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 MARCH 31, 2004

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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).

Yes No X
--- ---

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: As of May 10, 2004, 5,826,696
shares of common stock, $0.10 par value, were outstanding.

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

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,
2003. The results of operations for the three-month period ended March 31,
2004 are not necessarily indicative of operating results for the full year.

Stock-Based Compensation. The Company accounts for stock-based
compensation using the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees." Stock-based compensation expense associated with option grants
was not recognized in the net income for the quarters ended March 31, 2004
and 2003, as all options granted have had exercise prices equal to the
market value of the underlying common stock on the dates of grant. The
following table illustrates the effect on net income and income per common
share if the Company had applied the fair-value-based recognition
provisions of Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," to stock-based employee
compensation (in thousands, except per share amounts):

Page 5 of 13

2. Income (Loss) Per Share of Common Stock

The following table sets forth the computation of basic and diluted
income (loss) per common share:

3. Inventories

Inventories consisted of the following at:
(In thousands)

4. Banking Facilities and Other Debt

On April 22, 1999, the Company entered into a 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 eight
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.

Page 6 of 13

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 secure the Company's $6,000,000 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 ongoing basis and
maintain a minimum level of tangible net worth.

On March 3, 2003, the Company entered into a Loan and Security
Agreement with another bank for a $5,000,000 revolving credit facility to
replace a prior facility. In addition, the Company obtained a new
$2,000,000 equipment line of credit (available for financing or leasing
large mobile equipment used in its operations) from the same bank. The
revolving credit facility is secured by the Company's accounts receivable
and inventories, provides for an interest rate of LIBOR plus 2.75% and
originally matured on March 1, 2004. On December 29, 2003, the Loan and
Security Agreement was amended to increase the revolving credit facility to
$6,000,000 and extend the maturity to April 1, 2005. As of March 31, 2004,
the Company had no outstanding balance on the revolving credit facility. As
of March 31, 2004, the Company had entered into approximately $1,100,000 of
operating leases for mobile equipment under the $2,000,000 equipment line.

In April 2003, the Company engaged Frost Securities, Inc. ("Frost") to
advise it on possible financing alternatives for the Phase II expansion of
the Company's Arkansas facilities. Frost contacted potential sources of
financing and obtained several term sheet proposals for a subordinated debt
placement from outside investors. In conjunction with the review of the
proposals and further negotiations, Frost and the Company renewed
discussions with the Company's two largest shareholders and a third party
to determine whether they would be interested in the investment on terms
more favorable to the Company than those then available from other
potential outside investors.

On August 5, 2003, the Company sold $14,000,000 of unsecured
subordinated notes (the "Sub Notes") in a private placement under Section
4(2) of the Securities Act of 1933 to three accredited investors, one of
which is an affiliate of Inberdon Enterprises Ltd., the Company's majority
shareholder ("Inberdon"), and another of which is an affiliate of Robert S.
Beall, who owns approximately 11% of the Company's outstanding shares. The
Company believes that the terms of the private placement are more favorable
to the Company than the proposals previously received. Frost provided an
opinion to the Company's Board of Directors that, from a financial point of
view, the private placement was fair to the unaffiliated holders of the
Company's common stock in relation to other potential subordinated debt
transactions then available to the Company. The Company paid Frost an
aggregate of $381,000 for its advice, placement services and opinion.

The net proceeds of approximately $13,450,000 from the private
placement have primarily been used to fund the Phase II expansion of the
Company's Arkansas facilities. Terms of the Sub Notes include: a maturity
date of August 5, 2008, subject to acceleration upon a change in control;
no mandatory principal payments prior to maturity; an interest rate of 14%
(12% paid in cash and 2% paid in cash or in kind at the Company's option);
and, except as discussed below, no optional prepayment prior to August 5,
2005 and a 4% prepayment penalty if repaid before maturity. The terms of
the Sub Notes are identical to one another, except that the Sub Note for
the affiliate of Inberdon does not prohibit prepayment prior to August 5,
2005 and does not require a prepayment penalty if repaid before maturity,
resulting in a weighted average prepayment penalty of

Page 7 of 13

approximately 2.4% if the Sub Notes are repaid before maturity. The Sub
Notes include covenants similar to the covenants for the Loan.

The private placement also included six-year detachable warrants,
providing the Sub Note investors the right to purchase an aggregate of
162,000 shares of the Company's common stock, at 110% of the average
closing price of one share of common stock for the trailing 30 trading days
prior to closing, or $3.84. The fair value of the warrants was recorded as
a reduction of the carrying value of the Sub Notes and is being accreted
over the term of the Sub Notes, resulting in an effective annual interest
rate of 14.44%. After August 5, 2008, or upon an earlier change in control,
the investors may require the Company to repurchase any or all shares
acquired through exercise of the warrants (the "Warrant Shares"). The
repurchase price for each Warrant Share will equal the average closing
price of one share of the Company's common stock for the 30 trading days
preceding the date the Warrant Shares are put back to the Company. Changes
in the repurchase price for each Warrant Share are accreted or decreted
over the five-year period from the date of issuance to August 5, 2008. The
investors are also entitled to certain registration rights for the resale
of their Warrant Shares.

As a result of negotiations with the Company's existing bank lenders,
the Loan and the revolving credit facility were amended to approve the
terms of the Sub Notes. As part of these amendments, the Company is
prohibited from paying any dividends in cash through June 30, 2005 without
the prior written consent of the bank lenders.

A summary of outstanding debt follows:
(In thousands)

The Company made a $3,000,000 principal prepayment on the Sub
Notes on May 7, 2004. Pursuant to the terms of the Sub Notes, a $30,000
prepayment penalty was also paid on $1,500,000 of the principal prepayment.

Page 8 of 13

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

FORWARD-LOOKING STATEMENTS. Any statements contained in this 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. The Company cautions 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 in the Company's discretion; (ii) the Company's
plans and results of operations will be affected by its ability to manage its
growth; (iii) the Company's ability to meet short-term and long-term liquidity
demands, including servicing the Company's debt; (iv) inclement weather
conditions; (v) increased fuel costs; (vi) unanticipated delays or cost overruns
in completing current or planned construction projects; (vii) reduced demand for
the Company's products; and (viii) other risks and uncertainties set forth below
or 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, 2003.

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operations was $3,133,000 for the quarter ended
March 31, 2004, compared to $936,000 for the quarter ended March 31, 2003. The
$2,197,000 increase primarily resulted from $830,000 of net income in the 2004
period compared to a loss of $271,000 in the first quarter 2003, the effect of
noncash charges to income and other changes in working capital.

The Company invested $6,443,000 in capital expenditures in the first
quarter 2004, $4,698,000 of which related to the Phase II expansion of the
Company's Arkansas facilities, compared to $1,798,000 of capital expenditures in
the same period last year.

Net cash used by financing activities was $806,000 in the first quarter
2004, including $833,000 for repayment of debt. Financing activities provided
$1,223,000 net cash in the first quarter 2003, primarily from $2,201,000 of
draws on the Company's revolving credit facility, partially offset by $833,000
repayment of debt and $145,000 payment of cash dividends.

On March 3, 2003, the Company entered into a Loan and Security
Agreement with another bank for a $5,000,000 revolving credit facility to
replace a prior facility. In addition, the Company obtained a new $2,000,000
equipment line of credit (available for financing or leasing large mobile
equipment used in its operations) from the same bank. The revolving credit
facility is secured by the Company's accounts receivable and inventories,
provides for an interest rate of LIBOR plus 2.75% and originally matured on
March 1, 2004. On December 29, 2003, the Loan and Security Agreement was amended
to increase the revolving credit facility to $6,000,000 and extend the maturity
to April 1, 2005. As of March 31, 2004, the Company had no outstanding balance
on the revolving credit facility. As of March 31, 2004, the Company had entered
into approximately $1,100,000 of operating leases for mobile equipment under the
$2,000,000 equipment line.

In April 2003, the Company engaged Frost Securities, Inc. ("Frost") to
advise it on possible financing alternatives for the Phase II expansion of the
Company's Arkansas facilities. Frost contacted potential sources of financing
and obtained several term sheet proposals for a subordinated debt

Page 9 of 13

placement from outside investors. In conjunction with the review of the
proposals and further negotiations, Frost and the Company renewed discussions
with the Company's two largest shareholders and a third party to determine
whether they would be interested in the investment on terms more favorable to
the Company than those then available from other potential outside investors.

On August 5, 2003, the Company sold $14,000,000 of unsecured
subordinated notes (the "Sub Notes") in a private placement under Section 4(2)
of the Securities Act of 1933 to three accredited investors, one of which is an
affiliate of Inberdon Enterprises Ltd., the Company's majority shareholder
("Inberdon"), and another of which is an affiliate of Robert S. Beall, who owns
approximately 11% of the Company's outstanding shares. The Company believes that
the terms of the private placement are more favorable to the Company than the
proposals previously received. Frost provided an opinion to the Company's Board
of Directors that, from a financial point of view, the private placement was
fair to the unaffiliated holders of the Company's common stock in relation to
other potential subordinated debt transactions then available to the Company.
The Company paid Frost an aggregate of $381,000 for its advice, placement
services and opinion.

The net proceeds of approximately $13,450,000 from the private
placement have primarily been used to fund the Phase II expansion of the
Company's Arkansas facilities. Terms of the Sub Notes include: a maturity date
of August 5, 2008, subject to acceleration upon a change in control; no
mandatory principal payments prior to maturity; an interest rate of 14% (12%
paid in cash and 2% paid in cash or in kind at the Company's option); and,
except as discussed below, no optional prepayment prior to August 5, 2005 and a
4% prepayment penalty if repaid before maturity. The terms of the Sub Notes are
identical to one another, except that the Sub Note for the affiliate of Inberdon
does not prohibit prepayment prior to August 5, 2005 and does not require a
prepayment penalty if repaid before maturity, resulting in a weighted average
prepayment penalty of approximately 2.4% if the Sub Notes are repaid before
maturity. The Sub Notes include covenants similar to the covenants for the Loan.

The private placement also included six-year detachable warrants,
providing the Sub Note investors the right to purchase an aggregate of 162,000
shares of the Company's common stock, at 110% of the average closing price of
one share of common stock for the trailing 30 trading days prior to closing, or
$3.84. The fair value of the warrants was recorded as a reduction of the
carrying value of the Sub Notes and is being accreted over the term of the Sub
Notes, resulting in an effective annual interest rate of 14.44%. After August 5,
2008, or upon an earlier change in control, the investors may require the
Company to repurchase any or all shares acquired through exercise of the
warrants (the "Warrant Shares"). The repurchase price for each Warrant Share
will equal the average closing price of one share of the Company's common stock
for the 30 trading days preceding the date the Warrant Shares are put back to
the Company. Changes in the repurchase price for each Warrant Share are accreted
or decreted over the five-year period from the date of issuance to August 5,
2008. The investors are also entitled to certain registration rights for the
resale of their Warrant Shares.

As a result of certain negotiations with the Company's existing bank
lenders, the Loan and the revolving credit facility were amended to approve the
terms of the Sub Notes. As part of these amendments, the Company is prohibited
from paying any dividends in cash through June 30, 2005 without the prior
written consent of the bank lenders.

The Arkansas modernization and expansion project began in the fourth
quarter 1999 and was 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. We completed Phase I in the
second quarter 2001.

The total cost of Phase I of the Arkansas project was approximately
$33,000,000. The $33,000,000 included approximately $1,800,000 of costs
associated with the pre-building of certain

Page 10 of 13

facilities for Phase II of the project and the purchase of, but not all of the
improvements to, the out-of-state terminal in Shreveport, Louisiana.

The Phase II expansion has doubled the Arkansas plant's quicklime
production capacity through the installation of a second preheater rotary kiln
and additional storage capacity substantially identical to the kiln system built
in Phase I. Construction of the second kiln system commenced in the third
quarter 2003 and was timely completed with lime production from the new kiln
beginning in late February 2004. The plans for Phase II also include the
rehabilitation of the distribution terminal in Shreveport, Louisiana, currently
expected to be completed in 2004. The estimated total cost to complete Phase II
is approximately $16,000,000, of which approximately $13,200,000 has been spent
through March 31, 2004. The Company is financing the completion of the Phase II
expansion principally through cash flows from operations.

In March 2004, the Company incorporated a new Texas subsidiary, U. S.
Lime - Houston ("Houston"), to conduct lime slurry operations in Houston, Texas.
Houston had minimal activity in March 2004.

The Company is not contractually committed to any planned capital
expenditures until actual orders are placed for equipment. As of March 31, 2004,
the Company had no material open orders.

The Company made a $3,000,000 principal prepayment on the Sub Notes on
May 7, 2004. Pursuant to the terms of the Sub Notes, a $30,000 prepayment
penalty was also paid on $1,500,000 of the principal prepayment. As of the date
of this report, the Company has $47,128,000 in total debt outstanding.

RESULTS OF OPERATIONS

Revenues increased to $12,075,000 in the first quarter 2004 from
$9,556,000 in the first quarter 2003, an increase of $2,519,000, or 26.4%. The
increase in revenues for the first quarter 2004 compared to the 2003 quarter was
primarily due to increased lime sales resulting from lime production from the
new kiln at the Company's Arkansas plant which came on line in late February.
Due in part to temporary lime shortages, principally in the states east of the
Arkansas plant, the Company has sold most of the increased lime production at
Arkansas during the quarter. These shortages were primarily due to increased
consumption of lime for steel-related uses, closing of three lime plants in the
Midwest and production difficulties at some competitors' plants. In addition,
production at Texas during the first quarter 2003 was adversely affected by a
winter ice storm and a natural gas curtailment.

The Company's gross profit was $3,415,000 for the first quarter 2004,
compared to $1,749,000 for the first quarter 2003, a 95.3% increase. Gross
profit margin as a percentage of revenues and gross profit increased in the 2004
quarter compared to the 2003 quarter. These increases were primarily due to the
increased lime sales volume, with prices remaining firm.

Selling, general and administrative expenses ("SG&A") increased by
$129,000, or 12.2%, to $1,188,000 in the first quarter 2004, compared to
$1,059,000 in the first quarter 2003, principally as a result of increased
employee wages and benefits, insurance costs and an increase on allowance for
bad debts. As a percentage of sales, SG&A declined to 9.8% in the first quarter
2004 from 11.1% in the comparable 2003 quarter.

Interest expense in the first quarter 2004 increased $186,000, or
18.2%, to $1,207,000, compared to $1,021,000 in the first quarter 2003. The
increase in interest expense in the 2004 quarter primarily resulted from the
private placement of the Sub Notes, partially offset by $3,333,000 in repayments
on the Loan over the last 12 months. Approximately $303,000 of interest was
capitalized in the first quarter 2004 as part of the Arkansas Phase II expansion
project.

Page 11 of 13

Other, net was $18,000 income in the first quarter 2004, compared to
$12,000 income in the first quarter 2003. During the first quarter 2003, the
Company recorded embezzlement-related recoveries of $81,000, net of income tax
benefits ($100,000 gross), and embezzlement-related costs of $69,000, net of
income tax benefits ($81,000 gross).

The Company's net income was $830,000 ($0.14 per basic and diluted
share) during the first quarter 2004, compared to a net loss of $271,000 ($0.05
per basic and diluted share) during the first quarter 2003.

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

Not Applicable.

ITEM 4: CONTROLS AND PROCEDURES

The Company's management, with the participation of the Company's Chief
Executive Officer ("CEO") and Chief Financial Officer ("CFO"), evaluated the
effectiveness the Company's disclosure controls and procedures as of the end of
the period covered by this report. Based on that evaluation, the CEO and CFO
concluded that the Company's disclosure controls and procedures as of the end of
the period covered by this report were effective.

No change in the Company's internal control over financial reporting
occurred during the Company's most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.

PART II. OTHER INFORMATION

ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits:

31.1 Rule 13a-14(a)/15d-14(a) Certification by the Chief Executive
Officer.

31.2 Rule 13a-14(a)/15d-14(a) Certification by the Chief Financial
Officer.

32.1 Section 1350 Certification by the Chief Executive Officer.

32.2 Section 1350 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.

May 11, 2004 By: /s/ Timothy W. Byrne
---------------------------------------------
Timothy W. Byrne
President and Chief Executive Officer
Principal Executive Officer)

May 11, 2004 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
March 31, 2004

Index to Exhibits