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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 March 31, 2004
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 April 30, 2004
----- --------------------------------
Common Stock 100 shares
Better Minerals & Aggregates Company
Form 10-Q Index
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of March 31, 2004 (unaudited)
and December 31, 2003.................................................... 1
Condensed Consolidated Statements of Operations for the three months
ended March 31, 2004 and March 31, 2003 (unaudited)...................... 3
Condensed Consolidated Statements of Stockholder's Equity for the three
months ended March 31, 2004 and March 31, 2003 (unaudited)............... 4
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 2004 and March 31, 2003 (unaudited)...................... 5
Notes to Condensed Consolidated Financial Statements..................... 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations..................................... 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 16
Item 4. Controls and Procedures........................................ 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................. 17
Item 6. Exhibits and Reports on Form 8-K............................... 17
Signatures
Exhibits
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
BETTER MINERALS & AGGREGATES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
March 31, December 31,
2004 2003
---- ----
(Unaudited)
Assets
Current:
Cash and cash equivalents $ 279 $ 88
Accounts receivable:
Trade, less allowance for doubtful accounts of $1,251 and $1,199 29,868 26,785
Other 4,646 6,618
Inventories 17,207 17,221
Prepaid expenses and other current assets 5,091 5,073
Income tax deposits 422 468
------- -------
Total current assets 57,513 56,253
Property, plant and equipment:
Mining property 20,418 20,418
Mine development 4,664 4,406
Asset retirement cost 4,609
4,609
Land 15,990 16,227
Land improvements 3,990 3,990
Buildings 31,984 31,984
Machinery and equipment 120,719 120,118
Furniture and fixtures 668 668
Construction-in-progress 2,839 3,219
------- -------
205,881 205,639
Accumulated depletion, depreciation and amortization (118,457) (114,923)
------- -------
Property, plant and equipment, net 87,424 90,716
Other noncurrent:
Debt issuance costs 5,926 6,198
Insurance for third-party product liability claims 76,533 76,876
Other noncurrent assets 3,325 3,390
------- -------
Total other noncurrent 85,784 86,464
------- -------
Total assets $ 230,721 $ 233,433
======= =======
The accompanying notes are an integral part of these statements.
1
BETTER MINERALS & AGGREGATES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
March 31, December 31,
2004 2003
(Unaudited)
Liabilities
Current:
Book overdraft $ 3,033 $ 2,741
Accounts payable 9,368 11,266
Accrued liabilities 11,518 11,242
Due to parent 2,363 2,341
Accrued interest 842 5,787
Short-term debt 15,081 9,716
Current portion of capital leases 240 244
Current portion of long-term debt 275 275
------- -------
Total current liabilities 42,720 43,612
Noncurrent liabilities:
Obligations under capital lease 116 175
Long-term debt, net of current portion 150,341 150,601
Third-party products liability claims 107,668 108,095
Other noncurrent liabilities 38,752 37,650
------- -------
Total noncurrent liabilities 296,877 296,521
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 (1,365) (1,360)
Retained deficit (186,300) (184,129)
Accumulated other comprehensive (loss) (2,588) (2,588)
------- -------
Total stockholder's equity (108,876) (106,700)
------- -------
Total liabilities and stockholder's equity $230,721 $233,433
======= =======
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 Three Months Ended
March 31,
2004 2003
Net sales $ 44,788 $ 43,665
Cost of goods sold 34,790 35,028
Depreciation, depletion and amortization 3,637 4,053
Selling, general and administrative 3,863 3,688
------- -------
Operating income 2,498 896
Interest expense 5,463 8,003
Other income net, including interest income (813) (209)
------- -------
Loss before income taxes (2,152) (6,898)
(Provision) benefit for income taxes (28) 3,826
------- -------
Net loss from continuing operations (2,180) (3,072)
Gain (loss) from operations of discontinued operations (less applicable 9 (8,677)
Income taxes of $0 and $475)
Cumulative effect of change in accounting principle (less applicable
Income taxes of $0 and $191) -- 335
------- -------
Net loss $ (2,171) $(11,414)
======= =======
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, 2002 $ -- $81,377 $(129,207) $(1,360) $(1,095) $(4,164) $(5,259) $ (54,449)
Comprehensive income, net of income
taxes:
Net loss (11,414) (11,414)
Unrealized holding gain on
derivatives 5 5 5
---------
Total comprehensive loss (11,409)
Loans to related party (2) (2)
------- ------- -------- ------- ------- -------- ------- ---------
Balance March 31, 2003 $ -- $81,377 $(140,621) $(1,362) $(1,090) $(4,164) $(5,254) $ (65,860)
======= ======= ======== ======= ======= ======= ======= =========
Balance December 31, 2003 $ -- $81,377 $(184,129) $(1,360) $ -- $(2,588) $(2,588) $(106,700)
Comprehensive income, net of income
taxes:
Net loss (2,171) (2,171)
---------
Total comprehensive loss (2,171)
Loans to related party (5) (5)
------- ------- -------- ------- ------- -------- ------- ---------
Balance March 31, 2004 $ -- $81,377 $(186,300) $(1,365) $ -- $(2,588) $(2,588) $(108,876)
======= ======= ======== ======= ======= ======= ======= =========
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 Three Months Ended
March 31,
2004 2003
---- ----
Cash flows from operating activities:
Net loss $ (2,171) $(11,414)
Adjustments to reconcile net (loss) to cash flows from operations:
Depreciation, depletion and amortization 3,637 6,378
Debt issuance amortization 272 453
Deferred income taxes -- (3,611)
Disposal of property, plant and equipment (gain) loss (716) 98
Third-party products liability claims (84) (486)
Cumulative effect of change in accounting principle -- (526)
Other 1,063 670
Changes in assets and liabilities, net of the effects from disposed company:
Trade receivables (3,083) 4,256
Non-trade receivables 1,972 (98)
Payable to parent 22 5
Inventories 14 (478)
Prepaid expenses and other current assets (18) (776)
Accounts payable and accrued liabilities (1,622) 2,717
Accrued interest (4,945) (4,988)
Income taxes 46 801
------- -------
Net cash used for operating activities (5,613) (6,999)
Cash flows from investing activities:
Capital expenditures (478) (3,326)
Proceeds from sale of property, plant and equipment 953 314
Loans to related party (5) (2)
------- -------
Net cash provided (used) in investing activities 470 (3,014)
Cash flows from financing activities:
Increase (decrease) in book overdraft 292 (1,436)
Issuance of long-term debt -- 15,014
Repayment of long-term debt (260) (2,965)
Net change in revolving credit facility 5,365 1,000
Financing fees -- (804)
Principal payments on capital lease obligations (63) (253)
------- -------
Net cash provided by financing activities 5,334 10,556
Net increase in cash 191 543
Cash and cash equivalents, beginning of period 88 1,330
------- -------
Cash and cash equivalents, end of period $ 279 $ 1,873
======= =======
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 2003 Annual Report
on Form 10-K for the year ended December 31, 2003 (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 which has been disputed by Hanson in
an amount totaling $3.2 million and final proceeds may decrease by up to this
amount 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
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 $11.4 million
for the three months ended March 31, 2003 while the loss before income taxes for
these operations was $9.2 million for the same period.
3. Inventories
At March 31, 2004 and December 31, 2003, inventory consisted of the following:
March 31, December 31,
(In thousands) 2004 2003
---- ----
Supplies (net of $315 and $333 obsolescence reserve) $ 9,490 $ 9,342
Raw materials and work in process 4,114 3,988
Finished goods 3,603 3,891
------- -------
$17,207 $17,221
======= =======
4. 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 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.
6
5. Contingencies
One of the Company's subsidiaries, U.S. Silica, has been named as a defendant in
an estimated 788 product liability claims alleging silica exposure filed in the
period January 1, 2004 to March 31, 2004. U.S. Silica was named as defendant in
154 similar claims filed in all of 1998, 497 filed in all of 1999, 610 filed in
all of 2000, 1,320 filed in all of 2001, 5,225 filed in all of 2002 and 19,214
filed in all of 2003. U.S. Silica has been named as a defendant in similar suits
since 1975. As of March 31, 2004, there were an estimated 25,398 silica-related
products liability claims pending in which U.S. Silica is a defendant, as
compared to 25,000 claims pending at December 31, 2003. Almost of all of the
claims pending against U.S. Silica arose out of the alleged use of U.S. Silica
products in foundries or as an abrasive blast media and have been filed in the
states of Texas and Mississippi.
The plaintiffs, who allege that they are employees or former employees of our
customers, claim that the Company's silica products were defective or that the
Company acted negligently in selling 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
the Company's 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 March 31, 2004 and December 31, 2003, this
accrual amounted to $1.9 million. 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. 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.
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 million in actual damages (the verdict of $7.5 million, less
credits for other settlements), $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, the Company believes that the entire judgment and settlement 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 above. After the judgment was entered by the trial judge
and upon the posting of a bond, the Company filed an immediate appeal to the
appropriate appellate court in Texas, which upheld the trial court's ruling. A
petition for review has been filed with the Texas Supreme Court.
Prior to 2002, the Company 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 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, the Company determined it was no
longer sufficient for management to solely estimate the product liability claims
that might be filed against the Company, and the Company 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 the Company. In 2003, the rate of new claims filed against the Company
and others in the industry continued to increase and the independent actuary
updated the estimate of the number and costs of unresolved current and future
silica related product liability claims that might be asserted against the
Company.
The actuary relied on generally accepted actuarial methodologies and on
information provided by the Company, 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,
2003, 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
7
estimate were further analyzed and multiple iterations were modeled by the
actuary.
As previously discussed, the Company has available 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.
Based on the study performed by the actuary and its December 31, 2003 update,
the Company recorded a pre-tax charge related to silica claims of $5.9 million
and $23.7 million in 2003 and 2002, respectively, for estimated undiscounted
gross costs, including defense costs after consideration of recoveries under the
ITT indemnity and insurance. This resulted in a long term liability of $101.2
million and $101.7 million related to third party product liability claims and a
non-current asset of $70.1 million and $70.4 million for probable insurance
recoveries at March 31, 2004 and December 31, 2003, respectively. Recognizing
the inherent uncertainties and numerous factors and assumptions which are used
to develop this estimate management has determined that the amount is a
reasonable estimate when considering all relevant factors.
On an annual basis, the actuary has calculated that the Company's cash portion
of the retained losses (reflecting any insurance coverage and indemnity
payments) over the next 10 years would average $2.1 million per year, ranging
from $1.4 million to $2.3 million, in any year. In 2003 and 2002, the Company
incurred approximately $3.2 million and $1.2 million, respectively, in retained
cash losses.
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 the Company's past experience is predictive
of future experience. Unanticipated changes in factors such as judicial
decisions, future legal judgments against the Company, 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, the Company plans
to have these projections periodically updated based on actual claims experience
and other relevant factors such as changes in the judicial system and
legislative actions.
It is likely that the Company will continue to have silica-related product
liability claims filed against it including claims that allege silica exposure.
The Company has recorded estimated liabilities and recoveries under the current
ITT indemnity agreement and an estimate of future recoveries under insurance
policies after evaluating the legal obligations and financial viability of the
insurers and believes that such recoveries are probable. Increases in the number
of claims filed or costs associated with the silica-related claims will result
in the Company further increasing its liabilities and could have a material
adverse effect on the Company's financial position, results of operations and
cash flows, if such developments occur.
6. 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
7. Debt Covenants
The Company was in compliance with its debt covenants at March 31, 2004.
8. 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.
FAS 109 requires a valuation allowance against deferred tax assets if, based on
the available evidence, it is more likely than not that some or all of the
deferred tax assets will not be realized. The Company believes significant
uncertainty exists with respect to the future utilization of its net deferred
tax assets; therefore, the Company carried a valuation allowance relating to
such items of $83.7 million at March 31, 2004. The valuation allowance recorded
at December 31, 2003 was $81.8 million.
9. Pension and Post Retirement Benefits
Net periodic pension benefit cost for the three months ended March 31, 2004 and
2003 was as follows:
March 31, March 31,
(In thousands) 2004 2003
---- ----
Service cost $ 247 $ 323
Interest cost 1,088 1,140
Expected return on plan assets (1,059) (1,209)
Amortization of prior service cost 43 43
Amortization of net (gain) loss 152 18
----- -----
Net periodic benefit cost $ 471 $ 315
===== =====
Net periodic postretirement benefit cost for the three months ended March 31,
2004 and 2003 was as follows:
March 31, March 31,
(In thousands) 2004 2003
---- ----
Service cost $ 75 $ 46
Interest cost 342 267
Expected return on plan assets (3) (3)
Amortization of net (gain) loss 20 (12)
----- -----
Net periodic benefit cost $ 434 $ 298
===== =====
Total expected employer funding contributions during the fiscal year ending
December 31, 2004 are $1.1 million for the qualified plans, and $1.2 million for
the postretirement medical and life plans.
10. Subsequent Event
On May 4, 2004 the Company announced that it had commenced a cash tender offer
for any and all of the $150.0 million outstanding principal amount of its 13%
senior subordinated notes due 2009 and a consent solicitation to amend the
related note indenture. The consent solicitation will seek consents from holders
of the notes to eliminate substantially all of the restrictive covenants under
the note indenture.
The total consideration offered in the tender offer and consent solicitation is
$800 per $1,000 principal amount of the notes plus accrued and unpaid interest
to the payment date of approximately $4 million assuming all holders of the
outstanding notes elect to tender. The total consideration includes a consent
payment of $10 per $1,000 principal amount of the notes payable only to
noteholders tendering their notes and providing their consents on or prior to
5:00 p.m. New York City time, on May 17, 2004, the expiration time for the
consent solicitation, unless extended, or earlier terminated. The tender offer
will expire at 12:00 midnight, New York City time, on June 1, 2004 unless
extended or earlier terminated. The Company will use the proceeds of borrowings
under a new $125 million senior secured credit facility and, to the extent
necessary, the proceeds of available borrowings under its existing $30 million
9
revolving credit agreement to finance the tender offer and consent solicitation
and related fees. Holders who tender their notes after the consent solicitation
expiration date will not be entitled to receive the consent payment.
The tender offer and consent solicitation are subject to several conditions,
including the closing of the new senior secured credit facility, an amendment to
the Company's existing revolving credit agreement, the tender of, and the
receipt of consents from holders of, a majority in aggregate principal amount of
the notes and other customary conditions. The Company may amend, extend or
terminate the tender offer and consent solicitation at its sole discretion.
The tender offer and consent solicitation are being made only pursuant to, and
subject to the terms and conditions set forth in, the offer to purchase and
consent solicitation statement and related tender offer and consent solicitation
materials.
Depending on the principal amount of notes that are tendered and accepted by the
Company in the tender offer, the Company will continue to have a significant
amount of debt, principally constituting any remaining notes, borrowings and
fees related to the new senior secured financing and borrowings under its
revolving credit agreement with Wachovia. In addition, depending on the
principal amount of notes that are tendered, the Company may have minimal cash
on hand and a limited amount available to be borrowed under the revolving credit
agreement. For example, assuming 100% of the outstanding notes are validly
tendered and accepted for purchase by the Company, upon consummation of the
tender offer, the Company expects to have approximately $4.0 million available
to be borrowed under its revolving credit agreement.
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,
2003. 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 14 production facilities in 13 states.
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, 2003.
Three Months Ended March 31, 2004 Compared with Three Months Ended March 31,
2003
Sales. Sales increased $1.1 million, or 2.5%, to $44.8 million in the three
months ended March 31, 2004 from $43.7 million in the three months ended March
31, 2003.
Sales of industrial minerals products increased $1.2 million, or 3.3%, to
$37.7 million in the three months ended March 31, 2004 from $36.5 million in the
three months ended March 31, 2003. The primary reason for the increase in
industrial minerals product sales was increased shipments to the foundry and
filler and extender market segments, partially offset by decreased shipments to
the flat glass and container glass market segments.
10
Transportation revenue, which is the cost of transportation borne by our
customers when we pay the costs on their behalf and are subsequently reimbursed
by them, decreased $0.1 million to $7.1 million in the three months ended March
31, 2004 from $7.2 million in the three months ended March 31, 2003.
Cost of Goods Sold. Cost of goods sold decreased $0.2 million to $34.8
million in the three months ended March 31, 2004 from $35.0 million in the three
months ended March 31, 2003.
Cost of goods sold, excluding the cost of transportation that is reimbursed
by our customers, decreased $0.1 million, to $27.7 million in the three months
ended March 31, 2004 from $27.8 million in the three months ended March 31,
2003, primarily due to a $0.3 million reduction in the price of drier fuel,
partially offset by other inflationary factors including a $0.1 million increase
in general insurance premium costs.
Transportation expense included in cost of goods sold, which is the cost of
transportation for our customer shipments when we pay these costs on their
behalf and are subsequently reimbursed by them, decreased $0.1 million to $7.0
million in the three months ended March 31, 2004 from $7.1 million in the three
months ended March 31, 2003.
Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization decreased $0.4 million, or 10.0%, to $3.6 million in the three
months ended March 31, 2004 from $4.0 million in the three months ended March
31, 2003, as several plant assets have become fully depreciated without a
corresponding reinvestment.
Selling, General and Administrative. Selling, general and administrative
expenses increased $0.2 million, or 5.4%, to $3.9 million in the three months
ended March 31, 2004 from $3.7 million in the three months ended March 31, 2003
due to normal inflationary factors.
Operating Income. Operating income increased $1.6 million to $2.5 million
in the three months ended March 31, 2004 from $0.9 million in the three months
ended March 31, 2003 as a result of the factors noted earlier.
Interest Expense. Interest expense decreased $2.5 million, or 31.3%, to
$5.5 million in the three months ended March 31, 2004 from $8.0 million in the
three months ended March 31, 2003 due primarily to a reduction in the total
amount of our debt as a result of the sale of our aggregates business in July,
2003.
Other Income. Other income increased $0.6 million to $0.8 million in the
three months ended March 31, 2004 from $0.2 million in the three months ended
March 31, 2003 as a result of the gain on the sale of excess and idle land
holdings.
(Provision) Benefit for Income Taxes. The income tax expense on continuing
operations in the three months ended March 31, 2004 gives no effect for current
year tax benefits of losses as it was concluded these losses were not likely to
be realized due to our cumulative net operating loss carry forwards. The benefit
for income taxes on continuing operations in the three months ended March 31,
2003 was based on an estimated annual effective tax rate which resulted in an
estimated effective tax rate of approximately 55%.
Net Loss From Continuing Operations. Net loss from continuing operations
decreased $0.9 million to $2.2 million for the three months ended March 31,
2004, from a net loss of $3.1 million for the three months ended March 31, 2003
as a result of the factors noted earlier.
Gain (Loss) from Operations of Discontinued Operations. The $8.7 million
loss from discontinued operations incurred in the three months ended March 31,
2003 reflects the seasonal losses from our aggregates business that was divested
in July of 2003.
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 three month period ended March 31, 2003.
Net Loss. Net loss for the three month period ended March 31, 2004 was $2.2
million as compared to a net loss of $11.4 million for the three month period
ended March 31, 2003 as a result of the factors noted earlier.
11
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 March 31, 2004
was $166.1 million and our total stockholder's deficit as of that date was
$108.9 million, giving us total debt representing approximately 290% of total
capitalization. Our debt level makes us more vulnerable to economic downturns
and adverse developments in our business.
Net cash used by operating activities was $5.6 million in the three months
ended March 31, 2004 as compared to net cash used by operating activities
including our discontinued aggregates business of $7.0 million in the three
months ended March 31, 2003. Cash used by operating activities decreased $1.4
million in the three months ended March 31, 2004 due primarily to increased
earnings partially offset by an increase in working capital at our continuing
operations.
Net cash used for investing activities decreased $3.5 million to $0.5
million generated from investing activities in the three months ended March 31,
2004 from $3.0 million of cash used for investing activities including
investments in our discontinued aggregates business in the three months ended
March 31, 2003. This decrease resulted from a $2.8 million decrease in capital
expenditures and a $0.6 million increase in the proceeds from the sale of excess
property, plant and equipment.
Cash flow provided by financing activities was $5.3 million in the three
months ended March 31, 2004 as compared to $10.6 million in cash provided by
financing activities in the three months ended March 31, 2003. There was a $5.3
million increase in short term debt in the three months ended March 31, 2004
consisting solely of an increase in short term borrowings under our revolving
line of credit. In the three month period ended March 31, 2003, there was a
$15.0 million increase in tranche C debt, partially offset by a $3.0 million
reduction in tranche A and tranche B debt, all a part of our previous senior
secured credit agreement with BNP Paribas that has since been retired.
Interest payments on our 13% senior subordinated notes due 2009 ($150
million outstanding as of March 31, 2004), which are unconditionally and
irrevocably guaranteed, jointly and severally, by each of our domestic
subsidiaries, debt service 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 July 18, 2003, we sold our aggregates business to Hanson, 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 which has been disputed by Hanson in an amount
totaling $3.2 million and final proceeds may decrease by up to this amount upon
completion of that review. Proceeds were not 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 were reduced by 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 at the time of the sale, after deducting $4.9 million in fees,
expenses and interest on our previously outstanding senior secured term loans,
were $154.8 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.
On September 12, 2003, through our operating subsidiary U. S. Silica, we
completed a new $30.0 million, asset-based revolving line of credit agreement
with Wachovia Bank, National Association (Wachovia). Proceeds from this
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 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,
12
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.
We were in compliance with our debt covenants at March 31, 2004. We
believe, based on our calendar year 2004 forecast, that we will be in compliance
with the covenants contained in the revolving credit agreement throughout the
calendar year 2004.
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 March 31, 2004 our available borrowing base was $29.8 million, with
$15.1 million drawn as of that date, and $9.7 million allocated for letters of
credit, including $3.5 million in duplicate letters of credit that are in the
process of being returned to BNP Paribas, leaving $5.0 million available for our
general corporate use under this revolving credit agreement. As of this date,
our total debt outstanding was approximately $166.1 million, consisting of the
$15.1 million drawn under the revolver, $150.0 million of 13% senior
subordinated notes due 2009 and $1.0 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 $2.8 million to $0.5 million in the three
months ended March 31, 2004 from $3.3 million in the three months ended March
31, 2003. Our expected capital expenditure and mine development requirements for
2004 are $10.0 million.
Our ability to satisfy our debt obligations and to pay principal and
interest on our debt, fund working capital, mine development 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, many 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 in 2003, our cash flow from
operations is dependent on the results of our industrial minerals business. We
believe that based on current levels of operations from our industrial minerals
business and anticipated growth, the cash flow from these operations will be
adequate for at least the next twelve months to make required interest payments
on our debt and meet operating requirements. There can be no assurance, however,
that our business will generate sufficient cash flow from operations or that
future borrowings will be available under the revolving credit 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.
Proposed Tender Offer and Consent Solicitation
On May 4, 2004 we announced that we had commenced a cash tender offer for
any and all of the $150.0 million outstanding principal amount of our 13% senior
subordinated notes due 2009 and a consent solicitation to amend the related note
indenture. The consent solicitation will seek consents from holders of the notes
to eliminate substantially all of the restrictive covenants under the note
indenture.
The total consideration offered in the tender offer and consent
solicitation is $800 per $1,000 principal amount of the notes plus accrued and
unpaid interest to the payment date of approximately $4 million assuming all
holders of the outstanding notes elect to tender. The total consideration
includes a consent payment of $10 per $1,000 principal amount of the notes
payable only to noteholders tendering their notes and providing their consents
on or prior to 5:00 p.m. New York City time, on May 17, 2004, the expiration
13
time for the consent solicitation, unless extended, or earlier terminated. The
tender offer will expire at 12:00 midnight, New York City time, on June 1, 2004
unless extended or earlier terminated. We will use the proceeds of borrowings
under a new $125 million senior secured credit facility and, to the extent
necessary, the proceeds of available borrowings under our existing $30 million
revolving credit agreement to finance the tender offer and consent solicitation
and related fees. Holders who tender their notes after the consent solicitation
expiration date will not be entitled to receive the consent payment.
The tender offer and consent solicitation are subject to several
conditions, including the closing of the new senior secured credit facility, an
amendment to our existing revolving credit agreement, the tender of, and the
receipt of consents from holders of, a majority in aggregate principal amount of
the notes and other customary conditions. We may amend, extend or terminate the
tender offer and consent solicitation at our sole discretion.
The tender offer and consent solicitation are being made only pursuant to,
and subject to the terms and conditions set forth in, the offer to purchase and
consent solicitation statement and related tender offer and consent solicitation
materials.
Depending on the principal amount of notes that are tendered and accepted
by us in the tender offer, we will continue to have a significant amount of
debt, principally constituting any remaining notes, borrowings and fees related
to the new senior secured financing and borrowings under our revolving credit
agreement with Wachovia. In addition, depending on the principal amount of notes
that are tendered, we may have minimal cash on hand and a limited amount
available to be borrowed under the revolving credit agreement. For example,
assuming 100% of the outstanding notes are validly tendered and accepted for
purchase by us, upon consummation of the tender offer, we expect to have
approximately $4.0 million available to be borrowed under our revolving credit
agreement.
Significant Factors Affecting Our Business
Our Annual Report on Form 10-K for the year ended December 31, 2003
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, like scleroderma, end-stage renal disease and
chronic obstructive pulmonary disease.
One of our subsidiaries, U.S. Silica, was named as a defendant in an
estimated 790 new product liability claims filed between January 1, 2004 and
March 31, 2004, as compared to an estimated 5,765 claims filed between January
1, 2003 and March 31, 2003. U.S. Silica was named as a defendant in 19,200
similar clams in 2003 and 5,100 claims in 2002. Total open claims as of March
31, 2004 were an estimated 25,400, as compared to an estimated 25,000 open
claims as of December 31, 2003. 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
14
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 March 31, 2004 and 2003,
this accrual amounted to $2.0 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, 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.
Prior to 2002, 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
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. In 2003, the rate of new claims filed against the Company and others in the
industry continued to increase, and the independent actuary updated the estimate
of 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, 2003, 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, and based on the original
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.
Based on the study performed by the actuary and its December 31, 2003
update, we recorded a pre-tax charge related to silica claims of $5.9 million
and $23.7 million in 2003 and 2002, respectively, for estimated undiscounted
gross costs, including defense costs after consideration of recoveries under the
ITT indemnity and insurance. This resulted in a long term liability of $101.2
million and $101.7 million related to third party product liability claims and a
non-current asset of $70.1 million and $70.4 million for probable insurance
recoveries at March 31, 2004 and December 31, 2003, respectively. Recognizing
the inherent uncertainties and numerous factors and assumptions which are used
to develop this estimate management has determined that the amount is a
reasonable estimate when considering all relevant factors.
15
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 10 years would average $2.1 million per year, ranging from $1.4 million
to $2.3 million in any year. In 2003 and 2002, we incurred approximately $3.2
million and $1.2 million, respectively in retained cash losses. In each of the
three month periods ending March 31, 2004 and March 31, 2003 we incurred
approximately $0.5 million in retained cash losses.
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.
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, 2003. This information has not changed materially in the
interim period since December 31, 2003.
Item 4. Controls and Procedures
Based on their review and evaluation, as of March 31, 2004, 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, other than that
addressed below, that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
16
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.
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. 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, 2003 and elsewhere in this Quarterly Report on Form 10-Q.
Item 6. Exhibits and Reports on Form 8-K
A. 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.
B. Reports on Form 8-K
None.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
May 12, 2004 Better Minerals & Aggregates Company
By: /s/ Gary E. Bockrath
Name:Gary E. Bockrath
Title: Vice President and Chief Financial Officer
18
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.
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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: May 12, 2004 /s/John A. Ulizio
-----------------
John A. Ulizio
President and Chief Executive Officer
20
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: May 12, 2004 /s/Gary E. Bockrath
-------------------
Gary E. Bockrath
Vice President and Chief Financial Officer
21
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
March 31, 2004 (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.
May 12, 2004
By: /S/John A. Ulizio
-------------------------------------
John A. Ulizio
President and Chief Executive Officer of
Better Minerals & Aggregates Company
22
10
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
March 31, 2004 (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.
May 12, 2004
By: /S/GARY E. BOCKRATH
-------------------------------------
Gary E. Bockrath
Vice President and Chief Financial Officer of
Better Minerals & Aggregates Company
23