10-K/A 1 c22306_10ka.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Amendment No. 2 on (Mark One) FORM 10-K/A [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission File Number 001-15217 --------- U.S. AGGREGATES, INC. --------------------------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 57-0990958 ------------------------------ ----------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 147 West Election Road, Suite 110, Draper, Utah 84020 --------------------------------------------------- (Address of principal executive offices) (Zip Code) (801) 984-2600 ----------------------------------------------------- (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock, $.01 par value New York Stock Exchange ---------------------------- ----------------------- Securities registered pursuant to Section 12(g) of the Act: None 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 such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of March 20, 2001, the aggregate market value of voting stock held by non-affiliates of the registrant determined in accordance with Rule 405, based upon closing sales price for the registrant's common stock, as reported on the New York Stock Exchange, was approximately $43,552,082. Number of shares of registrant's common stock outstanding as of March 20, 2001 were 14,900,593. 1 INTRODUCTION The purpose of this amendment is to amend (i) Item 1 (Business), (ii) Item 2 (Properties) and (iii) Item 7 (Management's Discussion and Analysis). Other than the aforementioned changes, all other information included in the initial filing as amended by Amendment No. 1 on Form 10-K/A filed on September 7, 2001 is unchanged. -------------------------------------------------------------------------------- U.S. AGGREGATES, INC. AND SUBSIDIARIES FORM 10-K/A FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 CONTENTS PART ITEM PAGE I 1 Business 3 2 Properties 6 II 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 8 -- Signatures 15 2 PART I ITEM 1. BUSINESS U.S. Aggregates, Inc. ("U.S. Aggregates", "USAI" or "the Company") was founded in January 1994 and is a producer of aggregates and aggregate related products. Aggregates consist of crushed stone, sand and gravel. In 2000, the Company shipped approximately 19.7 million tons of aggregates, primarily to customers in nine Southeast and Mountain states, generating net sales and loss from operations of $291.7 million and ($5.0) million, respectively. In 2000, approximately 88% of the aggregates shipped by the Company were crushed stone or sand and gravel, and approximately 12% were unprocessed material. The following table shows, for the periods indicated, the Company's total shipments of aggregates, asphalt and ready-mix concrete. U.S. AGGREGATES, INC. SHIPMENTS OF AGGREGATES, ASPHALT AND READY-MIX CONCRETE YEARS ENDED DECEMBER 31, --------------------------------------- 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- (in millions) Tons of aggregates sold: Sold directly to customers 15.0 13.7 11.9 6.6 5.1 Used internally 4.7 5.4 3.9 2.9 2.1 ---- ---- ----- --- --- Total tons of aggregates sold 19.7 19.1 15.8 9.5 7.2 PERCENTAGES OF AGGREGATES USED INTERNALLY FOR ASPHALT AND CONCRETE 23.9% 28.3% 24.7% 30.5% 29.2 Tons of asphalt sold 1.8 2.2 1.6 1.3 0.9 Yards of ready-mix concrete sold 1.6 1.8 1.4 0.9 0.9 The Company's total production capacity is approximately 30 million tons per year. U.S. Aggregates markets its aggregates products to customers in a variety of industries, including public infrastructure, commercial and residential construction contractors; producers of asphalt, concrete, ready-mix concrete, concrete blocks, and concrete pipes; and railroads. In 2000, approximately 76% of the Company's aggregates volume was sold directly to customers, and the balance was used to produce asphalt (which generally contains 90% aggregates by volume) and ready-mix concrete (which generally contains 80% aggregates by volume). As a result of dependence upon the construction industry, the profitability of aggregates producers is sensitive to national, regional and local economic conditions, and particularly to downturns in construction spending and to changes in the level of infrastructure spending funded by the public sector. In fact, the Company's performance in the second half of 2000 was affected by the slowing economy and reduced government spending, especially in the Western operations. Currently, the Company does not have any customer that accounts for more than 10% of sales. Also as a result of the Company's dependence on the construction industry, the Company's business is seasonal with peak revenue and profits occurring primarily in the months of April through November. Bad weather conditions during this period can adversely affect operating income and cash flow and could therefore have a disproportionate impact on the Company's results for the full year. Quarterly results have varied significantly in the past and are likely to vary significantly from quarter to quarter in the future. In the fourth quarter of 2000, poor weather conditions in Utah negatively impacted the Company's sales and profits. In Utah, our sales volume of asphalt and processed aggregates in the fourth quarter of 2000 were down 42% and 36% respectively compared to the fourth quarter of 1999. Almost all of that volume decline was due to poor weather. In Utah, our sales volume of ready mix concrete in the fourth quarter of 2000 was down 11% compared to the fourth quarter of 1999. Ready mix concrete sales were less severely impacted by weather conditions as technology enables the use of concrete in colder weather. Because of the high cost of transporting aggregates, asphalt and ready-mix concrete, the Company believes that high-quality aggregate reserves located near customers are central to its long-term success. Accordingly, the Company has focused on the acquisition and development of aggregate production sites and companies that are well positioned to serve growing markets. Since U.S. Aggregates' inception, the Company completed and integrated 28 business and asset acquisitions, including both operating companies and aggregate production facilities. In 2000, U.S. Aggregates, Inc. continued to expand into new geographical markets in the Southeast, Utah and Nevada. Distribution of aggregate products in the Southeast was expanded with the startup of a major distribution yard in Memphis, Tennessee. Because of the Company's ambitious acquisition program, the Company acquired certain non-core assets over the last six years. These assets principally included ready mix and concrete block businesses which were acquired in connection with the acquisition of strategic quarry properties as well as quarry properties not critical to the Company's basic aggregates businesses. In 1994 we acquired Southern Ready Mix which owned two aggregate 3 quarries and a concrete products company producing ready mix concrete and concrete pipe. The aggregates business expanded from the original two quarries to nine operating quarries with an additional three in the preliminary development phase. As the aggregate business expanded, many of our customers for aggregates were firms that the Company competed against in ready mix concrete. As the aggregates volumes grew, our ready mix concrete and block businesses became less important to our overall business and, because of their competition with our core customers, had a negative impact on the future growth of our aggregates business. In 2000, the Company outlined a plan to sell certain assets to strengthen its strategic position, reduce debt and improve liquidity. The assets the Company planned to sell included its ready mix and concrete block business in Alabama, all its ready mix concrete operations in the greater Salt Lake area (including certain quarries related to such business) as well as other non-core ready mix and concrete block business. In 2000, the Company sold its ready-mix operations in Birmingham and subsequently the remaining ready-mix concrete and concrete block operations in the Alabama market to Ready-Mix USA, Inc. The ready-mix operations in Birmingham were sold for $6.6 million in total consideration, representing a book gain of $284,000. The ready-mix and concrete block operations in the Alabama market were sold for $14.5 million in total consideration, representing a book gain of $2.2 million. Terms of the sale include the establishment of a long-term contract for the Company to provide Ready-Mix USA with aggregates for its ready-mix operations. The revenues and total assets related to the sold properties represented approximately 11% and 4%, respectively, of the Company's 2000 consolidated totals. The localized nature of the business also limits competition to those producers in proximity to the Company's production facilities. Although U.S. Aggregates experiences competition in all of its markets, the Company believes that it is generally a leading producer in the market areas it serves. Competition is based primarily on aggregate production site location and price, but quality of aggregates and level of customer service are also important factors. The Company competes directly with a number of large and small producers in the markets it serves. A material rise in the price or a material decrease in the availability of oil could and did adversely affect operating results. The cost of transporting the Company's products, the cost of processing material and the cost of asphalt are all correlated to the price of oil. Any increase in the price of oil may and did reduce the demand for the Company's products. In 2000, the Company estimates that the total increase in oil, fuel and energy costs were in excess of $9 million. As a result of competitive pressures, the Company was not able to pass through these cost increases and profits were negatively impacted. Environmental and zoning regulations have made it increasingly difficult for the construction aggregates industry to expand existing quarries and to develop new quarry operations. Although it cannot be predicted what policies will be adopted in the future by federal, state and local governmental bodies regarding these matters, the Company anticipates that future restrictions will not have a material adverse effect upon its business. As of year-end, the Company employs approximately 1,476 employees, of whom approximately 1,259 are hourly, 216 are salaried and 1 is part-time. Approximately 313 of U.S. Aggregates' employees are represented by labor unions. The expiration dates of the various labor union contracts are from July 2001 through April 2003. The Company considers its relations with employees to be good. SUBSEQUENT DEVELOPMENTS As a result of issues raised regarding certain financial and accounting matters affecting the Company's Western operations and upon the recommendation of the Company's auditors, the Company's Board of Directors authorized the Audit Committee to expand the scope of the year-end audit and to increase its oversight of the audit. Under the supervision of the Audit Committee, an expanded audit was conducted of the Company's operations, principally those in the Western states. As a result of the expanded audit, a number of errors, material in the aggregate, were determined to have occurred. As a result of these errors, the Company determined that it was necessary to restate the earnings for the first three quarters of 2000. For the first quarter, the Company restated its net loss of $2.6 million, or $0.17 per diluted share, to a net loss of $5.1 million, or $0.34 per diluted share. For the second quarter, the Company restated its net income of $6.8 million, or $0.45 per diluted share, to net income of $3.1 million, or $0.20 per diluted share. For the third quarter, the Company restated its net income of $5.5 million, or $0.36 per diluted share, to net income of $1.7 million, or $0.11 per diluted share. The restatements relate primarily to the reclassification of certain capitalized items to operating expenses, the recognition of certain additional operating expenses, and an increase of the reserve for self-insurance claims. 4 As a result of the Audit Committee's review, certain members of management resigned, were put on administrative leave, or were terminated. These included the Company's former Executive Vice President and Chief Financial Officer, the president of the Western Operations and the Controller of the Western Operations. The Company has hired Stanford Springel as its new Chief Executive Officer and acting Chief Financial Officer, and retained the services of Charles Boryenace of FTI Policano & Manzo, a consultant with substantial financial experience, to assist the Company in its financial, accounting and cash management functions. Additionally, the Western Operations have hired John Friton as its new Chief Financial Officer and Richard Rawdin as its new Controller. A number of other employees have been terminated or re-assigned. The Company's San Mateo office is being closed and all financial operations transferred to Draper, Utah, headquarters of the Company's Western Operations, where the Company's Chief Executive Officer is now located. With the Company's poor financial results in 2000, the Company was in default of several covenants in the Fourth Amendment to its Credit Agreement and its Amendment No. 3 to its subordinated debt facilities. The Company was in default of its financial covenants by permitting its interest coverage ratio to be less than 1.75 to 1, permitting its fixed charge coverage ratio to be less than 0.80 to 1 and permitting its leverage ratio to be greater than 5.75 to 1. In April 2001, the Company entered into amendments (the Fifth and Sixth Amendments) with its senior secured lenders which waive all existing covenant defaults, adjust future financial covenants, defer certain principal payments until March 31, 2002, provide the Company with additional liquidity on the sale of certain assets, establish monthly interest payment schedules, increase interest rates, and provide for certain fees if the debt is not refinanced by a certain date in the future. The Company also entered into an amendment with its subordinated note holder to waive existing covenant defaults and to accept deferral of interest payments through May 22, 2002 in exchange for increased interest rates, a deferred fee of $900,000 and warrants for 671,582 shares with a nominal exercise price. In connection with the amendments of the senior secured credit facility and the subordinated notes, Golder, Thoma, Cressey, Rauner Fund IV, L.P. ("GTCR Fund IV"), the Company's largest shareholder, has committed to loan the Company $2 million as junior subordinated debt. GTCR Fund IV will receive a deferred fee of $450,000 and warrants for 435,469 shares with a nominal exercise price in exchange for its agreement to provide the Company with the junior subordinated debt. In 2001, the Company continued its plan to sell certain assets to improve its strategic position, reduce debt and improve its liquidity. Effective as of March 30,2001, the Company sold certain of its operations in northern Utah to Oldcastle Materials, Inc. for a total sales price of $30.9 million, inclusive of $6 million in contingent proceeds which relate to the Company obtaining zoning/permits for the operations sold, and which as of the date of this report are not recorded and have not been received. That transaction included the sale of the ready mix businesses in the greater Salt Lake area, a leasehold interest in one quarry, the subleasing of another and the sale of an asphalt plant. The sales proceeds were utilized to pay-down debt and certain operating leases and provided the Company with additional liquidity. The revenues and total assets related to the sold properties represented approximately 14% and 6%, respectively, of the Company's 2000 consolidated totals. In order to provide sufficient liquidity to fund operations, capital requirements and debt service, the Company will need to continue its plan to sell certain assets (See Liquidity and Capital Resources). In connection with the sale, the Company entered into a long-term, royalty bearing lease of a quarry to Oldcastle. The lease term is for a 40-year period and requires Oldcastle to pay a minimum annual royalty of $0.1 million. Royalty rates are $0.05 per ton of aggregate utilized during the first two years of the agreement, $0.10 per ton for the third through the fifth years and $0.25 per ton thereafter. The carrying value of the assets leased to Oldcastle as of June 30, 2001 was approximately $47.6 million. GOVERNMENTAL AND ENVIRONMENTAL REGULATION The Company's operations are subject to and affected by federal, state and local laws and regulations relating to the environment, health and safety and other regulatory matters. Certain of the Company's operations may from time to time involve the use of substances that are classified as toxic or hazardous substances within the meaning of these laws and regulations. Environmental operating permits are, or may be, required for certain of the Company's operations and such permits are subject to modification, renewal and revocation. The Company continually evaluates whether it must take additional steps at its locations to ensure compliance with these laws and regulations. The Company believes that its operations are in substantial compliance with applicable laws and regulations and that any noncompliance is not likely to have a material adverse effect on its business, financial condition or results of operations. However, future events, such as changes in or modified interpretations of existing laws and regulations or enforcement policies, or further investigation or evaluation of the potential health hazards of its products or business activities, may give rise to additional compliance and other costs that could have a material 5 adverse effect on us. In accordance with the Company's accounting policy for environmental costs, amounts are accrued and included in the Company's financial statements when it is probable that a liability has been incurred and such amount can be reasonably estimated. Costs incurred by the Company in connection with environmental matters in the preceding two fiscal years were not material to the Company's operations or financial condition. U.S. Aggregates, as well as other companies in the aggregates industry, produce some products containing varying amounts of crystalline silica. Excessive and prolonged inhalation of very small particles of crystalline silica has been associated with non-malignant lung disease. The carcinogenic potential of excessive exposure to crystalline silica has been evaluated for over a decade by a number of research groups including the International Agency for Research on Cancer, the National Institute for Occupational Safety and Health and the National Toxicology Program, a part of the Department of Health and Human Services. Results of various studies have ranged from classifying crystalline silica as a probable to a known carcinogen. Other studies concluded higher incidences of lung cancer in some operations was due to cigarette smoking, not silica. Governmental agencies, including the Occupational Safety and Health Administration and Mine Safety Health Administration, coordinate to establish standards for controlling permissible limits on crystalline silica. In the early 1990s, they considered lowering silica exposure limits but decided to retain existing limits. The Occupational Safety and Health Administration held stakeholder meetings in the fall of 2000, relating to the release of new rules to implement more stringent regulations controlling permissible limits on Crystalline Silica. No new regulations have been put in place through March 2001. We believe we currently meet government guidelines for Crystalline Silica exposure and will continue to employ advanced technologies as they become available to ensure worker safety and comply with regulations. An operating subsidiary of the Company has received a notice of violation regarding the removal and disposal of asbestos-containing insulation from two above ground asphalt storage tanks at one of the subsidiary's facilities and is the subject of several related state and federal civil and criminal investigations. The agencies involved include the Federal Environmental Protection Agency, the United States Department of Justice, the Occupational Safety and Health Administration and the Utah Department of Air Quality (DAQ). The site has been fully cleaned up under the supervision and with the approval of the Utah DAQ and costs related to the clean up have been recorded. In order to fully resolve the matter, the Company anticipates entering into settlements with the various governmental entities, which will involve the payment of fines and the establishment of certain environmental compliance procedures. The Company has accrued for these anticipated fines. ITEM 2. PROPERTIES In 2000, 27 of the Company's aggregates production sites each had shipments of greater than 100,000 tons. Of these sites, 10 are located on property the Company owns, two are on land owned in part and leased in part and 15 are on leased property. In addition to the Company's quarry sites, it owns other real property. In total, U.S. Aggregates owns 67 pieces of real property and has leasehold or permits or similar rights to 64 other pieces of real property as of December 31, 2001. As of the date of this 10-K, the Company owns 60 pieces of real property and has leasehold or permit or similar rights to 63 other pieces of real property. Most of these properties are subject to a mortgage. The Company's significant quarry leases expire between the year 2012 to 2039 and in some cases are renewable for additional periods. The Company believes that no single aggregate production site is of major significance to its operations. The Company's current estimated aggregate reserve position exceeds 1.3 billion tons. The yield from the extraction of reserves is based on an estimate of the volume of materials which can be economically extracted to meet current market and product applications. The Company's mining plans are developed by experienced mining and operating personnel based on internal and outside drilling and geological studies and surveys. In some cases, zoned properties must be extracted in phases as reserves in a particular area of the reserve are exhausted. U.S. Aggregates owns approximately 600 million tons and lease approximately 700 million tons of its aggregate reserves. Leases usually provide for royalty payments based on revenues from aggregates sold at a specific location. Leases usually expire after a specific time period and may be renewable for additional terms. Most leases have extension options providing for at least 20 years of operation based on 2000 extraction rates. With minor exceptions, where lease options total less than 20 years, the Company has developed and zoned additional reserves that will allow it to serve its markets on a competitive basis and ensure long term availability. Generally, reserves at the Company's aggregate production sites are adequate for in excess of 20 years production at 2000 rates of extraction. At one of the Company's quarries it is required to extract a minimum amount of 100,000 tons of 6 aggregate per year and at another quarry, 500,000 tons of aggregate per year in order to maintain its rights to mine reserves on these leased properties. The Company anticipates fulfilling these minimum extraction requirements during the lease terms. The following table summarizes the Company's production facilities:
Estimated Reserves Production 12/31/00 Year Ended 12/31/00 (000's Tons) (000's Tons) (See Notes) (See Notes) Quarry Location Lease Terms SOUTHEAST DIVISION OPERATING PLANTS The Company has six aggregate operations in Alabama located at Leased 497,000 Tarrant, Calera, O'Neal, Tuscumbia, Owned 152,000 Alabaster, and Vance and one --------- Current to 40 years aggregate plant located in Total 649,000 8,484 Cleveland, TN and two aggregate plants in Sequatchie, TN. DEVELOPING SITES The Company has one developing quarry in Alabama located at Calera and two developing quarries located in Dekalb and Mulberry, GA. Leased 287,000 Current to 30 years Owned -0- -0- -------- Total 287,000 WESTERN DIVISION MAJOR AGGREGATE OPERATIONS The company has five aggregate plants located in the Wasatch Front of Northern Utah: Northern Salt Lake City (2), Draper, Lehi, and Genola, Two in Central Utah: Centerfield and Elsinor, Three in Southern Utah: Cedar City (1) and St. George (2), one in Las Vegas and two in Boise, Idaho: Eagle and Middleton. Total Major Aggregate Operations 494,000 8,942 Other small operations in Utah, Idaho and 136,000 2,271 Arizona. ------- ------- 630,000 Total See Notes (1)-(4) 11,213
7 NOTES: ----- (1) Includes Beck Street Quarry in North Salt Lake City with reserves of 157 million tons leased effective March 31, 2001 to Oldcastle, Inc. for 40 years. (2) Includes Falcon Ridge Quarry sold effective March 31, 2001 to Oldcastle, Inc. with reserves of 18 million tons. (3) Excludes Kiegley Quarry in Genola, Utah, leased from Oldcastle, Inc. effective March 31, 2001 with reserves of 175 million tons. (4) Sales for the year ended December 31, 2000 at major operations were 7,246 thousand tons adjusted for assets in Northern Salt Lake sold in 2001. The following table presents the Company's aggregate reserves by market area. U.S. AGGREGATES, INC. AGGREGATE RESERVES BY MARKET AREA ZONED/ PERMITTED (IN MILLIONS TONS) Alabama ................................ 574 Eastern Tennessee........................ 75 Northern Utah............................ 362 Central Utah............................. 110 So. Utah/SE Nevada/NW Arizona............ 124 Idaho.................................... 34 ----- Total 1,279 ===== Management believes the raw material reserves are sufficient to permit production at present operational levels for the foreseeable future. The Company does not anticipate any material difficulty in obtaining the raw materials that it uses for production. The Company is required by the laws of various states to reclaim aggregate sites after reserves have been depleted. Each site's mining plan includes a reclamation plan, which has been developed for that site to maximize the value of the end use of the site. The Company has two aggregate production sites in Georgia. A major building materials producer has an option to lease one site under a long-term lease. The other aggregate production site is not anticipated to open in the near future. PART II ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL U.S. Aggregates conducts its operations through the quarrying and distribution of aggregate products in nine states in the two regions of the Mountain states and the Southeast. The Company's operations have the same general economic characteristics including the nature of the products, production processes, type and class of customers, methods of distribution and governmental regulations. In 2000, the Company shipped approximately 19.7 million tons of aggregates, primarily to customers in nine Southeast and Mountain states, generating net sales and loss from operations of $291.7 million and ($5.0) million, respectively. Since U.S. Aggregates' inception, the Company completed and integrated 28 business and asset acquisitions, including both operating companies and aggregate production facilities. In 2000, U.S. Aggregates, Inc. continued to expand into new geographical markets in the Southeast, Utah and Nevada. Distribution of aggregate products in the Southeast was expanded with the startup of a major distribution yard in Memphis, Tennessee. 8 Because of the Company's ambitious acquisition program, the Company acquired certain non-core assets over the last six years. These assets principally included ready mix and concrete block businesses which were acquired in connection with the acquisition of strategic quarry properties as well as quarry properties not critical to the Company's basic aggregates businesses. In 1994 we acquired Southern Ready Mix which owned two aggregate quarries and a concrete products company producing ready mix concrete and concrete pipe. The aggregates business expanded from the original two quarries to nine operating quarries with an additional three in the preliminary development phase. As the aggregate business expanded, many of our customers for aggregates were firms that the Company competed against in ready mix concrete. As the aggregates volumes grew, our ready mix concrete and block businesses became less important to our overall business and, because of their competition with our core customers, had a negative impact on the future growth of our aggregates business. In 2000, the Company outlined a plan to sell certain assets to strengthen its strategic position, reduce debt and improve liquidity. The assets the Company planned to sell included its ready mix and concrete block business in Alabama, all its ready mix concrete operations in the greater Salt Lake area (including certain quarries related to such business) as well as other non-core ready mix and concrete block business. In 2000, the Company sold its ready-mix operations in Birmingham and subsequently the remaining ready-mix concrete and concrete block operations in the Alabama market to Ready-Mix USA, Inc. The ready-mix operations in Birmingham were sold for $6.6 million in total consideration, representing a book gain of $284,000. The ready-mix and concrete block operations in the Alabama market were sold for $14.5 million in total consideration, representing a book gain of $2.2 million. Terms of the sale include the establishment of a long-term contract for the Company to provide Ready-Mix USA with aggregates for its ready-mix operations. The revenues and total assets related to the sold properties represented approximately 11% and 4%, respectively, of the Company's 2000 consolidated totals. In 2001, the Company continued its plan to sell certain assets to improve its strategic position, reduce debt and improve its liquidity. Effective as of March 30, 2001, the Company sold certain of its operations in northern Utah to Oldcastle Materials, Inc. for a total sales price of $30.9 million, inclusive of $6 million in contingent proceeds which relate to the Company obtaining zoning/permits for the operations sold, and which as of the date of this report are not recorded and have not been received. That transaction included the sale of the ready mix businesses in the greater Salt Lake area, a leasehold interest in one quarry, the subleasing of another and the sale of an asphalt plant. The sales proceeds were utilized to pay-down debt and certain operating leases and provided the Company with additional liquidity. The revenues and total assets related to the sold properties represented approximately 14% and 6%, respectively, of the Company's 2000 consolidated totals. In order to provide sufficient liquidity to fund operations, capital requirements and debt service, the Company will need to continue its plan to sell certain assets (See Liquidity and Capital Resources). In connection with the sale, the Company entered into a long-term, royalty bearing lease of a quarry to Oldcastle. The lease term is for a 40-year period and requires Oldcastle to pay a minimum annual royalty of $0.1 million. Royalty rates are $0.05 per ton of aggregate utilized during the first two years of the agreement, $0.10 per ton for the third through the fifth years and $0.25 per ton thereafter. The carrying value of the assets leased to Oldcastle as of June 30, 2001 was approximately $47.6 million. In order to provide sufficient liquidity to fund operations, capital requirements and debt service, the Company will need to continue its plan to sell certain assets (See Liquidity and Capital Resources). U.S. Aggregates markets its aggregates products to customers in a variety of industries, including public infrastructure, commercial and residential construction contractors; producers of asphalt, concrete, ready-mix concrete, concrete blocks, and concrete pipes; and railroads. In 2000, approximately 76% of the Company's aggregates volume was sold directly to customers, and the balance was used to produce asphalt (which generally contains 90% aggregates by volume) and ready-mix concrete (which generally contains 80% aggregates by volume). As a result of dependence upon the construction industry, the profitability of aggregates producers is sensitive to national, regional and local economic conditions, and particularly to downturns in construction spending and to changes in the level of infrastructure spending funded by the public sector. In fact, the Company's performance in the second half of 2000 was affected by the slowing economy and reduced government spending, especially in the Western operations. Currently, the Company does not have any customer that accounts for more than 10% of sales. Also as a result of the Company's dependence on the construction industry, the Company's business is seasonal with peak revenue and profits occurring primarily in the months of April through November. Bad weather conditions during this period can adversely affect operating income and cash flow and could therefore have a disproportionate impact on the Company's results for the full year. Quarterly results have varied significantly in the 9 past and are likely to vary significantly from quarter to quarter in the future. In the fourth quarter of 2000, poor weather conditions in Utah negatively impacted the Company's sales and profits. A material rise in the price or a material decrease in the availability of oil could and did adversely affect operating results. The cost of transporting the Company's products, the cost of processing material and the cost of asphalt are all correlated to the price of oil. Any increase in the price of oil may and did reduce the demand for the Company's products. In 2000, the Company estimates that the total increase in oil, fuel and energy costs were in excess of $9 million. As a result of competitive pressures, the Company was not able to pass through these cost increases and profits were negatively impacted. RESULTS OF OPERATIONS The following table presents net sales, gross profit, selling, general and administrative expenses, depreciation, depletion and amortization, gain on disposal of assets, restructuring charges, asset impairment charges income/(loss) from operations, and net interest expense for U.S. Aggregates:
YEARS ENDED DECEMBER 31, ---------------------------------------------------------------------- 2000 1999 1998 ------------------------ ---------------------- -------------------- (DOLLARS IN THOUSANDS) Net sales $291,689 100.0% $308,592 100.0% $237,333 100.0 Gross Profit 56,315 19.3 84,504 27.4 60,519 25.5 Selling, general and administrative expenses 35,825 12.3 32,035 10.4 25,001 10.5 Depreciation, depletion and amortization 16,816 5.8 12,851 4.2 11,098 4.7 (Gain) on disposal of assets (2,021) 0.7 -- -- -- -- Restructuring costs 2,199 0.8 -- -- -- -- Asset impairment charge 8,447 2.9 -- -- -- -- Income (loss) from operations (4,951) 1.7 39,618 12.8 24,420 10.3 Interest expense, net 19,964 6.8 16,042 5.2 14,351 6.0
2000 COMPARED TO 1999 NET SALES. Net sales decreased by $16.9 million, or 5.5% from $308.6 million in 1999 to $291.7 million in 2000. This decline was primarily isolated to the fourth quarter of the year. Through the first nine months of the 2000, the Company's net sales total of $230.1 million was slightly higher than the total of $228.6 through the same period of the prior year. However, during the fourth quarter of 2000 the Company's net sales declined by approximately $19.2 million, as processed aggregates, asphalt, and ready mix shipments declined by 16.0%, 45.5%, and 18.2%, respectively. This decrease in sales was partially caused by adverse weather conditions affecting the Western operations, as extremely wet weather, combined with early snow falls in Utah, contributed to the significant decline in activity during the quarter. Increased competition, particularly in Las Vegas, and unexpected delays in the ramp-up of TEA-21 spending further contributed to the decrease in asphalt, paving and construction sales in 2000. In the fourth quarter of 2000, the Company also felt the effects of the general slowing of the economy. For the full year, processed aggregates shipments and pricing increased by 3.2% and 3.1%, respectively, resulting in an increase of processed aggregates sales of $10.9 million for the year. However, this increase was more than offset by the declines in the asphalt, paving and construction business in 2000, which experienced an $18.2 million, or 17.5% decline in sales during the year. Ready-mix volume decreased by 8.4%, resulting in a $9.6 million decline in sales of this product in 2000. However, this decline was primarily related to the sale of the Company's ready-mix operations in Birmingham, Alabama in the first quarter of 2000. Excluding the impact of the sold businesses, ready-mix volumes decreased by 0.7%. GROSS PROFIT. Gross profit decreased by $28.2 million, or 33.4% from $84.5 million in 1999 to $56.3 million in 2000. This represented a decline in gross margin from 27.4% in 1999 to 19.3% in 2000. Gross profit from the Company's asphalt, paving and construction business declined $12.5 million, caused primarily by the increased competition in the marketplace and increased fuel, energy and liquid asphalt costs. In total, the Company experienced an increase in the cost of fuel, energy, and liquid asphalt in 2000 of $9.6 million ($4.5 million of which related to the aforementioned asphalt, paving and construction business). Heightened production costs in the Company's quarries also contributed to the decline in gross profit during the year. The Company also recorded a charge of $2.3 million within cost of sales which related to the write-off of inventory related to the restructuring plan implemented during the year. These inventories were abandoned as a result of the closure of several facilities. These factors, combined with the decline in sales for 2000, were the primary causes of the decline in gross profit for the year. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased $3.8 million, or 5.5% from $32.0 million in 1999 to $35.8 million in 2000. This increase was primarily attributable to (i) a $1.2 million increase in bad debt expense relating to collection issues identified in 2000, (ii) $0.9 million in expense for asbestos-related clean-up costs and litigation settlement, (iii) $0.4 million in data conversion costs in connection with system integration, (iv) an increase of $0.6 million in corporate overhead primarily related to additional public company expenses as the Company was public for a full year in 2000 and an increase of $0.4 million in professional fees related to the restatement of the 2000 quarterly results and (v) an increase in expenses in the regional operating units where the Company added personnel in 1999 and 2000 to meet 10 the increased demand for materials and services. The increase in bad debt expense relating to collection issues identified in 2000 was the outcome of a detailed analysis of the Company's accounts receivables at the end of the year. The amount of the general reserve was influenced by forecasts that predicted an overall softening of the economy in 2001 and therefore the possibility that the Company's ability to collect its receivables could be impaired versus its history. Additionally, specific reserves were increased based upon increased agings and the judgment that certain customers were unlikely to be able to remit their amounts due. GAIN ON DISPOSAL OF ASSETS. The Company recorded a $2.0 million gain on the two sales of the Company's ready-mix operations in Alabama in 2000. RESTRUCTURING CHARGES. During the fourth quarter of 2000, the Company began execution of its restructuring plan, which was comprised of four components: (i) closing an asphalt operation in Nevada; (ii) disposing of certain operations in Idaho; (iii) consolidating certain operations in Utah; and (iv) reducing corporate overhead. In conjunction with this plan, the Company recorded an asset write-down of $1.1 million related to the decision to close certain facilities. In addition, the Company recorded $1.0 million of facility closure costs and $0.1 million of severance costs associated with the restructuring plan, resulting in a total charge of approximately $2.2 million in the fourth quarter of 2000. All of these costs have been paid as of year end. The Company determined to undertake these actions in order to eliminate unprofitable operations and to generate cash from the sale of assets and the reduction of accounts receivable and inventory. The Company determined to use the resulting cash to repay debt. ASSET IMPAIRMENT CHARGES. During the fourth quarter of 2000, the Company made its decision to sell certain construction materials operations in Utah and Idaho. In conjunction with this decision, the Company performed an analysis of the carrying value of its related long-lived assets, and determined that the carrying value exceeded the fair market value of the assets by approximately $8.4 million. The Company therefore recorded an impairment charge to write-down these assets to their estimated fair market value during the fourth quarter of 2000. These assets were sold subsequent to year-end. DEPRECIATION, DEPLETION and AMORTIZATION. Depreciation, depletion and amortization increased $3.9 million from $12.9 million in 1999 to $16.8 million in 2000. This increase was primarily due to the additional capital investments made by the Company in 1999 and 2000. INCOME/(LOSS) FROM OPERATIONS. The Company reported a net loss from operations of $5.0 for the year ended December 31, 2000 compared with operating income of $39.6 million reported for 1999. However, this loss from operations included several unusual charges incurred in 2000, primarily the restructuring charge of $2.2 million, the asset write-down of $8.4 million, and the restructuring-related inventory write-off of $2.3 million described above. INTEREST EXPENSE, NET. Net interest expense increased $3.9 million from $16.0 million in 1999 to $19.9 million in 2000. This increase was primarily due to an increase in debt levels, as well as an increase in interest rates on outstanding borrowings during the year. 1999 COMPARED TO 1998 NET SALES. Net sales for 1999 increased by $71.3 million, or 30.0% from $237.3 million in 1998 to $308.6 million in 1999. This increase consisted of $39.5 million in additional net sales generated from the 1998 acquired businesses, and an increase in net sales from existing businesses of $31.8 million. The increase in sales from existing businesses was due to strong demand for the Company's aggregates and related products. Total shipments of aggregates increased to 19.1 million tons for 1999, from 15.8 million tons in 1998, an increase of 20.9%. Revenues were further enhanced by 32.8% and 24.7% increases in asphalt and ready-mix volumes, respectively. The Company also experienced an increase in selling prices of approximately 4% for its aggregates and related products. GROSS PROFIT. Gross profit for 1999 increased 39.6% to $84.5 million from $60.5 million for 1998. The increase consisted of $6.6 million additional gross profit from its 1998 acquired businesses and an increase in gross profit from its existing business of $17.4 million, a 34.6% increase. The increase in gross profit at its existing business was attributable to higher volumes and improved production efficiencies. Overall gross margins increased to 28.3% in 1999 from 26.5% in 1998. Gross margins from its existing business were 30.6% in 1999, compared to 11 26.5% in 1998. Margins from existing businesses increased due to higher selling prices and the leverage gained on fixed costs due to higher sales. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Selling, general and administrative expenses increased to $32.0 million for 1999 from $25.0 million for 1998, due to the inclusion of the 1998 acquired businesses and increased selling and administrative costs at existing businesses. As a percentage of net sales, selling, general and administrative expenses decreased to 10.7% for 1999 from 10.9% for 1998, due to the leveraging of these costs over a larger sales base. DEPRECIATION, DEPLETION AND AMORTIZATION. Depreciation, depletion and amortization increased to $12.9 million for 1999 from $11.1 million for 1998, primarily as a result of the inclusion of the 1998 acquired businesses and additional capital expenditures made in 1999. As a percentage of net sales, its depreciation, depletion and amortization expenses decreased to 4.3% from 4.9% for the same periods primarily due to the leveraging of these costs over a larger sales base. INCOME FROM OPERATIONS. Income from operations in 1999 increased 62.2% to $39.6 million compared to $24.4 million for 1998 because of the factors discussed above. INTEREST EXPENSE, NET. Net interest expense increased to $16.0 million for 1999 from $14.4 million for 1998 as a result of the inclusion of a full year of interest expense on the purchase of the 1998 acquired businesses in mid year of 1998 and other expansion and capital needs, offset by the debt reduction as a result of the 1999 initial public offering. LIQUIDITY AND CAPITAL RESOURCES From its inception in 1994, the Company has financed its operations and growth from the issuance of preferred and common stock, sales of assets, debt and operating cash flow. It has also used operating leases to finance the acquisition of equipment used in the business. In 2000, the Company began a strategy of evaluating and selling certain assets in order to improve the Company's liquidity. At December 31, 2000, the Company has $213.5 million of long-term debt outstanding. This debt level increased from $169.6 million outstanding as of December 31, 1999. The debt is primarily used to finance working capital and capital expansion. The terms of the Company's debt agreements are discussed further below and in Note 9 to the consolidated financial statements included herein. The Company leases aggregate production sites, facilities, and equipment under operating leases with terms generally ranging from 5 to 40 years. The future minimum commitment under these leases was $124.5 million in 2000, $104.7 million in 1999 and $67.9 million in 1998. The total minimum rentals under noncancelable operating leases for the next 12 months are $14.7 million. During 2000, the Company generated $2.8 million of cash from operations, a $24.2 million reduction from the $27.0 million generated in 1999. This decrease was primarily due to the decrease in operating income and the increase in interest expense incurred in 2000. In 1998, the Company generated $3.2 million of cash flow from operations, $23.8 million less than the total generated in 1999. The improvement in 1999 over 1998 was primarily due to improvements in earnings and a decrease in working capital requirements during the period. As of December 31, 2000 and 1999, working capital, exclusive of current maturities of debt, assets held for sale and cash items, totaled $30.0 million and $40.8 million, respectively. Net cash used in investing activities for 2000 was $26.4 million. The Company expended $40.9 million for the additions to property, plant and equipment, offset by proceeds of $14.5 million on the two sales of the Company's ready-mix operations in Alabama. A substantial portion of the capital expenditures related to the completion of the new facility at O'Neal, and expanded capacity and material handling capability at Pride. In addition, the Company made extensive improvements related to the expansion of the Mountain state quarries, including Point of the Mountain, Beck Street, Ekins, and Lehi. Net cash used in investing activities was $60.0 million in 1999. Of this amount, $63.1 million was for the additions to property, plant and equipment and $0.3 million was used for acquisitions, offset by proceeds of $3.4 million from the sale of assets. Net cash used in investing activities in 1998 totaled $100.9 million. Of this amount, $83.9 million was used for acquisitions, $67.8 million of which was for the purchase of Monroc. Additionally, $27.3 million of the 1998 investing expenditures were for the purchase of property, plant and equipment offset by proceeds of $10.4 million from the sale of certain properties, including a depleted sand and gravel deposit and an unused ready-mix plant site at Monroc. 12 Cash provided by financing activities was $24.1 million in 2000, $34.6 million in 1999 and $100.0 million in 1998. During 2000, $28.2 million of cash was generated from additional borrowings offset by $2.3 million of additional debt issuance costs and $1.8 million for dividends paid. During 1999, $65.7 million of cash was generated from the sale of stock through the initial public offering, which was used to reduce the Company's total debt. All of the cash provided by financing in 2000 and 1998 was from increased borrowings under existing or restructured debt agreements. In January 2000, the Company entered into a Third Amendment to its senior secured credit facility, which increased the revolving loan facility from $60 million to $90 million. In November 2000, the Company entered into a Fourth Amendment with the existing lenders pursuant to its senior secured credit facility effective September 29, 2000. The agreement amended, amongst other things, (i) the automatic and permanent reduction of the revolving facility to occur on December 31, 2001 and June 30, 2002 for the amount of $20 million and $10 million, respectively, (ii) all existing financial covenants, (iii) limitations on capital expenditures and acquisitions, (iv) the use of proceeds from the sale of assets, and (v) limitations on the Company's ability to pay dividends. The Company also similarly amended its agreements with the holders of its existing senior subordinated notes to parallel the covenants in the Fourth Amendment to the Bank of America credit facilities. The Company was in compliance with all existing debt covenants at December 31, 1998 and 1999. As a result of the Company's poor financial results in 2000, the Company was in default of several financial covenants pursuant to the Fourth Amendment to the senior credit facility and Amendment No. 3 to its Subordinated Note Agreement at December 31, 2000. These financial covenants include minimum Interest Coverage Ratios, minimum Fixed Charge Coverage Ratios and maximum Leverage Ratios. The following table includes the required and actual ratios for the twelve-month period ended Deceber 31, 2000:
Requirements pursuant Requirements pursuant to Senior CREDIT to Subordinated Note Ratio AGREEMENT AGREEMENT ACTUAl --------- ---------------------- ----- Minimum Interest Coverage 1.75 1.60 1.02 Minimum Fixed Charge Coverage .80 .65 .42 Maximum Leverage 5.75 6.50 10.43
The Company subsequently entered into amendments (Fifth and Sixth Amendments) with its senior secured lenders which waive all existing covenant defaults, adjust future financial covenants, defer certain principal payments until March 31, 2002, modify the debt repayment schedule, establish a borrowing base on the revolver, provide the Company with additional liquidity from the sale of certain assets, establish monthly interest payment schedules, provide for increased interest rates to Alternate Base Rate (equal to the higher of .50% above the Federal Funds Rate and the Bank of America reference rate) plus 5.00% or Eurodollar Rate plus 6.00%, of which 2.00% is capitalized and added to principal for the period through March 31, 2002. The Sixth Amendment also provides for a fee of $1.25 million if the senior credit facility is not paid in full by March 31, 2002. The Company also entered into an amendment with its subordinated note holder to waive existing covenant defaults and to accept deferral of interest payments through May 22, 2002 in exchange for a 2.00% increase in interest rates, a deferred fee of $900,000 and warrants for 671,582 shares with a nominal exercise price. In connection with the amendments of the senior secured credit facility and the subordinated notes, GTCR Fund IV has committed to loan to the Company $2 million as junior subordinated debt at an interest rate of 18.00%. The junior subordinated debt does not mature until 120 days after senior secured facilities and subordinated notes are paid in full. GTCR Fund IV will receive a deferred fee of $450,000 and warrants for 435,469 shares with a nominal exercise price in exchange for its agreement to provide the Company with the junior subordinated debt. 13 On December 22, 2000, the Company entered into a derivative in order to fix interest rate risks on $37 million of its senior credit facility borrowings. An interest rate swap contract, which will expire in two years, hedges the exposure related to interest rate risk. As of December 31, 2000, the difference between the contract amounts and fair value was immaterial. The Company believes that its internally generated cash flow (including the sales of assets) and access to existing credit facilities are sufficient to meet liquidity requirements necessary to fund operations, capital requirements and debt service. To the extent these sources of liquidity are not available or fall short of expectations, the Company may need to obtain additional sources of financing. There can be no assurance that such financing will be available or, if available, on terms favorable to the Company. If the Company is unable to obtain such additional financing, there could be a material adverse effect on the Company's business, financial condition and results of operation. EFFECT OF INFLATION Management believes that inflation has not had a material effect on U.S. Aggregates. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS In April 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-5, Reporting on the Costs of Start-Up Activities ("SOP 98-5"). Effective January 1, 1999, SOP 98-5 requires that all costs related to start-up activities, including organizational costs, be expensed as incurred. The cumulative effect of the adoption of SOP 98-5 impacted its net earnings by $84, which has been recorded as a nonoperating expense in the first quarter of 1999. In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities. In June 1999, the FASB issued SFAS No, 137, Accounting for Derivatives and Hedging Activities - Deferral of the Effective Date of SFAS No. 133. In June 2000, the FASB issued SFAS No, 138, Accounting for Certain Derivatives and Certain Hedging Activities, an amendment of FASB Statement No. 133. Statement 133, as amended, establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The Statement requires that changes in the derivative instrument's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Special accounting for qualifying hedges allows a derivative instrument's gains and losses to offset related results on the hedged item in the income statement, to the extent effective, and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. The Company has adopted Statement 133 effective January 1, 2001. The Company has applied Statement 133 to only those hybrid instruments that were issued, acquired, or substantively modified after December 31, 1998. On December 22, 2000, the Company entered into a derivative in order to fix interest rate risks on $37 million of its senior credit facility borrowings. An interest rate swap contract, which will expire in two years, hedges the exposure related to interest rate risk. This instrument will be accounted for under the provisions of this statement in 2001. If statement 133 had been applied at December 31, 2000, the change in fair value would be immaterial. In March 2000, the FASB issued FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation - an interpretation of APB Opinion No. 25" (FIN 44). FIN 44 clarifies the application of APB Opinion No. 25, and among other issues clarifies the following: the definition of an employee for purposes of applying APB Opinion No. 25; the criteria for determining whether a plan qualifies as a noncompensatory plan; the accounting consequence of various modifications to the terms of previously fixed stock options or awards; and the accounting for an exchange of stock compensation awards in a business combination. FIN 44 is effective July 1, 2000, but certain conclusions in FIN 44 cover specific events that occurred after either December 15, 1998 or January 12, 2000. The adoption of FIN 44 did not have a material impact on the Company's consolidated financial statements. The Emerging Issues Task Force issued No. 00-10, Accounting for Shipping and Handing Fees and Costs ("EITF 00-10), which requires that amounts billed to customers related to shipping and handling be classified as revenue and that the related costs should be included in costs of goods sold. The Company previously reported a portion or its shipping revenue as a reduction of shipping costs. The Company adopted EITF 00-10 in the fourth 14 quarter of 2000 and has reflected the impact of this pronouncement in the financial statements for all periods presented herein. The Company reports freight and delivery charges as sales and the related cost of freight and delivery is reported as cost of products sold. Gross profit has not changed from amounts that have been reported prior to the adoption of EITF 00-10. The adoption of this resulted in addition sales and costs of products sold of $12,833 in 2000, $10,411 in 1999, $8,595 in 1998, $3,672 in 1997, and $1,668 in 1996. FORWARD LOOKING STATEMENTS Certain matters discussed in this report contain forward-looking statements and information based on management's belief as well as assumptions made by and information currently available to management. Such statements are subject to risks, uncertainties and assumptions including, among other matters, future growth in the construction industry; the ability of U.S. Aggregates, Inc. to complete and effectively integrate its acquired companies operations; to fund its liquidity needs; and general risks related to the markets in which U.S. Aggregates, Inc. operates. Should one or more of these risks materialize, or should underlying assumptions prove incorrect, actual results may differ materially from those projected. Additional information regarding these risk factors and other uncertainties may be found in the Company's filings with the Securities and Exchange Commission. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 on November 16, 2001. U.S. AGGREGATES, INC. /s/ James A. Harris ------------------------ James A. Harris Chairman of the Board 15