-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, F/cX8KbmQlIdUP6bUWmKVKsaR6un+RV6wQSI1r6P+BrjV6RrPzX0RBhn5gP60T5W uSVj9tZvZ/WlQ1j/L5tvhQ== 0000922405-98-000008.txt : 19980401 0000922405-98-000008.hdr.sgml : 19980401 ACCESSION NUMBER: 0000922405-98-000008 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980331 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: GIANT CEMENT HOLDING INC CENTRAL INDEX KEY: 0000922405 STANDARD INDUSTRIAL CLASSIFICATION: CEMENT, HYDRAULIC [3241] IRS NUMBER: 570997411 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-24850 FILM NUMBER: 98582499 BUSINESS ADDRESS: STREET 1: 320-D MIDLAND PKWY STREET 2: HIGHWAY 453 & I-26 CITY: SUMMERVILLE STATE: SC ZIP: 29485 BUSINESS PHONE: 8038519898 MAIL ADDRESS: STREET 1: 320 D MIDLAND PKWY CITY: SUMMERVILLE STATE: SC ZIP: 29485 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] for fiscal year ended December 31, 1997 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from _______ to ___________ Commission File Number 0-24850 GIANT CEMENT HOLDING, INC. (Exact name of registrant as specified in its charter) Delaware 57-0997411 (State or other jurisdiction (I.R.S. Employer Identification No.) of incorporation) 320-D Midland Parkway, Summerville, South Carolina 29485 (Address of principal executive offices Zip Code) Registrant's telephone number, including area code: (843) 851-9898 Name of Each Exchange Securities registered pursuant to Title of Each Class on Which Registered Section 12(b) of the Act: Common Stock, $.01 Nasdaq -- NMS Par Value 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [x] As of March 18, 1998, 9,255,522 shares of the Registrant's Common Stock, par value $.01 per share, were outstanding. The aggregate market value of the Registrant's Common Stock held by non-affiliates (based on the closing price on the Nasdaq Stock Market on March 16, 1998) was approximately $273.0 million. DOCUMENTS INCORPORATED BY REFERENCE Specified portions of the Company's 1997 Annual Report to Stockholders are incorporated by reference into Part II hereof. Specified portions of the Company's definitive Proxy Statement for the May 12, 1998 Annual Meeting of Stockholders are incorporated by reference into Part III hereof. Exhibit Index located at Page 13 herein. TABLE OF CONTENTS PART I Item 1. Business Item 2. Properties Item 3. Legal Proceedings Item 4. Submission of Matters to a Vote of Security Holders PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters Item 6. Selected Financial Data Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 8. Financial Statements and Supplementary Data Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures PART III Item 10. Directors and Executive Officers of the Registrant Item 11. Executive Compensation Item 12. Security Ownership of Certain Beneficial Owners and Management Item 13. Certain Relationships and Related Transactions PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on 8-K PART I ITEM 1. BUSINESS General Development of Business Giant Cement Holding, Inc. (herein referred to as "the Company" on a consolidated basis or "GCHI" on a separate company basis) was incorporated under the laws of the state of Delaware in April 1994. The Company manufactures a complete line of portland and masonry cements used in residential, commercial, and infrastructure construction applications. The Company's manufacturing facilities have an aggregate rated annual clinker capacity of approximately 1.4 million tons, ranking it as the 17th largest producer of cement in the United States. In September 1994, 10,000,000 shares of common stock of GCHI were sold to the public in an initial public offering. The offering resulted in GCHI and its subsidiaries being spun-off from its predecessor parent. GCHI's primary subsidiaries have been in operation since 1883 and 1928. In September 1997, the Company entered into a Definitive Merger Agreement to acquire three lightweight aggregate manufacturing plants, five concrete block plants and a waste treatment and blending facility from Solite Corporation, a privately-held manufacturer. On March 2, 1998 the definitive agreement was amended to reduce the consideration to be received by Solite stockholders due to the increased value of the Company's common stock and the increased transaction costs associated with the Department of Justice review. The acquisition is subject to, among other matters, approvals by various regulatory authorities. If completed, the acquisition (which would be accounted for as a purchase) will require approximately $28 million to be financed through the issuance of approximately 325,000 shares of the Company's common stock to the stockholders of Solite Corporation and bank borrowings of approximately $20 million. The Solite operations the Company intends to acquire are located in Virginia, North Carolina and Alabama. The acquisition could expand the Company's existing construction material product lines as well as expand the Company's resource recovery service capabilities. The Company and Solite have received second requests for information from the United States Department of Justice, Antitrust Division (USDOJ), relating to their Premerger Notification filings under the Hart-Scott-Rodino Antitrust Improvements Act. On March 23, 1998 the USDOJ indicated that it will allow the Company and Solite to complete the merger if Solite retains an independent investment banking firm and attempts to market Solite's core assets to other potential purchasers. As a result of the uncertainty of the Company's ability to obtain clearance from the USDOJ to consummate the merger, the Company has elected to expense the costs incurred in connection wit the acquisition, which would normally be capitalized and accounted for as a portion of the acquisition. Acquisition related expenses totaling $1.2 million or $.08 per share after tax, were charged to expense in the fourth quarter. Financial Information About Industry Segments GCHI and its subsidiaries are involved in a single business segment which includes the domestic manufacture and sale of portland and masonry cements and related aggregates. The Company derives revenues from the sales of products, primarily cement and to a much lesser extent construction aggregates, as well as from the provision of resource recovery services. Resource recovery services revenue is primarily derived from third parties that pay the Company to utilize their waste as fuel, which additionally reduces the cost of traditional fossil fuels used in the manufacture of cement. Due to the nature of the Company's operations and the fact that the burning of waste-derived fuels is inseparable from the manufacture of cement, it is impractical to disaggregate the costs of sales and services by revenue classification. Information concerning the Company's net sales, operating income and assets for each of the years in the three-year period ended December 31, 1997 is included under "Five-Year Summary of Consolidated Financial Data" in the 1997 Annual Report. Narrative Description of Business The Company owns and operates two limestone quarries and cement manufacturing facilities through its wholly-owned subsidiaries Giant Cement Company ("Giant") and Keystone Cement Company ("Keystone"). Giant, located in Harleyville, South Carolina, serves the South-Atlantic region of the United States; and Keystone, located in Bath, Pennsylvania, serves the Middle-Atlantic region. The Company pioneered resource recovery techniques for use in the manufacturing of cement in the late 1970's and is one of the largest users of waste-derived fuels in the cement industry. Operations. Giant was founded in 1883 and commenced operations in Harleyville, South Carolina in 1947. Giant owns approximately 2,100 acres of land in Harleyville, where its cement production facilities and 230-acre limestone quarry are located. The Company presently estimates that Giant's limestone reserves are adequate to meet its plant requirements for in excess of 50 years. Giant has four wet process kilns with a combined rated annual clinker capacity of approximately 840,000 tons and a manufacturing plant with an annual finish grinding capacity of approximately 950,000 tons. Keystone, founded in 1928, owns approximately 1,000 acres of land in Bath, Pennsylvania, in the Lehigh Valley region approximately 60 miles north of Philadelphia. Keystone obtains the cement rock used in its production from its 200-acre limestone quarry located adjacent to its plant. The Company presently estimates that Keystone's limestone reserves are adequate to meet its plant requirements for in excess of 50 years. The two wet process kilns used in Keystone's operations have a combined rated annual clinker capacity of approximately 600,000 tons and its manufacturing plant has an annual finish grinding capacity of approximately 750,000 tons. Rated annual clinker capacity is based upon the cement kiln manufacturer's specifications. The Company's historical annual clinker production has not exceeded 1.3 million tons. In addition to limestone, the other principal raw materials used in the manufacturing of cement are silica, alumina, iron oxide, and gypsum, which are purchased from various suppliers. Management believes that the supply of these raw materials will be adequate to permit production at planned capacities for the foreseeable future. Products. The Company principally manufactures a full line of portland cement, which is the fundamental binding agent in concrete. Giant's cement has a low-alkali content, a characteristic favored for use by federal and state governments on certain projects due to its minimal reaction with soil and other aggregates. Keystone also produces limited quantities of low-alkali cement. The Company believes that Keystone is the only cement manufacturer currently producing a low-alkali cement within a 100 mile radius of the Keystone plant. In addition to portland cement, the Company manufactures masonry cement, which is used in the preparation of mortar used in block and brick masonry. The Company also mines, crushes, screens, and sells various sizes of stone and gravel, known as aggregates, to the construction industry for use in paving, road base material, and assorted small volume applications. Additionally, the Company markets cement kiln dust ("CKD") and, occasionally, a customized blend of CKD and cement under the registered trade name "StableSorb." StableSorb is utilized by construction, remediation, and other contractors for the purpose of solidifying soil, wastes, and other materials. Cement is made in a multi-stage process that begins with the crushing, grinding, and mixing of calcium (usually in the form of quarried limestone or "cement rock"), silica, alumina, iron oxide, and other materials. This raw material is then processed in a rotary kiln at extremely high temperatures, causing it to undergo a chemical reaction. The resulting marble-sized, pellet-like material (known as "clinker") is then cooled and ground with a small quantity of gypsum to produce cement. Marketing and Distribution. The Company markets its products to ready-mix concrete plants, concrete product manufacturers, building material dealers, construction contractors, and state and local government agencies through its experienced sales force. Approximately 85% of the Company's cement is sold in bulk, primarily to ready-mix and concrete products manufacturers, with the remainder sold in individually packed bags, primarily to building materials dealers. South-Atlantic Region. Giant's market area covers most of the South-Atlantic region of the United States, from southern Virginia to southern Georgia. The South-Atlantic region is one of the largest cement markets in the United States in terms of cement consumption. Giant's sales are most heavily concentrated in North and South Carolina, with the remainder of its sales in Georgia and southern Virginia. Middle-Atlantic Region. Keystone's market area, which covers most of the Middle-Atlantic region of the United States, includes eastern Pennsylvania, southeastern New York, New Jersey, western Connecticut, and portions of Delaware and Maryland. Keystone's sales are most heavily concentrated in eastern Pennsylvania, southeastern New York, and New Jersey, with the remainder of its sales in Connecticut, Delaware, and Maryland. Sales Practices and Distribution. The Company has more than 500 customers, the majority of which have been doing business with the Company for more than five years. No single customer accounted for 10% or more of the Company's cement sales during 1997, and the Company believes that the loss of any single customer would not have a material adverse effect on the Company's financial condition or results of operations. The Company, following the sales practices characteristic of its industry, does not provide the right to return nonfaulty product or extended payment terms to customers in the ordinary course of business. As is customary in the industry, the Company does not typically enter into long-term sales contracts, except with respect to major construction projects. Because the needs of its customers are generally short term in nature, backlog orders are not significant in the cement industry. The production facilities of both Keystone and Giant are located near, and served by, major rail transportation lines, which provide ready access for transporting cement to the Company's customers or terminals. Giant delivers a substantial portion of its product by rail either directly to its customers or to its terminals where the product is picked up by customers. At Keystone, almost all product is shipped via truck, with a substantial amount being picked up by customer-owned trucks. Both Giant and Keystone have good relations with contract carriers which operate fleets of trucks to provide quick delivery, on demand, to the Company's customers requesting truck deliveries. To meet the needs of its customers in the South-Atlantic market area, Giant and its wholly-owned subsidiary, Giant Cement NC, operate one terminal and three distribution warehouses, with annual throughput capacity of approximately 165,000 finished tons, and 25,000 square feet of storage capacity for bagged product. Giant Cement NC began upgrading its Durham, N.C. terminal facilities during 1997 to improve efficiency and distribution capabilities, and expects to complete the upgrade in 1998. General and Regional Economic Conditions. Demand for the Company's products is directly related to activity in the construction industry and general economic conditions. Various economic factors beyond the Company's control affect cement consumption, including the level of new residential, commercial and infrastructure construction activity, which are in turn affected by movement in interest rates, the availability of short and long-term financing and the availability of public funds for infrastructure projects. Accordingly, adverse economic conditions in the Company's markets or a worsening of general or local economic conditions could adversely affect the Company's operating results. Cement demand reached a cyclical low in 1991, and, as a consequence, the Company experienced a decline in sales in 1991. Demand was flat to slightly higher in most regions of the country during 1992 and increased in 1993 through 1996 to record levels for U.S. cement consumption. While U.S. cement consumption was at or near record levels again in 1997 and exceeded U.S. supply, there can be no assurance that increased cement demand will continue or that demand will remain at current levels. Competition. Due to the lack of product differentiation and the commodity nature of cement, the cement industry is highly competitive. Competition is based largely on price and, to a lesser extent, quality and service. The Company competes with national and regional cement producers in its markets. Many of the Company's competitors are larger and have significantly greater resources than the Company. The prices that the Company charges its customers are not likely to be materially different from the prices charged by other producers in the same markets. Accordingly, profitability in the cement industry is generally dependent on the level of cement demand and on a cement producer's ability to contain operating costs. Prices are subject to material changes in response to relatively minor fluctuations in supply and demand, general economic conditions and other market conditions beyond the Company's control. Prior to 1993, cement prices in the United States, including the Company's markets, had fallen and remained depressed for several years, primarily due to the economic recession and competition from lower priced foreign imports. Although the Company has been able to increase its cement prices in recent years, there can be no assurance that prices will not decline in the future. There are 11 companies in the South-Atlantic region which compete with Giant in some portion of its market, including three direct competitors, two of which compete throughout its market area. There are 15 companies in the Middle-Atlantic region which compete with Keystone in some portion of its market, including five direct primary competitors. The Company believes that Keystone is the only cement plant currently producing low-alkali cement in its immediate market area. Additionally, none of Keystone's direct competitors are currently permitted to utilize waste-derived fuel as an alternative source of fuel. During the latter part of the 1980's, an influx of low-price cement imports caused prices to deteriorate in many domestic markets. A portion of the market served by Keystone may be directly subject to imports of foreign cement which can affect pricing in all of its market areas. The market areas served by Giant are also impacted indirectly by imports of foreign cement. Imports declined significantly from 1987 to 1992. The Company believes the decline was the result of increased foreign consumption, increased ocean transportation costs and the imposition of anti-dumping duties, among other things. From 1993 to 1997, imports into the United States increased significantly as a result of the US demand and consumption exceeding the domestic supply. Through 1997, the increase in the cement imports has had little effect on current prices. While the Company does not believe imports had a significant impact on its market areas in 1997, nationally, imports increased significantly and there can be no assurance that importation of lower-priced cement in the future will not increase. Resource Recovery. The cost of energy represents a significant percentage of total cement manufacturing costs. The Company's plants utilize the "wet kiln" process. While the "wet kiln" process requires more thermal energy than the alternative "dry kiln" process, the Company has implemented technology which utilizes liquid and solid industrial wastes with high BTU values ("waste-derived fuels") as fuel substitutes ("resource recovery") in the process of manufacturing cement. In the late 1970's, Keystone pioneered resource recovery techniques in the U. S. cement industry. Giant also began the limited use of waste as a fuel substitute in 1987 and has since expanded its use of industrial solvents and other hazardous waste-derived fuels, including waste solids. These resource recovery efforts have significantly reduced the Company's traditional fossil fuel consumption and production costs, while providing it with an additional source of revenue as industrial companies pay the Company to utilize these waste-derived fuels. In 1997, waste-derived fuels comprised approximately 45% of Keystone's total fuel usage and 55% of Giant's. These percentages have grown significantly since such programs were initiated, allowing fuel costs to be substantially reduced. Although the Company was among the first in the cement industry to utilize resource recovery as a substitute for fossil fuels, this technique has since been adopted by a number of other U. S. cement producers and is utilized at 18 cement plants. Six of the ten largest cement companies in the United States utilize resource recovery at one or more of their production facilities. Keystone is, however, one of only two Pennsylvania plants which are presently permitted to commercially burn hazardous waste, and the only facility in the Lehigh Valley area which is permitted to utilize this economically beneficial process. Keystone is currently permitted to burn such waste at rates of up to approximately 50% of its fuel requirements. While Giant is one of two plants in its immediate market area that is presently permitted to burn numerous categories of hazardous and non-hazardous liquids and solids, it is the only one in such area that is presently permitted to burn such wastes at rates of up to approximately 100% of its fuel requirements. Additionally, Giant has developed techniques to increase the proportion of higher revenue waste solids used in its resource recovery activities. The Company's subsidiaries, Keystone, Giant and Giant Resource Recovery Company, Inc. ("GRR"), utilize a network of brokers, fuel blenders, and treatment, storage, and disposal facilities to obtain waste-derived fuels. The sources for such waste products range from Fortune 500 companies to small independent waste treatment, storage, and disposal facilities. The Company's resource recovery operations are dependent on general and regional economic conditions; federal, state and local environmental laws, regulations and policies; and the Company's cement kiln utilization. The Company competes with numerous other companies for the supply of waste-derived fuels primarily on the basis of service and price. Environmental Matters. The Company's operations and properties are subject to extensive and changing federal, state, and local environmental laws relating to air and water quality, as well as to the handling, treatment, storage and disposal of wastes. In connection with the Company's utilization of hazardous waste-derived fuels, environmental laws require certain permits and other authorizations mandating procedures under which the Company shall operate. Environmental laws also provide significant penalties for violators, as well as liabilities and costs of cleaning up releases of hazardous wastes into the environment. In addition, the Company could be subject to claims by employees or others alleging exposure to toxic or hazardous substances as a result of the failure to observe environmental laws. Violations of mandated procedures under operating permits, even if immaterial or unintentional, may result in fines, shutdowns, remedial actions, or revocation of such permits. The Company has been performing industrial operations at its properties for many years. Various materials from these operations have been disposed of in on-site landfills and may have been disposed of in off-site landfills and other facilities. As a result, the Company from time to time may be involved in administrative and other proceedings involving compliance matters and alleged violations of environmental laws at its operations and facilities. The Company estimates that annual expenditures for environmental compliance exceed $3.5 million per year, which includes dust collection and control systems and compliance expenditures related to the Company's resource recovery operations. Capital expenditures relative to environmental compliance totaled $1.6 million in 1995, $2.8 million in 1996 and $3.2 million in 1997. In 1997, the Company committed to construct a residual waste landfill at its Pennsylvania plant for the future management of cement kiln dust ("CKD"), the total capital cost of which is expected to be $2.5 million over the landfill's estimated 15 year life. The Company does not believe compliance expenditures impair its competitive position because its competitors are subject to the same laws and regulations, with the exception of those regulations specifically relating to resource recovery operations for which the Company currently receives revenues that more than offset the related compliance costs. However, the Company has no knowledge of its competitors' environmental compliance costs and such costs could vary depending upon the characteristics of a competitor's facilities. The Company's operations are subject to the Resource Conservation and Recovery Act of 1976, as amended ("RCRA"), and two delegated state programs, which together provide a comprehensive regulatory framework for the management of hazardous wastes at active facilities. RCRA sets up a "cradle to grave" system for the management of hazardous wastes, imposing upon all parties who generate, transport, treat, store, or dispose of waste above certain minimum quantities, requirements, including permitting requirements, for performance, testing, and record keeping. The boiler and industrial furnaces ("BIF") regulations, promulgated in 1991 under RCRA, also require, among other things, that cement kilns utilizing waste-derived fuels obtain operating permits. The BIF regulations are extremely complex and certain provisions are subject to different interpretations. In October 1991, the South Carolina Department of Health and Environmental Control issued to Giant a RCRA Part B Permit for the storage and management of hazardous waste. Keystone was issued a similar RCRA Part B Permit by the Commonwealth of Pennsylvania in December 1991. In addition, Giant and Keystone operate under BIF "interim status" permits, which allow them to substitute approximately 100% and 75% of their respective fuel requirements with hazardous waste-derived fuels. However, Keystone is currently limited to approximately 50% waste fuel substitution by its Pennsylvania Department of Environmental Protection ("PADEP") air quality plan approval at its Pennsylvania plant. During this interim status period, the Company's plants must comply with BIF standards regarding emissions of particulate matter and other parameters. Giant and Keystone are currently pursuing RCRA Part B permits for the burning of such fuels pursuant to the BIF regulations; which the Company believes may take one or more years to obtain. Pursuant to the BIF regulations, in order to maintain interim status permits for the burning of waste-derived fuels, the Company was required to perform BIF Compliance Tests ("BIF Tests") and submit Certificates of Compliance ("COC's") in 1995 and is required to perform BIF Tests and submit COC's every three years thereafter. The Company will be required to perform BIF tests in 1998. The BIF Tests results and COC's set various operating parameters within which the Company must operate, including volumes of waste-derived fuel, qualitative aspects of waste-derived fuel and various other parameters. The BIF Tests are monitored by the EPA or its representative, and the BIF Tests results and COC's are subsequently reviewed by the EPA for compliance with the BIF regulations. The Company believes its COC's are substantially in compliance with the BIF regulations. However, there can be no assurance that upon EPA's review of the submissions, the EPA will concur with the Company and not require a new BIF Test or levy fines for non-compliance. There can be no assurance that the results of future BIF Tests will be successful or that future COC's will provide favorable operating parameters for burning waste-derived fuels. The two BIF Tests conducted in 1995 cost the Company approximately $800,000. Should the Company fail a BIF Test, it can continue to utilize waste-derived fuels for a total of 720 hours including hours spent conducting a new BIF Test. Various aspects of the Company's operations are also subject to regulation under the federal Clean Air Act, as amended (the "CAA"). The CAA amendments of 1990 (the "Amendments") resulted in numerous changes to the CAA, including a new federal operating permit (Title V permit) and fee program for virtually all manufacturing operations. The Amendments will likely result in significantly increased capital and operational expenses for all manufacturers in the Company's industry in the future, the amounts of which are not presently determinable. In 1996, the Company's plants submitted detailed Title V permit applications for air emissions. In addition, the EPA is developing regulations for certain air pollutants under the Amendments for a broad spectrum of industrial sectors, including portland cement manufacturing and commercial waste combustion facilities. The EPA has indicated that the new maximum available control technology standard ("MACT") for these pollutants under these Amendments could require significant reduction of air pollutants below existing levels prevalent in the industry, which could have a material adverse effect on the Company's financial condition or results of operations. The EPA issued draft regulations for MACT in 1996 for public comment and requested additional public comment on alternative approaches in April 1997, with final promulgation expected in late 1998. Many of the raw materials, products, by-products, and wastes associated with the Company's facilities and operations contain chemical elements or compounds that are regulated under the environmental laws. Some examples of such materials are CKD and general purpose solvents, which in some instances may contain hazardous constituents including trace metals, organics or exhibit other hazardous waste characteristics. The Company has from time to time transported or delivered certain of these materials to various on-site and off-site disposal sites. Treatment and disposal of hazardous wastes generated from operations at on-site and off-site locations is additionally subject to the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended by the Superfund Amendments and Reauthorization Act of 1986 ("CERCLA" ). CERCLA imposes joint and several liability (without regard to fault) on certain categories of persons for clean-up costs related to releases of certain materials at facility sites, and for damage to natural resources. The Company has been identified as a potentially responsible party at a site in Southington, Connecticut under CERCLA. According to the EPA, it initially notified over 1,000 parties and subsequently notified hundreds of additional parties including the Company, of their potential liabilities. The final volumetric ranking for the site, dated July 1993, indicates the Company contributed only .03206 percent (3.2 one hundredths of a percent). The agent for the PRP group has estimated the cleanup cost could range from $30 million to $100 million over the course of ten to twelve years. Unless a substantial number of larger PRP's are released from liability, the Company's liability at .03206 percent is not expected to be material. In addition to CERCLA, similar state or other environmental laws may impose the same or even broader liability for the discharge, release, or the mere presence of certain substances into and in the environment. CKD, a by-product of cement manufacturing, is currently excluded from regulation as a hazardous waste under the "Bevill Amendment" to RCRA. However, CKD that comes in contact with water might produce a leachate with an elevated pH. In December 1993, the EPA issued a Report to Congress on CKD in which the EPA concluded that risks associated with CKD management are generally low, but that there is potential under certain circumstances for CKD to pose a danger to human health and the environment, or that it may do so in the future. On January 31, 1995 the EPA issued a Regulatory Determination on CKD. The EPA reported that CKD would retain its status as a "Bevill Waste" and remain exempt from regulation as a hazardous waste until such time as the EPA promulgates new regulatory controls. The EPA intends to take a "common sense" approach in developing a highly tailored set of standards that will "prevent damage to ground and potable water and reduce health risks associated with breathing and ingesting dust from cement kilns." The EPA further made it clear that it has no problems with recycling or reuse of CKD, and that it has not limited beneficial uses of CKD; however, the EPA does not encourage the use of CKD as an agricultural lime additive. Though the EPA originally intended to conduct a typical rule-making process which would involve information gathering, eventually followed by the development of a proposed rule and the promulgation of a final rule, the EPA is now considering two alternatives to the full rule-making process. Under the first alternative, a state with a federally approved hazardous waste program would be able to oversee the management of CKD on a site-by-site basis, either through regulation, permit, or enforceable agreement. The second alternative would be to create federal rules that would set contingent management standards for cement kiln dust to meet before being exempt from Subtitle C of the Resource Conservation and Recovery Act. Key components of management conditions would be based on the design of the waste management unit, dust control practices, and other factors. The EPA is expected to issue a proposed rule in late 1998, with a final rule anticipated in late 1999. The cement industry will be vigorously pursuing a range of regulatory, legislative and judicial remedies because the industry continues to believe that CKD is not a hazardous waste, should never be classified as a hazardous waste and, therefore, does not warrant RCRA Subtitle C regulation. The industry believes its voluntary enforceable agreement that was submitted to the Agency in 1995 offers a responsible and valid approach for managing CKD outside the realm of RCRA Subtitle C. These standards address all possible exposure pathways and are fully protective of human health and the environment. The industry is fully committed to avoiding regulation of CKD as a hazardous waste while at the same time acknowledging the need to generally improve CKD management. Accepted industry practice has been to store CKD on-site. The Company collects and stores CKD at its plants and recycles CKD related to its operations. Additionally, the Company markets CKD and, occasionally, a customized blend of CKD and cement under the registered trade name "StableSorb." StableSorb is utilized by construction, remediation, and other contractors for the purpose of solidifying soil, wastes, and other materials. Although the potential costs and impact of repeal of the Bevill Amendment exemption with respect to CKD or adoption of particular EPA or State management standards for CKD in the future cannot be estimated at this time, such costs and impact could have a material adverse effect on the Company's financial condition or results of operations. Another RCRA concern in the cement industry involves the disposal of refractory brick containing chromium. Refractory brick containing chromium was formerly widely used in the cement industry to line cement kilns and has been utilized and disposed of on-site by the Company in the past. The Company's facilities conduct tests on all brick removed from its kilns to determine whether or not it is a hazardous waste, and these tests have confirmed such brick to be non-hazardous under the applicable RCRA standards. The Company conducts these tests in accordance with EPA standards and believes that the EPA would reach the same conclusions. The Company's quarry sites must comply with noise and dust suppression regulations, zoning, and special use permitting requirements, applicable mining regulations and federal health and safety requirements administered by the Mine Safety and Health Administration. The Company is also obligated under certain of its mining permits and certain regulations to engage in reclamation of land within the quarries upon completion of extraction and mining. The burning of hazardous waste-derived fuels is a key factor to the profitability of the Company. A substantial reduction in the Company's ability to substitute hazardous waste-derived fuels for traditional fossil fuels could have a material adverse effect on the Company's financial condition or results of operations. The Company regularly monitors and reviews its operations, procedures, and policies for compliance with these environmental laws and the Company's operating permits. The Company believes that its current procedures and practices in its operations, including those for handling hazardous wastes, are substantially in compliance with all environmental laws and its material operating permits. There can be no assurance, however, that a review of the Company's past, present, or future operations by courts or federal, state, or local regulatory authorities will not result in determinations that could have a material adverse effect on the Company's financial condition or results of operations. In addition, the revocation of any of the Company's operating permits, the denial of any application by the Company for a permit or the failure to renew any interim permit could have a material adverse effect on the Company's financial condition or results of operations. The Company cannot predict what environmental laws will be enacted or adopted in the future or how such future environmental laws will be administered or interpreted. The trend has been toward more stringent environmental standards. Compliance with more stringent environmental laws or more vigorous enforcement policies or stricter interpretation of current environmental laws could have a material adverse effect on the Company's financial condition or results of operation. On December 8, 1997, the Company experienced a fire at its hazardous waste storage tank farm in Bath, Pennsylvania. There were no injuries and no known environmental releases. As a result of the fire, the Company suspended its utilization of hazardous wastes as fuel and burned 100% coal in its kilns for the last three weeks of December and is continuing to do so while system repairs and engineering certification work is ongoing. The Company and the PADEP have entered a consent agreement which requires the Company to submit certain information and certificates before commencing waste fuel operations. Counsel has informed the Company that Keystone has complied fully with the consent agreement. The Company believes that the interruption of its hazardous waste fuels business as a result of the fire is covered by insurance; however, there can be no assurance the Company will recover its losses. The Company expects to incur a fine in addition to legal, consulting and other costs associated with this incident. See "Legal Proceedings." Safety and Health Matters. The Company's facilities and operations are governed by laws and regulations relating to worker health and workplace safety. The Company believes that appropriate precautions are taken to protect employees and others from harmful exposure to materials handled and managed at its facilities. The Company does not believe that it will be required in the near future to expend amounts that are material in the aggregate to the Company's overall operations by reason of such health and safety laws and regulations. Insurance. The Company maintains property insurance and other insurance such as business interruption and boiler and machinery insurance on all of its plants in types and amounts believed to be customary for companies engaged in similar operations. The Company also maintains environmental liability insurance policies which, under certain circumstances, provide coverage in the event of certain off-site environmental damage resulting from the facilities' on-site operations of $5.0 million per occurrence and $10.0 million annual aggregate at each of its cement manufacturing facilities. The policies contain a number of exclusions, including liabilities arising under CERCLA, fines and penalties. Employees. As of December 31, 1997, the Company employed approximately 435 people. Approximately 255 of the Company's employees are covered by contracts with labor unions which expire on April 30, 1998 and April 30, 2000. The Company considers relations with employees to be satisfactory. The Company has substantially reduced its work force from approximately 550 persons at December 31, 1991, to approximately 435 persons at December 31, 1997, through voluntary early retirement programs offered to certain groups of employees and other measures. The Company's cement manufacturing, hourly employees are represented by the United Paperworkers International Union ("UPIU"). During 1997, the Company reached a new three-year labor agreement with the hourly employees at Giant, granting annual wage increases averaging 3.2% over the ensuing three year period. The agreement between Keystone Cement Company and UPIU Local 10547 expires April 30, 1198. While the Company will endeavor to negotiate a new agreement between Keystone Cement and the union effective May 1, 1998, there can be no assurance that an agreement will be reached on terms favorable to the Company, nor can there be assurance that the Company will not incur work stoppages, slowdowns or a strike which could have a material adverse effect on the Company's results of operations. Trademarks. While the Company has trademarks registered with the United States and with certain states in which its products are sold, the Company believes that its products are sold primarily on the basis of price, and to a lesser extent, quality and service. Seasonal and Cyclical Business. Regional cement markets are highly cyclical, experiencing volatility corresponding to regional construction cycles. While the impact on the Company of regional downturns in the construction industry may be mitigated to some degree by the Company's presence in both the Middle-Atlantic and South-Atlantic markets, profitability is significantly affected by such construction cycles. In addition, the cement industry is seasonal in nature primarily due to the effect of weather conditions on construction activity. The Company has historically experienced lower operating income during the months of December, January and February, particularly with respect to its Pennsylvania operations where construction activity is more significantly affected by inclement weather. The cement industry is highly dependent upon the level of cement demand as a result of the high fixed costs associated with production. The Company's cost per ton of production is directly related to the number of tons of cement manufactured; decreases in production increase the Company's fixed cost per ton. Equipment utilization percentages or uptime can vary from year to year based upon demand for the Company's products or as a result of equipment failure. Much of the Company's significant manufacturing equipment requires long lead-times to replace and is very costly to replace or repair. The Company attempts to maintain sufficient spare parts inventories to avoid long periods of shutdown in the event of equipment failure, but there can be no assurance such shutdowns can be avoided. Financial Information About Foreign and Domestic Operations and Export Sales The Company does not export products in the normal course of operations; however, through its subsidiaries, it exports an insignificant amount of products from time to time. Disclosure Regarding Forward Looking Statements The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward looking statements. Certain information in Items 1, 3 and 7 of this Form 10-K include information that is or could be considered to be forward looking, such as the Company's development of techniques to increase the proportion of higher revenue waste solids used in its resource recovery activities, its exposure to foreign imports, its anticipated liquidity and capital requirements, and the results of legal proceedings. The matters referred to in forward looking statements could be affected by the risks and uncertainties involved in the Company's business. These risks and uncertainties include, but are not limited to: the effect of national, regional and local economic conditions, changes in the level of housing starts or commercial, industrial and infrastructure construction spending, increases in cement supplies in relation to demand, possible increases in shipping rates or interruptions in shipping service, the level and volatility of interest rates, the impact of current, pending, or future federal, state and local legislation, policies and regulations, interruptions in waste fuel supplies, the loss of any operating permits or other disruptions of the Company's ability to utilize waste fuels, as well as certain other risks described above in this Item under "Competition", "Environmental Matters" and "Seasonal and Cyclical Business", and below in Item 3 in "Legal Proceedings" and in Item 7 in "Management's Discussion and Analysis of Financial Condition and Results of Operations ." Subsequent written and oral forward looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the cautionary statements in this paragraph and elsewhere in this Form 10-K. Executive Officers of the Registrant Set forth below are the executive officers of the Company, together with their ages, their positions with the Company and the year in which they first became an officer of the Company or its subsidiaries. Gary L. Pechota, 48, has served as Chairman, President, Chief Executive Officer and a director of the Company since its inception in April 1994. Mr. Pechota also has served as President of Giant since January 1993 and as President of Keystone since May 1992. Prior to joining Keystone, Mr. Pechota served as President and Chief Executive Officer of Dacotah Cement Company, a state-owned cement company, from January 1982 to May 1992. Mr. Pechota has been employed in the cement industry for over 16 years. Terry L. Kinder, 39, has served as Vice President, Chief Financial Officer, Secretary, Treasurer and a director of the Company since April 1994. Mr. Kinder has served as Vice President, Secretary and Treasurer of Giant Group, Ltd. ("GROUP"), the Company's former parent, from June 1986 to September 29, 1994. From June 1989 to December 1992, Mr. Kinder also served as President of Giant and from June 1989 to April 1992, he served as President of Keystone. Prior to joining GROUP, Mr. Kinder was a Certified Public Accountant with Coopers & Lybrand L.L.P. from January 1980 to June 1986. Richard A. Familia, 45, has served as Vice President, Environmental Affairs of the Company since April 1994. Mr. Familia has also served as President and Chief Operating Officer of GRR since February 1992. From 1987 to February 1992, he served as Director of Operations for various operating facilities of Laidlaw Environmental Services, Inc., a publicly-held company engaged in various environmental and other businesses. Mr. Familia has been employed in the environmental industry for over 20 years. ITEM 2. PROPERTIES Harleyville, South Carolina Cement Plant. The Company owns approximately 2,100 acres of land near Harleyville, South Carolina, where Giant's plant and the quarry for its primary raw material are located. Giant's manufacturing plant includes crushing, raw grinding, finished cement grinding and other cement processing facilities. The ages of the plant kilns range from 22 to 45 years. Bath, Pennsylvania Cement Plant. The Company owns approximately 1000 acres of land located in the Bath, Pennsylvania area, where Keystone's plant and the quarries for its primary raw material are located. The plant includes crushing, raw grinding, finished cement grinding and other cement processing facilities. One of its cement kilns was installed in 1956 and the other in 1966. The Company's manufacturing facilities have an annual rated clinker capacity of approximately 1.4 million tons and an annual rated cement grinding capacity of 1.7 million tons. The Company believes that these facilities are adequately maintained and suitable for its purposes. Other Properties. The Company's and Giant's headquarters are located in leased space in Summerville, South Carolina. The Company also operates a distribution facility on its land in Durham, North Carolina, which has storage facilities for approximately 775 tons of cement, and rents warehouse space in Atlanta , Georgia, as well as in Durham and Charlotte, North Carolina. Keystone's offices are located in leased space in Bath, Pennsylvania. The majority of the Company's assets are pledged as collateral under the terms of financing agreements. (See Note 6 of Notes to Consolidated Financial Statements) ITEM 3. LEGAL PROCEEDINGS On December 8, 1997, the resource recovery operation at Keystone Cement Company, a wholly-owned subsidiary of Giant Cement Holding, Inc., experienced a fire at its waste fuel storage tank farm. There were no injuries and no known environmental damage. Immediately after the incident, Keystone ceased utilization of waste fuels and later entered into a negotiated consent agreement with the PADEP to halt the use of waste fuels at its plant pending an investigation of the cause and determination of the appropriate corrective actions to ensure that a similar incident does not occur in the future. A report on the findings and recommended corrective actions was submitted to the PADEP on December 31, 1997. Management has estimated that costs relating to this matter total $1.4 million. These charges were fully accrued at December 31, 1997. In general, violations of the permit conditions or of the environmental regulations, even if immaterial or unintentional, may result in fines, shutdowns, remedial actions or revocation of the permits, the loss of any one of which could have a material adverse effect on the Company's results of operations. Keystone and the PADEP are negotiating to resolve all outstanding alleged violations of environmental statutes. In view of the early stage of negotiations and the inherent difficulty in predicting the outcome of these matters, management cannot estimate what the eventual outcome will be. In April 1995, the PADEP issued Keystone an air quality plan approval with new requirements for emission rates, operating conditions, and a risk assessment. While the new air quality plan approval left Keystone's waste fuel substitution rates intact, Keystone subsequently filed an appeal with the Pennsylvania Environmental Hearing Board (EHB) challenging certain permit conditions as outside the PADEP's authority, among other things. On March 11, 1997 the EHB entered a Partial Consent Adjudication in which Keystone and the PADEP agreed to a process to resolve all outstanding issues. Under the Consent Adjudication, Keystone agreed to perform a multipath risk assessment in accordance with a negotiated protocol and the PADEP agreed to process and publish a permit modification allowing Keystone to increase its hazardous waste fuel usage to 75% of its fuel needs if the risk assessment meets certain risk thresholds. Keystone completed the risk assessment and filed it and the permit modification with the PADEP. The PADEP has indicated its approval of the risk assessment. However, due to the December 8, 1997 incident, further action by the PADEP has been postponed to May 1, 1998. Keystone has been identified as a PRP under CERCLA at a site in Southington, Connecticut. According to the U. S. EPA Volumetric Ranking List, dated July 22, 1993, Keystone's percentage of waste disposed of at the site is .0302 percent (3.2 one-hundredths of a percent) of the total attributable to identifiable parties. Because liability under CERCLA is joint and several, the insolvency or discharge from liability of any other PRP could increase the Company's potential liability. Although no assurances can be given that this percentage represents a limitation on Keystone's liability, the Company believes that the final outcome of this matter will not have a material adverse effect on the Company's financial condition or results of operations. The basis for the Company's estimate as to the probable effect of these proceedings is its current analysis of such proceedings. Should the determination of these proceedings be adverse to the Company, such result could have a material adverse effect on the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information included in the section entitled "Market and Dividend Information" in the 1997 Annual Report is incorporated herein by reference. ITEM 6. SELECTED FINANCIAL DATA The information included in the section entitled "Five-Year Summary of Consolidated Financial Data" in the 1997 Annual Report is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information included in the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the 1997 Annual Report is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements of the Company, quarterly results of operations, and the Report of Independent Accountants, appearing in the 1997 Annual Report, are incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEMS 10, 11, 12 and 13. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; EXECUTIVE COMPENSATION; SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT; AND CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information required by these items, other than information set forth in this Form 10-K under Item I, "Executive Officers of Registrant," is omitted because the Company is filing a definitive proxy statement pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Report which includes the required information. The required information contained in the Company's proxy statement is incorporated herein by reference. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) Documents Filed as Part of this Report: (1) The following financial statements of Giant Cement Holding, Inc. required to be filed as part of this Report on Form 10-K are incorporated herein by reference to the 1997 Annual Report, attached hereto as Exhibit 13: Report of Independent Accountants Consolidated Balance Sheets, December 31, 1997 and 1996 Consolidated Statements of Income, for the years 1997, 1996 and 1995 Consolidated Statements of Cash Flows, for the years 1997, 1996 and 1995 Consolidated Statements of Shareholders' Equity, for the years 1997, 1996, and 1995 Notes to Consolidated Financial Statements Five-Year Summary of Consolidated Financial Data Quarterly Results of Operations Management's Discussion and Analysis of Financial Condition and Results of Operations Market and Dividend Information (2) The following financial statement schedule of GIANT CEMENT HOLDING, INC. is attached: Schedule II - Valuation and Qualifying Accounts - Years ended December 31, 1997, 1996 and 1995 Report of Independent Accountants (b) Exhibits Exhibit No. Description of Exhibit 2.1 Form of Agreement and Plan of Merger between the Company and Solite Corporation (Filed as Exhibit 6(a)(2) to the Company's Registration Statement on Form S-4 dated September 30, 1997 and incorporated herein by reference). *2.2 Form of Amendment to the Agreement and Plan of Merger between the Company and Solite Corporation. 3.1 Certificate of Incorporation (Exhibit 3.1 to Registration No. 33-78260 is incorporated herein by reference). 3.2 By-Laws (Exhibit 3.2 to Registration No. 33-78260 is incorporated herein by reference). 4 Specimen form of stock certificate for Common Stock (Exhibit 4 to Amendment 3 to Registration No. 33-78260 is incorporated herein by reference). 10.1 Registrant's 1994 Employee Stock Option Plan (Exhibit 10.1 to Registration No. 33-78260 is incorporated herein by reference). 10.2 Registrant's 1994 Outside Director Stock Option Plan (Exhibit 10.2 to Registration No. 33-78260 is incorporated herein by reference). 10.3 Form of Employment Agreement between the Company and Gary L. Pechota, as amended (Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, is incorporated herein by reference). 10.4 Form of Employment Agreement between the Company and Terry L. Kinder, as amended (Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, is incorporated herein by reference). *10.5 Form of Employment Agreement between the Company and Richard A. Familia. 10.6.1 Loan and Security Agreement, dated November 23, 1993, between Giant and The CIT Group/Equipment Financing, Inc. ("CIT") (Exhibit 10.5.1 to Registration No. 33-78260 is incorporated herein by reference). 10.6.2 Secured Promissory Note, date November 23, 1993, from Giant to CIT (Exhibit 10.5.2 to Registration No. 33-78260 is incorporated herein by reference). 10.6.3 South Carolina Mortgage and Security Agreement, dated November 23, 1993, between Giant and CIT (Exhibit 10.5.3 to Registration No. 33-78260 is incorporated herein by reference). 10.6.4 Continuing Guarantee Agreement, dated November 23, 1993, between Giant and CIT (Exhibit 10.5.4 to Registration No. 33-78260 is incorporated herein by reference). 10.6.5 Collateral Value Maintenance Agreement, dated November 23,1993, between Giant and CIT (Exhibit 10.5.5 to Registration No. 33-78260 is incorporated herein by reference). 10.6.6 Form of First Amendment to Loan and Security Agreement between Giant and CIT (Exhibit 10.5.6 to Amendment 4 to Registration No. 33-78260 is incorporated herein by reference). 10.6.7 Form of Continuing Guaranty Agreement by the Company in favor of CIT (Exhibit 10.5.7 to Amendment 4 to Registration No. 33-78260 is incorporated herein by reference). 10.6.8 Form of Second Amendment to Loan and Security Agreement between Giant and CIT. 10.6.9 Secured Promissory Note, dated August 31, 1995, from Giant to CIT. Exhibit No. Description of Exhibit 10.7 Form of Release and Indemnification Agreement between GROUP, KCC Delaware Company, and the Company (Exhibit 10.7 to Amendment 5 to Registration No. 33-78260 is incorporated herein by reference). 10.8.1 Tax Sharing Agreement, dated November 23, 1993, between the Company and GROUP (Exhibit 10.6.4 to Registration No.33-78260 is incorporated herein by reference). 10.8.2 Form of Tax Sharing and Indemnification Agreement between the Company and GROUP (Exhibit 10.6.5 to Amendment 3 to Registration No. 33-78260 is incorporated herein by reference). 10.9 Credit Agreement, dated December 20, 1996, between GCHI, Giant, Keystone, GRR, GCHI Investments and Giant NC and SouthTrust Bank of Alabama (Exhibit 10.8 to the Company's 1996 10-K is incorporated herein by reference). *13 Copy of the Company's Annual Report to Shareholders for the Year ended December 31, 1997. *21 List of Subsidiaries. *23(a) Consent of Coopers & Lybrand L.L.P. *27 Financial Data Schedule *Filed herewith (c) Reports filed on Form 8-K: During the quarter ended December 31,1997, the Company filed the following report on Form 8-K: Report filed on January 21, 1998 for an event of December 8, 1997 reporting in Item 5 therein Keystone Cement Company's ceasing utilization of waste fuels due to a fire in a waste fuel storage tank. (d) Exhibits Required by Item 601 of Regulation S-K: Described in Item 14 (b) of this Annual Report on Form 10-K. (e) Separate Financial Statements and Schedules Not applicable. SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY UNDERSIGNED, THEREUNTO DULY AUTHORIZED. Giant Cement Holding, Inc. Registrant Date: March 25, 1998 By: /S/ Gary Pechota ----------------- Gary Pechota Chairman PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED. Date: March 25, 1998 By: /S/Gary Pechota ------------------- Gary Pechota Chairman of the Board, President and Chief Executive Officer (Director and Principal Executive Officer) Date: March 25, 1998 By: /S/Terry L. Kinder ------------------- Terry L. Kinder Vice President and Chief Financial Officer Secretary and Treasurer (Director and Principal Financial and Accounting Officer) Date: March 25, 1998 By: /S/Dean M. Boylan ------------------- Dean M. Boylan Director Date: March 25, 1998 By: /S/Edward Brodsky ------------------- Edward Brodsky Director Date: March 25, 1998 By: /S/Robert L. Jones ------------------- Robert L. Jones Director ANNUAL REPORT ON FORM 10-K YEAR ENDED DECEMBER 31, 1997 ITEM 14(a) (2) FINANCIAL STATEMENT SCHEDULE GIANT CEMENT HOLDING, INC. GIANT CEMENT HOLDING, INC. SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS COL. A COL. B COL. C COL. D COL. E - ------ ------ ------ ------ ------ Additions Balance at Charged to Beginning Costs and Balance at End Description of Period Expenses Deductions(1) of Period - ----------- --------- -------- ------------ --------- Year ended December 31, 1997 Deducted from related current asset accounts: Accounts receivable: Allowance for doubtful accounts $ 836,000 $ 238,000 $ 225,000(1) $ 849,000 Allowance for cash discounts 287,000 1,820,000 1,631,000(2) 476,000 ---------- ----------- ----------- ----------- $1,123,000 $ 2,058,000 $ 1,856,000 $ 1,325,000 ========== =========== =========== =========== Year ended December 31, 1996 Deducted from related current asset accounts: Accounts receivable: Allowance for doubtful accounts $ 750,000 $ 344,000 $ 258,000(1) $ 836,000 Allowance for cash discounts 223,000 2,389,000 2,325,000(2) 287,000 ---------- ----------- ----------- ----------- $ 973,000 $ 2,733,000 $ 2,583,000 $ 1,123,000 =========== =========== =========== =========== Year ended December 31, 1995 Deducted from related current asset accounts: Accounts receivable: Allowance for doubtful accounts $ 775,000 $ 157,000 $182,000(1) $ 750,000 Allowance for cash discounts 219,000 1,942,000 1,938,000(2) 223,000 ----------- ----------- ----------- ----------- $ 994,000 $ 2,099,000 $ 2,120,000 $ 973,000 =========== =========== =========== =========== Notes: (1) Uncollectible accounts written off, net of recoveries. (2) The Company's normal payment terms allow a $1 per ton discount for payment by the 10th day of the month following shipment (net 30), which the Company believes is a standard industry practice. The deductions above represent cash discounts allowed for prompt payment and other allowances. REPORT OF INDEPENDENT ACCOUNTANTS Board of Directors and Shareholders Giant Cement Holding, Inc.: Our report on the consolidated financial statements of Giant Cement Holding, Inc. has been incorporated by reference in this Form 10-K from the 1997 Annual Report to Shareholders of Giant Cement Holding, Inc. In connection with our audits of such financial statements, we have also audited the related financial statement schedule listed in the index of this Form 10-K. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. Coopers & Lybrand, L.L.P. March 30, 1998 GIANT CEMENT HOLDING, INC. EXHIBITS TO FORM 10-K FOR FISCAL YEAR ENDED DECEMBER 31, 1997 EXHIBIT INDEX Exhibit No. Description of Exhibit 2.2 Amendment to the Agreement and Plan of Merger between the Company and Solite Corporation 10.5 Form of Employment Agreement between the Company and Richard A. Familia 13 Copy of the Company's Annual Report to Shareholders for the Year ended December 31, 1997 21 List of Subsidiaries 23(a) Consent of Coopers & Lybrand L.L.P. 27 Financial Data Schedule EX-2 2 Exhibit 2.2 Amendment to the Agreement and Plan of Merger between the Company and Solite Corporation AMENDMENT NO. 3, dated as of February 26, 1998 (the "Amendment') to the AGREEMENT AND PLAN OF MERGER, dated as of September 10, 1997, as amended (the "Merger Agreement") by and between Giant Cement Holding, Inc. (the "Parent"), GCHI Acquisition Corp. (the "Acquisition Sub"), and Solite Corporation (the "Company"). RECITALS Parent, Acquisition Sub, and the Company have heretofore entered into the Merger Agreement and now desire to amend certain provisions thereof. NOW, THEREFORE, in consideration of the premises and of the mutual covenants, representations, warranties and agreements contained herein the parties agree as follows: 1. Amendments. (a) Section 2.1 (a)(i) shall be deleted in its entirety and the following inserted in lieu thereof: "a number of shares of the voting common stock, par value $.01 per share (the "Parent Common Stock"), of the Parent, payable upon the surrender of the certificate formerly representing such share of Company Common Stock, equal to the quotient derived by dividing (A) 325,000 minus the number of shares to be placed in the Escrow Account and the Indemnity Escrow Account described below, by (B) the number of outstanding shares of Company Common Stock at the Closing (hereinafter referred to collectively, as the "Outstanding Stock")." (b) Section 2.2(b) shall be deleted in its entirety and the following inserted in lieu thereof: "Promptly after the Effective Time, the Parent shall (i) deliver to the escrow agent (the "Escrow Agent") under the escrow agreement dated the Effective Date, substantially in the form attached hereto as Exhibit B, a certificate representing 75,000 shares of Parent Common Stock (the "Escrow Account") to be held pursuant to such escrow agreement for dissemination pursuant to Section 2.4(c), and (iii) deliver to the escrow agent (the "Indemnity Escrow Agent") under the escrow agreement dated the Effective Time, substantially in the form of Exhibit C, a certificate representing 75,000 shares of Parent Common Stock (the "Indemnity Escrow Account") to be held pursuant to the provisions of Section 9.4. The shares of Parent Common Stock shall be deemed to have been issued at the Effective Time." (c) Section 2.4(c) shall be deleted in its entirety and the following inserted in lieu thereof: "If the consolidated net book value of the Company reflected in the Final Closing Balance Sheet is less than $4.5 million, then (i) the Parent shall be entitled to receive from the Escrow Account and to cancel the number of whole shares of Parent Common Stock as shall equal the quotient derived by dividing (A) the amount by which $4.5 million exceeds the consolidated net book value of the Company reflected in the Final Closing Balance Sheet by (B) $22 per share of Parent Common Stock, and (ii) subject to Section 2.4(d), the balance of the shares of Parent Common Stock in the Escrow Account shall be available immediately for distribution pursuant to Section 2. 1 (a)(ii). If the consolidated net book value of the Company reflected in the Final Closing Balance Sheet is more than $4.5 million, then, subject to Section 2.4(d), all the shares of Parent Common Stock in the Escrow Account shall be available immediately for distribution pursuant to Section 2.1(a)(ii). For purposes of calculating net book value, no effect will be given to (i) up to $1,000,000 of valuation allowance recorded against the net deferred tax assets of the Company and (ii) the cost of the AF Old Container Management Handling Facility (estimated at $250,000), if the Company writes-off the cost of such facility." (d) Section 2.4(d) shall be deleted in its entirety and the following inserted in lieu thereof: "If the net current assets of the Company reflected in the Final Closing Balance Sheet is less than $5.0 million then (i) the Parent shall be entitled to receive from the Escrow Account and to cancel the number of whole shares of Parent Common Stock as shall equal the quotient derived by dividing (A) the amount by which $5.0 million exceeds the net current assets of the Company reflected in the Final Closing Balance Sheet by (B) $22 per share of Parent Common Stock, and (ii) subject to Section 2.4(c), the balance of the shares of Parent Common Stock in the Escrow Account shall be available immediately for distribution pursuant to Section 2.1(a)(ii). If the net current assets of the Company reflected in the Final Closing Balance Sheet is more than $5.0 million, then, subject to Section 2.4(c), all the shares of Parent Common Stock in the Escrow Account shall be available immediately for distribution pursuant to Section 2.l(a)(ii). For purposes of calculating net current assets no effect will be given to current installments to indebtedness for borrowed money in an aggregate amount not exceeding $20 million. For the purposes hereof net current assets shall be equal to (x) the sum of cash accounts receivable less than 60 days past due and inventories less (y) the sum of accounts payable, accrued expenses and other current liabilities." (e) Section 4.7 shall be deleted in its entirety and the following inserted in lieu thereof: "Except as set forth in the Parent's current report on Form 8-K , dated December 8, 1997 and except for this Agreement, there is no material agreement, judgment, injunction, order or decree binding upon the Parent or any of its subsidiaries which has or could reasonably be expected to have the effect of prohibiting or materially impairing the business practice of the Parent or any of its subsidiaries, acquisition of property by the Parent or any of its subsidiaries or the conduct of business by the Parent or any of its subsidiaries as currently conducted or as proposed to be conducted by the Parent. (f) Section 8.1(b) shall be deleted in its entirety and the following inserted in lieu thereof: "by either the Parent or the Company, if the Merger shall not have been consummated before April 30, 1998," (g) Section 9.4 shall be deleted in its entirety and the following inserted in lieu thereof: The shares of Parent Common Stock held in the Escrow Account and the Indemnity Escrow Account shall be available to satisfy the indemnification claims of Parent Claimants pursuant to this Section 9. The shares of Parent Common Stock in the Escrow Account shall be available to satisfy the indemnification claims of Parent Claimants to the extent such shares of Parent Common Stock have not been released pursuant to Section 2.4. Unless a claim or claims by Parent Claimants are then pending, in amounts in excess of the then value of 37,500 shares of Parent Common Stock, 37,500 shares of Parent Common Stock held in the Indemnity Escrow Account shall be released on the second anniversary of the Closing Date, and unless any claim or claims by Parent Claimants are then pending, the balance of the shares of Parent Common Stock held in the Indemnity Escrow Account shall be released on the third anniversary of the Closing Date. For the purposes of this Section 9.4, the value of Parent Common Stock shall be the average of the closing bid and asked prices per share of Parent Common Stock as quoted on NASDAQ for the twenty trading days immediately preceding any release of Parent Common Stock. Any dispute relating to or in respect of the rights of any Indemnitee to receive shares of Parent Common Stock from the Escrow Account or the Indemnity Escrow Account in satisfaction of an indemnification claim pursuant to 9.2 hereof (an "Indemnification Dispute") shall be submitted to, and resolved exclusively pursuant to arbitration in accordance with the commercial arbitration rules of the American Arbitration Association. Such arbitration shall take place in Richmond, Virginia and shall be subject to the substantive law of the State of Virginia. Decisions pursuant to such arbitration shall be final, conclusive and binding upon the parties. Upon the conclusion of arbitration, the parties may apply to any court of competent jurisdiction to enforce the decision pursuant to such arbitration. The parties hereto waive and shall not seek jury trial in any lawsuit, proceeding, claim, counterclaim, defense or other litigation or dispute relating to or in respect of an Indemnification Dispute. Neither party shall submit a dispute to arbitration before that party has sought to resolve the dispute through direct negotiation with the other party. If the dispute is not resolved within three weeks after a demand for direct negotiation, the parties shall attempt to resolve the dispute through mediation. If the parties do not promptly agree on a mediator, either party may request the then senior judge of the civil division of the Circuit Court for the City of Richmond, Virginia to appoint a mediator. If the mediator is unable to facilitate a settlement of the dispute within a reasonable period of time, as determined by the mediator, the mediator shall issue a written statement to the parties to that effect and either party may then submit the dispute to arbitration as provided herein. The fees and expenses of the mediator shall be shared equally by the parties. If the dispute is submitted to arbitration, the arbitrator shall award the prevailing or substantially prevailing party its expenses and costs, including costs of arbitration and reasonable attorney's fees. (h) Schedule A-1 to the Merger Agreement shall be amended as follows: (i) Section 2.1(a)(i)shall be deleted in its entirety and the following inserted in lieu thereof: "a number of shares of the voting common stock, par value S.01 per share (the "Parent Common Stock"), of the Parent, payable upon the surrender of the certificate formerly representing such share of Company Common Stock, equal to the quotient derived by dividing (A) 325,000 minus the number of shares to be placed in the Escrow Account and the Indemnity Escrow Account described below, by (B) the number of outstanding shares of Company Common Stock at the Closing (hereinafter referred to collectively, as the "Outstanding Stock")." (ii) Section 2.2(b) shall be deleted in its entirety and the following inserted in lieu thereof: "Promptly after the Effective Time, the Parent shall (i) deliver to the escrow agent (the "Escrow Agent") under the escrow agreement dated the Effective Date, a certificate representing 75,000 shares of Parent Common Stock (the "Escrow Account") to be held pursuant to such escrow agreement for dissemination pursuant to Section 2.4(c), and (iii) deliver to the escrow agent (the "Indemnity Escrow Agent") under the escrow agreement dated the Effective Time, a certificate representing 75,000 shares of Parent Common Stock (the "Indemnity Escrow Account") to be held pursuant to the provisions of Section 9.4 of the Agreement and Plan of Merger, dated September 10, 1997, as amended among Parent, Acquisition Sub and the Company. The shares of Parent Common Stock shall be deemed to have been issued at the Effective Time." (iii) Section 2.4(c) shall be deleted in its entirety and the following inserted in lieu thereof: "If the consolidated net book value of the Company reflected in the Final Closing Balance Sheet is less than $4.5 million, then (i) the Parent shall be entitled to receive from the Escrow Account and to cancel the number of whole shares of Parent Common Stock as shall equal the quotient derived by dividing (A) the amount by which $4.5 million exceeds the consolidated net book value of the Company reflected in the Final Closing Balance Sheet by (B) $22 per share of Parent Common Stock, and (ii) subject to Section 2.4(d), the balance of the shares of Parent Common Stock in the Escrow Account shall be available immediately for distribution pursuant to Section 2.l(a)(ii). If the consolidated net book value of the Company reflected in the Final Closing Balance Sheet is more than $4.5 million, then, subject to Section 2.4(d), all the shares of Parent Common Stock in the Escrow Account shall be available immediately for distribution pursuant to Section 2.1(a)(ii). For purposes of calculating net book value, no effect will be given to (i) up to $ 1,000,000 of valuation allowance recorded against the net deferred tax assets of the Company and (ii) the cost of the AF Old Container Management Handling Facility (estimated at $250,000), if the Company writes-off the cost of such facility." (iv) Section 2.4(d)shall be deleted in its entirety and the following inserted in lieu thereof: "If the net current assets of the Company reflected in the Final Closing Balance Sheet is less than $5.0 million, then (i) the Parent shall be entitled to receive from the Escrow Account and to cancel the number of whole shares of Parent Common Stock as shall equal the quotient derived by dividing (A) the amount by which $5.0 million exceeds the net current assets of the Company reflected in the Final Closing Balance Sheet by (B) $22 per share of Parent Common Stock, and (ii) subject to Section 2.4(c), the balance of the shares of Parent Common Stock in the Escrow Account shall be available immediately for distribution pursuant to Section 2.1 (a)(ii). If the net current assets of the Company reflected in the Final Closing Balance Sheet is more than $5.0 million, then, subject to Section 2.4(c), all the shares of Parent Common Stock in the Escrow Account shall be available immediately for distribution pursuant to Section 2.1(a)(ii). For purposes of calculating net current assets no effect will be given to current installments to indebtedness for borrowed money in an aggregate amount not exceeding $20 million. For the purposes hereof, net current assets shall be equal to (x) the sum of cash, accounts receivable less than 60 days past due and inventories less (y) the sum of accounts payable, accrued expenses and other current liabilities." 2. Definitions. Capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed to them in the Merger Agreement. 3. Terms of Merger Agreement. Except as amended hereby , all of the terms of the Merger Agreement shall remain in full force and effect and are hereby confirmed in all respects. 4. Counterparts. This Amendment may be executed in one or more counterparts, each of which shall be deemed to constitute an original. 5 . Governing Law. This Amendment shall be governed by, and construed in accordance with the laws of the Commonwealth of Virginia without giving effect to the provisions thereof relating to the conflict of laws. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be executed in counterparts by their duly authorized officers, all as of the day and year first written above. SOLITE CORPORATION By: /s/ J. J. Jewett, III. J. J. Jewett, III. Vice President and Secretary By: /s/ Terry L. Kinder Terry L. Kinder Vice President and Chief Financial Officer GCHI ACQUISITION CORP. By: /s/ Terry L. Kinder Terry L. Kinder Vice President and Chief Financial Officer EX-10 3 Exhibit 10.5 Form of Employment Agreement between the Company and Richard A. Familia EMPLOYMENT AGREEMENT AGREEMENT, dated as of October 30, 1997, by and between GIANT CEMENT HOLDING, INC., a Delaware corporation (the "Company"), and RICHARD FAMILIA (the "Executive"). WHEREAS, the Company and the Executive wish to obtain assurances from each other that the Company will have the benefit of the Executive's services; NOW THEREFORE, in consideration of the foregoing and the mutual agreements contained herein, the Company and the Executive agree as follows: 1. Employment. The Company hereby employs the Executive as its Vice President, Environmental Affairs and as President of its subsidiary Giant Resource Recovery Company, Inc. and the Executive accepts such employment and agrees to perform services for the Company for the Term (as defined in Section 2 hereof) and upon the other terms and conditions set forth in this Agreement. 2. Term. The term of the Executive's employment hereunder (the "Term") shall be for a period commencing as of the date of this Agreement and terminating on December 31, 2000, subject to earlier termination as hereafter specified. This Agreement shall be automatically extended for one (1) year terms unless the Company or the Executive gives the other written notice that the Agreement is terminated prior to June 30, 2000 or thereafter on the applicable anniversary date. 3. Position and Duties. 3.01 Service with the Company. The Executive agrees to perform such executive employment duties for the Company and its subsidiaries consistent with the positions specified in Section 1 hereof and as the Chairman of the Board, the President or the Board of Directors of the Company (the "Board") shall assign to him from time to time. The executive also agrees to serve, during the Term hereof, as requested by the Board, and without any additional compensation, as a Director of the Company's subsidiaries. 3.02 Performance of Duties. The Executive agrees to serve the Company faithfully and to the best of his ability and to devote the time, attention and efforts necessary to advance the business and affairs of the Company and its subsidiaries during the Term of this Agreement. During the Term hereof, the Executive shall not serve as an officer, employee, proprietor, or partner (excluding a non-executive capacity which will not conflict with his duties herein) to any other corporation or other entity not affiliated with the Company without the prior written consent of the Board. 4. Compensation. 4.01 Base Salary. As compensation for all services to be rendered by the Executive under this Agreement, the Company shall pay the Executive an initial base annual salary (the "Base Salary") of $118,000. The Base Salary shall be paid in installments in accordance with the Company's normal payroll procedures and policies. In addition, on an annual basis, the Chief Executive Officer shall review the Base Salary with a view toward increases, bonuses or both, based upon the Executive's performance during the preceding year or pursuant to guidelines established by the Compensation Committee. 4.02 Stock Options. As an incentive to enter into this Agreement, the Executive shall be entitled to stock options for the purchase of shares of the Company's Common Stock exercisable over a five (5) year period, pursuant to the 1994 Employee Stock Option Plan. The Executive may be granted additional stock options as determined by the Stock Option Committee of the Board. 4.03 Participation in Benefit Plans. The Executive shall also be entitled, to the extent that his position, title, tenure, salary, age, health and other qualifications make him eligible, to participate in all employee benefit plans or programs (including, but not limited to, medical/dental and life insurance, disability, stock option, retirement and pension plans, vacation time, sick leave and holidays) of the Company currently in existence on the date hereof or as may hereafter be instituted from time to time. The Executive's participation in any such plan or program shall be subject to the provisions, rules and regulations applicable thereto. The Executive shall make himself available for medical examinations in connection with the Company obtaining insurance on the life of the Executive. 4.04 Expenses. In accordance with the Company's policies established from time to time, the Company shall pay or reimburse the Executive for all reasonable and necessary out-of-pocket expenses incurred by him in the performance of his duties under this Agreement, subject to the presentment of appropriate vouchers and receipts. The Company also shall provide the Executive with an automobile of the type commensurate with the Executive's position. 5. Confidential Information. Except as permitted or directed by the Board, the Executive shall not during the Term of this Agreement nor at any time thereafter divulge, furnish or make accessible to anyone for use in any way (other than in the ordinary course of the business of the Company) any confidential or secret knowledge or information of the Company (for the purposes of this Section 5 and Section 6 hereof, the term "Company" shall be deemed to include any subsidiary or affiliate of the Company, including, but not limited to, Giant Cement Company, Keystone Cement Company and Giant Resource Recovery Company, Inc.) which the Executive has acquired or become acquainted with or will acquire or become acquainted with prior to the termination of the Term of his employment by the Company, whether developed by himself or by others, concerning any trade secrets, confidential or secret designs, processes, formulae, plans, devices or material (whether or not patented or patentable) directly or indirectly useful in any aspect of the business of the Company, and confidential customer or supplier lists of the Company, or any confidential or secret development or research work of the Company or any other confidential or secret aspects of the business of the Company. The Executive acknowledges that the above-described knowledge or information constitutes a unique and valuable asset of the Company acquired at great time and expense by the Company, and that any disclosure or other use of such knowledge or information other than for the sole benefit of the Company would be wrongful and would cause irreparable harm to the Company. Both during and after the Term of this Agreement, the Executive shall refrain from any acts or omissions that would reduce the value of the use of such knowledge or information to the Company. The foregoing obligations of confidentiality, however, shall not apply to any knowledge or information which is now published or which subsequently becomes generally publicly known, other than as a direct or indirect result of the breach of this Agreement by the Executive. 6. Non-Competition. 6.01 Prohibition. The Executive agrees that for a period of one (1) year following the termination of his employment hereunder he shall not act as an officer, director, stockholder, partner, employee or consultant to a corporation, partnership or other entity which engages in a business competitive to the business that the Company is engaged in at the time the Executive ceased to be an employee of the Company or within six (6) months prior to the cessation of his employment hereunder, and which is located in area within a three hundred (300) mile radius of any cement plant or other major facility owned or operated by the Company at the time the Executive ceased to be an employee of the Company. 6.02 Application. The restrictions in this Section 6 shall not apply (i) with respect to a passive investment by the Executive of less than five percent (5%) of the outstanding shares of capital stock of any corporation, (ii) with respect to employment by the Executive with an entity in a management capacity in an area of business which is not, directly or indirectly, competitive with that of the Company, (iii) if the Executive's employment is terminated by the Company other than pursuant to Section 7.03 or by the Executive for Good Reason pursuant to Section 7.04 hereof or (iv) if the Company gives written notice to the Executive that the Agreement is terminated, pursuant to Section 2 hereof. 7. Termination. 7.01 By Death or Disability of the Executive. This Agreement shall automatically terminate in the event of the death or disability of the Executive. For purposes of this Agreement, "disability" shall mean a condition, due to illness or injury, either physical or mental, subject to which the Executive is unable to perform his customary duties and responsibilities as required by this Agreement for more than six (6) months in the aggregate out of any period of twelve (12) consecutive months. The determination that the Executive is disabled will be made by the Executive Committee, based upon the examination and certification by a qualified physician selected by the Company and subject to the Executive's approval. 7.02 Payment on Death or Disability. In the event this Agreement is terminated by reason of death of the Executive, the Company shall pay the representative of the Executive an amount equal to twice his then current Base Salary (less any disability insurance benefits previously paid to the Executive from disability policies provided by the Company) which payment shall be made within sixty (60) days after the date of death. The foregoing death benefit shall be in addition to any life insurance proceeds payable to the Executive's estate on policies taken by the Company or any subsidiary thereof. In the event this Agreement is terminated by reason of the disability of the Executive, the Company shall pay the Executive an amount equal to twice his then current Base Salary (less any disability insurance benefits paid to the Executive from disability policies provided by the Company), in twelve (12) equal monthly installments commencing no more than thirty (30) days after such termination. 7.03 By the Company for Cause. The Company may terminate this Agreement for cause at any time. For purposes of this Section 7.03, the term "cause" shall be limited to (i) the willful engaging by the Executive in gross misconduct which is materially injurious to the Company, with written notice of specific misconduct given to the Executive, (ii) the conviction of the Executive of a crime involving any financial impropriety or other crime which would materially interfere with the Executive's ability to perform his services required under this Agreement or otherwise be materially injurious to the Company or (iii) the willful breach by the Executive of any of his material obligations under this Agreement without proper justification, which breach is not cured within ten (10) days after written notice thereof from the Company. For the purposes of this Section 7.03 and Section 6.02 hereof, no act, or failure to act, on the Executive's part shall be considered willful unless done, or admitted to be done, by the Executive in bad faith and without reasonable belief that such action or omission was in the best interest of the Company. In the event this Agreement is terminated pursuant to the Section 7.03, the Executive shall not be entitled to any compensation other than his then current Base Salary which has accrued though his date of termination, subject to the Company's right of offset based upon acts of the Executive which gave rise to the termination. 7.04 By the Executive for Good Reason. (a) The Executive may terminate this Agreement at any time for good reason (as defined in Subsection (b) below). In the event that the Executive terminates this Agreement pursuant to this Section 7.04, or should the Company terminate this Agreement other than pursuant to Section 7.03 hereof, the Executive shall receive a severance allowance equal to the greater of (i) his then current Base Salary for twelve (12) months or (ii) the Base Salary for the remainder of the then Term of this Agreement, which payments shall be in equal monthly installments. (b) "Good Reason" shall mean, without the Executive's express written consent, any of the following circumstances, unless in the case of paragraphs (i), (iv), or (v) immediately below such circumstances are fully corrected prior to the date of termination specified in the notice of termination, given in respect thereof; (i) the assignment to the Executive of any duties inconsistent with his status as the Vice President, Environmental Affairs of the Company or a substantial adverse alteration in the nature or status of his responsibilities from those in effect immediately prior to a change in such duties or responsibilities; (ii) a reduction by the Company in the Executive's Base Salary as then in effect, except for across-the-board salary reductions similarly affecting all senior executives of the Company and all senior executives of any entity in control of the Company; (iii) the failure by the Company to pay to the Executive any portion of his current compensation except pursuant to an across-the-board compensation deferral similarly affecting all senior executives of the Company and all senior executives of any entity in control of the Company; (iv) the failure by the Company to continue in effect any compensation plan in which the Executive participates which is material to the Executive's total compensation, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or the failure by the Company to continue the Executive's participation therein (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount of benefits provided and the level of the Executive's participation relative to other participants, than the Executive's participation as it existed at the time of a change in any such plan; (v) the failure by the Company to continue to provide the Executive with benefits substantially similar to those enjoyed by him under any of the Company's medical/dental and life insurance, disability, retirement or pension plans in which he was participating, or the taking of any action by the Company which would, directly or indirectly, materially reduce any of such benefits or deprive the Executive of any material fringe benefit enjoyed by him, or the failure by the Company to provide the Executive with the number of paid vacation days to which he is entitled on the basis of years of service with the Company in accordance with the Company's normal vacation policy; (vi) the assignment of this Agreement by the Company pursuant to Section 9.05 hereof without the consent of the Executive; (vii) any purported termination of the Executive's employment which is not effected pursuant to the terms of this Agreement. 8. Injunctive Relief. The Executive agrees that it would be difficult to compensate the Company fully for damages for any violation of the provisions of this Agreement, including without limitation the provisions of Sections 5 and 6 hereof. Accordingly, the Executive specifically agrees that the Company shall be entitled to temporary and permanent injunctive relief to enforce the provisions of this Agreement. This provision with respect to injunctive relief shall not, however, diminish the right of the Company to claim and recover damages in addition to injunctive relief. 9. Miscellaneous. 9.01 Governing Law. This Agreement is made under and shall be governed by and construed in accordance with the laws of the State of Delaware, subject to any principles of conflict of laws. 9.02 Prior Agreements. This Agreement contains the entire agreement of the parties relating to the subject matter hereof and supersedes all prior agreements and understandings with respect to such subject matter, and the parties hereto have made no agreements, representations or warranties relating to the subject matter of this Agreement which are not set forth herein. 9.03 Withholding Taxes. The Company may withhold from any benefits payable under this Agreement all federal, state, city and other taxes as shall be required pursuant to any law or governmental regulation or ruling. 9.04 Amendments. No amendment or modification of this Agreement shall be deemed effective unless made in writing and signed by the party against whom enforcement of the amendment or modification is sought. Any written waiver shall not be deemed a continuing waiver unless specifically so stated and shall operate only as to the particular term, condition or act specified. 9.05 Binding; Assignment. This Agreement shall inure to the benefit of and be binding upon the parties hereto and their respective heirs, successors, administrators and permitted assigns. The Company may, without the consent of the Executive, assign its rights and obligations under this Agreement to any corporation, firm or other business entity (i) with or into which the Company may merge or consolidate, or (ii) to which the Company may sell or transfer all or substantially all of its assets or (iii) of which fifty percent (50%) or more of the equity investment and of the voting control is owned, directly or indirectly, by, or is under common ownership with, the Company; provided, however, that if the assignee was not previously part of a consolidated group with the Company, within thirty (30) days after receipt of written notice of the assignment the Executive may terminate this Agreement pursuant to Section 7.04 hereof, or the executive may terminate this Agreement pursuant to the terms of the Change of Control Agreement, dated October 30, 1997, by and between Giant Cement Holding, Inc. and the Executive. 9.06 Notices. Any notice, request, demand or other document to be given hereunder shall be in writing, and shall be delivered personally or sent by registered, certified or express mail or facsimile followed by mail as follows: If to the Company: Giant Cement Holding, Inc. 320-D Midland Parkway Summerville, SC 29485 Attention: Chief Financial Officer If to the Executive, to his or her last shown address on the books of the Company. or to such other address as either party hereto may hereinafter duly give to the other. 9.07. Severability. To the extent any provision of this Agreement shall be invalid or unenforceable, it shall be considered deleted here from and the remainder of such provision of this Agreement shall be unaffected and shall continue in full force and effect. In furtherance and not in limitation of the foregoing, should the duration or geographical extent of, or business activities covered by, any provision of this Agreement be in excess of that which is valid or enforceable under applicable law, then such provision shall be reconstructed to cover only that duration, extent or activities which may be valid and enforceable. IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year set forth above. GIANT CEMENT HOLDING, INC. By: _____________________________ Gary Pechota Chairman, President and CEO _____________________________ RICHARD FAMILIA EX-13 4 Exhibit 13 GIANT CEMENT HOLDING, INC. 1997 ANNUAL REPORT TO SHAREHOLDERS CORPORATE PROFILE GIANT CEMENT HOLDING, INC. manufactures and sells a complete line of portland and masonry cements used in residential, commercial and infrastructure construction applications. The Company is the 17th largest producer of cement in the United States. Its two manufacturing facilities are fully integrated from limestone mining through cement production and serve the rapidly growing South-Atlantic and the Middle-Atlantic regions of the United States. The Company pioneered resource recovery techniques for use in the manufacturing of cement and is one of the largest users of waste-derived fuels in the cement industry. Contents Financial Highlights, 1 Letter To Shareholders, 2 Business Review, 4 Consolidated Financial Statements, 6 Notes to Consolidated Financial Statements, 10 Report of Independent Accountants, 19 Management's Discussion and Analysis, 20 Corporate Information, 26 Directors and Officers, 28 FIVE-YEAR SUMMARY OF CONSOLIDATED FINANCIAL DATA 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- (amounts in thousands, except per share data) Income statement data: Total revenues $116,888 $110,198 $100,185 $ 90,802 $ 81,900 Gross profit 35,132 32,380 27,314 20,443 14,845 Operating income 26,409 24,539 19,767 13,752 8,725 Net income 16,085 15,421 12,715 9,195 5,148 Earnings per common share: Basic $ 1.70 $ 1.57 $ 1.27 $ .92 $ .51 Diluted $ 1.69 $ 1.57 $ 1.27 $ .92 $ .51 Cash dividends - - - - - Weighted average common shares outstanding 9,459 9,833 9,990 10,000 10,000 Balance sheet and other data: Working capital $ 29,778 $ 26,706 $ 17,539 $ 20,513 $ 12,228 Total assets 128,600 118,616 111,714 90,525 80,944 Long-term debt 10,549 11,751 15,525 8,403 9,312 Shareholders' equity 87,645 77,128 64,614 54,203 42,394 Return on beginning of year shareholders' equity 20.9% 23.9% 23.5% 21.7% 13.5% LETTER TO SHAREHOLDERS GIANT CEMENT HOLDING, INC. reported its fourth consecutive record year of earnings in 1997. The message this year is very similar to last year's. All aspects of the Company's business improved, margins continued to improve, and the balance sheet remains very strong. The Company's 14% return on sales and 21% return on equity rewarded investors as the stock price increased 40% for the second year in a row but still traded at a reasonable 13.5 times 1997 earnings. For the year, basic earnings per share increased 20% to $1.88, before special charges of $.18 per share, compared with $1.57 a year earlier. Record sales volume and revenue, record clinker and cement production and record waste fuel utilization all contributed to the increase in earnings. Revenues increased 6.1% to $116.9 million, up from $110.2 million in 1996. Operating income increased by 7.6% to $26.4 million, which represented a 22.6% operating margin. As a result of the strong operating performance, the Company was able to repurchase 387,000 shares of its common stock, fund capital expenditures of $15 million, significantly reduce its unfunded pension liability and still end the year with a healthy balance sheet. At year end, the Company's current ratio was 2.4, working capital was $30 million and cash totaled $12.7 million, $2.2 million more than the total debt of $10.5 million. We are pleased with the performance, and it is certainly our intention to continue to improve shareholder value. The Company believes the best use of its cash is to invest in its plants and purchase stock through its repurchase program. Since the Company went public in October 1994, over $50 million has been invested in its operations. We believe we have caught up on maintenance capital expenditures and are now in a position to focus more heavily on profit enhancement expenditures in the future, all of which we would expect to fund with internally-generated cash. In 1997, the Company's third $5 million buyback program was announced, and $2.3 million of that amount remains available. The Board continues to believe the periodic repurchasing of the Company's common stock represents a good use of available cash. The Company continues to cooperate with the Justice Department in connection with its planned acquisition of Solite and certain of its lightweight aggregate and block manufacturing operations. The Solite acquisition, at a cost of only 325,000 shares and the assumption of $20.0 million in debt, will increase the Company's revenues by approximately 45% and should be accretive to earnings per share in 1998 if the Company can consummate the merger. However, due to the basis in which the Company and Solite are pursuing clearance for the merger, the Department of Justice is requiring Solite to retain an investment banker, and to market the assets that the Company will acquire in the merger. If no bonafide purchaser results from the marketing efforts in 30 days, the Department of Justice has indicated that clearance for the merger would be granted. Keystone continues to work with the Pennsylvania Department of Environmental Protection ("DEP") to resolve their concerns related to the fire that occurred at Keystone's fuel storage tank farm in December. The process is taking longer than we would like; however, the safety of our employees and the surrounding communities is of utmost importance to us. We are hopeful that all of the DEP's concerns can be resolved and Keystone can resume utilization of resource recovery fuels early in the second quarter. The favorable fundamentals driving our industry are very much in place as we look to the future. The United States cement industry is operating at capacity and importing cement to meet customer demand. In addition, the new highway bill, if passed, will add approximately $6 billion to the current $22 billion program. This would be a tremendous benefit to the cement and construction industries since highway spending generally is more cement friendly than residential, commercial or other public outlays. Our markets, which serve the rapidly growing South-Atlantic and Middle-Atlantic regions of the eastern United States, remain vibrant. We are optimistic that the price increases of $4 per ton for Keystone and $3 per ton for Giant, both effective April 1, 1998, will hold; and we expect to sell out at both plants. Demand for cement is expected to exceed U. S. capacity for at least the next five years. Cement selling prices would have to increase substantially to provide an adequate return on investment for a greenfield plant. As a result, only modest increases in U. S. capacity are expected through the year 2001. In summary, we are pleased with the results achieved during 1997 and expect 1998 to be another good year. Inventory levels are reasonably good, and we expect to sell out the production of both plants. While we have demonstrated our ability to increase production and control costs, our goal is to improve further upon shareholders' long-term returns. We appreciate the efforts of our employees and the support of our customers and shareholders in making 1997 a successful year. Gary Pechota Chairman, President and Chief Executive Officer March 27, 1998 BUSINESS REVIEW Generally strong economic conditions contributed to near record cement consumption in 1997, allowing for another record year of profits for the cement industry. Giant Cement Holding, Inc. was able to capitalize on strong industry fundamentals increasing revenues by 6% to $116.9 million. Gross margins improved to 30%, while operating margins approached 23%. Net income in 1997 was $16.1 million, compared with $15.4 million in 1996. Net income in 1997 was reduced by after-tax charges of $900,000 relating to a fire at Keystone and $800,000 relating to the Solite acquisition. Cement sales volume increased 1% for the year with the increase coming in the Middle-Atlantic market (Keystone Cement). Shipments in the South-Atlantic market (Giant Cement) were level with last year but both Giant and Keystone were able to sell out their plant production. A slight pricing improvement in the South-Atlantic market and a 6% increase in the pricing in the Middle-Atlantic market contributed to the product sales revenue increase of 5% to $100.1 million. The supply/demand balance continues to remain tight in the South-Atlantic region with a very significant improvement in the Middle-Atlantic region. The Company announced a $4 per ton price increase at Keystone and a $3 per ton price increase at Giant, both effective April 1, 1998. We believe the price increases will hold. During 1997 the Company was successful in continuing its efforts to improve its manufacturing capabilities. Clinker production increased 1.1% to 1.3 million tons. This increase follows solid increases in both 1996 and 1995. Contributing to the record clinker production was an increase in the output of two of Giant Cement's kilns as a result of capital improvements early in the year. Cement production increased 3% to 1.5 million tons in 1997. Per unit costs were approximately 1% greater than a year ago, a slight disappointment, but still below the general increases in inflation. A large portion of the cost increase was related to depreciation expense due to increased capital expenditures over the last three years. Gross profit per ton increased 8% to $23.30 compared with $21.60 for 1996. Selling, general and administrative costs decreased as a percentage of sales to 6% in 1997, from 7% in 1996. In spite of the waste fuel curtailment in December at Keystone, 1997 was a very good year for resource recovery activities. Liquid waste fuel volumes increased 7%, while solid waste fuel volumes increased by 18%. Pricing improved on both liquids and solids by approximately 6% with total resource recovery revenues increasing 14%. The Company's strategy to move into higher revenue per ton solids continues to be successful, and the Company is considering alternatives to increase shredding capacity and reduce processing costs. The Company experienced a fire at its waste fuel storage tank farm at Keystone on December 8, 1997. There were no injuries and no known environmental damage and only minor damage to the equipment. As a result of the incident, Keystone burned 100% coal for three weeks in December and the Company incurred an after-tax charge of $0.10 per share in the fourth quarter. Keystone has made equipment, personnel and policy changes to ensure a similar incident does not occur in the future. Capital expenditures in 1997 were $15.4 million and were funded by internally-generated funds. Major projects completed include modest improvements for two kilns and further automation of Giant's quarry operation. Recent capital investment projects have yielded good results, with both clinker production and cement production increasing over the last three years. The Company continues to focus on improving productivity and lowering costs. The Company's capital expenditures and process improvements have contributed to improved plant efficiencies and higher cement kiln utilization rates. Capital spending of approximately $13 to $15 million is planned for 1998. Capital spending at this level should allow the Company to add incremental capacity and consistently replace equipment on an ongoing, as-needed basis. We are very pleased with the 1997 performance of Keystone's aggregate operation. Improvements in the plant and focus on operations resulted in a 50% increase in tonnage produced at a considerably lower cost per ton. The Company expects to produce and sell 750,000 tons of aggregate in 1998. During the year, the Company reached a new labor agreement with the union employees at Giant. The three-year contract calls for annual wage increases averaging 3.2% per year. The contract with union employees at Keystone expires April 30, 1998. The Company intends to reach a mutually acceptable agreement with the bargaining unit. One area of emphasis in 1997 was health and safety. Keystone has now gone 504 days without a lost-time accident. However, we are focusing additional attention on the Giant facility, where lost-time accidents actually increased during the year. Based upon industry forecasts, the outlook for the cement industry in 1998 and perhaps for the next five years or more is very positive. Demand is expected to exceed supply at least through 2001. The Company is well positioned to capitalize on a strong construction market. With the strength of the Company's balance sheet and financial position, the Company is positioned to continue to enhance its capacity through internal investment, enhance shareholder value through share repurchases, and to evaluate appropriate strategic acquisition opportunities. GIANT CEMENT HOLDING, INC. CONSOLIDATED STATEMENTS OF INCOME For the years ended December 31, 1997 1996 1995 (In thousands, except per share data) Revenues: Product sales $100,988 $ 96,186 $ 86,635 Resource recovery services 15,900 14,012 13,550 -------- -------- -------- Total revenues 116,888 110,198 100,185 Costs and expenses: Cost of sales and services 81,756 77,818 72,871 Selling, general and administrative 7,523 7,841 7,547 Acquisition related expenses 1,200 - - -------- -------- -------- Operating income 26,409 24,539 19,767 Other income (expense): Interest expense (966) (1,141) (181) Other, net (1,031) 298 (24) -------- -------- -------- Income before income taxes 24,412 23,696 19,562 Provision for income taxes 8,327 8,275 6,847 -------- -------- -------- Net income $ 16,085 $ 15,421 $ 12,715 ======== ======== ======== Earnings per common share: Basic $ 1.70 $ 1.57 $ 1.27 -------- -------- -------- Diluted $ 1.69 $ 1.57 $ 1.27 -------- -------- -------- Weighted average common shares outstanding 9,459 9,833 9,990 See accompanying notes to consolidated financial statements. GIANT CEMENT HOLDING, INC. CONSOLIDATED BALANCE SHEETS December 31, 1997 1996 (All amounts in thousands) ASSETS Current assets: Cash and cash equivalents $ 12,674 $ 10,432 Accounts receivable, less allowances of $1,325 in 1997 and $1,123 in 1996 14,927 14,897 Inventories 19,238 17,656 Other current assets 3,652 2,071 -------- -------- Total current assets 50,491 45,056 Property, plant and equipment, net 75,631 70,418 Deferred charges and other assets 2,478 3,142 -------- -------- Total assets $128,600 $118,616 ======== ======== LIABILITIES Current liabilities: Accounts payable $ 11,567 $ 10,437 Accrued expenses 8,258 6,843 Current maturities of long-term debt 888 1,070 -------- -------- Total current liabilities 20,713 18,350 Long-term debt, net of current maturities 9,661 10,681 Accrued pension and postretirement benefits 2,907 6,332 Deferred income taxes 7,674 6,125 -------- -------- Total liabilities 40,955 41,488 -------- -------- Contingencies (Note 13) SHAREHOLDERS' EQUITY Preferred stock, $.01 par value; 2.0 million shares authorized - - Common stock, $.01 par value; 20.0 million shares authorized, 10.0 million shares issued 100 100 Capital in excess of par value 41,317 41,022 Retained earnings 58,120 42,035 -------- -------- 99,537 83,157 Less: Treasury stock, at cost; 675 shares in 1997, 336 shares in 1996 11,247 4,491 Reduction for additional pension liability 645 1,538 -------- -------- Total shareholders' equity 87,645 77,128 -------- -------- Total liabilities and shareholders' equity $128,600 $118,616 ======== ======== See accompanying notes to consolidated financial statements. GIANT CEMENT HOLDING, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31, 1997 1996 1995 ---- ---- ---- (All amounts in thousands) OPERATIONS: Net income $ 16,085 $ 15,421 $ 12,715 Depreciation and depletion 10,189 9,031 7,855 Deferred income taxes 609 1,023 876 Amortization of deferred charges and other 485 431 492 Changes in operating assets and liabilities: Receivables (30) (2,340) (2,023) Inventories (1,582) (554) (3,058) Other current assets and deferred charges (2,810) (1,291) (1,303) Accounts payable 1,958 2,110 (41) Accrued expenses 656 (1,538) (2,029) -------- -------- -------- Net cash provided by operations 25,560 22,293 13,484 -------- -------- -------- INVESTING: Purchase of property, plant and equipment (15,362) (9,819) (23,898) -------- -------- -------- Net cash used by investing (15,362) (9,819) (23,898) -------- -------- -------- FINANCING: Repayment of long-term debt (1,202) (12,059) (3,041) Proceeds from long-term debt - 8,285 8,500 Proceeds from short-term borrowings 2,500 3,000 2,279 Repayment of short-term borrowings (2,500) (5,279) - Purchase of treasury shares (7,241) (4,091) (616) Other 487 - (201) -------- -------- -------- Net cash provided (used) by financing (7,956) (10,144) 6,921 -------- -------- -------- Increase (decrease) in cash and cash equivalents 2,242 2,330 (3,493) CASH AND CASH EQUIVALENTS: Beginning of period 10,432 8,102 11,595 -------- -------- -------- End of period $ 12,674 $ 10,432 $ 8,102 ======== ======== ======== SUPPLEMENTAL INFORMATION: Cash paid for: Interest (net of capitalized interest of $0 in 1997, $53 in 1996 and $733 in 1995) $ 1,003 $ 1,141 $ 186 Income taxes 8,540 6,987 7,519 Non-cash investing and financing activities: Assets financed by notes and accounts payable 1,268 2,096 2,021 Capital lease obligations - - 599 See accompanying notes to consolidated financial statements. GIANT CEMENT HOLDING, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Common Stock Minimum Capital in Pension Shares Par Excess of Retained Treasury Liability Outstanding Value Par Value Earnings Stock Adjustments Total (All amounts in thousands) Balance, January 1, 1995 10,000 $100 $40,985 $13,899 $ - $ (781) $54,203 Net income for 1995 12,715 12,715 Purchase of treasury shares (63) (616) (616) Pension liability adjustments, net of $927 deferred income taxes (1,688) (1,688) ----- ---- ------- ------- -------- ------- ------- Balance, December 31, 1995 9,937 100 40,985 26,614 (616) (2,469) 64,614 Net income for 1996 15,421 15,421 Issuance of treasury shares 22 37 216 253 Purchase of treasury shares (295) (4,091) (4,091) Pension liability adjustments, net of $501 deferred income taxes 931 931 ----- ---- ------- ------- -------- ------- ------- Balance, December 31, 1996 9,664 100 41,022 42,035 (4,491) (1,538) 77,128 Net income for 1997 16,085 16,085 Exercise of employee stock options 35 130 357 487 Tax benefit of stock options 84 84 Issuance of treasury shares 13 81 128 209 Purchase of treasury shares (387) (7,241) (7,241) Pension liability adjustments, net of $481 deferred income taxes 893 893 ----- ---- ------- ------- -------- ------- ------- Balance, December 31, 1997 9,325 $100 $41,317 $58,120 $(11,247) $ (645) $87,645 ===== ==== ======= ======= ======== ======== =======
See accompanying notes to consolidated financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation: Giant Cement Holding, Inc. (the "Company") was previously an indirect subsidiary of GIANT GROUP, LTD. ("GROUP"), the Company's former parent. In October 1994, GROUP completed the initial public offering of all 10 million shares of the Company's common stock GROUP previously held. The accompanying consolidated financial statements include the combined financial position, results of operations and cash flows of Giant Cement Company ("Giant"), Keystone Cement Company ("Keystone"), and Giant Resource Recovery Company, Inc. ("GRR") for all periods presented. Where referred to herein, the "Company" includes these subsidiaries. 2. Significant Accounting Policies: The Company is involved in a single business segment comprised of the domestic manufacture and sale of portland and masonry cements and related aggregates in the South-Atlantic and Middle-Atlantic regions of the United States. The Company is also involved in waste recycling and resource recovery, utilizing industrial waste as supplemental fuels in its cement kilns. Principles of Consolidation: The consolidated financial statements include the financial position, results of operations and cash flows of Giant Cement Holding, Inc. and its subsidiaries, which are wholly owned. All significant intercompany transactions and balances have been eliminated. Cash Equivalents: For purposes of the consolidated statements of cash flows, highly liquid securities with an original maturity date of three months or less are considered cash equivalents. Cash equivalents are recorded at market value and consist of short-term U.S. Government obligations and repurchase agreements collateralized by short-term U.S. Government obligations. Inventories: Inventories are carried at the lower of average cost or market. Property, Plant and Equipment: Property, plant and equipment are stated at cost. Major renewals and improvements are capitalized, while maintenance and repairs are expensed when incurred. Depreciation is computed over the estimated useful lives of depreciable assets using the straight-line method. Useful lives for property and equipment are as follows: Buildings and improvements 10 - 50 years Machinery and equipment 3 - 25 years Office furniture and equipment 5 - 10 years Depletion of the cost of quarry property is based upon the tonnage quarried in relation to the estimated total tonnage available. Deferred Charges: Deferred charges include debt issuance costs and certain costs incurred to obtain multi-year operating permits upon certification of compliance with environmental regulations. Deferred permit certification costs are amortized over the period benefited, presently three to ten years. Deferred loan costs are amortized by the straight-line method over the life of the related debt. Income Taxes: Income taxes are accounted for in accordance with the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Accordingly, deferred tax assets or liabilities are established for temporary differences between financial and tax reporting bases and are subsequently adjusted to reflect changes in tax rates expected to be in effect when the temporary differences reverse. Environmental Liabilities: The Company evaluates environmental contingencies and, if appropriate, accrues the estimated cost by charging income for the gross liability for all matters where a future loss is probable and reasonably estimable. If it is probable that the Company will be indemnified and/or recover all or a portion of a probable loss, and the amount of such recovery is reasonably estimable, the Company accrues the related asset on a gross basis. The Company utilizes all of the information available to it to estimate the range or amount of loss and the timing of loss payments. Revenue Recognition: The Company derives revenues from product sales and resource recovery services. Revenues for cement sales are recognized in the period in which the cement is shipped to customers. Revenues for resource recovery services are recognized in the period in which the service is provided or the waste-derived fuel is utilized. Inventories of waste-derived fuel are immaterial. 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, the 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. 3. Inventories: At December 31: 1997 1996 ---- ---- (In thousands) Finished goods $ 4,131 $ 3,141 In process 1,322 1,236 Raw materials 2,178 2,025 Supplies, repair parts and coal 11,607 11,254 ------- ------- $ 19,238 $ 17,656 ======== ======== 4. Property, Plant and Equipment: At December 31 (at cost): 1997 1996 ---- ---- (In thousands) Land and quarries $ 2,335 $ 2,335 Buildings 11,025 10,772 Machinery and equipment 152,736 139,008 Projects in process 1,981 3,655 -------- -------- 168,077 155,770 Less accumulated depreciation and depletion 92,446 85,352 -------- -------- $ 75,631 $ 70,418 ======== ======== 5. Accrued Expenses: At December 31: 1997 1996 ---- ---- (In thousands) Compensation $ 2,429 $ 2,161 Pension plan contributions 2,394 2,781 Other 3,435 1,901 -------- -------- $ 8,258 $ 6,843 ======== ======== 6. Debt: Long-term debt consists of the following at December 31: 1997 1996 ---- ---- (In thousands) Term loan $ 2,048 $ 2,705 Revolving credit facility borrowings 8,159 8,285 Other 342 761 -------- -------- 10,549 11,751 Less current maturities 888 1,070 -------- -------- Long-term debt, net of current maturities $ 9,661 $ 10,681 ======== ========= The Term Loan bears interest at 8.4% annually and matures in 2000. Property, plant and equipment having an aggregate net book value of $35.6 million have been pledged as collateral under the Term Loan Agreement. In December 1996, the Company entered into a three-year, annually renewable, $32 million Revolving Credit Facility and Letter of Credit Agreement (the "Credit Facility") with a bank. Advances under the Credit Facility bear interest at the lessor of LIBOR plus 1.75% or the bank's base rate minus 1.0%. Borrowings under the Credit Facility are partially collateralized by eligible accounts receivable and inventories (as defined). The Company is required to reduce outstanding borrowings under the Credit Facility to $22.0 million for a period of 30 days annually. At December 31, 1997, amounts outstanding and available under the Credit Facility totaled $8.2 million and $21.8 million, respectively. The Company's Term Loan and Credit Facility impose restrictions with respect to the maintenance of financial ratios and net worth of the Company. The most restrictive covenants currently require maintaining tangible net worth (as defined) aggregating $60.0 million. Aggregate maturities of long-term debt are as follows: 1998 - $888,000, 1999 - $920,000, 2000 - $8.7 million. 7. Stock Option Plans: The Company has an Employee Stock Option Plan (the "Employee Plan"), which authorizes the Stock Option Committee of the Board of Directors to grant incentive or non-qualified stock options for the purchase of up to 1.0 million shares of common stock to key employees. Additionally, the Company has a Directors Stock Option Plan for non-employee directors (the "Director Plan"), which provides for an initial grant of non-qualified options for 10,000 shares of common stock and thereafter an annual grant for 5,000 shares. Options to purchase up to 300,000 shares of Common Stock may be granted under the Director Plan. The exercise price under each stock option plan is equal to the market price at the date of grant, and at December 31, 1997, exercise prices ranged from $11.88 to $18.00. The following table summarizes the changes in the number of shares under option pursuant to the plans described above: Weighted Average Number Exercise of Shares Price Outstanding at December 31, 1994 (102,000 exercisable) 292,000 $14.00 Granted 15,000 13.25 Canceled 6,000 14.00 ------- ------ Outstanding at December 31, 1995 (207,000 exercisable) 301,000 13.96 Granted 71,000 12.24 Canceled 5,000 14.00 ------- ------ Outstanding at December 31, 1996 (332,000 exercisable) 367,000 13.63 Granted 126,000 16.30 Exercised 35,000 13.85 Canceled 1,000 11.88 ------- ------ Outstanding at December 31, 1997 (390,000 exercisable) 457,000 $14.35 ======= ====== As permitted by Statement of Financial Accounting Standards No. 123, "Accounting For Stock-Based Compensation" ("SFAS 123"), the Company has chosen to apply APB Opinion No. 25 and related interpretations in accounting for its stock option plans. Accordingly, no compensation cost has been recognized for options granted under the plans. Had compensation cost for the plans been determined based on the fair value at the grant dates for awards under the plans consistent with SFAS 123, the pro forma impact on the Company's net income and basic net income per share would be as follows: 1997 1996 1995 ---- ---- ---- Net earnings - as reported $16,085 $15,421 $12,715 Net earnings - pro forma 15,759 15,304 12,691 Basic earnings per share - as reported 1.70 1.57 1.27 Basic earnings per share - pro forma 1.67 1.56 1.27 In accordance with SFAS 123, the fair value approach to valuing stock options used for pro forma presentation has not been applied to stock options granted prior to January 1, 1995. The compensation cost calculated under the fair value approach is recognized over the vesting period of the stock options. 8. Income Taxes: The provision (credit) for income taxes is comprised of the following: 1997 1996 1995 ---- ---- ---- (In thousands) Current: Federal $ 7,838 $ 6,951 $ 5,391 State 317 761 982 Deferred: Federal 107 847 495 State 65 (284) (21) -------- -------- -------- $ 8,327 $ 8,275 $ 6,847 ======== ======== ======== The following is a reconciliation between the federal income tax rate and the Company's effective income tax rate: 1997 1996 1995 ---- ---- ---- Statutory tax rate 35.0% 35.0% 35.0% State income taxes, net of federal benefit 1.5 1.3 3.2 Excess depletion for tax purposes (2.9) (2.8) (3.5) Other, net .5 1.4 .3 ---- ---- ---- Effective rate 34.1% 34.9% 35.0% ==== ==== ==== Cumulative gross deferred tax assets and liabilities relate to the following at December 31: 1997 1996 ---- ---- (In thousands) Pension and postretirement benefits $1,080 $2,130 Allowances for discounts and doubtful accounts and other liabilities 1,615 993 Other 223 189 ------ ------ Gross deferred tax assets 2,918 3,312 ------ ------ Depreciation 7,634 7,363 Other 1,672 1,246 ------ ------ Gross deferred tax liabilities 9,306 8,609 ------ ------ Net deferred tax liability 6,388 5,297 Deferred tax asset-current 1,286 828 ------ ------ Deferred tax liability non-current $7,674 $6,125 ====== ====== 9. Pension Plans: The Company maintains noncontributory, defined benefit pension plans which cover substantially all employees. The Company's policy is to fund at least the minimum required by applicable regulations. Plan assets consist principally of listed stocks and bonds and commingled stock and bond funds. Over-Funded Under-Funded Plans Plans 1997 1997 1996 ---- ---- ---- (In thousands) Actuarial present value of benefit obligations: Vested $20,882 $12,540 $32,784 Nonvested 520 116 449 ------- ------- ------- Accumulated benefit obligation 21,402 12,656 33,233 Effect of future compensation increases - 757 608 ------- ------- ------- Projected benefit obligation 21,402 13,413 33,841 Plan assets, at fair value 23,572 10,223 27,852 ------- ------- ------- Plan assets in excess of (less than) projected benefit obligation 2,170 (3,190) (5,989) Unrecognized net transition asset (202) (153) (411) Unrecognized prior service cost 641 595 1,335 Unrecognized net (gain) loss (979) 1,610 3,444 Adjustment required to recognize additional minimum liability* - (1,295) (3,753) ------- ------- ------- Prepaid (accrued) pension expense $ 1,630 $(2,433) $(5,374) ======= ======= ======= * An intangible asset of $303,000 in 1997 and $1.4 million in 1996 and a reduction of equity (net of deferred income taxes) of $645,000 in 1997 and $1.5 million in 1996 were recognized to record the additional pension liability. Pension expense for the defined benefit plans includes the following: 1997 1996 1995 ---- ---- ---- (In thousands) Benefits earned during the year (service cost) $ 518 $ 500 $ 405 Interest cost on projected benefit obligation 2,448 2,433 2,501 Actual return on plan assets (6,562) (2,863) (3,498) Net amortization and deferral 4,249 717 1,474 ------- ------- ------- Total $ 653 $ 787 $ 882 ======= ======= ======= The assumed discount rates, long-term rates of return on assets and rates of increase for future compensation were 7.25%, 9.25% and 4.5%, respectively, for 1997; and were 7.5%, 9.25% and 4.5%, respectively, for 1996; and were 7.25%, 9.5% and 5.0%, respectively, for 1995. The Company also maintains tax deferred profit-sharing plans for certain eligible employee groups. Expenses related to the plans, which are based upon pre-tax income of the cement and resource recovery operations, were $656,000 for 1997, $612,000 for 1996 and $500,000 for 1995. 10. Postretirement Health Benefits: Postretirement medical and life insurance is provided to substantially all employees. The Company accrues these benefits over an employee's employment career. The Company funds these costs as incurred which totaled $1.1 million in both 1997 and 1996, and $1.4 million in 1995. Postretirement medical and life insurance expense includes the following: 1997 1996 1995 ---- ---- ---- (In thousands) Service cost $ 285 $ 261 $ 266 Interest cost 981 991 1,222 Amortization of items not previously recognized: Transition obligation 577 577 604 Net actuarial losses - 8 31 ------ ------ ------ $1,843 $1,837 $2,123 ====== ====== ====== The following sets forth the accumulated postretirement benefit obligation ("APBO") applicable to each employee group and amounts included in the Company's December 31 balance sheet: 1997 1996 ---- ---- (In thousands) Accumulated postretirement benefit obligations: Retired employees $ 9,972 $11,453 Active employees - fully eligible 1,342 1,208 Active employees - not yet eligible 2,912 2,681 -------- ------- Total APBO 14,226 15,342 Unrecognized transition obligation (8,657) (9,233) Unrecognized net loss (1,129) (2,370) -------- ------- Accrued postretirement benefits $ 4,440 $ 3,739 ======== ======= The discount rates used in determining the APBO were 7.25% in 1997 and 7.5% in 1996. The obligation is unfunded. The assumed health care cost trend rate used in measuring the APBO as of December 31, 1997 and 1996 was 8% and 9%, respectively, declining to a rate of 5% in 2001. Increasing the assumed trend rate for health care costs by one percentage point would result in an increase to the APBO at December 31, 1997 of $1.4 million and an increase to the related expense for 1997 of $155,000. 11. Leases: The Company leases office space, warehouse space and equipment under operating leases which have remaining terms of up to five years. The leases generally include renewal options. Total rental expense for the years 1997, 1996 and 1995 amounted to $2.4 million, $2.2 million and $1.9 million, respectively. Future minimum rental commitments under noncancelable leases with a remaining term in excess of one year as of December 31, 1997 are as follows (in thousands): 1998 $1,241 1999 843 2000 558 2001 445 2002 250 ------ $3,337 12. Treasury Stock: In October 1997, the Company's Board of Directors approved a plan to expend up to $5.0 million for the repurchase of shares of the Company's outstanding common stock over an 18-month period. During 1995, 1996 and 1997, the Company repurchased 745,000 shares of its common stock at a cost of $11.9 million. 13. Contingencies: The Company's operations and properties are subject to extensive and changing federal, state and local laws (including common law), regulations and ordinances relating to noise and dust suppression, air and water quality, as well as to the handling, treatment, storage and disposal of wastes ("Environmental Laws"). In connection with the Company's quarry sites and utilization of hazardous waste-derived fuel, Environmental Laws require certain permits and other authorizations mandating procedures under which the Company shall operate. Environmental Laws also provide significant penalties for violators, as well as liabilities and costs of cleaning up releases of hazardous wastes into the environment. Violations of mandated procedures under operating permits, even if immaterial or unintentional, may result in fines, shutdowns, remedial actions or revocation of such permits, the loss of any one of which could have a material adverse effect on the Company's results of operations. In December 1997, the resource recovery operation at Keystone Cement Company, a wholly-owned subsidiary of Giant Cement Holding, Inc., experienced a fire at its waste fuel storage tank farm. There were no injuries and no known environmental damage. Only very minimal damage to equipment at the plant occurred. Keystone is in the process of negotiating a consent agreement with the Pennsylvania Department of Environmental Protection to allow it to resume waste fuel burning and resolve all outstanding alleged violations of environmental statutes. Other expense in the fourth quarter of 1997 includes pretax charges of $1.4 million for the estimated costs related to this incident. 14. Pending Acquisition: In September 1997, the Company entered into a definitive agreement to merge Solite Corporation and certain of its subsidiaries with Giant Cement Holding, Inc. On March 2, 1998, the Definitive Merger Agreement was amended to reflect the increased value of the Company's common stock and the increased transaction costs associated with the Department of Justice review. The Solite transaction will include three lightweight aggregate manufacturing facilities with their associated resource recovery operations, five concrete block plants, and a waste treatment and blending facility. Giant will exchange 325,000 shares of its common stock for all of the outstanding stock of Solite. The terms of the transaction additionally include the assumption of up to $20.0 million of Solite's long-term debt. Pro Forma unaudited combined revenues for the year ended December 31, 1997, as if the merger had occurred on January 1, 1997, were approximately $169.0 million. The Company and Solite have received second requests for information from the United States Department of Justice, Antitrust Division (USDOJ), relating to their Premerger Notification filings under the Hart-Scott-Rodino Antitrust Improvements Act. On March 23, 1998, the USDOJ indicated it will oppose the merger unless Solite retains an investment banking firm and attempts to market the assets that the Company is acquiring to other potential purchasers. As a result of the uncertainty of the Company's ability to obtain clearance from the USDOJ to consummate the merger, the Company has elected to expense the costs incurred in connection with the acquisition, which would normally be capitalized and accounted for as a portion of the acquisition cost. Acquisition costs, totaling $1.2 million or $.08 per share after tax, were charged to operating expenses in the fourth quarter. 15. Earnings Per Share: In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"), which established new standards for computing and presenting earnings per share information. As required, the Company adopted the provisions of SFAS 128 in its year-end 1997 financial statements and has restated all prior-year earnings per share information. Basic earnings per share of common stock were determined by dividing net income applicable to common shares by the weighted average number of common shares outstanding during each year. Diluted earnings per share reflect the potential dilution that could occur assuming exercise of all issued and unexercised stock options. A reconciliation of the net income and numbers of shares used in computing basic and diluted earnings per share is as follows: 1997 1996 1995 (In thousands, except per share data) Basic earnings per share: Net income $ 16,085 $ 15,421 $ 12,715 Weighted average common shares outstanding for the year 9,459 9,833 9,990 -------- -------- -------- Basic earnings per share of common stock $ 1.70 $ 1.57 $ 1.27 ======== ======== ======== Diluted earnings per share: Net income $ 16,085 $ 15,421 $ 12,715 -------- -------- -------- Weighted average common shares outstanding for the year 9,459 9,833 9,990 Increase in shares which would result from: Exercise of stock options * 83 - - -------- -------- -------- Weighted average common shares, assuming conversion of the above securities 9,542 9,833 9,990 -------- -------- -------- Diluted earnings per share of common stock $ 1.69 $ 1.57 $ 1.27 ======== ======== ======== *Antidilutive in 1995 and 1996. Report of Independent Accountants Board of Directors and Shareholders GIANT CEMENT HOLDING, INC. We have audited the accompanying consolidated balance sheets of Giant Cement Holding, Inc. (the "Company") as of December 31, 1997 and 1996, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997. 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 generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Giant Cement Holding, Inc. as of December 31, 1997 and 1996, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. Coopers & Lybrand L.L.P. Charlotte, North Carolina February 5, 1998 except as to Note 14, for which the date is March 23, 1998 Management's Discussion and Analysis of Financial Condition and Results of Operations General The Company's cement operations are directly related to the construction industry. The regional markets in which the Company operates, the Middle-Atlantic and South-Atlantic regions, are highly cyclical, experiencing peaks and valleys in demand corresponding to regional and national construction cycles. Additionally, the demand for cement is seasonal because construction activity diminishes during the winter months of December, January, and February. The seasonal impact can be particularly acute in the Company's Middle-Atlantic market. In addition, the Company performs a substantial portion of its routine annual major maintenance projects during the period of low plant utilization, typically the first quarter of its fiscal year, which results in significant additional expense during this period. The Company believes that the routine annual maintenance performed in the first quarter results in lower maintenance costs throughout the remainder of the year. Accordingly, the Company has historically experienced its lowest levels of revenue and gross profit during the first quarter. The Company derives revenues from the sales of products, primarily cement and construction aggregates, as well as from the provision of resource recovery services. Resource recovery services revenue is primarily derived from third parties that pay the Company to utilize their waste as fuel, which additionally reduces the cost of traditional fossil fuels used in the manufacture of cement. Due to the nature of the Company's operations and the fact that the burning of waste-derived fuels is inseparable from the manufacture of cement, it is impractical to disaggregate the costs of sales and services by revenue classification. The Company's resource recovery operations are dependent on general and regional economic conditions; federal, state, and local environmental policies; and competition from other waste disposal alternatives. Cement is a commodity product sold primarily on the basis of price. The price of cement tends to rise in periods of high demand and can fall if supply exceeds demand. The economic recovery that began in 1993 resulted in improved demand and increased pricing for the Company's products. Demand for cement has exceeded available supplies in the Company's South-Atlantic market at various times since 1993, causing cement shortages. Demand in the Company's Middle-Atlantic market has been good for most of the past three years. In 1995, the Company realized a price increase of $6 per ton in its Middle-Atlantic market and a price increase of $8 per ton in its South-Atlantic market. In 1996, the Company realized a $4 per ton price increase in its South-Atlantic market. In 1997, the Company realized a $4 per ton increase in its Middle-Atlantic market. Effective April 1, 1998, the Company has announced a $4 per ton increase in its Middle-Atlantic market; and a $3 per ton increase in its South-Atlantic market, although there can be no assurance that these price increases will be realized or that current price levels will not decline should cement demand decline in relation to supply. The Company's cement manufacturing, hourly employees are represented by the United Paperworkers International Union ("UPIU"). During 1997, the Company reached a new three-year labor agreement with the hourly employees at Giant, granting annual wage increases averaging 3.2% per year. The Agreement between Keystone Cement Company and UPIU Local 10547 expires April 30, 1998. While the Company will endeavor to negotiate a new agreement with the UPIU, there can be no assurance that an agreement will be reached on terms favorable to the Company, nor can there be assurance that the Company will not incur work stoppages, slowdowns or a strike. The Company is in the initial stages of addressing year 2000 computer software and operating system issues. The Company is using a combination of internal and external resources to assess the needed changes to its various information systems. At present, the Company does not have an estimate of the total costs of evaluating and correcting any potential problems and is unable to determine if such expenses will be material. The costs associated with addressing these issues will be expensed as incurred. Financial Accounting Standards Board Statement No. 131, "Disclosure About Segments of an Enterprise and Related Information" ("SFAS 131"), is effective for the year ended December 31, 1998. The implementation of this standard will not have a material impact on the Company's financial statements. In accordance with SFAS 131, the Company will continue to report a single business segment. Results of Operations 1997 Versus 1996 Total operating revenues increased $6.7 million or 6.1% to $116.9 million in 1997, compared with $110.2 million in 1996. Product sales increased $4.8 million or 5.0% to $101.0 million in 1997, compared with $96.2 million in 1996. The increase resulted primarily from an increase in the average selling price of cement and increased aggregate sales. Cement shipping volumes increased .6% in 1997 compared with 1996 volumes. The Company's average selling price per ton of cement increased 3.4% in 1997, as a result of price increases implemented in April 1996 and 1997. The Company realized a price increase of $4 per ton in April 1997 in its Middle-Atlantic market. Resource recovery revenues increased $1.9 million or 13.5% to $15.9 million in 1997, compared with $14.0 million in 1996, as a result of higher volumes and pricing of both liquid and solid fuels. Liquid fuels utilized increased 6.7%, while liquids pricing improved 5.9%. The Company's solid fuels volume increased 17.6%, while solid fuels pricing improved 5.7%. Improved cement pricing and resource recovery revenues resulted in a $2.7 million or 8.5% increase in gross profit from $32.4 million in 1996 to $35.1 million in 1997. The Company's gross margin percentage increased from 29.4% in 1996 to 30.1% in 1997. The total cost of sales and services increased $4.0 million to $81.8 million, compared with $77.8 million in 1996. The largest component of the increase in cost was increased depreciation expense from recent capital improvements. Cement costs per ton increased 1.1% in 1997. Clinker and cement manufactured increased 1.2% and 3.3%, respectively, compared with 1996, as a result of capital and operating improvements made in 1996 and 1997. Both of the Company's plants have operated at effective capacity throughout 1997. Selling, general and administrative expenses decreased $318,000 to $7.5 million, and decreased to 6.4% of operating revenues. The expense decrease primarily related to lower administrative costs. Acquisition related expenses of $1.2 million were charged to expense in 1997 as a result of the uncertainty of the Company's ability to obtain clearance from the USDOJ to consummate the Solite acquisition (See note 14). Prior to acquisition related expenses, operating income improved $3.1 million or 12.5% to $27.6 million in 1997, compared with $24.5 million in 1996, primarily as the result of the increase in operating revenues. Prior to acquisition related expenses, operating income margins improved from 22.3% in 1996 to 23.6% in 1997. The 1997 results of operations were impacted by the Company's suspension of the utilization of waste fuels at Keystone for most of the month of December as a result of a fire at Keystone's waste fuel storage tank farm. Keystone's inability to utilize waste fuels resulted in lost revenues and additional costs of approximately $450,000 in the quarter or $.03 per share after tax. Interest expense decreased $175,000 as a result of lower average borrowings outstanding. Other expense in 1997 includes pre-tax charges of $1.4 million relating to Keystone's tank farm fire and its resulting suspension of the utilization of waste fuel. (See Environmental Matters). Federal and state income tax expenses resulted in an effective tax rate of 34.9% in 1996 and 34.1% in 1997. The Company's effective tax rate of 34.1% in 1997 is not expected to change materially under current tax law. Net income increased $700,000 or 4.3% to $16.1 million in 1997, compared with $15.4 million in 1996. Results of Operations 1996 Versus 1995 Total operating revenues increased $10.0 million or 10.0% to $110.2 million in 1996, compared with $100.2 million in 1995. Product sales increased $9.6 million or 11.0% to $96.2 million in 1996, compared with $86.6 million in 1995, as a result of increased shipping volumes and higher average selling prices of cement. Cement shipping volumes increased 6.7% in 1996, as a result of volume increases in both of the Company's market areas. The Company's average selling price per ton of cement increased 4.1% in 1996, as a result of price increases in its South-Atlantic market. No price increases were realized in the Company's Middle-Atlantic market in 1996. Resource recovery revenues increased $462,000 or 3.4% to $14.0 million in 1996, compared with $13.6 million in 1995, primarily as a result of a 124.2% increase in the volume of solid waste fuels utilized, partially offset by lower liquid fuels pricing. Liquid fuel volumes increased 3.8%; however, average liquid fuel pricing decreased 16.1% in 1996 compared with 1995. Improved shipping volumes and cement pricing resulted in a $5.1 million or 18.5% increase in gross profit from $27.3 million in 1995 to $32.4 million in 1996. The Company's gross margin percentage increased from 27.3% in 1995 to 29.4% in 1996. The total cost of sales and services increased $4.9 million to $77.8 million primarily as a result of higher shipping volumes and increased depreciation expense. Cement costs per ton increased less than one percent in 1996. Clinker and cement manufactured increased 1.5% and 2.5%, respectively, compared with 1995, as a result of capital and operating improvements made in 1995 and 1996. Both of the Company's plants have operated at effective capacity throughout 1996. Selling, general and administrative expenses increased $294,000 to $7.8 million, but decreased to 7.1% of operating revenues as a result of higher revenues. The increase related primarily to higher selling and promotional expenses. Operating income improved $4.8 million or 24.1% to $24.5 million in 1996, compared with $19.8 million in 1995, primarily as the result of the increase in operating revenues. Operating income margins improved from 19.7% in 1995 to 22.3% in 1996, as a result of higher cement selling prices with only minimal per unit cost increases. Interest expense increased $1.0 million as a result of higher average borrowings outstanding and the capitalization of $733,000 of interest cost in 1995. Federal and state income tax expenses resulted in an effective tax rate of 35.0% in 1995 and 34.9% in 1996. The Company's effective tax rate of 34.9% in 1996 is not expected to change materially under current tax law. Net income increased $2.7 million or 21.3% to $15.4 million in 1996, compared with $12.7 million in 1995. Net income as a percentage of net sales increased from 12.7% in 1995 to 14.0% in 1996. Liquidity and Capital Resources The Company's liquidity requirements arise primarily from the funding of capital expenditures, debt service obligations and working capital needs. The Company has historically met these needs through internal generation of cash and borrowings on revolving credit facilities. The Company's borrowings have historically increased during the first half of the year because of the seasonality of its business and the annual plant maintenance performed in the first quarter. Cash and cash equivalents totaled $12.7 million at December 31, 1997, compared with $10.4 million at December 31, 1996. At December 31, 1997 and 1996, the Company had working capital of $29.8 million and $26.7 million with a current ratio of 2.4 and 2.5, respectively. Accounts receivable increased $30,000 or less than 1% compared with 1996. Inventories increased $1.6 million or 9.0% to $19.2 million at December 31, 1997, primarily as a result of an increase in finished cement and repair parts inventories. Total current liabilities increased $2.4 million or 12.9% to $20.7 million in 1997, primarily as a result of higher trade accounts payable and accrued expenses. Net cash provided by operations increased $3.3 million or 14.7% to $25.6 million in 1997, compared with $22.3 million in 1996, primarily as a result of the Company's improved earnings, increased depreciation and a lesser increase in accounts receivable. Net cash used by investing increased to $15.4 million in 1997, compared with $9.8 million in 1996, as a result of increased capital expenditures. Net cash used by financing activities decreased to $8.0 million in 1997, compared with $10.1 million in 1996, primarily as a result of less debt repayment, partially offset by greater treasury share repurchases. The Company has entered into a three-year, annually renewable, $32 million Revolving Credit Facility and Letter of Credit Agreement. Advances under the Credit Facility bear interest at the lesser of LIBOR plus 1.75% or the bank's base rate minus 1.0%. Borrowings under the Credit Facility are partially collateralized by eligible accounts receivable and inventories (as defined). The Company is required to reduce outstanding borrowings under the Credit Facility to $22.0 million for a period of 30 days annually. At December 31, 1997, amounts outstanding and available under the Credit Facility totaled $8.2 million and $21.8 million, respectively. The Company anticipates that its capital expenditures for plant and equipment, including certain environmental compliance capital expenditures, will be $13.0 to $15.0 million in 1998. In addition to the Company's capital expenditure programs, the Company expends substantial resources on maintenance annually. These costs are expensed as incurred and were $12.2 million, $13.9 million and $14.9 million for 1995, 1996 and 1997, respectively. While a portion of these costs is discretionary, the Company anticipates that maintenance expenditures will continue at or near these levels. In September 1997, the Company entered into a definitive agreement to acquire certain lightweight aggregate and concrete block facilities of Solite Corporation, located principally in the South-Atlantic United States. The definitive agreement has since been renegotiated to reflect the increased value of the Company's common stock and the increased transaction costs associated with the Department of Justice review. The acquisition is subject to, among other matters, approvals by various regulatory authorities. If completed, (See note 14)the acquisition (which will be accounted for as a purchase) will require approximately $28 million to be financed through the issuance of approximately 325,000 common shares and bank borrowings of approximately $20 million. The Company intends to utilize a combination of new term financing and its existing Credit Facility to finance the $20 million. At December 31, 1997, three of the Company's defined benefit pension plans had projected benefit obligations of $3.2 million in excess of plan assets, while one of the Company's plans had assets in excess of projected benefit obligations of $2.2 million. The Company intends to fund the excess benefit obligation from time to time as funds are available. Additionally, under the provisions of Statement of Financial Accounting Standards No. 106, "Employer's Accounting for Postretirement Benefits Other Than Pensions," the Company's projected accumulated postretirement benefit obligation totaled $14.2 million at December 31, 1997, of which $4.4 million was accrued. The Company funds postretirement benefits as the claims are incurred and anticipates continuing to do so. Environmental Matters The Company's operations and properties are subject to extensive and changing federal, state and local laws (including common law), regulations and ordinances relating to noise and dust suppression, air and water quality, as well as to the handling, treatment, storage and disposal of wastes ("Environmental Laws"). In connection with the Company's quarry sites and utilization of hazardous waste-derived fuel, Environmental Laws require certain permits and other authorizations mandating procedures under which the Company shall operate. Environmental Laws also provide significant penalties for violators, as well as liabilities and costs of cleaning up releases of hazardous wastes into the environment. Violations of the permit conditions or of the regulations, even if immaterial or unintentional, may result in fines, shutdowns, remedial actions or revocation of the permits, the loss of any one of which could have a material adverse effect on the Company's financial condition or results of operations. In 1997, resource recovery services revenues totaled $15.9 million or 13.6% of consolidated revenues. While the Company endeavors to maintain full compliance with the environmental laws and regulations at all times, violations have occurred in the past and there is no assurance violations will not occur in the future, due to the inherent complexity and differing interpretations of the laws and regulations. The Company maintains environmental liability insurance with limits of $5.0 million per occurrence and $10.0 million annual aggregate at each of its cement manufacturing facilities. These policies cover certain off-site environmental damage. The policies do not cover liabilities arising under CERCLA, fines or penalties, and thus the Company has no claims for recovery of these items. On December 8, 1997, the resource recovery operation at Keystone Cement Company, a wholly-owned subsidiary of Giant Cement Holding, Inc., experienced a fire at its waste fuel storage tank farm. There were no injuries and no known environmental damage. Only very minimal damage to equipment at the plant occurred. Immediately after the incident, Keystone ceased utilization of waste fuels and later entered into a negotiated consent agreement with the Department of Environmental Protection (DEP) of the State of Pennsylvania to halt the use of waste fuels at its plant pending an investigation of the cause and determination of the appropriate corrective actions to ensure that a similar incident does not occur in the future. A report on the findings and recommended corrective actions was submitted to the DEP on December 31, 1997. Management has estimated that costs relating to this matter will total $1.4 million, which costs were fully accrued at December 31, 1997. Keystone is in the process of negotiating a further consent agreement with the DEP to allow it to resume waste fuel burning and resolve all outstanding alleged violations of environmental statutes. The Company believes the interruption of its waste fuel business is covered by insurance; however, no amounts have been recorded for this recovery pending further evaluation of the claim and the ability to estimate the amounts, if any, that may be recovered. Disclosure Regarding Forward Looking Statements This report contains certain forward-looking statements, containing the words "believes," "anticipates," "expects," and words of similar import, based upon current expectations that involve a number of known and unknown business risks and uncertainties. The factors that could cause results to differ materially include the following: national and regional economic conditions, changes in the levels of construction spending, changes in supply or pricing of waste fuels and other risks as further described in the Company's Annual Report on Form 10-K filed with the SEC for the year ended December 31, 1997. CORPORATE INFORMATION Quarterly Results of Operations (Unaudited; amounts in thousands, except per share data) Quarter Ended 1997 March 31 June 30 Sept. 30 Dec. 31 - ---- -------- ------- -------- ------- Operating revenues $24,358 $32,323 $31,672 $28,535 Gross profit 4,063 10,734 10,957 9,378 Operating income 2,040 8,839 9,112 6,418 Net income 1,238 5,694 5,888 3,265* Earnings per common share: Basic $ .13 $ .60 $ .63 $ .35 Diluted $ .13 $ .60 $ .62 $ .34 1996 Operating revenues $20,791 $32,414 $29,335 $27,658 Gross profit 4,010 9,923 9,699 8,748 Operating income 1,876 7,841 7,879 6,943 Net income 986 4,913 5,098 4,424 Earnings per common share: Basic $ .10 $ .50 $ .52 $ .46 Diluted $ .10 $ .50 $ .52 $ .46 * Includes special charges of $1.7 million or $.18 per share. Market and Dividend Information The Company's common stock is traded on the Nasdaq National Market tier of The Nasdaq Stock Market under the symbol: GCHI. On March 5, 1998, the approximate number of registered holders of the Company's common stock was 113 and the approximate number of beneficial shareholders was 3,000. The high and low price of the Company's common stock during the calendar quarters of 1996 and 1997 are set forth below. The closing price on December 31, 1997 was $23.13. The Company expects that earnings will be retained in the business, and no cash dividends will be paid to its common shareholders for the foreseeable future. Calendar Quarter 1997 1996 ---- ---- High Low High Low First $17.13 $15.25 $12.75 $10.44 Second $18.75 $15.50 $14.63 $12.38 Third $24.63 $18.13 $16.38 $12.63 Fourth $25.75 $22.00 $16.13 $14.75 Corporate Information Form 10-K and Company Information Corporate Offices A copy of Giant Cement Holding, Inc.'s 320-D Midland Parkway Annual Report on Form 10-K for the year Summerville, South Carolina 29485 ended December 31, 1997, filed with the (843) 851-9898 Securities and Exchange Commission, may be obtained by writing Terry L. Kinder, Vice President and Chief Financial Officer, at the corporate address. Auditors Annual Meeting Coopers & Lybrand L.L.P. The Annual Meeting of Shareholders for Charlotte, North Carolina Giant Cement Holding, Inc. will be held May 12, 1998, in New York, New York. Transfer Agent Registrar and Transfer Company 10 Commerce Drive Cranford, New Jersey 07016 GIANT CEMENT HOLDING, INC. DIRECTORS AND OFFICERS DIRECTORS Gary Pechota Chairman of the Board, President and Chief Executive Officer of the Company Terry L. Kinder Vice President, Chief Financial Officer, Secretary and Treasurer of the Company Dean M. Boylan Vice Chairman and Director of Boston Sand & Gravel Company, Inc. Edward Brodsky Partner in the law firm of Proskauer Rose LLP Robert L. Jones Chairman of Davidson - Jones - Beers Corporation OFFICERS Gary Pechota Chairman of the Board, President and Chief Executive Officer Terry L. Kinder Vice President, Chief Financial Officer, Secretary and Treasurer Richard A. Familia Vice President, Environmental Affairs EX-21 5 Exhibit 21 LIST OF SUBSIDIARIES Exhibit 21 SUBSIDIARIES Corporation State of Incorporation Ownership Giant Cement Company, Inc. Delaware 100% Keystone Cement Company, Inc. Pennsylvania 100% Giant Resource Recovery Company, Inc. Delaware 100% GCHI Investments, Inc. Delaware 100% GCHI Acquisition Corp. Delaware 100% Giant Cement NC, Inc. South Carolina 100%(1) (1) Indirect. Owned 100% by Giant Cement Company, Inc. EX-23 6 Exhibit 23(a) CONSENT OF COOPERS & LYBRAND L.L.P. CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference into the registration statement of Giant Cement Holding, Inc. on Form S-8 (filed May 16, 1995) of our reports dated February 5, 1998 (except as to Note 14, for which the date is March 23, 1998) on our audits of the consolidated financial statements and financial statement schedule of Giant Cement Holding, Inc. as of December 31, 1997 and 1996 and for each of the three years in the period ended December 31, 1997, which reports are included in the Annual Report on Form 10-K. Coopers & Lybrand L.L.P. Charlotte, North Carolina March 30, 1998 EX-27 7 WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
5 This Schedule Contains Summary Financial Information extracted from the Company's December 31, 1997 Financial Statements. 1000 year DEC-31-1997 JAN-01-1997 DEC-31-1997 12,674 0 16,252 1,325 19,238 50,491 168,077 92,446 128,600 20,713 0 0 0 100 87,545 128,600 100,988 116,888 81,756 81,756 1,200 0 966 24,412 8,327 16,085 0 0 0 16,085 1.70 1.69
-----END PRIVACY-ENHANCED MESSAGE-----