customers' needs. In response to those needs, we have made, and continue to make, investments in our plant and equipment to increase production and improve efficiencies. We are confident that we will benefit from these investments as the economy continues to improve. Operating results for the first nine months vary considerably from year- to-year. Sales and the resulting income are significantly affected by the length and severity of winter weather and the corresponding slowdown in construction activity. Although cement and ready-mixed concrete sales and profits for the first nine months of 2005 benefited from a shorter period of cold, wet weather and an improvement in economic conditions in our markets, our consolidated net sales decreased. This decrease is attributable to a reduction in the number of design/build construction projects we had in process during the first nine months of 2005 as compared to the first nine months of 2004. Our design/build contracts were substantially complete at the end of 2004 and we have elected not to participate in these activities at the level we did in 2004. As a result of our decision to substantially reduce our participation in design/build projects, our Ready-Mixed Concrete Business net sales for the first nine months of 2005 were less than those reported for the first nine months of 2004 and are projected to continue to lag 2004 sales levels for the remainder of the year. However, these design/build projects also led to a significant decline in income from operations during the latter part of 2004. Results of Operations - Third Quarter of 2005 Compared to Third Quarter of 2004 Consolidated net sales for the three months ended September 30, 2005 decreased by $2.5 million when compared to the three months ended September 30, 2004. Sales in our Cement Business were higher by $2.9 million, while sales in our Ready-Mixed Concrete Business decreased $5.4 million. Cement Business sales increased $.7 million due to increased volume sold and $2.2 million due to price increases. Sales in our Ready-Mixed Concrete Business decreased primarily due to a $7.6 million reduction in construction contract sales as discussed under "Overview" above, which was partially offset by an increase in ready-mixed concrete and other sundry building materials sales of $2.2 million of which $.9 million was due to increased volume and $1.3 million was due to price increases. Consolidated cost of sales for the three months ended September 30, 2005, decreased by $7.1 million when compared to the three months ended September 30, 2004. Cost of sales in our Cement Business was lower by $1.2 million while cost of sales in our Ready-Mixed Concrete Business was lower by $5.9 million. Lower fuel costs of approximately $1.2 million due to a reduction in the use of natural gas made possible by our new coal firing system reduced the Cement Business cost of sales. Other processing improvements completed during the last several years are now producing the desired results of increased production and reduced downtime, which combined to reduce cost of sales by about $.5 million. These decreases were partially offset by a $.5 million increase created by the 3.8% increase in volume sold. The decrease in cost of sales in our Ready-Mixed Concrete Business was primarily due to a $7.1 million reduction in contract expenses as discussed under "Overview" above, which was partially offset by an increase in cost of sales of ready-mixed concrete and other sundry building materials of $1.2 million due to the increased volume sold. As a result of the above sales and cost of sales factors, our overall gross profit rate for the three months ended September 30, 2005 was 25.4% versus 13.6% for the three months ended September 30, 2004. Selling, general, and administrative expenses increased by 12.8% during the third quarter of 2005 compared to the third quarter of 2004. These costs are normally considered fixed costs that do not vary significantly with changes in sales volume. This increase is primarily due to an increase in postretirement benefit costs caused by rising health care costs. Interest expense increased about $.1 million for the third quarter of 2005 as compared to the third quarter of 2004 due to an increase in interest rates. The Company utilized these loans for capital improvements and temporary operating funds. The effective tax rates for the third quarter of 2005 and 2004 were estimated to be 32.0% and 30.0%, respectively. These estimates were based upon the prior year effective tax rates. The Company's effective tax rate differs from the federal and state statutory income tax rate primarily due to the effects of percentage depletion, minority interest in consolidated income (loss) and valuation allowance. Results of Operations - First Nine Months of 2005 Compared to the First Nine Months of 2004 Consolidated net sales for the nine months ended September 30, 2005 decreased $9.1 million when compared to the nine months ended September 30, 2004. Sales in our Cement Business were higher by $7.2 million while sales in our Ready-Mixed Concrete Business decreased $16.3 million. Cement Business sales increased $3.2 million due to increased volume sold and $4.0 million due to price increases. Sales in our Ready-Mixed Concrete Business decreased primarily due to a $23.7 million reduction in construction contract sales as discussed under "Overview" above, which was partially offset by an increase in ready-mixed concrete sales of $7.4 million of which $3.7 million was due to increased volume and $3.7 million was due to price increases. Consolidated cost of sales for the nine months ended September 30, 2005, decreased by $15.3 million when compared to the nine months ended September 30, 2004. Cost of sales in our Cement Business was higher by $.3 million while cost of sales in our Ready-Mixed Concrete Business was lower by $15.6 million. Cement Business cost of sales increased $2.4 million due to the 8.0% increase in volume sold; about $.5 million due to increased supply costs related to maintenance performed in the early part of 2005; about $.5 million due to rising health care costs; and about $.2 million due to increased depreciation. These increases were nearly offset by lower fuel costs of approximately $3.3 million due to a reduction in the use of natural gas made possible by our new coal firing system. The decrease in cost of sales in our Ready-Mixed Concrete Business was primarily due to a $20.1 million reduction in contract expenses as discussed under "Overview" above, which was partially offset by an increase in cost of sales of ready-mixed concrete and other sundry building materials of $4.5 million due to the increased volume sold, increased raw material prices and increased fuel prices. As a result of the above sales and cost of sales factors, our overall gross profit rate for the nine months ended September 30, 2005 was 19.6% versus 12.5% for the nine months ended September 30, 2004. Selling, general, and administrative expenses increased by 3.6% during the first nine months of 2005 compared to the first nine months of 2004. These costs are normally considered fixed costs that do not vary significantly with changes in sales volume. This increase is due to an increase in postretirement benefit costs caused by rising health care costs. Interest expense increased about $.5 million for the first nine months of 2005 as compared to the first nine months of 2004 due to an increase in interest rates. The Company utilized these loans for capital improvements and temporary operating funds. Other, net increased about $.1 million during the first nine months of 2005 as compared to the first nine months of 2004 primarily due to an increase in the amount of gain realized on the sale of other equity investments of approximately $.4 million which was partially offset by a decrease in dividends received on other equity investments of approximately $.3 million. The effective tax rates for the nine months ended September 30, 2005 and 2004 were estimated to be 32.3% and 30.0%, respectively. These estimates were based on the prior year effective tax rates. The Company's effective tax rate differs from the federal and state statutory income tax rate primarily due to the effects of percentage depletion, minority interest in consolidated income (loss) and valuation allowance. LIQUIDITY We are able to meet our cash needs primarily from a combination of operations and bank loans. Cash decreased during the first nine months of 2005 primarily due to increases in receivables and inventories, the purchase of equipment and the payment of dividends. In December 2004, we renewed and modified our line of credit and term loan with our current lender. Our current unsecured credit commitment consists of a $25,000,000 advancing term loan maturing December 31, 2009 and a $10,000,000 line of credit maturing December 31, 2005. These loans bear floating interest rates based on JP Morgan Chase prime rate less .75% and 1.00%, respectively. The loan agreement contains a financial covenant related to net worth which the Company was in compliance with at the end of the first nine months of 2005. As of September 30, 2005, we had borrowed $23,613,405 on the advancing term loan and $-0- on the line of credit leaving a balance available on the line of credit of $10,000,000. The average daily interest rate we paid on the advancing term loan during the third quarter of 2005 and 2004 was 5.67% and 3.16%, respectively, and for the first nine months of 2005 and 2004 was 5.17% and 2.89%, respectively. The average daily interest rate we paid on the line of credit during the third quarter of 2005 and 2004 was 5.42% and 3.66%, respectively, and for the first nine months of 2005 and 2004 was 4.92% and 3.39%, respectively. As of September 30, 2005, the applicable interest rate was 6.00% on the advancing term loan and 5.75% on the line of credit. The advancing term loan was used to help finance the expansion project at our cement manufacturing facility. The line of credit was used to cover operating expenses during the first six months of the year when we build inventory due to the seasonality of our business. It was paid off using funds from operations during the third quarter. Our board of directors has given management the authority to borrow an additional $15,000,000 for a maximum of $50,000,000. Construction of an addition to the Company's corporate office has begun with completion anticipated in mid 2006 at a total cost of approximately $2.5 million. The Company has started the conversion of our remaining preheater kiln to a precalciner kiln. We have previously spent approximately $7.6 million on equipment and expect to spend an additional $10.5 million on installation, electrical and refractory to complete the conversion. Installation is expected to be completed in the first quarter of 2006. The conversion of this kiln should increase our production capacity by approximately 200,000 tons per year. We have not started depreciating this equipment. Other related projects, including changes to our quarrying and grinding operation to supply the raw materials required by the increased kiln capacity and increasing our finished cement storage capacity, are currently under consideration. For several years the Company has paid a $.20 per share dividend in January, March, June and September. Although dividends are declared at the Board's discretion, we project future earnings will support the continued payment of dividends at the current level. FINANCIAL CONDITION Total assets as of September 30, 2005 were $142 million, an increase of $7.0 million since December 31, 2004 due primarily to increases in receivables and inventories of approximately $5.3 million and $2.2 million, respectively. These variations are common during the first nine months of the year due to the seasonality of our business (see Seasonality below). Investments increased approximately $.2 million primarily as a result of the sale of about $1.1 million of equity investments and an unrealized gain of about $1.3 million during the first nine months of 2005. Accounts payable increased about $1.6 million as of September 30, 2005 compared to December 31, 2004 primarily due to September expenses related to the increased sales volume in both the Cement and Ready-Mixed Concrete Business. Indebtedness decreased about $2.6 million during the first nine months of 2005 primarily as a result of utilizing cash provided by operations to reduce our bank loans. CAPITAL RESOURCES The Company regularly invests in miscellaneous equipment and facility improvements in both the Cement Business and Ready-Mixed Concrete Business. Capital expenditures during the first nine months of 2005 included installation of a clinker cooler to accommodate the increased material flow when the second precalciner is installed. We also invested in routine equipment purchases during the first nine months of 2005, primarily in the Ready-Mixed Concrete Business. Property, plant and equipment expenditures for the first nine months of 2005 totaled approximately $9.6 million. We have started converting our remaining preheater kiln to a precalciner kiln with the major work on this project scheduled for the first quarter of 2006. Construction has also begun on the expansion and remodeling of our corporate offices, which is projected to be completed in the second quarter of 2006. Other routine equipment purchases are also planned during the remainder of 2005. In addition to the completion of the above projects, preliminary plans under consideration for 2006 include changes to our quarrying and grinding operation to supply the raw materials required by the increased kiln capacity and increasing our finished cement storage capacity. If we elect to proceed with these projects, additional bank financing may be required. MARKET RISK Market risks relating to the Company's operations result primarily from changes in demand for our products. A significant increase in interest rates could lead to a reduction in construction activities in both the residential and commercial market. Budget shortfalls during economic slowdowns could cause money to be diverted away from highway projects, schools, detention facilities and other governmental construction projects. Reduction in construction activity lowers the demand for cement, ready-mixed concrete, concrete products and sundry building materials. As demand decreases, competition to retain sales volume could create downward pressure on sales prices. 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. 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, and to a lesser extent natural gas, in its kilns. While we do not anticipate a significant increase above the rate of inflation in the cost of these solid fuels, or in the electricity required to operate our cement manufacturing equipment, an increase in such manufacturing components could adversely affect us. 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. SEASONALITY Portland cement is the basic material used in the production of ready- mixed concrete that is used in highway, bridge and building construction. These construction activities are seasonal in nature. During winter months when the ground is frozen, groundwork preparation cannot be completed. Cold temperatures affect concrete set-time, strength and durability, limiting its use in winter months. Dry ground conditions are also required for construction activities to proceed. During the summer, winds and warmer temperatures tend to dry the ground quicker creating fewer delays in construction projects. Variations in weather conditions from year-to-year significantly affect the demand for our products during any particular quarter; however, our Company's highest revenue and earnings historically occur in its second and third fiscal quarters, April through September. FUTURE CHANCE IN ACCOUNTING PRINCIPLES The Financial Accounting Standards Board (FASB) has issued the following new accounting pronouncements. In December 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 123 (revised 2004), Share-Based Payment. The Statement generally provides that the cost of Share-Based Payments be recognized over the service period based on the fair value of the option or other instruments at the date of grant. The grant date fair value should be estimated using an option-pricing model adjusted for the unique characteristics of the options or other instruments granted. With respect to future grants, the Company may elect to use the Black-Scholes option pricing model or may elect to determine the grant date fair value using an alternative method. This Statement will be effective for the Company beginning January 1, 2006. The Company does not have outstanding stock options or a stock option plan and therefore the Company does not expect this pronouncement to have an affect on its financial statements. In November 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4. This Statement clarifies that items such as idle facility expense, excessive spoilage, double freight, and re-handling costs should be classified as a current-period charge. The Statement also requires the allocation of fixed production overhead to inventory based on the normal capacity of the production facilities. The statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company has not yet determined the impact that this new pronouncement will have on the Company's consolidated financial statements. In December 2004, the Financial Accounting Standards Board (FASB) issued FASB Statement No. 153, Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29. Statement No. 29 generally provides that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged subject to certain exceptions to the general rule. The Statement amends Opinion No. 29 to eliminate the exception for exchanges involving similar productive assets with a general exception for exchanges that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. This Statement is effective for nonmonetary asset exchanges in periods beginning after June 15, 2005. The Company has not yet determined the impact that this new pronouncement will have on the Company's consolidated financial statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company has $13,804,631 of equity securities, primarily public traded entities, as of September 30, 2005. These investments are not hedged and are exposed to the risk of changing market prices. The Company classifies these securities as "available-for-sale" for accounting purposes and marks them to market on the balance sheet at the end of each period. Management estimates that its investments will generally be consistent with trends and movements of the overall stock market excluding any unusual situations. An immediate 10% change in the market price of our equity securities would have an $830,000 effect on comprehensive income. The Company also has $23,613,405 of bank loans as of September 30, 2005. Interest rates on the Company's advancing term loan and line of credit are variable and are based on the JP Morgan Chase prime rate less .75 % and 1.00%, respectively. ITEM 4. CONTROLS AND PROCEDURES The Company maintains disclosure controls and procedures (as defined in Rules 13a-5(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in the Company's reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, and that such information is accumulated and communicated to the Company's management, including its President and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. As of the end of the period covered by this report, an evaluation was carried out by the Company's management, including its President and Chairman of the Board of Directors and Chief Financial Officer, of the effectiveness of its disclosure controls and procedures (as defined in Rules 13a-5(e) under the Securities Exchange Act of 1934). There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon that evaluation, the Company's President and Chairman of the Board of Directors and Chief Financial Officer concluded that these disclosure controls and procedures were effective in all material respects to provide reasonable assurance that information required to be disclosed in the reports we file and submit under the Exchange Act is recorded, processed, summarized and reported as and when required as of the end of the period covered by this report. There were no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2005 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. PART II. OTHER INFORMATION Item 1. Legal Proceedings On April 27, 2005, our subsidiary, Tulsa Dynaspan, Inc. ("TDI"), filed a lawsuit in the United States District Court for the Northern District of Oklahoma against David G. Markle, a former director, President and employee of TDI, Richard L. Evilsizer, a former officer and employee of TDI, certain other former employees of TDI and companies controlled by one or more of such individuals. Some or all of the individual defendants have organized businesses that directly compete with TDI. TDI is claiming the defendants damaged TDI as a result of, among other things (1) the unauthorized use of TDI assets and resources while they were employees of TDI for the benefit of one or more defendants, (2) the improper use of TDI computers in violation of the Federal Computer Fraud and Abuse Act, (3) defamation and disparagement of TDI, (4) violation of fiduciary duties the individual defendants owed to TDI, and (5) improper use by the defendants of trade secrets and other proprietary information of TDI. On August 12, 2005, the judge in this litigation stayed further proceedings pending a judgment, or final order in the state court case described below. On December 28, 2004, Mr. Markle filed a lawsuit in the District Court for Tulsa County, Oklahoma against TDI and The Monarch Cement Company seeking a declaratory judgment as to the ownership of an alleged invention of a method for the construction of parking garages. On January 11, 2005, Mr. Markle resigned from TDI. Amendments to Mr. Markle's petition have been filed to add as plaintiffs in this action all of the defendants in the above-described TDI lawsuit filed in the Northern District of Oklahoma and to add certain claims, including claims alleging (i) that Monarch has breached its fiduciary duties to Mr. Markle and one other plaintiff as minority stockholders of TDI, (ii) defamation of the plaintiffs and (iii) interference with contractual relations. Monarch has moved to dismiss the breach of fiduciary duty claims against it, and has filed a counterclaim against Markle for breach of a non- competition agreement. TDI has filed counterclaims identical to those originally filed in federal court as set forth above. Discover is ongoing. No trial date is set at present. Monarch and TDI believe the invention is owned by TDI and that all claims against them are without merit. Monarch and TDI will vigorously contest any ownership by Mr. Markle in the invention and will vigorously defend all claims against them. Item 6. Exhibits 31.1 Certificate of the President and Chairman of the Board pursuant to Section 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934. 31.2 Certificate of the Chief Financial Officer pursuant to Section 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934. 32.1 18 U.S.C. Section 1350 Certificate of the President and Chairman of the Board dated November 14, 2005. 32.2 18 U.S.C. Section 1350 Certificate of the Chief Financial Officer dated November 14, 2005. S I G N A T U R E S Pursuant to the requirements 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. THE MONARCH CEMENT COMPANY (Registrant) Date November 14, 2005 /s/ Walter H. Wulf, Jr. Walter H. Wulf, Jr. President and Chairman of the Board Date November 14, 2005 /s/ Debra P. Roe Debra P. Roe, CPA Chief Financial Officer and Assistant Secretary-Treasurer EXHIBIT INDEX Exhibit Number Description 31.1 Certificate of the President and Chairman of the Board pursuant to Section 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934 31.2 Certificate of the Chief Financial Officer pursuant to Section 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934 32.1 18 U.S.C. Section 1350 Certificate of the President and Chairman of the Board dated November 14, 2005. 32.2 18 U.S.C. Section 1350 Certificate of the Chief Financial Officer dated November 14, 2005.