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 June 30, 2001
or
[_]______Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period ______ to ______
Commission File Number 333-32518
Better Minerals & Aggregates Company
(Exact Name of Registrant as Specified in Its Charter)
Delaware 55-0749125
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
Route 522 North, P.O. Box 187
Berkeley Springs, West Virginia 25411
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (304) 258-2500
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 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 Outstanding as of August 1, 2001
------ --------------------------------
Common Stock 100 shares
Better Minerals & Aggregates Company
Form 10-Q Index
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
June 30, 2001 (unaudited) and December 31, 2000......................... 1
Condensed Consolidated Statements of Operations for the quarter
and the six months ended June 30, 2001 and June 30, 2000 (unaudited).... 2
Condensed Consolidated Statements of Stockholder's Equity for
the six months ended June 30, 2001 and June 30, 2000 (unaudited)........ 3
Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 2001 and June 30, 2000 (unaudited)....................... 4
Notes to Condensed Consolidated Financial Statements.................... 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................. 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk.. 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................ 14
Item 5. Other Information........................................ 14
Item 6. Exhibits and Reports on Form 8-K......................... 14
Signatures
Exhibit Index
5
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BETTER MINERALS & AGGREGATES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
June 30, December 31,
2001 2000
---- ----
ASSETS
CURRENT:
Cash and cash equivalents ........................................... $ 572 $ 860
Accounts receivable
Trade, less allowance for doubtful accounts ........................ 55,903 44,817
Other .............................................................. 1,969 1,173
Inventories ......................................................... 27,715 27,890
Prepaid expenses and other current assets ........................... 3,155 3,221
Income tax deposit .................................................. 1,184 2,070
Deferred income taxes ............................................... 3,518 12,809
--------- ---------
Total current assets ........................................... 94,016 92,840
PROPERTY, PLANT AND EQUIPMENT:
Mining property ..................................................... 264,175 264,175
Mine Development .................................................... 8,427 8,156
Land ................................................................ 28,177 28,249
Land improvements ................................................... 5,252 5,043
Buildings ........................................................... 36,556 36,556
Machinery and equipment ............................................. 159,425 156,297
Furniture and fixtures .............................................. 1,997 1,395
Construction-in-progress ............................................ 10,431 5,317
--------- ---------
514,440 505,188
Accumulated depletion, depreciation and amortization ................ (104,985) (89,502)
--------- ---------
Property, plant, and equipment, net ............................. 409,455 415,686
OTHER NONCURRENT:
Goodwill and noncompete agreements, net ............................ 15,480 16,649
Debt issuance costs ................................................ 11,477 12,958
Other noncurrent assets ............................................ 267 153
Total other noncurrent ......................................... 27,224 29,760
--------- ---------
Total assets ................................................... $ 530,695 $ 538,286
========= =========
LIABILITIES
CURRENT:
Book overdraft ..................................................... $ 7,618 $ 7,264
Accounts payable ................................................... 16,444 15,908
Accrued liabilities ................................................ 11,648 11,490
Due to parent ...................................................... 2,409 2,362
Accrued interest ................................................... 8,097 8,654
Current portion of long-term debt .................................. 10,237 9,076
--------- ---------
Total current liabilities ...................................... 56,453 54,754
NONCURRENT LIABILITIES:
Long-term debt, net of current portion ............................. 292,639 280,329
Deferred income taxes .............................................. 94,493 110,676
Other noncurrent liabilities ....................................... 40,767 39,311
--------- ---------
Total noncurrent liabilities ................................... 427,899 430,316
STOCKHOLDER'S EQUITY
Common stock, par value $.01, authorized 5,000 shares, issued 100 shares -- --
Additional paid-in capital ............................................. 81,377 81,377
Loans to related party ................................................. (1,437) (1,507)
Retained deficit ....................................................... (33,389) (26,560)
Accumulated other comprehensive (loss) income .......................... (208) (94)
--------- ---------
Total stockholder's equity ...................................... 46,343 53,216
--------- ---------
Total liabilities and stockholder's equity .................... $ 530,695 $ 538,286
========= =========
The accompanying notes are an integral part of these statements.
1
BETTER MINERALS & AGGREGATES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands)
(Unaudited)
For the Quarter Ended For the Six Months Ended
June 30, June 30,
-------- --------
2001 2000 2001 2000
---- ---- ---- ----
Net sales .................................... $ 84,767 $ 80,535 $ 143,726 $ 141,504
Cost of goods sold ........................... 60,975 55,872 111,473 104,882
Depreciation, depletion and amortization ..... 8,117 9,169 16,355 17,625
Selling, general & administrative ............ 5,857 7,214 11,095 13,270
Incentive stock compensation ................. -- 998 -- 998
--------- --------- --------- ---------
Operating income .................... 9,818 7,282 4,803 4,729
Interest expense ............................. 8,945 8,937 18,916 17,797
Other (income) expense, net of interest income (249) (458) (594) (965)
--------- --------- --------- ---------
(Loss) income before income taxes ... 1,122 (1,197) (13,519) (12,103)
Provision (benefit) for income taxes ......... (5) (2,970) (6,690) (4,769)
--------- --------- --------- ---------
Net (loss) income .................. $ 1,127 $ 1,773 $ (6,829) $ (7,334)
========= ========= ========= =========
The accompanying notes are an integral part of these statements.
2
BETTER MINERALS & AGGREGATES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(Dollars in Thousands)
(Unaudited)
Accumulated Other
Comprehensive loss
Additional Loans Unrealized Minimum Total
Common Paid-In Retained to Related Loss on Pension Stockholder's
Stock Capital Deficit Party Derivatives Liability Total Equity
----- ------- ------- ----- ----------- --------- ----- ------
Balance December 31, 2000 . $ -- $ 81,377 $(25,560) $ (1,507) $ -- $ (94) $ (94) $ 53,216
Comprehensive income, net
of income taxes:
Net (loss) ........... (6,829) (6,829)
Unrealized holding ... (114) (114) (114)
loss
On derivatives
Total ............. (6,943)
comprehensive loss
Loans to related party .... 70 70
-------- -------- -------- -------- -------- -------- --------
Balance June 30, 2001 ..... $ -- $ 81,377 $(33,389) $ (1,437) $ (114) $ (94) $ (208) $ 46,343
======== ======== ======== ======== ======== ======== ======== ========
Accumulated Other
Comprehensive loss
Additional Loans Foreign Minimum Total
Common Paid-In Retained to Related Currency Pension Stockholder's
Stock Capital Deficit Party Translation Liability Total Equity
----- ------- ------- ----- ----------- --------- ----- ------
Balance December 31, 1999 $ -- $ 81,377 $(17,012) $ -- $ (30) $-- $ (30) $ 64,335
Comprehensive income, net
of income taxes:
Net (loss) .......... (7,334) (7,334)
Foreign currency .... 30 30 30
translation
Total comprehensive (7,304)
loss
Loans to related party .. (1,001) (1,001)
-------- -------- -------- -------- ----- ------ -------
Balance June 30, 2000 ... $ -- $ 81,377 $(24,346) $(1,001) $ -- $ -- $ -- $ 56,030
======== ======== ======== ======== ======== ===== ===== ========
The accompanying notes are an integral part of these statements.
3
BETTER MINERALS & AGGREGATES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Six Months Ended June 30,
2001 2000
---- ----
Cash flows from operating activities:
Net (loss) income ............................................................ $ (6,829) $ (7,334)
Adjustments to reconcile net (loss) income to cash flows from operations:
Depreciation ................................................................. 11,460 11,004
Depletion .................................................................... 3,529 3,253
Non compete agreement amortization ........................................... 591 2,749
Debt issuance amortization ................................................... 1,481 1,082
Deferred income taxes ........................................................ (6,892) (7,230)
Disposal of property, plant and equipment (gain) loss ........................ (204) 3
Loss on sale of investment ................................................... -- 83
Other ........................................................................ 1,387 116
Changes in assets and liabilities, net of the effects from acquired companies:
Trade receivables ........................................................ (11,086) (11,189)
Non-trade receivables .................................................... (796) 206
Payable to parent ........................................................ 47 2,778
Payable to related party ................................................. -- (523)
Inventories .............................................................. 175 (4,264)
Prepaid expenses and other current assets ................................ 66 (322)
Accounts payable and accrued liabilities ................................. 419 2,982
Accrued interest ......................................................... (557) 655
Income taxes ............................................................. 887 368
-------- --------
Net cash provided by (used in) operating activities ................... (6,322) (5,583)
Cash flows from investing activities:
Capital expenditures ......................................................... (8,434) (16,332)
Proceeds from sale of property, plant and equipment .......................... 606 4
Proceeds from sale of investment ............................................. -- 3,136
Loans to related party ....................................................... 70 (1,001)
Net cash used for investing activities ..................................... (7,758) (14,193)
Cash flows from financing activies:
Increase (decrease) in book overdraft ........................................ 354 (149)
Principal payments on capital lease obligations .............................. (33) (22)
Net revolver credit agreement facility ....................................... 17,700 10,300
Repayment of long-term debt .................................................. (4,229) (2,805)
Financing fees ............................................................... -- (435)
-------- --------
Net cash provided by (used in) financing activities ........................ 13,792 6,889
Effect of cash exchange rates on cash ........................................... -- 30
Net increase (decrease) in cash ....................................... (288) (12,857)
Cash, beginning ................................................................. 860 13,573
-------- --------
Cash, ending .................................................................... $ 572 $ 716
======== ========
Schedule of non-cash investing and financing activities:
Assets acquired by assuming capital lease obligations ....................... $ 1,209 $ --
======== ========
The accompanying notes are an integral part of these statements.
4
BETTER MINERALS & AGGREGATES COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Accounting Policies
The unaudited interim condensed consolidated financial statements of Better
Minerals & Aggregates Company (the "Company") have been prepared in accordance
with the rules and regulations of the Securities and Exchange Commission. As a
result, certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. In the opinion of management, the
statements reflect all adjustments necessary for a fair presentation of the
results of the reported interim periods. The statements should be read in
conjunction with the summary accounting policies and notes to the audited
financial statements of the Company included in the Company's 2000 Annual Report
on Form 10-K for the year ended December 31, 2000, as amended (the "Form 10-K").
Operating results are not necessarily indicative of the results to be expected
for the full year or any other interim period, due to the seasonal, weather-
related conditions in certain aspects of the Company's business.
2. Inventories
At June 30, 2001 and December 31, 2000, inventory consisted of the following:
June 30, December 31,
(In thousands) 2001 2000
---- ----
Supplies (net of $168 and $66 obsolescence reserve) $12,068 $ 11,820
Raw materials and work in process 4,200 4,563
Finished goods 11,447 11,507
------ ------
$27,715 $ 27,890
======= ========
3. Comprehensive Income (Loss)
Comprehensive income (loss), net of tax for the three and six months ended June
30, 2001 and 2000 was as follows:
Three Months Ended Six Months Ended
June 30, June 30,
(In thousands) 2001 2000 2001 2000
---- ---- ---- ----
Net income (loss) $1,127 $1,773 $(6,829) $(7,334)
Unrealized holding gain
(loss) on derivatives 2 - (114) -
Foreign currency translation - - - 30
------ ------- ------- -------
Total comprehensive income (loss) $1,129 $1,773 $(6,943) $(7,304)
====== ====== ======== ========
5
4. Segment Information
The Company operates in the industrial minerals and aggregates business segments
which are more fully described in the Form 10-K. On January 1, 2001, as part of
a change in management reporting responsibilities, all of the New Jersey
operating assets of the Company's industrial minerals business unit were
transferred to the Company's aggregates business unit. Net sales from the
transferred assets are made both directly to customers and to the Company's
industrial minerals subsidiary. Prior year segment reporting has been restated
to include the New Jersey operations as part of the Company's aggregates
business unit. Reportable segment information for the three and six months ended
June 30, 2001 and 2000 was as follows:
Three Months Ended Six Months Ended
June 30, June 30,
(In thousands) 2001 2000 2001 2000
---- ---- ---- ----
Net sales:
Aggregates $ 39,532 $ 35,095 $ 56,628 $ 51,357
Industrial Minerals 50,486 50,432 96,497 99,512
Eliminations (5,251) (4,992) (9,399) (9,365)
--------- --------- --------- ---------
Total net sales $ 84,767 $ 80,535 $ 143,726 $ 141,504
========= ========= ========= =========
Operating company income (loss):
Aggregates $ 3,776 $ 4,124 $ (3,335) $ (2,210)
Industrial Minerals 6,483 5,769 8,839 9,625
--------- --------- --------- ---------
Total operating company
income (loss) $ 10,259 $ 9,893 $ 5,504 $ 7,415
General corporate (expense) (441) (2,611) (701) (2,686)
--------- --------- --------- ---------
Total operating income (loss) $ 9,818 $ 7,282 $ 4,803 $ 4,729
========= ========= ========= =========
Depreciation, depletion
and amortization expense:
Aggregates $ 4,643 $ 4,232 $ 8,839 $ 7,781
Industrial Minerals 3,458 4,922 7,484 9,814
Corporate 16 15 32 30
--------- --------- --------- ---------
Total depreciation, depletion, and
amortization expense $ 8,117 $ 9,169 $ 16,355 $ 17,625
========= ========= ========= =========
Capital expenditures:
Aggregates $ 2,802 $ 8,199 $ 5,814 $ 11,166
Industrial Minerals 1,625 3,029 2,620 4,974
Corporate -- 157 -- 192
--------- --------- --------- ---------
Total capital expenditures $ 4,427 $ 11,385 $ 8,434 $ 16,332
========= ========= ========= =========
Asset segment information at June 30, 2001 and December 31, 2000 was as follows:
June 30, December 31,
(In thousands) 2001 2000
---- ----
Assets:
Aggregates $357,059 $351,969
Industrial Minerals 168,347 203,676
Corporate 14,160 20,533
Elimination of intersegment receivables (8,871) (37,892)
------- --------
Total assets $530,695 $538,286
======== ========
6
5. Impact of Recent Accounting Standards
In June 2001, the Financial Accounting Standard Board ("FASB") issued FAS No.
141, "Business Combinations", which addresses the accounting and reporting for
business combinations, and FAS No. 142, "Goodwill and Other Intangible Assets",
which addresses the accounting and reporting for acquired goodwill and other
intangible assets. FAS 141 and 142 are effective January 1, 2002 for the
Company. The Company is in the process of reviewing the new pronouncements and
does not anticipate that adoption will have a material impact.
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
133, "Accounting for Derivative Instruments and Hedging Activities," on January
1, 2001. Initial adoption of this new accounting standard did not have a
material impact on the Company's financial statements. In accordance with SFAS
No. 133, all derivatives are recognized on the balance sheet at their fair
value. Changes in the fair value of a derivative instrument designated as a
"fair value" hedge, along with the corresponding change in fair value of the
hedged asset or liability, are recorded in current-period earnings. Changes in
the fair value of a derivative instrument designated as a "cash flow" hedge, to
the extent the hedge is highly effective, are recorded temporarily in other
comprehensive income then recognized in earnings along with the related effects
of the hedged items. Any ineffective portion of the cash flow hedge is
recognized in current-period earnings.
At June 30, 2001, the Company's derivative contracts consisted of an interest
rate swap used to convert a portion of its variable-rate debt to fixed-rate debt
and interest rate cap agreements to limit a portion of its variable-rate debt to
a fixed rate. These instruments are designated as, and are considered, effective
cash flow hedges of the Company's forecasted variable rate interest payments.
During 2000, the Emerging Issues Task Force ("EITF") issued EITF No. 00-10,
"Accounting for Shipping and Handling Fees and Costs." EITF No. 00-10 addresses
the statement of earnings classification of shipping and handling costs billed
to customers and was effective for the fourth quarter of 2000. The Company
adopted the provisions of EITF No. 00-10 at that time and has restated the
second quarter and year-to-date 2000 results to include $13.8 million and $24.9
million, respectively, in revenue and in cost of sales.
6. Sale of Canadian Facility
On February 29, 2000 the Company completed the sale of stock of its Canadian
subsidiary, George F. Pettinos (Canada) Limited, for $3.1 million. The proceeds
were used to retire the Company's tranche A term loan facility and for general
corporate uses. As a result of the sale, the Company recognized a pretax loss of
$0.1 million, which is included in other income.
7. Income Taxes
In accordance with generally accepted accounting principles, it is the
Company's practice at the end of each interim reporting period to make its best
estimate of the effective tax rate expected to be applicable for the full fiscal
year. Estimates are revised as additional information becomes available. In
addition, in the first quarter of 2000, the sale of George F. Pettinos (Canada)
Limited created a one-time $1.1 million charge to the tax provision.
8. Contingencies
On April 20, 2001, in an action pending in Beaumont, Texas, (Donald
Tompkins et at vs American Optical Corporation et al, the "Tompkins Case"), a
jury rendered a verdict against Ottawa Silica Company and Pennsylvania Glass
Sand Corporation, predecessor to U.S. Silica Company, in the amount of $7.5
million in actual damages. On June 1, 2001, the trial judge entered judgment on
the verdict; the amount of the judgment was approximately $6.4 million, the sum
of the verdict (reduced by settlements from other parties) and prejudgment
interest. In addition, punitive damages were settled for $600,000.
In light of the facts entered into evidence relating to the timing of the
exposure, the Company believes that the entire judgment in this action is
covered by a combination of the historical insurance coverage of Ottawa Silica
Company and the current indemnity agreement of ITT industries, as described
below. The company posted a bond, which is required to be filed as part of the
appeal process. The notice of appeal to the appropriate intermediate appellate
court in Texas will be timely filed. Based on advice of counsel, the Company
believes that there are meritorious grounds to file this appeal and that a
reversal and remand of the Tompkins case is probable.
7
The Company and its subsidiaries are involved in other legal proceedings, claims
and litigation arising in the ordinary course of business. Management believes,
through discussions with counsel, that its liability arising from or the
resolution of these legal proceedings, claims and litigation, in the aggregate,
will not have a material adverse effect on the consolidated financial position,
results of operations or cash flows of the Company.
The Company's subsidiary U.S. Silica Company is self-insured for product
liability insurance as it relates to occupational disease. In addition, U.S.
Silica Company is self-insured for health care costs and, in some states,
workers' compensation. The Company provides for estimated future losses based on
reported cases and past claim history. Management believes that the provision
for estimated losses is adequate.
Certain product liability claims related to occupational disease are indemnified
by ITT Industries, successor to a former owner of U.S. Silica Company, under an
agreement whereby claims filed against U.S. Silica Company prior to September
12, 2005 alleging exposure prior to September 12, 1985 are shared ratably based
on the claimant's total exposure period. The indemnity is subject to a
cumulative annual deductible and carry-forward adjustments and expires September
12, 2005.
9. Senior Subordinated Notes Subsidiary Guarantees
Except for the Company's Canadian subsidiary, which is an inactive company with
an immaterial amount of assets and liabilities, each of the Company's
subsidiaries has fully and unconditionally guaranteed the Senior Subordinated
Notes on a joint and several basis. The separate financial statements of the
subsidiary guarantors are not included in this report because (a) the Company is
a holding company with no assets or operations other than its investments in its
subsidiaries, (b) the subsidiary guarantors each are wholly owned by the
Company, comprise all of the direct and indirect subsidiaries of the Company
(other than inconsequential subsidiaries) and have jointly and severally
guaranteed the Company's obligations under the Senior Subordinated Notes on a
full and unconditional basis, (c) the aggregate assets, liabilities, earnings
and equity of the subsidiary guarantors are substantially equivalent to the
assets, liabilities, earnings and equity of the Company on a consolidated basis
and (d) management has determined that separate financial statements and other
disclosures concerning the subsidiary guarantors are not material to investors.
10. Related Party Transactions
In May, 2001, the Company entered into a new management services agreement with
D. George Harris & Associates (DGH&A) that becomes effective as of January 1,
2002. The new agreement has similar terms to the terms contained in the current
management services agreement with DGHA, which are described in the Company's
Annual Report on Form 10-K for the year ended December 31, 2000, as amended.
Under the terms of the new agreement, however, the annual fee to DGH&A for
management services is reduced to $500,000 per annum from the $950,000 fee
expected to be paid in 2001.
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following information should be read in conjunction with the accompanying
unaudited consolidated financial statements and the notes thereto included in
Item 1 of this quarterly report, and the audited consolidated financial
statements and the notes thereto and management's discussion and analysis of
financial condition and results of operations contained in our Annual Report on
Form 10-K for the year ended December 31, 2000, as amended. Unless otherwise
indicated or the context otherwise requires, all references in this quarterly
report to "we," "us," "our" or similar terms refer to Better Minerals &
Aggregates Company and its direct and indirect subsidiaries.
Overview
We mine, process and market industrial minerals, principally industrial silica,
in the eastern and midwestern United States. We also mine, process and market
aggregates and produce and market asphalt in certain parts of Pennsylvania and
New Jersey. Our end use markets for our silica products include container glass,
fiberglass, specialty glass, flat glass, fillers and extenders, chemicals and
ceramics. We also supply our silica products to the foundry, building materials
and other end use markets. Our customers use our aggregates, which consist of
high quality crushed stone, construction sand and gravel, for road construction
and maintenance, other infrastructure projects and residential and commercial
construction and to produce hot mixed asphalt. We operate a network of 26
production facilities in 14 states. Our industrial minerals business
(substantially all the net sales of which consist of silica products) and our
aggregates business accounted for 60% and 40% of our net sales, respectively,
for the three months ended June 30, 2001 and 67% and 33% of our net sales,
respectively, for the six months
ended June 30, 2001.
Our aggregates business is seasonal, due primarily to the effect of weather
conditions in winter months on construction activity in our Pennsylvania and New
Jersey markets. As a result, peak sales of aggregates occur primarily in the
months of April through November. Accordingly, our results of operations in any
individual quarter may not be indicative of our results of operations for the
full year.
On January 1, 2001, as part of a change in management reporting
responsibilities, all of the New Jersey operating assets of our industrial
minerals business unit were transferred to our aggregates business unit. Net
sales from the transferred assets are made both directly to customers and to our
industrial minerals subsidiary, which are then eliminated in the consolidated
financial statements. Prior year segment reporting has been restated as if the
asset transfer had occurred at the beginning of 2000.
Three Months Ended June 30, 2001 Compared with Three Months Ended June 30, 2000
Net Sales. Net sales increased $4.3 million, or 5.3% to $84.8 million in the
three months ended June 30, 2001 from $80.5 million in the three months ended
June 30, 2000.
Net sales for our industrial minerals business increased $0.1 million to $50.5
million in the three months ended June 30, 2001 from $50.4 million in the three
months ended June 30, 2000. This increase was from increased silica sales to the
oil and gas extraction, building products and matrix end use markets, which was
almost completely offset by decreased silica sales to the glass, foundry and
fillers & extenders end use markets.
Net sales for our aggregates business increased $4.4 million or 12.5% to $39.5
million in the three months ended June 30, 2001 from $35.1 million in the three
months ended June 30, 2000. Included in net sales are intercompany sales to our
industrial minerals subsidiary totaling $5.3 million for the three months ended
June 30, 2001 as compared to $5.0 million for the three months ended June 30,
2000. Excluding these intercompany sales, net sales for our aggregates business
increased $4.1 million, or 13.6%, to $34.2 million in the three months ended
June 30, 2001 from $30.1 million in the three months ended June 30, 2000,
primarily from a 12% increase in asphalt volume and a 20% increase in stone
volume sold in the period, partially offset by a 9% reduction in the average
selling price for stone products due to product mix with increased sales of
lower priced stone product.
Cost of Goods Sold. Cost of goods sold increased $5.1 million, or 9.1% to $61.0
million in the three months ended June 30, 2001 from $55.9 million in the three
months ended June 30, 2000.
Cost of goods sold for our industrial minerals business increased $0.7 million
or 1.9% to $37.1 million in the three months ended June 30, 2001 from $36.4
million in the three months ended June 30, 2000, primarily due to a $0.6 million
increase in the price of dryer fuel, and normal cost inflation.
9
Cost of goods sold for our aggregates business increased $4.2 million or 17.3%
to $28.5 million in the three months ended June 30, 2001 from $24.3 million in
the three months ended June 30, 2000, primarily due to increased stone and
asphalt volume, partially offset by a $0.8 million reduction in the price of
asphalt cement used in the production of hot mixed asphalt.
Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization decreased $1.1 million or 12.0% to $8.1 million in the three months
ended June 30, 2001 from $9.2 million in the three months ended June 30, 2000.
The decrease was primarily due to a $1.3 million decrease in amortization from
the completion the amortization of a non-compete agreement with the former
parent company of our industrial minerals subsidiary.
Selling, General and Administrative. Selling, general and administrative
expenses decreased $2.3 million or 24.2% to $5.9 million in the three months
ended June 30, 2001 from $8.2 million in the three months ended June 30, 2000.
This decrease was due to a $2.3 million non-recurring charge in 2000, $1.0
million of which was non-cash incentive stock compensation, related to stock
issued to the newly hired President of our aggregates business.
Operating Income. Operating income was $9.8 million in the three months ended
June 30, 2001 compared to $7.3 million in the three months ended June 30, 2000,
as a result of the factors noted earlier.
Operating income for our industrial minerals business increased $0.7 million or
12.1% to $6.5 million in the three months ended June 30, 2001 from $5.8 million
in the three months ended June 30, 2000 primarily due to the factors noted
earlier.
Operating income for our aggregates business decreased $0.3 million to $3.8
million in the three months ended June 30, 2001 from $4.1 million in the three
months ended June 30, 2000 as a result of a $0.4 million increase in
depreciation, depletion and amortization and the other factors noted earlier.
Due to the seasonality of our aggregates business, operating income incurred in
the second quarter of our fiscal year may not be indicative of operating results
for the full year.
Corporate expenses not allocated to business segments decreased $2.2 million to
$0.4 million in the three months ended June 30, 2001, from $2.6 million in the
three months ended June 30, 2000 as a result of the non-recurring compensation
expense incurred in 2000 noted earlier.
Interest Expense. Interest expense was $8.9 million in the three months ended
June 30, 2001 and in the three months ended June 30, 2000 as the interest cost
of increased borrowings was offset by decreased interest rates.
Benefit for Income Taxes. The benefit for income taxes for the three months
ended June 30, 2001 has been adjusted to reflect the estimated benefit for the
first half of the year using an estimated annual effective tax rate of 49%.
Net Income. Net income decreased $0.7 million to $1.1 million in the three
months ended June 30, 2001 from $1.8 million in the three months ended June 30,
2000, primarily due to a $3.0 million reduction in income tax benefits which
offset a $2.3 million increase in pre tax income due to the factors noted
earlier.
Six Months Ended June 30, 2001 Compared With Six Months Ended June 30, 2000
Net Sales. Net sales increased $2.2 million or 1.6% to $143.7 million in the six
months ended June 30, 2001 from $141.5 million in the six months ended June 30,
2000.
Net sales for our industrial minerals business decreased $3.0 million or 3.0% to
$96.5 million in the six months ended June 30, 2001 from $99.5 million in the
six months ended June 30, 2000. This decrease was primarily due to the $1.9
million reduction in sales as a result of the divestiture of one of our two
Canadian subsidiaries, George F. Pettinos (Canada) Limited, ("PECAL") in
February 2000. Excluding the divestiture, net sales for our industrial minerals
business decreased $1.1 million or 1.1% to $96.5 million in the six months ended
June 30, 2001 from $97.6 million in the six months ended June 30, 2000, due
primarily to decreased silica sales to the glass, foundry and filler and
extender end use markets partially offset by an increase in sales to the oil and
gas extraction and building products end use markets.
Net sales for our aggregates business increased $5.2 million or 10.1% to $56.6
million for the six months ended June 30, 2001 from $51.4 million for the six
months ended June 30, 2000, including intercompany sales to our industrial
minerals business totaling $9.4 million in the six months ended June 30, 2001
and $9.2 million in the six months ended June 30, 2000. Excluding these
intercompany sales, net sales of aggregates increased $5.0 million or 11.8% to
$47.2 million in the six months ended June 30, 2001 from $42.2 million for the
six months ended June 30, 2000 due to a 10.4% increase in asphalt volume and
10
a 20.0% increase in stone volume sold during the period, partially offset by an
8.2% decrease in the average selling price for stone products due to product
mix.
Cost of Goods Sold. Cost of goods sold increased $6.6 million or 6.3% to $111.5
million for the six months ended June 30, 2001 from $104.9 million for the six
month period ended June 30, 2000.
Cost of goods sold for our industrial minerals business increased $0.2 million
to $73.2 million for the six months ended June 30, 2001 from $73.0 million for
the six months ended June 30, 2000. The divestiture of PECAL in February, 2000
resulted in a $1.5 million decrease in cost of goods sold in 2001. Excluding the
divestiture, cost of goods sold increased $1.7 million or 2.4% to $73.2 million
in the six months ended June 30, 2001 from $71.5 million for the six months
ended June 30, 2000 due primarily to a $2.3 million increase in the price of
dryer fuel, offset by a 2.7% reduction in volume.
Cost of goods sold for our aggregates business increased $5.4 million or 13.2%
to $46.4 million for the six months ended June 30, 2001 from $41.0 million for
the six months ended June 30, 2000, primarily due to increased stone and asphalt
volume, partially offset by a $0.8 million reduction in the purchase price of
asphalt cement used in the production of hot mixed asphalt.
Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization decreased $1.2 million, or 6.8% to $16.4 million in the six months
ended June 30, 2001 from $17.6 million in the six months ended June 30, 2000.
This decrease is primarily due to a $2.2 million decrease in amortization
expense on the completion of the amortization of a non-compete agreement with
the former parent company of our industrial minerals subsidiary, partially
offset by an increase in depreciation from our capital expenditure program.
Selling, General and Administrative. Selling, general and administrative
expenses decreased $3.2 million or 22.4% to $11.1 million in the six months
ended June 30, 2001 from $14.3 million for the six months ended June 30, 2000.
This decrease resulted primarily from a $2.3 million non-recurring charge in
2000, $1.0 million of which was non-cash incentive stock compensation, for the
issuance of stock to the newly hired President of our aggregates business and
the elimination of $0.4 million in costs as a result of the divestiture of
PECAL.
Operating Income. Operating income was $4.8 million in the six months ended June
30, 2001 compared to $4.7 million in the six months ended June 30, 2000, as a
result of the factors noted earlier.
Operating income for our industrial minerals business decreased $0.8 million or
8.3% to $8.8 million in the six months ended June 30, 2001 from $9.6 million in
the six months ended June 30, 2000 primarily due to the factors noted earlier.
Operating loss for our aggregates business increased $1.1 million to a $3.3
million operating loss in the six months ended June 30, 2001 from a $2.2 million
operating loss in the six months ended June 30, 2000 as a result of a $1.1
million increase in depreciation, depletion and amortization and the factors
noted earlier. Due to the seasonality of our aggregates business, operating
losses incurred in the first half of our fiscal year and may not be indicative
of operating results for the full year.
Corporate expenses not allocated to business segments decreased $2.0 million to
$0.7 million in the six months ended June 30, 2001 from $2.7 million in the six
months ended June 30, 2000, as a result of the non-recurring compensation
expense incurred in 2000 noted earlier.
Interest Expense. Interest expense increased $1.8 million to $18.9 million in
the six months ended June 30, 2001 from $17.8 million in the six months ended
June 30, 2000 due primarily to increased borrowings partially offset by
decreased interest rates.
Benefit for Income Taxes. The benefit for income taxes for the six months ended
June 30, 2001 is based on the effective tax rate expected to be realizable for
the year of approximately 49%. The benefit for taxes for the six-month period
ended June 30, 2000 was also based on an effective tax rate of 49%. However, the
benefit in 2000 was reduced by taxes required on the sale of PECAL, resulting in
a net effective tax rate of 39%.
Net Loss. Net loss decreased $0.4 million to $6.8 million in the six months
ended June 30, 2001 from $7.3 million in the six months ended June 30, 2000
primarily as a result of the factors noted earlier.
Liquidity and Capital Resources
Our principal liquidity requirements have historically been to service our debt,
meet our working capital, capital expenditures and mine development expenditure
needs and finance acquisitions. We are a holding company and as such we
11
conduct all our operations through our subsidiaries. As a holding company, we
are dependent upon dividends or other intercompany transfers of funds from our
subsidiaries to meet our debt service obligations, and have historically met our
liquidity and capital investment needs with internally generated funds.
Conversely, we have funded our acquisitions through borrowings and equity
investments. Our total long term debt as of June 30, 2001 was $302.9 million,
and our total stockholder's equity as of that date was $46.3 million, giving us
total debt representing approximately 87% of total capitalization. Our debt
level makes us more vulnerable to economic downturns and adverse developments in
our business.
Net cash used in operating activities was $6.3 million for the six months ended
June 30, 2001 compared to $5.6 million for the six months ended June 30, 2000.
Cash used in operating activities increased $0.7 million in the first half of
2001 due primarily to $2.7 million less in advances received from our parent,
who sold stock in 2000 but not 2001, and a $0.9 million reduction in our
earnings before depreciation, depletion and amortization, partially offset by a
$2.0 million improvement in working capital, due to a reduced inventory build,
and a $1.0 million income tax refund. Interest paid in the six months ended June
30, 2001 was $17.8 million, an increase of $1.9 million from the $15.9 million
paid in the six months ended June 30, 2000, primarily as a result of increased
borrowings, and a $0.4 million amendment fee under our senior secured credit
agreement.
Net cash used for investing activities decreased $6.4 million to $7.8 million
for the period ended June 30, 2001 from $14.2 million for the period ended June
30, 2000. This decrease primarily resulted from a $7.9 million decrease in
capital expenditures due in a part to the one-time $6.1 million purchase in 2000
of a hot mixed asphalt plant, and $0.6 million received in 2001 for excess land
and property sales, partially offset by the $3.1 million received from the PECAL
sale in February 2000. In addition, we acquired $1.2 million in mining and
mobile equipment through new capital lease obligations.
Cash flow provided by financing activities was $13.8 million for the six months
ended June 30, 2001 as compared to $6.9 million for the six months ended June
30, 2000. There was a $13.5 million increase in long term debt in the six months
ended June 30, 2001 as compared to a $7.5 million increase in long term debt in
the same period in 2000.
Interest payments on our 13% senior subordinated notes due 2009 ($150 million
outstanding as of June 30, 2001), which are unconditionally and irrevocably
guaranteed, jointly and severally, by each of our domestic subsidiaries, senior
debt service under our senior secured credit agreement, working capital, capital
expenditures and mine development expenditures incurred in the normal course of
business as current deposits are depleted, represent our significant liquidity
requirements.
Under our senior secured credit agreement, as of June 30, 2001, we had $36.0
million outstanding under the tranche A term loan facility and $92.5 million
outstanding under the tranche B term loan facility. In addition, this credit
agreement provides us with a $50 million revolving credit facility of which
$23.2 million was drawn as of June 30, 2001, with an additional $19.0 million
available for borrowing, after taking into consideration $7.8 million allocated
for letters of credit. The revolving credit facility is available for general
corporate purposes, including working capital and capital expenditures, but
excluding acquisitions, and includes sublimits of $12.0 million and $3.0
million, respectively, for letters of credit and swingline loans. Debt under the
senior secured credit agreement is secured by substantially all of our assets,
including our real and personal property, inventory, accounts receivable and
other intangibles. For a further description of the senior secured credit
agreement, including certain restrictions that it imposes upon us and certain
financial covenants that it requires us to maintain, please see Note 6 to our
audited consolidated financial statements included in our Annual Report on Form
10-K for the year ended December 31, 2000, as amended.
On February 22, 2001, the lenders under our senior secured credit agreement
approved an amendment effective December 31, 2000 that revised the required
leverage ratio and interest coverage ratio covenants under the credit agreement
for the period of December 31, 2000 through December 31, 2001. As a result of
this amendment, we were in compliance with these financial ratio covenants, as
revised, as of December 31, 2000, March 31, 2001 and June 30, 2001. In
connection with this amendment, we agreed to a 25 basis point increase in
interest rates for any period in which our leverage ratio is greater than 5.0.
In addition, we agreed to cancel the undrawn $40.0 million acquisition term loan
facility, which also resulted in a $300,000 reduction in our annual loan
commitment fees, as of February 22, 2001. A one-time amendment fee of
approximately $400,000 was paid to the lenders as part of this amendment. This
amendment to our credit agreement was filed as an exhibit to our Current Report
on Form 8-K dated February 22, 2001.
We believe, based on our calendar year 2001 forecast, that we will be in
compliance with the amended leverage ratio and interest coverage ratio covenants
contained in the senior secured credit agreement throughout the calendar year
2001. In the event that we do not substantially achieve our forecast, it will be
necessary to seek further amendments to the senior secured credit agreement
covenants. While we obtained amendments and waivers under the secured credit
agreement in the past, there
12
can be no assurance that future amendments or waivers will be granted or that
such amendments or waivers, if granted, would be on terms satisfactory to us.
Capital expenditures totaled $8.4 million in the six months ended June 30, 2001
compared with $16.3 million in the six months ended June 30, 2000. Our expected
capital expenditure requirements for the remainder of 2001 and 2002 are $9.8
million and $21.2 million, respectively.
Our ability to satisfy our debt obligations and to pay principal and interest on
our debt, fund working capital, mine development and acquisition requirements
and make anticipated capital expenditures will depend on our future performance,
which is subject to general economic, financial and other factors, some of which
are beyond our control. We cannot be certain that the cash earned by our
subsidiaries will be sufficient to allow us to pay principal and interest on our
debt and meet our other obligations. We believe, however, that based on current
levels of operations and anticipated growth, cash flow from operations, together
with borrowings under the revolving credit facility, will be adequate for at
least the next twelve months to make required payments of principal and interest
on our debt, and fund working capital, mine development and capital expenditure
requirements. There can be no assurance, however, that our business will
generate sufficient cash flow from operations or that future borrowings will be
available under the revolving credit facility in an amount sufficient to enable
us to service our debt or to fund our other liquidity needs. If we do not have
enough cash, we may be required to refinance all or part of our existing debt,
sell assets, borrow more money or raise equity. We cannot guarantee that we will
be able to refinance our debt, sell assets, borrow more money or raise equity on
terms acceptable to us, if at all.
Forward-Looking Statements
This quarterly report, including this management's discussion and analysis of
financial condition and results of operations section, includes "forward-
looking statements". We have based these forward-looking statements on our
current expectations and projections about future events. Although we believe
that our plans, intentions and expectations reflected in or suggested by those
forward-looking statements are reasonable, we can give no assurance that our
plans, intentions or expectations will be achieved. We believe that the
following factors, among others, could affect our future performance and cause
actual results to differ materially from those expressed or implied by these
forward-looking statements: (1) general and regional economic conditions,
including the economy in the states in which we have production facilities and
in which we sell our products; (2) demand for residential and commercial
construction; (3) demand for automobiles and other vehicles; (4) levels of
government spending on road and other infrastructure construction; (5) the
competitive nature of the industrial minerals and aggregates industries; (6)
operating risks typical of the industrial minerals and aggregates industries,
including the price and availability of oil: (7) difficulties in, and
unanticipated expense of, assimilating newly-acquired businesses; (8)
fluctuations in prices for, and availability of, transportation and power; (9)
unfavorable weather conditions; (10) regulatory compliance, including compliance
with environmental and silica exposure regulations, by us and our customers;
(11) litigation affecting us and our customers; (12) changes in the demand for
our products due to the availability of substitutes for products of our
customers; (13) labor unrest: and (14) interest rate changes and changes in
financial markets generally.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Information regarding the Company's financial instruments that are sensitive to
changes in interest rates is contained in our Annual Report on Form 10-K for the
year ended December 31, 2000, as amended. This information has not changed
materially in the interim period since December 31, 2000.
13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are a defendant in various lawsuits related to our businesses. These matters
include lawsuits relating to the exposure of persons to crystalline silica as
discussed in detail in our Annual Report on Form 10-K for the year ended
December 31, 2000, as amended, filed with the Securities and Exchange
Commission.
On April 20, 2001, in an action pending in Beaumont, Texas, (Donald Tompkins et
at vs American Optical Corporation et al, the "Tompkins Case"), a jury rendered
a verdict against Ottawa Silica Company and Pennsylvania Glass Sand Corporation,
predecessor to U.S. Silica Company, in the amount of $7.5 million in actual
damages. On June 1, 2001, the trial judge entered judgment on the verdict; the
amount of the judgment was approximately $6.4 million, the sum of the verdict
(reduced by settlements from other parties) and prejudgment interest. In
addition, punitive damages were settled for $600,000.
In light of the facts entered into evidence relating to the timing of the
exposure, we believe that the entire judgment in this action is covered by a
combination of the historical insurance coverage of Ottawa Silica Company and
the current indemnity agreement of ITT industries, as described in such Annual
Report on Form 10-K. We have posted a bond, which is required to be filed as
part of the appeal process. The notice of appeal to the appropriate intermediate
appellate court in Texas will be timely filed. Based on advice of counsel, we
believe that there are meritorious grounds to file this appeal and that a
reversal and remand of the Tompkins case is probable.
Although we do not believe that these lawsuits are likely to have a material
adverse effect upon our business, we cannot predict what the full effect of
these or other lawsuits will be. We currently believe, however, that these
claims and proceedings in the aggregate are unlikely to have a material adverse
effect on us.
Item 5. Other Information
In May, 2001, we entered into a new management services agreement with D. George
Harris & Associates (DGH&A) that becomes effective as of January 1, 2002. The
new agreement has similar terms to the terms contained in the current management
services agreement with DGHA, which are described in our Annual Report on Form
10-K for the year ended December 31, 2000, as amended. Under the terms of the
new agreement, however, the annual fee to DGH&A for management services is
reduced to $500,000 per annum from the $950,000 fee expected to be paid in 2001.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit No.
10.1 SECOND AMENDED AND RESTATED MANAGEMENT SERVICES AGREEMENT (the
"Agreement") dated as of March 28, 2001, among USS HOLDINGS, INC., a
Delaware corporation ("USSH"), BETTER MINERALS & AGGREGATES COMPANY.,
a Delaware corporation formerly known as USS Intermediate Holdco, Inc.
("BMAC"), U.S. SILICA COMPANY, a Delaware corporation ("Silica")
(collectively, the "Companies", and individually a "Company"), and D.
GEORGE HARRIS & ASSOCIATES, LLC., a Delaware corporation ("DGHA").
(b) Reports on Form 8-K
None.
14
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.
August 9, 2001 Better Minerals & Aggregates Company
By: /s/ Gary E. Bockrath
---------------------------------
Name: Gary E. Bockrath
Title: Vice President and Chief
Financial Officer
EXHIBIT INDEX
Exhibit No.
- -----------
10-1 SECOND AMENDED AND RESTATED MANAGEMENT SERVICES AGREEMENT (the
"Agreement") dated as of March 28, 2001, among USS HOLDINGS,
INC., a Delaware corporation ("USSH"), BETTER MINERALS &
AGGREGATES COMPANY., a Delaware corporation formerly known as USS
Intermediate Holdco, Inc. ("BMAC"), U.S. SILICA COMPANY, a
Delaware corporation ("Silica") (collectively, the "Companies",
and individually a "Company"), and D. GEORGE HARRIS & ASSOCIATES,
LLC., a Delaware corporation ("DGHA").
6
Exhibit 10-1.
SECOND AMENDED AND RESTATED MANAGEMENT SERVICES AGREEMENT (the
"Agreement") dated as of March 28, 2001, among USS HOLDINGS,
INC., a Delaware corporation ("USSH"), BETTER MINERALS &
AGGREGATES COMPANY., a Delaware corporation formerly known
as USS Intermediate Holdco, Inc. ("BMAC"), U.S. SILICA
COMPANY, a Delaware corporation ("Silica") (collectively,
the "Companies", and individually a "Company"), and D.
GEORGE HARRIS & ASSOCIATES, LLC., a Delaware corporation
("DGHA").
WHEREAS, USSH, BMAC, USS Acquisition, Inc., a Delaware corporation (which
was merged with and into Silica on February 9, 1996) and DGHA entered into
a Management Services Agreement dated as of February 9, 1996 (the "First
Agreement"), which was amended and restated by the Amended and Restated
Management Services Agreement dated as of October 1, 1998 (the "Old
Agreement");
WHEREAS, DGHA and the Companies desire that the Old Agreement remain in
effect until December 31, 2001 and that this Agreement become effective as
of January 1, 2002 (the "Effective Date").
WHEREAS, each Company desires to continue to avail itself of DGHA's
expertise and consequently has requested DGHA to continue to provide such
expertise, from time to time, in rendering certain management services
related to the business and affairs of such Company and its Subsidiaries
and the review and analysis of certain financial and other transactions.
WHEREAS, DGHA and the Companies agree that it is in their respective
interests to enter into this Agreement whereby, for the consideration
specified herein, DGHA shall provide such services to the Companies.
WHEREAS, each Company and DGHA wish to amend in certain respects and
restate the Old Agreement;
NOW, THEREFORE, in consideration of the mutual covenants hereinafter set
forth, the Companies and DGHA agree as follows:
Section 1. Definitions.
------------
Unless defined herein, capitalized terms used in this Agreement shall have
the meanings ascribed to them in the Amended and Restated Stockholders
agreement dated as of the date of the Old Agreement, as amended from time
to time (the "Stockholders Agreement"), among USSH and the Stockholders.
The use in this Agreement of the term "including" means "including, without
limitation." The words "herein," "hereof," "hereunder" and other words of
similar import refer to this Agreement as a whole, including the schedules
and exhibits, as the same may from time to time be amended or supplemented,
and not to any particular section, subsection, paragraph, subparagraph or
clause contained in this Agreement. All references to sections, schedules
and exhibits mean the sections of this Agreement and the schedules and
exhibits attached to this Agreement.
2
The title of and the section and paragraph headings in this Agreement are
for convenience of reference only and shall not govern the interpretation
of any of the terms or provisions of this Agreement.
The use herein of the masculine, feminine or neuter forms shall also denote
the other forms, as in each case the context may require.
Section 2. Retention of DGHA.
------------------
The Companies retain DGHA, and DGHA accepts such retention, upon the terms
and conditions set forth in this Agreement.
Section 3. Term.
-----
Subject to the provisions of Section 3(b) and except for the provisions of
Section 13 which shall be effective as of the date hereof, this Agreement
shall commence on the date hereof and shall terminate on the first
anniversary of the date hereof (the "Initial Term"); provided that upon the
termination of the Initial Term this Agreement shall be automatically
extended until terminated by USSH or DGHA by serving 9 months prior written
notice upon the other.
This Agreement shall automatically terminate with respect to (i) any
Company and its Subsidiaries upon a sale of such Company to a person which
is not an Affiliate of such Company (whether pursuant to a merger or
consolidation, a sale of capital stock or all or substantially all of its
assets) and (ii) all of the Companies in the event that (A) the Majority of
the Institutional Stockholders have designated the Additional Institutional
Directors pursuant to Section 2(b) of the Stockholders Agreement and USSH
has provided written notice to DGHA of its desire to terminate this
Agreement pursuant to this clause (ii)(A) of Section 3(b) or (B) the DGHA
Stockholders and their respective Affiliates cease to own 50% or more of
the Securities (other than the DGHA Restricted Shares) held by them on the
date hereof.
This Agreement may be terminated at the option of USSH if neither D. George
Harris nor Anthony J. Petrocelli is actively involved in the management of
DGHA.
Section 4. Management Services.
--------------------
DGHA shall advise the Companies concerning such management matters as
relate to proposed financial transactions, acquisitions and other senior
management matters related to the Companies' business, administration and
policies, in each case as the Companies shall reasonably and specifically
request by way of notice to DGHA, which notice shall specify the services
required of DGHA and shall include all background material necessary for
DGHA to complete such services. DGHA shall not be required to devote any
specified amount of time to any such written request and shall be required
to devote only so much time to any such written request as DGHA shall, in
its reasonable discretion, deem necessary to complete such services. Such
consulting services shall, in DGHA's reasonable discretion, be rendered in
person or by telephone or other communication. DGHA shall (i) use its
reasonable efforts to deal effectively with all subjects submitted to it
hereunder and (ii) endeavor to further, by performance of its services
hereunder, the policies and objectives of the Companies.
DGHA shall perform all such services as an independent contractor to the
Companies. DGHA is not an employee, agent or representative of any Company
and has no authority to act for or to bind any Company without its prior
written consent.
This Agreement shall in no way prohibit DGHA or any partner or employee
thereof from engaging in other activities, whether or not competitive with
any business of the Companies.
3
Section 5. Compensation.
-------------
As consideration for DGHA's agreement to render the management services set
forth in Section 4 and as compensation for any such services rendered by
DGHA, the Companies shall pay DGHA (or one or more designees thereof) an
annual fee (the "Annual Fee") of $500,000.
The Annual Fee shall be paid for each fiscal year in equal monthly
installments, payable in arrears.
The Companies shall reimburse DGHA for all reasonable out-of- pocket travel
and entertainment expenses incurred by DGHA in connection with the
rendering of management services pursuant to this Agreement.
Section 6. Loans.
------
Silica has, pursuant to the Old Agreement, provided to DGHA one or more
interest-free loans which total $1,522,375.26 in the aggregate (the "Old
Loans") as of this date as set forth on Schedule 1 attached hereto. From
the Effective Date of this Agreement until the earlier of (i) termination
of this Agreement in accordance with Section 3 or (ii) December 31, 2004,
at the request of DGHA, Silica shall provide to DGHA one or more
interest-free loans of not more than $500,000 in the aggregate per calendar
year (the "New Loans" and together with the Old Loans, the "Loans").
The Loans shall mature and be payable as of the date of the consummation of
an IRR Event.
The Loans are guaranteed by the persons listed on Schedule 2 attached
hereto (the "Guarantors") and in proportion with the percentages listed
opposite such Guarantors' names on Schedule 1, which guarantees shall be
several but not joint obligations of the Guarantor. A form of such
guarantees is attached hereto as Exhibit C.
Section 7. Notices.
--------
All notices, requests, consents and other communications hereunder shall be
in writing and shall be deemed sufficient if personally delivered, sent by
nationally-recognized overnight courier, by facsimile, or by registered or
certified mail, return receipt requested and postage prepaid, addressed as
follows:
if to DGHA, to:
D. George Harris & Associates, Inc.
399 Park Avenue
32nd Floor
New York, New York 10022
Attention: Anthony J. Petrocelli
Telecopier: (212) 207-6450
Telephone: (212) 207-6405
if to the Companies:
USS Holdings, Inc.
c/o U.S. Silica Company
P.O. Box 187
Berkeley Springs, WV 25411
Attention: President
Telecopier: (304) 258-3500
Telephone: (304) 258-2500
4
wth a copy to:
J.P. Morgan Partners (SBIC), LLC
c/o J.P. Morgan Partners
1221 Avenue of the Americas
New York, NY 10020
Attention: Timothy J. Walsh
Telecopier: (212) 899-3553
Telephone: (212) 899-3755
or to such other address as the party to whom notice is to be given may
have furnished to each other party in writing in accordance herewith. Any
such notice or communication shall be deemed to have been received (a) in
the case of personal delivery, on the date of such delivery, (b) in the
case of nationally-recognized overnight courier, on the next business day
after the date when sent, (c) in the case of facsimile transmission, when
received, and (d) in the case of mailing, on the third business day
following that on which the piece of mail containing such communication is
posted.
Section 8. Benefits of Agreement.
----------------------
This Agreement shall bind and inure to the benefit of any successors to or
assigns of DGHA and the Companies; provided, however, that this Agreement
may not be assigned by any party hereto without the prior written consent
of the other parties. The obligations of the Companies hereunder shall be
joint and several.
Section 9. Governing Law.
--------------
This Agreement shall be governed by and construed and enforced in
accordance with the laws of the State of New York (without giving effect to
principles of conflicts of laws).
Section 10. Entire Agreement; Amendments.
-----------------------------
This Agreement contains the entire understanding of the parties with
respect to its subject matter, and neither it nor any part of it may in any
way be altered, amended, extended, waived, discharged or terminated except
by a written agreement signed by each of the parties hereto.
Section 11. Counterparts.
-------------
This Agreement may be executed in counterparts, and each such counterpart
shall be deemed to be an original instrument, but all such counterparts
together shall constitute but one agreement.
Section 12. Waivers.
--------
Any party to this Agreement may, by written notice to the other parties,
waive any provision of this Agreement. The waiver by any party of a breach
of any provision of this Agreement shall not operate or be construed as a
waiver of any subsequent breach.
Section 13. Old Agreement.
--------------
The Old Agreement shall remain in full force and effect through December
31, 2001. Effective as of January 1, 2002, the Old Agreement shall
terminate and be superceded by this Agreement.
* * * * *
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IN WITNESS WHEREOF, the parties have duly executed this Management Services
Agreement as of the date first above written.
USS HOLDINGS, INC.
By: /s/ R. D. Reeves
--------------------------------
Name: R. D. Reeves
Title: President
BETTER MINERALS & AGGREGATES COMPANY
By: /s/ R. D. Reeves
--------------------------------
Name: R. D. Reeves
Title: President
U.S. SILICA COMPANY
By /s/ R. D. Reeves
---------------------------------
Name: R. D. Reeves
Title:
D. GEORGE HARRIS & ASSOCIATES, LLC.
By: /s/ D. George Harris
--------------------------------
Name: D. George Harris
Title:
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