UNITED STATES LIME & MINERALS INC - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
----------------------------------
Washington, D.C. 20549

Form 10-Q

(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended JUNE 30, 2002

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ........ to ........

Commission file number is 000-4197

UNITED STATES LIME & MINERALS, INC.
-----------------------------------
(Exact name of registrant as specified in its charter)

TEXAS 75-0789226
-------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

13800 MONTFORT DRIVE, SUITE 330, DALLAS, TX 75240
- -------------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)

(972) 991-8400
--------------
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: As of August 13, 2002,
5,799,845 shares of common stock, $0.10 par value, were outstanding.

Page 1 of 13

PART I. FINANCIAL INFORMATION
ITEM 1: FINANCIAL STATEMENTS

UNITED STATES LIME & MINERALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands of dollars)
(Unaudited)

See accompanying notes to condensed consolidated financial statements.

Page 2 of 13

UNITED STATES LIME & MINERALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands of dollars, except per share data)
(Unaudited)

See accompanying notes to condensed consolidated financial statements.

Page 3 of 13

UNITED STATES LIME & MINERALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
(Unaudited)

See accompanying notes to condensed consolidated financial statements.

Page 4 of 13

UNITED STATES LIME & MINERALS, INC. AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements
(Unaudited)

1. Basis of Presentation

The condensed consolidated financial statements included herein have
been prepared by the Company without independent audit. In the opinion of
the Company's management, all adjustments of a normal and recurring nature
necessary to present fairly the financial position, results of operations
and cash flows for the periods presented have been made. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. It is suggested that these
condensed consolidated financial statements be read in conjunction with the
consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the period ended December 31,
2001. The results of operations for the three-month and six-month periods
ended June 30, 2002 are not necessarily indicative of operating results for
the full year.

2. Embezzlement Matter and Restatements and Reclassification of Previously
Reported Amounts

On January 31, 2002, the Company announced that it had discovered that
an employee who had recently left the Company may have improperly diverted
Company funds without authorization. Trading in the Company's common stock
on the Nasdaq National Market(R) ("Nasdaq") was halted, and the Audit
Committee of the Company's Board of Directors retained outside counsel to
conduct a special investigation into the matter. The Audit Committee also
retained an independent accounting firm to review the Company's internal
controls and to make recommendations for improvement, and the Company has
implemented the recommended improvements. The Company also contacted the
Securities and Exchange Commission (the "SEC"), as well as criminal
authorities, and is cooperating with the SEC, Nasdaq, and criminal
authorities with respect to their investigations into this matter.

The Company's former Vice President - Finance, Controller, Treasurer,
and Secretary, Larry Ohms (the "Former VP Finance"), over a period of four
years beginning in 1998, embezzled approximately $2,179,000 from the
Company. The Former VP Finance voluntarily resigned from the Company on
January 22, 2002, approximately one week before the Company discovered the
defalcations. The Company has since filed suit against the Former VP
Finance. The Former VP Finance has stated that no one else at the Company
was involved in perpetrating the embezzlements. From the results of the
special investigation, the Company believes this statement to be accurate.

On March 14, 2002, the Company received $500,000 in insurance proceeds
from the Company's insurance policies covering employee theft. The $500,000
had been recorded on the Consolidated Balance Sheet at December 31, 2001 in
prepaid expenses and other assets, and recognized in the Consolidated
Statement of Operations in other income in the fourth quarter 2001. In
addition, the Company has retained counsel for assistance in its efforts to
recover the embezzled funds from the Former VP Finance, and to pursue
possible civil actions on behalf of the Company against third parties. The
Former VP Finance has claimed not to have any funds. At this time, it is
too early to determine if any additional recoveries beyond the insurance
proceeds will be realized. During the first six months 2002, no additional
recoveries were realized. Any future recoveries will be recognized in the
quarters in which the recoveries are realized. The costs of the Company's
special investigation, the Company's cooperation with the SEC, Nasdaq, and
criminal authorities

Page 5 of 13

in their investigations, and the Company's ongoing recovery efforts will be
recognized as incurred. During the first six months 2002, the Company
recognized $622,000 of such embezzlement-related costs.

Of the total amount embezzled, $126,000 was embezzled during 1998,
$282,000 was embezzled during 1999, $791,000 was embezzled during 2000, and
$980,000 was embezzled during 2001. The Former VP Finance used a variety of
methods to hide the embezzlements. Funds embezzled during 1998 were
improperly expensed to selling, general and administrative expenses. Funds
embezzled during 1999 were improperly expensed to labor and other operating
expenses. Of the $791,000 that was embezzled in 2000, $328,000 was
improperly expensed to labor and other operating expenses, and $463,000 was
improperly recorded as prepaid financing costs within other assets, net.
Funds embezzled during 2001 totaling $980,000 were also improperly recorded
as prepaid financing costs in other assets, net. As a result of the
fraudulent entries in other assets, net during 2000 ($463,000) and 2001
($980,000), the Company improperly recognized excess amortization of its
prepaid financing costs, as a component of interest expense, of $19,000 for
the year ended December 31, 2000 and $166,000 for the nine months ended
September 30, 2001.

As a result of the embezzlements, the Company has reclassified to other
expenses $126,000 in 1998, and $282,000 in 1999, removing those amounts
from selling, general and administrative expenses, and labor and other
operating expenses, respectively. The embezzlements had a material effect
on the Company's financial statements for fiscal year 2000 and the first
three quarters 2001. Therefore, the Company has restated its financial
statements for 2000 and the first three quarters 2001. As a result of the
correction for the overstated prepaid financing costs for 2000 and the
first three quarters 2001, and the reclassification of excess interest
expense to other expenses, the Company's restatements reflected an
additional loss of $344,000 ($0.09 per share) net of income tax benefits
($444,000 gross) in 2000, and a reduction in net income of $525,000 ($0.10
per share) net of income tax benefits ($647,000 gross) for the nine months
ended September 30, 2001.

The Company's Consolidated Statement of Operations for first six months
2001 has been restated to eliminate excess amortization of prepaid
financing costs, as a component of interest expense, of $100,000, and to
recognize in other expenses $620,000 of embezzlement expense. The Company's
restatement resulted in an additional loss of $422,000 ($0.08 per share)
net of income tax benefits ($520,000 gross) for the six months ended June
30, 2001.

3. Inventories

Inventories consisted of the following at:

Page 6 of 13

4. Banking Facilities and Other Debt

On April 22, 1999, the Company entered into a new credit agreement with
a consortium of commercial banks for a $50,000,000 Senior Secured Term Loan
(the "Loan"). The Loan is repayable over a period of approximately 8 years,
maturing on March 30, 2007, and requires monthly principal payments of
$278,000, which began April 30, 2000, with a final principal payment of
$26,944,000 on March 30, 2007, which equates to a 15-year amortization. The
Company paid a fee equivalent to 2.50% of the Loan value to the placement
agent.

The interest rate on the first $30,000,000 of the Loan is 8.875%. The
subsequent installments bear interest from the date they were funded at
3.52% above the secondary market yield of the United States Treasury
obligation maturing May 15, 2005. The blended rate for the additional
$20,000,000 is 9.84%.

The Loan is secured by a first lien on substantially all of the
Company's assets, with the exception of accounts receivable and inventories
which have been used to secure the Company's revolving credit facility. The
Loan agreement contains covenants that restrict the incurrence of debt,
guaranties and liens, and places certain restrictions on the payment of
dividends and the sale of significant assets. The Company is also required
to meet minimum debt service coverage ratios on an on-going basis and
maintain a minimum level of tangible net worth.

As of April 26, 2001, the Company renewed its revolving credit
facility, extending it through May 31, 2002. The revolving credit facility
was increased from $4,000,000 to $5,000,000 and bears interest at LIBOR
plus 1.40%, which rate will increase to a maximum of LIBOR plus 3.55% in
accordance with a defined rate spread based upon the Company's then-current
ratio of total funded debt to earnings before interest, taxes, depreciation
and amortization (EBITDA). Further, on December 31, 2001, the Company
amended the revolving credit facility to extend the maturity date to July
31, 2002, and to allow for a contractual overadvance above the borrowing
base limitation as previously stated in the facility in an amount not to
exceed $750,000 that expired on July 31, 2002. The $5,000,000 revolving
credit facility was further amended on May 31, 2002 to extend the maturity
date to January 31, 2003. As of July 31, 2002, the Company's outstanding
balance was $2,825,000, and the average interest rate for the first six
months 2002 was 4.23%. The revolving credit facility is secured by the
Company's accounts receivable and inventory.

On December 27, 2000, the Company obtained a $5,000,000 bridge loan
under normal commercial terms from Inberdon Enterprise, Ltd. ("Inberdon"),
evidenced by a subordinated promissory note. Inberdon owned approximately
51% of the outstanding common stock of the Company at the time. The bridge
loan was unsecured, bore interest at 9.75%, and had to be repaid by March
27, 2001. The bridge loan was repaid with a portion of the proceeds of the
Company's rights offering that closed on February 8, 2001. See Note 5.

Page 7 of 13

A summary of outstanding debt at the dates indicated is as follows:
(In thousands of dollars)

The carrying amount of the Company's long-term debt approximates
its fair value.

5. Rights Offering

On December 26, 2000, the Company initiated a rights offering for
$10,000,000. The rights offering allowed each shareholder to receive 0.4566
non-transferable subscription rights for each share of the Company's common
stock owned on December 26, 2000. The purchase price for the subscription
was $5.50 per share, and the rights offering expired on February 5, 2001.

As a result of the rights offering, the Company received $10,000,000
($9,551,000 net of offering costs) and issued an additional 1,818,181
shares effective February 8, 2001. In the rights offering, the Company
honored the over subscription requests of its shareholders in full. The
Company's majority shareholder, Inberdon, subscribed for its full pro-rata
amount, and in addition purchased 461,005 shares not purchased by other
shareholders in the rights offering. Immediately following the rights
offering, Inberdon owned approximately 59% of the Company's common stock.

ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operating activities was $3,032,000 for the six months
ended June 30, 2002, compared to net cash used in operating activities of
$2,720,000 for the six months ended June 30, 2001. The $5,752,000 improvement in
first half 2002 was primarily the result of changes in working capital. The most
significant changes in working capital resulted from $2,920,000 less cash being
required to pay for accounts payable and accrued expenses in the first half
2002, compared to the same period in 2001. The 2001 decrease in accounts payable
and accrued expenses primarily reflected payments for costs incurred related to
the Phase I of the modernization and expansion project at the Arkansas facility
that was completed in the first half 2001. In addition, the Company reduced its
inventories by $1,045,000 in the 2002 period, compared to a $348,000 increase in
the 2001 period, and accounts receivable increased $1,952,000 during the 2002
period, compared to a $3,102,000 increase in the 2001 period.

The Company invested $2,132,000 in capital expenditures in the first six
months 2002, compared to $3,478,000 in the same period last year. In the first
six months 2001, capital expenditures of approximately $1,506,000 were related
to Phase I of the modernization and expansion project at the Arkansas facility.

Page 8 of 13

Net cash used in financing activities was $709,000 in the first six months
2002, primarily from $2,166,000 repayment of debt and $293,000 payment of cash
dividends, partially offset by $1,750,000 of draws on the Company's revolving
credit facility. Financing activities provided $1,594,000 net cash in the first
six months 2001, as explained below.

During the fourth quarter 2000, the Company required additional capital
because the costs to complete both Phase I of the Arkansas modernization and
expansion project and the new pulverized limestone production line at Texas were
significantly higher than originally anticipated and because the Company's cash
flow and operating profits were lower than expected. To meet its short-term
liquidity demands, the Company determined to make a pro-rata rights offering to
its existing shareholders to raise $10,000,000 in additional equity capital.

On December 27, 2000, the Company obtained a $5,000,000 bridge loan
("Bridge Loan") under normal commercial terms from Inberdon Enterprise, Ltd.
("Inberdon"), its majority shareholder. Inberdon owned approximately 51% of the
outstanding common stock of the Company at the time the Bridge Loan was made.
The Bridge Loan was unsecured, carried interest at 9.75%, and matured on March
27, 2001.

The Company commenced the rights offering on December 26, 2000, and it
closed on February 8, 2001. In the rights offering, the Company raised an
additional $10,000,000 ($9,551,000 net of offering costs) in equity capital and
issued 1,818,181 shares of common stock at the subscription price of $5.50 per
share. The Company was able to honor in full all over-subscription requests from
its shareholders. The Company's majority shareholder, Inberdon, subscribed for
its full pro rata amount and also purchased, at the $5.50 per share subscription
price, 461,005 additional shares not purchased by other shareholders in the
rights offering, for a total investment of approximately $7,630,000. Immediately
following the rights offering, Inberdon owned approximately 59% of the Company's
outstanding common stock.

The proceeds of the rights offering were used to repay the $5,000,000
Bridge Loan from Inberdon, to repay the Company's then-outstanding $4,000,000
revolving credit facility, and for working capital. Accordingly, the Company has
fully utilized the proceeds of the rights offering. As a result of repaying the
revolving credit facility, however, the Company continued to have access to the
funds available under the facility.

On December 31, 2001, the Company amended the revolving credit facility to
extend the maturity date to July 31, 2002, and to allow for a contractual
overadvance above the borrowing base limitation as previously stated in the
facility in an amount not to exceed $750,000 that expired on July 31, 2002. The
$5,000,000 revolving credit facility was further amended on May 31, 2002 to
extend the maturity date to January 31, 2003. As of July 31, 2002, the Company's
outstanding balance on the revolving credit facility was $2,825,000. The Company
believes that funds generated from operations and available under the revolving
credit facility will be sufficient to meet the Company's liquidity and capital
needs for the year.

The Arkansas modernization and expansion project commenced with ground
breaking in November 1999 and is expected to be completed in two phases: Phase I
involved the redevelopment of the quarry plant, rebuilding of the railroad to
standard gauge, the purchase of a facility to establish an out-of-state terminal
in Shreveport, Louisiana, the installation of a rotary kiln with preheater, and
increased product storage and loading capacity. The kiln in Phase I produced its
first lime on October 22, 2000, which is of excellent quality and has been well
received by customers. Phase I of the

Page 9 of 13

modernization and expansion project for the Arkansas plant required additional
work in order to be fully operational and efficient. The Company completed this
work in the second quarter 2001.

After final resolution of all outstanding matters with a contractor, the
total cost of Phase I was approximately $33,000,000. The $33,000,000 included
$1,800,000 of costs associated with the pre-building of certain facilities for
Phase II of the Arkansas project and the purchase of, but not all of the
improvements to, the out-of-state terminal in Shreveport, Louisiana.

Phase II of the Arkansas project will further expand the plant capacity
through the installation of a second kiln with additional storage capacity, and
includes the completion of the out-of-state terminal in Shreveport, Louisiana
for distribution of the Company's products. The Company may complete the
terminal before proceeding with Phase II.

Arkansas Phase II is estimated to cost approximately $16,000,000, not
including the $1,800,000 spent as part of Phase I. The Company plans to proceed
with Phase II and will continue to review the optimum time to start the project
based on its future operating results, market demand, and ability to secure
competitive construction bids and financing.

The Company is not contractually committed to any planned capital
expenditures until actual orders are placed for equipment. As of June 30, 2002,
the Company had no material open orders.

As of July 31, 2002, the Company had $45,047,000 in total debt outstanding.

RESULTS OF OPERATIONS

Revenues increased to $10,961,000 in the second quarter 2002 from
$10,812,000 in the second quarter 2001, an increase of $149,000, or 1.4%. This
resulted from a 2.7% increase in sales volume and a 1.3% decrease in prices.
Revenues increased to $19,938,000 in the first half 2002 from $19,503,000 for
the first half 2001, an increase of $435,000, or 2.2%. This resulted from a 1.5%
increase in sales volume and a 0.7% increase in prices. The market for the
Company's products continues to be very competitive. There was also a reduction
in the amount of Texas highway construction work let in the first half of the
year, as compared to the first half of last year. Recently, there has been an
upturn in the letting of contracts for highway construction work which the
Company believes should approach prior years' levels.

The Company's gross profit was $2,981,000 for the second quarter 2002,
compared to $3,298,000 for the second quarter 2001, a 9.6% decrease. Gross
profit margin as a percentage of revenues for the first quarter 2002 decreased
to 27.2% from 30.5% in second quarter 2001. Gross profit and gross profit
margins declined due to reduced lime production of approximately 15% during the
second quarter at the Company's Texas plant caused by various operational
problems, partially the result of unseasonably wet weather that continued into
the beginning of the third quarter. This reduced production resulted in the
depletion of finished goods inventories and increased costs through the purchase
of lime from alternative sources to fulfill the Company's sales commitments.
These operational problems are being resolved and production is returning to
normal.

The Company's gross profit was $4,818,000 for the first half 2002,
compared to $4,749,000 for the first half 2001, a 1.5% increase. Gross profit
margin as a percentage of revenues for the first half 2002 was 24.2% compared to
24.4% in first half 2001. The increase in gross profit during the first half
2002 is due to increased production and sales at the Arkansas facility. These
improvements in the first half 2002 more than offset the $353,000 increase in
depreciation expense and the operational problems at the Company's Texas plant
in the second quarter. The increase in depreciation resulted from the completion
of the Company's Arkansas Phase I modernization and expansion project in the
second quarter 2001.

Page 10 of 13

Selling, general and administrative expenses ("SG&A") increased by
$97,000, or 10.6%, to $1,015,000 in the second quarter 2002, as compared to
$918,000 in the second quarter 2001, and increased by $3,000, or 0.2%, to
$1,973,000 in the first half 2002, as compared to $1,970,000 in the first half
2001. As a percentage of sales, SG&A was 9.3% in the second quarter 2002, as
compared to 8.5% in the comparable 2001 period, and 9.9% for the 2002 six-month
period, as compared to 10.1% in the first six months 2001.

Interest expense in the second quarter 2002 was $1,102,000. This compares
to $955,000, net for the second quarter 2001, after $211,000 had been
capitalized as part of the Arkansas Phase I project costs during the 2001
quarter. Interest expense in the first half 2002 was $2,215,000. This compares
to $1,571,000, net for the comparable 2001 period, after $845,000 had been
capitalized as part of the Arkansas Phase I project costs during the first half
2001.

Other, net increased by $35,000 to $195,000 in the second quarter 2002, as
compared to the restated $160,000 in the second quarter 2001. Other, net in the
2002 quarter consisted of $247,000 for embezzlement-related costs, partially
offset by interest and other income. In the second quarter 2001 as restated,
$172,000 of embezzlement expense was the primary other expense, partially offset
by interest income. Other, net increased by $7,000 to $573,000 in the first half
2002, as compared to the restated $566,000 in the first half 2001. Other, net in
the 2002 period consisted of $622,000 for embezzlement-related costs partially
offset by interest and other income. In the first half 2001 as restated,
$620,000 of embezzlement expense was the primary other expense, partially offset
by interest income. (See Note 2 to Condensed Consolidated Financial Statements.)

The Company reported net income of $516,000 ($0.09 per share) during the
second quarter 2002, compared to a restated net income of $941,000 ($0.16 per
share) during the second quarter 2001. The Company reported a net income of
$46,000 ($0.01 per share) during the fist half 2002, compared to a restated net
income of $449,000 ($0.08 per share) during the first half 2001.

EBITDA (earnings before interest, taxes, depreciation and amortization) was
$3,338,000 for the second quarter 2002, a decrease of 11.3% from the restated
second quarter 2001 EBITDA of $3,764,000. This $426,000 decrease was primarily
due to the operational problems at the Company's Texas plant during the second
quarter. EBITDA was $5,433,000 for the first half 2002, an increase of 7.9% from
the restated first half 2001 EBITDA of $5,037,000. This $396,000 improvement was
primarily due to the $435,000 increase in revenues for the six-month period.

FORWARD-LOOKING STATEMENTS. Any statements contained in this Quarterly Report
that are not statements of historical fact are forward-looking statements as
defined in the Private Securities Litigation Reform Act of 1995. Forward-looking
statements in this Report, including without limitation, statements relating to
the Company's plans, strategies, objectives, expectations, intentions, and
adequacy of resources, are identified by such words as "will," "could,"
"should," "believe," "expect," "intend," "plan," "schedule," "estimate,"
"anticipate," and "project." The Company undertakes no obligation to publicly
update or revise any forward-looking statements. Investors are cautioned that
forward-looking statements involve risks and uncertainties that could cause
actual results to differ materially from expectations, including without
limitation the following: (i) the Company's plans, strategies, objectives,
expectations, and intentions are subject to change at any time at the discretion
of the Company; (ii) the Company's plans and results of operations will be
affected by the Company's ability to manage its growth and modernization; and
(iii) other risks and uncertainties, including without limitation those risks
and uncertainties indicated from time to time in the Company's filings with the
Securities and Exchange Commission, including the Company's Form 10-K for the
fiscal year ended December 31, 2001.

Page 11 of 13

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Not Applicable.

PART II. OTHER INFORMATION

ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Annual Meeting of Shareholders was held May 3, 2002 in Dallas, Texas.
The table below shows the proposal submitted to shareholders in the Company's
Proxy Statement, dated April 3, 2002.

Election of Directors

There were no broker non-votes.

ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K

a. Exhibits:

10 Fifth Amendment to Amended and Restated Loan and
Security Agreement dated as of May 31, 2002 among
United States Lime and Minerals, Inc., Arkansas Lime
Company, Texas Lime Company and First Union National
Bank

11 Statement re computation of per share earnings

99(a) Section 906 Certification by the Chief Executive
Officer

99(b) Section 906 Certification by the Chief Financial
Officer

b. Reports on Form 8-K: None

Page 12 of 13

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

UNITED STATES LIME & MINERALS, INC.

August 13, 2002 By: /s/ Timothy W. Byrne
--------------------------------------------
Timothy W. Byrne
President and Chief Executive Officer
(Principal Executive Officer)

August 13, 2002 By: /s/ M. Michael Owens
--------------------------------------------
M. Michael Owens
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)

Page 13 of 13

UNITED STATES LIME & MINERALS, INC.

Quarterly Report on Form 10-Q
Quarter Ended
June 30, 2002

Index to Exhibits