Item 1
Business
Company Overview
American Rock Salt Company LLC (sometimes referred to herein as the “Company” or “we” or “us”) is a producer of highway deicing rock salt in North America. We own and operate a rock salt mine located approximately 35 miles south of Rochester, New York. Our mine is located in the heart of the western and central New York and Pennsylvania snow belt, with on-site access to truck and rail transportation.
Our principal customers are government agencies that purchase rock salt for ice control on public roadways. Our served market area encompasses New York, Pennsylvania, Ohio and eight other states. New York and Pennsylvania accounted for approximately 89.3% of our sales for fiscal year 2007.
The construction of our mine was substantially completed in December 2001. Our mine has a base production capacity of over 3.0 million tons per year with an incremental swing capacity (additional production achieved by adding overtime in response to favorable market conditions) of approximately 1.5 million tons per year, to achieve a total production level of 4.5 million tons per year.
From fiscal year 2001 to 2003, we increased our sales volume from 1.0 million tons to 3.2 million tons, and increased our revenues from $29.1 million to $95.5 million. This increase in sales corresponded to the increase in the production capacity of our mine; as capacity came online, our market share correspondingly increased. As a result of our strategic initiatives to increase profitability by optimizing pricing, bidding, and distribution while reducing freight costs, we have successfully increased revenues and gross income from $95.5 million and $26.7 million, respectively, in fiscal 2003 to $121.3 million and $29.3 million in fiscal 2007. For the upcoming 2007-2008 season we expect our awarded tonnage to increase as compared to the prior two winter seasons. No single customer accounted for more than 5% of our annual sales during fiscal year 2007.
We have mineral rights to over 10,000 underground acres, of which more than 80% are located within a one-mile radius of our drill holes. Based solely on data extrapolated from areas within that one-mile radius, we believe that we have approximately 6,694 acres of proven salt reserves with approximately 51 years of remaining mineable reserves at the current production rate of 3.0 million tons per year. In addition, we operate 21 distribution centers in eight states for storage and distribution of rock salt and we operate a fleet of approximately 1,000 rail cars. We believe that our cash flows are not materially impacted by economic cycles due to the stable end use markets for rock salt and the lack of cost effective alternatives.
We are located adjacent to Interstate 390, with an entrance approximately 3/10 of a mile from our front gate. We also have on-site rail loading capabilities and ready access to three Class A long-haul rail lines. The following maps show the location of, and access to road and rail transportation from, our mine:
Industry Overview
Over the past 30 years, the aggregate tons produced and price per ton sold in the United States highway deicing salt industry have increased by 3.1% and 7.0% per annum, respectively, resulting in a total average annual market increase of 10.1% during the period. While actual annual demand for rock salt is subject to variations in snow and ice conditions, the lack of cost effective alternatives, steadily increasing highway infrastructure and the overriding concern for public safety insulates the demand for rock salt from economic cycles. Rock salt is the principal deicing agent used in the United States due to its effectiveness, low cost, and availability. It is easy to ship, handle, store, apply, and is non-toxic and relatively harmless to the environment when properly used. The deicing rock salt market is a highly regional one with a limited number of producers. Transportation and handling costs constitute a significant portion of the overall delivered cost of rock salt. As a result, the proximity of a mine to end users can provide a significant cost advantage.
New York State and the surrounding regions are some of the hardest hit segments of the nation in terms of severe snow and ice conditions. Our primary markets in western and central New York and Pennsylvania are consistently impacted by lake-effect snow. Harsh winters and a very large, mobile population cause New York State and its local municipalities consistently to be the largest consumers of rock salt in the nation. We estimate that annual purchases by New York State and its local municipalities over the last four winter seasons have averaged over 3.2 million tons. Pennsylvania is also a major consumer of rock salt, but no salt is mined within the state. We estimate that, over the same period, annual purchases by Pennsylvania and its local municipalities averaged approximately 1.7 million tons.
Background
Company History
Our mine was first conceived by Akzo Nobel Salt, Inc. (including its predecessors) in the early 1960’s to eventually replace and/or supplement its rock salt mine at nearby Retsof, New York, which had been in operation since 1885. Mineral rights were acquired over time and state and local planning decisions were made in anticipation of our mine’s eventual development including (a) proper zoning, (b) bounding the site by Interstate Route 390 (I-390) to the west, Route 408 to the south, and Route 63 to the east, and (c) leaving room for a railroad spur to pass under I-390.
In March 1994, the Retsof mine began flooding due to a roof failure in one area of the mine. The roof failure occurred under a section of the Genesee River Valley that contained an underground aquifer which was the source of the inflows. In response, Akzo accelerated the development process for the construction of the new mine and spent nearly two years completing the construction design plan and securing the necessary mining and environmental permits required for a new salt mine. As part of the mine permitting process, all concerns raised by the flooding of the Retsof mine were studied and addressed to the satisfaction of the appropriate regulators and the local communities. However, in August 1996, the Netherlands-based senior management of Akzo’s parent decided to exit the United States rock salt business and entered into an agreement to sell nearly all of its United States salt operations-except the assets related to our mine-to Cargill, Inc., which operated the only other rock salt mine in New York State, located in Lansing, about 10 miles north of Ithaca.
In January 1997, American Rock Salt was formed and the Company’s founding members entered into a $4.2 million asset purchase agreement with Akzo to acquire the assets related to our mine. The assets consisted primarily of mining and environmental permits, surface acreage, mineral rights and mineral rights options, certain mining equipment and certain business information and records (consisting principally of all project related surveys, geological exploration studies, engineering reports, construction drawings, and design plans). Management believes it purchased these assets at a significant discount to their original cost. The Company did not acquire any interest in the Retsof mine when it acquired mineral and mine rights from Akzo.
Our founding members negotiated a package of governmental grants, loans, tax credits, waivers, and abatements valued at over $25 million to help develop our mine. Included in the package were over $8.5 million in grants from New York State, a $9.8 million grant to the Genesee & Wyoming Railroad for construction of a railroad spur, a $0.6 million grant to the local water authority for the mine area, and a 30-year local property tax discount agreement.
In May 1997, we began selectively building a market presence by utilizing salt made available as a result of an April 1997 antitrust consent decree (the “Cargill Settlement”) entered into by Cargill and, collectively, the U.S. Department of Justice and the Attorneys General of the States of New York, Pennsylvania, and Ohio. The Cargill Settlement was intended to preserve competition in the bidding and sale of deicing salt in the Northeast interior market in the period preceding the completion of our mine. The Cargill Settlement was a four-year salt supply agreement, under which Cargill agreed to supply the Company with approximately 2.3 million tons of salt at a substantial discount from market prices and to assign 11 distribution stockpiles, including the related operator agreements and all property and site improvements at the stockpiles, free of charge.
Construction of our mine began in November 1998. The work was performed by a joint venture of Frontier-Kemper Contractors, Inc. and Flatiron Construction, LLC (together, the “EPC Contractor”) under a fixed-price (subject to limited exceptions), turnkey engineering, procurement and construction contract (the “EPC Contract”). The EPC Contract was originally valued at approximately $70.7 million plus related costs of approximately $1.0 million. The EPC Contract did not include any of the mobile mining equipment necessary to operate our mine, which was separately purchased by the Company. Our mine was turned over to the Company in December 2001. Through August 2002, the management of the Company made modifications to improve the mine, fine-tuned its processes, and ramped-up production. The Company attained full operating capacity during fiscal 2003.
On June 12, 2007, the Company entered into an Agreement of Merger (the “Merger Agreement”) dated as of June 12, 2007, but effective as of June 13, 2007, with ARS Mergeco LLC, a New York limited liability company (“Mergeco”) and a wholly-owned subsidiary of American Rock Salt Holdings LLC, a New York limited liability company (“Holdings”). Upon consummation of the merger and pursuant to the terms of the Merger Agreement, each of the membership interests in the Company was converted into a corresponding membership interest in Holdings, Mergeco was merged with and into the Company, and the Company became a wholly-owned subsidiary of Holdings. Holdings is a holding company and has no assets or operations other than its ownership of all of the equity interests of the Company.
In connection with the holding company reorganization described above, Holdings entered into a seven and one-half year $100.0 million aggregate principal amount senior unsecured term loan facility on July 3, 2007 with Morgan Stanley Senior Funding, Inc. as the initial lender and administrative agent. In connection with that loan, the Company became a Restricted Subsidiary, as defined, of Holdings. Holdings is required to cause the Company to pay a cash dividend to Holdings annually, commencing April 2008, which will allow the timing of the dividend to be consistent with past practices of the Company. The amount of the dividend must be no less than 75.0% of its “available free cash flow”, wherein “available free cash flow” includes a number of financial components in its determination but cannot exceed the amount the Company is permitted to pay as a cash distribution under its existing credit facilities or the indenture governing its senior secured notes. As a Restricted Subsidiary, the Company is subject to financial and other restrictions that are comparable to existing restrictions under the Company’s senior secured notes.
Mineral Rights
We currently own or have the rights to approximately 10,000 acres, of which more than 80% are located within a one-mile radius of our drill holes. Based solely on data extrapolated from areas located within that one-mile radius, we believe that we have approximately 154 million tons of proven mineral rights. We pay a royalty related to the acquisition of mineral rights of 2.5% of the gross income from the mine as reported for purposes of computing percentage depletion for federal income tax purposes. The consistency and quality of the underlying salt deposit has been verified by numerous geological surveys performed by Akzo and its predecessors. As part of the verification of the salt reserves and of the mining permit application process, the consulting firm of Alpha Geosciences, Inc. was retained by Akzo to conduct the geologic exploration program for the mine and to provide geologic logs of holes drilled to establish the thickness, depth, continuity, and quality of the salt reserves.
We are currently mining the B6 Salt Seam, which averages over 19 feet in thickness over the more than 8,000 acres of mineral rights owned by the Company within a one-mile radius of our drill holes and equates to approximately 300 million tons of salt reserves. This is the same seam that was mined continuously for over 110 years at the Retsof mine. To ensure mine working stability, an average of approximately six feet of salt in total is left in place in the mine’s roof and floor, and with a 60% extraction ratio in the production areas, the remaining 40% is retained as solid permanent pillars. The approximately 180 million remaining tons of salt equal the future mineable reserves. Based on tests conducted to date, exploratory results, and the quality control measures discussed below, and further based on mining history within the region of our mine, management believes that all of such reserves meet applicable industry standards, including standards requiring an average sodium chloride (NaCl) content of over 97%. A total of approximately 19 million tons have been extracted through September 30, 2007. Depletion of salt deposits and mineral rights occurs as the minerals are extracted, based on units-of-production and engineering estimates of total reserves. The reserve estimates are primarily a function of the area and volume covered by the mining rights and estimates of extraction rates utilized by the Company with the reasonable expectation of reliably operating the mine on a long-term basis. The above estimates are based solely on data extrapolated from areas located within a one-mile radius of our drill holes. We also own approximately 2,000 additional acres of mineral rights beyond that one-mile radius. Established criteria for proven and probable reserves are primarily applicable to mining deposits of discontinuous metal, where both presence of ore and its variable grade need to be precisely identified. However, the massive continuous nature of evaporative deposits, such as salts, require proportionately less data for the same degree of confidence in mineral reserves, both in terms of quantity and quality. Reserve studies performed by Akzo, its predecessors, and a third-party engineering firm suggest that our salt reserves most closely resemble proven reserves and we have therefore classified our reserves as proven reserves.
We have established Quality Assurance/Quality Control (QA/QC) measures to ensure that our products meet the specifications of the customers we serve. Among other things, we conduct random sample testing on a daily basis to determine the physical properties, chemical properties, and moisture content of our salt. This testing is designed to ensure that our salt meets customer standards and the industry standards published by ASTM International, including standards related to sodium chloride (NaCl) content.
Production Method
We use the drill and blast mining method at our mine. Rooms are mined in a planned pattern by undercutting, drilling, and blasting. An undercutter cuts a horizontal slot or kerf along the floor of the advancing room to provide a free face for blasting. A drilling rig drills a series of holes into the face and an ammonium nitrate-fuel oil mixture is pneumatically packed into the holes. The room is then blasted, creating a “muck” pile of salt ready to be transported to underground crushing and screening stations. Large mining vehicles move the blasted salt to conveyor belts, which transport the salt to an underground screening plant, where further crushing and screening, if necessary, takes place. After crushing and screening, salt is automatically hoisted to the surface where it is directly loaded into railcars or trucks, or added to an on-site stockpile for later truck shipment. We believe that we have one of the most automated systems in the industry. After salt is placed on the conveyor belt, the processing and loading functions are completely automated. We believe that the mine and the operating equipment are maintained in good working condition.
Seasonality
The “salting” season runs primarily from October to March with the highest demand typically in December, January, and February. Consumption of highway deicing rock salt is impacted by the severity of winter weather. While it is true that individual snow storms with large accumulations require a great deal of salt, numerous small snow and ice storms tend to require more salt. For example, we believe that a 2-inch snowstorm requires nearly as much salt as a 6-inch storm. It is the type of storm that dictates the frequency of application and the total amount of salt needed. In addition, freezing rain and ice storms also require substantial amounts of salt.
Due to the fact that weather conditions in the Company’s market areas were much milder than normal during the first quarter of fiscal year 2007, the Company accumulated a substantial amount of inventory of salt available for distribution to its customers. As a result, the Company elected to temporarily cease production of salt commencing December 26, 2006 for approximately five weeks. By mid-January vigorous winter weather patterns returned, producing snowfall nearly every day through mid-March within the market areas we serve. This allowed for the return of the workforce in February and the resumption of mining operations, which continued seven days a week to meet demand. Winter weather continued into the month of April, enhancing late season sales in much of our market area.
The fiscal years ended September 30, 2007 and September 30, 2006 overall presented unseasonably warm and dry winter weather patterns, when compared to historical averages. In spite of this, our market area continued to provide sufficient winter weather conditions to require salting of roadways, which in turn allowed us to experience satisfactory financial results. For the fiscal year ended September 30, 2007 we reached $121.3 million in gross sales which was a 16.0% increase over our previous high of $104.6 million in the fiscal year ended September 30, 2005. We believe our ability to produce favorable financial results despite milder than normal weather for a prolonged period is a product of our physical location in the market which includes consistent “lake effect” snow.
Marketing and Distribution
Bid Market
Our principal customers are states, counties, and municipalities that purchase bulk salt for ice control on public roadways. Annual supply contracts generally are awarded on the basis of lowest price of tendered bids once the purchaser is assured that the minimum requirements for purity, service, and delivery can be met. The bid market eliminates the need for us to invest significant time and effort in marketing and advertising or to have a large direct sales force or network of dealers or distributors.
Salt is contracted at a “delivered price,” wherein the mine is responsible for substantially all of the freight and handling costs incurred to deliver the salt to the customer. Generally, the delivered price increases as the distance between the customer and the mine increases. While in general each mine can best supply its local area more profitably than competitors, the competitive advantage is directly impacted by factors such as mode of freight, available inventory and fuel prices, thereby at times allowing us to supply distant customers as profitably as we supply our local customers.
Logistics
In our industry, salt sold to customers within 100-150 miles of a mine is usually shipped by truck directly to the customer from the stockpile located at a mine. All other salt is typically first shipped by rail to various strategically located stockpiles, stored until needed, and then shipped by truck from the stockpiles to customers. Typically, salt sold locally is more profitable due to: (i) lower transportation costs, (ii) lower handling costs as salt is moved only once from a mine to the customers, and (iii) elimination of expenses for off-site stockpile storage facilities. Nonetheless, as a result of continuing improvements in our logistical capabilities, the gross profit per ton of salt sold from stockpiles has been steadily increasing.
We sell to our target markets by distributing approximately half of our salt by direct truck shipments from our mine to customers in western New York and western Pennsylvania, while distributing approximately half by railcar to our 21 stockpiles which serve the rest of New York and Pennsylvania and the nine other states where we have sales. The concentrated demand period for rock salt, limited customer storage facilities and delivery distance considerations necessitate off-site stockpiles in order to deliver rock salt within 3-5 days of an order. The Company currently operates 21 such off-site stockpiles and plans to add one additional stockpile in the next 12 months. The Company currently operates a fleet of approximately 1,000 railcars on a year-round basis to transport the salt from our mine to our stockpiles. In addition, we are located adjacent to Interstate 390 and have on-site rail loading capabilities and ready access to three Class I long-haul rail lines.
Market Area
New York State and the area east and southeast of Lake Ontario and Lake Erie in particular, is one of the hardest hit areas of the country in terms of winter severity. Bad winters coupled with a very large, mobile population result in New York State consistently being the largest consumer of rock salt in the United States. The harsh winter weather that western and central New York and Pennsylvania experience is in part attributable to a phenomenon known as lake-effect snow. Lake-effect snow is generated from the temperature contrast between cold arctic air moving west-to-east over the relatively warm waters of the Great Lakes. Generally, the greater the contrast between arctic air and water temperature, the greater the amount of snowfall. Lake-effect snows are common over the Great Lakes region because these large bodies of water can hold their summer heat well into the winter, rarely freeze over, and provide the long fetch (or the distance an air mass travels over water) which allows the air to gain the heat and moisture required to fuel the snow squalls. Furthermore, because winds accompanying arctic air masses generally originate from a southwest to northwest direction, lake-effect snow typically falls on the east or southeast sides of the lakes. Lake Ontario and Lake Erie stretch west-to-east lengthwise, which places western New York and Pennsylvania, located immediately east and southeast of the lakes, directly in the path of the largest west-to-east fetch in the United States.
Competition
Highway deicing salt is a highly regional market with a number of competitors that have significant cost advantages in the proximity of their production facilities. The geographic dispersion of rock salt mines allows some of our major competitors to prosper in their respective locales. United States rock salt mines are concentrated around the five major underground salt deposits in the United States and the primary means of competition among rock salt producers is price. There are three large integrated producers in the North American deicing market: Cargill, Inc., Compass Minerals Group, Inc., and Morton International. In addition to the three large nationally recognized companies, there are several smaller regional producers of highway deicing salt. There are also importers of salt into North America, and the imports are generally confined to the eastern seaboard of the United States.
Employees
The Company had 235 full-time salaried and hourly employees as of September 30, 2007. The Company’s hourly production employees are covered by a labor agreement with the United Steel Workers International Union, AFL-CIO-CLC, formerly the Paper, Allied-Industrial, Chemical & Energy Workers International Union, Local 1-0763, which currently expires in October 2008.
Salt mining is considerably less hazardous than other forms of underground mining. In fact, the Company enjoys a reduced workers’ compensation insurance rate for the mine’s underground workers as a result of a more favorable experience rating. In addition, there are no known long-term health problems associated with salt mining.
Environmental, Health and Safety Matters
The production and distribution of deicing products are subject to various federal, state and local laws and regulations that regulate: (i) the conduct of our mining operations, including safety procedures followed by our employees;
(ii) the use of our products by our customers; (iii) the handling of raw materials; (iv) the air and water quality impacts of our facility; (v) the disposal, storage and management of hazardous and solid wastes; (vi) the remediation of contamination at our facility and sites; and (vii) post-mining land reclamation. The regulations governing these activities are subject to change from time to time, so we cannot estimate with certainty the costs that we will incur to assure future compliance. We intend to comply with all applicable regulatory requirements associated with our business operations and will implement such modifications to our practices and to our facilities as is necessary.
We did not make any material capital expenditures in order to comply with applicable environmental, health and safety standards during fiscal 2007.
Item 1A
Item 1A
Risk Factors
You should carefully consider the following risks and all of the information set forth in this annual report on Form 10-K. The risks facing our Company are not limited to those listed below. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may also materially and adversely affect our business, financial condition, or results of operations.
The demand for our products changes seasonally and is dependent upon weather conditions.
Our business is highly seasonal, with operating results varying from quarter to quarter. The “salting” season runs primarily from October through March, with the highest demands typically in December, January, and February. During our history, we have generated approximately 78% of our sales during the months of December through March, when the need for highway deicing is at its peak. We need to produce and stockpile sufficient highway deicing salt during the remainder of the year to meet estimated demand for the winter season.
Consumption of highway deicing salt is impacted by the severity of winter weather, including the number of snow storms and the accumulations associated with those storms. Weather conditions which impact our highway deicing product line include levels of temperature, precipitation, snow days, and duration and timing of snowfall in our relevant geographic markets. Lower than expected sales during this period could have a material adverse effect on the timing of our cash flows and therefore our ability to service our obligations with respect to our indebtedness.
We operate in a highly competitive market.
Highway deicing salt is a highly regional market with a number of competitors that have significant cost advantages associated with the proximity of their production facilities to their customers. Although the primary means of competition is price, there are a number of other considerations affecting competition including product performance, cost of transportation in the distribution of salt, brand reputation, quality of client service, and customer support. To remain competitive, we may need to invest in production, marketing, customer service and support, and our distribution networks. We may have to adjust the prices of some of our products to stay competitive. We cannot assure you that we will have sufficient resources to continue to make such investments or that we will maintain our competitive position. Some of our competitors have greater financial and other resources than we do.
We must generally bid competitively to acquire contracts.
Principal customers in our industry are states, counties, and municipalities that purchase bulk salt for ice control on public roadways. Annual supply contracts generally are awarded on the basis of the lowest price of tendered bids once the purchaser is assured that its minimum requirements for quality, service, and delivery can be met. While this bid process mitigates the need to make expenditures for marketing and reduces the need for a large sales force, it requires us to rely primarily on our ability to be price competitive to maintain our existing accounts and acquire new accounts. The loss of accounts as a result of the competitive bid process could have a material adverse effect on our business.
We may be subject to certain penalties if we fail to meet performance requirements in our sales contracts.
We are a party to various salt sales contracts which include specific performance provisions governing delivery and product specifications. If we fail to meet our performance requirements, we could be subject to penalties. The amount of such performance penalties, if any, is dependent upon our failure to meet such requirements, as well as other factors such as weather patterns and related product demand in our served markets. As a result, we cannot estimate the likelihood or amount of any such performance penalties.
We may be adversely affected by the environmental regulations to which we are subject.
We are subject to numerous environmental, health and safety laws and regulations in the United States, including laws and regulations relating to land reclamation and remediation of hazardous substance releases, and discharges to air and water. For example, the U.S. Comprehensive Environmental Response, Compensation, and Liability Act, or “CERCLA,” imposes liability, without regard to fault or to the legality of a party’s conduct, on certain categories of persons (known as “potentially responsible parties”) who are considered to have contributed to the release of “hazardous substances” into the environment. Although we are not currently incurring material liabilities pursuant to CERCLA, we may in the future incur material liabilities, under CERCLA and other environmental cleanup laws, with regard to our mining facilities, adjacent or nearby third party facilities or offsite disposal locations. Under CERCLA, or its various state equivalents, one party may, under certain circumstances, be required to bear more than its proportional share of cleanup costs at a site where it has liability if payments cannot be obtained from other responsible parties. Liability under these laws involves inherent uncertainties. Violations of environmental, health and safety laws are subject to civil, and in some cases criminal, sanctions.
Continued government and public emphasis on environmental issues can be expected to result in increased future investments for environmental controls at ongoing operations, which will be charged against income from future operations. Present and future environmental laws and regulations applicable to our operations may require substantial capital expenditures and may have a material adverse effect on our business, financial condition, and results of operations.
Our operations are dependent on our having received the required permits and approvals from governmental authorities.
We hold numerous environmental, mining, and other permits and approvals issued by governmental authorities that are necessary to maintain operations at our facilities. A decision by a governmental agency to deny or delay issuing a new or renewed permit or approval, or to revoke or substantially modify an existing permit or approval, could have a material adverse effect on our ability to continue operations at the affected facility. Expansion of our existing operations also is predicated upon securing the necessary environmental or other permits or approvals.
Our business could suffer if we are unsuccessful in negotiating new collective bargaining agreements.
We have a collective bargaining agreement covering our hourly production employees with the United Steel Workers International Union, AFL-CIO-CLC, Local 763, which will expire in October 2008. Although we believe that our relations with our employees are good, we cannot assure you that we will be successful in negotiating new collective bargaining agreements, that such negotiations will not result in significant increases in the cost of labor or that a breakdown in such negotiations will not result in the disruption of our operations.
If we lose our senior management, our business may be adversely affected.
The success of our business is dependent on our senior management, as well as on our ability to attract and retain other qualified personnel. We cannot assure you that we will be able to attract and retain the personnel necessary for the development of our business. The loss of the services of key personnel or the failure to attract additional personnel as required could have a material adverse effect on our business, financial condition, and results of operations. We do not currently maintain “key person” life insurance on any of our key employees.
We face competition from both existing products and products under development.
There are numerous alternative deicing products, both in existence and under development. While these products are currently believed to be substantially more expensive and less effective than rock salt, there can be no assurances that certain of the current or developing alternative deicing products will not become as or more effective than salt. There can be no assurances that alternative deicers, or new deicing agents to be used with salt, will not gain widespread acceptance and result in diminished demand for rock salt which could have a material adverse effect on our business.
Flooding in our mine could seriously impact our ongoing operations.
The Retsof mine, which was located approximately seven miles from our mine and had extensive workings below the Genesee River Valley, flooded in 1994. There can be no assurances that our mine, despite our use of more conservative mining methods and our direction of mining operations away from the valley, will not be exposed to the risk of flooding, which could have a material adverse effect on our business.
Mining is a highly regulated activity.
Mining activities are subject to a variety of governmental regulations, including the need to comply with laws relating to the reclamation of the land and other environmental legislation. Compliance with such regulation requires significant capital outlays. Existing, as well as future, legislation and regulation concerning mining operations could cause additional expense, operating restrictions, and delays in maintaining mining operations, the extent of which cannot be predicted.
Our mining permit will expire in October 2011. Permit renewal is an automatic action by the New York Department of Environmental Conservation (“DEC”) for mines wishing to continue in business, absent flagrant violation of permit terms or refusal of a permittee to correct violations of one or more permit conditions. In either of such cases, the DEC can revoke a permit or delay renewal until violations are corrected.
Pending legislation which affects environmental laws applicable to mining includes proposals which may substantially alter the Clean Water Act, Safe Drinking Water Act, and the Endangered Species Act. There can be no assurances that adverse regulatory developments and operating requirements will not impair our ability to operate our mine and will not have a material adverse effect on our business.
The business of mining is subject to a variety of risks and hazards, not all of which can be covered by insurance.
The business of salt mining is generally subject to a number of risks and hazards, including environmental hazards, industrial accidents, labor disputes, unusual or unexpected geological conditions, changes in the regulatory environment and natural phenomena such as earthquakes, earth movement, and floods. Such occurrences could result in damage or impairment to, or destruction of, mineral properties or production facilities, personal injury or death, property or environmental damage, delays in mining, business interruption, monetary losses, and legal liability. While insurance is not commonly available for all these risks, we do maintain insurance against risks that are typical and reasonably insurable in the salt mining industry and in amounts that we believe to be reasonable but which will contain limits, deductibles, exclusions, and endorsements. There can be no assurance that the coverage and amount of insurance will be sufficient for the needs of the Company.
We depend upon geological surveys and studies and there can be no assurance as to the accuracy of such studies.
Continued salt production is dependent upon the existence of an adequate quantity and quality of salt in our salt deposits. While numerous geological surveys and studies have been performed to determine the size and quality of our salt deposits, there can be no assurances that our salt deposits will not be subject to premature depletion or contain pockets where quality is below production grade. Inadequate quantity or quality of our salt deposits would have a materially adverse effect on the results of operations of our business.
We have certain agreements with our affiliates which may create conflicts of interest.
We have entered into agreements with or have had certain transactions with related parties, including the payment of mine acquisition costs to persons who are members of Holdings. We have also obtained legal services from a law firm with which several of our affiliates are partners, and certain of our affiliates have received management, advisory and service fees from us. These transactions may create conflicts of interest which may not be resolved in the manner most favorable to holders of notes.
We are controlled by Holdings, which in turn is controlled by its principal members, whose interests in our business may be different than those of the holders of our notes.
Joseph G. Bucci, Gunther K. Buerman, and Neil L. Cohen, our principal founding members, collectively hold over 90% of the Class F membership interests in Holdings, which is our sole member. Because of their ownership interests
in Holdings, Messrs. Bucci, Buerman, and Cohen have the power to elect all three of the Class F managers on our Board of Managers. Under the terms of our operating agreement, each Class F manager has three votes on all matters submitted to a vote of the Board of Managers, and each Class A manager has one vote on all matters submitted to a vote of the Board of Managers. Therefore, Messrs. Bucci, Buerman, and Cohen collectively have voting control over all matters submitted to a vote of the Board of Managers other than matters in which one or more of such individuals has a financial interest. Additionally, Messrs. Bucci, Buerman, and Cohen comprise the Executive Committee of the Board of Managers, which generally exercises the authority of the Board of Managers except with respect to certain items required to be submitted to a vote of the entire Board of Managers in accordance with our operating agreement.
As a result of the majority ownership interest by Messrs. Bucci, Buerman and Cohen, their interests could conflict with those of the holders of our notes. For example, if we encounter financial difficulties or are unable to pay our debts as they mature, the interests of those individuals as equity holders in Holdings might conflict with the interests of a holder of our notes, as a debt holder. Messrs. Bucci, Buerman and Cohen or their affiliates might also have an interest in pursing transactions that, in their judgment, could enhance their equity investments in Holdings, even though such transactions might involve risks to the holders of our notes.
Our substantial indebtedness could adversely affect our financial condition and prevent us from fulfilling our obligations under our indebtedness.
As of September 30, 2007, we had approximately $128.7 million of indebtedness, including $37.7 million of indebtedness under our bank facility, $91.0 million of indebtedness under our senior secured notes, and $0.1 million of indebtedness under our promissory note payable to the Empire State Development Corporation. As a result, we are a leveraged company. This level of leverage could have important consequences to our financial condition, including the following:
•
making it difficult for us to satisfy our obligations under the senior secured notes and our other indebtedness;
•
limiting our ability to obtain additional debt financing or sell equity interests to fund our working capital, capital expenditures and other requirements;
•
limiting our flexibility in planning for, or reacting to, changes in our industry;
•
placing us at a competitive disadvantage to those of our competitors who operate on a less leveraged basis;
•
making us more vulnerable to adverse changes in economic conditions;
•
making it more difficult for us to make payments on the senior secured notes due to the debt service requirements of our other indebtedness; and
•
requiring us to dedicate a substantial portion of our cash flow from operations to the repayment of our indebtedness, which would reduce the funds available for other purposes.
In addition, the indenture governing our senior secured notes and our bank facility contain financial and other restrictive covenants that may limit our ability to engage in activities that may be in our long-term best interests. Our failure to comply with those covenants could result in an event of default which, if not cured or waived, could result in the acceleration of all of our indebtedness.
Despite our substantial indebtedness we may still incur significantly more debt. This could exacerbate the risks described above.
The terms of the indenture governing our senior secured notes permit, and our bank facility, permits us to incur additional indebtedness in the future. We are able to borrow up to $30.0 million under our working capital facility, subject to certain conditions. As mentioned above, the Company had outstanding borrowings in the amount of $16.0 million at September 30, 2007 under the working capital facility.
The proceeds from the collateral securing our indebtedness may not be sufficient to pay all amounts owed under such indebtedness.
If we default on our bank facility or our senior secured notes, the proceeds from the sale of the collateral may not be sufficient to satisfy in full our obligations under the bank facility and the notes. An intercreditor agreement sets forth the relative rights to the collateral of the lenders under the bank facility and the holders of the senior secured notes. Proceeds from the sale of the collateral will be used first to satisfy obligations under the bank facility and, thereafter, the senior secured notes. The lenders under the bank facility will have the sole ability to control foreclosure and sale of the collateral. The amount to be received upon such a sale would depend upon numerous factors, including, among others, the timing, manner, and ability to sell the collateral in an orderly sale, the condition of the collateral, the condition of the national and local economies, the availability of buyers and similar factors. The book value of the collateral should not be relied upon as a measure of realizable value for such assets. By their nature, portions of the collateral are illiquid and may have no readily ascertainable market value. Accordingly, there can be no assurance that the collateral could be sold in a short period of time or that the proceeds obtained from such a sale would be sufficient to pay all amounts owing under the bank facility and the senior secured notes. Additionally, the terms of the indenture governing our senior secured notes allow us to issue additional notes provided that we meet the Consolidated Fixed Charge Coverage Ratio (as defined in the indenture). Any additional notes issued pursuant to the indenture will rank equal to the notes and will be entitled to the same rights and priority with respect to the collateral. Thus, the issuance of additional notes pursuant to the indenture may have the effect of significantly diluting the ability of a holder of our senior secured notes to recover payment in full from the then existing pool of collateral.
To the extent that holders of other secured indebtedness or third parties enjoy liens (including statutory liens), whether or not permitted by the indenture governing the senior secured notes, such holders or third parties may have rights and remedies with respect to the collateral securing the senior secured notes that, if exercised, could reduce the proceeds available to satisfy the obligations under the senior secured notes.
The ability of the trustee to foreclose on the collateral securing the senior secured notes may be limited.
The right of the trustee to repossess and dispose or otherwise exercise remedies in respect of the collateral securing the senior secured notes upon the occurrence of an event of default is likely to be significantly impaired by applicable bankruptcy law if a bankruptcy proceeding were to be commenced by or against us prior to the trustee having repossessed and disposed of the collateral or otherwise completed the exercise of its remedies with respect to the collateral. Under the United States Bankruptcy Code, a secured creditor such as the trustee is prohibited from repossessing its security from a debtor in a bankruptcy case, or from disposing of security repossessed from such debtor, without bankruptcy court approval. Moreover, the Bankruptcy Code permits the debtor to continue to retain and to use collateral even though the debtor is in default under the applicable debt instruments if the secured creditor is given “adequate protection.” The meaning of the term “adequate protection” may vary according to circumstances, but it is intended in general to protect the value of the secured creditor’s interest in the collateral securing the obligations owed to it and may include cash payments or the granting of additional security, if and at such times as the bankruptcy court in its discretion determines, for any diminution in the value of such collateral as a result of the stay of repossession or disposition or any use of the collateral by the debtor during the pendency of the bankruptcy case. In view of the lack of a precise definition of the term “adequate protection” and the broad discretionary powers of a bankruptcy court, it is impossible to predict how long payments under the senior secured notes could be delayed following commencement of a bankruptcy case, whether or when the trustee could repossess or dispose of the collateral or whether or to what extent holders of the senior secured notes would be compensated for any delay in payment or loss of value of the collateral through the requirement of “adequate protection.” Furthermore, if a bankruptcy court determines that the value of the collateral is not sufficient to repay all amounts due on the notes; holders of the senior secured notes would hold “under-secured claims.” Applicable federal bankruptcy laws do not permit the payment or accrual of interest, costs, and attorney’s fees for “under-secured claims” during a debtor’s bankruptcy case.
Moreover, the trustee may need to evaluate the impact of the potential liabilities before determining to foreclose on collateral consisting of real property because a secured creditor that holds a lien on real property may be held liable under environmental laws for the costs of remediating or preventing release or threatened releases of hazardous substances at such real property. Consequently, the trustee may decline to foreclose on such collateral or exercise remedies available if it does not receive indemnification to its satisfaction from the holders of the senior secured notes.
The trustee’s ability to foreclose on the collateral securing the notes may be subject to lack of perfection, the consent of third parties, prior liens, and practical problems associated with the realization of the trustee’s lien on the collateral.
The lien on the collateral securing the senior secured notes is junior in some respects to the lien securing our bank facility.
Although the senior secured notes are secured by substantially all of our assets, we maintain a $62.1 million bank facility, and the lien on the collateral securing that bank facility is senior to the lien on the collateral securing the notes in accordance with an intercreditor agreement. As a result, upon any distribution to our creditors in a bankruptcy, liquidation or reorganization or similar proceeding relating to us or our property, the lenders under the bank facility will be entitled to be paid in full from the proceeds of the collateral securing such debt before any payment may be made with respect to the senior secured notes.
Restrictive covenants in our bank facility and the indenture governing the senior secured notes may restrict our ability to operate our business.
Our bank facility and the indenture governing the senior secured notes contain covenants that limit our ability, among other things, to:
•
incur additional indebtedness or contingent obligations;
•
make certain payments or investments;
•
create liens;
•
pay dividends and make other distributions;
•
redeem subordinated debt;
•
enter into transactions with our affiliates;
•
sell assets;
•
acquire the assets of, or merge or consolidate with, other entities; and
•
allow subsidiaries to issue capital stock.
Our ability to comply with these covenants may be affected by events beyond our control. We cannot assure you that we will satisfy these covenants. A breach of any of these covenants could result in a default under the indenture governing the senior secured notes or our bank facility, which could allow all amounts outstanding thereunder to be declared immediately due and payable, in which case we may be required to adopt an alternative strategy that may include actions such as reducing or delaying acquisitions and capital expenditures, selling assets, restructuring or refinancing our indebtedness, seeking additional equity capital or filing for bankruptcy. If we default under our bank facility, we could be prohibited from making any payments on the senior secured notes. In addition, the lenders under our bank facility could require immediate repayment of the entire principal amount of their loans. If those lenders require immediate repayment, we may not be able to repay them and also repay the senior secured notes in full.
In addition, the indenture governing the senior secured notes and our bank facility require us to maintain financial ratios. We may not be able to maintain these ratios. Covenants in our bank facility may also impair our ability to finance future operations or capital needs or to enter into acquisitions or joint ventures or engage in other favorable business activities.
To service our indebtedness, including the senior secured notes, we will require a significant amount of cash. The ability to generate cash depends on many factors beyond our control.
Our ability to make payments on and to refinance our indebtedness, including our senior secured notes, and to fund planned capital expenditures will depend on our ability to generate cash in the future. This, to a certain extent, is subject to general economic, financial, competitive, legislative, regulatory, climate, and other factors that are beyond our control.
We cannot assure you that our business will generate sufficient cash flow from operations that our business plans will be implemented as scheduled, or that future borrowings will be available to us in an amount sufficient to enable us to pay our indebtedness, including our senior secured notes, or to fund our other liquidity needs. We may need to refinance all or a portion of our indebtedness, including the senior secured notes, on or before maturity. We cannot assure you that we will be able to refinance any of our indebtedness, including the bank facility and the senior secured notes, on commercially reasonable terms or at all.
We may not have the ability to raise the funds necessary to finance any change of control offer required by the indenture governing the senior secured notes.
If we undergo a change of control (as defined in the indenture governing our senior secured notes) we may need to refinance large amounts of our debt, including the senior secured notes and borrowings under our bank facility. If a change of control occurs, we must offer to buy back the senior secured notes for a price equal to 101% of the principal amount of the senior secured notes, plus any accrued and unpaid interest. We cannot assure you that there will be sufficient funds available for us to make any required repurchases of the notes upon a change of control. The bank facility will provide that the occurrence of certain change of control events with respect to us will constitute a default under the bank facility. Therefore, if a change of control were to occur, we may be required to repay or refinance all borrowings under the bank facility. Any future debt which we incur may also contain restrictions on repayment upon a change of control. If any change of control occurs, we cannot assure you that we will have sufficient funds to satisfy all of our debt obligations.
The market price for our senior secured notes may be volatile.
Historically, the market for non-investment grade debt has been subject to disruptions that have caused substantial volatility in the prices of securities similar to the senior secured notes. The market for the senior secured notes, if any, may be subject to similar disruptions. Any such disruptions may adversely affect the value of our senior secured notes.
Item 1B
Item 1B
Unresolved Staff Comments
None.
Item 2
Item 2
Properties
Information regarding our mine and properties, including a map showing the location of our principal mining facility, is included in Item 1, “Business,” of this report. In addition, we own and are a party to non-mining leases of property that permit us to perform activities ancillary to our mining operations, such as storage, depot, and warehouse leases. We believe that all of the leases were entered into on market terms.
Item 3
Item 3
Legal Proceedings
The Company is involved in various routine legal proceedings from time to time. These typically involve commercial claims, personal injury claims, and workers’ compensation claims. While the Company cannot predict the outcome of such proceedings, it does not believe that these proceedings will have a material adverse effect on its business.
Item 4
Item 4
Submission of Matters to a Vote of Security Holders
There were no matters brought to the holder of our membership interests for a vote during the fourth quarter of fiscal 2007.
Part II
Item 5
Item 5
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
There is no public market for the equity securities of the Company.
Holders
The Company’s outstanding common equity consists of Class A Units and Class F Units. As of November 15, 2007, there were 6,250 Class A Units outstanding, all of which were held by Holdings, and 12,750 Class F Units outstanding, all of which were held by Holdings.
Dividends
The Company may from time to time make distributions to its member subject to the restrictions of the Company’s bank facility and the indenture governing its senior secured notes, which contain certain covenants and financial ratios restricting the Company’s ability to make such distributions. During fiscal 2007, the Company made a permitted cash distribution in the amount of $6.0 million from fiscal year end 2006 earnings.
Item 6
Item 6
Selected Financial Information
The following table presents selected financial information. The historical financial information for the years ended September 30, 2007, 2006 and 2005 is derived from our audited financial statements included elsewhere in this Form 10-K. The historical information for the fiscal years ended September 30, 2004 and September 30, 2003 is derived from our audited statements, respectively, not presented herein.
The information included in the following table should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the audited financial statements and accompanying notes thereto included elsewhere in this Form 10-K.
(1)
The increase in Other Income, net, during fiscal year 2006 is due to the $2.1 million received in connection with the settlement of the litigation with the EPC Contractor, as discussed in Note 8 to our financial statements included elsewhere in this Form 10-K.
(2)
Because we are a limited liability company that has elected to be treated as a partnership for tax purposes, all of our profits and losses are allocated to our member and the Company is not subject to a taxation on those amounts.
(3)
For purposes of computing the ratio of earnings to fixed charges, earnings consist of net income before fixed charges (the company does not incur income taxes). Fixed charges consist of interest expense including the amortization of deferred debt issuance costs, the amortization of capitalized interest, and the interest component of our operating rents.
Item 7
Item 7
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The statements in this discussion regarding the industry outlook, our expectations regarding the future performance of our business, and the other non-historical statements in this discussion are forward-looking statements. These forward-looking statements are subject to numerous risks and uncertainties, including, but not limited to, the risks and uncertainties described in the section entitled “Risk Factors” included in Item 1A of this Form 10-K. You should read the following discussion with the section entitled “Risk Factors” and the financial statements and notes thereto included elsewhere in this annual report on Form 10-K.
Company Overview
We are a producer of highway deicing rock salt in North America. We own and operate a rock salt mine located approximately 35 miles south of Rochester, New York. Our mine is located in the heart of the western and central New York and Pennsylvania snow belt, with on-site access to truck and rail transportation.
Salt mines and mining operations are long-lived assets. Based solely on data extrapolated from areas within a one-mile radius of our drill holes, we believe that our mine currently has over 51 years of remaining mineable reserves at the current production rate of 3.0 million tons per year.
While winter weather conditions in individual markets can vary from year to year, our target markets in New York and Pennsylvania are the most impacted by harsh winter snow and ice conditions and overall demand across the region is relatively stable. Our served markets in New York, Pennsylvania, Ohio and eight other states have an aggregate regional demand for over 9.3 million tons per year of rock salt, and Pennsylvania and New England currently have no operating rock salt mines.
Most of our sales are based on annual supply contracts with set pricing and reserved volume generally awarded on the basis of lowest price of bids tendered. This allows us to plan our production and staffing schedule, and our inventory placement and sales distribution strategy for the upcoming season. We routinely adjust the size of our workforce, as well as the number of hours and days worked, to reflect seasonal demand.
From fiscal year 2001 to 2003, we increased our sales volume from 1.0 million tons to 3.2 million tons, and our revenues from $29.1 million to $95.5 million. This increase in sales corresponded to the increase in the production capacity of our mine; as capacity came online, our market share correspondingly increased. As a result of our strategic initiatives to increase profitability by optimizing pricing, bidding, and distribution while reducing freight costs, we have successfully maintained our 3.2 million ton sales volumes while increasing revenues and gross income from $95.5 million and $26.7 million, respectively, in fiscal 2003 to $121.3 million and $29.3 million in fiscal 2007. For the 2007-2008 season, we expect our awarded contract tonnage to increase as compared to the prior two winter seasons.
Critical Accounting Policies
In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, or GAAP, we are required to make estimates and assumptions that affect the reported amount of assets and liabilities and the disclosure of contingent assets and liabilities at the date of our financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates. We have identified the following as critical accounting policies that are most important to the portrayal of our financial condition and results of operation.
Salt Deposits, Mineral Rights, and Mine Development Costs
Salt deposits and mineral rights are underground reserves with respect to which the Company has extraction rights. Mine Development Costs are primarily underground assets used in the production of salt with amortization lives linked to the quantity of available production reserves. Depletion of salt deposits and mineral rights and amortization of mine development costs occur as the minerals are extracted based on units-of-production and engineering estimates of total
reserves. As such, our mineral rights interests include estimates of probable mineral reserves. As such, the carrying values, depletion and amortization expense charges for these assets are dependent upon estimates of proven mineral reserves. The impact of revisions to our reserve estimates is recognized on a prospective basis.
Mine Reclamation Cost
We have calculated the estimated net future cost of dismantling, restoring, and reclaiming our mine and its related mine site in accordance with federal, state, and local regulatory requirements, and in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 143, Accounting for Obligations Associated with the Retirement of Long-Lived Assets. SFAS No. 143 requires that we recognize the legal obligation of our mine reclamation costs at fair value as a liability when incurred and capitalize such costs by increasing the carrying amount of our mine assets.
Impairment of Long-Lived Assets
In the event that relevant facts and circumstances indicate that the carrying amounts of our long-lived assets may be impaired, an evaluation of recoverability is performed. If such an evaluation is required, the estimated future undiscounted cash flows associated with the asset would be compared to the asset’s carrying amount to determine if a write-down is required. If our review indicates that the assets will not be recoverable, the carrying value of the Company’s assets would be reduced to their estimated fair value.
Other Significant Accounting Policies
Other significant accounting policies not involving the same level of estimates and assumptions as those discussed above are important to an understanding of our financial statements. For example, our policies related to our inventory allowances, revenue recognition, and legal contingencies require judgments and estimates.
Results of Operations
The following table sets forth certain historical financial information for the fiscal years ended September 30, 2007 2006, and 2005. The historical financial information for the fiscal year ending September 30, 2005 has been adjusted as discussed in footnote 2 to the accompanying financial statements. We record sales to customers based upon total billings including shipping and handling costs necessary to transport our products from the production or storage sites to the delivery point. In establishing our prices to our customers, we must take into account the estimated cost of transportation of our products since we assume responsibility for such costs. We manage the profitability and attractiveness of existing and prospective customers and product lines by analyzing, among other factors, the customer billings net of related shipping and handling costs. This allows for a more comparable look at the relative profitability of our business as well as providing a more accurate analysis of the business trends.
The following table and discussion should be read in conjunction with the information contained in our financial statements and the notes thereto included elsewhere in this Form 10-K.
Fiscal Year Ended September 30, 2007 Compared to Fiscal Year Ended September 30, 2006
Sales
Total sales for the fiscal year ended September 30, 2007 of $121.3 million increased $25.6 million, or 26.8%, as compared to $95.7 million during fiscal 2006. Sales primarily consist of bulk salt sales, as well as packaged salt sales. The increase was primarily attributable to a 17.9% increase in tonnage sold combined with a 7.6% increase in sales price per ton. The increase in tonnage sold was due to an increase in seasonal tonnage commitments as well as the late arriving but significantly colder and snowier winter weather conditions in fiscal 2007, as compared to fiscal 2006.
Gross Income
Gross income for fiscal 2007 of $29.3 million decreased by $2.5 million, or 8.0%, compared to $31.8 million for fiscal 2006. The decrease in gross income was primarily attributable to a 22.3% increase in average cost of sales per ton partially offset by a 7.6% increase in revenue per ton sold over fiscal 2006. Total cost of sales for the year increased by $28.2 million or 44.1% as compared to fiscal 2006, while on a percentage of sales basis, total cost of sales increased by 9.1%. Total cost of sales increased as a result of the combination of the 17.9% increase in volume and the 22.3% increase in cost of sales per ton. Gross profit per ton decreased by 22.0% as a result of the increase in cost of sales price per ton, partially offset by the increase in the average sales price per ton referred to above. The increase in cost of sales per ton is primarily due to the temporary cessation of salt production and inventory staging activities during the first and second quarters of fiscal 2007 and increased freight and handling due to higher fuel costs. Many of these factors were related to the milder than normal winter weather we experienced during those first two fiscal quarters, which resulted in less efficient absorption of our production, freight and handling costs during fiscal year 2007.
Operating Expenses
Operating expenses of $7.6 million for fiscal 2007 decreased $0.3 million, or 3.8%, as compared to $7.9 million for fiscal 2006. Operating expenses primarily consist of selling, general and administrative expenses, miscellaneous overhead and non-production related depreciation and amortization expenses. The decrease in operating expenses for fiscal 2007 is primarily attributable to a $0.2 million decrease in accounting expense related to the change in accounting principle we adopted during fiscal 2006, as discussed in Note 2 to our audited financial statements included elsewhere in this Form 10-K, as well as a $0.1 million decrease in other miscellaneous general and administrative expenses.
Other Income (Expense)
Other expense of $11.3 million for fiscal 2007 increased $1.5 million, or 15.3%, as compared to $9.8 million in fiscal 2006. This increase is related to the $2.1 million received in connection with the settlement of the litigation with the EPC Contractor in fiscal year 2006, as discussed in Note 8 to our financial statements included elsewhere in this Form 10-K, in addition to an increase of $0.1 million in interest expense related to our bank facility. The increase in other expense was partially offset by a $0.4 million decrease in bond interest expense related to our repurchase of certain of our 9 1/2% Senior Secured Notes due 2014 during the first and fourth quarters of fiscal 2007 and a $0.3 million increase in interest income related to a higher average cash balance in the daily credit sweep.
Fiscal Year Ended September 30, 2006 Compared to Fiscal Year Ended September 30, 2005
Sales
Total sales for the fiscal year ended September 30, 2006 of $95.7 million decreased $8.9 million, or 8.5%, as compared to $104.6 million during fiscal 2005. Sales primarily consist of bulk salt sales, as well as packaged salt sales. The $9.0 million decrease was primarily attributable to a 16.5% decrease in tonnage sold partially offset by a 9.5% increase in sales price per ton. The decrease in tonnage sold was due to significantly milder and drier winter weather conditions in fiscal 2006, as compared to fiscal 2005.
Gross Income
Gross income for fiscal 2006 of $31.8 million increased by $1.3 million, or 4.3%, compared to $30.5 million for fiscal 2005. Gross income increased despite significantly lower sales volume and increased per ton freight and handling costs due primarily to the increase in sales price per ton. Cost of sales related to freight and handling for fiscal 2006 decreased by $3.1 million or 6.7% corresponding to the 16.5% decrease in tons sold offset by an 11.78% increase in the cost per ton due to increased fuel prices. Cost of sales related to products for fiscal 2006 decreased $7.2 million or 25.5%. The decrease is primarily attributable to the 16.5% decrease in tonnage sold and a 10.8% decrease in the production cost per ton.
Operating Expenses
Operating expenses of $7.9 million for fiscal 2006 decreased $0.3 million, or 3.6%, as compared to $8.2 million for the same period in fiscal 2005. Operating expenses primarily consist of selling, general and administrative expenses, miscellaneous overhead and non-production related depreciation and amortization expenses. The decrease in operating expenses for fiscal 2006 is primarily attributable to a decrease of $0.5 million in legal and consulting fees as a result of the settlement of the litigation with the EPC Contractor, as discussed in Note 8 to our audited financial statements included elsewhere in this Form 10-K, offset by an increase in accounting fees of approximately $0.2 million primarily related to expense incurred for the amended filings of our historical financial statements in connection with the change in accounting principle discussed in Note 2 to our audited financial statements included elsewhere in this Form 10-K.
Other Income (Expense)
Other expense of $9.8 million for fiscal 2006 decreased $1.5 million, or 13.6%, as compared to $11.3 million in fiscal 2005. Other expense consists primarily of interest expense of $12.0 million on our credit facility and other related financing charges, which increased by $0.6 million, or 5.6%, offset by the $2.1 million received in connection with the settlement of the litigation with the EPC Contractor, as discussed in Note 8 to our financial statements included elsewhere in this Form 10-K.
Liquidity and Capital Resources
Historical Cash Flow
We have used the cash generated from operations, borrowings under revolving lines of credit, and borrowings under construction and post-construction financing facilities to meet our working capital needs and to fund capital expenditures. Our ongoing cash flows have served to significantly strengthen our working capital position, while funding debt service, capital expenditures and permitted distributions to our members. Additional information regarding our cash flows for fiscal 2007 is provided below. For any short or long term cash requirements we will continue to access funding through our revolving line of credit.
Fiscal Year Ended September 30, 2007 Compared to Fiscal Year Ended September 30, 2006
Operating Activities-Net cash provided by operating activities was $22.1 million for fiscal 2007 compared to $8.4 million during fiscal 2006. The $13.7 million increase is primarily related to the late but vigorous winter weather and associated increased sales occurring in fiscal year 2007 which resulted in an $18.4 million positive cash flow change related to a decrease in inventory from increased sales across our market region when compared with fiscal 2006 and an increase in sales late in the season, offset by a $4.4 million decrease in cash flow related to an increase in accounts receivable due to the increased sales late in the fourth quarter of fiscal 2007.
For the fiscal year ended September 30, 2007, the $22.1 million in net cash from operating activities was primarily attributable to net income of $10.4 million and a decrease in inventory of $7.5 million related to the fiscal year 2006 build up of inventory and the subsequent late arriving but vigorous winter weather and increased sales occurring in fiscal year 2007. Cash provided by operating activities during fiscal 2007 was also the result of normal depreciation and amortization of $5.8 million; a decrease in prepaid expenses and other assets of $0.4 million, a result of timing of the amortization of our prepaid expenses; and increases in accrued expenses and accounts payable of $0.7 million and $0.8 million, respectively, a result of late timing of invoicing. This positive cash flow activity was offset by an increase in accounts receivable of $3.6 million, a result of an increase in sales late in the fourth quarter of fiscal 2007.
Investing Activities-Net cash flow used in investing activities for fiscal 2007 and 2006 was $3.2 million and $4.1 million respectively. The $0.9 million decrease is attributable to a decrease in the purchase of property and equipment in fiscal 2007 as compared to prior year.
Financing Activities-Net cash used in financing activities during fiscal 2007 was $18.8 million as compared to $4.1 million used during fiscal 2006. During the fiscal year ended September 30, 2007, repayments, net of borrowing, on our revolving credit facility totaled $5.1 million, and we used an additional $6.0 million to repurchase certain of our 9 1/2% Senior Secured Notes due 2014 and made principal payments of $2.0 million under our term loan facility. We also paid a distribution of $6.0 million to our then-current members during fiscal 2007, out of fiscal year end 2006 earnings. The $14.7 million increase in cash used in financing activities was used to decrease our borrowing under our senior credit facility, repurchase certain of our 9 1/2% Senior Secured Notes due 2014 and pay a higher distribution to our then-current members.
Fiscal Year Ended September 30, 2006 Compared to Fiscal Year Ended September 30, 2005
Operating Activities - Net cash provided by operating activities was $8.4 million for fiscal 2006 compared to $6.5 million in net cash provided during fiscal 2005. The $1.9 million increase was attributable to an increase in net income of $3.1 million, offset primarily by an increase in inventory of $10.9 million corresponding to lower sales volume in fiscal 2006 as compared to fiscal 2005.
Investing Activities - Net cash flow used in investing activities for fiscal 2006 and 2005 was $4.1 million and $12.7 million, respectively. For fiscal 2006, net cash flow used in investing activities primarily consisted of capital expenditures. For fiscal 2005, net cash flow used in investing activities consisted primarily of $1.6 million of capital expenditures, $4.8 million in capitalized mine development expenses resulting from the settlement of litigation with the EPC Contractor, as discussed in Note 8 to our audited financial statements included elsewhere in this Form 10-K, $4.2 million of mine construction retention previously withheld and owed to the EPC Contractor, and payment of $1.0 million with respect to the EPC contractor’s last invoice dated December 2001. Both mine construction retention and last invoice amounts had been previously recorded as accrued liabilities on the Company’s balance sheet.
Financing Activities - Net cash used in financing activities was $4.1 million for fiscal 2006 as compared to $5.4 million provided by financing activities during fiscal 2005. During September 2006, we repurchased $3.0 million of our 9 1/2 % Senior Secured Notes due 2014. Also during fiscal 2006, we made $3.7 million in principal payments under our term loan facility, and paid distributions in the aggregate amount of $4.6 million to our then-current members. This compares to $27.9 million of borrowings on long-term debt, $17.2 million used for net repayments on our revolving line of credit, $0.7 million principal repayments on our term loan and distribution to members of $24.1 million during fiscal 2006. In addition, during fiscal 2005 we had $2.0 million in cash provided by financed payables related to the timing of the litigation settlement payment discussed in Note 8 to our audited financial statements included elsewhere in this Form 10-K.
Contractual Cash Obligations
The following table summarizes our contractual cash obligations as of September 30, 2007, and the effect such obligations are expected to have on our liquidity and cash flows in future periods.
Seasonality
We experience a substantial amount of seasonality in salt sales. The result of this seasonality is that sales and operating income are generally higher in the first and fourth quarters and lower during the second and third quarters of each calendar year. Sales of highway and consumer deicing salt products are seasonal as they vary based on the severity of the winter conditions in areas where the product is used. Following industry practice, we and our customers stockpile significant quantities of deicing salt in the second, third and fourth calendar quarters.
Due to the fact that weather conditions in the Company’s market areas were much milder than normal during the first quarter of fiscal year 2007, the Company accumulated a substantial amount of inventory of salt available for distribution to its customers. As a result, the Company elected to temporarily cease production of salt commencing December 26, 2006 for approximately five weeks. By mid-January vigorous winter weather patterns returned, producing snowfall nearly every day through mid-March within the market areas we serve. This allowed for the return of the workforce in February and the resumption of mining operations which continued seven days a week to meet demand. Winter weather continued into the month of April, enhancing late season sales in much of our market area.
The fiscal years ended September 30, 2007 and September 30, 2006 overall presented unseasonably warm and dry winter weather patterns, when compared to historical averages. In spite of this, our market area continued to provide sufficient winter weather conditions to require salting of roadways, which in turn allowed us to experience satisfactory financial results. When each of the past two winter seasons is viewed as compared to an average winter season, our financial results were very strong. For the fiscal year ended September 30, 2007, we exceeded $120.0 million in gross sales for the first time in our history. We believe our ability to produce favorable financial results despite milder than normal weather for a prolonged period is a product of our physical location in the market which includes consistent “lake effect” snow.
EBITDA
EBITDA represents net income before interest expense, depreciation, depletion, and amortization (the Company does not incur income taxes). EBITDA does not represent and should not be considered as an alternative to net income or cash flow from operations, as determined by GAAP, and our calculations of EBITDA may not be comparable to those reported by other companies. Investors should carefully consider the specific items included in our computation of EBITDA. EBITDA is included herein because it is a basis upon which we assess our liquidity position and performance and because certain covenants in our borrowing arrangements are tied to similar measures. EBITDA is also included herein because we believe that it presents useful information to investors regarding a company’s ability to service and/or incur indebtedness. This belief is based on negotiations with lenders who have indicated that the amount of indebtedness we have been permitted to incur is
based, in part, on measures similar to our EBITDA. EBITDA does not take into account working capital requirements, capital expenditures, debt service requirements and other commitments, and accordingly, EBITDA is not necessarily indicative of amounts that may be available for discretionary use.
The following table reconciles EBITDA to net income for the periods indicated (dollars in thousands):
American Rock Salt Company LLC
EBITDA Reconciliation to Net Income
(dollars in thousands)
Recent Accounting Pronouncements
In September 2006 the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) No. 108 Topic 1N, Financial Statements, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, which provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. SAB 108 is effective for the first fiscal year ending after November 15, 2006. We adopted SAB 108 in fiscal 2007. The adoption of SAB 108 had no impact on our Consolidated Financial Statements.
In September 2006 the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair value in generally accepted accounting principles (“GAAP”) and expands disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is currently assessing the impact of SFAS No. 157 on its consolidated financial position and results of operations.
Item 7A.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
The Company’s business is subject to a variety of market risks, including but not limited to, interest rate risks and commodity pricing risks. Although the Company’s senior secured notes have a fixed interest rate, its bank facility is subject to variable interest rates keyed to LIBOR. As of September 30, 2007, we had $37.7 outstanding under our bank facility and $91.0 million of debt outstanding under our senior secured notes. Borrowings under our bank facility are subject to a variable rate. As of September 30, 2007 the variable rate was 5.86%. Our senior secured notes bear interest at a rate of 9.5% per annum. Our bank facility, with an available aggregate amount of up to $51.7 million, currently consists of (a) a $21.7 million term loan facility, and (b) a $30.0 million working capital facility. The working capital facility permits us to borrow up to $30.0 million in revolving loans with a sub-limit available for the issuance of letters of credit. As of September 30, 2007, there was $16.0 million drawn and $2.0 million of standby letters of credit outstanding under the working capital facility.
Our earnings and cash flows are affected by changes in interest rates applicable to our bank facility. Assuming our current debt structure, a $21.7 million term loan facility, and an average level of borrowings from our revolving credit facility at variable rates, and assuming a one hundred basis point increase in the average interest rate under these borrowings, we estimate that our interest expense for the fiscal year ended September 30, 2007 would have increased by approximately $0.3 million.
Item 8
Item 8
Financial Statements and Supplementary Data
INDEX TO AUDITED FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Balance Sheets as of September 30, 2007 and 2006
Statements of Operations for the three years ended September 30, 2007
Statements of Changes in Members’ Equity (Deficit) for the three years ended September 30, 2007
Statements of Cash Flows for the three years ended September 30, 2007
Notes to Financial Statements
Report of Independent Registered Public Accounting Firm
To the Board of Managers and Executive Committee
of American Rock Salt Company, LLC
In our opinion, the accompanying balance sheets and the related statements of operations, changes in members’ equity (deficit) and of cash flows present fairly, in all material respects, the financial position of American Rock Salt Company LLC at September 30, 2007 and 2006 and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2007 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
PricewaterhouseCoopers LLP
Rochester, NY
December 18, 2007
American Rock Salt Company LLC
Balance Sheets
September 30, 2007 and 2006
The accompanying notes are an integral part of these financial statements.
American Rock Salt Company LLC
Statements of Operations
Years Ended September 30, 2007, 2006 and 2005
The accompanying notes are an integral part of these financial statements.
American Rock Salt Company LLC
Statements of Changes in Members’ Equity (Deficit)
Years Ended September 30, 2007, 2006 and 2005
The accompanying notes are an integral part of these financial statements.
American Rock Salt Company LLC
Statements of Cash flows
Years Ended September 30, 2007, 2006 and 2005
The accompanying notes are an integral part of these financial statements.
American Rock Salt Company LLC
Notes to Financial Statements
For the years ended September 30, 2007, 2006 and 2005
1. The Company
American Rock Salt Company LLC (the “Company”) primarily sells bulk rock salt for use in deicing roads. The Company bids on supply contracts for salt produced at the Hampton Corners Mine to be provided to State Departments of Transportation and local municipalities as well as industrial consumers throughout the Northeastern United States. The Company was formed on January 30, 1997, construction of the Hampton Corners Mine began in November 1998, and it was substantially completed in December 2001. The Company steadily increased sales as production and distribution capacity came online during a ramp-up phase in fiscal 2001 and 2002. The Company attained full operating capacity during fiscal 2003.
On June 12, 2007, the Company entered into an Agreement of Merger (the “Merger Agreement”) dated as of June 12, 2007, but effective as of June 13, 2007, with ARS Mergeco LLC, a New York limited liability company (“Mergeco”) and a wholly-owned subsidiary of American Rock Salt Holdings LLC, a New York limited liability company (“Holdings”). Upon consummation of the merger and pursuant to the terms of the Merger Agreement, each of the membership interests in the Company was converted into a corresponding membership interest in Holdings, Mergeco was merged with and into the Company, and the Company became a wholly-owned subsidiary of Holdings. Holdings is a holding company and has no assets or operations other than its ownership of all of the equity interests of the Company.
In connection with the holding company reorganization described above, Holdings entered into a seven and one-half year $100.0 million aggregate principal amount senior unsecured term loan facility on July 3, 2007 with Morgan Stanley Senior Funding, Inc. as the initial lender and administrative agent. In connection with that loan, the Company became a Restricted Subsidiary, as defined, of Holdings. Holdings is required to cause the Company to pay a cash dividend to Holdings annually, commencing April 2008, which will allow the timing of the dividend to be consistent with past practices of the Company. The amount of the dividend must be no less than 75.0% of its “available free cash flow”, wherein “available free cash flow” includes a number of financial components in its determination but cannot exceed the amount the Company is permitted to pay as a cash distribution under its existing credit facilities or the indenture governing its senior secured notes. As a Restricted Subsidiary, the Company is subject to financial and other restrictions that are comparable to existing restrictions under the Company’s senior secured notes.
2. Summary of Significant Accounting Policies
Basis of Accounting
The financial statements are prepared on the accrual basis of accounting, in accordance with US GAAP.
Cash and Equivalents
The Company considers all highly liquid debt instruments with a maturity at the date of purchase of three months or less to be cash equivalents. The Company maintains its cash in bank deposit accounts which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant risk on cash and equivalents.
Inventory
Inventory is stated at the lower of cost or market, on an average cost basis. The Company records reserves for unusable raw materials and supplies inventory. The amount of unusable raw materials is immaterial during the ordinary course of business.
Fixed Assets and Depreciation
The Company concluded in September 2006 to change its method of amortizing its mine development costs from the straight line method to the units-of-production method. In accordance with Statement of Financial Accounting Standards (SFAS) No. 154, Accounting Changes and Error Corrections, the Company retrospectively adjusted its financial statements for all periods to reflect such change, as reflected in the Company’s 10-K for the fiscal year ended September 30, 2006.
Mine development costs, primarily underground assets used in the production of salt, totaled $69.8 million as of September 30, 2007 and are included on the Company’s balance sheet in property and equipment, net. Under the units-of-production method, the assets are amortized based on the tons of salt extracted compared to the total tons of proven salt reserves. This accounting method reflects the usage patterns of these assets, links their estimated useful lives to the life of the Company’s proven salt reserves, and is the industry predominant accounting practice for similar assets.
Property and Equipment
Property and equipment is stated at cost and is depreciated over its estimated useful life using the straight-line method. Major renewals and betterments are capitalized. Mine development costs consist of materials, labor, engineering, and consulting costs incurred to construct the mine and are being amortized on a units-of-production method. Also, costs related to the construction of the production and service shafts are included in mine development costs. Maintenance, repairs, and minor renewals are expensed as incurred. When properties are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts.
Depreciable lives are as follows:
Salt Deposits and Mineral Rights
Salt deposits and mineral rights are underground reserves on which the Company has extraction rights. Salt deposits and mineral rights are amortized as the minerals are extracted, based on units-of-production and engineering estimates of total reserves. The impact of revisions to reserve estimates is recognized on a prospective basis. Salt deposits and mineral rights are presented net of accumulated depletion of approximately $0.3 million, $0.2 million, and $0.2 million at September 30, 2007, 2006 and 2005, respectively.
Mine Reclamation Costs
In June 2001, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS)” No. 143, Accounting for Obligations Associated with the Retirement of Long-Lived Assets. The objective of SFAS No. 143 is to establish an accounting standard for the recognition and measurement of an obligation related to the retirement of certain long-lived assets. The retirement obligation must be one that results from the acquisition, construction, or normal operations of a long-lived asset. SFAS No. 143 requires the legal obligation associated with the retirement of a tangible long-lived asset to be recognized at fair value as a liability when incurred and the cost to be capitalized by increasing the carrying amount of the related long-lived asset.
American Rock Salt Company LLC
Notes to Financial Statements (Continued)
For the years ended September 30, 2007, 2006 and 2005
Financing Costs
Financing costs include legal, professional and other related fees incurred in connection with obtaining financing, and are being amortized over the terms of the related obligations.
Revenue Recognition
The Company recognizes revenue upon transfer of title or in accordance with contracted terms which are primarily FOB destination. The Company sells mineral products, primarily salt and mixed salt products. Sales include customer billings excluding sales tax charged on the product and include shipping and handling costs. The shipping and handling costs are expensed when the product is sold.
Income Taxes
No provision is made for income taxes in the accompanying financial statements as the Company is wholly-owned by another limited liability company and is therefore treated as a disregarded entity for tax purposes. The taxable income and loss and any available credits of the Company and Holdings are includable on the individual tax returns of the members of Holdings.
Impairment of Long-Lived Assets
In the event that facts and circumstances indicate that the carrying amounts of long-lived assets may be impaired, an evaluation of recoverability would be performed. If an evaluation is required, the estimated future undiscounted cash flows associated with the asset would be compared to the asset’s carrying amount to determine if a write-down is required. If this review indicates that the assets will not be recoverable, the carrying value of the Company’s assets would be reduced to their estimated fair value.
Members’ Equity
The Company’s authorized, issued and outstanding membership interests consist of 6,250 Class A Units and 12,750 Class F Units. Holdings is currently the sole member of the Company and holds all issued and outstanding Class A and Class F units, as a consequence of which the Company is treated as a “disregarded entity” for tax purposes and all profits and losses of the Company are allocated to Holdings.
American Rock Salt Company LLC
Notes to Financial Statements (Continued)
For the years ended September 30, 2007, 2006 and 2005
Fair Value Disclosures of Financial Instruments
The carrying amounts of the Company’s financial instruments, including cash and cash equivalents approximate their fair values at September 30, 2007 and 2006.
The estimated fair value of the Company’s long-term debt is approximately $113,850,246 as of September 30, 2007. The estimated fair value was based on market yields for similar instruments.
Estimates
The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Supplemental Disclosure of Cash Flow Activities
Supplemental information regarding cash flow activities for the year ended September 30:
3. Inventory
Inventory consists of the following at September 30:
American Rock Salt Company LLC
Notes to Financial Statements (Continued)
For the years ended September 30, 2007, 2006 and 2005
4. Property and Equipment
Property and equipment consisted of the following at September 30:
5. Leases
The Company has entered into several agreements for the storage and handling of its salt at several stockpiles; several of these agreements include land and building rent. In addition, the Company has various lease agreements for railcars. These stockpile and railcar lease obligations extend through 2016. Most leases contain renewal and purchase options. No leases contain restrictions on the Company’s activities concerning capital distributions, additional debt, or further leasing. Rental expenses for all operating leases amounted to approximately $5,221,000, $4,817,000 and $4,152,000 during fiscal 2007, 2006 and 2005, respectively.
Future minimum rental payments under operating leases with non-cancelable terms in excess of one year are as follows.
American Rock Salt Company LLC
Notes to Financial Statements (Continued)
For the years ended September 30, 2007, 2006 and 2005
6. Long-Term Debt
Long-term debt consisted of the following at September 30:
On March 7, 2006, the Company amended its bank facility primarily in order to reduce the pricing grid leverage ratio and to eliminate certain financial covenants, as previously reported in the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission (the “SEC”) on March 8, 2006. At September 30, 2007, the Company’s bank facility in the aggregate principal amount of $51.7 million consisted of: (a) a $21.7 million term loan, and (b) a $30.0 million working capital facility. Both the term loan and the working capital facility bear interest at an annual rate equal to the LIBOR rate plus up to 1.375%, based on a pricing grid leverage ratio or a base rate (the higher of the Federal Funds Rate plus 0.5% or the prime rate plus the applicable margin for base rate loans), at the Company’s option. The term loan has a maturity of eight years commencing March 7, 2006. The working capital facility has an initial term of five years commencing March 7, 2006.
The term loan was drawn at the conclusion of the litigation (see footnote 8). At September 30, 2007, a balance of approximately $21.7 million was outstanding bearing interest at a rate of 5.86%.
American Rock Salt Company LLC
Notes to Financial Statements (Continued)
For the years ended September 30, 2007, 2006 and 2005
The working capital facility permits the Company to borrow up to $30,000,000 in revolving loans with a $7,000,000 sub-limit available for the issuance of letters of credit. Availability of the working capital facility is subject to a borrowing base formula. As of September 30, 2007, the Company had $16,000,000 drawn and $2,000,000 of standby letters of credit outstanding under the working capital facility, with approximately $8,400,000 million of remaining availability thereunder. Amounts under the working credit facility when outstanding bear an interest rate of 5.86%.
The aggregate maturities of long-term debt for each of the five fiscal years subsequent to September 30, 2007 and thereafter are as follows:
7. Related Party Transactions
Legal Services
Certain legal costs were incurred by the Company and paid to an organization affiliated with several of our affiliates of approximately $327,000, $443,000 and $990,000 during fiscal 2007, 2006 and 2005, respectively. These amounts are included in operating expenses.
Goods and Services
Certain affiliates received management and services fees of approximately $294,000, $294,000 and $294,000 during fiscal 2007, 2006, and 2005, respectively. These amounts are included in operating expenses.
Additionally, certain affiliates received payments for goods and services aggregating approximately $2,086,000, $1,646,000 and $1,473,000 during fiscal 2007, 2006, and 2005, respectively. In fiscal 2007, approximately $1,686,000 of the total $2,086,000 is included in cost of sales with the remaining balance in operating expenses. In fiscal 2006, approximately $1,360,000 of the total $1,646,000 is included in cost of sales with the remaining balance in operating expenses. In fiscal 2005, approximately $1,142,000 of the total $1,473,000 is included in cost of sales with the remaining balance in operating expenses.
American Rock Salt Company LLC
Notes to Financial Statements (Continued)
For the years ended September 30, 2007, 2006 and 2005
Financing Costs
Certain costs were incurred from an affiliate for financial advisory fees of approximately $35,000, $197,500 and $310,000 for fiscal 2007, 2006 and 2005, respectively. These amounts are included in operating expenses.
Non-operating Mineral Interests (“NOMIs”)
We pay a royalty (“NOMI”) related to the acquisition of mineral rights equal to 2.5% of the gross income from the mine as reported for purposes of computing percentage depletion for federal income tax purposes. Certain affiliates receive a portion of such royalty payments. NOMI expense to such affiliates was approximately $2,659,000, $2,346,000, and $2,396,000, during fiscal 2007, 2006, and 2005, respectively. These amounts are included in cost of sales.
8. Commitments and Contingencies
Engineering and Procurement Contract/Litigation
The Company was involved in litigation with Frontier-Kemper Constructors, Inc., Flatiron Constructors, Inc. (formerly known as Flatiron Constructors, LLC, and also known as Flatiron Structures LLC), Jointly and Severally with Frontier-Kemper Constructors, Inc. and d/b/a Frontier-Kemper/Flatiron Joint Venture (together, the “EPC Contractor” or “FKF”), whom the Company engaged to design and construct its mine facility, as well as the EPC Contractor’s bonding companies, Travelers Casualty and Surety Company of America and Liberty Mutual Insurance Company (the “Bonding Companies”), and Willis Corroon Corporation of Missouri, Willis Limited, Willis Faber and Dumas (collectively “Willis”) and Lloyd’s U/W at London, Sponsoring Syndicates (“Lloyd’s), the insurance brokers and underwriters, respectively, of certain liquidated damages insurance purchased to insure the timely completion of the mine facility. On June 30, 2005, the Company, the EPC Contractor and the Bonding Companies reached a settlement agreement with respect to the litigation, pursuant to which the parties agreed to dismiss all claims and counterclaims, subject to limited exceptions, with no findings or admissions of liability by any party. All of the settled claims were dismissed with prejudice. In July 2005, the Company paid a total of $10.0 million to the EPC Contractor, including $4.2 million of mine construction retention previously withheld and owed to the EPC Contractor and the last invoice dated December 2001 totaling $1.0 million, both of which had been previously recorded as accrued liabilities on the Company’s balance sheet. The remaining $4.8 million of the settlement payment was for additional mine construction expenditures and was also recorded on June 30, 2005 as capitalized mine development costs. The Company agreed to share with the EPC Contractor one-half of any payment received by the Company in connection with its claims against Willis Corroon Corporation of Missouri, Willis Limited, Willis Faber and Dumas and Lloyd’s U/W at London, Sponsoring Syndicates, third party defendants in the action (the “Willis Parties”). Other terms of the settlement are confidential by agreement of the parties. The settlement also freed the Company from any further obligation under a $32.1 million bond the Company posted as security to discharge a mechanic’s lien the EPC Contractor had filed against the Hampton Corners Salt Mine arising out of the dispute between the parties. The settlement did not include the settling parties’ claims against Willis and Lloyd’s, which claims remained pending.
American Rock Salt Company LLC
Notes to Financial Statements (Continued)
For the years ended September 30, 2007, 2006 and 2005
On October 18, 2005, the court in which the remaining litigation against Willis and Lloyd’s was pending granted summary judgment to the Company on its claims against Willis for breach of its obligations to the Company as insurance brokers in connection with the above-mentioned liquidated damages insurance, and the Company and the EPC Contractor subsequently agreed to a settlement of their claims against Willis and Lloyd’s. The claims against the Willis Parties were settled on February 27, 2006 for $4.2 million, one-half of which was retained by the Company and one-half of which was paid over to the EPC Contractor, both net of litigation expenses, pursuant to the terms of the original settlement. The Company’s amount ($2.1 million) had been included as Other Income in the Statement of Operations for the fiscal year ended September 30, 2006.
Union Agreement
On October 29, 2005, the Company entered into a three-year labor agreement with the United Steel Workers International Union, AFL-CIO-CLC, formerly the Paper, Allied-Industrial, Chemical & Energy Workers International Union, Local 1-0763. The labor agreement covers all hourly production and maintenance workers employed by the Company. The labor agreement expires on October 31, 2008.
Livingston County IDA Assistance
On September 1, 1998, Livingston County Industrial Development Agency (“IDA”) approved the Payment-in-Lieu-of-Tax (“PILOT”) Agreement between the Company and the IDA. Under the terms of the Agreement, the Company receives abatements on a percentage of property taxes through 2031, exemption from mortgage taxes related to the financing of the mine and exemption from sales and use taxes otherwise payable on all purchases made to construct the mine. Under the agreement, the Company is required to maintain a staffing level of 124 full time or equivalent employees (“Full Time Employees”). If the Full Time Employees fall below 75 percent of 165 (124), the PILOT payments increase based on a pre-defined formula. The Company had 235 Full Time Employees as of September 30, 2007.
American Rock Salt Company LLC
Notes to Financial Statements (Continued)
For the years ended September 30, 2007, 2006 and 2005
Sales Contracts
The Company has various salt sales contracts that include performance provisions governing delivery and product quality. These sales contracts either require the Company to maintain performance bonds for stipulated amounts or contain contractual penalty provisions in the event of nonperformance. The amount of such performance penalties, if any, would be dependent upon failure to perform and factors such as weather patterns and resultant product demand in the Company’s geographic markets and as a result cannot be estimated. For the three fiscal years ended September 30, 2007, the Company has not incurred any penalties related to these sales contracts. At September 30, 2007, the Company had approximately $12.5 million of outstanding performance bonds.
Rail Carrier Agreements
The Company has agreements with rail carriers for the transportation of its rock salt. These agreements have minimum usage requirements that obligate the Company to pay, in the aggregate, a minimum of $1.9 million per annum. In fiscal 2007, 2006 and 2005, the Company met its minimum usage requirements. The current agreements expire in 2011. Based on current projections, the Company expects to meet the minimum usage requirements for the remainder of the agreements.
9. Employee Benefit Plan
The Company administers a 401(k) defined contribution plan covering substantially all employees. Total expense related to the employer matching contribution was approximately $275,000, $216,000, and $216,000 in fiscal 2007, 2006, and 2005, respectively.
10. Accounting Pronouncements
In September 2006 the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) No. 108 Topic 1N, Financial Statements, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, which provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. SAB 108 is effective for the first fiscal year ending after November 15, 2006. We adopted SAB 108 in fiscal 2007. The adoption of SAB 108 had no impact on our Consolidated Financial Statements.
In September 2006 the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair value in generally accepted accounting principles (“GAAP”) and expands disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is currently assessing the impact of SFAS No. 157 on its consolidated financial position and results of operations.
Item 9
Item 9
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.
Item 9A
Item 9A
Controls and Procedures
The Company’s management, with the participation of its Principal Executive Officers and Principal Financial Officer, evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on that evaluation, the Company’s Principal Executive and Principal Financial Officers concluded that the Company’s disclosure controls and procedures as of September 30, 2007 (the end of the period covered by this Report) have been designed and are functioning effectively to provide reasonable assurance that the information required to be disclosed by the Company in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.
There were no changes to the Company’s internal control over financial reporting that occurred during the fiscal quarter ended September 30, 2007 that materially affected or are reasonably likely to materially affect the Company’s internal control over financial reporting.
Item 9B
Item 9B
Other Information
None.
Part III
Item 10
Item 10
Directors, Executive Officers and Corporate Governance
The following table sets forth information with respect to our Managers, executive officers, and key employees as of September 30, 2007:
Name
Age
Position
Joseph G. Bucci
Vice Chairman, Operations, Vice President, Real Estate, Executive Committee Member and Class F Manager
Gunther K. Buerman
Chairman, Executive Committee Member and Class F Manager
Neil L. Cohen
Vice Chairman, Finance and Marketing, Executive Committee Member and Class F Manager
Raymond R. Martel
Chief Financial Officer and Chief Administrative Officer
Gary L. Perrin
Human Resources Manager
Gregory J. Norris
Plant Manager
Ann M. Blake
Controller
Mark Assini
Bidding Manager
Charles T. Collins
Class A Manager
C. Wesley Gregory III
Class A Manager
Gregory O’Connell
Class A Manager
John M. Odenbach, Jr.
Class A Manager
E. Philip Saunders
Class A Manager
Thomas Terry, Jr.
Class A Manager
Board of Managers and Executive Committee
We have a nine-member Board of Managers and a three-member Executive Committee. The members of the Executive Committee, taken together, own a majority of the membership interests in Holdings. The Executive Committee generally has the authority to exercise all the powers of the full Board of Managers, other than the power to take certain actions enumerated in the Company’s operating agreement. The members of the Executive Committee collectively fulfill the duties of chief executive officer. The Board of Managers consists of three Class F Managers, who serve ex officio by virtue of the election as Class F Managers of Holdings, and up to eight Class A Managers, who serve ex officio by virtue of their election as Class A Managers of Holdings. Each Class F Manager has three votes on all matters submitted to a vote of the Board of Managers, and each Class A Manager has one vote on all matters submitted to a vote of the Board of Managers. Managers hold office until their successors are duly elected and qualified as Managers of Holdings or their earlier removal or resignation.
A brief biography of each member of the Board of Managers is set forth below:
Executive Committee/Class F Managers
Joseph G. Bucci became a Manager of the Company and Vice President, Real Estate and Mineral Rights in October 1997. In 2002, he became Vice Chairman, Operations. From June 1, 2003 to September 2005 Mr. Bucci also served as Plant Manager responsible for all production and the day to day operation of our mine. Mr. Bucci, founder and owner of Bucci Real Estate, has been involved in real estate since 1968. He has been responsible for the purchases of mineral rights on behalf of the former International Salt Company, Akzo Nobel Salt and the Company since 1974. Mr. Bucci serves on the board of directors of The Bank of Castile and the Livingston County Chamber of Commerce. He holds a B.S. in history and education from SUNY Geneseo as well as New York State certification as a Licensed Real Estate Broker.
Gunther K. Buerman became a Manager of the Company in January 1997 and Chairman of the Board of Managers of the Company in 2002. He is the Chairman of Harris Beach PLLC where he has been an associate or equity member since 1968 in the area of corporate and commercial law. He serves on the board of directors of a number of private entities and non-profit organizations. Mr. Buerman holds a J.D. from Syracuse University College of Law and a B.A. from St. Lawrence University.
Neil L. Cohen became a Manager of the Company in January 1997 and Vice Chairman, Finance and Marketing in 2002. He is the President and managing member of Cohen & Company, LLC, a private equity firm he founded in 1994. Mr. Cohen is currently a board member of a number of private entities and non-profit organizations. Mr. Cohen holds an M.S. in Management with concentrations in corporate strategy, finance, and management of technological innovation from MIT and a B.E.S. in Mathematical Sciences from The Johns Hopkins University.
Messrs. Bucci, Buerman, and Cohen are parties to a voting agreement which limits the ability of any such person to vote on any changes to the Company’s operating agreement which would have the effect of removing any party to the voting agreement from the Executive Committee or amending the rules for voting for Class F Managers.
Class A Managers
Charles T. Collins became a Manager of the Company in November 1998. Mr. Collins served as the Company’s Chief Financial Officer from January 1997 to November 1998. He is a managing director of Cohen & Company, LLC, a private equity firm he joined in 1996. Prior to joining Cohen & Company, Mr. Collins was a CPA and manager in the audit practice of Coopers & Lybrand, LLP, which he joined as an associate in 1988. He holds a B.S. in Accounting from New York University.
C. Wesley Gregory, III became a Manager of the Company in November 1998. Mr. Gregory is owner and manager of WeCare Holdings LLC and its affiliated entities, which provide goods and services to the water, wastewater and solid wastes industry. Prior to founding the WeCare family of companies in 1998, Mr. Gregory founded Waste Stream Environmental, Inc. in 1987 to provide goods and services to the municipal wastewater industry.
Gregory O’Connell became a Manager of the Company in November 1998. Mr. O’Connell has been the President and owner of O’Connell Construction Company Inc. for over 30 years.
John M. Odenbach, Jr. became a Manager of the Company in November 1998. Mr. Odenbach is President of Dolomite Products Company, Inc., a position he has held for more than five years.
E. Philip Saunders became a Manager of the Company in November 1998, and served as its Chief Executive Officer from May 2000 through September 2003. Mr. Saunders is Chief Executive Officer of Genesee Regional Bank and Swain Ski & Snowboard Center, and serves on the boards of directors of Roswell Hospital, Griffith Energy, Paul Smiths College, the American Red Cross, Lewis Tree Service, PCORE Electric Co., Inc., the National Association of Truckstop Operators Foundation, Genesee Valley Trust Company and Genesee Regional Bank. Mr. Saunders previously served on the boards of directors of Hahn Automotive, Fleet Bank of New York, Ryder Systems, Excellus, Inc. of Rochester, Rochester General Hospital and the Petroleum Marketing Education Foundation. Mr. Saunders previously served as Chief Executive Officer of Truckstops of America, Inc., Econo- Car International, Inc., Griffith Oil, Sugar Creek Corporation, Travel Ports of America, Inc. and Richardson Foods Corporation.
Thomas Terry, Jr. became a Manager of the Company in November 1998. Prior to 1998, Mr. Terry was the President and owner of Lewis Tree Service, Inc., a vegetation management company founded by the Terry family in the 1950s.
Operating Management
The Company’s operating management and key personnel have significant experience in the development and operation of various rock salt mines and have specific experience selling and distributing rock salt in the Northeastern market. The key operating personnel include the following:
Raymond R. Martel became Chief Financial Officer of the Company in November 1998 and Chief Administrative Officer in May 2007. Mr. Martel has 27 years of financial experience, including 5 years of management consulting and 10 years of concentrated mineral industry experience. Mr. Martel’s prior employers include British Petroleum and Coopers & Lybrand, LLP, where he was a member of the Tax/Finance teams supporting exploration and development of mineral properties. Mr. Martel’s major area of responsibility was the financial and tax reporting for the development of the liquid natural gas property on the Northwest Shelf of Australia. Mr. Martel serves on the board of directors of Tri County Family Medicine, Livingston County Chamber of Commerce, and Board of Trustees for Houghton College.
Gary L. Perrin is the Company’s Human Resources Manager. He joined the Company in March 2001. Mr. Perrin has over 24 years of diversified management experience in Human Resources and Finance. Prior to joining the Company, Mr. Perrin was employed by Stroehmann Bakeries Inc. and the Quaker Oats Company. He has worked with organizations experiencing rapid growth and also has guided organizations through periods of downsizing, including layoffs and office/plant closings. Mr. Perrin has labor relations experience with the following unions: United Steel Workers of America (USWA), International Brotherhood of Teamsters (IBT), Bakery, Confectionary, Tobacco Workers International (BC&T), United Food and Commercial Workers (UFCW) and Paper, Allied-Industrial, Chemical and Energy Workers International Union (PACE).
Gregory J. Norris has been the Company’s Plant Manager since September 2005. Previously, he was the Company’s Engineering Manager. He joined the Company in June 2000. Mr. Norris has over 18 years of mine engineering experience, including five years working for Akzo Nobel Salt, Inc. at two different salt mines. He has worked in copper and silver mines for Copper Range Company, and has managed a 1.0 million tons-per-year limestone quarry for Southdown Inc.
Ann M. Blake was named the Company’s Controller in May 2007. She joined the Company in 2006 as the Company’s Accounting Manager. Ms. Blake is a Certified Public Accountant and has over eight years of financial reporting and accounting experience. Prior to joining the Company, Ms. Blake was employed in the audit practice of Arthur Andersen, LLP, which she joined as an associate in 1999. Ms. Blake joined Xerox Corp in 2003 where she held positions as Senior Analyst, Consolidations and Reporting- North America; Senior Analyst, Accounting and Internal Control and Manager of Accounting, Xerox Information Management. She holds a B.S. in Accounting from St. John Fisher College.
Mark Assini was named the Company’s Bidding Manager in May 2007. He joined the Company in 2004 as Manager of Marketing Analysis. Prior to joining the Company, Mr. Assini served as a cost accountant at Pfaudler, Inc from 1995-2004. While at Eastman Kodak Company from 1981-1994, Mr. Assini maintained lead roles in Supply Chain Management as well as in Finance. Mr. Assini is certified in Material Requirements Planning by the American Production and Inventory Control Society and holds a B.S. in Production Management from Rochester Institute of Technology.
Audit Committee
The members of the Company’s Executive Committee, Gunther K. Buerman, Joseph G. Bucci and Neil L. Cohen, have served as the Audit Committee of the Board of Managers. The Board of Managers formally appointed the Executive Committee members as the Audit Committee in December 2004, recognizing that they had previously been serving in that capacity. The Company’s Board of Managers has not determined that any member of the Audit Committee is an “audit committee financial expert” as defined in applicable Securities and Exchange Commission regulations. The Board of Managers believes that the collective knowledge and experience of the Audit Committee members is sufficient to perform the functions of the Audit Committee without any one member being deemed to be an “audit committee financial expert”.
Code of Ethics
As of September 30, 2007, the Company had not adopted a “Code of Ethics” as defined in applicable Securities and Exchange Commission regulations. The Board of Managers believes that our current internal control procedures and business practices are adequate to promote honest and ethical conduct and to deter wrongdoing by its executives.
Item 11
Item 11
Executive Compensation
Compensation Discussion and Analysis
Introduction
This section addresses certain aspects of the compensation paid to our Named Executive Officers, as defined below. Although this discussion may address our historical practices, the focus is on the practices used in our most recent fiscal year.
Oversight
The Board of Managers does not have a separately designated Compensation Committee. The Executive Committee performs the functions of the Compensation Committee with respect to our executive officers and senior management other than our Co-Chief Executive Officers and in that capacity oversees the compensation paid to those individuals. Mr. Bucci is not involved in determining his annual compensation for his role as an operational manager. Our entire Board of Managers performs the functions of the Compensation Committee with respect to our Co-Chief Executive Officers and in that capacity oversees the compensation paid to Messrs. Bucci, Buerman and Cohen, for their service in that role. The Board of Managers has taken no action with respect to the compensation paid to our Co-Chief Executive Officers during the past three fiscal years. Among other things, the Executive Committee reviews the performance of our executive officers and makes determinations concerning the compensation levels of those officers.
Objectives of Executive Compensation
The objective of our executive compensation is to attract, motivate and retain highly talented individuals. The Executive Committee periodically reviews the competitiveness of our executive compensation in order to evaluate whether it is achieving the desired goals and objectives. Our executive compensation program is principally designed to give executives incentives to focus on and achieve our business objectives. Key elements of the executive compensation program are competitive base salaries and annual performance-based bonuses.
Competitive Factors.
In determining the compensation levels of our executive officers, the Executive Committee takes into account competitive market data from the mining industry as a whole and focuses on institutions of a size similar to us. Although the Executive Committee has not historically established specific targets in relation to peer group compensation, it has taken into account the total compensation paid to executive officers by our competitors. Information regarding pay practices at other companies in the mining industry is useful because we recognize that our compensation must be competitive in the marketplace and this information also assists us in assessing the overall reasonableness of our compensation.
Elements of Our Compensation Program
Elements of Compensation
To date, our executive compensation has had three components: base salary, annual cash incentives and employee benefits. The Company previously maintained a plan under which it could grant awards of Units to certain employees and executive officers, but recently determined to discontinue this plan. No awards were ever granted under the plan.
Base salary is designed to provide competitive levels of compensation to our executive officers based upon the responsibilities assigned to them and taking into account their experience and qualifications. As was discussed above, we have established base salaries at levels we consider appropriate to recruit and retain executives and which are competitive with those paid by similar institutions. To ensure we remain competitive in base salaries, we use industry and region specific salary guidelines as a measure. The Executive Committee reviews base salaries on an annual basis to take into account reported cost of living adjustments as well as changes in responsibilities and the individual performance of our executives.
We have also made annual cash bonus payments, which are intended to recognize individual accomplishments, as well as the overall performance of the Company during the past year. Annual bonuses have not been awarded based upon the attainment of pre-established targets or other measurable criteria, but have been determined based on the Company’s performance and various factors determined relevant by the Board of Managers.
We provide various benefits to all of our eligible employees, including executive officers, which include group life insurance, health insurance and a 401(k) plan. The 401(k) plan is a tax-qualified profit sharing plan under the Internal Revenue Code, and eligible employees meeting certain length of service requirements may make tax deferred contributions subject to certain limitations. We make discretionary matching contributions of up to 3% of employee compensation which vest to the employee over a five year period.
Perquisites and other personal benefits have not represented a significant part of total compensation for any of our executive officers.
Post-Termination Compensation
Other than the 401(k) plan mentioned above, we do not offer any other pension or post-employment benefits. We do not maintain employment agreements with any of our executive officers entitling them to severance or other post-employment benefits.
Role of Executive Officers in Compensation Decisions
The Board of Managers has the authority to make all final determinations with respect to the compensation paid to our Co-Chief Executive Officers for their service in that role. The Board of Managers has taken no action with respect to the compensation paid to our Co-Chief Executive Officers during the past three fiscal years. The Executive Committee makes all final determinations with respect to the compensation paid to our other executive officers. Because Messrs. Buerman, Bucci and Cohen, our Co-Chief Executive Officers, are members of the Board of Managers, they are entitled to participate in deliberations regarding executive compensation, including concerning the fees to be paid to them in compensation for their service as Co-Chief Executive Officers. Mr. Bucci is not involved in determining his annual compensation for his role as an operational manager.
Changes in Executive Compensations
The discussion above relates to our recent practices, and most particularly those used in the most recent fiscal year. The Executive Committee continues to evaluate our executive compensation programs, but does not anticipate making any material changes in our executive compensation practices in the foreseeable future.
Tax Considerations
It has been the Executive Committee’s intent that all incentive payments be deductible to the Company, unless such deductibility would undermine our ability to meet our objectives. Currently, we believe that all of the compensation paid to our executive officers qualifies for a federal tax deduction in computing our taxable income. We have not historically relied on deferred compensation arrangements or made equity awards, so Section 409A of the Internal Revenue Code has not had any impact on our compensation programs to date.
Summary
In summary, we believe that the compensation paid to our executive officers has been consistent with our overall objectives and has enabled us to retain and motivate our management team.
Summary Compensation Table
The following table sets forth information concerning the compensation paid by the Company for the fiscal year ended September 30, 2007 to (i) the three individuals who collectively serve as the Company’s chief executive officer, (ii) the Company’s chief financial officer, and (iii) the other most highly compensated individual (based on total compensation for the last completed fiscal year) who was serving as an executive officer at the end of the fiscal year ended September 30, 2007, and whose total compensation was in excess of $100,000 (collectively, the “Named Executive Officers”)
(1)
Messrs. Bucci, Buerman, and Cohen collectively serve as Chief Executive Officer for the Company. Amounts included in “All Other Compensation” for Messrs. Bucci, Buerman and Cohen represent fees of $48,000 paid to such persons for service as a member of the Executive Committee and $50,000 for service as Co-Chief Executive Officer.
(2)
Amounts included in “Other Annual Compensation” for Mr. Martel represent employer matching contributions under the Company’s 401(k) plan.
(3)
Mr. Holman served as the Vice President Marketing of the Company until May 2007. Amounts included in All Other Compensation for Mr. Holman represent $2,939 in employer matching contributions under the Company’s 401(k) plan and $14,807 in fees paid to Mr. Holman for consulting services provided to the Company after his departure.
Retirement Plans
We do not maintain a qualified or non-qualified defined benefit pension plan covering any of our employees. Our Named Executive Officers are eligible to participate in our tax-qualified Profit Sharing and Savings Plan on the same basis as other employees under the plan. The Company makes a discretionary matching contribution of up to 3% of employee compensation. The Summary Compensation Table above reflects the actual dollar amounts contributed to our Profit Sharing and Savings Plan on each Named Executive Officer’s behalf.
Compensation Committee Interlocks and Insider Participation
As of September 30, 2007, the Company did not have a compensation committee. The Executive Committee functions as the compensation committee with respect to all of our executive officers other than our Co-Chief Executive Officers, and the entire Board of Managers functions as the compensation committee with respect to our Co-Chief Executive Officers. No interlocking relationship existed during the last completed fiscal year between the Company’s Board of Managers or Executive Committee and the board of directors or compensation committee of any other company, nor has any interlocking relationship existed in the past.
Compensation Committee Report
The information contained in this Compensation Committee Report shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C promulgated by the SEC or the liabilities of Section 18 of the Securities Exchange Act, except to the extent that the Company specifically requests that the information be treated as soliciting material or specifically incorporates it by reference into a document filed under the Securities Act or the Securities Exchange Act. The information contained in this Compensation Committee Report shall not be deemed to be incorporated by reference into any filing under the Securities Act or the Securities Exchange Act, except to the extent the Company specifically incorporates it by reference.
The Executive Committee, serving as the Compensation Committee:
•
has reviewed and discussed the Compensation Discussion and Analysis contained in this Annual Report on Form 10-K with the Company’s management, and
•
based upon such review and discussion, recommended to the Board that such Compensation Discussion and Analysis be included in this Annual Report on Form 10-K.
Submitted by the Executive Committee (serving as the Compensation Committee):
Joseph G. Bucci
Gunther K. Buerman
Neil L. Cohen
Managers’ Fees
Each board member of the Executive Committee is entitled to compensation at a rate of $4,000 per month as a member of the Executive Committee. Additionally, each member of the Executive Committee is entitled to receive $50,000 annually as compensation for his role in fulfilling the duties of co-chief executive officer. All such fees paid to Executive Committee members are reported for each such individual in the Summary Compensation Table, above. These fees have remained level over past three fiscal years. All Managers, including the Executive Committee members, are entitled to reimbursement for all reasonable out-of-pocket expenses incurred by them in connection with their performance of services in that capacity.
Item 12
Item 12
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The Company’s issued and outstanding membership interests consist of 6,250 Class A Units and 12,750 Class F Units. As of December 5, 2007, all issued and outstanding Units of the Company were held by Holdings. Holdings’ business address is 3846 Retsof Road, Retsof, New York 14539.
Item 13
Item 13
Certain Relationships and Related Transactions, and Director Independence
Related Party Transactions
From time to time, we enter into agreements with Managers of the Company or their affiliates. We believe that the terms of these relationships are at least as favorable as those we could have obtained as a result of arm’s-length negotiations with unaffiliated third parties. Set forth below are descriptions of the material agreements or arrangements we have entered into with our Managers or their affiliates.
Legal Services
Gunther K. Buerman, one of the founders of the Company who currently serves as Co-Chief Executive Officer and Chairman of the Executive Committee, is the Chairman of Harris Beach PLLC, a law firm which serves as general outside counsel to the Company. In addition, certain current and former members of the firm of Harris Beach PLLC own in the aggregate 150.5 Class A Units of Holdings (not including the Units owned by Mr. Buerman). The Company incurred legal expenses to Harris Beach of approximately $327,000 during fiscal 2007. Mr. Buerman has less than 1% equity interest in Harris Beach PLLC.
Fuel Supply Services
E. Philip Saunders, a Class A Member of Holdings and a Class A Manager of the Company is the Chairman of the Board of Griffith Energy, Inc., which provides petroleum product to the Company on an as-needed basis. The Company incurred approximately $1,379,000 in fees payable to Griffith Energy, Inc. during fiscal 2007. Mr. Saunders owns an equity interest in Griffith Energy, Inc.
Non-Operating Mineral Interests (“NOMIs”)
Under the terms of the Company’s operating agreement, Joseph G. Bucci, Gunther K. Buerman, and Neil L. Cohen, in addition to certain other members of Holdings, hold certain Non-Operating Mineral Interests, or “NOMIs”, related to the Company’s initial acquisition of mineral rights. The NOMIs entitle the holders to receive payments equal to 2.5% of the gross income of our mine as reported for purposes of computing percentage depletion for federal income tax purposes. The Company paid approximately $2,659,000 to holders of NOMIs during fiscal 2007. The approximate dollar value of the interest of each of Messrs. Bucci, Buerman and Cohen in the NOMIs paid during fiscal 2007 is $905,000, $944,000 and $788,000, respectively.
Miscellaneous
The Company has incurred certain additional costs from several related parties for various goods and services in the amount of approximately $667,000 during fiscal 2007.
Policies and Procedures for Approval of Related Party Transactions
Our Audit Committee reviews and discusses with management, the entire Board of Managers and our independent auditors any potential related party transactions. Our Board of Managers has the authority to approve all related party transactions.
Manager Independence
The Company is a privately-held company, and is not subject to the listing standards of any national securities exchange or inter-dealer quotation system which has requirements that a majority of the board of directors be independent. For purposes of the following determinations on director independence, the Board of Managers has chosen to apply the independence criteria set forth in Nasdaq Rule 4200(a)(15). Under that standard, the Board of Managers believes that Messrs. O’Connell, Odenbach and Terry are “independent” for purposes of general board service.
The members of the Company’s Executive Committee, Gunther K. Buerman, Joseph G. Bucci and Neil L. Cohen, have served as the Audit Committee of the Board of Managers. The Board of Managers does not believe that Messrs. Buerman, Bucci and Cohen are “independent” for purposes of the heightened independence criteria for audit committees set forth in Nasdaq Rule 4350(d). The Board of Managers does not have a separately designated Compensation Committee or Nominating Committee, and the entire Board of Managers performs the functions of those committees, except that the Executive Committee performs the functions of the Compensation Committee with respect to our executive officers other than the Co-Chief Executive Officers. The Board of Managers believes that Messrs. O’Connell, Odenbach and Terry are “independent” for purposes of Nasdaq Compensation Committee and Nominating Committee standards. The Board of Managers does not believe that the Executive Committee members are “independent” for purposes of Nasdaq Compensation Committee standards.
Item 14
Item 14
Principal Accountant Fees and Services
PricewaterhouseCoopers LLP is the Company’s independent registered public accounting firm. A summary of the aggregate fees billed by PricewaterhouseCoopers LLP for services provided during the fiscal years ended September 30, 2007 and 2006 are as follows (in thousands):
(1) Related to services for the annual financial statement audits included in our Annual Reports on Form 10-K, quarterly reviews for the financial statements included in our Quarterly Reports on Form 10-Q and reviews of registration statements and other SEC filings. Also includes fees for services rendered in relation to the accounting principle change discussed in Note 2 to our audited financial statements included in this Annual Report on Form 10-K, including amended filings relating thereto.
The Company’s Audit Committee has not adopted any policies or procedures for the pre-approval of non-audit services. The Audit Committee has considered the role of PricewaterhouseCoopers LLP in providing audit, tax, and non-audit services and has concluded that such services are compatible with PricewaterhouseCoopers LLP’s role as the Company’s independent registered public accounting firm.
Part IV
Item 15
Item 15
Exhibits and Financial Statement Schedules
Financial Statements and supplementary data required by this Item 15, set forth below, are included in Item 8 of this Form 10-K on the pages indicated.
Balance Sheets as of September 30, 2007 and 2006
Statement of Operations for the three years ended September 30, 2007
Statement of Members’ Equity (Deficit) for the three years ended September 30, 2007
Statement of Cash Flows for the three years ended September 30, 2007
Notes to Financial Statements
The following exhibits are filed as part of this report on Form 10-K :
* Denotes management contract or arrangement
SIGNATURES
The registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
December 28, 2007
AMERICAN ROCK SALT COMPANY LLC
By:
/s/ Raymond R. Martel
Raymond R. Martel,
Chief Financial Officer
(Principal Financial Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
EXHIBIT INDEX
* Denotes management contract or arrangement