SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________
FORM 10-Q/A
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended June 30, 2003
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 by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [_] No [X]
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, 2003
----- --------------------------------
Common Stock 100 shares
EXPLANATORY NOTE
This Quarterly Report on Form 10-Q/A for the quarterly period ended June 30,
2003 is being filed for the purpose of restating the financial statements for
the quarter and the six months ended June 30, 2003 contained in Item 1 hereof to
reflect a write-off of all of our net deferred tax assets due to the uncertainty
of the future utilization of our net operating losses and alternative minimum
tax credit carry forwards. A valuation of these assets should have been
performed in connection with the classification of our aggregates business as an
asset held for sale in the second quarter. Except for related changes to Items
1, 2 and 4 hereof, no other modifications or changes have been made to our Form
10-Q for the quarterly period ended June 30, 2003 as originally filed or the
exhibits filed therewith.
Better Minerals & Aggregates Company
Form 10-Q/A Index
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 2003 (unaudited)
(restated) and December 31, 2002........................................... 1
Condensed Consolidated Statements of Operations for the quarter and
six months ended June 30, 2003 (unaudited) (restated) and
June 30, 2002 (unaudited).................................................. 3
Condensed Consolidated Statements of Stockholder's Equity for the
quarter and six months ended June 30, 2003 (unaudited) (restated) and
June 30, 2002 (unaudited).................................................. 4
Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 2003 (unaudited) (restated) and June 30, 2002 (unaudited)... 5
Notes to Condensed Consolidated Financial Statements....................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................... 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk...... 18
Item 4. Controls and Procedures......................................... 18
PART II. OTHER INFORMATION
Item 3. Defaults Upon Senior Securities................................. 19
Item 6. Exhibits and Reports on Form 8-K................................ 19
Signatures
Exhibits
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BETTER MINERALS & AGGREGATES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
June 30, December 31,
2003 2002
---- ----
(Unaudited)
Assets (Restated)
Current:
Cash and cash equivalents $ 2,886 $ 1,330
Accounts receivable:
Trade, less allowance for doubtful accounts of $975 and $885 28,890 25,298
Other 7,276 5,537
Inventories 17,204 17,106
Prepaid expenses and other current assets 3,814 4,748
Deferred income taxes - 2,904
Income tax deposits 77 23
Current assets of discontinued operations 40,377 36,266
------- -------
Total current assets 100,524 93,212
Property, plant and equipment:
Mining property 20,262 24,041
Mine development 4,406 4,406
Asset retirement cost 4,609 --
Land 15,910 15,936
Land improvements 3,990 4,053
Buildings 31,984 31,984
Machinery and equipment 119,154 122,771
Furniture and fixtures 668 668
Construction-in-progress 1,964 1,489
------- -------
202,947 205,348
Accumulated depletion, depreciation and amortization (107,128) (100,172)
------- -------
Property, plant and equipment, net 95,819 105,176
Other noncurrent:
Debt issuance costs 9,376 9,518
Insurance for third-party product liability claims 42,594 40,864
Deferred income taxes - 14,747
Noncurrent assets of discontinued operations 172,859 173,285
Other noncurrent assets 4,372 3,819
------- -------
Total other noncurrent 229,201 242,233
------- -------
Total assets $425,544 $440,621
======= =======
The accompanying notes are an integral part of these statements.
1
BETTER MINERALS & AGGREGATES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
June 30, December 31,
2003 2002
---- ----
(Unaudited)
Liabilities (Restated)
Current:
Book overdraft $ 3,864 $ 3,676
Accounts payable 9,983 9,238
Accrued liabilities 10,607 8,424
Due to parent 2,347 2,346
Accrued interest 7,250 7,381
Current portion of capital leases 258 193
Current portion of long-term debt 160,715 10,725
Current liabilities of discontinued operations 12,725 9,934
------- -------
Total current liabilities 207,749 51,917
Noncurrent liabilities:
Obligations under capital lease 289 258
Long-term debt, net of current portion 150,558 283,143
Third-party products liability claims 68,904 69,209
Noncurrent liabilities of discontinued operations 49,638 51,253
Other noncurrent liabilities 41,234 39,290
------- -------
Total noncurrent liabilities 310,623 443,153
Commitments and contingencies
Stockholder's Equity
Common stock, par value $.01, authorized 5,000
shares, issued 100 shares -- --
Additional paid-in capital 81,377 81,377
Loan to related party (1,377) (1,360)
Retained deficit (167,672) (129,207)
Accumulated other comprehensive (loss) (5,156) (5,259)
------- -------
Total stockholder's equity (92,828) (54,449)
------- -------
Total liabilities and stockholder's equity $425,544 $440,621
======= =======
The accompanying notes are an integral part of these statements.
2
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,
2003 2002 2003 2002
---- ---- ---- ----
(Restated) (Restated)
Net sales $ 48,501 $ 48,550 $ 92,166 $ 91,140
Cost of goods sold 36,583 35,996 71,611 69,465
Depreciation, depletion and amortization 3,882 4,171 7,935 7,732
Selling, general & administrative 8,137 4,416 11,825 9,232
-------- -------- -------- --------
Operating income (loss) (101) 3,967 795 4,711
Interest expense 8,373 7,906 16,376 16,098
Other income, net, including interest income (275) (390) (484) (698)
-------- -------- -------- --------
Income (loss) before income taxes (8,199) (3,549) (15,097) (10,689)
Benefit for income taxes 18,516 (1,296) 14,690 (6,290)
-------- -------- -------- --------
Net (loss) from continuing operations $(26,715) $ (2,253) $(29,787) $ (4,399)
-------- -------- -------- --------
Income (loss) from operations of discontinued
operations, less applicable income taxes of $421, $350, (335) 4,867 (9,013) (1,890)
$896, and $1,079
Cumulative effect of change in accounting principle,
less applicable income taxes of $0, $0, $191, and $6,117 -- -- (335) 8,621
-------- -------- -------- --------
Net income (loss) $(27,050) $ 2,614 $(38,465) $(14,910)
======== ======== ======== ========
3
BETTER MINERALS & AGGREGATES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(Dollars in Thousands)
(Unaudited)
Accumulated Other
Comprehensive Loss
Additional Loans to Unrealized Minimum Total
Common Paid-In Retained Related Loss on Pension Stockholder's
Stock Capital Deficit Party Derivatives Liability Total Equity
--------- ------- --------- ------ ------- -------- ------- ---------
Balance December 31, 2001 $ $81,377 $(30,604) $(1,434) $ (499) $ (14) $(513) $ 48,826
Comprehensive income, net of income
taxes:
Net loss (14,910) (14,910)
Unrealized holding gain on derivatives (257) (257) (257)
---------
Total comprehensive loss (15,167)
Loans to related party 58 58
--------- ------- --------- ------- ------- -------- ------- ---------
Balance June 30, 2002 $ -- $81,377 $(45,514) $(1,376) $ (756) $ (14) $ (770) $ 33,717
========= ======= ========= ======= ======= ======== ======= =========
Balance December 31, 2002 $ $81,377 $(129,207) $(1,360) $(1,095) $ (4,164) $(5,259) $(54,449)
Comprehensive income, net of income
taxes:
Net loss (Restated) (38,465) (38,465)
Unrealized holding gain on derivatives 103 103 103
---------
Total comprehensive loss (Restated) (38,362)
Loans to related party (17) (17)
--------- ------- --------- ------- ------- -------- ------- ---------
Balance June 30, 2003 (Restated) $ -- $81,377 $(167,672) $(1,377) $ (992) $ (4,164) $(5,156) $ (92,828)
========= ======= ========= ======= ======= ======== ======= =========
The accompanying notes are an integral part of these statements.
4
BETTER MINERALS & AGGREGATES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
For the Six Months Ended
June 30,
2003 2002
---- ----
(Restated)
Cash flows from operating activities:
Net loss $ (38,465) $ (14,910)
Adjustments to reconcile net (loss) to cash flows from operations:
Depreciation, depletion and amortization 13,070 14,178
Debt issuance amortization 946 893
Deferred income taxes 18,081 (12,138)
Disposal of property, plant and equipment (gain) loss (1) (67)
Third-party products liability claims (2,035) --
Cumulative effect of change in accounting principle (526) 14,738
Other 2,252 (441)
Changes in assets and liabilities:
Trade receivables (4,020) (9,944)
Non-trade receivables (3,047) (196)
Payable to parent 1 (58)
Inventories (1,487) (1,447)
Prepaid expenses and other current assets (1,355) (159)
Accounts payable and accrued liabilities 4,682 3,107
Accrued interest (132) (38)
Income taxes (65) (156)
-------- --------
Net cash used for operating activities (12,101) (6,638)
Cash flows from investing activities:
Capital expenditures (3,468) (6,994)
Proceeds from sale of property, plant and equipment 25 264
Loans to related party (17) 58
-------- --------
Net cash used for investing activities (3,460) (6,672)
Cash flows from financing activities:
Decrease in book overdraft 1,285 (69)
Issuance of long-term debt 15,236 --
Repayment of long-term debt (6,290) (5,393)
Net revolver credit agreement facility 8,200 17,350
Financing fees (804) --
Principal payments on capital lease obligations (510) (420)
-------- --------
Net cash provided by financing activities 17,117 11,468
Net increase (decrease) in cash 1,556 (1,842)
Cash and cash equivalents, beginning of period 1,330 2,493
Cash and cash equivalents, ending of period $ 2,886 $ 651
Schedule of noncash financing activities:
Assets acquired by entering into capital lease obligations $ 194 $ 955
The accompanying notes are an integral part of these statements.
5
BETTER MINERALS & AGGREGATES COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements
(Unaudited)
1. Restatement
During the final review and preparation of the 2003 year-end financial
statements, Better Minerals & Aggregates Company (the "Company") determined that
there was a need to provide a full valuation allowance against its net deferred
tax assets due to the uncertainty of the future utilization of net operating
losses, alternative minimum tax credit carry forwards and other deferred tax
assets. An assessment of the realizability of these deferred tax assets should
have been performed in connection with the classification of the aggregates
business as held for sale in the second quarter of 2003. The sale was completed
in the third quarter of 2003. The change has been reported through a restatement
of previously recorded amounts in the consolidated financial statements.
The net result of the change was to reduce deferred tax assets by $19.7 million
($2.9 million current and $16.8 million noncurrent), increase the retained
deficit by $19.7 million, increase the income tax provision for continuing
operations, the net loss for continuing operations and the net loss for the
three and six months ended June 30, 2003 by $19.7 million in each.
2. Accounting Policies
The unaudited interim condensed consolidated financial statements of 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 2002 Annual Report on Form 10-K for the year ended
December 31, 2002 (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.
Assuming the current revolving credit facility continues to be its only source
of external working capital, the Company does not believe that it will have
sufficient liquidity to make the $9.75 million interest payment due on September
15, 2003 with respect to its senior subordinated notes. The Company is currently
in discussions with a financial institution for a new asset based revolving
credit facility that it believes will provide working capital for the remaining
business and sufficient proceeds to repay the remaining $14.6 million of tranche
C term debt under the existing senior secured credit agreement, canceling that
agreement (including the related revolving credit facility), and to make the
senior subordinated notes interest payment on schedule.
These financial statements have been prepared on the assumption that the Company
will continue to operate as a going concern, although no assurance can be given
in that regard. If the Company were unable to continue as a going concern,
assets and liabilities would likely require significant adjustments.
3. Discontinued Operations
On April 10, 2003, the Company signed an agreement for the sale of its
aggregates business, Better Materials Corporation, to a subsidiary of Hanson
Building Materials America, Inc. ("Hanson"), the proceeds from which would be
used to reduce outstanding indebtedness under the senior secured credit
agreement. On July 18, 2003, the Company completed the sale, receiving total
cash consideration of $158.3 million before fees and expenses. Proceeds have not
been reduced for the effect of a $2.0 million non-interest-bearing contingent
note payable to Hanson that will be forgiven when certain post-closing zoning
and permit objectives are achieved. The Company believes achievement of these
objectives will be reached within the five-year term of the note payable.
Proceeds from the sale are less than originally anticipated due to a $3.0
million purchase price reduction, reflecting an estimate of the damages and
losses caused by an incident that occurred on June 25, 2003 at one of the
operating sites included in the sale. While the Company believes that some
portion of this loss will be recoverable under its insurance policies, there is
no guarantee that it will receive any reimbursement from the claim.
6
As a result of the sale, the financial statements have been restated to reflect
discontinued operations. Sales from discontinued operations were $28.7 million
and $35.8 million for the three months ended June 30, 2003 and 2002,
respectively and $40.1 million and $49.3 million for the six months ended June
30, 2003 and 2002, respectively. Income (loss) before income taxes for these
operations were $2.0 million loss and $4.0 million income for the three months
ended June 30, 2003 and 2002, respectively and $12.5 million loss and $4.4
million loss for the six months ended June 30, 2003 and 2002, respectively.
Significant categories of assets and liabilities from discontinued operations
are included in the following table:
June 30, December 31,
(In thousands) 2003 2002
---- ----
Accounts receivable $20,287 $18,551
Inventories 16,165 14,776
Property, plant, and equipment, net 169,373 170,000
Other assets 7,411 6,224
-------- --------
Total assets 213,236 209,551
Book overdraft 2,053 956
Accounts payable and accrued liabilities 9,532 7,778
Deferred income taxes 44,158 43,919
Other liabilities 6,620 8,534
-------- --------
Total liabilities 62,363 61,187
-------- --------
Net assets $150,873 $148,364
======== ========
4. Inventories
At June 30, 2003 and December 31, 2002, inventory consisted of the following:
June 30, December 31,
(In thousands) 2003 2002
---- ----
Supplies (net of $89 and $98 obsolescence reserve) $ 9,614 $ 9,448
Raw materials and work in process 3,721 3,852
Finished goods 3,869 3,806
------- -------
$17,204 $17,106
======= =======
5. Segment Information
The Company formerly operated in the industrial minerals and aggregates business
segments which are more fully described in the Form 10-K. As a result of a
decision by the board of directors to dispose of the aggregates segment, as
discussed above, the financial statements have been prepared with the aggregates
segment presented as discontinued operations. Accordingly, segment information
is no longer applicable.
6. Impact of Recent Accounting Standards
Effective January 1, 2003, the Company adopted Statement of Financial Accounting
Standards No. 143 (FAS 143), Accounting for Asset Retirement Obligations. FAS
143 establishes accounting and reporting standards for obligations associated
with the retirement of tangible long-lived assets. Previously, the Company
provided for this obligation as described in Note 2.j. in the Form 10-K and, as
a result, recognized a $335,000 gain, net of income taxes of $191,000, as a
cumulative effect of a change in accounting principle as of January 1, 2003. As
of June 30, 2003, the Company reported a liability of $6.9 million in other
noncurrent liabilities related to this obligation. As of January 1, 2003, the
liability was $8.6 million, which included $1.9 million from discontinued
operations. The liability was increased by $211,000 in additional expense for
the six months ended June 30, 2003.
Effective January 1, 2002 the Company adopted Statement of Financial Accounting
Standards No. 142 (FAS 142), Goodwill and Other Intangible Assets. FAS 142
eliminates goodwill amortization and requires an evaluation of potential
goodwill impairment upon adoption, as well as subsequent annual valuations, or
more frequently if circumstances indicate a possible impairment. Adoption of FAS
142 eliminated annual goodwill amortization expense of approximately $1.2
million.
The adoption of FAS 142 resulted in goodwill impairment of $8.6 million, net of
income taxes of $6.1 million, and represents the elimination of the entire
amount of goodwill previously reported on the balance sheet. In accordance with
FAS 142, this amount has been recorded as a cumulative effect of accounting
change as of the beginning of the 2002. The Company has performed its assessment
7
of goodwill and other intangible assets by comparing the fair value of the
aggregates segment, which has been determined to be the only reporting unit that
had goodwill, to its net book value in accordance with the provisions of FAS
142. The Company has estimated the fair value of the reporting unit based upon a
combination of several valuation methods including residual income, replacement
cost and market approaches, giving appropriate weighting to such methods in
arriving at an estimate of fair value. The Company's equity is not subject to
market quotations.
7. Contingencies
The Company's principal operating subsidiary, U.S. Silica Company, was named as
a defendant in an estimated 14,990 new product liability claims filed between
January 1, 2003 and June 30, 2003, as compared to 1,235 claims filed between
January 1, 2002 and June 30, 2002. During the six month period ended June 30,
2003, new claims filed by state were 11,989 claims in Mississippi, 1,986 claims
in Texas, 730 claims in Louisiana, 217 claims in Ohio, 67 claims in Pennsylvania
and 1 claim in Indiana. U.S. Silica was named as a defendant in 5,100 similar
claims in 2002, with 3,100 of these claims filed in November and December, 2002.
Total open claims as of June 30, 2003 were an estimated 21,742 as compared to an
estimated 7,141 open claims as of December 31, 2002 and an estimated 3,505 open
claims as of June 30,2002. Almost all of the claims pending against U.S. Silica
arise out of the alleged use of U.S. Silica products in foundries or as an
abrasive blast media and have been filed against it and numerous other
defendants.
The plaintiffs, who allege that they are employees or former employees of U.S.
Silica's customers, claim that its silica products were defective or that it
acted negligently in selling its silica products without a warning, or with an
inadequate warning. The plaintiffs further claim that these alleged defects or
negligent actions caused them to suffer injuries and sustain damages as a result
of exposure to its products. In almost all cases, the injuries alleged by the
plaintiffs are silicosis or "mixed dust disease," a claim that allows the
plaintiffs to pursue litigation against the sellers of both crystalline silica
and other minerals. There are no pending claims of this nature against any of
the Company's other subsidiaries.
ITT Industries, Inc., successor to a former owner of U.S. Silica, has agreed to
indemnify U.S. Silica for third party silicosis claims (including litigation
expenses) filed against it prior to September 12, 2005 alleging exposure to U.S.
Silica products for the period prior to September 12, 1985, to the extent of the
alleged exposure prior to that date. This indemnity is subject to an annual
deductible of $275,000, which is cumulative and subject to carry-forward
adjustments. The Company fully accrued this deductible on a present value basis
when it acquired U.S. Silica. As of December 31, 2002 and 2001, this accrual
amounted to $1.9 million and $1.8 million, respectively. Pennsylvania Glass Sand
Corporation, predecessor to U.S. Silica, was a named insured on insurance
policies issued to ITT Industries for the period April 1, 1974 to September 12,
1985 and to U.S. Borax (another former owner) for the period September 12, 1985
to December 31, 1985. To date, U.S. Silica has not sought coverage under these
policies. However, as a named insured, it believes that coverage under these
policies will be available to it. Ottawa Silica Company (a predecessor that
merged into U.S. Silica in 1987) had insurance coverage on an occurrence basis
prior to July 1, 1985.
It is likely that U.S. Silica will continue to have silica-related product
liability claims filed against it, including claims that allege silica exposure
for periods after January 1, 1986. The Company cannot guarantee that the current
indemnity agreement with ITT Industries (which currently expires in 2005 and in
any event only covers alleged exposure to certain U.S. Silica products for the
period prior to September 12, 1985), or potential insurance coverage (which, in
any event, only covers periods prior to January 1, 1986) will be adequate to
cover any amount for which U.S. Silica may be found liable in such suits. Any
such claims or inadequacies of the ITT Industries indemnity or insurance
coverage could have a material adverse effect in future periods on the Company's
consolidated financial position, results of operations or cash flows, if such
developments occur.
In the past, U.S. Silica recorded amounts for product liability claims based on
estimates of its portion of the cost to be incurred for all pending product
liability claims and estimates based on the value of an incurred but not
reported liability for unknown claims for exposures that occurred before 1976,
when it began warning its customers and their employees of the health effects of
crystalline silica. Estimated amounts recorded were net of any expected
recoveries from insurance policies or the ITT Industries indemnity. The amounts
recorded for product liability claims were estimates, which were reviewed
periodically by management and legal counsel and adjusted to reflect additional
information when available. As the rate of claims filed against the Company and
others in the industry increased in 2002, U.S. Silica determined it was no
longer sufficient for management to solely estimate the product liability claims
that might be filed against the Company, and it retained the services of an
independent actuary to estimate the number and costs of unresolved current and
future silica related product liability claims that might be asserted against
it.
8
The actuary relied on generally accepted actuarial methodologies and on
information provided by U.S. Silica, including the history of reported claims,
insurance coverages and indemnity protections available to it from third
parties, the quantity of sand sold by market and by year through December 31,
2002, recent court rulings addressing the liability of sellers of silica sand,
and other reports, articles and records publicly available that discuss silica
related health risks, to estimate a range of the number and severity of claims
that could be filed against the company over the next 50 years, the period found
by the actuary to be reasonably estimable. The variables used to determine the
estimate were further analyzed and multiple iterations were modeled by the
actuary to calculate a range of expected outcomes.
As previously discussed, U.S. Silica has available to it several forms of
potential recovery to offset a portion of these costs in the form of insurance
coverage and the ITT Industries indemnity. As part of the overall study, the
actuary also estimated the amount recoverable from these sources, assuming that
all primary and excess insurance coverage and the ITT indemnity is valid and
fully collectible and also based on the timing of current and new claims filed,
the alleged exposure periods and the portion of the exposure that would fall
within an insured or indemnified exposure period.
Following the adverse developments during 2002, especially in the fourth
quarter, and based on the study performed by the actuary, U.S. Silica recorded a
pre-tax charge related to silica claims of $23.7 million in 2002 for the
estimated undiscounted gross costs, including defense costs, after consideration
of recoveries under the ITT indemnity and insurance, that it expects to incur
over the next 50 years through the end of 2052. This resulted in a long term
liability of $69.2 million related to third party product liability claims and a
non-current asset of $40.9 million for probable insurance and indemnity
recoveries at December 31, 2002. The pre-tax charge in 2001 for silica claims
was $2.1 million and the net liability recorded at December 31, 2001 was $4.6
million.
No additional charges to income were recorded in the six month period ended June
30, 2003. However, due to the uncertainty of the outcome of the petition for
review filed with the Texas Supreme Court in the Tompkins case (see Part II,
Item 1, Legal Proceedings in the Company's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 2003), U.S. Silica has increased the amount of
both the long term liability for third party product liability claims and the
non-current asset for probable insurance and indemnity recoveries each by $6.0
million. In addition, it paid $6.3 million in defense and settlement costs, and
invoiced ITT Industries $4.2 million under the terms of the indemnity agreement
with them resulting in retained losses to us of $2.1 million in the period. For
the comparable six-month period ended June 30, 2002, the Company paid $0.9
million in defense and settlement costs, and invoiced ITT Industries $0.7
million, resulting in retained losses to the Company of $0.2 million.
The balance in the long term liability for third party product liability claims
was $68.9 million at June 30, 2003 and non-current asset for probable insurance
and indemnity recoveries was $42.6 million as of that date.
On an annual basis, the actuary has calculated that U.S. Silica's cash portion
of the retained losses (reflecting any insurance coverage and indemnity
payments) over the next 15 years would average $1.4 million per year, ranging
from $0.7 million to $2.0 million in any year. On average, U.S. Silica has
incurred approximately $1.0 million per year in retained losses in 2001 and
2002.
The process of estimating and recording amounts for product liability claims is
imprecise and based on a variety of assumptions, some of which, while reasonable
at the time, may prove to be inaccurate. The actuary's report is based to a
large extent on the assumption that U.S. Silica's past experience is predictive
of future experience. Unanticipated changes in factors such as judicial
decisions, future legal judgments against U.S. Silica, legislative actions,
claims consciousness, claims management, claims settlement practices and
economic conditions make these estimates subject to a greater than normal degree
of uncertainty that could cause the silica-related liabilities and insurance or
indemnity recoveries to be greater or less than those projected and recorded.
Given the inherent uncertainty in making future projections, U.S. Silica plans
to have these projections periodically updated based on its actual claims
experience and other relevant factors such as changes in the judicial system and
legislative actions.
The exposure of persons to silica and the accompanying health risks have been,
and will continue to be, a significant issue confronting the industrial minerals
industry and the industrial minerals segment. Concerns over silicosis and other
potential adverse health effects, as well as concerns regarding potential
liability arising from the use of silica, may have the effect of discouraging
U.S. Silica's customers' use of its silica products. The actual or perceived
health risks of mining, processing and handling silica could materially and
adversely affect silica producers, including U.S. Silica, through reduced use of
silica products, the threat of product liability or employee lawsuits, increased
levels of scrutiny by federal and state regulatory authorities of U.S. Silica
and its customers or reduced financing sources available to the silica industry.
9
8. 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.
9. Debt Covenants
As discussed in Note 2, on July 18, 2003, the Company completed its sale of the
aggregates segment. Net proceeds from the sale, after deducting $4.9 million in
fees, expenses and interest on the senior secured term loans, were $153.4
million, which were used to permanently reduce and eliminate the tranche A and
tranche B term loans under the senior secured credit agreement, totaling $107.9
million in the aggregate, and $45.5 million of the $50.0 million available to
the Company under the revolving credit facility, including $5.5 million in cash
collateral for outstanding letters of credit, as required by the terms of the
senior secured credit agreement. After taking into effect the remaining letters
of credit that reduces the amount available to the Company under the revolving
credit facility, the Company had $1.3 million available for its immediate use.
Outstanding letters of credit include $3.4 million that still support surety
requirements of Better Materials Corporation, the divested subsidiary, that will
be cancelled when Hanson provides substitute collateral in place of the letters
of credit. When that substitution occurs, assuming the Company obtains an
amendment or waiver with respect to the current default under the senior secured
credit agreement as described below, the full $4.5 million of the remaining
working capital revolver will be available for Company use for general corporate
purposes. After taking into account these permanent reductions of debt under the
senior secured credit agreement, the Company had approximately $164.6 million of
long-term debt outstanding, consisting of approximately $14.6 million
outstanding under the tranche C term loan under the senior secured credit
agreement and $150 million of 13% senior subordinated notes due 2009.
Assuming the current revolving credit facility continues to be its only source
of external working capital, the Company does not believe that it will have
sufficient liquidity to make the $9.75 million interest payment due on September
15, 2003 with respect to its senior subordinated notes. The Company is currently
in discussions with a financial institution for a new asset based revolving
credit facility that it believes will provide working capital for the remaining
business and sufficient proceeds to repay the remaining $14.6 million of tranche
C term debt under the existing senior secured credit agreement, canceling that
agreement (including the related revolving credit facility), and to make the
senior subordinated notes interest payment on schedule.
In addition to the above, as of June 30, 2003 the Company was not in compliance
with the financial covenants of the senior secured credit agreement as amended
on April 17, 2003, and accordingly it is in default under the senior secured
credit agreement, and its lenders could prevent further borrowings and could
declare all amounts borrowed under the senior secured credit agreement together
with accrued interest, immediately due and payable. Accordingly, if the Company
does not replace the senior secured credit agreement with a new financing
arrangement as previously noted, even if it does generate sufficient cash flow
to meet the $9.75 million interest payment due on September 15, 2003, it could
be a) prevented from making further borrowings and required to repay all
outstanding borrowings and/or b) prevented from making that interest payment
until it either amends the senior secured credit agreement, or receives a waiver
from its senior secured lenders. Similarly, if the lenders accelerate the
repayment of borrowings under the senior secured credit agreement, the Company
would be in default under the indenture relating to the senior subordinated
notes and, if the default is not cured within 10 days after notice thereof, the
bondholders could declare the principal of and accrued interest on the notes
immediately due and payable. In the event this debt becomes due and payable it
is unlikely that the Company will be able to repay the amounts due and payable
and it, therefore, could be required to sell assets to generate cash or the
lenders under the senior secured credit agreement could foreclose on the pledged
stock of its subsidiaries and on the assets in which they have been granted a
security interest. While the Company has obtained amendments and waivers under
the senior secured credit agreement in the past, there is no assurance that this
amendment or waiver will be granted or that it would be granted on terms
satisfactory to the Company.
10
These financial statements have been prepared on the assumption that the Company
will continue to operate as a going concern, although no assurance can be given
in that regard. If the Company were unable to continue as a going concern,
assets and liabilities would likely require significant adjustments.
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 condensed consolidated financial statements and the notes
thereto included in Item 1 of this Quarterly Report on Form 10-Q, 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,
2002. 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 are a holding company
that conducts substantially all our operations through our subsidiaries. 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. We operate a network of 16 production facilities in 14 states.
This Quarterly Report on Form 10-Q/A for the quarterly period ended June
30, 2003 is being filed for the purpose of restating the financial statements
for the quarter and the six months ended June 30, 2003 contained in Item 1
hereof to reflect a write-off of all of our net deferred tax assets due to the
uncertainty of the future utilization of our net operating losses and
alternative minimum tax credit carry forwards. A valuation of these assets
should have been performed in connection with the classification of our
aggregates business as an asset held for sale in the second quarter. Except for
related changes to Items 1, 2 and 4 hereof, no other modifications or changes
have been made to our Form 10-Q for the quarterly period ended June 30, 2003 as
originally filed or the exhibits filed therewith.
On April 10, 2003, we signed an agreement for the sale of our aggregates
business, Better Materials Corporation, to a subsidiary of Hanson Building
Materials America, Inc. ("Hanson"), the proceeds from which would be used to
reduce outstanding indebtedness under our senior secured credit agreement. On
July 18, 2003, we completed the sale, receiving total cash consideration of
$158.3 million before fees and expenses. Proceeds have not been reduced for the
effect of a $2.0 million non-interest-bearing contingent note payable to Hanson
that will be forgiven when certain post-closing zoning and permit objectives are
achieved. We believe achievement of these objectives will be reached within the
five-year term of the note payable. The current and historical results from
operations of our aggregates business are being reported as discontinued
operations, net of all applicable taxes, in our management's discussion and
analysis that follows, and the financial statements included in this report have
been restated accordingly.
These financial statements have been prepared on the assumption that the
Company will continue to operate as a going concern, although no assurance can
be given in that regard. If the Company were unable to continue as a going
concern, assets and liabilities would likely require significant adjustments.
Critical Accounting Policies
In our opinion, we do not have any individual accounting policy that is
critical to the preparation of our financial statements. Also, in many
instances, we must use an accounting policy or method because it is the only
policy or method permitted under accounting principles generally accepted in the
United States. However, certain accounting policies are more important to the
reporting of the Company's financial position and results of operations. These
policies are discussed in "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Critical Accounting Policies" in our
Annual Report on Form 10-K for the year ended December 31, 2002.
11
Three Months Ended June 30, 2003 Compared with Three Months Ended June 30, 2002
Sales. Sales were $48.5 million in both the three months ended June 30,
2003 and the three months ended June 30, 2002. Increased shipments totaling $1.1
million to the oil & gas-fracturing, glass, building products and recreational
market segments were offset by a $1.1 million reduction in shipments to the
foundry and fillers and extenders market segments. Transportation revenue, which
is provided as a service to our customers but has no gross margin impact to us,
increased by $0.2 million.
Cost of Goods Sold. Cost of goods sold increased $0.6 million, or 1.7%, to
$36.6 million in the three months ended June 30, 2003 from $36.0 million in the
three months ended June 30, 2002, primarily on a $0.9 million increase in the
price of drier fuel and a $0.2 million increase in customer transportation costs
(as noted previously in Sales comments), partially offset by a $0.1 million
reduction in the purchase price of power, and other miscellaneous cost
reductions.
Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization decreased $0.3 million, or 7.1%, to $3.9 million in the three
months ended June 30, 2003 from $4.2 million in the three months ended June 30,
2002 as several capital assets have become fully depreciated without a
corresponding reinvestment.
Selling, General and Administrative. Selling, general and administrative
expenses increased $3.7 million, or 84.1%, to $8.1 million in the three months
ended June 30, 2003 from $4.4 million in the three months ended June 30, 2002.
The increase in selling, general and administrative expenses was primarily due
to accrued separation expenses of $3.1 million for our former Chief Executive
Officer, $1.0 million in transaction fees and expenses related to the sale of
Better Materials Corporation and other inflationary cost increases, partially
offset by a $0.6 million decrease in the costs recorded for silica litigation.
Changes in silica litigation accruals and expense will be made periodically when
we update or revise the third party studies that estimate our future exposure to
third party products liability litigation. See "Significant Factors Affecting
Our Business - Silica Health Risks and Litigation May Have a Material Adverse
Effect on Our Business" included elsewhere in this Quarterly Report on Form
10-Q.
Operating Loss. Operating loss incurred for the three months ended June 30,
2003 was $0.1 million as compared to operating income of $4.0 million in the
three months ended June 30, 2002 as a result of the factors noted earlier.
Interest Expense. Interest expense increased $0.5 million, or 6.3%, to $8.4
million in the three months ended June 30, 2003 from $7.9 million in the three
months ended June 30, 2002 due primarily to an increase in the total amount of
our debt.
Provision for Income Taxes. The income tax expense on continuing operations
for the three months ended June 30, 2003 gives no effect for current year tax
benefits of losses as these were concluded to not be likely of realization.
Additionally, the tax provision reflects the provision of a full valuation
allowance to write off all of our net deferred tax assets that existed at the
time we signed the agreement to sell our aggregates business in the second
quarter due to the uncertainty of the future utilization of our net operating
losses, alternative minimum tax carry forwards and other deferred tax assets as
a consequence of such sale.
Net Loss From Continuing Operations. Net loss from continuing operations
increased $24.4 million to $26.7 million for the three months ended June 30,
2003, from a net loss of $2.3 million for the three months ended June 30, 2002
as a result of the factors noted earlier.
Income/Loss from Operations of Discontinued Operations. Net loss from our
discontinued aggregates business segment was $0.3 million in the three months
ended June 30, 2003 as compared to net income of $4.9 million in the three
months ended June 30, 2002, due primarily to a 44% reduction in asphalt volume
shipped.
Net Loss. Net loss for the three month period ended June 30, 2003 was $27.1
million as compared to net income of $2.6 million for the three month period
ended June 30, 2002 as a result of the factors noted earlier.
Six Months Ended June 30, 2003 Compared with Six Months Ended June 30, 2002
Sales. Sales increased $1.1 million, or 1.2%, to $92.2 million in the six
months ended June 30, 2003 from $91.1 million in the six months ended June 30,
2002. Increased shipments totaling $3.2 million to the oil & gas-fracturing,
glass, building products and recreational market segments were partially offset
by $1.5 million in reduced shipments to the foundry and fillers and extenders
market segments. Transportation revenue, which is provided as a service to our
customers but has no gross margin impact to us, increased by $0.2 million.
12
Cost of Goods Sold. Cost of goods sold increased $2.1 million, or 3.0%, to
$71.6 million in the six months ended June 30, 2003 from $69.5 million in the
six months ended June 30, 2002, primarily from a $1.9 million increase in the
price of drier fuel, a $0.2 million increase in general insurance costs, and a
$0.2 million increase in customer transportation costs (as noted previously in
Sales comments), partially offset by miscellaneous cost reductions at various
operating sites.
Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization increased $0.2 million, or 2.6%, to $7.9 million in the six months
ended June 30, 2003 from $7.7 million in the six months ended June 30, 2002.
Selling, General and Administrative. Selling, general and administrative
expenses increased $2.6 million, or 28.3%, to $11.8 million in the six months
ended June 30, 2003 from $9.2 million in the six months ended June 30, 2002. The
increase in selling, general and administrative expenses was primarily due to
accrued separation expenses of $3.1 million for our former Chief Executive
Officer, $1.3 million in transaction fees and expenses related to the sale of
Better Materials Corporation and other inflationary cost increases, partially
offset by a $0.4 million decrease in bad debt accruals and a $1.2 million
decrease in the costs recorded for silica litigation. Changes in silica
litigation accruals and expense will be made periodically when we update or
revise the third party studies that estimate our future exposure to third party
products liability litigation. See "Significant Factors Affecting Our Business -
Silica Health Risks and Litigation May Have a Material Adverse Effect on Our
Business" included elsewhere in this Quarterly Report on Form 10-Q.
Operating Income. Operating income for the six months ended June 30, 2003
was $0.8 million as compared to operating income of $4.7 million incurred in the
six months ended June 30, 2002 as a result of the factors noted earlier.
Interest Expense. Interest expense increased $0.3 million, or 1.9%, to
$16.4 million in the six months ended June 30, 2003 from $16.1 million in the
six months ended June 30, 2002 due primarily to an increase in the total amount
of our debt.
Provision for Income Taxes. The income tax expense on continuing operations
for the six months ended June 30, 2003 gives no effect for current year tax
benefits of losses as these were concluded to not be likely of realization.
Additionally, the tax provision reflects the provision of a full valuation
allowance to write off all of our net deferred tax assets that existed at the
time we signed the agreement to sell our aggregates business in the second
quarter due to the uncertainty of the future utilization of our net operating
losses, alternative minimum tax carry forwards and other deferred tax assets as
a consequence of such sale.
Net Loss From Continuing Operations. Net loss from continuing operations
increased $5.7 million to $10.1 million for the six months ended June 30, 2003,
from a net loss of $4.4 million for the six months ended June 30, 2002 as a
result of the factors noted earlier.
Loss/Income from Operations of Discontinued Operations. Net loss from our
discontinued aggregates business segment was $9.0 million in the six months
ended June 30, 2003 as compared to a net loss of $1.9 million in the six months
ended June 30, 2002, due primarily to a 44% reduction in asphalt volume shipped.
Cumulative Effect of Change in Accounting for Asset Retirement Obligations.
Under Statement of Financial Accounting Standards Number 143, Accounting for
Asset Retirement Obligations, new standards were developed to account for the
obligation incurred by the Company for the ultimate retirement of tangible
long-lived assets. Upon adoption of this accounting standard, we recorded a $0.3
million after tax credit in the six month period ended June 30, 2003.
Under Statement of Financial Accounting Standards No. 142, we were required
to perform an asset impairment test on all goodwill recorded on our books as of
January 1, 2002. The result of the impairment test was a complete write-down of
the $14.7 million of goodwill recorded as an asset as of January 1, 2002. The
$8.6 million expense recorded in the six months ended June 30, 2002 is net of
applicable income taxes of $6.1 million.
Net Loss. Net loss for the six month period ended June 30, 2003 was $18.8
million as compared to a net loss of $14.9 million for the six month period
ended June 30, 2002 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 expenditure and mine development
expenditure needs and finance acquisitions. We are a holding company and as such
we conduct substantially all our operations through our subsidiaries. As a
holding company, we are dependent upon dividends or other intercompany transfers
13
of funds from our subsidiaries to meet our debt service and other obligations,
and have historically met our liquidity and capital investment needs with
internally generated funds supplemented from time to time by borrowings under
our revolving credit facility. Conversely, we have funded our acquisitions
through borrowings and equity investments. Our total debt as of June 30, 2003
was $311.3 million and our total stockholder's deficit as of that date was $73.1
million, giving us total debt representing approximately 131% 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 including our discontinued aggregates
business was $12.1 million for the six months ended June 30, 2003 compared to
$6.6 million for the six months ended June 30, 2002. Cash used by operating
activities increased $5.5 million in 2003 due primarily to $7.1 million in
decreased earnings at our discontinued operating segment, partially offset by a
$3.1 million improvement in accounts receivable.
Net cash used for investing activities decreased $3.2 million to $3.5
million for the period ended June 30, 2003 from $6.7 million for the period
ended June 30, 2002. This decrease primarily resulted from a $3.5 million
decrease in capital expenditures.
Cash flow provided by financing activities was $17.1 million for the six
months ended June 30, 2003 as compared to $11.5 million for the six months ended
June 30, 2002. The $5.6 million increase in cash provided by financing
activities relates to a $15.2 million increase in long-term debt (the tranche C
term loan facility referred to below) in the six months ended June 30, 2003,
which was partially offset by a decrease in the net revolver credit agreement
facility of $9.2 million.
Interest payments on our 13% senior subordinated notes due 2009 ($150
million outstanding as of June 30, 2003), which are unconditionally and
irrevocably guaranteed, jointly and severally, by each of our domestic
subsidiaries, debt service under the remaining amounts outstanding under our
senior secured credit agreement described below, working capital, capital
expenditures and mine development expenditures, incurred in the normal course of
business as current deposits are depleted, represent our current significant
liquidity requirements.
Under our senior secured credit agreement, as of June 30, 2003, we had
$19.35 million outstanding under the tranche A term loan facility; $88.5 million
outstanding under the tranche B term loan facility; and $14.6 million under the
second lien tranche C term loan facility that matures in September 2007. In
addition, this credit agreement provides us with a $50.0 million revolving
credit facility. The revolving credit facility was partially drawn for $38.0
million as of June 30, 2003, and $8.6 million was allocated for letters of
credit, leaving $3.4 million available for our use as of that date. 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
collateralized by substantially all of our assets, including our real and
personal property, inventory, accounts receivable and other intangibles. For a
further description of our senior secured credit agreement, including interest
rate provisions, certain restrictions that it imposes upon us and certain
quarterly and annual 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, 2002.
On April 10, 2003, we signed an agreement for the sale of our aggregates
business, Better Materials Corporation, to Hanson, the proceeds from which would
be used to reduce outstanding indebtedness under our senior secured credit
agreement. On July 18, 2003, we completed the sale, receiving total cash
consideration of $158.3 million before fees and expenses. Proceeds have not been
reduced for the effect of a $2.0 million non-interest-bearing contingent note
payable to Hanson that will be forgiven when certain post-closing zoning and
permit objectives are achieved. We believe achievement of these objectives will
be reached within the five-year term of the note payable. Proceeds from the sale
are less than we originally anticipated due to a $3.0 million purchase price
reduction, reflecting an estimate of the damages and losses caused by an
incident that occurred on June 25, 2003 at one of the operating sites included
in the sale. While we believe that some portion of this loss will be recoverable
under our insurance policies, there is no guarantee that we will receive any
reimbursement from the claim.
Net proceeds from the sale, after deducting $4.9 million in fees, expenses
and interest on our senior secured term loans, were $153.4 million, which were
used to permanently reduce and eliminate our tranche A and tranche B term loans
under our senior secured credit agreement, totaling $107.9 million in the
aggregate, and $45.5 million of the $50.0 million available to us under the
revolving credit facility, including $5.5 million in cash collateral for
outstanding letters of credit, as required by the terms of our senior secured
credit agreement. After taking into effect the remaining letters of credit that
reduces the amount available to us under the revolving credit facility, we had
$1.3 million available for our immediate use. Our outstanding letters of credit
include $3.4 million that still support surety requirements of Better Materials
Corporation, our divested subsidiary, that will be cancelled when Hanson
provides substitute collateral in place of our letters of credit. When that
14
substitution occurs, assuming we obtain an amendment or waiver with respect to
the current default under our senior secured credit agreement as described
below, the full $4.5 million of the remaining working capital revolver will be
available for our use for general corporate purposes. After taking into account
these permanent reductions of debt under our senior secured credit agreement, we
had approximately $164.6 million of long-term debt outstanding, consisting of
approximately $14.6 million outstanding under our tranche C term loan under the
senior secured credit agreement and $150 million of 13% senior subordinated
notes due 2009. Projected cash interest expense on our debt is approximately
$21.0 million over the next 12 months.
Based on our current projections of the remaining industrial minerals
business, we believe that we will generate sufficient cash flow to meet our
operating requirements over the next 12 months. However, assuming our current
revolving credit facility continues to be our only source of external working
capital, we do not believe that we will have sufficient liquidity to make the
$9.75 million interest payment due on September 15, 2003 with respect to our
senior subordinated notes. We are currently in discussions with a financial
institution for a new asset based revolving credit facility that we believe will
provide working capital for our remaining business and sufficient proceeds to
repay the remaining $14.6 million of tranche C term debt under the existing
senior secured credit agreement, canceling that agreement (including the related
revolving credit facility), and to make the senior subordinated notes interest
payment on schedule. While we are reasonably confident that we will be able to
obtain this new source of financing, we cannot guarantee that we will be able to
do so on terms satisfactory to us, in a timely manner (including by the
September 15, 2003 interest payment due) or at all.
In addition to the above, as of June 30, 2003 we were not in compliance
with the financial covenants of the senior secured credit agreement as amended
on April 17, 2003, and accordingly we are in default under the senior secured
credit agreement, and our lenders could prevent further borrowings and could
declare all amounts borrowed under the senior secured credit agreement together
with accrued interest, immediately due and payable. Even though after taking
into account the proceeds from the sale of Better Materials, we would have been
in compliance with these financial covenants if the sale had occurred as of June
30, 2003, that does not cure the actual default as of that date. Accordingly, if
we do not replace the senior secured credit agreement with a new financing
arrangement as previously noted, even if we do generate sufficient cash flow to
meet the $9.75 million interest payment due on September 15, 2003, we could be
a) prevented from making further borrowings and required to repay all
outstanding borrowings and/or b) prevented from making that interest payment
until we either amend the senior secured credit agreement, or receive a waiver
from our senior secured lenders. Similarly, if the lenders accelerate the
repayment of borrowings under the senior secured credit agreement, we would be
in default under the indenture relating to our senior subordinated notes and, if
the default is not cured within 10 days after notice thereof, the bondholders
could declare the principal of and accrued interest on the notes immediately due
and payable. In the event this debt becomes due and payable it is unlikely that
we will be able to repay the amounts due and payable and we, therefore, could be
required to sell assets to generate cash or the lenders under our senior secured
credit agreement could foreclose on the pledged stock of our subsidiaries and on
the assets in which they have been granted a security interest. While we have
obtained amendments and waivers under the senior secured credit agreement in the
past, there is no assurance that this amendment or waiver will be granted or
that it would be granted on terms satisfactory to us.
Capital expenditures decreased $3.5 million to $3.5 million in the six
months ended June 30, 2003 from $7.0 million in the six months ended June 30,
2002. Our expected capital expenditure and mine development requirements for
2003 are $8.0 million.
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 the future
performance of our subsidiaries, 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 debts and meet our other obligations. As a result
of the completion of the sale of our aggregates business, our cash flow from
operations are dependent on the results of our industrial minerals segment. We
believe that based on current levels of operations from our industrial minerals
business, cash flow will be adequate for at least the next twelve months to meet
operating requirements. As discussed above, however, assuming our current
revolving credit facility continues to be our only source of external working
capital, we do not believe that we will have sufficient liquidity to make the
$9.75 million interest payment due on September 15, 2003 with respect to our
senior subordinated notes. There can be no assurance that our business will
generate sufficient cash flow from operations or that future borrowings will be
available under the revolving credit facility or other credit facilities 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, including the notes, 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,
or at all.
15
Significant Factors Affecting Our Business
Our Annual Report on Form 10-K for the year ended December 31, 2002
contains a description of some of the more significant factors affecting our
business under "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Significant Factors Affecting Our Business". The
following is an update to these significant factors.
Silica Health Risks and Litigation May Have a Material Adverse Effect on
Our Business. The inhalation of respirable crystalline silica is associated with
several adverse health effects. First, it has been known since at least the
1930s that prolonged inhalation of respirable crystalline silica can cause
silicosis, an occupational disease characterized by fibrosis, or scarring, of
the lungs. Second, since the mid-1980s, the carcinogenicity of crystalline
silica has been at issue and the subject of much debate and research. In 1987,
the International Agency for Research on Cancer, or IARC, an agency of the World
Health Organization, classified crystalline silica as a probable human
carcinogen. In 1996, a working group of IARC voted to reclassify crystalline
silica as a known human carcinogen. On May 15, 2000, the National Toxicology
Program, part of the Department of Health and Human Services, issued its Ninth
Report on Carcinogens, which reclassified crystalline silica (respirable size)
from its previous classification as "a reasonably anticipated carcinogen" to "a
known human carcinogen." Third, the disease silicosis is associated with an
increased risk of tuberculosis. Finally, there is recent evidence of a possible
association between crystalline silica exposure or silicosis and other diseases
such as immune system disorders, end-stage renal disease and chronic obstructive
pulmonary disease.
One of our subsidiaries, U.S. Silica, was named as a defendant in an
estimated 14,490 new product liability claims filed between January 1, 2003 and
June 30, 2003, as compared to an estimated 1,235 claims filed between January 1,
2002 and June 30, 2002. During the six month period ended June 30, 2003, new
claims filed by state were 11,989 claims in Mississippi, 730 claims in
Louisiana, 1,986 claims in Texas, 217 claims in Ohio, 67 claims in Pennsylvania
and 1 claim in Indiana. U.S. Silica was named as a defendant in 5,100 similar
claims in 2002, with 3,100 of these claims filed in November and December, 2002.
Total open claims as of June 30, 2003 were an estimated 21,742, as compared to
an estimated 7,141 open claims as of December 31, 2002 and an estimated 3,505
open claims as of June 30, 2002. Almost all of the claims pending against U.S.
Silica arise out of the alleged use of U.S. Silica products in foundries or as
an abrasive blast media and have been filed against us and numerous other
defendants.
The plaintiffs, who allege that they are employees or former employees of
our customers, claim that our silica products were defective or that we acted
negligently in selling our silica products without a warning, or with an
inadequate warning. The plaintiffs further claim that these alleged defects or
negligent actions caused them to suffer injuries and sustain damages as a result
of exposure to our products. In almost all cases, the injuries alleged by the
plaintiffs are silicosis or "mixed dust disease," a claim that allows the
plaintiffs to pursue litigation against the sellers of both crystalline silica
and other minerals. There are no pending claims of this nature against any of
our other subsidiaries.
ITT Industries, Inc., successor to a former owner of U.S. Silica, has
agreed to indemnify U.S. Silica for third party silicosis claims (including
litigation expenses) filed against it prior to September 12, 2005 alleging
exposure to U.S. Silica products for the period prior to September 12, 1985, to
the extent of the alleged exposure prior to that date. This indemnity is subject
to an annual deductible of $275,000, which is cumulative and subject to
carry-forward adjustments. The Company fully accrued this deductible on a
present value basis when it acquired U.S. Silica. As of December 31, 2002 and
2001, this accrual amounted to $1.9 million and $1.8 million, respectively.
Pennsylvania Glass Sand Corporation, predecessor to U.S. Silica, was a named
insured on insurance policies issued to ITT Industries for the period April 1,
1974 to September 12, 1985 and to U.S. Borax (another former owner) for the
period September 12, 1985 to December 31, 1985. To date, we have not sought
coverage under these policies. However, as a named insured, we believe that
coverage under these policies will be available to us. Ottawa Silica Company (a
predecessor that merged into U.S. Silica in 1987) had insurance coverage on an
occurrence basis prior to July 1, 1985.
It is likely that we will continue to have silica-related product liability
claims filed against us, including claims that allege silica exposure for
periods after January 1, 1986. We cannot guarantee that our current indemnity
agreement with ITT Industries (which currently expires in 2005 and in any event
only covers alleged exposure to certain U.S. Silica products for the period
prior to September 12, 1985), or potential insurance coverage (which, in any
event, only covers periods prior to January 1, 1986) will be adequate to cover
any amount for which we may be found liable in such suits. Any such claims or
inadequacies of the ITT Industries indemnity or insurance coverage could have a
material adverse effect in future periods on our consolidated financial
position, results of operations or cash flows, if such developments occur.
In the past, we recorded amounts for product liability claims based on
estimates of our portion of the cost to be incurred for all pending product
liability claims and estimates based on the value of an incurred but not
reported liability for unknown claims for exposures that occurred before 1976,
when we began warning our customers and their employees of the health effects of
16
crystalline silica. Estimated amounts recorded were net of any expected
recoveries from insurance policies or the ITT Industries indemnity. The amounts
recorded for product liability claims were estimates, which were reviewed
periodically by management and legal counsel and adjusted to reflect additional
information when available. As the rate of claims filed against the company and
others in the industry increased in 2002, we determined it was no longer
sufficient for management to solely estimate the product liability claims that
might be filed against the company, and we retained the services of an
independent actuary to estimate the number and costs of unresolved current and
future silica related product liability claims that might be asserted against
us.
The actuary relied on generally accepted actuarial methodologies and on
information provided by us, including the history of reported claims, insurance
coverages and indemnity protections available to us from third parties, the
quantity of sand sold by market and by year through December 31, 2002, recent
court rulings addressing the liability of sellers of silica sand, and other
reports, articles and records publicly available that discuss silica related
health risks, to estimate a range of the number and severity of claims that
could be filed against the company over the next 50 years, the period found by
the actuary to be reasonably estimable. The variables used to determine the
estimate were further analyzed and multiple iterations were modeled by our
actuary to calculate a range of expected outcomes.
As previously discussed, we have available to us several forms of potential
recovery to offset a portion of these costs in the form of insurance coverage
and the ITT Industries indemnity. As part of the overall study, our actuary also
estimated the amount recoverable from these sources, assuming that all primary
and excess insurance coverage and the ITT indemnity is valid and fully
collectible and also based on the timing of current and new claims filed, the
alleged exposure periods and the portion of the exposure that would fall within
an insured or indemnified exposure period.
Following the adverse developments during 2002, especially in the fourth
quarter, and based on the study performed by our actuary, we recorded a pre-tax
charge related to silica claims of $23.7 million in 2002 for the estimated
undiscounted gross costs, including defense costs, after consideration of
recoveries under the ITT indemnity and insurance, that we expect to incur over
the next 50 years through the end of 2052. This resulted in a long term
liability of $69.2 million related to third party product liability claims and a
non-current asset of $40.9 million for probable insurance and indemnity
recoveries at December 31, 2002. The pre-tax charge in 2001 for silica claims
was $2.1 million and the net liability recorded at December 31, 2001 was $4.6
million.
No additional charges to income were recorded in the six month period ended
June 30, 2003. However, due to the uncertainty of the outcome of the petition
for review filed with the Texas Supreme Court in the Tompkins case (see Part II,
Item 1, Legal Proceedings in our Quarterly Report on Form 10-Q for the quarterly
period ended March 31, 2003), we have increased the amount of both the long term
liability for third party product liability claims and the non-current asset for
probable insurance and indemnity recoveries each by $6.0 million. In addition,
we paid $6.3 million in defense and settlement costs in the six month period
ended June 30, 2003, and invoiced ITT Industries $4.2 million under the terms of
the indemnity agreement with them resulting in retained losses to us of $2.1
million in the six months ended June 30, 2003. For the comparable six month
period ended June 30, 2002 we paid $0.9 million in defense and settlement costs,
and invoiced ITT Industries $0.7 million, resulting in retained losses to us of
$0.2 million.
The amount recorded for the long term liability for third party product
liability claims was $68.9 million at June 30, 2003 and the non-current asset
for probable insurance and indemnity recoveries was $42.6 million as of that
date.
On an annual basis, our actuary has calculated that our cash portion of the
retained losses (reflecting any insurance coverage and indemnity payments) over
the next 15 years would average $1.4 million per year, ranging from $0.7 million
to $2.0 million in any year. On average, we have incurred approximately $1.0
million per year in retained losses in 2001 and 2002.
The process of estimating and recording amounts for product liability
claims is imprecise and based on a variety of assumptions, some of which, while
reasonable at the time, may prove to be inaccurate. Our actuary's report is
based to a large extent on the assumption that our past experience is predictive
of future experience. Unanticipated changes in factors such as judicial
decisions, future legal judgments against us, legislative actions, claims
consciousness, claims management, claims settlement practices and economic
conditions make these estimates subject to a greater than normal degree of
uncertainty that could cause the silica-related liabilities and insurance or
indemnity recoveries to be greater or less than those projected and recorded.
Given the inherent uncertainty in making future projections, we plan to
have these projections periodically updated based on our actual claims
experience and other relevant factors such as changes in the judicial system and
legislative actions.
17
The exposure of persons to silica and the accompanying health risks have
been, and will continue to be, a significant issue confronting the industrial
minerals industry and our industrial minerals segment. Concerns over silicosis
and other potential adverse health effects, as well as concerns regarding
potential liability arising from the use of silica, may have the effect of
discouraging our customers' use of our silica products. The actual or perceived
health risks of mining, processing and handling silica could materially and
adversely affect silica producers, including us, through reduced use of silica
products, the threat of product liability or employee lawsuits, increased levels
of scrutiny by federal and state regulatory authorities of us and our customers
or reduced financing sources available to the silica industry.
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) the competitive
nature of the industrial minerals industry; (5) operating risks typical of the
industrial minerals industry; (6) fluctuations in prices for, and availability
of, transportation, power, petroleum based products and other energy products;
(7) unfavorable weather conditions; (8) regulatory compliance, including
compliance with environmental and silica exposure regulations, by us and our
customers; (9) litigation affecting our customers; (10) product liability
litigation by our customers' employees affecting us, including the adequacy of
indemnity and insurance coverage and of the reserves we have recorded relating
to current and future litigation; (11) changes in the demand for our products
due to the availability of substitutes for products of our customers; (12) labor
unrest; (13) interest rate changes and changes in financial markets generally;
and (14) the ability to obtain new sources of financing to serve the working
capital needs of our remaining industrial minerals business.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Information regarding our 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, 2002. This information has not changed materially in the
interim period since December 31, 2002.
Item 4. Controls and Procedures
Based on their review and evaluation, as of June 30, 2003, our principal
executive officer and principal financial officer have concluded that our
disclosure controls and procedures (as defined in Rule 15d-15(e) under the
Securities Exchange Act of 1934) were effective, with the exception of the item
noted in the following paragraph. There was no change in our internal control
over financial reporting (as defined in Rule 15d-15(f) under the Securities
Exchange Act of 1934) identified in connection with the evaluation of our
disclosure controls and procedures referred to in the preceding sentence that
occurred during our last fiscal quarter, other than that addressed below, that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting.
During the final review and preparation of the 2003 year-end financial
statements, we, along with our auditors, PricewaterhouseCoopers LLP, informed
the Audit Committee that we had identified a material weakness related to our
interim period reporting of deferred tax valuation allowances which ultimately
resulted in our restatement of our interim consolidated financial statements and
the tax provision and deferred tax accounts for the quarter and year to date
periods ended June 30, 2003 and September 30, 2003. Effective the first quarter
of 2004, we instituted new procedures for assessing the valuation of our
deferred tax assets for interim reporting purposes to rectify this material
weakness and to prevent such an error from occurring in the future. We have
discussed our corrective actions with our Audit Committee and
PricewaterhouseCoopers LLP and, as of the date of this report, we believe such
actions have corrected the identified material weakness.
18
PART II. OTHER INFORMATION
Item 3. Defaults Upon Senior Securities
The disclosure contained in the tenth paragraph under "Management's
Discussion and Analysis of Financial Condition and Results of Operations
- -Liquidity and Capital Resources" is incorporated by reference into this Item 3
of this Quarterly Report on Form 10-Q.
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
EXHIBIT EXHIBIT
NUMBER
10 Separation Agreement and General Release dated as of June 24, 2003
(effective June 30, 2003) between Roy D. Reeves and USS Holdings, Inc.
(Incorporated by reference from Exhibit 10 to our Current Report on
Form 8-K dated July 18, 2003)
31.1 Certification of Chief Executive Officer Pursuant to Rule 15d-14(a)
31.2 Certification of Chief Financial Officer Pursuant to Rule 15d-14(a)
32.1 Statement of Chief Executive Officer Pursuant to Section 1350 of
Chapter 63 of Title 18 of the United States Code.
32.2 Statement of Chief Financial Officer Pursuant to Section 1350 of
Chapter 63 of Title 18 of the United States Code.
B. Reports on Form 8-K
A Current Report on Form 8-K dated April 16, 2003 was filed with the Securities
and Exchange Commission by us reporting information under Item 5 (Other Events
and Required FD Disclosure).
A Current Report on Form 8-K dated June 20, 2003 was filed with the Securities
and Exchange Commission by us reporting information under Item 9 (Regulation FD
Disclosure).
19
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.
April 2, 2004 Better Minerals & Aggregates Company
By: /s/ Gary E. Bockrath
Name:Gary E. Bockrath
Title: Vice President and Chief Financial Officer
20
INDEX TO EXHIBITS
EXHIBIT EXHIBIT
NUMBER
31.1 Certification of Chief Executive Officer Pursuant to Rule 15d-14(a)
31.2 Certification of Chief Financial Officer Pursuant to Rule 15d-14(a)
32.1 Statement of Chief Executive Officer Pursuant to Section 1350 of
Chapter 63 of Title 18 of the United States Code.
32.2 Statement of Chief Financial Officer Pursuant to Section 1350 of
Chapter 63 of Title 18 of the United States Code.
21
Exhibit 31.1
CERTIFICATION
I, John A. Ulizio, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A of Better Minerals
& Aggregates Company;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the end of the period covered by this report based on
such evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: April 2, 2004 /s/John A. Ulizio
John A. Ulizio
President and Chief Executive Officer
22
Exhibit 31.2
CERTIFICATION
I, Gary E. Bockrath, certify that:
1. I have reviewed this quarterly report on Form 10-Q/A of Better Minerals
& Aggregates Company;
2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures or caused such
disclosure controls and procedures to be designed under our
supervision, to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to
us by others within those entities, particularly during the period in
which this report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the end of the period covered by this report based on
such evaluation; and
c) disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, to
the registrant's auditors and the audit committee of registrant's board of
directors (or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: April 2, 2004 /s/Gary E. Bockrath
Gary E. Bockrath
Vice President and Chief Financial Officer
23
Exhibit 32.1
STATEMENT OF CHIEF EXECUTIVE OFFICER
In connection with the filing of the Quarterly Report of Better Minerals &
Aggregates Company (the "Company") on Form 10-Q for the quarterly period ended
June 30, 2003 (the "Report"), I, John A. Ulizio, the chief executive officer of
the Company, certify for the purpose of section 1350 of chapter 63 of title 18
of the United States Code that, to the best of my knowledge:
(i) the Report fully complies with the requirements of section 15(d) of the
Securities Exchange Act of 1934; and
(ii) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
April 2, 2004
by: /S/ John A. Ulizio
-------------------------------------
John A. Ulizio
President and Chief Executive
Officer of
Better Minerals & Aggregates Company
24
Exhibit 32.2
STATEMENT OF CHIEF FINANCIAL OFFICER
In connection with the filing of the Quarterly Report of Better Minerals &
Aggregates Company (the "Company") on Form 10-Q for the quarterly period ended
June 30, 2003 (the "Report"), I, Gary E. Bockrath, the chief financial officer
of the Company, certify for the purpose of section 1350 of chapter 63 of title
18 of the United States Code that, to the best of my knowledge:
(i) the Report fully complies with the requirements of section 15(d) of the
Securities Exchange Act of 1934; and
(ii) the information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
April 2, 2004
By: /S/ GARY E. BOCKRATH
-------------------------------------
Gary E. Bockrath
Vice President and Chief Financial
Officer of Better Minerals &
Aggregates Company
25