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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 30, 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 November 1, 2003
----- ----------------------------------
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 September 30, 2003
(unaudited) and December 31, 2002....................................... 1
Condensed Consolidated Statements of Operations for the quarter
and nine months ended September 30, 2003 and
September 30, 2002 (unaudited).......................................... 3
Condensed Consolidated Statements of Stockholder's Equity for the
quarter and nine months ended September 30, 2003 and
September 30, 2002 (unaudited).......................................... 4
Condensed Consolidated Statements of Cash Flows for the nine months
ended September 30, 2003 and September 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 1. Legal Proceedings.......................................... 18
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)
September 30, December 31,
2003 2002
---- ----
(Unaudited)
Assets
Current:
Cash and cash equivalents $ 329 $ 1,330
Accounts receivable:
Trade, less allowance for doubtful accounts of $1,035 and $885 28,270 25,298
Other 4,927 5,537
Inventories 16,795 17,106
Prepaid expenses and other current assets 5,761 4,748
Deferred income taxes 3,115 2,904
Income tax deposits 514 23
Current assets of discontinued operations - 36,266
-------- --------
Total current assets 59,711 93,212
Property, plant and equipment:
Mining property 20,079 24,041
Mine development 4,406 4,406
Asset retirement cost 4,609 -
Land 16,227 15,936
Land improvements 3,990 4,053
Buildings 31,984 31,984
Machinery and equipment 119,231 122,771
Furniture and fixtures 668 668
Construction-in-progress 2,778 1,489
-------- --------
203,972 205,348
Accumulated depletion, depreciation and amortization (110,708) (100,172)
-------- --------
Property, plant and equipment, net 93,264 105,176
Other noncurrent:
Debt issuance costs 6,311 9,518
Insurance for third-party product liability claims 40,609 40,864
Deferred income taxes 17,979 14,747
Noncurrent assets of discontinued operations - 173,285
Other noncurrent assets 3,456 3,819
-------- --------
Total other noncurrent 68,355 242,233
-------- --------
Total assets $221,330 $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)
September 30, December 31,
2003 2002
---- ----
(Unaudited)
Liabilities
Current:
Book overdraft $ 2,095 $ 3,676
Accounts payable 11,150 9,238
Accrued liabilities 12,242 8,424
Due to parent 2,334 2,346
Accrued interest 843 7,381
Short-term debt 12,703 -
Current portion of capital leases 249 193
Current portion of long-term debt 275 10,725
Current liabilities of discontinued operations - 9,934
-------- --------
Total current liabilities 41,891 51,917
Noncurrent liabilities:
Obligations under capital lease 230 258
Long-term debt, net of current portion 150,580 283,143
Third-party products liability claims 66,849 69,209
Noncurrent liabilities of discontinued operations - 51,253
Other noncurrent liabilities 40,753 39,290
-------- --------
Total noncurrent liabilities 258,412 443,153
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 (1,370) (1,360)
Retained deficit (154,778) (129,207)
Accumulated other comprehensive (loss) (4,202) (5,259)
-------- --------
Total stockholder's equity (78,973) (54,449)
-------- --------
Total liabilities and stockholder's equity $221,330 $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 Nine Months Ended
September 30, September 30,
------------- -------------
2003 2002 2003 2002
---- ---- ---- ----
Net sales $ 46,279 $ 47,388 $138,158 $138,529
Cost of goods sold 35,183 36,350 106,597 104,972
Depreciation, depletion and amortization 3,787 4,084 11,825 11,817
Selling, general & administrative 6,269 4,940 18,094 14,172
-------- -------- -------- --------
Operating income 1,040 2,014 1,642 7,568
Interest expense 6,582 7,843 22,958 23,948
Loss on early extinguishment of debt 6,979 - 6,979 -
Other income, net, including interest income (774) (359) (1,264) (1,066)
-------- -------- -------- --------
Income (loss) before income taxes (11,747) (5,470) (27,031) (15,314)
Benefit for income taxes (1,894) (1,471) (6,907) (8,547)
-------- -------- -------- --------
Net (loss) from continuing operations $ (9,853) $ (3,999) $(20,124) $(6,767)
-------- -------- -------- --------
Discontinued operations:
Gain on sale of discontinued operations 6,369 - 6,369 -
Income (loss) from operations of discontinued
operations, less applicable income tax expense (3,325) 6,451 (12,151) 2,929
(benefit) of $470, ($24), $2,222 and $1,982
-------- -------- -------- --------
Net gain (loss) from discontinued operations 3,044 6,451 (5,782) 2,929
Cumulative effect of change in accounting
principle, less applicable income taxes of $0,
$0, $191, and $6,117 - - (335) 8,621
-------- -------- -------- --------
Net income (loss) $ (6,809) $ 2,452 $(25,571) $(12,459)
======== ======== ======== ========
The accompanying notes are an integral part of these statements.
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 (12,459) (12,459)
Unrealized holding gain on
derivatives, net of tax (662) ( 662) (662)
--------
Total comprehensive loss (13,121)
Loans to related party 32 32
-------- ------- -------- ------- ------- -------- ------- --------
Balance September 30, 2002 $ - $81,377 $ (43,063) $(1,402) $(1,161) $ (14) $(1,175) $ 35,737
======== ======= ======== ======= ======= ======== ======= ========
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 (25,571) (25,571)
Minimum pension liability,
net of tax (38) (38) (38)
Unrealized holding gain on
derivatives, net of tax 1,095 1,095 1,095
--------
Total comprehensive loss (24,514)
Loans to related party (10) (10)
-------- ------- -------- ------- ------- -------- ------- --------
Balance September 30, 2003 $ - $81,377 $(154,778) $(1,370) $ - $ (4,202) $(4,202) $(78,973)
======== ======= ======== ======= ======= ======== ======= ========
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 Nine Months Ended
September 30,
-------------
2003 2002
---- ----
(Unaudited)
Cash flows from operating activities:
Net loss $ (25,571) $ (12,459)
Adjustments to reconcile net (loss) to cash flows from operations:
Depreciation, depletion and amortization 17,678 22,223
Debt issuance amortization 1,437 1,333
Deferred income taxes (2,750) (12,851)
Disposal of property, plant and equipment (gain) loss (502) (94)
Third-party products liability claims (2,105) -
Early extinguishment of debt 6,979 -
Gain on sale of discontinued operations (6,369) -
Cumulative effect of change in accounting principle (526) 14,738
Other 704 1,003
Changes in assets and liabilities:
Trade receivables (4,763) (11,629)
Non-trade receivables 317 (1,075)
Payable to parent (12) (58)
Inventories 237 410
Prepaid expenses and other current assets (2,285) (1,678)
Accounts payable and accrued liabilities 8,472 7,115
Accrued interest (6,538) (4,960)
Income taxes (176) (1,374)
--------- ---------
Net cash provided by / (used for) operating activities (15,773) 644
Cash flows from investing activities:
Capital expenditures (4,560) (12,048)
Proceeds from sale of discontinued operations, net of fees 154,641 -
Proceeds from sale of property, plant and equipment 3,383 386
Loans to related party (10) 32
--------- ---------
Net cash provided by / (used for) investing activities 153,454 (11,630)
Cash flows from financing activities:
Decrease in book overdraft (2,537) (4,330)
Issuance of long-term debt 15,236 -
Repayment of long-term debt (128,709) (7,815)
Net revolver credit agreement facility (17,097) 21,950
Financing fees (1,386) -
Prepayment penalties (3,541) -
Principal payments on capital lease obligations (648) (666)
--------- ---------
Net cash provided by / (used for) financing activities (138,682) 9,139
Net decrease in cash (1,001) (1,847)
Cash and cash equivalents, beginning of period
1,330 2,493
Cash and cash equivalents, ending of period $ 329 $ 646
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. 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 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.
2. 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"). On July 18, 2003, the Company
completed the sale, receiving total cash consideration of $158.3 million
including an estimated adjustment for changes in the closing balance sheet of
the aggregates business. Final cash consideration is subject to Hanson's review
and acceptance of the closing balance sheet and may increase or decrease upon
completion of that review, which is expected to occur in the fourth quarter.
Proceeds have not been reduced for the effect of a $2.0 million contingent
liability to Hanson that will be eliminated 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 contingency.
As a result of the sale, the financial statements have been restated to reflect
discontinued operations. Sales from discontinued operations were $7.5 million
and $42.9 million for the three months ended September 30, 2003 and 2002,
respectively and $47.7 million and $104.0 million for the nine months ended
September 30, 2003 and 2002, respectively. Income (loss) before income taxes for
these operations were $3.2 million loss and $3.5 million income for the three
months ended September 30, 2003 and 2002, respectively and $15.6 million loss
and $3.7 million loss for the nine months ended September 30, 2003 and 2002,
respectively. Significant categories of assets and liabilities from discontinued
operations are included in the following table:
December 31,
(In thousands) 2002
----
Accounts receivable $ 18,551
Inventories 14,776
Property, plant, and equipment, net 170,000
Other assets 6,224
--------
Total assets 209,551
--------
Book overdraft 956
Accounts payable and accrued liabilities 7,778
Deferred income taxes 43,919
Other liabilities 8,534
--------
Total liabilities 61,187
--------
Net assets $148,364
========
6
3. Inventories
At September 30, 2003 and December 31, 2002, inventory consisted of the
following:
September 30, December 31,
2003 2002
---- ----
(In thousands)
Supplies (net of $102 and $98 obsolescence reserve) $ 9,568 $ 9,448
Raw materials and work in process 3,870 3,852
Finished goods 3,357 3,806
------- -------
$16,795 $17,106
4. 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 the
sale 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.
5. 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 September 30, 2003, the Company reported a liability of $7.0 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 $317,000 in additional expense for
the nine months ended September 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, effective January 1, 2002, resulted in goodwill
impairment of $8.6 million, net of income taxes of $6.1 million, and represented
the elimination of the entire amount of goodwill previously reported on the
balance sheet. In accordance with FAS 142, this amount was recorded as a
cumulative effect of accounting change as of the beginning of the 2002. The
Company performed its assessment 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 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.
6. Contingencies
The Company's principal operating subsidiary, U.S. Silica Company, was named as
a defendant in an estimated 17,620 new product liability claims filed between
January 1, 2003 and September 30, 2003, as compared to an estimated 2,000 claims
filed between January 1, 2002 and September 30, 2002. During the nine month
period ended September 30, 2003, new claims filed by state were 12,491 claims in
Mississippi, 3,928 claims in Texas, 731 claims in Louisiana, 316 claims in Ohio,
76 claims in Oklahoma, 67 claims in Pennsylvania, 2 claims in California, 1
claim in Minnesota 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 September 30, 2003 were an estimated
23,936, as compared to an estimated 7,141 open claims as of December 31, 2002
and an estimated 3,676 open claims as of September 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.
7
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 September 30, 2003 and December 31, 2002,
this accrual amounted to $1.9 million and $1.9 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.
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.
8
No additional charges to income were recorded in the nine month period ended
September 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 this Quarterly Report on Form 10-Q), 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 $8.4 million in
defense and settlement costs, and invoiced ITT Industries $5.8 million under the
terms of the indemnity agreement with them resulting in retained losses to us of
$2.6 million in the period. For the comparable nine-month period ended September
30, 2002, the Company paid $3.0 million in defense and settlement costs, and
invoiced ITT Industries $2.4 million, resulting in retained losses to the
Company of $0.6 million.
The balance in the long term liability for third party product liability claims
was $66.8 million at September 30, 2003 and non-current asset for probable
insurance and indemnity recoveries was $40.6 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 Company will record any required adjustments that
result from the completion of an updated actuarial study during the fourth
quarter of 2003. The results of such updated actuarial study can not be
estimated at this time, however such amounts could be significant to the
Company's results of operations.
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.
7. 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.
8. New Credit Agreement
On September 12, 2003, the Company, through its operating subsidiary U. S.
Silica Company, completed a new $30.0 million, asset-based revolving line of
credit agreement with Wachovia Bank, National Association ("Wachovia"), a copy
of which is attached as Exhibit 10 to the Current Report on Form 8-K, filed
September 12, 2003. Proceeds from the new revolving credit agreement were used
to repay all remaining amounts due under, and terminate, the previously
9
outstanding senior secured credit agreement with BNP Paribas, provide the
Company with a $10.0 million line for letters of credit and to fund its general
liquidity needs.
Under the terms of the new revolving credit agreement, which expires June 30,
2008, the Company has pledged as security all of its personal property,
inventory, and accounts receivable, along with first mortgage liens on its
Berkeley Springs, West Virginia, Montpelier, Virginia and Pacific, Missouri
plant operations as collateral for the loan. The revolving credit agreement
includes certain conditions to borrowings, representations and covenants,
including required minimum fixed charge coverage and maximum leverage covenant
ratios that are measured quarterly, other covenants that impose significant
restrictions on the Company, and certain events of default, including an event
of default upon the occurrence of a material adverse change. Advances under the
new credit agreement bear interest at either LIBOR plus 250 basis points, or
prime plus 125 basis points, at our option.
Monthly borrowing availability (the borrowing base) is determined by a formula,
taking into consideration eligible accounts receivable and inventory, reduced by
any outstanding letters of credit and a pro-rata reduction for future interest
payments due with respect to the senior subordinated notes. Each day, all cash
receipts are automatically applied as a reduction against any advances made by
Wachovia to the Company, and, subject to the satisfaction or waiver of the
conditions to borrowing set forth in the revolving credit agreement, Wachovia
will advance at the Company's request new borrowings to meet its daily cash
requirements, up to the amount available under the borrowing base. If the
monthly borrowing base is less than the $30.0 million total line of credit,
then, at Wachovia's sole discretion, advances in excess of the borrowing base
may be made up to the full amount of the $30.0 million line of credit.
U.S. Silica's obligations under the revolving credit agreement are
unconditionally and irrevocably guaranteed, jointly and severally, by the
Company's parent company, the Company, and the Company's domestic subsidiaries.
As of September 30, 2003 the available borrowing base was $27.0 million, with
$12.7 million drawn as of that date and $8.1 million allocated for letters of
credit, leaving $6.2 million available for general corporate use under this
revolving credit agreement. As of this date, total debt outstanding was
approximately $164.0 million, consisting of the $12.7 million drawn under the
revolver, $150.0 million of 13% senior subordinated notes due 2009 and $1.3
million in miscellaneous other debt including capital leases. Projected cash
interest expense on the Company's debt is approximately $20.5 million over the
next 12 months.
Although the final maturity date of the revolving credit agreement is June 30,
2008, as required under generally accepted accounting principles, the borrowings
under this facility have been classified on the balance sheet as a current
liability due to the fact that Wachovia has the right to declare the occurrence
of a material adverse change at its sole discretion, which could result in all
borrowings outstanding under this agreement to be declared immediately due and
payable by Wachovia.
9. Debt Covenants
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 was in default under the senior secured credit agreement. As a
result of the sale of the aggregates segment and the subsequent debt
refinancing, all defaults under the senior secured credit agreement were cured
and the agreement was terminated. As of September 30, 2003, the Company is in
compliance with its financial covenants under the new revolving credit facility
described in note 8 above.
10. 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.
10
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.
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") as discussed in more detail under "Liquidity
and Capital Resources" that follows. On July 18, 2003, we completed the sale,
receiving total cash consideration of $158.3 million before fees and expenses.
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.
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.
Three Months Ended September 30, 2003 Compared with Three Months Ended September
30, 2002
Sales. Sales decreased $1.1 million, or 2.3%, to $46.3 million in the three
months ended September 30, 2003 from $47.4 million in the three months ended
September 30, 2002 primarily from decreased shipments to the glass, foundry and
fillers and extenders market segments, only partially offset by increased
shipments to the oil & gas extraction market segment. Transportation revenue,
which is provided as a service to our customers but has no gross margin impact
to us, was $7.5 million in both the three months ended September 30, 2003 and
the three months ended September 30, 2002.
Cost of Goods Sold. Cost of goods sold decreased $1.2 million, or 3.3%, to
$35.2 million in the three months ended September 30, 2003 from $36.4 million in
the three months ended September 30, 2002, primarily due to the reduction in
sales volume noted earlier, partially offset by a $0.5 million increase in the
price of drier fuel.
Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization decreased $0.3 million, or 7.3%, to $3.8 million in the three
months ended September 30, 2003 from $4.1 million in the three months ended
September 30, 2002 as several capital assets have become fully depreciated
without a corresponding reinvestment.
Selling, General and Administrative. Selling, general and administrative
expenses increased $1.4 million, or 28.6%, to $6.3 million in the three months
ended September 30, 2003 from $4.9 million in the three months ended September
30, 2002. The increase in selling, general and administrative expenses was
primarily due to $1.6 million in costs incurred related to our efforts to sell
the aggregates business and complete our debt refinancing, and $0.9 million in
accrued separation payments for several executive officers, partially offset by
a $1.0 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. The Company will record any required
adjustments that result from the completion of an updated actuarial study during
the fourth quarter of 2003. The results of such updated actuarial study can not
11
be estimated at this time, however such amount could be significant to the
Company's results of operations. 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 incurred for the three months ended
September 30, 2003 was $1.0 million as compared to operating income of $2.0
million in the three months ended September 30, 2002 as a result of the factors
noted earlier.
Interest Expense. Interest expense decreased $1.2 million, or 15.4%, to
$6.6 million in the three months ended September 30, 2003 from $7.8 million in
the three months ended September 30, 2002 due primarily to a decrease in the
total amount of our debt.
Loss on Early Extinguishment of Debt. We recorded an expense of $7.0
million for the early extinguishment of debt in the three months ended September
30, 2003 consisting of $3.5 million in previously capitalized debt issuance
costs written off, $2.4 million in prepayment penalties, and $1.1 million to
cancel interest rate hedges on the senior secured debt upon the repayment and
retirement of our senior secured credit facility on September 12, 2003.
Other Income. Other income increased $0.4 million to $0.8 million for the
three months ended September 30, 2003 from $0.4 million for the three months
ended September 30, 2002 as a result of a gain on sale of idle land.
Benefit of Income Taxes. The benefit for income taxes on continuing
operations for the three months ended September 30, 2003 reflects an estimated
benefit for the first nine months of the year using an annual effective tax rate
of 25%. The benefit for income taxes for the three months of continuing
operations ended September 30, 2002 reflected an annual effective rate of 60%.
The effective tax rate declined in the current year primarily due to a tax
valuation allowance recorded in the current year that reduced the book value of
our deferred tax credits and net operating loss carry-forwards to the amounts
reasonably expected to be utilized in the future.
Net Loss From Continuing Operations. Net loss from continuing operations
increased $6.2 million to $11.7 million for the three months ended September 30,
2003, from a net loss of $5.5 million for the three months ended September 30,
2002 as a result of the early extinguishment of debt and the other factors noted
earlier.
Gain on Sale of Discontinued Operations. A gain of $6.4 millionon the sale
of the aggregates business was realized for the three month period ended
September 30, 2003. The recorded gain was computed against the revised book
value of the aggregates business, after taking into effect the $107.9 million
asset impairment charge for the aggregates business previously recorded in 2002.
Neither the current year gain, nor the asset impairment charge recorded in 2002,
have any tax effect, due to offsetting tax valuation allowances.
Income/Loss from Operations of Discontinued Operations. Net loss from our
discontinued aggregates business segment was $3.3 million in the three months
ended September 30, 2003 as compared to net income of $6.5 million in the three
months ended September 30, 2002, due primarily to the seasonality of the
aggregates business and completion of the divestiture prior to the normal
seasonal earnings period of that business.
Net Loss. Net loss for the three month period ended September 30, 2003 was
$6.8 million as compared to net income of $2.5 million for the three month
period ended September 30, 2002 as a result of the factors noted earlier.
Nine Months Ended September 30, 2003 Compared with Nine Months Ended September
30, 2002
Sales. Sales decreased $0.3 million, or 0.2%, to $138.2 million in the nine
months ended September 30, 2003 from $138.5 million in the nine months ended
September 30, 2002. Increased shipments totaling $2.4 million to the oil &
gas-fracturing, and glass market segments were offset by $2.8 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, decreased $0.3 million to $22.7 million for the
nine months ended September 30, 2003 from $22.4 million for the nine months
ended September 30, 2002.
Cost of Goods Sold. Cost of goods sold increased $1.6 million, or 1.5%, to
$106.6 million in the nine months ended September 30, 2003 from $105.0 million
in the nine months ended September 30, 2002, primarily from a $2.4 million
increase in the price of drier fuel, partially offset by reduced sales volume
and miscellaneous cost reductions at various operating sites.
12
Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization was $11.8 million in both the nine months ended September 30, 2003
and the nine months ended September 30, 2002, as several capital assets have
become fully depreciated without a corresponding reinvestment.
Selling, General and Administrative. Selling, general and administrative
expenses increased $3.9 million, or 27.5%, to $18.1 million in the nine months
ended September 30, 2003 from $14.2 million in the nine months ended September
30, 2002. The increase in selling, general and administrative expenses was
primarily due to accrued separation expenses of $4.0 million for several of our
former executive officers including our former Chief Executive Officer, $1.3
million in compensation expense related to the sale of Better Materials
Corporation, $1.7 million in fees and expenses related to our efforts to
complete our new debt refinancing, and other inflationary cost increases,
partially offset by a $0.4 million decrease in bad debt accruals, a $2.1 million
decrease in the costs recorded for silica litigation and other miscellaneous
cost reductions. 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. The Company will
record any required adjustments that result from the completion of an updated
actuarial study during the fourth quarter of 2003. The results of such updated
actuarial study can not be estimated at this time, however such amount could be
significant to the Company's results of operations. 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 nine months ended September 30,
2003 was $1.6 million as compared to $7.6 million for the nine months ended
September 30, 2002 as a result of the factors noted earlier.
Interest Expense. Interest expense decreased $0.9 million, or 3.8%, to
$23.0 million in the nine months ended September 30, 2003 from $23.9 million in
the nine months ended September 30, 2002 due primarily to an increase in the
total amount of our debt.
Loss on Early Extinguishment of Debt. We recorded an expense of $7.0
million for the early extinguishment of debt in the nine months ended September
30, 2003 consisting of $3.5 million in previously capitalized debt issuance
costs written off, $2.4 million in prepayment penalties, and $1.1 million to
cancel interest rate hedges on the senior secured debt upon the repayment and
retirement of our senior secured credit facility on September 12, 2003.
Benefit of Income Taxes. The benefit for income taxes on continuing
operations for the nine months ended September 30, 2003 reflected an effective
tax rate expected to be realizable for the year of approximately 25%. The
benefit for income taxes on continuing operations for the nine month period
ended September 30, 2002 reflected an effective tax rate of 60%.
Net Loss From Continuing Operations. Net loss from continuing operations
increased $13.3 million to $20.1 million for the nine months ended September 30,
2003, from a net loss of $6.8 million for the nine months ended September 30,
2002 primarily as a result of the early extinguishment of debt and the other
factors noted earlier.
Gain on Sale of Discontinued Operations. A gain of $6.4 million on the sale
of the aggregates business was realized for the nine month period ended
September 30, 2003. The recorded gain was computed against the book value of the
aggregates business, after taking into effect the $107.9 million asset
impairment charge for the aggregates business previously recorded in 2002.
Loss/Income from Operations of Discontinued Operations. Net loss from our
discontinued aggregates business segment was $12.2 million in the nine months
ended September 30, 2003 as compared to a net income of $2.9 million in the nine
months ended September 30, 2002, due primarily to a 44% reduction in asphalt
volume shipped prior to divestiture and the completion of the divestiture prior
to the normal seasonal earnings period of that business.
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 nine month period ended September 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 nine months ended September 30, 2002 is net
of applicable income taxes of $6.1 million.
13
Net Loss. Net loss for the nine month period ended September 30, 2003 was
$25.6 million as compared to a net loss of $12.5 million for the nine month
period ended September 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
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
various revolving credit facilities. Conversely, we have funded our acquisitions
through borrowings and equity investments. Our total debt as of September 30,
2003 was $164.0 million and our total stockholder's deficit as of that date was
$78.6 million, giving us total debt representing approximately 192% 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 $15.8 million for the nine months ended September 30, 2003 compared
to $0.6 million of net cash provided by operations for the nine months ended
September 30, 2002. Cash used by operating activities increased $16.4 million in
2003 due primarily to $18.3 million in decreased earnings at our discontinued
operating segment.
Net cash provided by investing activities was $153.5 million for the nine
month period ended September 30, 2003 primarily from $154.6 million in net cash
proceeds received from the sale of our aggregates business and $3.4 million in
net cash proceeds from the sale of idle land, partially offset by $3.1 million
in capital expenditures at our discontinued operations and $1.5 million of
capital expenditures in our continuing operations. Cash used for investing
activities in the nine month period ended September 30, 2002 totaled $11.6
million, primarily due to $9.1 million in capital expenditures made in our
discontinued operations and $2.9 million of capital expenditures made in our
continuing operations.
Cash flow used for financing activities was $138.7 million for the nine
months ended September 30, 2003 as compared to $9.1 million of cash provided by
financing activities for the nine months ended September 30, 2002. The $147.8
million increase in cash used for financing activities is due to a $130.6
million net reduction in our debt, $2.4 million in prepayment penalties related
to that debt reduction and $1.1 million to cancel interest rate hedges on the
senior debt, in the nine month period ended September 30, 2003 as compared to a
$14.1 million increase in long-term debt in the nine months ended September 30,
2002.
Interest payments on our 13% senior subordinated notes due 2009 ($150
million outstanding as of September 30, 2003), which are unconditionally and
irrevocably guaranteed, jointly and severally, by our domestic subsidiaries,
debt service for the amounts outstanding under our revolving 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.
On April 10, 2003, we entered into an agreement to sell our aggregates
business to Hanson. On July 18, 2003, we completed the sale, receiving total
cash consideration of $158.3 million before fees and expenses including an
estimated adjustment for changes in the closing balance sheet of our aggregates
business. Final cash consideration is subject to Hanson's review and acceptance
of the closing balance sheet and may increase or decrease upon completion of
that review. Proceeds have not been reduced for the effect of a $2.0 million
contingent liability to Hanson that will be eliminated if 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 contingency.
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 for the claim.
Net proceeds from the sale, after deducting $4.9 million in fees, expenses
and interest on our previously outstanding 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 prior senior secured credit agreement,
totalling $107.9 million in the aggregate, and $45.5 million of the $50.0
million available to us under the related revolving credit facility, including
$5.5 million in cash collateral for outstanding letters of credit.
14
On September 12, 2003, through our operating subsidiary U. S. Silica
Company, we completed a new $30.0 million, asset-based revolving line of credit
agreement with Wachovia Bank, National Association ("Wachovia"), a copy of which
is attached as Exhibit 10 to our Current Report on Form 8-K, filed September 12,
2003. Proceeds from the new revolving credit agreement were used to repay all
remaining amounts due under, and terminate, our previously outstanding senior
secured credit agreement with BNP Paribas, provide us with a $10.0 million line
for letters of credit and to fund our general liquidity needs.
Under the terms of the new revolving credit agreement, which expires June
30, 2008, we have pledged as security all of our personal property, inventory,
and accounts receivable, along with first mortgage liens on our Berkeley
Springs, West Virginia, Montpelier, Virginia and Pacific, Missouri plant
operations as collateral for the loan. The revolving credit agreement includes
certain conditions to borrowings, representations and covenants, including
required minimum fixed charge coverage and maximum leverage covenant ratios that
are measured quarterly, other covenants that impose significant restrictions on
us, and certain events of default, including an event of default upon the
occurrence of a material adverse change. Advances under the new credit agreement
bear interest at either LIBOR plus 250 basis points, or prime plus 125 basis
points, at our option.
Monthly borrowing availability (the borrowing base) is determined by a
formula, taking into consideration eligible accounts receivable and inventory,
reduced by any outstanding letters of credit and a pro-rata reduction for future
interest payments due with respect to our senior subordinated notes. Each day,
all cash receipts are automatically applied as a reduction against any advances
made by Wachovia to us, and, subject to the satisfaction or waiver of the
conditions to borrowing set forth in the revolving credit agreement, Wachovia
will advance at our request new borrowings to meet our daily cash requirements,
up to the amount available under the borrowing base. If the monthly borrowing
base is less than the $30.0 million total line of credit, then, at Wachovia's
sole discretion, advances in excess of the borrowing base may be made up to the
full amount of the $30.0 million line of credit.
U.S. Silica's obligations under the revolving credit agreement are
unconditionally and irrevocably guaranteed, jointly and severally, by our parent
company, us, and our domestic subsidiaries.
As of September 30, 2003 our available borrowing base was $27.0 million,
with $12.7 million drawn as of that date, and $8.1 million allocated for letters
of credit leaving $6.2 million available for our general corporate use under
this revolving credit agreement. As of this date, our total debt outstanding was
approximately $164.0 million, consisting of the $12.7 million drawn under the
revolver, $150.0 million of 13% senior subordinated notes due 2009 and $1.3
million in miscellaneous other debt including capital leases. Projected cash
interest expense on our debt is approximately $20.5 million over the next 12
months.
Capital expenditures decreased $7.4 million to $4.6 million in the nine
months ended September 30, 2003 from $12.0 million in the nine months ended
September 30, 2002. Our expected capital expenditure and mine development
expenditures 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. 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 agreement 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 senior subordinated 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.
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.
15
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 17,620 new product liability claims filed between January 1, 2003 and
September 30, 2003, as compared to an estimated 2,000 claims filed between
January 1, 2002 and September 30, 2002. During the nine month period ended
September 30, 2003, new claims filed by state were 12,491 claims in Mississippi,
731 claims in Louisiana, 3,928 claims in Texas, 316 claims in Ohio, 76 claims in
Oklahoma, 67 claims in Pennsylvania 2 claims in California, 1 claim in Minnesota
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 September 30, 2003 were an estimated 23,936, as compared
to an estimated 7,141 open claims as of December 31, 2002 and an estimated 3,676
open claims as of September 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
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
16
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 nine month period
ended September 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 this Quarterly Report on Form 10-Q ), 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 $8.4 million in
defense and settlement costs in the nine month period ended September 30, 2003,
and invoiced ITT Industries $5.8 million under the terms of the indemnity
agreement with them resulting in retained losses to us of $2.6 million in the
nine months ended September 30, 2003. For the comparable nine month period ended
September 30, 2002 we paid $3.0 million in defense and settlement costs, and
invoiced ITT Industries $2.4 million, resulting in retained losses to us of $0.6
million.
The amount recorded for the long term liability for third party product
liability claims was $66.8 million at September 30, 2003 and the non-current
asset for probable insurance and indemnity recoveries was $40.6 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. We will record any required adjustments that result from
the completion of an updated actuarial study during the fourth quarter of 2003.
The results of such updated actuarial study can not be estimated at this time,
however such amounts could be significant to our results of operations.
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; and (13) interest rate changes and changes in financial markets
generally.
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 September 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. 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 that has
materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
We are a defendant in various lawsuits related to our business. These matters
include lawsuits relating to the exposure of persons to silica. On April 20,
2001, in an action pending in Beaumont, Texas (Donald Tompkins et al v. American
Optical Corporation et al), a jury rendered a verdict against Ottawa Silica
Company and Pennsylvania Glass Sand Corporation, predecessors to U.S. Silica, in
the amount of $7.5 million in actual damages. On June 1, 2001, the trial judge
entered judgment on the verdict against U.S. Silica in the amount of $5,928,000
in actual damages (the verdict of $7.5 million, less credits for other
settlements), approximately $464,000 in prejudgment interest and $40,000 in
court costs. 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 and settlements of the Tompkins action are
covered by a combination of Ottawa Silica Company's insurance coverage and the
current indemnity agreement of ITT Industries, in each case, discussed in our
Annual Report on Form 10-K for the year ended December 31, 2002 and elsewhere in
this Quarterly Report on Form 10-Q. After the judgment was entered by the trial
judge and upon the posting of a bond, we filed an immediate appeal to the
appropriate appellate court in Texas, which upheld the trial court's ruling. A
18
petition for review was filed with the Texas Supreme Court. In August, the Texas
Supreme Court requested the parties submit full briefs on the merits of the
case. Our brief was filed on October 27, 2003 and the plaintiffs have until late
November to respond. We have no indication when the Texas Supreme Court will
rule on the case. For a detailed discussion of the potential liability to us
from silica-related product liability claims, please see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations-Significant Factors Affecting Our Business-Silica Health Risks and
Litigation May Have a Material Adverse Effect on Our Business" discussed in our
Annual Report on Form 10-K for the year ended December 31, 2002 and elsewhere in
this Quarterly Report on Form 10-Q.
Item 6. Exhibits and Reports on Form 8-K
A. Exhibits
EXHIBIT EXHIBIT
NUMBER
Credit Agreement dated as of September 8, 2003 among U.S. Silica
Company, as Borrower, BMAC Holdings, Inc., Better Minerals &
Aggregates Company, The Fulton Land and Timber Company, Ottawa Silica
Company, Pennsylvania Glass Sand Corporation, George F. Pettinos, LLC
10 and BMAC Services Co., Inc., each as Affiliate Guarantors, the
financial institutions identified as Lenders on the signature pages
thereto, and Wachovia Bank, National Association, as Administrative
Agent and Swingline Lender (incorporated by reference from Exhibit 10
to our Current Report on Form 8-K dated September 12, 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 July 18, 2003 was filed with the Securities
and Exchange Commission by us reporting information under Item 2 (Acquisition or
Disposition of Assets), Item 5 (Other Events and Required FD Disclosure), Item 7
(Financial Statements, Pro Forma Financial Information and Exhibits) and Item 12
(Results of Operations and Financial Condition).
A Current Report on Form 8-K dated August 1, 2003 was filed with the Securities
and Exchange Commission by us reporting information under Item 12 (Results of
Operations and Financial Condition).
A Current Report on Form 8-K dated September 12, 2003 as filed with the
Securities and Exchange Commission by us reporting information under Item 5
(Other Events and Required FD Disclosure) and Item 7 (Financial Statements, Pro
Forma Financial Information and Exhibits).
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.
November 13, 2003 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
Credit Agreement dated as of September 8, 2003 among U.S. Silica
Company, as Borrower, BMAC Holdings, Inc., Better Minerals &
Aggregates Company, The Fulton Land and Timber Company, Ottawa Silica
Company, Pennsylvania Glass Sand Corporation, George F. Pettinos, LLC
10 and BMAC Services Co., Inc., each as Affiliate Guarantors, the
financial institutions identified as Lenders on the signature pages
thereto, and Wachovia Bank, National Association, as Administrative
Agent and Swingline Lender (incorporated by reference from Exhibit 10
to our Current Report on Form 8-K dated September 12, 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.
21
Exhibit 31.1
CERTIFICATION
I, John A. Ulizio, certify that:
1. I have reviewed this quarterly report on Form 10-Q 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: November 13, 2003 /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 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: November 13, 2003 /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
September 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.
November 13, 2003
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
September 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.
November 13, 2003
By: /S/ GARY E. BOCKRATH
------------------------------
Gary E. Bockrath
Vice President and Chief Financial Officer of
Better Minerals & Aggregates Company
25