SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 2004
Commission File number 000-32665
OGLEBAY NORTON COMPANY
(Exact name of registrant as specified in its charter)
Ohio | 34-1888342 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S.employer identification no.) | |
North Point Tower, 1001 Lakeside Ave., 15th Floor, Cleveland, Ohio | 44114-1151 | |
(Address of principal executive offices) | (Zip Code) |
Registrants telephone number, including area code 216 861-3300
N/A
Former name, former address and former fiscal year,
if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, 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 Rule 12b-2 of the Exchange Act).
Yes ¨ No x
Common shares outstanding at May 11, 2004: 5,064,149
OGLEBAY NORTON COMPANY AND SUBSIDIARIES
Page Number | ||
PART I. FINANCIAL INFORMATION |
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Item 1 |
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3 | ||
Condensed Consolidated Balance Sheet (Unaudited) - March 31, 2004 and December 31, 2003 |
4 | |
5 | ||
6-18 | ||
Item 2 |
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Managements Discussion and Analysis of Financial Condition and Results of Operations |
19-28 | |
Item 3 |
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29 | ||
Item 4 |
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30 | ||
PART II. OTHER INFORMATION |
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Item 1 |
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31-34 | ||
Item 2 |
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Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities |
34 | |
Item 3 |
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34 | ||
Item 4 |
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34 | ||
Item 5 |
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35 | ||
Item 6 |
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35 | ||
36-40 |
-2-
Part I. Item 1. FINANCIAL INFORMATION
OGLEBAY NORTON COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share amounts)
(UNAUDITED)
Three Months Ended March 31 |
||||||||
2004 |
2003 |
|||||||
NET SALES AND OPERATING REVENUES |
$ | 69,434 | $ | 62,884 | ||||
COSTS AND EXPENSES |
||||||||
Cost of goods sold and operating expenses |
54,534 | 49,544 | ||||||
Depreciation, depletion, amortization and accretion |
5,491 | 5,473 | ||||||
General, administrative and selling expenses |
9,341 | 10,075 | ||||||
Provision for restructuring, asset impairments and early retirement programs |
1,315 | 0 | ||||||
70,681 | 65,092 | |||||||
OPERATING LOSS |
(1,247 | ) | (2,208 | ) | ||||
Reorganization items, net |
(4,565 | ) | 0 | |||||
(Loss) gain on disposition of assets |
(15 | ) | 63 | |||||
Interest expense |
(12,555 | ) | (13,281 | ) | ||||
Other income (expense), net |
93 | (1,591 | ) | |||||
LOSS BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE |
(18,289 | ) | (17,017 | ) | ||||
INCOME TAX BENEFIT |
(552 | ) | (7,358 | ) | ||||
LOSS BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE |
(17,737 | ) | (9,659 | ) | ||||
CUMULATIVE EFFECT OF ACCOUNTING CHANGE FOR ASSET RETIREMENT OBLIGATIONS (net of tax benefit of $889) |
| (1,391 | ) | |||||
NET LOSS |
$ | (17,737 | ) | $ | (11,050 | ) | ||
PER SHARE AMOUNTSBASIC AND ASSUMING DILUTION: |
||||||||
Loss before cumulative effect of accounting change |
$ | (3.40 | ) | $ | (1.90 | ) | ||
Cumulative effect of accounting change for asset retirement obligations (net of tax benefit of $0.18) |
| (0.27 | ) | |||||
Net loss per sharebasic and assuming dilution |
$ | (3.40 | ) | $ | (2.17 | ) | ||
See notes to condensed consolidated financial statements.
-3-
OGLEBAY NORTON COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(In thousands, except per share amounts)
ASSETS | LIABILITIES AND STOCKHOLDERS EQUITY | |||||||||||||||
(UNAUDITED) 2004 |
December 31, 2003 |
(UNAUDITED) 2004 |
December 31, 2003 |
|||||||||||||
CURRENT ASSETS |
LIABILITIES NOT SUBJECT TO COMPROMISE |
|||||||||||||||
Cash and cash equivalents |
$ | 7,441 | $ | | CURRENT LIABILITIES |
|||||||||||
Accounts receivable, net of reserve for doubtful accounts (2004 - $5,571; 2003 - $5,842) |
36,970 | 50,422 | Accounts payable |
$ | 15,338 | $ | 26,070 | |||||||||
Inventories Raw materials and finished products |
31,999 | 35,236 | Payroll and other accrued compensation |
2,107 | 4,857 | |||||||||||
Operating supplies |
12,072 | 12,795 | Accrued expenses |
7,836 | 14,906 | |||||||||||
44,071 | 48,031 | Accrued interest expense |
2,671 | 8,392 | ||||||||||||
Deferred income taxes |
3,901 | 3,901 | Current portion of long-term debt |
| 420,350 | |||||||||||
Prepaid expenses and other current assets |
32,112 | 10,915 | Income taxes payable |
| 480 | |||||||||||
TOTAL CURRENT ASSETS |
124,495 | 113,269 | TOTAL CURRENT LIABILITIES |
27,952 | 475,055 | |||||||||||
PROPERTY AND EQUIPMENT |
745,096 | 746,640 | LONG-TERM DEBT, less current portion |
| 1,490 | |||||||||||
Less allowances for depreciation, depletion and amortization |
334,339 | 332,447 | OTHER LONG-TERM LIABILITIES |
1,888 | 29,500 | |||||||||||
410,757 | 414,193 | POSTRETIREMENT BENEFITS OBLIGATION |
366 | 50,049 | ||||||||||||
GOODWILL, net of accumulated amortization ($11,093 in 2004 and 2003) |
73,877 | 73,877 | DEFERRED INCOME TAXES |
4,283 | 4,596 | |||||||||||
PREPAID PENSION COSTS |
34,758 | 35,319 | TOTAL LIABILITIES NOT SUBJECT TO COMPROMISE |
34,489 | 559,200 | |||||||||||
OTHER ASSETS |
13,517 | 12,036 | LIABILITIES SUBJECT TO COMPROMISE |
552,251 | | |||||||||||
STOCKHOLDERS' EQUITY |
||||||||||||||||
Common stock, par value $1 per share, authorized 30,000 shares; issued 7,253 shares |
7,253 | 7,253 | ||||||||||||||
Additional capital |
9,272 | 9,312 | ||||||||||||||
Retained earnings |
88,338 | 106,075 | ||||||||||||||
Accumulated other comprehensive loss |
(4,167 | ) | (4,542 | ) | ||||||||||||
100,696 | 118,098 | |||||||||||||||
Treasury stock, at cost - 2,189 and 2,193 shares at respective dates |
(30,032 | ) | (30,094 | ) | ||||||||||||
TOTAL STOCKHOLDERS EQUITY |
70,664 | 88,004 | ||||||||||||||
TOTAL ASSETS |
$ | 657,404 | $ | 648,694 | TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
$ | 657,404 | $ | 648,694 | |||||||
See notes to condensed consolidated financial statements.
-4-
OGLEBAY NORTON COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
(UNAUDITED)
Three Months Ended March 31 |
||||||||
2004 |
2003 |
|||||||
OPERATING ACTIVITIES |
||||||||
Net loss |
$ | (17,737 | ) | $ | (11,050 | ) | ||
Adjustments to reconcile net loss to net cash provided (used) for operating activities: |
||||||||
Cumulative effect of accounting change for asset retirement obligations, net of taxes |
0 | 1,391 | ||||||
Depreciation, depletion, amortization and accretion |
5,491 | 5,473 | ||||||
Deferred vessel costs |
(5,753 | ) | (5,564 | ) | ||||
Deferred winter maintenance costs |
(8,388 | ) | (9,936 | ) | ||||
Deferred income taxes |
(552 | ) | (6,472 | ) | ||||
Restructuring, asset impairments and early retirement programs |
1,262 | (420 | ) | |||||
Reorganization items, net |
4,565 | 0 | ||||||
Gain (loss) on disposition of assets |
15 | (63 | ) | |||||
Increase in prepaid insurance |
(5,285 | ) | (1,540 | ) | ||||
Increase in cash collateral |
(1,376 | ) | 0 | |||||
Decrease in prepaid pension costs |
561 | 552 | ||||||
Decrease in accounts receivable |
13,452 | 19,546 | ||||||
Decrease in inventories |
3,917 | 3,171 | ||||||
Increase (decrease) in accounts payable |
8,838 | (4,829 | ) | |||||
Decrease in payrolls and other accrued compensation |
(6 | ) | (2,414 | ) | ||||
Increase (decrease) in accrued expenses |
1,736 | (3,415 | ) | |||||
Increase (decrease) in accrued interest |
1,823 | (2,046 | ) | |||||
Increase (decrease) in income taxes payable |
7 | (20 | ) | |||||
Increase in postretirement benefits |
791 | 797 | ||||||
Other operating activities |
1,420 | 1,782 | ||||||
NET CASH PROVIDED (USED) FOR OPERATING ACTIVITIES |
4,781 | (15,057 | ) | |||||
NET CASH USED FOR REORGANIZATION ITEMS |
(2,916 | ) | 0 | |||||
INVESTING ACTIVITIES |
||||||||
Capital expenditures |
(5,120 | ) | (6,335 | ) | ||||
Acquisition of Erie Sand and Gravel Company |
0 | (6,831 | ) | |||||
Proceeds from the sale of Redi-Mix |
1,225 | 0 | ||||||
Proceeds from the sale of Richard Reiss |
1,800 | 0 | ||||||
Proceeds from the disposition of assets |
0 | 123 | ||||||
NET CASH USED FOR INVESTING ACTIVITIES |
(2,095 | ) | (13,043 | ) | ||||
FINANCING ACTIVITIES |
||||||||
Repayments on debt |
(41,577 | ) | (38,805 | ) | ||||
Additional debt |
52,077 | 66,321 | ||||||
Financing costs |
(2,829 | ) | (172 | ) | ||||
NET CASH PROVIDED BY FINANCING ACTIVITIES |
7,671 | 27,344 | ||||||
Increase (decrease) in cash and cash equivalents |
7,441 | (756 | ) | |||||
CASH AND CASH EQUIVALENTS, JANUARY 1 |
0 | 756 | ||||||
CASH AND CASH EQUIVALENTS, MARCH 31 |
$ | 7,441 | $ | | ||||
See notes to condensed consolidated financial statements.
-5-
OGLEBAY NORTON COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. | On February 23, 2004, the Company and all of its wholly owned subsidiaries filed voluntary petitions under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. The Company intends to continue operations without interruption. The Company intends to seek emergence from Chapter 11 as rapidly as possible with a new, de-levered capital structure that will enable the Company to move forward on its strategic operating plan. |
In furtherance of the Companys goal of emerging from Chapter 11 as expeditiously as possible, prior to the filing, the Company reached an agreement in principle, subject to certain conditions, with a majority of the holders of its $100,000,000 Senior Subordinated Notes to exchange their notes for equity. The agreement also contemplates having certain of them make a new equity investment in the reorganized Company. Additionally, prior to filing Chapter 11, the Company accepted a commitment for a new credit facility that, among other things, would retire its existing bank debt. On April 30, 2004, the Bankruptcy Court entered an order authorizing the Company to enter into this facility.
On February 24, 2004, the Bankruptcy Court also entered a variety of orders designed to afford the Company a smooth transition into Chapter 11 and permit the Company to continue operating on a normal basis post-petition. Among others, the Court entered orders authorizing the Company to continue its consolidated cash management system, pay employees their accrued pre-petition wages and salaries, honor the Companys obligations to its customers and pay some or all of the pre-petition claims of certain vendors that are critical to the continued operations of the Company, subject to certain restrictions. The relief granted in these orders has facilitated the Companys transition into Chapter 11 and has allowed the Company to continue its operations uninterrupted.
On February 25, 2004, U.S. Bankruptcy Judge Joel B. Rosenthal of the United States Bankruptcy Court for the District of Delaware in Wilmington entered an order granting interim approval for the Company to utilize cash collateral and to borrow up to $40,000,000 from a $75,000,000 debtor-in-possession (DIP) credit facility. The Company obtained the DIP facility from a syndicate that includes various members of its pre-petition bank group. The judges order provided the Company access to the liquidity necessary to continue operations without disruption and meet its obligations to its suppliers, customers and employees during the Chapter 11 reorganization process.
On April 8, 2004, the Bankruptcy Court granted final approval for the Company to borrow up to $70 million under the (DIP) credit facility (the Company having requested the reduction to $70 million from $75 million). During the first quarter of 2004, the Company incurred $2,579,000 in deferred financing costs which were commitment fees and professional fees related to the DIP facility.
-6-
OGLEBAY NORTON COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On April 27, 2004, the Company filed a joint plan of reorganization (Plan) with the United States Bankruptcy Court. The Company is required to file a disclosure statement by no later than May 25, 2004. The Plan, which may be amended or modified, has not yet been confirmed by the Bankruptcy Court and remains subject to Bankruptcy Court approval. This document has been prepared on a historic basis and does not describe the potential ramifications of the Plan.
On April 30, 2004, the Bankruptcy Court entered an order authorizing the Debtors to enter into a $305 million second DIP credit facility providing the Company with post-petition and exit financing. The Judge also authorized the Company to pay commitment fees for these loans. The second DIP is in the process of being negotiated with one of the agents for the first DIP facility. The second DIP will be used to repay any borrowings under the first DIP of $70 million and the existing pre-petition bank credit facility and will provide working capital while the Company is in Chapter 11. Upon confirmation of the Companys Plan and emergence from Chapter 11, the $305 million DIP will convert to a five-year $305 million credit facility to provide financing for the reorganized Company. On April 28, 2004, the Bankruptcy Court denied a motion to compel the United States Trustee to appoint an equity security holders committee.
While the Company is in Chapter 11, investments in its securities continue to be highly speculative. Shares of the Companys common stock have little or no value and will likely be canceled. Additionally, the Companys shares were delisted from trading on the NASDAQ National Market effective at the opening of business on March 3, 2004. The Companys shares continue to trade as an Other OTC issue under the symbol OGLEQ.
Notwithstanding the progress made to date by the Company towards achieving its restructuring goals, at this time, the ability of the Company to complete a financial restructuring is uncertain and subject to substantial risk. Furthermore, the form and timing of any financial restructuring is uncertain. There can be no assurance that the Company will be successful in achieving its goals, or that any measures that are achievable will result in sufficient improvement to the Companys financial position. Accordingly, until the time that the Company emerges from bankruptcy and a financial restructuring is completed, there will be substantial doubt about the Companys ability to continue as a going concern. In the event that a financial restructuring is not completed, the Company could be forced to sell a significant portion of its assets to retire debt outstanding or, under certain circumstances, to cease operations. Management remains in active discussions to sell the Companys mica operations.
2. | These interim unaudited Condensed Consolidated Financial Statements have been prepared on a going concern basis, which assumes continuity of operations and realization of assets and satisfaction of liabilities in the ordinary course of business, and in accordance with Statement of Position 90-7 (SOP 90-7), Financial Reporting by Entities in Reorganization under the Bankruptcy Code. Accordingly, all pre-petition liabilities subject to compromise have been segregated in the unaudited Condensed Consolidated Balance Sheets and classified as Liabilities Subject to Compromise, at the estimated amount of |
-7-
OGLEBAY NORTON COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
allowable claims. Being classified as a Liability Subject to Compromise neither affirms nor denies the future payment of any of the liabilities so categorized. The payment of all these items is subject to the confirmation of the Plan by the Bankruptcy Court. The following table details the Liabilities Subject to Compromise (in thousands): |
Liabilities Subject to Compromise |
|||
Current portion of long term debt |
$ | 431,886 | |
Accounts payable |
21,070 | ||
Payroll and other accrued compensation |
2,745 | ||
Accrued expenses |
9,209 | ||
Accrued interest expense |
7,543 | ||
Income tax payable |
487 | ||
Other long term liabilities |
28,383 | ||
Long term debt |
454 | ||
Postretirement benefits obligation |
50,474 | ||
Total Liabilities Subject to Compromise |
$ | 552,251 | |
Liabilities Not Subject to Compromise are separately classified as current and non-current in their respective account classification. Revenues, expenses, realized gains and losses, and provisions for losses resulting from the reorganization are reported separately as Reorganization items, net in the unaudited Condensed Consolidated Statements of Operations. Cash used for reorganization items is disclosed separately in the unaudited Condensed Consolidated Statements of Cash Flows.
The accompanying interim unaudited Condensed Consolidated Financial Statements have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all information and notes to the Condensed Consolidated Financial Statements necessary for a fair presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States. Management of the Company, however, believes that all adjustments considered necessary for a fair presentation of the results of operations for such periods have been made.
The Condensed Consolidated Balance Sheet at December 31, 2003 has been derived from the audited financial statements at that date, but does not include all the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements. For further information, refer to the consolidated financial statements and notes thereto included in the Companys 2003 Annual Report on Form 10-K.
-8-
OGLEBAY NORTON COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
3. | Operating results are not necessarily indicative of the results to be expected for the year, due to the seasonal nature of certain aspects of the Companys business. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the Companys Condensed Consolidated Financial Statements. Actual results could differ from those estimates and assumptions. |
The Company utilizes certain tax preference deductions afforded by law to mining companies. Although the amount of these deductions is materially consistent from year to year, these permanent book/tax differences can cause significant fluctuations in the Companys effective tax rate based upon the level of pre-tax book income or loss. The Company continues to incur tax operating losses and there is an uncertainty regarding the future realization of any portion of these losses as a tax benefit. Accordingly, the Company has recorded a tax valuation allowance for the deferred tax asset and will maintain such an allowance until sufficient positive evidence (i.e. cumulative positive earnings and future taxable income) exists to support the reversal.
4. | In separate transactions during January 2004, the Company sold two assets of its Erie Sand and Gravel operations (the Redi-Mix business unit and the vessel M/V Richard Reiss) to E.E. Austin & Son, Inc. and Grand River Navigation Company, Inc., respectively. The Redi-Mix business unit was comprised of Serv-All Concrete, Inc. and S&J Trucking, Inc. These assets were not considered integral to the long-term strategic direction of the Company. Proceeds from the sales were $1,225,000 for Redi-Mix and $1,800,000 for the vessel. No gain or loss on sale was recognized by the Company. |
In conjunction with the sale of the Redi-Mix business unit, the Company entered into a long-term supply agreement with E. E. Austin & Son, Inc. dated January 21, 2004, pursuant to which the Company will provide certain aggregates to E. E. Austin & Son, Inc. for an initial term of fifteen years beginning on the closing date of the agreement. Additionally, the Company and E. E. Austin & Son, Inc. entered into a sublease agreement dated January 21, 2004, whereby E. E. Austin & Son, Inc. is subleasing property from the Company previously dedicated to the operation of the Redi-Mix business unit. The initial term of the sublease agreement commences on the closing date of the agreement and extends to December 31, 2019. The agreement is renewable in five-year increments thereafter, upon agreement by both parties.
5. | On October 27, 2003, as part of its ongoing business restructuring, the Company sold the Lawn and Garden business of its Global Stone operating segment to Oldcastle Retail, Inc. (Oldcastle). The sales price was $10,000,000 of value subject to working capital adjustments. Based upon those working capital adjustments, the Company received $6,871,000 in cash at closing. The net book value of the Lawn and Garden business at the closing date, including an allocation of the Global Stone segments goodwill of $3,316,000, was $10,057,000. The Company recognized a loss on sale of assets of $3,692,000 during the fourth quarter of 2003. |
-9-
OGLEBAY NORTON COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In conjunction with the sale of the Lawn and Garden business, the Company entered into a long-term supply agreement with Oldcastle dated October 27, 2003, pursuant to which the Company will provide certain raw materials at market price to Oldcastle for an initial term of ten years beginning on the closing date of the agreement, with a renewal option for an additional ten-year period. The Company and Oldcastle also entered into a lease and operation of equipment agreement dated October 27, 2003, whereby certain areas of the Companys York, Pennsylvania, operations previously dedicated to Lawn and Garden operations are being leased at market rates to Oldcastle through December 31, 2005.
6. | In early January 2003, the Company acquired all of the outstanding common shares and other ownership interests in a group of companies together known as Erie Sand and Gravel Company (Erie Sand and Gravel) for $6,831,000 in cash and $4,069,000 in assumed debt, which was refinanced at closing. The acquisition included fixed assets of $5,446,000 and goodwill of $4,149,000. At the time of the acquisition, Erie Sand and Gravel operated a dock, a bulk products terminal, a Great Lakes self-unloading vessel, a ready-mix concrete mixing facility and a trucking company that distributes construction sand and aggregates in the northwest Pennsylvania/western New York region. See note 4 regarding the disposition of some of these assets. The acquisition of Erie Sand and Gravel is an integral part of the Companys strategic plan. The net assets and results of operations of Erie Sand and Gravel are included within the Companys Great Lakes Minerals segment. The Erie Sand and Gravel acquisition was accounted for under the purchase method of accounting. |
7. | The Company adopted Statement of Financial Accounting Standards (SFAS) No. 143, Accounting for Asset Retirement Obligations, at January 1, 2003. SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred and capitalized as part of the carrying amount of the long-lived asset. |
The Companys asset retirement obligation balance as of March 31, 2004 and March 31, 2003 was $ 6,912,000 and $5,956,000, respectively. The accretion expense for the three-month period ended March 31, 2004 and March 31, 2003 was $134,000 and $102,000, respectively.
8. | The Company recognizes all derivative instruments on the balance sheet at fair value. The Companys pre-petition syndicated banking group had required interest rate protection on 50% of the Companys Senior Credit Facility and Syndicated Term Loan. Accordingly, the Company entered into interest rate swap agreements that effectively convert a portion of its floating-rate debt to a fixed-rate basis, thus reducing the impact of interest-rate changes on future interest expense. The effect of these agreements was to fix the Companys interest rate exposure, including the applicable margin charged the Company on its LIBOR-based |
-10-
OGLEBAY NORTON COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
interest rate, at 12.97% on the $50,000,000 (21.4%) hedged portion Companys Senior Credit Facility and Syndicated Term Loan at March 31, 2004. |
On January 1, 2001, the Company entered into interest rate swap agreements with an aggregate notional value of $220,000,000. At that time, interest rate swaps with a notional value of $50,000,000 were designated in cash flow hedge relationships in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, while interest rate swaps with a notional value of $170,000,000 did not qualify as hedging instruments.
For the interest rate swaps with a notional value of $50,000,000 that were designated in cash flow hedge relationships on January 1, 2001, the effective portion of the changes in fair value of the swaps was recorded in other comprehensive loss, a component of stockholders equity. At December 31, 2002, the Company undesignated one of these interest rate swaps with a notional value of $20,000,000, since the Companys outstanding variable rate debt at that time was less than the $220,000,000 aggregate notional value.
Changes in the fair value of the undesignated interest rate swap after December 31, 2002 were recognized in interest expense. These interest rate swaps expired on April 3, 2003 and have not been replaced by the Company.
For the interest rate swaps with a notional value of $170,000,000 that did not qualify as hedging instruments on January 1, 2001, a transition adjustment of $2,820,000 (net of income taxes of $1,803,000) was recorded in other comprehensive loss. The transition adjustment was amortized to interest expense over ten quarters, ending June 30, 2003. There was no charge to interest expense for the three-month period ended March 31, 2004. The three-month period ended March 31, 2003 was charged $462,000 (or $0.06 per share, assuming dilution). The Company amended all of the interest rate swap agreements that did not qualify as hedging instruments at the end of the first quarter 2001. The amended interest rate swaps were then designated in cash flow hedge relationships. Beginning in the second quarter of 2001, the amended interest rate swap agreements effective portion of the changes in fair value was recorded in other comprehensive loss. On December 31, and June 30, 2003, certain of these interest rate swaps with an aggregate notional value of $70,000,000 expired and were not replaced by the Company.
At March 31, 2004, the Company has one remaining interest rate swap with a notional value of $50,000,000 and a maturity date of June 30, 2004. The liability for derivative instruments as of March 31, 2004 was $747,000 and is recorded in Liabilities Subject to Compromise on the Condensed Consolidated Balance Sheet. At March 31, 2003 the liability for derivative instruments was $7,045,000 and was included in Other Long-Term Liabilities on the Condensed Consolidated Balance Sheet.
When using interest rate swap agreements, the intermediaries to such agreements expose the Company to the risk of nonperformance, though such risk is not considered likely under the circumstances. The Company does not hold or issue financial instruments for trading purposes.
-11-
OGLEBAY NORTON COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. | The following represents a movement of the reserve for restructuring, asset impairments and early retirement programs recorded by the Company (in thousands): |
Employee Retirement & Severance Benefits |
Asset Impairment Charges |
Other Exit Costs |
Total |
|||||||||||||
Reserve at January 1, 2003 |
$ | 765 | $ | -0- | $ | 1,269 | $ | 2,034 | ||||||||
2003 charge |
13,272 | 13,272 | ||||||||||||||
Amounts utilized in 2003 |
(13,272 | ) | (13,272 | ) | ||||||||||||
Actual expenditures in 2003 |
(759 | ) | (428 | ) | (1,187 | ) | ||||||||||
Provisions and adjustments to prior reserves, net |
36 | (87 | ) | (51 | ) | |||||||||||
Remaining reserve at December 31, 2003 |
42 | -0- | 754 | 796 | ||||||||||||
2004 charge |
1,315 | 1,315 | ||||||||||||||
Amounts utilized in 2004 |
(1,315 | ) | (1,315 | ) | ||||||||||||
Actual expenditures in first quarter of 2004 |
(13 | ) | (40 | ) | (53 | ) | ||||||||||
Remaining reserve at March 31, 2004 |
$ | 29 | $ | -0- | $ | 714 | $ | 743 | ||||||||
In the first quarter, the Company recorded a $1,315,000 impairment charge related to the exit and sublease of the Cleveland Marine Services office. Of this charge, $1,170,000 was primarily related to the difference between base rent due until December 2009 and sublease income that will be received into March, 2008. An additional $145,000 pretax charge was recorded to write-off leasehold improvements made at the office facility.
During the second quarter of 2003, the Company recorded a $13,114,000 pretax asset impairment charge (or $1.57 per share, assuming dilution) to reduce the net book value of the Performance Minerals segments Specialty Minerals operation to its estimated fair value, as determined by management based on a third-party appraisal. The charge reduced the carrying value of the operations land, depreciable fixed assets and mineral reserves by $2,610,000, $2,334,000 and $8,170,000, respectively. Fair values were estimated using a discounted cash flow valuation technique incorporating a discount rate commensurate with the risks involved for each group of assets.
-12-
OGLEBAY NORTON COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10. | On May 1, 2003, Eveleth Mines LLC (d.b.a. EVTAC Mining) filed for protection under Chapter 11 of the U.S. Bankruptcy Code. EVTAC Mining is a non-trade debtor to the Company for obligations arising out of a prior relationship. The Company recognized a charge of $888,000 (or $0.17 per share, assuming dilution) in the first quarter of 2003 to establish a reserve for this matter. The charge was included in Other Expense on the Condensed Consolidated Statement of Operations. Additionally, during the third quarter of 2003, the Company recognized another $784,000 (or $0.09 per share, assuming dilution) charge to fully reserve for this matter. |
11. | During the third quarter of 2003, the Company agreed with one of its several insurers to fund a settlement insurance trust (the Trust) to cover a portion of settlement and defense costs arising out of asbestos litigation. The Company will have access to Trust funds to cover settlements and defense costs and will not have the obligation to cover such costs from its own funds. Additionally, the agreement provides that the Company may use up to $4,000,000 ($3,576,000 used as of March 31, 2004) of the Trusts assets to cover the cost of any insurable or insurance related expenses. |
12. | The Company has contributed $394,000 to its pension plans in the first quarter of 2004. The Company expects to contribute approximately $4,328,000 to its pension plans for the full year 2004. The components of net periodic benefit cost is as follows (in thousands): |
Three Months Ended March 31 |
||||||||
2004 |
2003 |
|||||||
Components of net periodic benefit cost: |
||||||||
Service Cost |
$ | 489 | $ | 447 | ||||
Interest Cost |
1,198 | 1,125 | ||||||
Expected return on plan assets |
(1,474 | ) | (1,374 | ) | ||||
Amortization of prior service cost |
26 | 25 | ||||||
Amortization of initial net asset |
0 | (4 | ) | |||||
Recognized net actuarial loss |
544 | 504 | ||||||
Net periodic benefit cost |
$ | 783 | $ | 723 | ||||
-13-
OGLEBAY NORTON COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Consistent with other operating expenses, first quarter Great Lakes Minerals pension expenses are deferred and expensed over the production and sailing seasons. The effect of which is $464,000 of expenses in the first quarter of 2004 and $425,000 in the first quarter of 2003 were deferred.
13. | The Company accounts for stock-based compensation using the intrinsic value method of accounting in accordance with the provisions of Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. The table below summarizes stock compensation cost included in the determination of net loss using the intrinsic value method and the impact on net loss and net loss per share, basic and assuming dilution, had the Company accounted for stock-based compensation using the alternative fair value method of accounting (in thousands, except per share amounts): |
Three Months Ended March 31 |
||||||||
2004 |
2003 |
|||||||
Stock compensation cost included in the determination of net loss, as reportednet of income taxes |
$ | 8 | $ | 66 | ||||
Net loss, as reported |
$ | (17,737 | ) | $ | (11,050 | ) | ||
Estimated fair value of stock compensation cost, net of income taxes |
(60 | ) | (202 | ) | ||||
Net loss, as adjusted |
$ | (17,797 | ) | $ | (11,252 | ) | ||
Net loss per share, as reportedbasic and assuming dilution |
$ | (3.40 | ) | $ | (2.17 | ) | ||
Net loss per share, as adjustedbasic and assuming dilution |
$ | (3.41 | ) | $ | (2.22 | ) | ||
-14-
OGLEBAY NORTON COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. | The following table sets forth the reconciliation of the Companys net (loss) to its comprehensive (loss)in thousands: |
Three Months Ended March 31 |
||||||||
2004 |
2003 |
|||||||
Net loss |
$ | (17,737 | ) | $ | (11,050 | ) | ||
Other comprehensive loss: |
||||||||
Derivative instruments: |
||||||||
Gain( Loss) on derivatives, net of taxes |
93 | (151 | ) | |||||
Reclassification adjustments to earnings, net of taxes |
281 | 1,586 | ||||||
Total derivative instruments |
374 | 1,435 | ||||||
Comprehensive loss |
$ | (17,363 | ) | $ | (9,615 | ) | ||
-15-
OGLEBAY NORTON COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
15. | The calculation of net loss per share follows (in thousands, except per share amounts): |
Three Months Ended March 31 |
||||||||
2004 |
2003 |
|||||||
Average number of shares outstanding: |
||||||||
Average number of shares basic |
5,221 | 5,074 | ||||||
Dilutive effect of stock plans |
| | ||||||
Average number of shares outstanding-assuming dilution |
5,221 | 5,074 | ||||||
Net loss per share - basic and assuming dilution |
||||||||
Loss before cumulative effect of accounting change |
$ | (17,737 | ) | $ | (9,659 | ) | ||
Cumulative effect of accounting for asset retirement obligations, net of tax |
| (1,391 | ) | |||||
Net Loss |
$ | (17,737 | ) | $ | (11,050 | ) | ||
Loss before cumulative effect of accounting change |
$ | (3.40 | ) | $ | (1.90 | ) | ||
Cumulative effect of accounting for asset retirement obligations, net of tax |
$ | | $ | (0.27 | ) | |||
Net loss per share - basic and assuming dilution |
$ | (3.40 | ) | $ | (2.17 | ) | ||
-16-
OGLEBAY NORTON COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
16. | The Company, headquartered in Cleveland, Ohio, supplies essential natural resources to industrial and commercial customers. The Company has aligned its businesses into three reporting segments focused on its key markets served. This segment reporting structure aligns operations which share business strategies, are related by geography and product mix, and reflect the way management evaluates the operating performance of its businesses. The operations are reported as: Great Lakes Minerals, which is the largest and only fully integrated producer and bulk transporter of limestone on the Great Lakes and combines the Companys Michigan Limestone, Marine Services and Erie Sand and Gravel operations; Global Stone, whose lime, limestone fillers, chemical limestone, and construction aggregate operate primarily in the Southeast and Mid-Atlantic regions; and Performance Minerals, which mines and processes specialized industrial minerals, primarily high-purity silica sands and muscovite mica, and combines the Companys Industrial Sands and Specialty Minerals operations. |
Primarily through a direct sales force, the Company serves customers in a wide range of industries, including building products, energy, environmental and industrial. The composition of the segments and measure of segment profitability is consistent with the segment reporting structure used by the Companys management to evaluate the operating performance of the Companys businesses.
-17-
OGLEBAY NORTON COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table sets forth the operating segment information as of and for the three months ended March 31, 2004 and 2003 (in thousands):
Great Lakes Minerals |
Global Stone |
Performance Minerals |
Total Operating Segments |
Corporate And Other |
Consolidated |
|||||||||||||||||||
2004 |
||||||||||||||||||||||||
Identifiable assets |
$ | 261,321 | $ | 249,633 | $ | 76,468 | $ | 587,422 | $ | 69,982 | $ | 657,404 | ||||||||||||
Depreciation, depletion, amortization and accretion |
189 | 3,361 | 1,873 | 5,423 | 68 | 5,491 | ||||||||||||||||||
Capital expenditures |
2,970 | 1,603 | 463 | 5,036 | 84 | 5,120 | ||||||||||||||||||
Net sales and operating revenues |
$ | 6,710 | $ | 40,187 | $ | 22,537 | $ | 69,434 | $ | 69,434 | ||||||||||||||
Operating (loss) income, before impairment charge |
$ | (639 | ) | $ | 2,769 | $ | 2,249 | $ | 4,379 | $ | (4,311 | ) | $ | 68 | ||||||||||
Provision for restructuring, asset impairments and early retirement programs |
(1,315 | ) | (1,315 | ) | (1,315 | ) | ||||||||||||||||||
Operating (loss) income |
(1,954 | ) | 2,769 | 2,249 | 3,064 | (4,311 | ) | (1,247 | ) | |||||||||||||||
Reorganization items, net |
(4,565 | ) | (4,565 | ) | ||||||||||||||||||||
Loss on disposition of assets |
(10 | ) | (5 | ) | (15 | ) | (15 | ) | ||||||||||||||||
Interest expense |
(12,555 | ) | (12,555 | ) | ||||||||||||||||||||
Other income, net |
93 | 93 | ||||||||||||||||||||||
(Loss) income before income taxes and cumulative effect of accounting change |
$ | (1,964 | ) | $ | 2,769 | $ | 2,244 | $ | 3,049 | $ | (21,338 | ) | $ | (18,289 | ) | |||||||||
2003 |
||||||||||||||||||||||||
Identifiable assets |
$ | 270,186 | $ | 275,916 | $ | 92,596 | $ | 638,698 | $ | 60,645 | $ | 699,343 | ||||||||||||
Depreciation, depletion, amortization and accretion |
228 | 3,350 | 1,786 | 5,364 | 109 | 5,473 | ||||||||||||||||||
Capital expenditures |
3,008 | 2,212 | 761 | 5,981 | 354 | 6,335 | ||||||||||||||||||
Net sales and operating revenues |
$ | 4,203 | $ | 40,307 | $ | 18,374 | $ | 62,884 | $ | 62,884 | ||||||||||||||
Operating (loss) income |
$ | (2,063 | ) | $ | 2,814 | $ | 1,603 | $ | 2,354 | (4,562 | ) | $ | (2,208 | ) | ||||||||||
Gain (loss) on disposition of assets |
26 | (26 | ) | | | 63 | 63 | |||||||||||||||||
Interest expense |
(13,281 | ) | (13,281 | ) | ||||||||||||||||||||
Other expense, net |
(1,591 | ) | (1,591 | ) | ||||||||||||||||||||
Loss (income) before income taxes and cumulative effect of accounting change |
$ | (2,037 | ) | $ | 2,788 | $ | 1,603 | $ | 2,354 | $ | (19,371 | ) | $ | (17,017 | ) | |||||||||
-18-
ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Financial Condition
On February 23, 2004, the Company and all of its wholly owned subsidiaries filed voluntary petitions under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. The Company intends to continue operations without interruption. The Company intends to seek emergence from Chapter 11 as rapidly as possible with a new, de-levered capital structure that will enable the Company to move forward on its strategic operating plan.
In furtherance of the Companys goal of emerging from Chapter 11 as expeditiously as possible, prior to the filing, the Company reached an agreement in principle, subject to certain conditions, with a majority of the holders of its $100,000,000 Senior Subordinated Notes to exchange their notes for equity. The agreement also contemplates having certain of them make a new equity investment in the reorganized Company. Additionally, prior to filing Chapter 11, the Company accepted a commitment for a new credit facility that, among other things, would retire its existing bank debt. On April 30, 2004, the Bankruptcy Court entered an order authorizing the Company to enter into this facility.
On February 24, 2004, the Bankruptcy Court also entered a variety of orders designed to afford the Company a smooth transition into Chapter 11 and permit the Company to continue operating on a normal basis post-petition. Among others, the Court entered orders authorizing the Company to continue its consolidated cash management system, pay employees their accrued pre-petition wages and salaries, honor the Companys obligations to its customers and pay some or all of the pre-petition claims of certain vendors that are critical to the continued operations of the Company, subject to certain restrictions. The relief granted in these orders has facilitated the Companys transition into Chapter 11 and has allowed the Company to continue its operations uninterrupted.
On February 25, 2004, U.S. Bankruptcy Judge Joel B. Rosenthal of the United States Bankruptcy Court for the District of Delaware in Wilmington entered an order granting interim approval for the Company to utilize cash collateral and to borrow up to $40,000,000 from a $75,000,000 debtor-in-possession (DIP) credit facility. The Company obtained the DIP facility from a syndicate that includes various members of its pre-petition bank group. The judges order provided the Company access to the liquidity necessary to continue operations without disruption and meet its obligations to its suppliers, customers and employees during the Chapter 11 reorganization process.
On April 8, 2004, the Bankruptcy Court granted final approval for the Company to borrow up to $70 million under the (DIP) credit facility (the Company having requested the reduction to $70 million from $75 million). During the first quarter of 2004, the Company incurred $2,579,000 in deferred financing costs which were commitment fees and professional fees related to the DIP facility.
-19-
FINANCIAL CONDITION (Continued)
On April 27, 2004, the Company filed a joint plan of reorganization (Plan) with the United States Bankruptcy Court. The Company is required to file a disclosure statement by no later than May 25, 2004. The Plan, which may be amended or modified, has not yet been confirmed by the Bankruptcy Court and remains subject to Bankruptcy Court approval. This document has been prepared on a historic basis and does not describe the potential ramifications of the Plan.
On April 30, 2004, the Bankruptcy Court entered an order authorizing the Debtors to enter into a $305 million second DIP credit facility providing the Company with post-petition and exit financing. The Judge also authorized the Company to pay commitment fees for these loans. The second DIP is in the process of being negotiated with one of the agents for the first DIP facility. The second DIP will be used to repay any borrowings under the first DIP of $70 million and the existing pre-petition bank credit facility and will provide working capital while the Company is in Chapter 11. Upon confirmation of the Companys Plan and emergence from Chapter 11, the $305 million DIP will convert to a five-year $305 million credit facility to provide financing for the reorganized Company. On April 28, 2004, the Bankruptcy Court denied a motion to compel the United States Trustee to appoint an equity security holders committee.
While the Company is in Chapter 11, investments in its securities continue to be highly speculative. Shares of the Companys common stock have little or no value and will likely be canceled. Additionally, the Companys shares were delisted from trading on the NASDAQ National Market effective at the opening of business on March 3, 2004. The Companys shares continue to trade as an Other OTC issue under the symbol OGLEQ.
Notwithstanding the progress made to date by the Company towards achieving its restructuring goals, at this time, the ability of the Company to complete a financial restructuring is uncertain and subject to substantial risk. Furthermore, the form and timing of any financial restructuring is uncertain. There can be no assurance that the Company will be successful in achieving its goals, or that any measures that are achievable will result in sufficient improvement to the Companys financial position. Accordingly, until the time that the Company emerges from bankruptcy and a financial restructuring is completed, there will be substantial doubt about the Companys ability to continue as a going concern. In the event that a financial restructuring is not completed, the Company could be forced to sell a significant portion of its assets to retire debt outstanding or, under certain circumstances, to cease operations. Management remains in active discussions to sell the Companys mica operations.
Due to the seasonal nature of certain aspects of the Companys business, the operating results and cash flows for the first three months of the year are not necessarily indicative of the results to be expected for the full year.
The Companys operating activities provided cash of $1,865,000 in the first three months of 2004 compared with a use of cash of $15,057,000 in the first three months of 2003. The cash provided in the first three months of 2004 was primarily the result of the increase in accounts payable, accrued expenses, accrued interest, and payroll and other accrued compensation due to the Bankruptcy
-20-
FINANCIAL CONDITION (Continued)
Court stay issued on pre-petition liabilities prohibiting payment and resulting in their reclassification to Liabilities Subject to Compromise pending final approval of the Companys Plan. The net cash provided from these operating activities were partially offset by the decrease in the deferred tax benefit.
Capital expenditures were $5,120,000 in the first three months of 2004 compared with $6,335,000 for the same period in 2003. During the three-month period ended March 31, 2004, expenditures for replacement of existing equipment totaled $3,739,000 while expansion projects received funding of $770,000, with the balance of $611,000 allocated to quarry development. During the three-month period ended March 31, 2003, capital expenditures for replacement of existing equipment, expansion projects and quarry development totaled $4,427,000, $1,056,000 and $852,000, respectively. Full-year capital expenditures for 2004 are expected to approximate $23,500,000.
During the first three months of 2004, the Companys additional borrowings exceeded debt repayments by $10,500,000 compared with the first three months of 2003 when additional borrowings exceeded debt repayments by $27,516,000. Historically, additional borrowings exceed debt repayments during the first quarter of the year because of the seasonal nature of many of the Companys businesses as previously discussed. The additional borrowings in the first three months of 2004 were lower than had been experienced in the past due to the benefit of $3,025,000 in proceeds from the sale of Company assets and the Bankruptcy Court stay issued on pre-petition liabilities prohibiting payment. The increase in financing activities in the three months ended March 31, 2003 was primarily due to the funding of higher interest costs and the timing of interest payments and the Erie Sand and Gravel acquisition. The Company anticipates being a net borrower for the year.
The Company did not declare a dividend in the first three months of 2004 or 2003. The Companys 2001 amendments to its financial covenants on its Syndicated Term Loan and Senior Credit Facility prohibit the payment of cash dividends.
The Company continues to incur tax operating losses and there is an uncertainty regarding the future realization of any portion of these losses as a tax benefit. Accordingly, the Company has recorded a tax valuation allowance for the deferred tax asset and will maintain such an allowance until sufficient positive evidence (i.e. cumulative positive earnings and future taxable income) exists to support the reversal.
Several of the Companys subsidiaries have been and continue to be named as defendants in a large number of cases relating to the exposure of people to asbestos and silica. The plaintiffs in the cases generally seek compensatory and punitive damages of unspecified sums based upon the Jones Act, common law or statutory product liability claims. Some of these cases have been brought by plaintiffs against the Company (or its subsidiaries) and other marine services companies or product manufacturer co-defendants. Considering our past and present operations relating to the use of asbestos and silica, it is possible that additional claims may be made against the Company and its subsidiaries based upon similar or different legal theories seeking similar or different types of damages and relief.
-21-
FINANCIAL CONDITION (Continued)
The suits filed pursuant to the Jones Act are filed in Federal Court and have been assigned to the Multidistrict Litigation Panel (MDL); all such cases are currently dormant and have been so for many years.
The Company believes that both the asbestos and silica product liability claims are covered by multiple layers of insurance policies and an insurance trust from multiple sources. In the third quarter 2003, the Company agreed with one of its several insurers to fund a settlement insurance trust (the Trust) to cover a portion of settlement and defense costs arising out of asbestos litigation. The Company will have access to Trust funds to cover settlements and defense costs and will not have the obligation to cover such costs from its own funds. Additionally, the Trust provides that the Company may use up to a maximum of $4,000,000 to cover the cost of any other insurable or insurance related expense. At March 31, 2004, the Company was a co-defendant in cases alleging asbestos-induced illness involving claims of approximately 72,000 claimants. With respect to silica claims, the Company at March 31, 2004 was co-defendant in cases involving approximately 21,000 claimants. The Company has been and will continue to be responsible for funding a small percentage of all settlements and defense costs. Management believes that its share of settlements on an annual basis is not significant, although the Company continues to maintain a reserve on its balance sheet to address this contingency.
The exposure of persons to silica and the accompanying health risks have been and continue to be significant issues confronting the industrial minerals industry in general, and specifically our Performance Minerals segment. Proposed changes to standards for exposure to silica are under review by the United States Occupational Safety and Health Administration. This review could result in more stringent worker safety standards or, in the alternative, requirements for additional action on the part of silica users regarding lower permissible exposure limits for silica. More stringent worker safety standards or additional action requirements, including the costs associated with these revised standards or additional action requirements, and actual or perceived concerns regarding the threat of liability, or health risks, including silicosis, associated with silica use, may affect the buying decisions of the users of our silica products. If worker safety standards are made more stringent, if the Company is required to take additional action regarding lower permissible exposure limits for silica, or if the Companys customers decide to reduce their use of silica products based on actual or perceived health risks or liability concerns, the Companys operating results, liquidity and capital resources could be materially adversely affected. The extent of any material adverse effect would depend on the nature and extent of the changes to the exposure standards, the cost of meeting and our ability to meet more stringent standards, the extent of any reduction in our customers use of our silica products and other factors that cannot be estimated at this time.
-22-
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2004 COMPARED TO
THREE MONTHS ENDED MARCH 31, 2003
The Companys net sales and operating revenues increased 10% to $69,434,000 in the first quarter ended March 31, 2004. This is a $6,550,000 increase over the $62,884,000 in net sales and operating revenues generated in the first quarter of 2003. The Great Lakes Minerals and Performance Minerals segments accounted for the net sales and operating revenue increase in the quarter with gains of $2,507,000 and $4,163,000, respectively. Vessel revenues were up in the quarter due to more sailing days than a year ago, because of increased demand and mild weather conditions. All the segments were hampered a year ago by severe weather through the Great Lakes, Mid-Atlantic and Southeast regions. Market demand for gas and oil well fracturing sands, building materials and aggregate, lime and fillers used in carpet and flooring manufacturing have all exceeded their prior year demand. Additionally, the Company has improved its market share with its gas and oil well fracturing sand business and has seen strong pricing power with lime sales.
The operating loss for the first quarter of 2004 was $1,247,000, a $961,000 or 43% improvement versus the $2,208,000 operating loss reported in the same quarter a year ago. In the first quarter, the Company recorded a $1,315,000 impairment charge related to the exit and sublease of the Cleveland Marine Services office. The Company continues to realize benefits from its cost cutting activities over the past year and the increasing demand for its products. Operating income for the three operations segments in the first quarter of 2004 was $3,064,000 or 30% greater than operating income in the first quarter of 2003.
The net loss for the first quarter of 2004 was $17,737,000, which represents a loss of $3.40 per share on a fully diluted basis. This compares to the net loss of $11,050,000, or $2.17 per share, assuming full dilution, in the three months ended March 31, 2003. The $6,687,000 increase in the net loss for the current quarter is primarily attributable to a $6,806,000 reduction in the income tax benefit. Due to the Companys continuing tax operating losses, it cannot justify creating a net deferred tax asset on its balance sheet and therefore, is limited in its income tax benefit for 2004. As a result of the bankruptcy petition, the Company has incurred $4,565,000 of expenses related to reorganization items in the first quarter of 2004. The net loss in the first quarter of 2003 included a non-cash charge of $1,391,000 (net of tax benefit of $889,000) related to the adoption of Statement of Financial Accounting Standards (SFAS) No. 143, Accounting for Asset Retirement Obligations, and a first quarter charge of $888,000 (net of tax benefit of $567,000) to establish a reserve for a non-trade debtor of the Company who filed for Chapter 11 bankruptcy protection.
-23-
RESULTS OF OPERATIONS (Continued)
Great Lakes Minerals
The Great Lakes Minerals segment net sales and operating revenue increased $2,507,000, or 60%, to $6,710,000 for the first quarter of 2004 from $4,203,000 for the first quarter of 2003. The increase in net sales and operating revenues was attributable to additional sailing days, better weather conditions than a year ago and an increase in the number of the iron ore pellet shuttles for its vessel operations. The increased iron ore pellet shuttles also increased revenues for the Companys Cleveland Dock facility. Revenues from the quarries in Michigan improved with increased demand in both the aggregate and metallurgical markets. The Company also generated additional revenue through its ship repair business at its Erie location. First quarter net sales and operating revenue for the Great Lakes Minerals segment historically are not material to the total year because of curtailed winter operations. In 2003, first quarter operating revenues represented only 3% of the full year results.
Cost of goods sold and operating expenses for the Great Lakes Minerals segment were $5,406,000 for the three months ended March 31, 2004 compared with $4,006,000 for the same period in 2003, an increase of $1,400,000 or 35%. Costs of goods sold and operating expenses, as a percentage of net sales and operating revenues, were 81% in the first quarter of 2004 and 95% in the same quarter of 2003. The improved operating margin as a percentage of net sales and operating revenues is primarily a result of the increased demand and improved weather conditions, which allowed for early resumption of this segments business activities.
Operating loss for the quarter ended March 31, 2004 was $1,954,000 as compared with an operating loss of $2,063,000 for the same period in 2003. In the first quarter, the Company recorded a $1,315,000 impairment charge related to the exit and sublease of the Cleveland Marine Services office. Excluding the impairment charge, the operating loss for the 2004 first quarter is 10% of net sales and operating revenues. This compares to a loss in the same quarter of 2003 that was 49% of net sales and operating revenues.
Global Stone
Net sales for the Companys Global Stone segment decreased $120,000 to $40,187,000 for the three months ended March 31, 2004 from $40,307,000 in the same period of 2003. The prior year net sales include net sales from the Lawn and Garden business, which was sold in the third quarter of 2003. This segment is benefiting from increased industry demand for aggregate, roofing fillers, lime, and a renewed demand in the carpet and flooring markets for fillers. Additionally, this segment is experiencing some pricing power in certain lime markets.
Cost of goods sold for the Global Stone segment totaled $32,031,000 in the three months ended March 31, 2004 compared with
-24-
RESULTS OF OPERATIONS (Continued)
$31,962,000 in the three months ended March 31, 2003, a minimal increase of $69,000. Cost of goods sold as a percentage of net sales was 80% and 79% in the first quarter of 2004 and 2003, respectively. The slight decrease in operating margin is primarily attributable to increased energy costs for electricity and coal and slightly higher repair and maintenance expenses.
The segment contributed $2,769,000 to operating income for the three months ended March 31, 2004, compared with $2,814,000 in the same period of 2003. The $45,000 decrease in operating income in the first quarter of 2004 was primarily attributable to the lost contribution resulting from the Lawn and Garden disposition. The segment also endured higher energy costs partially offset by increased demand in the continuing businesses.
Performance Minerals
The Performance Minerals segment had net sales of $22,537,000 for the first quarter of 2004, an increase of $4,163,000 or 23%, over the net sales of $18,374,000 for the same quarter of 2003. The increase in net sales was primarily attributable to the improved industry demand for sands used in gas and oil well fracturing and building materials in California. Additional market development for gas and oil well fracturing sands was experienced in Canada and the Rocky Mountain region.
Cost of goods sold for the Performance Minerals segment was $17,213,000 for the first quarter of 2004, which was 26% higher than the $13,685,000 in the same quarter of 2003 primarily due to the increase in net sales discussed above. Cost of goods sold as a percentage of net sales was 76% for the first quarter of 2004 compared to 74% in 2003. The reduction in operating margin was primarily attributable to higher energy costs and maintenance expense.
Operating income for the Performance Minerals segment was $2,249,000 for the first quarter of 2004 compared with $1,603,000 for the same period of 2003, a 40% increase. The operating income increase of $646,000 was primarily related to the volume increase in net sales discussed above.
Depreciation, Depletion, Amortization and Accretion
Depreciation, depletion, amortization and accretion expense was $5,491,000 for the three months ended March 31, 2004 compared with $5,473,000 for the same period of 2003. Depreciation, depletion, amortization and accretion expense were 8% and 9% of total net sales and operating revenues in 2004 and 2003, respectively. The reduction in the percentage, illustrates the Companys ability to increase net sales and operating revenue without the need for significant new capital expenditures.
-25-
RESULTS OF OPERATIONS (Continued)
General, Administrative and Selling Expenses
Total general, administrative and selling expenses were $9,341,000 for the first quarter of 2004 compared with $10,075,000 for 2003. The total general, administrative and selling expense decreased $734,000 in the first quarter of 2004 versus the first quarter of 2003. General, administrative and selling expenses as a percentage of net sales and operating revenue was 13% in 2004 compared with 16% in 2003. Each of the operating segments and the corporate office had reductions in the general, administrative and selling expense in the quarter. Headcount reductions, particularly at the corporate office and the Great Lakes Mineral segment, which were implemented throughout 2003, were the major contributors to the improved leverage in the general, administrative and selling expense.
Other
Interest expense was $12,555,000 in the first quarter of 2004, an $726,000 decrease compared with $13,281,000 for the first quarter of 2003. Several factors contributed to the net decrease in the interest expense. Primarily, a reduction in hedge interest expense offset by higher spreads. The Companys interest on hedges was $645,000 in the first quarter of 2004 compared with $2,662,000 in the same period of 2003. The company is no longer required to hedge at least 50% of its senior debt; as a result the Company has just one $50,000,000 notional value hedge as of March 31, 2004. This compared with $220,000,000 in notional value throughout the first quarter of 2003. Interest on bank debt was $9,915,000 in 2004 compared with $9,593,000 in 2003. In 2003, the Company amended its bank agreements with its lenders on its Senior Credit Facility, Term Loan and Senior Secured Notes. These amendments were needed because of anticipated defaults under its existing agreements. The result of these amendments increased the margin over LIBOR from 4% at March 31, 2003 to 6% in the first quarter of 2004. Additionally, amendments to the Companys Senior Secured Notes increased the payment-in-kind rate from 5% during the first quarter 2003 to 6% for the first quarter of 2004. These increases were offset by the cessation of interest accrued on the Companys 10% Senior Subordinated Notes as of the bankruptcy filing. The Senior Subordinated Notes are deemed unsecured by the Company and interest is no longer being accrued. The Companys amortization of deferred financing fees was $1,959,000 in the first quarter of 2004 compared with $965,000 in 2003. The capitalized amendment fees paid to senior lenders throughout 2003 were the reason for the increase. The remainder of interest expense was related to capital leases and notes payable.
The reorganization items represent legal and professional fees associated with the bankruptcy petition filing and its related activities. These items totaled $4,565,000 at the end of the first quarter 2004.
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RESULTS OF OPERATIONS (Continued)
On May 1, 2003, Eveleth Mines LLC (d.b.a. EVTAC Mining) filed for protection under Chapter 11 of the U.S. Bankruptcy Code. EVTAC Mining is a non-trade debtor to the Company for obligations arising out of a prior relationship. The Company recognized an after-tax charge of $888,000 (or $0.17 per share, assuming dilution) in the first quarter of 2003 to establish a reserve for this matter. The charge was included in Other Expense on the Condensed Consolidated Statement of Operations.
Cumulative Effect of Accounting Change for Asset Retirement Obligations
The Company adopted Statement of Financial Accounting Standards (SFAS) No. 143, Accounting for Asset Retirement Obligations, at January 1, 2003. SFAS No. 143 requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred and capitalized as part of the carrying amount of the long-lived asset. The Companys asset retirement obligation balance as of March 31, 2004 and March 31, 2003 was $ 6,912,000 and $5,956.000, respectively. The accretion expense for the three-month period ended March 31, 2004 and March 31, 2003 was $134,000 and $102,000, respectively.
New Accounting Pronouncements
The Companys postretirement health care plan provides prescription drug benefits that may be affected by the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (the Act), signed into law in December 2003. In accordance with Federal Accounting Standards Board (FASB) Staff Position FAS 106-1, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, the effects of the Act on the Companys postretirement plan have not been included in the measurement of the Companys accumulated postretirement benefit obligation or net periodic postretirement benefit cost for 2003. In February 2004, the FASB determined that the federal subsidy available under the Act to plan sponsors that provide retiree health benefits that are actuarially equivalent to Medicare benefits should be accounted for within the scope of SFAS No. 106, Employers Accounting for Postretirement Benefits Other than Pensions. The effect of the federal subsidy on benefits attributable to past services and future changes in the estimated amount of the subsidy should be accounted for as an actuarial gain under SFAS No. 106, while the effects of the subsidy attributable to future service should be accounted for as a reduction to future service costs. Plan amendments made in contemplation of the subsidy should be accounted for as either an actuarial gain (if the net result of the amendment and the subsidy is a reduction to the accumulated postretirement benefit obligation) or a plan amendment (if the net result of the amendment and subsidy increases the accumulated postretirement benefit obligation). Furthermore, the FASB decided that the tax exempt nature of the subsidy should be reflected when the subsidy is recognized as a reduction to the accrued postretirement benefit obligation. The FASB has not yet finalized how actuarial equivalency should be determined. The final guidance, when issued, may require the Company to re-measure its postretirement benefit obligation and may require the Company to amend its plan to benefit from the Act.
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RESULTS OF OPERATIONS (Continued)
Critical Accounting Policies
Managements discussion and analysis of its financial condition and results of operation are based upon the Companys Condensed Consolidated Financial Statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires the Company to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent liabilities. On a continual basis, the Company evaluates its estimates, including those related to accounts receivable reserves, inventories, intangible assets, impairment and useful lives of long-lived assets, valuation allowance against deferred tax assets, pensions and other postretirement benefits, asset retirement obligations and commitments and contingencies. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. These estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
Cautionary Statement Regarding Forward-Looking Information
Managements Discussion and Analysis of Financial Condition and Results of Operations contains statements concerning certain trends and other forward-looking information within the meaning of the federal securities laws. Such forward-looking statements are subject to uncertainties and factors relating to the Companys operations and business environment, all of which are difficult to predict and many of which are beyond the control of the Company. The Company believes that the following factors, among others, could affect its future performance and cause actual results to differ materially from those expressed or implied by forward-looking statements made by or on behalf of the Company: (1) business and financial risks associated with the Companys decision to file for protection under Chapter 11 of the U.S. Bankruptcy Code; (2) the Companys ability to restructure its debt, and the ability of such activities to provide adequate liquidity to sufficiently improve the Companys financial position; (3) the Companys ability to complete its cost reduction initiatives; (4) weather conditions, particularly in the Great Lakes region, flooding, and/or water levels; (5) fluctuations in energy, fuel and oil prices; (6) fluctuations in integrated steel production in the Great Lakes region; (7) fluctuations in Great Lakes and Mid-Atlantic construction activity; (8) economic conditions in California or population growth rates in the Southwestern United States; (9) the outcome of periodic negotiations of labor agreements; (10) shortage in skilled labor particularly for the marine vessels; (11) changes in the demand for the Companys products due to changes in technology; (12) the loss, insolvency or bankruptcy of major customers, insurers or debtors; (13) changes in environmental laws; and (14) an increase in the number and cost of asbestos and silica product liability claims filed against the Company and its subsidiaries and determinations by a court or jury against the Companys interest. While the Company is in Chapter 11 bankruptcy, investments in its securities will be highly speculative. Shares of the Companys common stock have little or no value and will likely be cancelled.
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ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Information regarding the Companys financial instruments that are sensitive to changes in interest rates was disclosed in the 2003 Annual Report on Form 10-K filed by the Company on March 29, 2004.
The following table provides information about the Companys derivative and other financial instruments that are sensitive to changes in interest rates, which include interest rate swaps and debt obligations. For debt obligations, the table presents cash flows and related weighted average interest rates by the original contracted maturity dates. Based upon the Companys default under the current debt agreements and the bankruptcy filing, $432,340,000 is classified as Subject to Compromise on the Condensed Consolidated Balance Sheet. For interest rate swaps, the table presents notional amounts and weighted average LIBOR interest rates by contractual maturity dates. Notional amounts are used to calculate the contractual payments to be exchanged under the contract. Weighted average variable rates are based on implied forward LIBOR rates in the yield curve, plus a 6% margin at March 31, 2004 and December 31, 2003 for variable rate long-term debt. The Company does not hold or issue financial instruments for trading purposes.
March 31, 2004 | ||||||||||||||||||||||||||||||
2004 |
2005 |
2006 |
2007 |
2008 |
Thereafter |
Total |
Fair Value | |||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||||
Liabilities: |
||||||||||||||||||||||||||||||
Long-term debt: |
||||||||||||||||||||||||||||||
Fixed rate |
$ | 2,127 | $ | 2,101 | $ | 2,111 | $ | 7,941 | $ | 81,046 | $ | 100,000 | $ | 195,326 | $ | 133,943 | ||||||||||||||
Average interest rate |
13.49 | % | 13.57 | % | 13.64 | % | 13.72 | % | 12.61 | % | 10.00 | % | ||||||||||||||||||
Variable rate |
$ | 237,014 | $ | 237,014 | $ | 237,014 | ||||||||||||||||||||||||
Average interest rate |
5.11 | % | ||||||||||||||||||||||||||||
Interest rate derivatives: |
||||||||||||||||||||||||||||||
Interest rate swaps: |
||||||||||||||||||||||||||||||
Variable to fixed |
$ | 50,000 | $ | 50,000 | $ | 746 | ||||||||||||||||||||||||
Average LIBOR pay rate |
6.97 | % | ||||||||||||||||||||||||||||
Average LIBOR receive rate |
1.11 | % | ||||||||||||||||||||||||||||
December 31, 2003 | ||||||||||||||||||||||||||||||
2004 |
2005 |
2006 |
2007 |
2008 |
Thereafter |
Total |
Fair Value | |||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||||
Liabilities: |
||||||||||||||||||||||||||||||
Long-term debt: |
||||||||||||||||||||||||||||||
Fixed rate |
$ | 2,226 | $ | 2,093 | $ | 2,125 | $ | 51,076 | $ | 37,510 | $ | 100,000 | $ | 195,030 | $ | 134,889 | ||||||||||||||
Average interest rate |
13.43 | % | 13.51 | % | 13.58 | % | 13.66 | % | 12.45 | % | 10.00 | % | ||||||||||||||||||
Variable rate |
$ | 225,808 | $ | 334 | $ | 334 | $ | 334 | $ | 226,810 | $ | 226,810 | ||||||||||||||||||
Average interest rate |
7.46 | % | 2.99 | % | 4.18 | % | 4.96 | % | ||||||||||||||||||||||
Interest rate derivatives: |
||||||||||||||||||||||||||||||
Interest rate swaps: |
||||||||||||||||||||||||||||||
Variable to fixed |
$ | 50,000 | $ | 50,000 | $ | 1,457 | ||||||||||||||||||||||||
Average LIBOR pay rate |
6.97 | % | ||||||||||||||||||||||||||||
Average LIBOR receive rate |
1.46 | % |
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ITEM 4. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
The Company maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms. The Companys management, with the participation of the Companys Chief Executive Officer (CEO) and Chief Financial Officer (CFO), has evaluated the effectiveness of the Companys disclosure controls and procedures. Based on the evaluation, the CEO and CFO have concluded the Companys disclosure controls and procedures are effective as of the end of the period covered by this report.
Changes in Internal Controls
In connection with managements evaluation, no changes during the quarter ended March 31, 2004 were identified that have materially affected, or are reasonably likely to materially affect, the Companys internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. | LEGAL PROCEEDINGS |
On February 23, 2004, the Company and all of its wholly owned subsidiaries filed voluntary petitions under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. The Company intends to continue operations without interruption. The Company intends to seek emergence from Chapter 11 as rapidly as possible with a new, de-levered capital structure that will enable the Company to move forward on its strategic operating plan.
In furtherance of the Companys goal of emerging from Chapter 11 as expeditiously as possible, prior to the filing, the Company reached an agreement in principle, subject to certain conditions, with a majority of the holders of its $100,000,000 Senior Subordinated Notes to exchange their notes for equity. The agreement also contemplates having certain of them make a new equity investment in the reorganized Company. Additionally, prior to filing Chapter 11, the Company accepted a commitment for a new credit facility that, among other things, would retire its existing bank debt. On April 30, 2004, the Bankruptcy Court entered an order authorizing the Company to enter into this facility.
On February 24, 2004, the Bankruptcy Court also entered a variety of orders designed to afford the Company a smooth transition into Chapter 11 and permit the Company to continue operating on a normal basis post-petition. Among others, the Court entered orders authorizing the Company to continue its consolidated cash management system, pay employees their accrued pre-petition wages and salaries, honor the Companys obligations to its customers and pay some or all of the pre-petition claims of certain vendors that are critical to the continued operations of the Company, subject to certain restrictions. The relief granted in these orders has facilitated the Companys transition into Chapter 11 and has allowed the Company to continue its operations uninterrupted.
On February 25, 2004, U.S. Bankruptcy Judge Joel B. Rosenthal of the United States Bankruptcy Court for the District of Delaware in Wilmington entered an order granting interim approval for the Company to utilize cash collateral and to borrow up to $40,000,000 from a $75,000,000 debtor-in-possession (DIP) credit facility. The Company obtained the DIP facility from a syndicate that includes various members of its pre-petition bank group. The judges order provided the Company access to the liquidity necessary to continue operations without disruption and meet its obligations to its suppliers, customers and employees during the Chapter 11 reorganization process.
On April 8, 2004, the Bankruptcy Court granted final approval for the Company to borrow up to $70 million under the (DIP) credit facility (the Company having requested the reduction to $70 million from $75 million). During the first quarter of 2004, the Company incurred $2,579,000 in deferred financing costs which were commitment fees and professional fees related to the DIP facility.
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LEGAL PROCEEDINGS (Continued)
On April 27, 2004, the Company filed a joint plan of reorganization (Plan) with the United States Bankruptcy Court. The Company is required to file a disclosure statement by no later than May 25, 2004. The Plan, which may be amended or modified, has not yet been confirmed by the Bankruptcy Court and remains subject to Bankruptcy Court approval. This document has been prepared on a historic basis and does not describe the potential ramifications of the Plan.
On April 30, 2004, the Bankruptcy Court entered an order authorizing the Debtors to enter into a $305 million second DIP credit facility providing the Company with post-petition and exit financing. The Judge also authorized the Company to pay commitment fees for these loans. The second DIP is in the process of being negotiated with one of the agents for the first DIP facility. The second DIP will be used to repay any borrowings under the first DIP of $70 million and the existing pre-petition bank credit facility and will provide working capital while the Company is in Chapter 11. Upon confirmation of the Companys Plan and emergence from Chapter 11, the $305 million DIP will convert to a five-year $305 million credit facility to provide financing for the reorganized Company. On April 28, 2004, the Bankruptcy Court denied a motion to compel the United States Trustee to appoint an equity security holders committee.
While the Company is in Chapter 11, investments in its securities continue to be highly speculative. Shares of the Companys common stock have little or no value and will likely be canceled. Additionally, the Companys shares were delisted from trading on the NASDAQ National Market effective at the opening of business on March 3, 2004. The Companys shares continue to trade as an Other OTC issue under the symbol OGLEQ.
Notwithstanding the progress made to date by the Company towards achieving its restructuring goals, at this time, the ability of the Company to complete a financial restructuring is uncertain and subject to substantial risk. Furthermore, the form and timing of any financial restructuring is uncertain. There can be no assurance that the Company will be successful in achieving its goals, or that any measures that are achievable will result in sufficient improvement to the Companys financial position. Accordingly, until the time that the Company emerges from bankruptcy and a financial restructuring is completed, there will be substantial doubt about the Companys ability to continue as a going concern. In the event that a financial restructuring is not completed, the Company could be forced to sell a significant portion of its assets to retire debt outstanding or, under certain circumstances, to cease operations. Management remains in active discussions to sell the Companys mica operations.
The Company and certain of its subsidiaries are involved in a limited number of claims and routine litigation incidental to operating its current business. In each case, the Company is actively defending or prosecuting the claims. Many of the claims are covered by insurance and none are expected to have a material adverse effect on the financial condition of the Company. While the Company is under Chapter 11 bankruptcy protection, all legal proceedings against the Company and/or its subsidiaries are stayed by operation of federal law. The following describes pending legal proceedings against the Company prior to its bankruptcy filing.
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LEGAL PROCEEDINGS (Continued)
Several of the Companys subsidiaries have been and continue to be named as defendants in a large number of cases relating to the exposure of people to asbestos and silica. The plaintiffs in the cases generally seek compensatory and punitive damages of unspecified sums based upon the Jones Act, common law or statutory product liability claims. Some of these cases have been brought by plaintiffs against the Company (or its subsidiaries) and other marine services companies or product manufacturer co-defendants. Considering the Companys past and present operations relating to the use of asbestos and silica, it is possible that additional claims may be made against the Company and its subsidiaries based upon similar or different legal theories seeking similar or different types of damages and relief.
The suits filed pursuant to the Jones Act are filed in Federal Court and have been assigned to the Multidistrict Litigation Panel (MDL); there are approximately 700 claims, all of which are currently dormant and have been so for many years.
The Company believes that both the asbestos and silica product liability claims are covered by multiple layers of insurance policies and an insurance trust from multiple sources. In the third quarter 2003, the Company agreed with one of its several insurers to fund a settlement insurance trust (the Trust) to cover a portion of settlement and defense costs arising out of asbestos litigation. The Company will have access to Trust funds to cover settlements and defense costs and will not have the obligation to cover such costs from its own funds. At March 31, 2004, the Company was a co-defendant in cases alleging asbestos-induced illness involving claims of approximately 72,000 claimants.
With respect to silica claims, the Company at March 31, 2004 was co-defendant in cases involving approximately 21,000 claimants. The Company has been and will continue to be responsible for funding a small percentage of all settlements and defense costs. Management believes that its share of settlements on an annual basis is not significant, although the Company continues to maintain a reserve on its balance sheet to address this contingency.
The exposure of persons to silica and the accompanying health risks have been and continue to be significant issues confronting the industrial minerals industry in general, and specifically our Performance Minerals segment. Proposed changes to standards for exposure to silica are under review by the United States Occupational Safety and Health Administration. This review could result in more stringent worker safety standards or, in the alternative, requirements for additional action on the part of silica users regarding lower permissible exposure limits for silica. More stringent worker safety standards or additional action requirements, including the costs associated with these revised standards or additional action requirements, and actual or perceived concerns regarding the threat of liability, or health risks, including silicosis, associated with silica use, may affect the buying decisions of the users of our silica products. If worker safety standards are made more stringent, if the Company is required to take additional action regarding lower permissible exposure limits for silica, or if the Companys customers decide to reduce their use of silica products based on actual or perceived health risks or liability concerns, the Companys operating results, liquidity and capital resources could be materially adversely affected. The extent of any material adverse effect would depend on the nature and extent of the changes to the exposure standards, the cost of meeting and our ability to meet more stringent standards, the extent of any reduction in our customers use of our silica products and other factors that cannot be estimated at this time.
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LEGAL PROCEEDINGS (Continued)
On February 20, 2004, the Company and Oglebay Norton Specialty Minerals, Inc., a wholly-owned subsidiary, were named in an action filed by Pueblo of Picuris, in the District Court of Taos County, New Mexico, seeking to quiet title to certain land upon which a mica mine is situated in Taos County, New Mexico. The action also includes a claim for money damages for allegations of trespass, denial of access, damage to property and other related claims. The Company is investigating the facts and circumstances surrounding this matter to determine if it has liability or significant risk of adverse finding.
Litigation is inherently unpredictable and subject to many uncertainties. Adverse court rulings, determinations of liability or retroactive or prospective changes in the law could affect claims made against the Company and encourage or increase the number and nature of future claims and proceedings. Together with reserves recorded and available insurance, pending litigation is not expected to have a material adverse effect on the Companys operations, liquidity or financial condition.
ITEM 2. | CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Not Applicable
ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
On January 30, 2004, the Company announced it had decided not to make the interest payment due February 2, 2004, on its 10% Senior Subordinated Notes, due February 1, 2009. Such announcement caused an event of default under the Companys Senior Securities and such default has not been cured as of the date of this filing.
On February 23, 2004, the Company and its wholly owned subsidiaries filed voluntary petitions under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware in Wilmington to complete the financial restructuring of its long-term debt. Such filings were also an event of default under the Companys Senior Securities and the Company continues to be in default.
The Company caused another event of default under its Senior Securities by failing to reduce outstanding pre-petition bank debt under the Senior Securities by $100 million prior to February 25, 2004. The Company continues to be in default under its Senior Securities.
ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
Not Applicable
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ITEM 5. | OTHER INFORMATION |
Not Applicable
ITEM 6. | EXHIBITS AND REPORTS ON FORM 8-K |
(a) | Exhibits |
31(a) | Certification of the Chief Executive Officer, Michael D. Lundin, pursuant to Rule 13a-14(a) /15d-14(a) of Securities Exchange Act of 1934. | |
31(b) | Certification of the Chief Financial Officer, Julie A. Boland, pursuant to Rule 13a-14(a) /15d-14(a) of Securities Exchange Act of 1934. | |
32 | Certification of the Chief Executive Officer, Michael D. Lundin, and the Chief Financial Officer, Julie A. Boland, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes- Oxley Act of 2002. |
(b) | Reports on Form 8-K |
On March 2, 2004, the Company filed a Form 8-K with regard to a press release announcing that on February 23, 2004, the Company and all of its wholly owned subsidiaries (collectively, the Debtors) filed voluntary petitions with the United States Bankruptcy Court for the District of Delaware (the Bankruptcy Court) (Case No. 04-10558 (JBR)) seeking relief under Chapter 11 of the United States Bankruptcy Code (the Bankruptcy Code) in order to complete its reorganization efforts. The Debtors will continue operations without interruption and fulfill its commitments to its employees, retirees and customers during the reorganization process as debtors-in-possession in accordance with the applicable provisions of the Bankruptcy Code.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
OGLEBAY NORTON COMPANY | ||||||||
DATE: May 17, 2004 |
By: |
/s/ Michael D. Lundin | ||||||
Michael D. Lundin President and Chief Executive Officer, on behalf of the Registrant and as Principal Executive Officer |
By: |
/s/ Julie A. Boland | |||||||
Julie A. Boland Vice President and Chief Financial Officer, on behalf of the Registrant and as Principal Financial and Accounting Officer |
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