UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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, CA 94402
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(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 October 31, 2001
------------------------------ -----------------------------------------
Common stock, $.01 par value 14,900,593
U.S. AGGREGATES, INC. AND SUBSIDIARIES
FORM 10-Q
For the Quarter Ended September 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 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 3. Defaults Upon Senior Securities 22
Item 5 Other Information 23
Item 6. Exhibits and Reports on Form 8-K 23
SIGNATURES 24
EXHIBIT INDEX 25
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
U.S. AGGREGATES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
September 30, December 31,
2001 2000
---- ----
(unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 5,142 $ 5,021
Trade accounts receivable, net 33,533 34,860
Inventories, net 19,249 29,795
Assets held for sale 91,320 23,880
Prepaid expenses and other current assets 5,186 7,357
--------- ---------
Total current assets 154,430 100,913
--------- ---------
PROPERTY, PLANT AND EQUIPMENT 240,844 333,901
Less: Accumulated depreciation and depletion (38,640) (41,835)
--------- ---------
Net property, plant and equipment 202,204 292,066
--------- ---------
INTANGIBLE ASSETS, net 3,273 18,823
OTHER ASSETS 4,608 15,404
--------- ---------
Total assets $ 364,515 $ 427,206
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES $ 260,726 $ 64,850
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS, net of current portion 6,802 190,673
DEFERRED INCOME TAXES, net 20,238 47,377
OTHER 1,871 330
--------- ---------
Total liabilities 289,637 303,230
--------- ---------
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 (1,128) (1,243)
Treasury stock, at cost (2) (2)
Retained earnings (deficit) (49,371) 1,413
--------- ---------
Total shareholders' equity 74,867 123,965
--------- ---------
Total liabilities, minority interest and shareholders' equity $ 364,515 $ 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 Nine Months Ended
September 30, September 30,
------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
(unaudited) (unaudited)
NET SALES $ 61,209 $ 92,966 $ 165,064 $ 230,975
COST OF PRODUCTS SOLD 49,558 72,813 152,061 180,212
-------- -------- --------- ---------
Gross profit 11,651 20,153 13,003 50,763
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 9,526 7,449 27,249 24,220
DEPRECIATION, DEPLETION AND AMORTIZATION 3,189 4,208 14,339 12,347
LOSS ON DISPOSAL OF ASSETS 295 - 1,775 -
RESTRUCTURING COSTS - - 1,715 -
ASSET IMPAIRMENT CHARGE 596 - 15,346 -
-------- -------- --------- ---------
Income (loss) from operations (1,955) 8,496 (47,421) 14,196
OTHER EXPENSES:
Interest and financing, net (9,550) (5,246) (24,804) (13,968)
Other, net 3 (662) (1,110) (690)
-------- -------- --------- ---------
Income (loss) before income taxes (11,502) 2,588 (73,335) (462)
BENEFIT FROM (PROVISION FOR) INCOME TAXES 4,131 (906) 25,277 162
-------- -------- --------- ---------
Income (loss) before extraordinary item (7,371) 1,682 (48,058) (300)
EXTRAORDINARY ITEM: Loss on extinguishment of debt,
less applicable income tax benefit of $1,468 - - (2,726) -
-------- -------- --------- ---------
Net income (loss) $ (7,371) $ 1,682 $ (50,784) $ (300)
======== ======= ========= ======
Income (loss) per common share-basic
Income (loss) before extraordinary item available for
common shareholders $ (0.49) $ 0.11 $ (3.23) $ (0.02)
Extraordinary item, net of tax - - (0.18) -
-------- -------- --------- ---------
Net income (loss) available for common shareholders $ (0.49) $ 0.11 $ (3.41) $ (0.02)
======= ====== ======= =======
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 $ (0.49) $ 0.11 $ (3.23) $ (0.02)
Extraordinary item, net of tax - - (0.18) -
-------- -------- --------- ---------
Net income (loss) available for common shareholders $ (0.49) $ 0.11 $ (3.41) $ (0.02)
======= ====== ======= =======
Weighted average common shares outstanding 14,900,593 15,202,644 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)
Nine Months Ended
September 30,
2001 2000
---- ----
(unaudited)
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES $ (22,874) $ 3,115
--------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (4,303) (35,101)
Proceeds from sale of assets 26,155 5,055
--------- -------
Net cash provided by (used in) investing activities 21,852 (30,046)
--------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on long-term debt (28,164) (39,639)
New borrowings 30,400 71,500
Dividends paid - (1,341)
Debt issuance costs (1,093) (1,964)
--------- -------
Net cash provided by financing activities 1,143 28,556
--------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS 121 1,625
CASH AND CASH EQUIVALENTS, beginning of period 5,021 4,478
--------- -------
CASH AND CASH EQUIVALENTS, end of period $ 5,142 $ 6,103
======= =======
DISCLOSURE OF SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 12,765 $ 14,619
Income taxes 332 679
NON-CASH TRANSACTIONS:
Value assigned to warrants 1,571 -
Addition of equipment acquisition agreements 11,770 -
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 three and nine months ended September 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 results 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
these 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.
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), reorganization or sale. The process is on going, but to date certain
aggregate pits have been shutdown, and operations have been, or will be,
curtailed or suspended at other 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 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 totaled approximately
$17.0 million in the second quarter of 2001 and $0.9 million in the third
quarter of which $13.8 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 for the nine months ended September 30,
2001. 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 by December 31, 2001. The following table sets forth a summary of
the charges taken during the second and third quarters (in millions):
Closed transportation business, primarily goodwill $ 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 6.5
Fixed asset write-offs 5.0
Prepaid expense adjustments 0.7
---------
$ 17.9
=========
In addition to the above charges, in the second and third quarters 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, asset impairment
charges of $15.4 million related to the write-down of an asphalt plant and 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.
In the second quarter of 2001, the Company disclosed that it had
entered into a definitive agreement to sell its southeastern operations to
Florida Rock Industries, Inc., which agreement was terminated subsequent to
September 30, 2001 as more fully described in Note 7.
In anticipation of the Florida Rock transaction, the Company's senior
secured lenders had provided waivers of covenant defaults and extensions of
maturities of certain indebtedness to September 30, 2001. After the transaction
was terminated, the Company and its senior secured lenders entered into a Ninth
Amendment to its Credit Agreement, as more fully described in Note 3, which
waived financial covenant defaults, extended due dates of interest and bank fee
payments and extended maturities of certain indebtedness to November 16, 2001.
The effectiveness of the Ninth Amendment is subject to certain conditions
including receiving waivers of non-compliance with certain substantially
7
equivalent financial covenants under the subordinated notes and waivers of
default under the equipment acquisition agreements described below, which have
been requested but not yet received. There is no assurance that the Company will
be able to obtain such waivers. As a result, the Company has reflected such
indebtedness as current liabilities.
The Company is currently in discussions with its senior secured lenders
relative to restructuring of its indebtedness and for an extension of the
November 16, 2001 due date for certain principal payments in the amount of $8.8
million, interest in the amount of approximately $2.0 million and fees in the
amount of $1.9 million, and for a deferral of the November 30, 2001 interest
payment. The Company's ability to continue as a going concern is dependent on
its ability to refinance and restructure its indebtedness. There is no assurance
that the Company will be able to achieve any of the foregoing.
If the Company is unable to negotiate an agreement with its lenders, it
may have no other alternative but to seek bankruptcy court protection. Even if
the Company is successful in its negotiations with its lenders, it may still be
necessary to seek bankruptcy court protection to effect a debt restructuring.
3. Long-Term Debt and Capital Lease Obligations
Due to the Company's failure to comply with certain financial
covenants, the Company is in default on its senior secured credit facility,
senior subordinated notes, junior subordinated debt and certain equipment
acquisition agreements as described below. As a result, the Company has
reflected such indebtedness as current liabilities at September 30, 2001.
A summary of long-term debt and capital lease obligations is as
follows:
September 30, December 31,
2001 2000
---- ----
(dollars in thousands)
Prudential Insurance subordinated notes, net of discount
of $508 and $575, respectively $ 44,492 $ 44,425
GTCR Fund IV junior subordinated note, net of discount
of $589 1,440 -
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 34,500 77,600
Notes payable to former shareholders 712 1,890
Capital lease obligations 19,361 11,240
Other 2,920 4,456
-------- --------
Total long-term debt and capital lease obligations 215,856 213,515
Less: Current portion (209,054) (22,842)
-------- --------
Long-term debt and capital lease obligations,
net of current portion $ 6,802 $ 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.
8
U.S. AGGREGATES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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 was 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 $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 plus 7.00%, and fees of $1.55 million. As
described below, the Ninth Amendment to the Company's Credit Agreement extended
the due date for such fees and principal payments to November 16, 2001.
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, which
became effective on September 5, 2001, 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. This Eighth Amendment also provided $3.0 million
of additional liquidity to the Company at an interest rate of a base rate plus
7%. As of September 30, 2001 the Alternate Base Rate was 6.0%. The Company
borrowed the $3.0 million during the quarter ended September 30, 2001.
Additionally, the Eighth Amendment provided for a fee of $0.125 million. As
described below, the Ninth Amendment to the Company's Credit Agreement extended
the due date for such fees, interest and principal payments to November 16,
2001. In addition, on August 14, 2001, the Company received waivers of
non-compliance with certain substantially equivalent financial covenants under
the subordinated notes.
On September 27, 2001, the Company entered into a Ninth 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 $12.5
million for the period from April 1, 2001 through September 30, 2001. The actual
EBITDA for this period was a loss of $26.9 million. The Company was also in
default under the Eighth Amendment to its Credit Agreement in that it did not
pay certain fees by September 28, 2001 and did not repay the principal and
interest due on September 30, 2001. This Ninth Amendment also provides for a
deferral of all fees, interest and principal due between September 28, 2001 and
November 15, 2001 to November 16, 2001. The effectiveness of the Ninth Amendment
is subject to certain conditions including receiving waivers of non-compliance
9
U.S. AGGREGATES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
with certain substantially equivalent financial covenants under the subordinated
notes and waivers of default under the equipment acquisition agreements
described below, which have been requested but not yet received. There is no
assurance that the Company will be able to obtain such waivers.
The Company is currently in discussions with its senior secured lenders
relative to restructuring of its indebtedness and for an extension of the
November 16, 2001 due date for certain principal payments in the amount of $8.8
million, interest in the amount of approximately $2.0 million and fees in the
amount of $1.9 million, and for a deferral of the November 30, 2001 interest
payment. The Company's ability to continue as a going concern is dependent on
its ability to refinance and restructure its indebtedness. There is no assurance
that the Company will be able to achieve any of the foregoing.
If the Company is unable to negotiate an agreement with its lenders, it
may have no other alternative but to seek bankruptcy court protection. Even if
the Company is successful in its negotiations with its lenders, it may still be
necessary to seek bankruptcy court protection to effect a debt restructuring.
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 September
30, 2001, the financial institution has funded approximately $11.8 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
September 30, 2001 as a current liability. Two of these projects provided for a
completion date of May 31, 2001 and one provided for a completion date of
September 15, 2001, which were not achieved and resulted in an event of default
under such agreements and cross defaults under certain of the Company's other
debt agreements. The Company requested waivers of the defaults under such
agreements as well as extensions of time periods necessary to complete such
projects. On September 4, 2001, the financial institution 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 were paid off upon the sale of the Company's
southeastern operations. As a result of the termination of the Florida Rock
transaction, the Company is currently in default of these equipment acquisition
agreements and has requested waivers of default and extensions of due dates.
There is no assurance that the Company will be able to obtain such waivers and
extensions.
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 the second quarter of 2001 (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.
10
U.S. AGGREGATES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
4. Shareholders' Equity
The following Statement of Changes in Shareholders' Equity summarizes
the Company's equity transactions between December 31, 2000 and September 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 - - - 115 - - - 115
Issuance of stock warrants - - 1,571 - - - - 1,571
Net loss - - - - - - (50,784) (50,784)
---------- ----- -------- -------- ----- ---- ------ ----------
BALANCE AT SEPTEMBER 30, 2001 14,908,222 $ 149 $125,219 $ (1,128) 7,629 $ (2) $(49,371) $ 74,867
========== ===== ======== ======== ===== ==== ======== ==========
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. The San Mateo corporate office was relocated to Draper, Utah
effective September 20, 2001.
As of September 30, 2001, $0.4 million of restructuring costs have been
paid and an accrual in the amount of $0.7 million related to the above
restructuring plans is included in the Condensed Consolidated Balance Sheet. The
remaining accrual is expected to be utilized within the next twelve months. The
Company is currently unable to quantify the expected future savings from these
restructurings.
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 excluded $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
11
U.S. AGGREGATES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
and other current assets) totaling $91.3 million have been classified as Assets
Held for Sale in the Condensed Consolidated Balance Sheet at September 30, 2001.
7. Sale of Southeastern 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 was subject to approval by the Company's shareholders, which was
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 occurred, as well as other customary closing conditions. The
aggregate purchase price to be received by the Company on the closing was to
equal $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.
On October 15, 2001, the Company announced that it had terminated its
definitive agreement to sell its southeastern operations to the Buyer per a
Termination and Release Agreement between the parties dated October 12, 2001. In
the period during which the Company was obtaining the necessary approvals for
the transaction and following completion by the Buyer of its due diligence, the
Buyer had requested certain contract modifications including a substantial
reduction in purchase price. The companies mutually concluded that they were
unable to reach agreement on these modifications. At September 30, 2001, as
indicated in Note 6, the Company continues to carry such assets as assets held
for sale.
As described above, the Company is currently in discussions with its
senior secured lenders relative to restructuring of its indebtedness. As a
result of such discussions, the Company may decide not to sell its southeastern
operations, in which case, it would review the impairment charges taken on such
assets in the second quarter of 2001, reinstate depreciation and amortization
expenses of approximately $1.1 million not taken in the third quarter since such
assets were held for sale, and reclassify such assets from assets held for sale.
8. Inventories
Inventories consist of the following as of:
September 30, December 31,
2001 2000
(dollars in thousands)
Finished products $ 18,755 $ 26,835
Raw materials 835 1,892
Supplies and parts 892 768
Fuel 286 324
Less: Allowances (1,519) (24)
$ 19,249 $ 29,795
Inventories are pledged as security under various debt agreements.
12
U.S. AGGREGATES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
9. Income (Loss) Per Share
Three Months Ended September 30,
------------------------------------------------------------------
2001 2000
----------------------------- ----------------------------------
(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 $ (7,371) 14,900,593 $ (0.49) $ 1,682 14,900,593 $ 0.11
Effect of dilutive securities - 302,051
---------- ----------
Dilutive income (loss) before extraordinary item
available for common shareholders $ (7,371) 14,900,593 $ (0.49) $ 1,682 15,202,644 $ 0.11
======== ========== ======= ======= ========== ======
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. 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 third
quarter and nine months ended September 30, 2001, the Company recorded a
decrease in the value of this swap contract of $0.6 million and $1.5 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
assessing 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.
In August 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. This pronouncement addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets. This pronouncement supersedes FASB Statement No, 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, and
the accounting and reporting provisions of APB Opinion No. 30, Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions, for the disposal of a segment of a business. This pronouncement
resolves significant implementation issues related to Statement 121 and
establishes a single accounting model for long-lived assets to be disposed of by
sale. The Company is evaluating this statement and has not yet made a
13
U.S. AGGREGATES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
determination of the impact of adoption on the Company's results of operations,
financial position or liquidity, if any. The Company will adopt SFAS No. 144
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 $6.0 million in contingent proceeds as discussed
below. 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 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
September 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 and other unspecified damages. The Company has denied the claims.
However, on November 1, 2001, the Company executed a Settlement Agreement and
Release with one of the executives. The total settlement is estimated to be
approximately $476 thousand, which includes among other things the satisfaction
of notes receivable of $189 thousand, cash payment of $25 thousand and the
execution of two promissory notes totaling $150 thousand bearing zero interest
payable by the Company in three equal annual installments commencing October 1,
2002. The Company has recorded the settlement expense in the third quarter 2001.
14
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.
In the second quarter of 2001, the Company disclosed that it had
entered into a definitive agreement to sell its southeastern operations to
Florida Rock Industries, Inc., which agreement was terminated subsequent to
September 30, 2001 as more fully described in Note 7.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2001, the Company had negative working capital of
$106.5 million primarily as a result of the reclassification of a majority of
its indebtedness due to defaults as described below.
Net cash used in operating activities for the nine months ended
September 30, 2001 was $22.9 million, compared to $3.1 million provided 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 nine months ended September 30,
2001 was $21.9 million compared to $30.0 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 $21.1 million. Net cash provided by financing activities was
$1.1 million for the nine months ended September 30, 2001 compared to $28.6
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 historically
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 could
continue to unfavorably impact the liquidity of the Company.
Results of the Company's operations have declined over the last several
quarters, which have negatively impacted the Company's liquidity. As more fully
described herein, the ability of the Company to maintain sufficient short-term
liquidity and continue as a going concern is dependent upon the Company's
ability to obtain waivers of non-compliance of financial covenants, extensions
of maturities, deferral of interest and fee payments and additional loans from
its senior secured lenders. In the longer term, the Company's ability to
maintain sufficient liquidity is dependent upon achieving and maintaining
profitable operations, restructuring or refinancing its debt, selling
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 which case the Company may have no alternative
but to seek bankruptcy court protection. Even if the Company is successful in
its negotiations with its lenders, it may still be necessary to seek bankruptcy
court protection to effect a debt restructuring.
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 $6.0 million in contingent proceeds as discussed
below. 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 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
15
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 September
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 plus 7.00%, and fees of $1.55 million. As
described below, the Ninth Amendment to the Company's Credit Agreement extended
the due date for such fees and principal payments to November 16, 2001.
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 was subject to approval by the Company's shareholders, which was
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 occurred, as well as other customary closing conditions. The
aggregate purchase price to be received by the Company on the closing was to
equal $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.
On October 15, 2001, the Company announced that it had terminated its
definitive agreement to sell its southeastern operations to the Buyer per a
Termination and Release Agreement between the parties dated October 12, 2001. In
the period during which the Company was obtaining the necessary approvals for
the transaction and following completion by the Buyer of its due diligence, the
Buyer had requested certain contract modifications including a substantial
reduction in purchase price. The companies mutually concluded that they were
unable to reach agreement on these modifications.
16
On August 14, 2001, the Company entered into an Eighth Amendment, which
became effective on September 5, 2001, 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. This Eighth
Amendment also provided $3.0 million of additional liquidity to the Company at
an interest rate of a base rate plus 7%. As of September 30, 2001, the
Alternative Base Rate was 6.0%. The Company borrowed the $3.0 million during the
quarter ended September 30, 2001. Additionally, the Eighth Amendment provided
for a fee of $0.125 million. As described below, the Ninth Amendment to the
Company's Credit Agreement extended the due date for such fees, interest and
principal payments to November 16, 2001. In addition, on August 14, 2001, the
Company received waivers of non-compliance with certain substantially equivalent
financial covenants under the subordinated notes.
On September 27, 2001, the Company entered into a Ninth 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 $12.5
million for the period from April 1, 2001 through September 30, 2001. The actual
EBITDA for this period was a loss of $26.9 million. The Company was also in
default under the Eighth Amendment to its Credit Agreement in that it did not
pay certain fees by September 28, 2001 and did not repay the principal and
interest due on September 30, 2001. This Ninth Amendment also provides for a
deferral of all fees, interest and principal due between September 28, 2001 and
November 15, 2001 to November 16, 2001. The effectiveness of the Ninth Amendment
is subject to certain conditions including receiving waivers of non-compliance
with certain substantially equivalent financial covenants under the subordinated
notes and waivers of default under the equipment acquisition agreements
described below, which have been requested but not yet received. There is no
assurance that the Company will be able to obtain such waivers.
The Company is currently in discussions with its senior secured lenders
relative to restructuring of its indebtedness and for an extension of the
November 16, 2001 due date for certain principal payments in the amount of $8.8
million, interest in the amount of approximately $2.0 million and fees in the
amount of $1.9 million, and for a deferral of the November 30, 2001 interest
payment. The Company's ability to continue as a going concern is dependent on
its ability to refinance and restructure its indebtedness. There is no assurance
that the Company will be able to achieve any of the foregoing.
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 September
30, 2001, the financial institution has funded approximately $11.8 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
September 30, 2001 as a current liability. Two of these projects provided for a
completion date of May 31, 2001 and one provided for a completion date of
September 15, 2001, which were not achieved and resulted in an event of default
under such agreements and cross defaults under certain of the Company's other
debt agreements. The Company requested waivers of the defaults under such
agreements as well as extensions of time periods necessary to complete such
projects. On September 4, 2001, the financial institution 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 were paid off upon the sale of the Company's
southeastern operations. As a result of the termination of the Florida Rock
transaction, the Company is currently in default of these equipment acquisition
agreements and has requested waivers of default and extensions of due dates.
There is no assurance that the Company will be able to obtain such waivers and
extensions.
17
RESULTS OF OPERATIONS
Third Quarter Ended September 30, 2001 Compared to Restated Third Quarter Ended
September 30, 2000
Net sales for the three-month period ended September 30, 2001 decreased
approximately 34.2% to $61.2 million, compared to $93.0 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
(8%) in the third quarter, which includes a decrease in sales at the Company's
southeastern operations of $1.3 million (7%) and a decrease at the Company's
western operations of $4.1 million (9%). Excluding sold or closed operations;
sales for the quarter ended September 30, 2001 were approximately $61.2 million
as compared to $66.6 million for the same period in 2000. Excluding the effect
of sold or closed operations; aggregate sales decreased $1.1 million or 6%. This
change was due to a decrease in aggregate tons sold and was partially offset by
an increase in average selling prices. Asphalt, paving and construction sales,
excluding the effect of sold or closed operations, in the third quarter of 2001
increased $0.3 million or 1% over the same period of 2000 and ready mix concrete
sales decreased $2.7 million or 17% due primarily to an approximate 18% decrease
in ready mix cubic yards sold. In addition, there were reductions in
transportation and other sales.
For the three month period ended September 30, 2001, the Company
reported a gross profit of approximately $11.7 million or 19.0% of net sales,
compared to a gross profit of $20.2 million or 21.7% of net sales, for the same
period in 2000. Of the $8.5 million decrease in gross profit, approximately $3.7
million of the decline resulted from operations existing in 2000 that were sold
or closed prior to the second quarter of 2001. A decrease in sales from
continuing operations of approximately $5.4 million contributed an approximate
$1 million to the decline in gross profit. The Company also experienced lower
margins in its construction business in 2001 accounting for an additional $1.5
million decrease in gross profit. The decrease in construction margins from
21.0% in 2000 to 13.4% in 2001 was generally the result of an increase in the
number of state projects which typically have lower margins, a more competitive
marketplace and increases in certain construction related costs.
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), reorganization or sale. As a part of this review, management
implemented new accounting policies that affected aggregate inventory valuation
and cost allocations to capital projects. For the third quarter, these changes
resulted in a decrease in gross profit of approximately $2.3 million in the
Company's aggregates operations which included an approximate $.9 million
inventory write-down.
Selling, general and administrative expenses increased to approximately
$9.5 million for the three-month period ended September 30, 2001 from
approximately $7.4 million for the same period in 2000, an increase of $2.1
million, or 27.9%. This increase was due primarily to costs related to the
Florida Rock transaction, increased legal fees, professional service fees and
employee related costs in addition to an increase in the allowance for doubtful
accounts. These increases were partially offset by reductions in selling,
general and administrative costs at closed or sold operations.
Depreciation, depletion and amortization expenses decreased
approximately $1.0 million or 24.2%, to $3.2 million for the three-month period
ended September 30, 2001 from $4.2 million for the same period in 2000. This
decrease was primarily due to depreciation not being recorded on assets held for
sale at the Company's southeastern operations in 2001. Depreciation at the
Company's southeastern operations totaled approximately $1.1 million for the
three-month period ended September 30, 2000 as compared to $0.1 million for the
same period in 2001.
The Company recorded a loss on disposal of assets of approximately $0.3
million in the third quarter of 2001. This loss related primarily to the
disposition of land at the Company's southeastern operations.
The Company recorded an asset impairment charge of approximately $0.6
million in the third quarter of 2001. This loss related to the write-down of an
asphalt plant at the Company's western operations.
18
Net interest and financing expenses increased $4.3 million to $9.6
million in 2001 from $5.2 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 (income)/expense improved to income of $3 thousand for the
three-month period ended September 30, 2001 from an expense of $.7 million for
the same period in 2000. This improvement was primarily due to charges for
deferred finance costs and costs incurred in its review of strategic
alternatives for its business recorded in 2000 without similar expenses being
incurred by the Company in 2001.
Net loss for the third quarter of 2001 was $7.4 million, or $0.49 per
share, compared with net income of $1.7 million, or $0.11 per share, for the
same quarter of 2000.
The effective tax rates for the quarters ended September 30, 2001 and
September 30, 2000 were approximately 36% and 35%, respectively.
Nine Months Ended September 30, 2001 Compared to Restated Nine Months Ended
September 30, 2000
Net sales for the nine-month period ended September 30, 2001 decreased
by 28.5% to $165.1 million compared to $231.0 million for the same period 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 quarter of 2001, the Company's sales decreased
approximately $8.0 million or 4.8% for the nine-month period ended September 30,
2001 as compared to the same period in 2000. The Company's southeastern
operations recorded a net sales increase of $3.1 million (6%), and its western
operations recorded a decrease in net sales of $11.1 million (10%). Excluding
sold or closed operations, sales for the nine-month period ended September 30,
2001 were approximately $159.7 million as compared to $167.7 million for the
same period in 2000. Excluding the effect of sold or closed operations,
aggregate sales increased $1.2 million or 2%. This change was due to an increase
in average selling prices that was partially offset by a decrease in aggregate
tons sold. Asphalt, paving and construction sales, excluding the effect of sold
or closed operations, in the nine-month period ended September 30, 2001
decreased $0.7 million, or 1%, over the same period of 2000 primarily due to a
decrease in third party asphalt sales; and ready-mix concrete sales decreased
$5.8 million or 13% primarily due to a decrease in cubic yards sold which was
offset by a slight increase in average prices. Transportation and other sales
were reduced from 2000 levels.
For the nine-month period ended September 30, 2001, the Company
reported a gross profit of approximately $13.0 million or 7.9% of net sales,
compared to a gross profit of $50.8 million or 22.0% 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 $11.1 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), reorganization or sale. The process is
on going, but to date certain aggregate pits have been shutdown, and operations
have been, or will be, curtailed or suspended at other 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 written-off. At some 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 totaled approximately $17.0 million in the second quarter of 2001
and approximately $1.5 million in the third quarter of 2001 of which $13.8
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
19
count of all fixed assets in the second half of 2001. In addition to these
charges taken through the nine-month period ended September 30, 2001, gross
profit was lower than the prior year due to decreases in the Company's margins,
primarily in its construction businesses. The decrease in construction margins
from 21.7% in 2000 to 11.3% in 2001 was the result of an increase in the number
of state projects which typically have lower margins, a more competitive
marketplace and increases in certain construction related costs. Also, as a
result of significantly curtailed capital expenditures, costs charged to
operations at the quarries are higher in 2001 versus prior years.
Selling, general and administrative expenses were $27.2 million for the
nine-month period ended September 30, 2001 versus $24.2 million in 2000, an
increase of $3.0 million or 12.5%. This increase was due to costs related to the
Florida Rock transaction, 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 $2.0 million or 16.1% to $14.3 million for the nine-month period
ended September 30, 2001 from $12.3 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 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; and depreciation not being recorded
for the third quarter only, on assets held for sale at the Company's
southeastern operations for which depreciation was recorded in 2000.
The Company recorded a loss on disposal of assets of approximately $1.8
million for the nine-month period ended September 30, 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. In addition, the Company incurred
losses related to the disposition of land at the Company's southeastern
operations.
During the nine-month period ended September 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; and $0.5 million relating to severance and relocation costs
for the 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. In addition, the Company recorded an asset
impairment charge of approximately $0.6 million related to the write-down of an
asphalt plant at the Company's western operations.
Net interest and financing expenses increased $10.8 million to $24.8
million in 2001 from $14.0 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
nine-month period ended September 30, 2001 from approximately $.7 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.
20
Net loss for the nine-month period ended September 30, 2001 was $50.8
million, or $3.41 per share, compared with a net loss of $0.3 million, or $0.02
per share, for the same period of 2000.
The effective tax rates for the nine-month periods ended September 30,
2001 and September 30, 2000 were approximately 34% and 35%, respectively.
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to certain market risks arising from
transactions that are entered into in the normal course of business.
All of the Company's borrowings under its floating rate credit
facilities are subject to interest rate risk. Borrowings under its syndicated
credit facility bear interest, at its option, at either the Eurodollar rate or
the Alternate Base Rate, plus margin. On December 22, 2000, the Company entered
into a derivative in order to fix interest rate risks on $37.0 million of its
senior credit facility borrowings. Each 1.0% increase in the interest rates on
the total of its floating rate debt less the hedged amount would impact pretax
earnings by approximately $1.2 million.
21
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
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 and other unspecified damages. The Company has denied the claims.
However, on November 1, 2001, the Company executed a Settlement Agreement and
Release with one of the executives. The total settlement is estimated to be
approximately $476 thousand which includes among other things the satisfaction
of notes receivable of $189 thousand, cash payment of $25 thousand and the
execution of two promissory notes totaling $150 thousand bearing zero interest
payable by the Company in three equal annual installments commencing October 1,
2002. The Company has recorded the settlement expense in the third quarter 2001.
From time to time, the Company and its subsidiaries have been involved
in various legal proceedings relating to it and its subsidiaries' operations and
properties which, except for the proceedings described in the previous
paragraph, we believe are routine in nature and incidental to the conduct of it
and its subsidiaries' business. The Company and its subsidiaries' ultimate legal
and financial liability with respect to these matters cannot be estimated with
certainty, but we believe, based on examination of such matters, that none of
these proceedings, if determined adversely, would have a material adverse effect
on the Company's business, financial condition or results of operations.
Item 3. Defaults Upon Senior Securities
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 $12.5
million for the period from April 1, 2001 through September 30, 2001. The
Company was also in default of a substantially equivalent financial covenant
under the subordinated notes that requires a minimum EBITDA of $11.25 million
for the period from April 1, 2001 through September 30, 2001. The actual EBITDA
for this period was a loss of $26.9 million. In addition, the Company was in
default under the Eighth Amendment to its Credit Agreement in that it did not
pay certain fees by September 28, 2001 and did not repay the principal and
interest due on September 30, 2001.
On September 27, 2001, the Company entered into a Ninth 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. This Ninth
Amendment also provides for a deferral of all fees, interest and principal due
between September 28, 2001 and November 15, 2001 to November 16, 2001. The
effectiveness of this Amendment is subject to certain conditions including
receiving waivers of non-compliance with certain substantially equivalent
financial covenants under the subordinated notes and waivers of default under
certain other debt instruments, which have been requested but not yet received.
There is no assurance that the Company will be able to obtain such waivers.
The Company is currently in discussions with its senior secured lenders
relative to restructuring of its indebtedness and for an extension of the
November 16, 2001 due date for certain principal payments in the amount of $8.8
million, interest in the amount of approximately $2.0 million and fees in the
amount of $1.9 million, and for a deferral of the November 30, 2001 interest
payment. The Company's ability to continue as a going concern is dependent on
its ability to refinance and restructure its indebtedness. There is no
assurance that the Company will be able to achieve any of the foregoing.
22
Item 5. Other Information
On October 18, 2001, Bruce V. Rauner resigned from the Board of
Directors.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No. Description
3.1* Form of Restated Certificate of Incorporation of the
Company (Amendment No. 1 to Form S-1 (Reg. No.
333-79209), Exhibit 3.1(vi), filed July 14, 1999)
3.2* Form of Restated By-laws of the Company (Amendment
No. 1 to Form S-1 (Reg. No. 333-79209), Exhibit
3.2(ii), filed July 14, 1999)
4.1(ix) Eighth Amendment to Third Amended and Restated Credit
Agreement dated as of August 14, 2001 by and among
the Company, various financial institutions and Bank
of America National Trust and Savings Association,
individually and as agent
4.1(x) Ninth Amendment to Third Amended and Restated Credit
Agreement dated as of September 27, 2001 by and among
the Company, various financial institutions and Bank
of America National Trust and Savings Association,
individually and as agent
10.1* Asset Purchase Agreement, dated as of July 11, 2001,
by and among SRM Aggregates, Inc., Bradley Stone &
Sand, Inc., BHY Ready Mix, Inc., Dekalb Stone, Inc.,
Mulberry Rock Corporation, Bama Crushed Corporation,
Grove Materials Corporation, U.S. Aggregates, Inc.,
and Florida Rock Industries, Inc. (Preliminary Proxy
Statement, Annex B, filed July 20, 2001)
10.2* Termination and Release Agreement dated October 12,
2001 (Form 8-K, Exhibit 10.1, filed October 16, 2001)
* Incorporated by reference to the filing indicated
(b) Reports on Form 8-K
1. On July 12, 2001 the Registrant filed a report on Form 8-K
announcing that it had entered into an Asset Purchase Agreement (the
"Agreement") with Florida Rock Industries, Inc. for the sale of the assets of
SRM Aggregates, Inc., Bradley Stone & Sand, Inc., BHY Ready Mix, Inc., Mulberry
Rock Corporation, Bama Crushed Corporation, wholly owned subsidiaries of the
Company, and Dekalb Stone, Inc., a majority owned subsidiary of the Company, to
Florida Rock Industries, Inc for approximately $105 million in cash, plus the
assumption of certain external debt and equipment operating leases, having an
approximate value of $45 million.
2. On August 24, 2001 the Registrant filed a current report on Form 8-K
announcing that it was delaying the date of its Special Meeting of Stockholders
until September 20, 2001 to allow for a full review of its preliminary proxy
statement by the Securities and Exchange Commission.
3. On September 20, 2001 the Registrant filed a report on Form 8-K
announcing that it had relocated its principal executive offices from 400 South
El Camino Real, Suite 500, San Mateo, California 94402 to 147 West Election
Road, Suite 110, Draper, Utah 94020.
4. On September 28, 2001 the Registrant filed a report on Form 8-K
announcing that it had received a request for a reduction in the purchase price
of its Southeastern Assets.
No other reports on Form 8-K were filed during the three months ended
September 30, 2001.
All other items specified by Part II of this report are inapplicable and
accordingly have been omitted.
23
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 14, 2001 /s/ Stanford Springel
-------------------------
Stanford Springel
Chief Executive Officer
24
EXHIBIT INDEX
Exhibit No. Description
3.1* Form of Restated Certificate of Incorporation of the Company
(Amendment No. 1 to Form S-1 (Reg. No. 333-79209), Exhibit
3.1(vi), filed July 14, 1999)
3.2* Form of Restated By-laws of the Company (Amendment No. 1 to
Form S-1 (Reg. No. 333-79209), Exhibit 3.2(ii), filed July 14,
1999)
4.1(ix) Eighth Amendment to Third Amended and Restated Credit
Agreement dated as of August 14, 2001 by and among the
Company, various financial institutions and Bank of America
National Trust and Savings Association, individually and as
agent
4.1(x) Ninth Amendment to Third Amended and Restated Credit Agreement
dated as of September 27, 2001 by and among the Company,
various financial institutions and Bank of America National
Trust and Savings Association, individually and as agent
10.1* Asset Purchase Agreement, dated as of July 11, 2001, by and
among SRM Aggregates, Inc., Bradley Stone & Sand, Inc., BHY
Ready Mix, Inc., Dekalb Stone, Inc., Mulberry Rock
Corporation, Bama Crushed Corporation, Grove Materials
Corporation, U.S. Aggregates, Inc., and Florida Rock
Industries, Inc. (Preliminary Proxy Statement, Annex B, filed
July 20, 2001)
10.2* Termination and Release Agreement dated October 12, 2001 (Form
8-K, Exhibit 10.1, filed October 16, 2001)
* Incorporated by reference to the filing indicated
25