UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 2
on
FORM 10-Q/A
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number 001-15217
---------
U.S. AGGREGATES, INC.
---------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 57-0990958
------------------------------ -----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
147 West Election Road, Suite 110,
Draper, Utah 84020
---------------------------------------------------
(Address, of principal executive offices) (Zip Code)
(801) 984-2600
-----------------------------------------------------
(Registrant's telephone number, including area code)
400 South El Camino Real, Suite 500, San Mateo, California 84020
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class Shares Outstanding as of July 31, 2001
- ------------------------------ --------------------------------------
Common stock, $.01 par value 14,900,593
INTRODUCTION
The purpose of this amendment is to amend (i) Note 3 (Long-Term Debt), (ii)
Note 12 (Sale of Northern Utah Assets) and (iii) Item 2 (Management's Discussion
and Analysis of Financial Condition and Results of Operations). Other than the
aforementioned changes, all other information included in the initial filing as
amended by Amendment No. 1 on Form 10-Q/A filed on September 7, 2001 is
unchanged.
- -------------------------------------------------------------------------------
U.S. AGGREGATES, INC. AND SUBSIDIARIES
FORM 10-Q/A
FOR THE QUARTER ENDED JUNE 30, 2001
CONTENTS
PART I. FINANCIAL INFORMATION
PAGE NO.
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of Operations 14
SIGNATURES 21
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
U.S. AGGREGATES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
JUNE 30, DECEMBER 31,
2001 2000
---------- ---------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 7,366 $ 5,021
Trade accounts receivable, net 36,141 34,860
Inventories, net 19,334 29,795
Assets held for sale 91,288 23,880
Prepaid expenses and other current assets 5,493 7,537
--------- --------
Total current assets 159,622 100,913
--------- --------
PROPERTY, PLANT AND EQUIPMENT 242,564 333,901
Less: Accumulated depreciation and depletion (36,893) (41,835)
--------- --------
Net property, plant and equipment 205,671 292,066
--------- --------
INTANGIBLE ASSETS, net 4,262 18,823
OTHER ASSETS 4,400 15,504
--------- --------
Total assets $ 373,955 $427,206
========= ========
LIABILITIES AND SHAREHOLDERS'EQUITY
CURRENT LIABILITIES $ 75,058 $ 64,850
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, net of current portion 190,641 190,673
DEFERRED INCOME TAXES, net 24,370 47,377
OTHER 1,801 330
--------- --------
Total liabilities 291,870 303,230
--------- --------
MINORITY INTEREST, net 11 11
--------- --------
SHAREHOLDERS' EQUITY:
Common stock, $.01 par value, 100,000,000 shares authorized,
14,908,222 shares outstanding, including 7,629 shares of treasury stock 149 149
Additional paid-in capital 125,219 123,648
Notes receivable from sale of stock (1,292) (1,243)
Treasury stock, at cost (2) (2)
Retained earnings (deficit) (42,000) 1,413
--------- --------
Total shareholders' equity 82,074 123,965
--------- --------
Total liabilities, minority interest and shareholders' equity $373,955 $427,206
========= ========
The accompanying notes are an integral part of these statements.
3
U.S. AGGREGATES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------------ --------------------------
2001 2000 2001 2000
------------- ----------- --------- ----------
(UNAUDITED) (UNAUDITED)
NET SALES $60,123 $83,423 $103,855 $138,009
COST OF PRODUCTS SOLD 61,757 62,067 102,503 107,399
------- ------- -------- --------
Gross profit (loss) (1,634) 21,356 1,352 30,610
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 9,686 7,776 17,723 16,771
DEPRECIATION, DEPLETION AND AMORTIZATION 6,732 4,126 11,150 8,139
LOSS ON DISPOSAL OF ASSETS 1,529 -- 1,480 --
RESTRUCTURING COSTS 525 -- 1,715 --
ASSET IMPAIRMENT CHARGE 14,750 -- 14,750 --
------- ------- -------- --------
Income (loss) from operations (34,856) 9,454 (45,466) 5,700
OTHER EXPENSES:
Interest and financing, net (7,384) (4,644) (15,254) (8,722)
Other, net (1,011) (34) (1,113) (28)
-------- ------- -------- --------
Income (loss) before income taxes (43,251) 4,776 (61,833) (3,050)
BENEFIT FROM (PROVISION FOR) INCOME TAXES 14,642 (1,671) 21,146 1,068
-------- ------- -------- --------
Income (loss) before extraordinary item (28,609) 3,105 (40,687) (1,982)
EXTRAORDINARY ITEM: Loss on extinguishment of debt,
less applicable income tax benefit of $1,468 (2,726) -- (2,726) --
-------- ------- -------- ---------
Net income (loss) $(31,335) $3,105 $(43,413) $(1,982)
======== ======= ======== =========
Income (loss) per common share--basic
Income (loss) before extraordinary item available for
common shareholders $(1.92) $0.21 $(2.73) $(0.13)
Extraordinary item, net of tax (0.18) -- (0.18) --
---------- --------- ---------- ----------
Net income (loss) available for common shareholders $(2.10) $0.21 $(2.91) $(0.13)
========== ========= ========== ==========
Weighted average common shares outstanding 14,900,593 14,900,593 14,900,593 14,900,593
Income (loss) per common share--diluted
Income (loss) before extraordinary item available for
common shareholders $(1.92) $0.20 $(2.73) $(0.13)
Extraordinary item, net of tax (0.18) -- (0.18) --
---------- --------- --------- ----------
Net income (loss) available for common shareholders $(2.10) $0.20 $(2.91) $(0.13)
========== ========= ========= ==========
Weighted average common shares outstanding 14,900,593 15,216,029 14,900,593 14,900,593
The accompanying notes are an integral part of these statements.
4
U.S. AGGREGATES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
SIX MONTHS ENDED
JUNE 30,
----------------------
2001 2000
---------- ---------
(UNAUDITED)
NET CASH USED IN OPERATING ACTIVITIES $(20,337) $(14,086)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (3,391) (22,773)
Proceeds from sale of assets 25,845 4,836
-------- --------
Net cash provided by (used in) investing activities 22,454 (17,937)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (26,079) (17,364)
New borrowings 27,400 50,500
Dividends paid -- (894)
Debt issuance costs (1,093) (1,965)
--------- ---------
Net cash provided by financing activities 228 30,277
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,345 (1,746)
CASH AND CASH EQUIVALENTS, beginning of period 5,021 4,478
---------- ---------
CASH AND CASH EQUIVALENTS, end of period $7,366 $2,732
========== ========
DISCLOSURE OF SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $9,816 $9,497
Income taxes 298 672
NON-CASH TRANSACTIONS:
Value assigned to warrants 1,571 --
Addition of equipment acquisition agreements 11,738
Dividends declared but not paid -- 447
Addition of capital lease obligations -- 14,224
Termination of capital lease obligation 520 --
Net inventory sold as part of sale of Northern Utah assets 1,416 --
Net other assets sold as part of sale of Northern Utah assets 223 --
Debt assumed by buyers as part of sale of Northern Utah assets 1,849 --
Transfer of assets held for sale as part of the sale of Northern Utah Assets 22,381 --
The accompanying notes are an integral part of these statements.
5
U.S. AGGREGATES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Organization and Basis of Presentation
Founded in 1994, U.S. Aggregates, Inc. ("USAI" or the "Company") conducts
its operations through the quarrying and distribution of aggregate products in
nine states in two regions of the United States, the Mountain states and the
Southeast. Aggregates consist of crushed stone, sand and gravel. The Company's
products are used primarily for construction and maintenance of highways, other
infrastructure projects, and for commercial and residential construction.
The accompanying unaudited condensed consolidated financial statements of
U.S. Aggregates, Inc. and subsidiaries have been prepared in accordance with
accounting principles generally accepted in the United States for interim
financial information and with the instructions to the Quarterly Report on Form
10-Q and to Article 10 of Regulation S-X. In the opinion of management, the
interim financial information provided herein reflects all adjustments necessary
for a fair presentation of the results of operations for the interim periods.
The results of operations for the six months ended June 30, 2001 are not
necessarily indicative of the results to be expected for the full year.
These condensed consolidated financial statements and the notes thereto
should be read in conjunction with the consolidated financial statements
included in the Company's Annual Report on Form 10-K for the year ended December
31, 2000.
2. Risk Factors
The Company's business is seasonal with peak revenue and profits occurring
primarily in the months of April through November. Bad weather conditions during
this period could adversely affect operating income and cash flow and could
therefore have a disproportionate impact on the Company's results for the full
year. Quarterly results have varied significantly in the past and are likely to
vary significantly from quarter to quarter in the future.
A majority of the Company's revenues are from customers who are in
industries and businesses that are cyclical in nature and subject to changes in
general economic conditions. In addition, since operations occur in a variety of
local geographic markets, the Company's business is subject to the economic
conditions in each such geographic market. General economic downturns or
localized downturns in the regions where the Company has operations, including
any downturns in the construction industry, could have a material adverse effect
on the Company's business, financial condition and results of operations.
The Company's operations are subject to and affected by federal, state and
local laws and regulations including such matters as land usage, street and
highway usage, noise level and health, safety and environmental matters. In many
instances, various permits are required. Although management believes that the
Company is in compliance with regulatory requirements, there can be no assurance
that the Company will not incur material costs or liabilities in connection with
regulatory requirements.
Certain of the Company's operations may from time to time involve the use
of substances that are classified as toxic or hazardous substances within the
meaning of relevant laws and regulations. Risk of environmental liability is
inherent in the operation of the Company's business. As a result, it is possible
that environmental liabilities will have a material adverse effect on the
Company in the future.
The Company markets its aggregates products to customers in a variety of
industries, including public infrastructure, commercial and residential
construction; asphaltic concrete, ready-mix concrete, concrete blocks and
concrete pipes; and railroads. A substantial amount of aggregate products is
used in publicly funded projects. A decrease or delay in government funding of
highway construction and maintenance or other infrastructure projects could
reduce sales and profits.
A material rise in the price or a material decrease in the availability of
oil could adversely affect operating results. The cost of asphalt is correlated
to the price of oil. Any increase in the price of oil might result in the
Company's customers using less asphalt. A material increase in the price of oil
could also lead to higher gasoline
6
U.S AGGREGATES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
costs, which could increase the Company's operating costs. These increases may
not be accepted by customers in the form of higher prices.
The Company has entered into a definitive agreement, described elsewhere
herein, to sell its southeastern operations to Florida Rock Industries, Inc.
(the "Buyer"). Consummation of the agreement is subject to shareholder approval,
which is assured as a result of a shareholders agreement between the Buyer and
the majority shareholder of the Company, as well as other customary closing
conditions. The ability of the Company to continue its remaining business is
dependent upon consummation of the transaction and upon reaching a satisfactory
agreement with its lenders regarding the allocation between such lenders and the
Company of the proceeds to be received upon consummation of the transaction.
There is no assurance that the transaction will be consummated or that the
Company will be able to negotiate such an agreement with its lenders.
Following consummation of the sale transaction, the Company will continue
to have significant debt and intends to evaluate various strategic options
relating to the Company's continuing operations. Some of the options to be
evaluated by the Company include reduction of the Company's debt by selling off
non-strategic assets, complete sale of the Company's assets, conversion of
existing debt to equity and raising additional equity. However, there can be no
assurance that such options will be available, or if available, on terms
acceptable to the Company. The Company's ability to continue as a going concern
following consummation of the transaction is also dependent upon the refinancing
or restructuring of its remaining debt. There is no assurance that the Company
will be able to refinance its debt or that it will be able to achieve operations
sufficiently profitability to service its remaining debt.
In the event the sale transaction is not consummated or the net proceeds
from the transaction fall short of expectations, the Company will need to obtain
additional sources of financing which may involve the sale of additional assets.
There is no assurance that such financing will be available or, if available, on
terms favorable to the Company. If the Company is unable to obtain such
additional financing, there could be a material adverse effect on the Company's
business, financial condition and results of operations.
In the second quarter of 2001, as a result of tight cash flows, higher
costs, weakened demand for certain products and poor performance of the
Company's western operations and to a lesser extent its southeastern operations,
management began a comprehensive review of the Company's operations (primarily
aggregate pits) or businesses for possible closure (either permanent or
temporary) or reorganization. Other businesses or sites are being considered for
sale. The process is on going, but to date certain aggregate pits have been
shutdown, or operations have been, or will be, curtailed or suspended at certain
sites. In addition, the transportation business has been closed. Capital
expenditures have been dramatically curtailed, certain fixed assets have been
sold and fixed assets which will no longer be used in the business or could not
be identified or have been damaged or destroyed, have been written down to their
realizable value or written-off. Goodwill or quarry development costs, which
were associated with a closed business or aggregate pits, were also written-off.
At some of the closed locations, adjustments to deferred royalties were
required, expense accruals for future minimum royalties due were recorded and
related stripping costs were written-off. Inventory at these sites, or at
continuing sites, which will not be sold, is in excess of foreseeable demand or
has a carrying value in excess of the market value has been written-off or
reserved, as appropriate. These charges total approximately $17.0 million in the
second quarter of 2001 of which $12.9 million is included in cost of products
sold, $2.6 million is included in depreciation, depletion and amortization
expense and $1.5 million is included in loss on disposal of assets in the
accompanying Condensed Consolidated Statement of Operations. It is possible that
additional write-offs may be required as management completes its review of all
operations and conducts a full physical count of all fixed assets in the second
half of 2001. The following table sets forth a summary of the charges taken
during the second quarter (in millions):
7
U.S. AGGREGATES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Closed transportation business, primarily good will $1.7
Quarry development related to closed leased quarries 1.0
Deferred royalties related to closed leased quarries 0.5
Future minimum royalties related to closed leased quarries 0.5
Deferred stripping costs 0.5
Loss on sale of assets 1.5
Inventory writedowns 5.6
Fixed asset write-offs 5.0
Prepaid expense adjustments 0.7
----
$17.0
=====
In addition to the above charges, in the second quarter of 2001 the Company
also recorded a restructuring charge of $0.5 million related to the relocation
of its corporate office as described in Note 5, an asset impairment charge of
$14.8 million related to the decision to sell its southeastern operations as
described in Note 6, a $1.0 million charge to write-off deferred financing
charges as described in Note 3 and an extraordinary loss on extinguishments of
debt as described in Note 3.
3. Long-Term Debt
A summary of long-term debt is as follows:
JUNE 30, DECEMBER 31,
2001 2000
----------- ----------
(DOLLARS IN THOUSANDS)
Prudential Insurance subordinated notes, net of discount
of $530 and $575, respectively $ 44,470 $ 44,425
GTCR Fund IV junior subordinated note, net of discount
of $543 1,529 -
Bank of America term loan A 74,396 30,900
Bank of America term loan B 38,035 43,004
Bank of America revolving loan 35,000 77,600
Notes payable to former shareholders 1,145 1,890
Capital lease obligations 8,471 11,240
Other 2,994 4,456
----------- ---------
Total long-term debt and capital lease obligations 206,040 213,515
Less: Current portion (15,399) (22,842)
---------- ---------
Long-term debt and capital lease obligations,
net of current portion $ 190,641 $ 190,673
========== =========
On April 18, 2001, the Company entered into a Sixth Amendment to its senior
secured credit facility ("Credit Agreement") which waived all existing covenant
defaults, adjusted future financial covenants, deferred certain principal
payments until March 31, 2002, modified the debt repayment schedule, established
a borrowing base on the revolving loan up to a maximum of $35 million, provided
the Company with additional liquidity from the sale of certain assets,
established monthly interest payment schedules and provided for increased
interest rates to an Alternate Base Rate (equal to the higher of .50% above the
Federal Funds Rate and the Bank of America reference rate) plus 5.00% or
Eurodollar Rate plus 6.00%, of which 2.00% is capitalized and added to principal
for the period through March 31, 2002. The Sixth Amendment also provides for a
fee of $1.25 million if the Credit Agreement is not paid in full by March 31,
2002. This fee is being accrued over a 12-month period.
On April 18, 2001, the Company also entered into an amendment with its
subordinated note holder to waive existing covenant defaults and to accept
deferral of interest payments through May 22, 2002 in exchange for a 2.00%
increase in interest rates, a deferred fee of $0.9 million and warrants for
671,582 shares with a nominal exercise price.
In connection with the amendments of the Credit Agreement and the
subordinated notes, an agreement was entered into with GTCR Fund IV, the
Company's majority shareholder, to loan the Company $2 million of junior
subordinated debt at an interest rate of 18.00%. The junior subordinated debt
does not mature until 120 days after senior secured facilities and subordinated
notes are paid in full. GTCR Fund IV will receive a deferred fee of $0.45
million and received warrants for 435,469 shares with a nominal exercise price
in exchange for its agreement to provide the Company with the junior
subordinated debt. This loan was funded on April 30, 2001.
The warrants issued to Prudential Insurance, the Company's subordinated
note holder, for 671,582 shares of the Company's common stock were valued at
$1.40 per share or a total of $940 thousand. The warrants issued to GTCR Fund IV
for 435,469 shares of the Company's common stock were valued at $1.45 per share
or a total of $631 thousand. The fair value of these warrants were calculated at
the date of issuance using a Black-Scholes option pricing model with the
following assumptions: risk-free interest rate of 5.25%; dividend yield of 0%;
volatility factors of the expected market price of the Company's common stock of
165.8%; an exercise price of
8
U.S. AGGREGATES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
$0.01; and market value of the Company common stock of $1.40 and $1.45 on the
issuance dates of the warrants to Prudential Insurance and GTCR Fund IV,
respectively.
On May 30, 2001, the Company entered into a Seventh Amendment to its Credit
Agreement with its existing senior secured lenders to provide $6.0 million of
additional liquidity to the Company. The Company borrowed the $6.0 million
available under the agreement during the quarter ended June 30, 2001. This
agreement was subsequently supplemented and currently provides for an interest
rate of Alternate Base Rate (equal to the higher of .50% above the Federal Funds
Rate and the Bank of America reference rate) plus 7.00%, a fee of $1.15 million
is payable upon the earlier of September 28, 2001 or the consummation of the
sale of certain assets. An amendment fee of 25 basis points, or approximately
$0.4 million is payable upon the earlier of September 30, 2001 (expiration of
this short-term agreement) or the consummation of certain asset sales.
In late July 2001 the Company repaid $0.5 million under its revolving
credit agreement and subsequently issued its surety a $0.5 million letter of
credit as collateral for the issuance of up to $5 million of surety bonds
supporting the construction activities of its western operations.
On August 14, 2001, the Company entered into an Eighth Amendment to its
Credit Agreement with its existing senior secured lenders pursuant to which the
Company received waivers of non-compliance with certain financial and
non-financial covenants under the senior secured credit facility. Prior to the
amendment the Company was not in compliance with a financial covenant under the
Sixth Amendment to its Credit Agreement that requires a minimum EBITDA (defined
as net income before minority interests, interest expense, income tax expense,
depreciation, depletion and amortization and non-cash restructuring charges
incurred in connection with business closures and asset dispositions) of $5.5
million for the quarter ending June 30, 2001. The actual EBITDA for this quarter
was a loss of $28.0 million. The Company was also in default under the Seventh
Amendment to its Credit Agreement in that it did not repay the principal and
capitalized interest due on its Term C loan by July 31, 2001. This Eighth
Amendment also provides $3.0 million of additional liquidity to the Company at
an interest rate of a Alternate Base Rate (equal to the higher of .50% above the
Federal Funds Rate and the Bank of America reference rate) plus 7%. As of August
31, 2001, the Alternate Base Rate was 6.5%. Additionally, the Eighth Amendment
provides for a fee of $0.125 million which is deferred until the earlier of
September 28, 2001 or the consummation of the sale of the Company's southeastern
operations as described in Note 7. Sale of Southeastern Operations. Amounts
borrowed under the agreement are due on the earlier of September 30, 2001 or the
consummation of the sale of the southeastern operations. The effectiveness of
the Eighth Amendment is subject to certain conditions including receipt by the
Company of definitive documentation of a forbearance agreement referred to in
the next paragraph. The Eighth Amendment became effective on September 5, 2001.
In addition, on August 14, 2001, the Company received waivers of non-compliance
with certain substantially equivalent financial covenants under the subordinated
notes.
In September 2000 the Company's southeastern operations entered into three
equipment acquisition agreement commitments with a financial institution, which
provide for the financing of three construction projects consisting of a rail
and barge load out facility at the Company's Pride quarry, an addition to the
aggregates processing plant at the Pride quarry and a crushing plant at the
Company's Mulberry quarry, totaling approximately $13.7 million. As of June 30,
2001, the financial institution has funded approximately $11.7 million under
such commitments. Upon completion, the projects are to be converted to either
operating leases or capital leases, at the Company's option. Such amounts are
included in the accompanying Condensed Consolidated Balance Sheet as of June 30,
2001 as a current liability. Two of these projects provided for a completion
date of May 31, 2001, which was not achieved and has resulted in an event of
default under such agreements and cross defaults under certain of the Company's
other debt agreements. The Company had requested waivers of the defaults under
such agreements as well as extensions of time periods necessary to complete such
projects. The financial institution has agreed in principal to enter into a
forbearance agreement, subject to definitive documentation, with the Company
which would i) waive all defaults under such agreements and ii) provide an
extension of the completion dates of such projects to September 30, 2001,
provided that amounts funded under such agreements as well as other amounts
outstanding under either operating or capital leases with the Company's
southeastern operations are paid off upon the sale of the Company's southeastern
operations. The Company signed the final documentation for that forbearance
agreement on August 23, 2001 and it became effective on September 4, 2001.
9
U.S. AGGREGATES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Other expenses include the write-off of approximately $1.0 million of
deferred finance charges relating to a reduction in borrowing capacity under the
Company's revolving loan resulting from the Sixth Amendment to its Credit
Agreement (in addition to the extraordinary charge described below) and other
deferred fees related to operations that have been closed or sold.
The Company has continued to classify a portion of its senior secured
credit facility and its subordinated notes as long term obligations as the
Company has received waivers of existing defaults from such lenders, thereby
precluding the lenders from accelerating payment of such obligations. In
connection with the various refinancings of the Company's debt, fees and costs
of $2.7 million, some of which were previously capitalized, net of a tax benefit
of $1.5 million, were recorded as an Extraordinary Item - Loss on Extinguishment
of Debt in the second quarter of 2001.
4. Shareholders' Equity
The following Statement of Changes in Shareholders' Equity summarizes the
Company's equity transactions between December 31, 2000 and June 30, 2001:
TREASURY STOCK
NOTES --------------------
COMMON STOCK ADDITIONAL RECEIVABLE SHARES RETAINED TOTAL
------------------ PAID-IN FROM SALE HELD IN EARNINGS SHAREHOLDERS'
SHARES AMOUNT CAPITAL OF STOCK TREASURY AMOUNT (DEFICIT) EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
BALANCE AT
DECEMBER 31, 2000 14,908,222 $149 $123,648 $(1,243) 7,629 $ (2) $ 1,413 $123,965
Notes receivable, net of
payments -- -- -- (49) -- -- -- (49)
Issurance of stock warrants -- -- 1,571 -- -- -- 1,571
Net loss -- -- -- -- -- -- 43,413) (43,413)
--------- ---- -------- -------- ------ ------ -------- ---------
BALANCE AT JUNE 30, 2001 14,908,222 $149 $125,219 $(1,292) 7,629 $ (2) $(42,000) $82,074
========== ===== ======== ========= ====== ====== ======== =========
The accompanying notes are an integral part of these statements.
5. Restructuring Costs
During the fourth quarter of 2000, the Company decided to restructure its
business operations through a plan, which provided for the closure of an asphalt
operation in Nevada, the disposition of certain operations in Idaho and the
consolidation of facilities in Utah (the "Restructuring Plan"). The
Restructuring Plan also included actions intended to achieve an overall
reduction in corporate overhead. The Company recorded restructuring charges of
$1.2 million in the first quarter of 2001, of which $0.5 million related to the
loss on sale of properties and certain equipment in Idaho. The cash charge of
$0.7 million related to severance benefits for terminated employees and lease
obligations relating to the closure of one of its offices.
To further reduce overhead, the Company decided and announced in the second
quarter of 2001 that it would relocate its corporate office from San Mateo,
California to Draper, Utah during 2001. As a result of this decision, the
Company recorded additional restructuring charges in the second quarter of 2001
in the amount of $0.5 million, of which $0.1 million relates to the write-down
of assets at the corporate office to fair market value. The cash charges of $0.4
million relate to severance benefits for employees, who have or will be
terminated, and lease obligations related to the closure of the San Mateo
corporate office.
As of June 30, 2001, $0.2 million of restructuring costs have been paid and
an accrual in the amount of $0.9 million related to above restructuring plans is
included in the Condensed Consolidated Balance Sheet.
6. Assets Held for Sale and Asset Impairment Charges
During the second quarter of 2001, the Company made a decision to sell its
southeastern operations. As a result, an evaluation for impairment of long-lived
assets was performed. Based upon this analysis, the Company determined that the
fair market value of these long-lived assets was less than the carrying value.
Accordingly, during the second quarter of 2001, the Company adjusted the
carrying value of these assets to their estimated fair value (less estimated
costs of sale) resulting in a non-cash impairment charge of $14.8 million. The
fair market value excludes $15.0 million of potential proceeds to be placed in
an escrow account as more fully described in Note 7. Sale of Southeastern
Operations. These assets (excluding accounts receivable, inventory and other
current assets) totaling $91.3 million have been classified as Assets Held for
Sale in the Condensed Consolidated Balance Sheet at June 30, 2001.
7. Sale of Southeastern Operations
10
U.S AGGREGATES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On July 11, 2001, the Company entered into a definitive agreement to sell
its southeastern operations to Florida Rock Industries, Inc. (the "Buyer"). The
sale is subject to approval by the Company's shareholders, which is assured as a
result of a shareholders agreement between the Buyer and the majority
shareholder of the Company, and the waiver or expiration of any waiting periods
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended,
which has occurred, as well as other customary closing conditions. The aggregate
purchase price to be received by the Company on the closing will be equal to
$150 million plus or minus a working capital adjustment to be determined at
closing, less approximately $30 million to cover certain liabilities assumed by
Buyer or the payment of such liabilities, and less $15 million to be placed in
an escrow account to be released upon the receipt of certain third-party
waivers. There is no assurance that such waivers will be obtained.
The Company will recognize a taxable gain on the sale of these assets,
which will result in corporate federal tax. However, the Company estimates that
the gain will be largely offset by losses available to the Company.
Following consummation of the sale of the southeastern operations, the
Company will continue to have a significant amount of debt. The Company
estimates, subject to negotiations with the lenders under its senior secured
credit facilities, that it will be able to repay at closing from proceeds
received from the transaction approximately $79.2 million of the principal and
interest owing under its senior secured credit facilities. Assuming repayment of
$79.2 million, as of June 30, 2001, the remaining principal and interest owing
under the Company's senior credit facilities would total approximately $74.9
million. In addition, following the consummation of the transaction, assuming
occurrence as of June 30, 2001, the Company would continue to owe $60.7 million
consisting of principal and interest, under its subordinated and other debt
obligations, excluding obligations of the southeastern operations which will be
repaid from proceeds of the sale. The Company's ability to continue to operate
its remaining businesses is dependent upon the consummation of the southeastern
sale transaction and upon reaching a satisfactory agreement with its lenders
regarding the allocation between such lenders and the Company of the proceeds to
be received upon consummation of the transaction. While there is no assurance,
the Company believes that it will be able to negotiate such an agreement.
The remaining assets of the Company following consummation of the
transaction will consist of aggregates production operations, ready-mix
operations, concrete block operations, paving operations and asphalt production
operations in the States of Arizona, California, Idaho, Nevada and Utah.
The Company will continue to have significant debt and intends to evaluate
various strategic options relating to the Company's continuing operations. Some
of the options to be evaluated by the Company include reduction of the Company's
debt by selling off non-strategic assets, complete sale of the Company's assets,
conversion of existing debt to equity and raising additional equity. However,
there can be no assurance that such options will be available, or if available,
on terms acceptable to the Company. The Company's ability to continue as a going
concern following consummation of the transaction is dependent upon the
refinancing or restructuring of its remaining debt. In addition, there is no
assurance that the Company following consummation of the transaction will be
able to achieve operations sufficiently profitable to service its remaining
debt, nor is there assurance that the sale of the southeastern operations will
be consummated.
8. Inventories
Inventories consist of the following as of:
JUNE 30, DECEMBER 31
2001 2002
--------- ---------
(DOLLARS IN THOUSANDS)
Finished products $18,538 $26,835
Raw materials 899 1,892
Supplies and parts 844 768
Fuel 276 324
Less: Allowances (1,263) (24)
------- -------
$19,334 $29,795
======= =======
Inventories are pledged as security under various debt agreements.
9. Income (Loss) Per Share
THREE MONTHS ENDED JUNE 30,
---------------------------------------------------------------------
2001 2002
--------------------------------- -----------------------------------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
PER SHARE PER SHARE
LOSS SHARES AMOUNT INCOME SHARES AMOUNT
---------- ---------- -------- ------- ----------- --------
Basic income (loss) before
extraordinary item available
for common shareholders $ (28,609) 14,900,593 $ (1.92) $ 3,105 14,900,593 $ 0.21
Effect of dilutive securities -- 315,436
---------- ----------
Dilutive income (loss) before
extraordinary item available
for common shareholders $ (28,609) 14,900,593 $ (1.92) $ 3,105 15,216,029 $ 0.20
========= ========== ======== ======= =========== ======
11
U.S AGGREGATES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
10. New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 133, Accounting for Derivative
Instruments and Hedging Activities. In June 1999, the FASB issued SFAS No, 137,
Accounting for Derivatives and Hedging Activities - Deferral of the Effective
Date of SFAS No. 133. In June 2000, the FASB issued SFAS No, 138, Accounting for
Certain Derivatives and Certain Hedging Activities, an amendment of FASB
Statement No. 133. Statement 133, as amended, establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
Statement requires that changes in the derivative instrument's fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. Special accounting for qualifying hedges allows a derivative instrument's
gains and losses to offset related results on the hedged item in the income
statement, to the extent effective, and requires that a company must formally
document, designate, and assess the effectiveness of transactions that receive
hedge accounting treatment. The Company has adopted Statement 133 effective
January 1, 2001. The Company has applied Statement 133 to only those hybrid
instruments that were issued, acquired, or substantively modified after December
31, 1998.
The Company has variable rate borrowings tied to the LIBOR rate. To reduce
its exposure to changes in the LIBOR rate, the Company has entered into a swap
contract. The Company is a party to an interest rate swap under which it
exchanges, at specified intervals, the difference between fixed and floating
interest amounts calculated on an agreed-upon notional amount of $37.0 million.
The interest rate swap contract has a two-year term that ends on December 29,
2002. The swap contract requires the Company's counter party to pay it a
floating rate of interest based on USD-LIBOR-BBA due quarterly beginning March
29, 2001. In return, the Company will pay its counter party a fixed rate of
6.11% interest due quarterly beginning March 29, 2001. The Company will report
all changes in fair value of its swap contract in earnings. During the second
quarter and six months ended June 30, 2001, the Company recorded an increase in
the value of this swap contract of $2 thousand and a decrease in the value of
this swap contact of $0.9 million, respectively. Such amounts are included in
interest and financing expenses. The cumulative effect of adopting this standard
effective January 1, 2001 was not significant.
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard No. 141, Business Combinations. This
pronouncement requires all business combinations initiated after June 30, 2001
to be accounted for using the purchase method.
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets. This pronouncement provides that goodwill be reviewed for
impairment rather than amortized, beginning on January 1, 2002. The Company is
accessing this statement and has not yet made a determination of the impact of
adoption on the Company's results of operations, financial position, or
liquidity. The Company will adopt SFAS No. 142 beginning January 1, 2002.
11. Effective Tax Rate
The Company uses an effective tax rate based on its best estimate of the
tax rate expected to be applicable for the full fiscal year. This estimated rate
is applied to the current year-to-date results to determine the interim
provision for income taxes.
12. Sale of Northern Utah Assets
In March 2001, the Company sold certain of its construction materials
operations in Northern Utah to Oldcastle Materials, Inc. for a total sales price
of $30.9 million, inclusive of $6 million in contingent proceeds which relate to
the Company obtaining zoning/permits for the operations sold, and which as of
the date of this report are not recorded and have not been received. The
proceeds were utilized to pay down debt and certain operating leases and provide
the Company with additional liquidity. The revenues and total assets related to
the sold properties
12
U.S. AGGREGATES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
represented approximately 14% and 6%, respectively, of the Company's 2000
consolidated totals. On April 2, 2001, the Company received $22.2 million of
cash proceeds and applied $14.2 million to the pay-down of its senior credit
facility. In addition, there are potential contingent proceeds in the amount of
$6.0 million, which the Company has not recorded that relate to the Company
obtaining zoning/permits for certain property sold to Oldcastle by March 31,
2003. There is no assurance the Company will be able to obtain the necessary
zoning/permits.
In connection with the sale, the Company entered into a long-term, royalty
bearing lease of a quarry to Oldcastle. The lease term is for a 40-year period
and requires Oldcastle to pay a minimum annual royalty of $0.1 million. Royalty
rates are $0.05 per ton of aggregate utilized during the first two years of the
agreement, $0.10 per ton for the third through the fifth years and $0.25 per ton
thereafter. The carrying value of the assets leased to Oldcastle as of June 30,
2001 was approximately $47.6 million.
13. Litigation
During May 2001, three complaints were filed against the Company and
certain of its officers and directors in the United States District Court for
the Northern District of California. The suits purport to be class actions filed
on behalf of the plaintiffs and others similarly situated, which allege certain
violations of the federal securities laws, including violations of Sections
10(b) and 20 of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.
The complaints allege that the Company's press releases relating to its 2000
financial statements were false and misleading. The complaints seek unspecified
damages and other relief. These cases have been consolidated before Judge
Wilken. Eugene L. Loper has been named lead plaintiff, and his choice of counsel
has been approved. The Company has retained counsel and intends to vigorously
defend these complaints.
In May 2001, the Company terminated the employment of two senior
executives. The executives have asserted claims for severance against the
Company, aggregating approximately $950,000 and other unspecified damages. The
Company has denied the claims.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following Management's Discussion and Analysis ("MD & A") should be
read in conjunction with the MD&A included in the Company's Annual Report on
Form 10-K for the year ended December 31, 2000.
INTRODUCTION
The Company conducts its operations through the quarrying and distribution
of aggregate products in nine states in two regions of the United States, the
Mountain states and the Southeast. The Company's operations have the same
general economic characteristics including the nature of the products,
production processes, type and class of customers, methods of distribution and
governmental regulations. The Company's business is seasonal, with peak sales
and profits occurring primarily in the months of April through November.
Accordingly, results of operations for any individual quarter are not
necessarily indicative of results for the full year.
The Company has entered into a definitive agreement, as more fully
described elsewhere herein, to sell its southeastern operations to Florida Rock
Industries, Inc. (the "Buyer"). Consummation of the agreement is subject to
shareholder approval, which is assured as a result of a shareholders agreement
between the Buyer and the majority shareholder of the Company, as well as other
customary closing conditions.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2001, working capital, exclusive of current maturities of debt,
assets held for sale and cash items, totaled $13.0 million compared to $30.0
million at December 31, 2000.
Net cash used in operating activities for the six months ended June 30,
2001 was $20.3 million, compared to $14.1 million used during the same period
last year. The increase in the use of cash was due to an increase in operating
losses offset by a reduction of working capital needs. Net cash provided by
investing activities for the six months ended June 30, 2001 was $22.5 million
compared to $17.9 million used in the same period in 2000 due to a reduction in
capital expenditures and an increase in proceeds from the sale of assets of
$21.0 million. Net cash provided in financing activities was $0.2 million for
the six months ended June 30, 2001 compared to $30.3 million during the same
period last year, primarily through borrowings under the Company's senior credit
agreement.
As a result of dependence upon the construction industry, the profitability
of aggregates producers, including the Company, is sensitive to national
regional and local economic conditions, and particularly to downturns in
construction spending and changes in the level of infrastructure spending funded
by the public sector. In fact, the Company's performance has been affected by
the slowing economy and reduced governmental spending. Additionally, increases
in the price of oil and energy costs affect the cost of processing and
transporting the Company's products. These increased costs have also impacted
the profitability of the Company. The combination of the foregoing as well as
the increase in both the level and cost of borrowings have and will continued to
unfavorably impact the liquidity of the Company.
Results of the Company's operations have declined over the last several
quarters, which has negatively impacted the Company's liquidity. As more fully
described herein, the ability of the Company to maintain sufficient short-term
liquidity is dependent upon the Company's ability to obtain additional loans
from its senior secured lenders, consummate the sale of the southeastern
operations and negotiate a satisfactory arrangement with its current senior
secured lenders on sharing proceeds from such sale. In the longer term, as more
fully discussed below, the Company's ability to maintain sufficient liquidity is
dependent upon achieving and maintaining profitable operations, restructuring or
refinancing its debt, selling additional non-strategic assets to reduce debt,
conversion of debt to equity or raising additional equity. There is no assurance
that the Company will be able to achieve any of the foregoing.
In March 2001, the Company sold certain of its construction materials
operations in Northern Utah to Oldcastle Materials, Inc. for a total sales price
of $30.9 million, inclusive of $6 million in contingent proceeds which relate to
the Company obtaining zoning/permits for the operations sold, and which as of
the date of this report are not recorded and have not been received.. The
proceeds were utilized to pay down debt and certain operating leases and provide
the Company with additional liquidity. The revenues and total assets related to
the sold properties
14
represented approximately 14% and 6%, respectively, of the Company's 2000
consolidated totals. On April 2, 2001, the Company received $22.2 million of
cash proceeds and applied $14.2 million to the pay-down of its senior credit
facility. In addition, there are potential contingent proceeds in the amount of
$6.0 million, which the Company has not recorded that relate to the Company
obtaining zoning/permits for certain property sold to Oldcastle by March 2003.
There is no assurance the Company will be able to obtain the necessary
zoning/permits.
In connection with the sale, the Company entered into a long-term, royalty
bearing lease of a quarry to Oldcastle. The lease term is for a 40-year period
and requires Oldcastle to pay a minimum annual royalty of $0.1 million. Royalty
rates are $0.05 per ton of aggregate during the first two years of the
agreement, $0.10 per ton for the third through the fifth years and $0.25 per ton
thereafter. The carrying value of the assets leased to Oldcastle as of June 30,
2001 was approximately $47.6 million.
On April 18, 2001, the Company entered into a Sixth Amendment to its Credit
Agreement with its senior secured lenders which waived all existing covenant
defaults, adjusted future financial covenants, deferred certain principal
payments until March 31, 2002, modified the debt repayment schedule, established
a borrowing base on the revolving loan up to a maximum of $35 million, provided
the Company with additional liquidity from the sale of certain assets,
established monthly interest payment schedules and provided for increased
interest rates to Alternate Base Rate (equal to the higher of .50% above the
Federal Funds Rate and the Bank of America reference rate) plus 5.00% or
Eurodollar Rate plus 6.00%, of which 2.00% is capitalized and added to principal
for the period through March 31, 2002. The Sixth Amendment also provides for a
fee of $1.25 million if the senior credit facility is not paid in full by March
31, 2002. This fee is being accrued over a 12-month period.
On April 18, 2001, the Company also entered into an amendment with its
subordinated note holder to waive existing covenant defaults and to accept
deferral of interest payments through May 22, 2002 in exchange for a 2.00%
increase in interest rates, a deferred fee of $0.9 million and warrants for
671,582 shares with a nominal exercise price.
In connection with the amendments of the senior secured credit facility and
the subordinated notes, an agreement was entered into with GTCR Fund IV, the
Company's majority shareholder, to loan the Company $2 million of junior
subordinated debt at an interest rate of 18.00%. The junior subordinated debt
does not mature until 120 days after senior secured facilities and subordinated
notes are paid in full. GTCR Fund IV will receive a deferred fee of $0.45
million and received warrants for 435,469 shares with a nominal exercise price
in exchange for its agreement to provide the Company with the junior
subordinated debt. This loan was funded on April 30, 2001.
On May 30, 2001, the Company entered into a Seventh Amendment to its Credit
Agreement with its existing senior secured lenders to provide $6.0 million of
additional liquidity to the Company. The Company borrowed the $6.0 million
available under the agreement during the quarter ended June 30, 2001. This
agreement was subsequently supplemented and currently provides for an interest
rate of Alternate Base Rate (equal to the higher of .50% above the Federal Funds
Rate and the Bank of America reference rate) plus 7.00%, a fee of $1.15 million
is payable upon the earlier of September 28, 2001 or the consummation of the
sale of certain assets. An amendment fee of 25 basis points, or approximately
$0.4 million is payable upon the earlier of September 30, 2001 (expiration of
this short-term agreement) or the consummation of certain asset sales.
The Company has significant repayment obligations under its senior credit
facility and subordinated notes over the next 12 months. The Company's senior
secured credit facility requires it to repay $6.0 million plus any borrowings
under the Eighth Amendment, as described below, on the earlier of September 30,
2001 or the consummation of the sale of the southeastern operations. In
addition, the Company is obligated to pay fees to its senior secured lenders in
the sum of $1.15 million and $0.4 million on the earlier of September 28, 2001
and September 30, 2001, respectively, or the consummation of the sale of the
southeastern operations. Under the senior credit facility, the Company is also
required to repay principal in the amount of $2.0 million, together with any
capitalized interest, $6.0 million and $2.2 million payable on March 31, 2002,
April 15, 2002 and June 30, 2002, respectively. The Sixth Amendment of the
Company's senior secured credit facility also provides for a fee of $1.25
million if the senior secured credit facility is not paid in full by March 31,
2002. Capitalized interest estimated to be $7.9 million and a fee of $0.9
million are due and payable on April 18, 2002 to the Company's subordinated note
holder. In addition, the Company will make principal payments of $5.2 million on
its other debt over the next 12 months.
15
In late July 2001 the Company repaid $0.5 million under its revolving
credit agreement and subsequently issued its surety a $0.5 million letter of
credit as collateral for the issuance of up to $5 million of surety bonds
supporting the construction activities of its western operations.
On July 11, 2001, the Company entered into a definitive agreement to sell
its southeastern operations to Florida Rock Industries, Inc. (the "Buyer"). The
sale is subject to approval by the Company's shareholders, which is assured as a
result of a shareholders agreement between the Buyer and the majority
shareholder of the Company, and the waiver or expiration of any waiting periods
under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended,
which has occurred, as well as other customary closing conditions. The aggregate
purchase price to be received by the Company on the closing will be equal to
$150 million plus or minus a working capital adjustment to be determined at
closing, less approximately $30 million to cover certain liabilities assumed by
Buyer or the payment of such liabilities, and less $15 million to be placed in
an escrow account to be released upon the receipt of certain third-party
waivers. There is no assurance that such waivers will be obtained.
The Company will recognize a taxable gain on the sale of these assets,
which will result in corporate federal tax. However, the Company estimates that
the gain will be largely offset by losses available to the Company.
Following consummation of the sale of the southeastern operations, the
Company will continue to have a significant amount of debt. The Company
estimates, subject to negotiations with the lenders under its senior secured
credit facilities, that it will be able to repay at closing from proceeds
received from the transaction approximately $79.2 million of the principal and
interest owing under its senior secured credit facilities. Assuming repayment of
$79.2 million, as of June 30, 2001, the remaining principal and interest owing
under the Company's senior credit facilities would total approximately $74.9
million. In addition, following the consummation of the transaction, assuming
occurrence as of June 30, 2001, the Company would continue to owe $60.7 million
consisting of principal and interest under its subordinated and other debt
obligations, excluding obligations of the southeastern operations which will be
repaid from proceeds of the sale. The Company's ability to continue to operate
its remaining businesses is dependent upon the consummation of the southeastern
sale transaction and upon reaching a satisfactory agreement with its lenders
regarding the allocation between such lenders and the Company of the proceeds to
be received upon consummation of the transaction. While there is no assurance,
the Company believes that it will be able to negotiate such an agreement.
The remaining assets of the Company following consummation of the
transaction will consist of aggregates production operations, ready-mix
operations, concrete block operations, paving operations and asphalt production
operations in the States of Arizona, California, Idaho, Nevada and Utah.
The Company will continue to have significant debt and intends to evaluate
various strategic options relating to the Company's continuing operations. Some
of the options to be evaluated by the Company include reduction of the Company's
debt by selling off non-strategic assets, complete sale of the Company's assets,
conversion of existing debt to equity and raising additional equity. However,
there can be no assurance that such options will be available, or if available,
on terms acceptable to the Company. The Company's ability to continue as a going
concern following consummation of the transaction is dependent upon the
refinancing or restructuring of its remaining debt. In addition, there is no
assurance that the Company following consummation of the transaction will be
able to achieve operations sufficiently profitable to service its remaining
debt, nor is there assurance that the sale of the southeastern operations will
be consummated.
To the extent the Company is not able to consummate the sale of the
southeastern operations or reach agreement on sharing of proceeds, the Company
may need to obtain additional sources of financing. There can be no assurance
that such financing will be available or, if available, on terms favorable to
the Company. If the Company is unable to obtain such additional financing, there
could be a material adverse effect on the Company's business, financial
condition and results of operation. The Company's ability to continue as a going
concern if the southeastern operations are not sold is dependent upon the
refinancing or restructuring of its debt. In addition, there is no assurance
that the Company will be able to achieve operations sufficiently profitable to
service its debt.
On August 14, 2001, the Company entered into an Eighth Amendment to its
senior secured credit facility ("Credit Agreement") with its existing senior
secured lenders pursuant to which the Company received waivers of non-compliance
with certain financial and non-financial covenants under the senior secured
credit facility. Prior to the amendment the Company was not in compliance with a
financial covenant under the Sixth Amendment to its Credit Agreement that
requires a minimum EBITDA (defined as net income before minority interests,
interest
16
expense, income tax expense, depreciation, depletion and amortization and
non-cash restructuring charges incurred in connection with business closures and
asset dispositions) of $5.5 million for the quarter ending June 30, 2001. The
actual EBITDA for this quarter was a loss of $28.0 million. The Company was also
in default under the Seventh Amendment to its Credit Agreement in that it did
not repay the principal and capitalized interest due on its Term C loan by July
31, 2001. This Eighth Amendment also provides $3.0 million of additional
liquidity to the Company at an interest rate of Alternative Base Rate (equal to
the higher of .50% above the Federal Funds Rate and the Bank of America
reference rate) plus 7%. As of August 31, 2001, the Alternative Base Rate was
6.5%. Additionally, the Eighth Amendment provides for a fee of $0.125 million
which is deferred until the earlier of September 28, 2001 or the consummation of
the sale of the Company's southeastern operations. Amounts borrowed under the
agreement are due on the earlier of September 30, 2001 or the consummation of
the sale of the southeastern operations. The effectiveness of the Eighth
Amendment is subject to certain conditions including receipt by the Company of
definitive documentation of a forbearance agreement referred to in the next
paragraph. The Eighth Amendment became effective on September 5, 2001. In
addition, on August 14, 2001, the Company received waivers of non-compliance
with certain substantially equivalent financial covenants under the subordinated
notes.
In September 2000 the Company's southeastern operations entered into three
equipment acquisition agreement commitments with a financial institution. Those
commitments provide for the financing of three construction projects consisting
of a rail and barge load out facility at the Company's Pride quarry, an addition
to the aggregates processing plant at the Pride quarry and crushing plant at the
Company's Mulberry quarry, totaling approximately $13.7 million. As of June 30,
2001, the financial institution has funded approximately $11.7 million under
such commitments. Upon completion, the projects are to be converted to either
operating leases or capital leases, at the Company's option. Such amounts are
included in the accompanying Condensed Consolidated Balance Sheet as of June 30,
2001 as a current liability. Two of these projects provided for a completion
date of May 31, 2001, which was not achieved and has resulted in an event of
default under such agreements and cross defaults under certain of the Company's
other debt agreements. The Company had requested waivers of the defaults under
such agreements as well as extensions of time periods necessary to complete such
projects. The financial institution has agreed in principal to enter into a
forbearance agreement, subject to definitive documentation, with the Company
which would waive all defaults under such agreements and provide an extension of
the completion dates of such projects to September 30, 2001, provided that
amounts funded under such agreements as well as other amounts outstanding under
either operating or capital leases with the Company's southeastern operations
are paid off upon the sale of the Company's southeastern operations. The Company
signed the final documentation for that forbearance agreement on August 23, 2001
and it became effective on September 4, 2001.
RESULTS OF OPERATIONS
SECOND QUARTER ENDED JUNE 30, 2001 COMPARED TO RESTATED SECOND QUARTER ENDED
JUNE 30, 2000
Net sales for the three-month period ended June 30, 2001 decreased
approximately 27.9% to $60.1 million, compared to $83.4 million for the same
period in 2000. Sales in 2000 included sales from the Company's Alabama concrete
operations sold under two separate transactions in April and December of 2000;
sales from Eastern Idaho operations, which were closed and the properties and
certain equipment subsequently sold in the first quarter of 2001; sales from the
Company's asphalt and construction operations in Nevada which were closed in
November 2000; and sales from certain construction materials operations in
Northern Utah sold in March 2001. Excluding sales from operations that were sold
or closed in 2000 and the first quarter of 2001, the Company's sales decreased
slightly (1%) in the second quarter with an increase in sales in the Company's
southeastern operations of $2.8 million (16%), offset by a decline in sales at
the Company's western operations of $3.3 million (7%). Excluding sold or closed
operations, sales for the quarter ended June 30, 2001 were approximately $60.1
million as compared to $60.6 million for the same period in 2000. Excluding the
effect of sold or closed operations, aggregate sales increased $3.4 million or
21%. This change was due to an increase in aggregate tons sold and, to a lesser
extent, an increase in average prices. Asphalt, paving and construction sales,
excluding the effect of sold or closed operations, in the second quarter of 2001
decreased $1.9 million or 8% over the same period of 2000 due to a decrease in
construction projects and third party asphalt sales; and ready mix concrete
sales decreased $1.9 million or 12% due primarily to an approximate 14% decrease
in ready mix cubic yards sold. In addition, there were slight reductions in
transportation and other sales.
For the three month period ended June 30, 2001, the Company reported a
negative gross profit of approximately $1.6 million or 2.7% of net sales,
compared to a gross profit of $21.4 million or 25.6% of net sales, for the same
period in 2000. The decline in gross profit related primarily to the Company's
western operations and
17
to a lesser extent its southeastern operations. Approximately $5.5 million of
the decline in gross profit resulted from operations existing at March 31, 2000
that were subsequently sold or closed prior to the second quarter of 2001. In
the second quarter of 2001, as a result of tight cash flows, higher costs,
weakened demand for certain products and poor performance of the Company's
western operations and to a lesser extent its southeastern operations,
management began a comprehensive review of the Company's operations (primarily
aggregate pits) or businesses for possible closure (either permanent or
temporary) or reorganization. Other businesses or sites are being considered for
sale. The process is on going, but to date certain aggregate pits have been
shutdown, or operations have been, or will be, curtailed or suspended at certain
sites. In addition, the transportation business has been closed. Capital
expenditures have been dramatically curtailed, certain fixed assets have been
sold and fixed assets which will no longer be used in the business or could not
be identified or have been damaged or destroyed, have been written down to their
realizable value or written-off. Goodwill or quarry development costs, which
were associated with closed business or aggregate pits, were also written-off.
At some of the closed locations, adjustments to deferred royalties were
required, expense accruals for future advance minimum royalties due were
recorded and related stripping costs have been written-off. Inventory at these
sites, or at continuing sites, which will not be sold, is in excess of
foreseeable demand or has a carrying value in excess of the market value has
been written-off or reserved, as appropriate. These charges total approximately
$17.0 million in the second quarter of 2001 of which $12.9 million is included
in cost of products sold, $2.6 million is included in depreciation, depletion
and amortization expense and $1.5 million is included in loss on disposal of
assets in the accompanying Condensed Consolidated Statement of Operations. It is
possible that additional write-offs may be required as management completes its
review of all operations and conducts a full physical count of all fixed assets
in the second half of 2001. In addition to these charges, gross profit for the
quarter ended June 30, 2001 were lower than prior year due to increases in
certain costs such as energy, fuel, freight and repairs and maintenance. Also,
as a result of significantly curtailed capital expenditures, costs charged to
operations at the quarries are higher in 2001 versus prior year.
Selling, general and administrative expenses increased to approximately
$9.7 million for the three-month period ended June 30, 2001 from approximately
$7.8 million for the same period in 2000, an increase of $1.9 million, or 24.6%.
This increase was due primarily to increased legal fees, professional service
fees and employee related costs in addition to an increase in the allowance for
doubtful accounts to reflect management's estimates of the changes in the status
of the collectability of specific accounts. These increases were partially
offset by reductions in selling, general and administrative costs at closed or
sold operations.
Depreciation, depletion and amortization expenses increased approximately
$2.6 million or 63.2%, to $6.7 million for the three-month period ended June 30,
2001 from $4.1 million for the same period in 2000. This increase was primarily
due to charges of approximately $2.6 million related to the write-off of
goodwill in connection with a closed transportation business and quarry
development costs associated with closed aggregate pits. This increase was
partially offset by lower depreciation, depletion and amortization expenses
recorded during the three-month period ended June 30, 2001 due to a net decrease
in total assets as a result of asset sales.
The Company recorded a loss on disposal of assets of approximately $1.5
million in the second quarter of 2001. This loss related primarily to the sale
of assets from the Company's western operations with a net book value of
approximately $2.3 million. The Company netted proceeds of approximately $0.8
million in the transaction.
During the second quarter of 2001, the Company recorded restructuring costs
of approximately $0.5 million, representing expected severance and relocation
costs related to the upcoming move of the Company's corporate office from San
Mateo, California to Draper, Utah.
During the second quarter of 2001, the Company made a decision to sell its
southeastern operations. As a result, an evaluation for impairment of long-lived
assets was performed. Based upon this analysis, the Company determined that the
fair market value of these long-lived assets was less than the carrying value.
Accordingly, during the second quarter of 2001, the Company adjusted the
carrying value of these assets to their estimated fair value (less estimated
costs of sale) resulting in a non-cash impairment charge of approximately $14.8
million. The fair market value excludes $15.0 million of potential proceeds to
be placed in an escrow account as more fully described above.
Net interest and financing expenses increased $2.8 million to $7.4 million
in 2001 from $4.6 million in 2000. This increase was primarily due to higher
debt levels and an increase in interest rates and financing costs associated
with amendments to the Company's senior credit facility and a lower level of
capitalized interest in 2001 due to a reduced level of capital projects.
18
Other expenses increased to $1.0 million for the three-month period ended
June 30, 2001 from $0.03 million for the same period in 2000. This increase was
primarily due to charges of approximately $1.0 million for the write-off of
deferred finance charges relating to a reduction in the borrowing capacity under
the Company's revolving loan resulting from the Sixth Amendment to its Credit
Agreement (in addition to the extraordinary charge described below) and other
deferred fees related to operations that have been closed or sold.
In connection with the various refinancings of the Company's debt, fees and
costs of $2.7 million, some of which were previously capitalized, net of a tax
benefit of $1.5 million, were recorded as an Extraordinary Item - Loss on
Extinguishment of Debt in the second quarter of 2001.
Net loss for the second quarter of 2001 was $31.3 million, or $2.10 per
share, compared with net income of $3.1 million, or $0.21 per share, for the
same quarter of 2000.
The effective tax rates for the quarters ended June 30, 2001 and June 30,
2000 were approximately 34% and 35%, respectively.
SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO RESTATED SIX MONTHS ENDED
JUNE 30, 2000
Net sales for the first half of 2001 decreased by 24.7% to $103.9 million
compared to $138.0 million for the first half of 2000. Sales in 2000 included
sales from the Company's Alabama concrete operations sold under two separate
transactions in April and December of 2000; sales from Eastern Idaho operations,
which were closed and the properties and certain equipment subsequently sold in
the first quarter of 2001; sales from the Company's asphalt and construction
operations in Nevada that were closed in November 2000; and sales from certain
construction materials operations in Northern Utah sold in March 2001. Excluding
sales from operations that were sold or closed in 2000 and the first half of
2001, the Company's sales increased approximately $4.7 million or 4.7% for the
six-month period ended June 30, 2001 over the same period in 2000. The Company's
southeastern operations recorded a net sales increase of $4.4 million (14%), and
its western operations recorded a slight increase in net sales of $0.3 million.
Excluding sold or closed operations, sales for the six-month period ended June
30, 2001 were approximately $103.9 million as compared to $99.2 million for the
same period in 2000. Excluding the effect of sold or closed operations,
aggregate sales increased $5.1 million or 17%. This change was due to an
increase in aggregate tons sold and to a lesser extent an increase in average
prices. Asphalt, paving and construction sales, excluding the effect of sold or
closed operations, in the second half of 2001 decreased $0.9 million, or 3%,
over the same period of 2000 primarily due to a decrease in third party asphalt
sales; and ready-mix sales increased $1.7 million or 6% primarily due to an
approximate 4% increase in prices and a slight increase in cubic yards sold.
Transportation and other sales were slightly reduced from 2000 levels.
For the six month period ended June 30, 2001, the Company reported a gross
profit of approximately $1.4 million or 1.3% of net sales, compared to a gross
profit of $30.6 million or 22.2% of net sales, for the same period in 2000. The
decline in gross profit related primarily to the Company's western operations
and to a lesser extent its southeastern operations. Approximately $6.1 million
of the decline in gross profit resulted from operations existing at January 1,
2000 that were subsequently sold or closed prior to the second quarter of 2001.
In the second quarter of 2001, as a result of tight cash flows, higher costs,
weakened demand for certain products and poor performance of the Company's
western operations and to a lesser extent its southeastern operations,
management began a comprehensive review of the Company's operations (primarily
aggregate pits) or businesses for possible closure (either permanent or
temporary) or reorganization. Other businesses or sites are being considered for
sale. The process is on going, but to date certain aggregate pits have been
shutdown, or operations have been, or will be, curtailed or suspended at certain
sites. In addition, the transportation business has been closed. Capital
expenditures have been dramatically curtailed, certain fixed assets have been
sold and fixed assets which will no longer be used in the business or could not
be identified or have been damaged or destroyed, have been written down to their
realizable value or written-off. Goodwill or quarry development costs, which
were associated with closed business or aggregate pits, were also written-off.
At some of the closed locations, adjustments to deferred royalties were
required, expense accruals for future advance minimum royalties due were
recorded and related stripping costs have been written-off. Inventory at these
sites, or at continuing sites, which will not be sold, is in excess of
foreseeable demand or has a carrying value in excess of the market value has
been written-off or reserved, as appropriate. These charges total approximately
$17.0 million in the second quarter of 2001 of which $12.9 million is included
in cost of products sold, $2.6 million is included in depreciation, depletion
and amortization expense and $1.5 million is included in loss on disposal of
assets in the accompanying Condensed Consolidated Statement of Operations. It is
possible that additional write-offs may be required as management completes its
review of all operations and
19
conducts a full physical count of all fixed assets in the second half of 2001.
In addition to these charges, gross profit for the six months ended June 30,
2001 were lower than prior year due to increases in certain costs such as
energy, fuel, freight and repairs and maintenance. Also, as a result of
significantly curtailed capital expenditures, costs charged to operations at the
quarries are higher in 2001 versus prior year.
Selling, general and administrative expenses were $17.7 million for the
first half of 2001 versus $16.8 million in 2000, an increase of $0.9 million or
5.7%. This increase was due to increased legal fees, professional service fees
and employee related costs in addition to an increase in the allowance for
doubtful accounts to reflect management's estimates of the changes in the status
of the collectability of specific accounts. These increases were partially
offset by reductions in selling, general and administrative costs at closed or
sold operations.
Depreciation, depletion and amortization expenses increased approximately
$3.0 million or 37.0% to $11.1 million for the first half of 2001 from $8.1
million for the same period of 2000. This change was primarily due to charges of
approximately $2.6 million related to the write-off of goodwill in connection
with a closed transportation business and quarry development costs associated
with closed aggregate pits; and depreciation, depletion and amortization
expenses recorded in the first six months of 2001 for 2000 capital expenditures.
This increase was partially offset by lower depreciation, depletion and
amortization expenses recorded during the period due to a decrease in total
assets as a result of asset sales.
The Company recorded a loss on disposal of assets of approximately $1.5
million in the first half of 2001. This loss related primarily to the sale of
assets from the Company's western operations with a net book value of
approximately $2.3 million. The Company netted proceeds of approximately $0.8
million in the transaction.
During the six-month period ended June 30, 2001, the Company recorded
restructuring costs of approximately $1.7 million, representing the loss on the
sale of one of the Company's operations in Idaho of $0.5 million; cash charges
of $0.7 million for severance benefits to terminated employees and lease
obligations relating to the closure of one of its corporate offices; and $0.5
million relating to severance and relocation costs for the upcoming move of the
Company's corporate office from San Mateo, California to Draper, Utah.
During the second quarter of 2001, the Company made a decision to sell its
southeastern operations. As a result, an evaluation for impairment of long-lived
assets was performed. Based upon this analysis, the Company determined that the
fair market value of these long-lived assets was less than the carrying value.
Accordingly, during the second quarter of 2001, the Company adjusted the
carrying value of these assets to their estimated fair value (less estimated
costs of sale) resulting in a non-cash impairment charge of approximately $14.8
million. The fair market value excludes $15.0 million of potential proceeds to
be placed in an escrow account as more fully described above.
Net interest and financing expenses increased $6.5 million to $15.2 million
in 2001 from $8.7 million in 2000. This increase was primarily due to higher
debt levels and an increase in interest rates and financing costs associated
with amendments to the Company's senior credit facility and a lower level of
capitalized interest in 2001 due to a reduced level of capital projects.
Other expenses increased to approximately $1.1 million for the six-month
period ended June 30, 2001 from approximately $0.03 million for the same period
in 2000. This increase was primarily due to charges of approximately $1.0
million for the write-off of deferred finance charges relating to a reduction in
the borrowing capacity under the Company's revolving loan resulting from the
Sixth Amendment to its Credit Agreement (in addition to the extraordinary charge
described below) and other deferred fees related to operations that have been
closed or sold.
In connection with the various refinancings of the Company's debt, fees and
costs of $2.7 million, some of which were previously capitalized, net of a tax
benefit of $1.5 million, were recorded as an Extraordinary Item - Loss on
Extinguishment of Debt in the second quarter of 2001.
Net loss for the six-month period ended June 30, 2001 was $43.4 million, or
$2.91 per share, compared with a net loss of $2.0 million, or $0.13 per share,
for the same period of 2000.
The effective tax rates for the six-month periods ended June 30, 2001 and
June 30, 2000 were approximately 34% and 35%, respectively.
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FORWARD LOOKING STATEMENTS
Certain matters discussed in this report contain forward-looking statements
and information based on management's belief as well as assumptions made by and
information currently available to management. Such statements are subject to
risks, uncertainties and assumptions including, among other matters, future
growth in the construction industry, sale of assets, satisfactory agreements
with lenders to fund its liquidity needs and general risks related to the
markets in which U.S. Aggregates, Inc. operates. Should one or more of these
risks materialize, or should underlying assumptions prove incorrect, actual
results may differ materially from those projected. Additional information
regarding these risk factors and other uncertainties may be found in the
Company's filings with the Securities and Exchange Commission.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
U.S. AGGREGATES, INC.
Dated: November 16, 2001 /s/ Stanford Springel
--------------------------
Stanford Springel
Chief Executive Officer
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