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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

FOR ANNUAL AND TRANSITION

REPORTS PURSUANT TO SECTIONS 13 OR 15(d)

OF THE SECURITIES ACT OF 1934

(Mark One)

For the fiscal year ended December 31, 2002

OR

For the transition period from              to             

Commission file number 333-32518

BETTER MINERALS & AGGREGATES COMPANY

(Exact name of registrant as specified in its charter)

Route 522 North, P.O. Box 187

Berkeley Springs, West Virginia 25411

(Address of principal executive offices, including zip code)

Registrant’s telephone number, including area code: (304) 258-2500

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: None

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Annual Report on Form 10-K or any amendment to this Annual Report on Form 10-K. x

Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date:

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes ¨ No x

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Forward-Looking Information

This Annual Report on Form 10-K contains statements that constitute “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934. We have based these forward-looking statements on our current expectations and projections about future events. Although we believe that our plans, intentions and expectations reflected in or suggested by those forward-looking statements are reasonable, we can give no assurance that our plans, intentions or expectations will be achieved. We caution investors that all forward-looking statements involve risks and uncertainties, including those arising out of economic, climatic, political, regulatory, competitive and other factors. The forward-looking statements in this document are intended to be subject to the safe harbor protection provided by Section 21E. Important factors that could cause actual results to differ materially from those expressed or implied by the forward-looking statements we make in this Annual Report on Form 10-K are set forth in this Annual Report on Form 10-K. We believe that the following factors, among others, could affect our future performance and cause actual results to differ materially from those expressed or implied by forward-looking statements made in this Annual Report on Form 10-K:

Except for our obligations under the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, our future performance may differ materially from that expressed or implied by the forward-looking statements discussed in this Annual Report on Form 10-K.

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Industry Data

Information contained in this Annual Report on Form 10-K concerning the industrial minerals and aggregates industries, our general expectations concerning these industries and our market position and market share within these industries and the end use markets we serve are based on estimates prepared by us using data from various sources (primarily the U. S. Geological Survey, including its web site at www.usgs.gov, the Committee on Environment and Public Works of the United States Senate and data from our internal research) and on assumptions made by us, based on that data and our knowledge of these industries, which we believe to be reasonable. We believe data regarding the industrial minerals and aggregates industries and our market position and market share within those industries and the end use markets we serve are inherently imprecise, but are generally indicative of their size and our market position and market share within those industries and end use markets. While we are not aware of any misstatements regarding any industry data presented in this Annual Report on Form 10-K, our estimates, particularly as they relate to our general expectations concerning the industrial minerals and aggregates industries, involve risks and uncertainties and are subject to change based on various factors, including those discussed under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations— Significant Factors Affecting Our Business” and elsewhere in this Annual Report on Form 10-K. Information contained in this Annual Report on Form 10-K relating to the Transportation Equity Act for the 21st Century comes primarily from the United States Department of Transportation’s web site located at www.fhwa.dot.gov. The information contained in, or linked to, the web sites referenced in this paragraph does not constitute part of this Annual Report on Form 10-K.

Measurements

When used in this Annual Report on Form 10-K:

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PART I

Overview of Better Minerals & Aggregates Company

We mine, process and market industrial minerals, principally industrial silica, in the eastern and midwestern United States. We also mine, process and market aggregates and produce and market hot mixed asphalt in certain parts of Pennsylvania and New Jersey.

We are the second leading producer of industrial silica in the United States, accounting for approximately 24% of industry volume in 2002, and believe that we have leading positions in most of our key end use markets for our silica products, typically occupying the number one or two position by sales. These end use markets include container glass, fiberglass, specialty glass, flat glass, fillers and extenders, chemicals and ceramics. We also supply our silica products to the foundry, building materials and other end use markets.

Our customers use our aggregates, which consist of high quality crushed stone, construction sand and gravel, for road construction and maintenance, other infrastructure projects and residential and commercial construction and to produce hot mixed asphalt and concrete products. We also use our aggregates to produce hot mixed asphalt.

We operate a network of 27 production facilities in 14 states. Many of our production facilities are located near major modes of transportation and our significant customers, which reduces transportation costs and enhances customer service. Our principal industrial minerals and aggregates properties each have deposits that we believe will support production in excess of 15 years. Our industrial minerals business (substantially all the sales of which consists of silica products) and our aggregates business accounted for 61% and 39% of our sales, respectively, for the year ended December 31, 2002.

On April 10, 2003, we entered into an agreement to sell our aggregates segment to a subsidiary of Hanson Building Materials of America, Inc. The consideration consists of $152 million in cash and the assumption of $3 million in capital lease obligations. Pursuant to the agreement, we would owe Hanson $2 million plus interest (beginning after the third year) on the fifth anniversary of the closing if certain post-closing permit and rezoning objectives specified in the agreement are not achieved during this period. The agreement also contains customary representations, warranties and indemnities. Closing on the sale is subject to customary closing conditions, including antitrust clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and completion of environmental and geological due diligence and real estate surveys at certain of our aggregates operating sites. We will also need to obtain the consent of our senior secured lenders in order to release any liens on the assets being sold and the release of the guarantees of our aggregates subsidiaries of the obligations under the indenture relating to our senior subordinated notes.

Products

We operate in two business segments: industrial minerals products and aggregates products.

Industrial Minerals. Our industrial minerals products are processed to meet a broad range of chemical purity, particle shape and sizing specifications. Our key industrial minerals products are known as unground silica, ground silica, fine ground silica, kaolin and aplite. Our unground silica products consist of silica of various size grades ranging from 120 to 20 mesh. For the year ended December 31, 2002, we sold 5.5 million tons of unground silica. Our ground silica products consist of unground silica that is further processed into sizes of 40 to 125 microns. For the year ended December 31, 2002, we sold 550,000 tons of ground silica. Our fine ground silica products consist of ground silica that we have further processed with highly engineered equipment into size grades of 5 to 40 microns. For the year ended December 31, 2002, we sold 53,000 tons of fine ground silica. In addition to our silica products we also produce a limited amount of kaolin and aplite. Kaolin is a mineral co-product in our production of silica in Kosse, Texas that we sell primarily as a filler and extender to the paints and coatings industry. For the year ended December 31, 2002, we sold 43,000 tons of kaolin. Aplite is an alumina source produced at our Montpelier, Virginia facility that we sell primarily to the glass industry. For the year ended December 31, 2002, we sold 246,000 tons of aplite.

Aggregates. Our aggregates products include high quality crushed stone, construction sand and gravel, which we provide in various sizes, and hot mixed asphalt. Hot mixed asphalt is a blended mixture of approximately 95% crushed stone, sand or gravel bound together by asphalt oil. A major component of the road system in the United States, hot mixed asphalt covers approximately 95% of the paved roads in the United States, and the hot mixed asphalt industry generates over $10 billion in sales annually in the United States. Market growth and demand is primarily driven by road construction and population growth. We

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sold 10.4 million tons of our aggregates products that included 1.8 million tons of our hot mixed asphalt for the year ended December 31, 2002.

We produce a high quality, anti-skid asphalt for use in Superpave. Superpave is a relatively new approach to asphalt mix design, which provides designers with standards for customizing roadway mixes for specific weather and traffic conditions. This new set of standards generally requires high quality aggregates that conform to a variety of specific characteristics, including hardness, absorption, size and shape. Many state governments have elected to require their roadways to conform to the Superpave standards. For example, the Pennsylvania Department of Transportation requires all roadway contracts to include the use of the Superpave standards. We have the ability both to supply our customers with the quality of aggregates required for Superpave as well as to manufacture Superpave-compliant asphalt from our own hot mixed asphalt plants.

End Use Markets and Customers

Our industrial minerals and aggregates businesses generate sales from a diversified base of customers and end use markets. During the year ended December 31, 2002, we exceeded $10 million in sales in each of 8 distinct end use markets, and no single customer accounted for more than 5% of our sales.

Industrial Minerals. Our industrial mineral products are sold into a variety of end use markets, as described below.

Container Glass. We supply unground silica and aplite to the container glass end use market for use in the production of food, beverage and liquor bottles.

Fiberglass. We supply unground and ground silica and aplite to the textile and insulation fiberglass end use markets. Textile fiberglass is used in the production of roofing products and composites for automotive parts, sports equipment and boats. Insulation fiberglass is used to maximize energy efficiency in buildings by insulating heating and cooling ducts, attics, basements and exterior walls.

Specialty Glass. We supply unground and ground silica and aplite to the specialty glass end use market for use in the production of television tubes, lights and tableware. Because of the higher quality standards in this market, certain of our industrial minerals for specialty glass are shipped regionally, nationally and also are exported.

Flat Glass. We supply unground silica to the flat glass end use market for use in the production of automotive glass and windows. Windows are primarily used in commercial and residential construction and remodeling.

We estimate that in 2002 our shipments of industrial silica to the container glass, fiberglass, specialty glass and flat glass end use markets accounted for approximately 29% of the total volume of industrial silica shipped to the glass end use markets in the United States.

Foundry. We supply unground and ground silica to the foundry end use market for use in the production of automotive, heavy equipment and machine tool castings. We estimate that in 2002 we accounted for approximately 14% of the silica volume shipped to the foundry end use market in the United States.

Fillers and Extenders. We supply unground, ground and fine ground silica and kaolin to the paints and coatings end use market as fillers and extenders in the production of architectural, industrial and traffic paints, and to the rubber and plastic end use market for use in the production of epoxy molded countertops and silicone rubber. We estimate that in 2002 we accounted for approximately 30% of the silica volume shipped to the fillers and extenders end use market in the United States. We are able to ship certain of these products, which are primarily marketed on a local basis, to customers nationally as well as regionally. In addition, we are also able to compete internationally with some of these products.

Building Materials. We supply unground, ground and fine ground silica and kaolin to the building materials end use market for use in the production of bricks, stucco, concrete and asphalt shingles. We estimate that in 2002 we accounted for approximately 25% of the silica volume shipped to the building materials end use market in the United States.

Chemicals. We supply unground and ground silica to the chemicals end use market where it is used in the manufacture of sodium silicate, which is used in products such as detergents, paper textile, finishing and dental products. We estimate that in 2002 we accounted for approximately 65% of the silica volume shipped to the chemicals end use market in the United States.

Ceramics. We supply unground, ground and fine ground silica and kaolin to the ceramics end use market for use in the production of ceramic whiteware, floor tiles and glaze formulations. We estimate that in 2002 we accounted for approximately 29% of the silica volume shipped to the ceramics end use market in the United States.

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Other. We also supply our silica, kaolin and aplite to a variety of additional markets. For example, our silica is used as fracturing sand in the oil and gas end use market and in athletic fields, race tracks, sand boxes, playgrounds and golf courses.

Aggregates. We supply our aggregates products primarily to the paving and construction end use market in southern New Jersey and southeastern and western Pennsylvania for use in pavements. We also supply our aggregates for use in outside recreational facilities, sport stadiums and residential and commercial construction. We use the remainder of our aggregates to produce hot mixed asphalt.

Our aggregates business is highly seasonal, due primarily to the effect of weather conditions on construction activity in the markets that we serve. Poor weather during the peak season of our aggregates business from April through November could result in lower sales of aggregates by reducing or delaying road construction and maintenance, other infrastructure projects and residential and commercial construction. In the past, significant changes in weather conditions during this period have caused variations in demand for aggregates. In addition, because we are not as geographically diverse as some of our aggregates competitors, we may be more vulnerable than these competitors to poor weather conditions in the geographic areas in which we operate.

Many of our aggregates customers depend substantially on government funding of highway construction and maintenance and other infrastructure projects that is provided from federal funding and state and municipal governmental matching funds. Accordingly, a decrease in federal funding of highways and related infrastructure improvements or a failure of states or municipalities to match the federal funding provided them, could adversely affect our revenue and profits in our aggregates business. In addition, unlike some of our competitors, we currently sell our aggregates products almost entirely in only two states, Pennsylvania and New Jersey. As a result, we are more vulnerable than our more geographically diverse competitors to decreases in state government highway spending in those states.

Sales and Marketing

We market our industrial minerals products primarily on a local basis. Our local sales and marketing efforts are each managed by a regional sales person, and are directed to meet our local customers’ specific needs. Our technical and customer service personnel support our local sales and marketing personnel. Certain of our smaller local customers are primarily serviced by customer service representatives located at our facilities. We also sell to distributors for resale to customers who desire to purchase a combination of our industrial minerals and other products that the distributor supplies.

In the case of our customers that have facilities in multiple states, we also direct our sales and marketing efforts at the corporate headquarters level. While competition for these customers generally remains at the local level, the terms of certain of our agreements are negotiated with the customer at the corporate level. Our national account managers also coordinate multi- disciplinary teams that work with these customers and their technical and engineering departments to jointly develop specifications for industrial minerals to meet their local product and application needs. In addition, we provide technical and customer service to these customers’ individual facility locations at the local level.

We market our aggregates products, including our hot mixed asphalt, directly through our local sales force, which calls on our customers at their facilities.

Competition

We operate in the highly competitive industrial silica and aggregates industries. Transportation costs are a significant portion of the total cost of industrial minerals and aggregates to customers, typically representing up to 50% of that cost. As a result, the industrial minerals and aggregates markets are typically local, and competition from beyond the local area is limited. Although we experience competition in all of our end use markets, we believe that we are a leading producer in the key end use markets and geographic areas that we serve.

The industrial silica industry is a competitive market that is characterized by a small number of large, national producers and a larger number of small, regional producers. We are the second leading producer of industrial silica in the United States, accounting for approximately 24% of industry volume in 2002. We compete with, among others, Unimin Corporation, Fairmount Minerals, Inc., Oglebay Norton Industrial Sands, Inc. and Badger Mining Corporation. Competition in the industrial minerals industry is based on price, consistency and quality of product, site location, distribution capability, customer service, reliability of supply, breadth of product offering and technical support. In addition, there is significant underutilized capacity in the industrial minerals industry that could adversely affect the pricing of our industrial minerals products.

In recent years, the aggregates industry has seen increasing consolidation, although competition remains primarily local.

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Competition in the aggregates industry is based primarily on price, quality of product, site location, distribution capability and customer service. Due to the high cost of transportation relative to the value of the product, competition within the aggregates industry favors producers with aggregates production facilities in close proximity to transportation modes and customers. Accordingly, in Pennsylvania and New Jersey, we compete primarily with local or regional operations. In addition, in western Pennsylvania, slag, a residue from steel processing, also competes with our aggregates products.

Many of our competitors are large companies that have greater financial resources than we do, may develop technology superior to ours and have production facilities that are located closer to key customers. We cannot guarantee that we will be able to compete successfully against our competitors in the future or that competition will not have a material adverse effect on us.

Production and Distribution

Our production process for our industrial minerals generally consists of mining mineral ore followed by a number of processing steps. All of our industrial minerals mining operations involve surface mining. As is customary in our industry, some of our mining operations, particularly drilling and blasting, are outsourced to third parties. After the mineral ore is mined we crush it into various sizes, depending on the specific customer application. We then remove impurities from the materials in a washing process and remove oversized particles by screening. Moisture is removed through a drying process and the product is loaded into trucks or rail cars for shipment or is bagged before shipping.

We ship our industrial mineral products direct to our customers by either truck or rail. Bagged product is generally distributed by truck. We sometimes utilize rail-truck transfer stations to deliver our products if we can thereby achieve lower delivery costs to a given customer or region. Almost all our truck shipments of industrial minerals are carried out by third parties. Our rail shipments are generally made by railcar equipment owned by the railroad, although for some customers and regions we lease our own railcars. Given the value to weight ratio of most of our industrial mineral products, the cost-effective distribution range is approximately 200 miles. For some of our high margin fine ground silica and other specialty products such as kaolin, we can effectively distribute our products nationally and, in some cases, internationally.

Our production process for our aggregates consists of mining mineral ore and then crushing it into various sizes based on customer specifications. All of our aggregates mining operations involve surface mining, except for two that involve underground mining. Generally, surface mining is subject to less operational risk than underground mining. We either ship our aggregates products directly to our customers by truck, typically within 75 miles of the plant, or store it at our facility to meet future customer demand. In certain instances we deliver large orders by rail. Our hot mixed asphalt is produced by mixing our aggregates with asphalt oil, blending to customer specifications and then delivering by truck typically within 30 miles of the plant.

Our Commercial Aggregates Transportation and Sales, LLC (“CATS”) subsidiary runs a cooperative fleet of dump trucks owned by independent contractors. CATS hires these trucks for hauling aggregates and other bulk materials. In return, the independent trucking contractors benefit from a steady source of work and bulk discounts on fuel, tires and other services. CATS enables us to secure reliable access to a fleet of approximately 200 dump trucks on a cost-effective basis.

Technical Support

We operate an industrial minerals laboratory to monitor the quality of our products, plants and services. The laboratory has four principal functions. The technical service function provides support to both current and prospective customers and performs controlled tests for a variety of applications. The lab also assists foundries in their quality control programs through periodic testing of their sand and equipment, a service that has enabled us to increase our business by acquiring several large foundries as customers. The application function evaluates the chemical, physical and performance characteristics of our products and those of our competitors. These evaluations assist us in developing new products and applications and enable us to provide our customers with technical support and recommendations. The analytical function both provides support for plants lacking the ability to provide certain technical information to customers, and analyzes drill core samples to provide data for short- and long-term mine planning. The mineral processing function is designed to simulate all plant processes, primarily preparing and analyzing drill core samples for mine planning purposes and providing expertise in plant problem troubleshooting. We are ISO 9002 registered at nine plants.

Government Regulation

Environmental Matters. We are subject to a variety of governmental regulatory requirements relating to the environment, including those relating to our handling of hazardous materials and air and wastewater emissions. Some environmental laws impose substantial penalties for noncompliance, and others, such as the federal Comprehensive Environmental Response, Compensation, and Liability Act, impose strict, retroactive and joint and several liability upon persons responsible for releases of hazardous substances.

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We believe that we have all material environmental permits, that our operations are in substantial compliance with applicable laws and that any noncompliance is not likely to have a material adverse effect on us. Through periodic self-audits, we continually evaluate whether we must take additional steps to ensure compliance with existing environmental laws. However, if we fail to comply with present and future environmental laws and regulations, we could be subject to liabilities or our operations could be interrupted. In addition, future environmental laws and regulations could restrict our ability to expand our facilities or extract our mineral deposits or could require us to acquire costly equipment or to incur other significant expenses in connection with our business. Although we believe we have made sufficient capital expenditures to achieve substantial compliance with existing environmental laws and regulations, future events, including changes in any environmental requirements and the costs associated with complying with such requirements, could have a material adverse effect on us.

We have taken a number of steps to minimize potential environmental liabilities and address environmental activities in a proactive manner, including performing regular environmental audits, performing Phase 1 environmental assessments on all of our properties in 1995 and, prior to acquisition, on all properties acquired after that time, removing all known underground storage tanks, replacing PCB-containing transformers with non-PCB transformers and developing and implementing an “environmental information management system” to allow us to better track permits and compliance matters.

Some of our facilities have a long history of industrial operations. As such, we may have liability for cleanup of contamination from historical discharges of hazardous materials. For example, we may be required to remediate groundwater contamination at our Rockwood, Michigan facility. Although the contamination has not moved off of our site and has not affected drinking water supplies, further action may be required by state authorities. Our Ottawa, Illinois facility has trace levels of arsenic contamination in the groundwater beneath the quarries. Studies show that there is no health risk to workers and that the product is not contaminated. We believe that we have claims against responsible third parties or have insurance coverage for these matters. We also believe that, even assuming third-party or insurance recoveries were not successful, all such remediation matters, individually or in the aggregate, would not have a material adverse effect on us. We have identified other areas of historic waste disposal on our properties. Historically, the waste, pallets, bags, scrap metal and other wastes from the plant sites were dumped on certain of our lands. The presence of the disposal areas has not materially impacted, and is not expected to materially impact, our operations or otherwise have a material adverse effect on us.

Regulation of Silica. The Occupational Safety and Health Administration, or OSHA, regulates work place exposure to crystalline silica at our customer locations through a “permissible exposure level,” commonly referred to as a PEL and through ancillary provisions. In the Department of Labor regulatory agenda published in December 2002, OSHA announced that it would publish a Notice of Proposed Rule Making regarding occupational exposure to crystalline silica in general industry in November 2003.

The Mining Safety and Health Administration, or MSHA, regulates occupational health and safety matters for mining. Accordingly, MSHA regulates our quarries, underground mines and industrial mineral processing facilities. The MSHA “threshold limit value” for crystalline silica as quartz is the same as the current OSHA PEL. MSHA is expected to follow OSHA’s actions regarding the permissible limits of exposure to crystalline silica for mining.

The Environmental Protection Agency, or EPA, is currently evaluating crystalline silica under its Integrated Risk Information System, or IRIS, program. Essentially, the EPA is conducting a risk assessment regarding the cancer and non-cancer health effects of crystalline silica and may possibly develop reference concentrations for non-cancer health effects and unit risk factors for cancer health effects. These reference concentrations and unit risk factors, if developed, will be entered into the EPA IRIS database. In an EPA regulatory agenda, the EPA announced that the EPA’s evaluation of crystalline silica under the IRIS program would be complete in 2004 or 2005. In addition, several states have considered, and a few have promulgated, regulations regarding crystalline silica air emissions. For example, in Oklahoma and Texas, crystalline silica is considered a toxic air contaminant. As such, these states have established maximum allowable ambient concentrations, or MAACs, for crystalline silica (quartz). Generally, these MAACs establish limits for facility crystalline silica emissions, measured at the facility property line. The IRIS initiative and state MAAC standards could result in lower permit limits requiring costly equipment upgrades or operational restrictions.

The U.S. Consumer Product Safety Commission (“CPSC”) is studying the potential for crystalline silica exposure arising from the use of play sand. The CPSC activities have just recently begun, and the estimated completion date and any regulatory action resulting from the activities are unknown.

In 2001, Massachusetts classified crystalline silica smaller than 10 micron in particle size and used for abrasive blasting or in foundry molding operations as a toxic substance for purposes of the state’s toxic use reduction act program. The toxic use reduction act program imposes fees on the use of toxic substances and requires certain users of toxic substances to develop plans

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to reduce the use of the toxic substance. California requires that a warning accompany any chemical that the state has published as being known to cause cancer. “Silica, crystalline (airborne particles of respirable size)” has been included as a carcinogen under these criteria since 1988. These state programs, or others similar to them or the Oklahoma MAAC program, may have the effect of reducing our customers’ demand for silica products.

We believe that we materially comply with governmental requirements for crystalline silica exposure and emissions and other regulations relating to silica and plan to continue to comply with these regulations. However, we cannot guarantee that we will be able to comply with any new standards that are adopted or that these new standards will not have a material adverse effect on us by requiring us to modify our operations or equipment or shut down some of our plants. Additionally, we cannot guarantee that our customers will be able to comply with any new standards or that any such new standards will not have a material adverse effect on our customers by requiring them to shut down old plants and to relocate plants to locations with less stringent regulations that are further away from us. Accordingly, we cannot at this time reasonably estimate our costs of compliance or the timing of any costs associated with any new standards, or any material adverse effects that any new standards will have on our customers and, consequently, on us.

Mining and Processing of Minerals. In addition to the regulatory matters described above, the industrial minerals and aggregates industries are subject to extensive governmental regulation on matters such as permitting and licensing requirements, plant and wildlife protection, wetlands protection, reclamation and restoration of mining properties after mining is completed, the discharge of materials into the environment, surface subsidence from underground mining and the effects that mining has on groundwater quality and availability. Our future success depends upon the quantity of our industrial minerals and aggregates deposits and our ability to extract these deposits profitably. It is difficult for us to estimate quantities of recoverable deposits, in part due to future permitting and licensing requirements. We believe we have obtained all material permits and licenses required to conduct our present mining operations. However, we will need additional permits and renewals of permits in the future. We may be required to prepare and present to governmental authorities data pertaining to the impact that any proposed exploration or production activities may have upon the environment. New site approval procedures may require the preparation of archaeological surveys, endangered species studies and other studies to assess the environmental impact of new sites. Compliance with these regulatory requirements is expensive, requires an investment of funds well before the potential producer knows if its operation will be economically successful and significantly lengthens the time needed to develop a new site. Furthermore, obtaining or renewing required permits is sometimes delayed or prevented due to community opposition and other factors beyond our control. New legal requirements, including those related to the protection of the environment, could be adopted that could materially adversely affect our mining operations (including the ability to extract mineral deposits), our cost structure or our customers’ ability to use our industrial minerals or aggregates products.

For most of our operations, state statutes and regulations or local ordinances require that mine property be restored in accordance with specific standards and an approved reclamation plan. We believe that we are making adequate provisions for all expected reclamation and other costs relating to expected mine closures in the reasonably foreseeable future. We believe that future costs associated with reclamation provisions and mine closures will not have a material adverse effect on us. Nevertheless, we could be adversely affected if these provisions were later determined to be insufficient, or if future costs associated with reclamation are significantly greater than our current estimates. Accordingly, there can be no assurance that current or future mining regulation will not have a material adverse effect on our business or that we will be able to obtain or renew permits in the future.

Employees

As of March 1, 2003, we had approximately 1,050 employees, of which approximately 550 were represented by 12 local unions under 12 union contracts. These union contracts have remaining durations ranging from one to four years. Over the last 10 years, we have been involved in numerous labor negotiations, only two of which have resulted in a work disruption at two of our 27 facilities. During these disruptions, the operations of the facilities and our ability to serve our customers were not materially affected. Although we consider our current relations with our employees to be good, if we do not maintain these good relations, or if a work disruption were to occur, we could suffer a material adverse effect.

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We own or lease a number of properties located in the eastern and midwestern United States. Our headquarters is in Berkeley Springs, West Virginia. Set forth below is the location, use, status and number of years of remaining reserves as of December 31, 2002 for each of our principal properties:

With respect to each operation at which we mine industrial minerals and aggregates, we obtain permits from various governmental authorities prior to the commencement of mining. The current permitted deposits on our properties are sufficient to support production, based on historical rates of production ranging from approximately four years to approximately 77 years. We obtain permits to mine deposits as needed in the normal course of business based on our mine plans and state and local regulatory provisions regarding mine permitting and licensing. Based on our historical permitting experience, we expect to be able to continue to obtain necessary mining permits to support historical rates of production. Industrial minerals and aggregates properties which have deposits (which include both permitted and unpermitted deposits) that we believe are sufficient to support production for over 15 years accounted for approximately 97% of our sales for the year ended December 31, 2002. Additionally, to further assure sufficient deposits and adequate facilities to meet future demand, we plan to obtain new deposits through expansion of existing sites, where feasible, and acquisitions of industrial minerals and aggregates businesses.

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Some of our mining leases can be indefinitely renewed by us on an annual basis while others have terms ranging from two to 50 years (including unilateral renewal rights). These leases generally provide for royalty payments to the lessor based on a specific amount per ton or a percentage of revenue. In addition, we have a number of non-mining leases that relate to the above properties that permit us to perform activities that are ancillary to the mining of industrial minerals or aggregates such as surface use leases that allow haul trucks to transport material from the mine to the plant site.

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We are a defendant in various lawsuits related to our business. These matters include lawsuits relating to the exposure of persons to silica. On April 20, 2001, in an action pending in Beaumont, Texas (Donald Tompkins et al v. American Optical Corporation et al), a jury rendered a verdict against Ottawa Silica Company and Pennsylvania Glass Sand Corporation, predecessors to U.S. Silica, in the amount of $7.5 million in actual damages. On June 1, 2001, the trial judge entered judgment on the verdict against U.S. Silica in the amount of $5,928,000 in actual damages (the verdict of $7.5 million, less credits for other settlements), approximately $464,000 in prejudgment interest and $40,000 in court costs. In addition, punitive damages were settled for $600,000. In light of the facts entered into evidence relating to the timing of the exposure, we believe that the entire judgment and settlements of the Tompkins action are covered by a combination of Ottawa Silica Company’s insurance coverage and the current indemnity agreement of ITT Industries, in each case, discussed elsewhere in this Annual Report on Form 10-K. After the judgment was entered by the trial judge and upon the posting of a bond, we filed an immediate appeal to the appropriate appellate court in Texas, which upheld the trial court’s ruling. A petition for review has been filed with the Texas Supreme Court. For a detailed discussion of the potential liability to us from silica-related product liability claims, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Significant Factors Affecting Our Business—Silica Health Risks and Litigation May Have a Material Adverse Effect on Our Business.”

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No matters were submitted to a vote of security holders during the fourth quarter of fiscal year 2002.

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PART II

Not applicable.

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The following table sets forth our selected historical consolidated financial and other data as of the end of and for the periods presented. The selected historical consolidated financial data as of December 31, 2002 and December 31, 2001 and for the years ended December 31, 2002, 2001 and 2000 have been derived from our audited consolidated financial statements and the notes thereto included elsewhere in this Annual Report on Form 10-K. The selected historical consolidated financial data as of December 31, 2000, December 31, 1999 and December 31, 1998 and for the years ended December 31, 1999 and 1998 are derived from our audited consolidated financial statements that are not included in this Annual Report on Form 10-K. This information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and the notes thereto included elsewhere in this Annual Report on Form 10-K.

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The following information should be read in conjunction with our audited consolidated financial statements and the notes thereto included in Item 8 of this Annual Report on Form 10-K.

Overview

We mine, process and market industrial minerals, principally industrial silica, in the eastern and midwestern United States. We also mine, process and market aggregates and produce and market hot mixed asphalt in certain parts of Pennsylvania and New Jersey. We are a holding company that conducts substantially all our operations through our subsidiaries.

We were incorporated in Delaware in January 1996 and purchased U.S. Silica Company, which was organized in 1927 as the Pennsylvania Glass Sand Corporation, from U.S. Borax in February 1996. After purchasing U.S. Silica, we subsequently completed the following acquisitions and disposition:

In November 2000 we incorporated a new Delaware subsidiary, BMAC Services Co., Inc., to provide consulting and management services to our other subsidiaries. In April 2001, Commercial Stone merged with Better Materials, with Better Materials surviving. As a result of this merger, CATS became a wholly-owned subsidiary of Better Materials.

On October 1, 2002, as part of a change in management reporting responsibilities, the New Jersey operating assets of our aggregates business unit that also manufactured industrial minerals were transferred to our industrial minerals business unit. Net sales from the transferred assets are made both directly to customers and to our aggregates subsidiary. Prior year segment reporting has been restated to reflect this change.

On April 10, 2003, we entered into an agreement to sell our aggregates segment to a subsidiary of Hanson Building Materials of America, Inc. The consideration consists of $152 million in cash and the assumption of $3 million in capital lease obligations. Pursuant to the agreement, we would owe Hanson $2 million plus interest (beginning after the third year) on the fifth anniversary of the closing if certain post-closing permit and rezoning objectives specified in the agreement are not achieved during this period. The agreement also contains customary representations, warranties and indemnities. Closing on the sale is subject to customary closing conditions, including antitrust clearance under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and completion of environmental and geological due diligence and real estate surveys at certain of our aggregates operating sites. We will also need to obtain the consent of our senior secured lenders in order to release any liens on the assets being sold and the release of the guarantees of our aggregates subsidiaries of the obligations under the indenture relating to our senior subordinated notes.

Critical Accounting Policies

In our opinion, we do not have any individual accounting policy which is critical to the preparation of our financial statements. Also, in many instances, we must use an accounting policy or method because it is the only policy or method permitted under accounting principles generally accepted in the United States. However, certain accounting policies are more important to the reporting of the Company’s financial position and results of operations. These policies are discussed in the succeeding paragraphs. The notes to the audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K include a summary of the significant accounting policies used in the preparation of our financial statements.

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Sales. We recognize sales at the time the product is shipped to our customers and title passes (generally when the product leaves our facility). Sales includes the costs of transportation borne by our customers when we pay the costs on their behalf and are reimbursed.

Cost of Goods Sold. Cost of goods sold includes the ongoing mining and processing costs of our operations (primarily labor costs, energy and power costs, repair and maintenance costs, transportation costs on customer shipments, costs of hiring third party subcontractors to drill and blast in our mining operations, as well as lease and royalty payments, at some locations) and non-cash charges associated with estimated net future costs of restoring and reclaiming operating mine sites. This reclamation provision is made at each operating location based on units of production and engineering estimates of total reserves, which are expected to last from 2 to 77 years, as of the balance sheet date. The effect of any changes in estimated costs, production, and minable reserves is recognized on a prospective basis.

Selling, General and Administrative. Selling, general and administrative expenses are the costs of operating our business, including corporate overhead and associated fees and expenses related to acquisitions. Management fees to our acquisition advisors, due diligence costs for any acquisitions that we are unable to complete and amounts recorded for product liability claims are also included in this category. See “Self-Insurance and Product Liability Claim Reserves” below.

Depreciable Properties. Acquired property and mineral deposits are recorded at cost. Costs to develop new mining properties are capitalized and amortized based on units of production. The purchase price of business acquisitions is allocated based on the fair values of assets acquired and liabilities assumed at that time. Depreciation is computed using the straight line method over the estimated useful lives of the assets, which ranges from 3 to 15 years. Depletion of mineral deposits is accounted for as the minerals or aggregates are extracted, based on units of production and engineering estimates of total deposits. Accordingly, depletion expense will increase or decrease with changes in the volumes of minerals or aggregates extracted or, prospectively, for changes in engineering estimates of total deposits. Amortization of various non-current assets such as non-competition agreements are made on a straight line basis over the life of the related agreement. Goodwill related to purchased acquisitions was amortized over 15 years. As described under “Recent Accounting Pronouncements,” the adoption of SFAS 142 eliminated goodwill amortization and required an evaluation of goodwill impairment upon adoption, as well as subsequent annual valuations. The Company reviews long-lived assets for impairment periodically in accordance with SFAS 144.

Upon retirement or disposal of assets, other than those of U.S. Silica acquired on February 9, 1996, the cost and accumulated depreciation or amortization are eliminated from the accounts and any gain or loss is reflected in the statement of operations. Group asset accounting is utilized for the U.S. Silica assets acquired on February 9, 1996. Gains and losses on normal retirements or dispositions of these assets are excluded from net income and proceeds for dispositions are recorded as a reduction of the acquired cost. Expenditures for normal repairs and maintenance are expensed as incurred. Construction-in-progress is primarily comprised of machinery and equipment which has not yet been placed in service.

Self-Insurance and Product Liability Claim Reserves. We are self-insured for healthcare costs and, in some states, worker’s compensation. Our subsidiary, U.S. Silica Company, is currently self-insured for third party product liability claims alleging occupational disease. We provide for estimated future losses based on reported cases and past claim history. Accounting for these liabilities requires us to use our best judgment. While we believe that our accruals for these matters are adequate, if the actual loss is significantly different than the estimated loss for these liabilities, our results of operations could be materially affected. See “Significant Factors Affecting Our Business – Silica Health Risks and Litigation May Have a Material Adverse Effect on Our Business” for a further discussion of the manner in which we record amounts for product liability claims.

Employee Benefit Plans. We provide a range of benefits to our employees and retired employees, including pensions and postretirement healthcare and life insurance benefits. We record annual amounts relating to these plans based on calculations specified by generally accepted accounting principles, which include various actuarial assumptions, including discount rates, assumed rates of returns, compensation increases, turnover rates and healthcare cost trend rates. We review the actuarial assumptions on an annual basis and make modifications to the assumptions based on current rates and trends when it is deemed appropriate to do so. As required by U.S. generally accepted accounting principles, the effect of the modifications is generally recorded or amortized over future periods. We believe that the assumptions utilized in recording our obligations under the plans, which are presented in note 10 to the audited consolidated financial statements, are reasonable based on advice from our actuaries and information as to assumptions used by other employers.

Taxes. We account for income taxes in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes” which requires that deferred tax assets and liabilities be recognized using enacted tax rates for the effect of temporary differences between the book and tax bases of recorded assets and liabilities. SFAS No. 109 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized.

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We evaluate quarterly the realizability of our deferred tax assets by assessing the need for a valuation allowance and by adjusting the amount of such allowance, if necessary. The factors used to assess the likelihood of realization are our forecast of future taxable income and available tax planning strategies that could be implemented to realize the net deferred tax assets. Failure to achieve forecasted taxable income might affect the ultimate realization of the net deferred tax assets. Factors that may affect our ability to achieve sufficient forecasted taxable income include, but are not limited to, the following: a decline in sales or margins, increased competition or loss of market share. In addition, we operate within multiple taxing jurisdictions and are subject to audit in these jurisdictions. These audits can involve complex issues, which may require an extended time to resolve. In management’s opinion, adequate provisions for income taxes have been made for all years.

Use of Estimates and Assumptions. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Significant estimates include doubtful accounts, amortization and depreciation, income taxes, environmental and product liabilities, mine reclamation and employee benefit costs. Actual results could differ from those estimates.

Results of Operations

The following table sets forth our consolidated statement of operations data for the three years ended December 31, 2002, 2001 and 2000, and the percentage of sales of each line item for the periods presented. This statement of operations data is derived from our consolidated financial statements and the notes thereto included elsewhere in this Annual Report on Form 10-K.

Year Ended December 31, 2002 Compared with Year Ended December 31, 2001

Sales. Sales decreased $7.4 million, or 2.4%, to $300.5 million in the year ended December 31, 2002 from $307.9 million in the year ended December 31, 2001.

        Sales of industrial minerals decreased $5.0 million, or 2.6%, to $184.7 million in the year ended December 31, 2002 from $189.7 million in the year ended December 31, 2001. Included in industrial minerals sales are intercompany shipments to our aggregates business that are then resold to customers. These intercompany shipments are eliminated in consolidation and totaled $2.9 million in the year ended December 31, 2002 and $2.6 million in the year ended December 31, 2001. Excluding the intercompany shipments, sales of industrial minerals decreased $5.3 million, or 2.8%, to $181.8 million in the year ended December 31, 2002 from $187.1 million in the year ended December 31, 2001. The primary reason for the decrease in sales was a $6.9 million decrease in transportation revenue as several customers have changed their terms with us and now pay these costs directly to the transportation companies. This decline was partially offset by an increase in product sales to customers of $1.6

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million in the year, primarily from increased silica and aplite sales to our glass customers, partially offset by a decline in sales to the oil &gas extraction market.

Sales of aggregates decreased $2.2 million, or 1.8%, to $118.6 million in the year ended December 31, 2002 from $120.8 million in the year ended December 31, 2001. The primary reason behind the decrease in aggregates sales was a $7.9 million, or 16.9% decrease in asphalt sales from our existing, or heritage, operations, partially offset by a $2.5 million increase in asphalt sales from a new leased operation, $2.3 million in stone sales from the same leased operation and a $1.0 million increase in transportation revenue.

Cost of Goods Sold. Cost of goods sold increased $3.4 million, or 1.5%, to $232.6 million in the year ended December 31, 2002 from $229.2 million in the year ended December 31, 2001.

Cost of goods sold for industrial minerals decreased $0.5 million, or 0.4%, to $139.2 million in the year ended December 31, 2002 from $139.7 million in the year ended December 31, 2001. The primary reason for the decrease was a $6.9 million decrease in transportation costs for customer shipments, as several customers changed their terms and pay these costs directly to the transportation companies, and a $2.1 million reduction in the cost of drier fuel, substantially offset by increased costs of maintenance, wages, premiums and benefits, power and insurance.

Cost of goods sold for aggregates increased $4.0 million, or 4.5%, to $93.7 million for the year ended December 31, 2002 from $89.7 million for the year ended December 31, 2001. Included in cost of goods sold are the costs of the intercompany shipments from our industrial minerals business as noted earlier. The cost of these shipments are eliminated in consolidation and increased $0.3 million to $2.9 million in the year ended December 31, 2002 from $2.6 million in the year ended December 31, 2001. Excluding these intercompany costs, the cost of goods sold for aggregates increased $3.7 million, or 4.3%, to $90.8 million for the year ended December 31, 2002 from $87.1 million for the year ended December 31, 2001. The primary reason for the increase in cost of goods sold were the costs of our new leased operations, that were only partially offset by the decline in asphalt volume.

Depreciation, Depletion and Amortization. Depreciation, depletion and amortization decreased $2.7 million, or 8.3%, to $30.0 million for the year ended December 31, 2002 from $32.7 million for the year ended December 31, 2001, primarily from a $1.2 million decrease in goodwill amortization as a result of new accounting rules that eliminated goodwill amortization, and a $0.5 million decrease in the amortization of a covenant not to compete that expired in 2001.

Asset Impairment Charge. We recorded in the fourth quarter of 2002 an asset impairment charge of $107.9 million to record the current fair market value of our aggregates business unit according to Statement of Financial Accounting Standard No. 144 “Accounting for Impairment or Disposal of Long-Lived Assets” (SFAS 144). The impairment analysis was necessitated by the sale process for our aggregates business which began late in the fourth quarter of 2002. Following the asset impairment charge, the expected proceeds upon sale of the aggregates business in 2003 as discussed previously will approximate the value of the business. This non-cash charge to operating loss results in a corresponding decrease in the valuation of the ore reserves for the aggregates business. The reported results of the aggregates business, including the impairment charge in 2002 will be classified as discontinued operations for all periods presented commencing in the second quarter of 2003 and the related assets and liabilities will be classified as held for sale.

Selling, General and Administrative. Selling, general and administrative expenses increased $22.5 million, or 94.1%, to $46.4 million for the year ended December 31, 2002 from $23.9 million for the year ended December 31, 2001. Included in selling, general and administrative expense are our costs and accruals for third party product liability litigation relating to occupational health claims against one of our subsidiaries. Our industrial minerals subsidiary incurred a significant increase in new cases filed against it in the fourth quarter of 2002 and accordingly performed a comprehensive review of the estimated future costs of this litigation, and, as a result, recorded a non-cash expense of $23.7 million in the year ended December 31, 2002, an increase of $22.3 million, from the $1.4 million of non-cash charges recorded in the year ended December 31, 2001. See “Significant Factors Affecting Our Business – Silica Health Risks and Litigation May Have a Material Adverse Effect on Our Business.” Except for the non-cash charges for silica health litigation relating to occupational health claims, selling, general and administrative expense only increased $0.2 million to $22.7 million for the year ended December 31, 2002 from $22.5 million for the year ended December 31, 2001.

Operating Loss. Operating loss incurred for the year ended December 31, 2002 was $116.4 million, as compared to operating income of $22.2 million for the year ended December 31, 2001 as a result of the factors noted earlier, primarily the non-cash asset impairment charge of $107.9 million and the non-cash charges for occupational health claims from alleged silica exposure of $23.7 million.

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Interest Expense. Interest expense decreased $3.5 million, or 9.8%, to $32.1 million for the year ended December 31, 2002 from $35.6 million for the year ended December 31, 2001 due primarily to decreased interest rates.

Benefit for Income Taxes. The benefit for income taxes of $56.8 million reflects the tax benefits related to the current year loss reduced by a $7.5 million valuation allowance from the uncertainty of the future utilization of our net operating loss carry forwards and alternative minimum tax credit carry forward.

Net Loss Before Accounting Changes. Net loss before the cumulative change in accounting for goodwill increased $86.0 million to $90.0 million in the year ended December 31, 2002 from $4.0 million in the year ended December 31, 2001.

Cumulative Effect of Change in Accounting for Goodwill. Under Statement of Financial Accounting Standards No. 142 “Goodwill and Other Intangible Assets” (SFAS 142), we were required to perform an asset impairment test on all goodwill recorded on our books as of January 1, 2002. The result of the impairment test was a complete write-down of the $14.7 million of goodwill recorded as an asset as of January 1, 2002, which was recorded as a cumulative effect of change in accounting. The goodwill was the result of the acquisitions of the Morie Assets and Commercial Stone completed in 1999 by the aggregates segment. Adoption of this standard, which was effective January 1, 2002, eliminated annual goodwill amortization expense of approximately $1.2 million. The $8.6 million expense recorded in the year ended December 31, 2002 is net of applicable income taxes of $6.1 million.

Net Loss. Net loss for the year ended December 31, 2002 was $98.6 million as a result of the factors noted earlier, but primarily the asset impairment charge, silica litigation charge and cumulative effect of the change in accounting for goodwill.

Year Ended December 31, 2001 Compared with Year Ended December 31, 2000

Sales. Sales increased $8.6 million, or 2.9%, to $307.9 million in the year ended December 31, 2001 from $299.3 million in the year ended December 31, 2000.

Sales of industrial minerals decreased $2.9 million, or 1.5% to $189.7 million in the year ended December 31, 2001 from $192.6 million in the year ended December 31, 2000. Included in sales in 2000 was $1.9 million from PECAL, our subsidiary that was sold in February 2000. Excluding PECAL results, sales of industrial minerals decreased $1.0 million, or 0.5%, to $189.7 million in the year ended December 31, 2001 from $190.7 million in the year ended December 31, 2000. The primary reason behind the decrease in industrial minerals sales was decreased sales of silica sand to all glass market segments, and the chemicals and foundry market segments, partially offset by increased silica sand sales to the oil and gas and building product market segments, a $1.7 million increase, from $0.9 million in 2000 to $2.6 million in 2001, in intercompany shipments to our aggregates business that are eliminated in consolidation, and additional sales of aplite to the glass container market segment.

Sales of aggregates increased $13.2 million, or 12.3% to $120.8 million in the year ended December 31, 2001 from $107.6 million in the year ended December 31, 2000. The increase in sales is primarily due to a 14.5% increase in asphalt volume and a 21.4% increase in stone volume sold to customers, and a $3.4 million, or 14.1% increase in transportation costs billed to customers, increasing from $24.1 million in 2000 to $27.5 million in 2001.

Cost of Goods Sold. Cost of goods sold increased $6.4 million, or 2.9%, to $229.2 million in the year ended December 31, 2001 from $222.8 million in the year ended December 31, 2000.

Cost of goods sold for industrial minerals decreased $1.3 million, or 0.9%, to $139.7 million in the year ended December 31, 2001 from $141.0 million in the year ended December 31, 2000. Excluding PECAL’s results from 2000, cost of goods sold for industrial minerals increased $0.2 million to $139.7 million for the year ended December 31, 2001 from $139.5 million in the year ended December 31, 2000. The remaining change in cost of goods sold is primarily due to the 3.8% decrease in the volume of material sold in the year, offset by a $1.9 million increase in the price of drier fuel and a $0.4 million increase in the price of electricity.

Cost of goods sold for aggregates increased $7.8 million, or 9.5%, to $89.7 million in the year ended December 31, 2001 from $81.9 million in the year ended December 31, 2000. The increase in cost of goods sold for aggregates is primarily due to a 14.4% increase in the volume of material sold in the year, and an increase of $1.7 million in the cost of materials received from our industrial minerals business unit that is eliminated in consolidation, partially offset by a $2.9 million decrease in the price of asphalt cement that is the binder used in the production of hot mixed asphalt.

Depreciation, Depletion and Amortization. Depreciation, depletion and amortization decreased $3.2 million, or 8.9%, to $32.7 million in the year ended December 31, 2001 from $35.9 million in the year ended December 31, 2000. The decrease was primarily due to a $4.9 million decrease in the amortization of non-compete agreements on the expiration, in February 2001, of

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the non-compete agreement with the former owner of our industrial minerals subsidiary. Depletion costs increased $1.5 million in 2001 to $7.9 million from $6.4 million in 2000 due to the increase in aggregates volume mined and sold.

Selling, General and Administrative. Selling, general and administrative expenses decreased $2.6 million, or 9.8%, to $23.9 million in the year ended December 31, 2001 from $26.5 million in the year ended December 31, 2000. Included in selling, general and administrative expense in 2000 were $2.3 million in compensation costs incurred to recruit our new chief executive officer that were not duplicated in 2001, and $0.4 million in costs for PECAL. Excluding both the compensation costs and PECAL’s results from 2000, selling, general and administrative expenses increased $0.1 million to $23.9 million in the year ended December 31, 2001 from $23.8 million in the year ended December 31, 2000. This increase is primarily due to reduced personnel and other operating expenses, and a $0.8 million reduction in management fees and consulting expenses on unsuccessful acquisitions, offset by a $1.4 million increase in the amounts provided for product liability claims primarily recorded in the fourth quarter relating to occupational health claims. See “Significant Factors Affecting Our Business – Silica Health Risks and Litigation May Have a Material Adverse Effect on Our Business.”

Operating Income. Operating income increased $8.1 million or 57.5% to $22.2 million in the year ended December 31, 2001, from $14.1 million in the year ended December 31, 2000.

Corporate expenses not allocated to the business segments decreased $2.9 million to $1.1 million in the year ended December 31, 2001 from $4.0 million in the year ended December 31, 2000 due to the reduction in management and consulting fees, and non-recurring compensation and incentive stock compensation expenses noted earlier.

Interest Expense. Interest expense decreased $0.8 million, or 2.2%, to $35.6 million in the year ended December 31, 2001 from $36.4 million in the year ended December 31, 2000 primarily as a result of lower interest rates on the variable portion of our senior secured debt.

Net Income (Loss). Net loss decreased $5.5 million to $4.0 million in the year ended December 31, 2001 from $9.5 million in the year ended December 31, 2000. The decrease is primarily due to the factors noted earlier, partially offset by $2.8 million decrease in the benefit for income taxes.

Liquidity and Capital Resources

Our principal liquidity requirements have historically been to service our debt, meet our working capital, capital expenditure and mine development expenditure needs and finance acquisitions. We are a holding company and as such we conduct substantially all our operations through our subsidiaries. As a holding company, we are dependent upon dividends or other intercompany transfers of funds from our subsidiaries to meet our debt service and other obligations, and have historically met our liquidity and capital investment needs with internally generated funds supplemented from time to time by borrowings under our revolving credit facility. Conversely, we have funded our acquisitions through borrowings and equity investments. Our total debt as of December 31, 2002 was $294.9 million and our total stockholder’s deficit as of that date was $54.4 million, giving us total debt representing approximately 123% of total capitalization. Our debt level makes us more vulnerable to economic downturns and adverse developments in our business.

Net cash provided by operating activities was $9.2 million for the year ended December 31, 2002 compared to $16.5 million of net cash provided by operating activities in the year ended December 31, 2001. Cash provided by operating activities decreased $7.3 million in 2002 due primarily to decreased earnings.

Net cash used for investing activities decreased $0.2 million to $12.9 million in the year ended December 31, 2002 from $13.1 million for the year ended December 31, 2001. This decrease primarily resulted from an increase in proceeds from sale of property, plant and equipment of $0.4 million partially offset by increased capital spending of $0.3 million.

Cash flow provided by financing activities was $2.6 million for the year ended December 31, 2002 as compared to $1.8 million of cash flow used for financing activities in the year ended December 31, 2001. There was a $10.7 million reduction in long-term debt in the year ended December 31, 2002 and a $9.2 million decrease in long-term debt in the same period in 2001. Advances under the revolving credit facility were $16.5 million and $7.9 million in the years ended December 31, 2002 and December 31, 2001, respectively.

Interest payments on our 13% senior subordinated notes due 2009 ($150 million outstanding as of December 31, 2002), which are unconditionally and irrevocably guaranteed, jointly and severally, by each of our domestic subsidiaries, debt service under our senior secured credit agreement described below, working capital, capital expenditures and mine development expenditures, incurred in the normal course of business as current deposits are depleted, represent our current significant liquidity requirements.

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Under our senior secured credit agreement, as of December 31, 2002, we had $23.7 million outstanding under the tranche A term loan facility (which matures in September 2005) and $89.5 million outstanding under the tranche B term loan facility (which matures in September 2007). In addition, this credit agreement provides us with a $50.0 million revolving credit facility. The revolving credit facility was partially drawn for $29.8 million as of December 31, 2002, and $8.6 million was allocated for letters of credit, leaving $11.6 million available for our use. As of March 31, 2003, borrowings under the revolving credit facility increased to $30.8 million, and $8.6 million was allocated for letters of credit, leaving $10.6 million available for our use. The revolving credit facility is available for general corporate purposes, including working capital and capital expenditures, but excluding acquisitions, and includes sublimits of $12.0 million and $3.0 million, respectively, for letters of credit and swingline loans. In addition, effective March 13, 2003 a new second lien tranche C term loan facility in the amount of $15.0 million (which matures in September 2007) was added and fully utilized. Debt under the senior secured credit agreement is collateralized by substantially all of our assets, including our real and personal property, inventory, accounts receivable and other intangibles. For a further description of our senior secured credit agreement, including interest rate provisions, certain restrictions that it imposes upon us and certain quarterly and annual financial covenants that it requires us to maintain, please see note 6 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

On November 8, 2002, the lenders under our senior secured credit agreement approved an amendment effective September 30, 2002 that waived any default under the required leverage ratio and interest coverage covenants as of September 30, 2002. In connection with this amendment, we agreed to a 50 basis point increase in interest rates when the leverage ratio is greater than 5.0. When combined with two earlier amendments under the senior secured credit agreement, this results in a 100 basis point increase in interest rates over the original senior secured credit agreement for any quarter in which the leverage ratio is greater than 5.0. As of September 30, 2002 the leverage ratio was 6.1 compared to the applicable covenant of 5.5. The interest coverage ratio at September 30, 2002 was 1.68 compared to a 1.70 covenant. A one-time amendment fee of approximately $415,000 was paid to the lenders as part of this amendment.

On March 12, 2003, the lenders under our senior secured credit agreement approved an amendment that provided for a the new second lien tranche C term loan facility of $15.0 million and waived the agreement’s leverage ratio and interest coverage covenants through June 30, 2003. A one-time amendment fee of approximately $203,000 was paid to the lenders as part of this amendment and a one-time commitment fee of $600,000 was paid to the term C lender.

On April 17, 2003, the lenders under our senior secured credit agreement approved an amendment that revised the required leverage ratio and interest coverage ratio covenants through January 1, 2004. Under this amendment, the leverage ratio must be less than 7.98 at June 30, 2003, 7.51 at September 30, 2003 and 6.94 at December 31, 2003. The interest coverage ratio has been changed to greater than 1.26 at June 30, 2003, 1.31 at September 30, 2003 and 1.46 at December 31, 2003. In connection with this amendment, if our proposed aggregates sale is not completed by July 16, 2003, there will be a 100 basis point increase in the applicable margins under the senior secured credit agreement.

We believe, based on our calendar year 2003 forecast (which, for this purpose, includes our aggregates business), that we will be in compliance with the amended leverage ratio and interest coverage ratio covenants contained in the senior secured credit agreement throughout calendar year 2003. In the event that we do not substantially achieve our 2003 forecast, it will be necessary to seek further amendments to the senior secured credit agreement covenants. In addition, the required leverage ratio and interest coverage ratio covenants contained in the senior secured credit agreement are substantially more restrictive as of March 31, 2004 than the amended 2003 covenants and it is probable that we will need to seek amendments or waivers to avoid violating these covenants at that time. While we have obtained amendments and waivers under the senior secured credit agreement in the past, there can be no assurance that future amendments or waivers will be granted or that such amendments or waivers, if granted, would be on terms satisfactory to us.

In the event that we are not in compliance with the leverage ratio and interest ratio covenants contained in the senior secured credit agreement and we do not obtain a waiver or amendment under the agreement, we would be in default under the agreement and the lenders could declare all of the funds borrowed under the agreement, together with accrued interest, immediately due and payable. Similarly, if the lenders take this action under the senior secured credit agreement, we would be in default under the indenture relating to our senior subordinated notes and, if the default is not cured within 10 days after notice thereof, the bondholders could declare the principal of and accrued interest on the notes immediately due and payable. In the event this debt becomes due and payable it is unlikely that we will be able to repay the amounts due and payable and we could be, therefore, required to sell assets to generate cash or the lenders under our senior secured credit agreement could foreclose on the pledged stock of our subsidiaries and on the assets in which they have been granted a security interest.

As discussed earlier, on April 10, 2003, we signed an agreement for the sale of our aggregates business, which we expect will result in net cash proceeds to us of approximately $147 million (subject to a post-closing working capital adjustment). We plan to use the net proceeds from the sale to repay indebtedness outstanding under our senior secured credit agreement. In addition, as a result of this planned repayment, we will seek a new source of financing for the liquidity needs of the remaining

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business. In addition to providing working capital for the remaining business, we may use this new source of financing to repay the remaining amounts outstanding under the senior secured credit agreement. We are currently in discussions with a number of financial institutions to establish this new credit facility, which we would expect would be entered into at or around the time of the completion of the aggregates sale. While we believe that we will be able to obtain this new credit facility, we cannot guarantee that we will be able to do so on terms satisfactory to us or at all.

Capital expenditures increased $0.3 million, or 2.2%, to $14.0 million in the year ended December 31, 2002 from $13.7 million in the year ended December 31, 2001. Excluding possible acquisitions, our expected capital expenditure and mine development requirements for 2003 are $10.0 million.

As of December 31, 2002, the total of our future contractual cash commitments, including the repayment of our debt obligations under our senior secured credit agreement and our senior subordinated notes, is summarized as follows:

Our ability to satisfy our debt obligations and to pay principal and interest on our debt, fund working capital, mine development and acquisition requirements and make anticipated capital expenditures will depend on the future performance of our subsidiaries, which is subject to general economic, financial and other factors, some of which are beyond our control. We cannot be certain that the cash earned by our subsidiaries will be sufficient to allow us to pay principal and interest on our debts and meet our other obligations. We believe, however, that based on current levels of operations and anticipated growth, cash flow from operations, together with borrowings under the revolving credit facility, will be adequate for at least the next twelve months to make required payments of principal and interest on our debt and fund working capital, mine development and capital expenditure requirements. After the completion of the sale of our aggregates business, our cash flow from operations will be principally dependent on the results of our industrial minerals segment. We believe, assuming the completion of the aggregates

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sale and transactions related to the aggregates sale, that based on current levels of operations from our remaining business and anticipated growth, cash flow from these remaining operations, together with borrowings under credit facilities, will be adequate for at least the next twelve months to make required payments of principal and interest on our debt and fund working capital and capital expenditure requirements. There can be no assurance, however, that our business will generate sufficient cash flow from operations or that future borrowings will be available under the revolving credit facility or other credit facilities in an amount sufficient to enable us to service our debt or to fund our other liquidity needs. If we do not have enough cash, we may be required to refinance all or part of our existing debt, including the notes, sell assets, borrow more money or raise equity. We cannot guarantee that we will be able to refinance our debt, sell assets, borrow more money or raise equity on terms acceptable to us, or at all.

Significant Factors Affecting Our Business

Silica Health Risks and Litigation May Have a Material Adverse Effect on Our Business. The inhalation of respirable crystalline silica is associated with several adverse health effects. First, it has been known since at least the 1930s that prolonged inhalation of respirable crystalline silica can cause silicosis, an occupational disease characterized by fibrosis, or scarring, of the lungs. Second, since the mid-1980s, the carcinogenicity of crystalline silica has been at issue and the subject of much debate and research. In 1987, the International Agency for Research on Cancer, or IARC, an agency of the World Health Organization, classified crystalline silica as a probable human carcinogen. In 1996, a working group of IARC voted to reclassify crystalline silica as a known human carcinogen. On May 15, 2000, the National Toxicology Program, part of the Department of Health and Human Services, issued its ninth report on carcinogens, which reclassified crystalline silica (respirable size) from its previous classification as “a reasonably anticipated carcinogen” to “a known human carcinogen.” Third, the disease silicosis is associated with an increased risk of tuberculosis. Finally, there is recent evidence of a possible association between crystalline silica exposure or silicosis and other diseases such as immune system disorders, like scleroderma, end-stage renal disease and chronic obstructive pulmonary disease.

One of our subsidiaries, U.S. Silica, was named as a defendant in an estimated 5,100 product liability claims alleging silica exposure filed in the period January 1, 2002 to December 31, 2002, with 3,100 of those claims filed between November 1, 2002 and December 31, 2002. U.S. Silica was named as a defendant in 154 similar claims filed in 1998, 497 filed in 1999, 610 filed in 2000, and 1,320 filed in 2001. Year-to-date through April 3, 2003 (the latest date information is available), U.S. Silica has been named in an additional 9,900 product liability claims, and as of that date, there were an estimated 16,500 silica-related products liability claims pending in which U.S. Silica is a defendant. Almost all of the claims pending against U.S. Silica arise out of the alleged use of U.S. Silica products in foundries or as an abrasive blast media and have been filed in the states of Texas and Mississippi.

The plaintiffs, who allege that they are employees or former employees of our customers, claim that our silica products were defective or that we acted negligently in selling our silica products without a warning, or with an inadequate warning. The plaintiffs further claim that these alleged defects or negligent actions caused them to suffer injuries and sustain damages as a result of exposure to our products. In almost all cases, the injuries alleged by the plaintiffs are silicosis or “mixed dust disease,” a claim that allows the plaintiffs to pursue litigation against the sellers of both crystalline silica and other minerals. There are no pending claims of this nature against any of our other subsidiaries.

ITT Industries, Inc., successor to a former owner of U.S. Silica, has agreed to indemnify U.S. Silica for third party silicosis claims (including litigation expenses) filed against it prior to September 12, 2005 alleging exposure to U.S. Silica products for the period prior to September 12, 1985, to the extent of the alleged exposure prior to that date. This indemnity is subject to an annual deductible of $275,000, which is cumulative and subject to carry-forward adjustments. The Company fully accrued this deductible on a present value basis when it acquired U.S. Silica. As of December 31, 2002 and 2001, this accrual amounted to $1.9 million and $1.8 million, respectively. Pennsylvania Glass Sand Corporation, predecessor to U.S. Silica, was a named insured on insurance policies issued to ITT Industries for the period April 1, 1974 to September 12, 1985 and to U.S. Borax (another former owner) for the period September 12, 1985 to December 31, 1985. To date, we have not sought coverage under these policies. However, as a named insured, we believe that coverage under these policies will be available to us. Ottawa Silica Company (a predecessor that merged into U.S. Silica in 1987) had insurance coverage on an occurrence basis prior to July 1, 1985.

It is likely that we will continue to have silica-related product liability claims filed against us, including claims that allege silica exposure for periods after January 1, 1986. We cannot guarantee that our current indemnity agreement with ITT Industries (which currently expires in 2005 and in any event only covers alleged exposure to certain U.S. Silica products for the period prior to September 12, 1985), or potential insurance coverage (which, in any event, only covers periods prior to January 1, 1986) will be adequate to cover any amount for which we may be found liable in such suits. Any such claims or inadequacies of the ITT Industries indemnity or insurance coverage could have a material adverse effect in future periods on our consolidated

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financial position, results of operations or cash flows, if such developments occur.

In the past, we recorded amounts for product liability claims based on estimates of our portion of the cost to be incurred for all pending product liability claims and estimates based on the value of an incurred but not reported liability for unknown claims for exposures that occurred before 1976, when we began warning our customers and their employees of the health effects of crystalline silica. Estimated amounts recorded were net of any expected recoveries from insurance policies or the ITT Industries indemnity. The amounts recorded for product liability claims were estimates, which were reviewed periodically by management and legal counsel and adjusted to reflect additional information when available. As the rate of claims filed against the company and others in the industry increased in 2002, we determined it was no longer sufficient for management to solely estimate the product liability claims that might be filed against the company, and we retained the services of an independent actuary to estimate the number and costs of unresolved current and future silica related product liability claims that might be asserted against us.

The actuary relied on generally accepted actuarial methodologies and on information provided by us, including the history of reported claims, insurance coverages and indemnity protections available to us from third parties, the quantity of sand sold by market and by year through December 31, 2002, recent court rulings addressing the liability of sellers of silica sand, and other reports, articles and records publicly available that discuss silica related health risks, to estimate a range of the number and severity of claims that could be filed against the company over the next 50 years, the period found by the actuary to be reasonably estimable. The variables used to determine the estimate were further analyzed and multiple iterations were modeled by our actuary to calculate a range of expected outcomes.

As previously discussed, we have available to us several forms of potential recovery to offset a portion of these costs in the form of insurance coverage and the ITT Industries indemnity. As part of the overall study, our actuary also estimated the amount recoverable from these sources, assuming that all primary and excess insurance coverage and the ITT indemnity is valid and fully collectible and also based on the timing of current and new claims filed, the alleged exposure periods and the portion of the exposure that would fall within an insured or indemnified exposure period.

Following the adverse developments during the year, especially in the fourth quarter, and based on the study performed by our actuary, we recorded a pre-tax charge related to silica claims of $23.7 million in 2002 for the estimated undiscounted gross costs, including defense costs, after consideration of recoveries under the ITT indemnity and insurance, that we expect to incur over the next 50 years through the end of 2052. This resulted in a long term liability of $69.2 million related to third party product liability claims and a non-current asset of $40.9 million for probable insurance and indemnity recoveries at December 31, 2002. The pre-tax charge in 2001 for silica claims was $2.1 million and the net liability recorded at December 31, 2001 was $4.6 million.

On an annual basis, our actuary has calculated that our cash portion of the retained losses (reflecting any insurance coverage and indemnity payments) over the next 15 years would average $1.4 million per year, ranging from $0.7 million to $2.0 million in any year. On average, we have incurred approximately $1.0 million per year in retained losses over the past two years.

The process of estimating and recording amounts for product liability claims is imprecise and based on a variety of assumptions, some of which, while reasonable at the time, may prove to be inaccurate. Our actuary’s report is based to a large extent on the assumption that our past experience is predictive of future experience. Unanticipated changes in factors such as judicial decisions, future legal judgments against us, legislative actions, claims consciousness, claims management, claims settlement practices and economic conditions make these estimates subject to a greater than normal degree of uncertainty that could cause the silica-related liabilities and insurance or indemnity recoveries to be greater or less than those projected and recorded.

Given the inherent uncertainty in making future projections, we plan to have these projections periodically updated based on our actual claims experience and other relevant factors such as changes in the judicial system and legislative actions.

The exposure of persons to silica and the accompanying health risks have been, and will continue to be, a significant issue confronting the industrial minerals industry and our industrial minerals segment. Concerns over silicosis and other potential adverse health effects, as well as concerns regarding potential liability arising from the use of silica, may have the effect of discouraging our customers’ use of our silica products. The actual or perceived health risks of mining, processing and handling silica could materially and adversely affect silica producers, including us, through reduced use of silica products, the threat of product liability or employee lawsuits, increased levels of scrutiny by federal and state regulatory authorities of us and our customers or reduced financing sources available to the silica industry.

Our Business Is Subject to Operating Risks, Including Fluctuations in Oil and Energy Prices. All of our revenue is and will be derived from our industrial minerals and aggregates businesses. The mining, processing and related infrastructure facilities

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of these businesses are subject to risks normally encountered in the industrial minerals and aggregates industries. These risks include environmental hazards, industrial accidents, technical difficulties or failures, late delivery of supplies, the price and availability of power, the price and availability of transportation, unusual or unexpected geological formations or pressures, cave-ins, pit wall failures, rock falls, unanticipated ground, grade or water conditions, flooding and periodic or extended interruptions due to the unavailability of materials and equipment, inclement or hazardous weather conditions, fires, explosions or other accidents or acts of force majeure. Any of these risks could result in damage to, or destruction of, our mining properties or production facilities, personal injury, environmental damage, delays in mining or processing, losses or possible legal liability. Any prolonged downtime or shutdowns at our mining properties or production facilities could have a material adverse effect on us.

In addition, the price or availability of oil, a raw material used in making hot mixed asphalt, could adversely affect operating costs, which could in turn adversely affect our operating results if we cannot pass these increased costs through to our customers or if customers use less asphalt due to higher prices. Furthermore, increased energy prices, particularly relating to natural gas, propane, diesel fuel and other petroleum-based products, could adversely affect operating costs and, therefore, operating results.

Demand for Our Products Is Affected by External Factors. Demand in the markets served by the industrial minerals and aggregates industries is affected by many external factors, including the general and regional economic conditions in the states in which we produce and sell our products, demand for automobiles and other vehicles, the substitution of plastic or other materials for glass, levels of government spending on road and other infrastructure construction and demand for residential and commercial construction. General or localized economic downturns or other external factors adversely affecting demand in the areas where we sell our products could result in a decrease in sales and operating income and, therefore, could have a material adverse effect on us. For example, because our aggregates business is more geographically concentrated than the businesses of some of our competitors, we may be more vulnerable to local economic conditions in Pennsylvania and New Jersey.

We Rely Heavily on Third Party Transportation. We rely heavily on railroads and trucking companies to ship our industrial minerals and aggregates products to our customers. Because freight costs represent a significant portion of the total cost to the customer, fluctuations in freight rates can change the relative competitive position of our production facilities. Rail and trucking operations are subject to various hazards, including extreme weather conditions, work stoppages and operating hazards. If we are unable to ship our products as a result of the railroads or trucking companies failing to operate or if there are material changes in the cost or availability of railroad or trucking services, we may not be able to arrange alternative and timely means to ship our products, which could lead to interruptions or slowdowns in our businesses and, therefore, have a material adverse effect on us.

Future Acquisitions May Adversely Affect Our Operations. We may actively pursue acquisition opportunities, some of which could be material. We may finance future acquisitions through internally generated funds, bank borrowings, public offerings or private placements of equity or debt securities, or a combination of these sources. We might not be able to make acquisitions on terms that are favorable to us, or at all. If we do complete any future acquisitions, we will face many risks, including the possible inability to integrate an acquired business into our operations, diversion of our management’s attention, failure to retain key acquired personnel and unanticipated problems or liabilities, some or all of which could have a material adverse effect on us. Acquisitions could place a significant strain on management, operating, financial and other resources and increased demands on our systems and controls.

We May Face Difficulties or Delays in Completing the Sale of Our Aggregates Business. The closing of the sale of our aggregates business to a subsidiary of Hanson Building Materials of America, Inc. is subject to various closing conditions, including antitrust clearance under the Hart-Scott-Rodino Improvements Act of 1976, as amended, completion of environmental and geological due diligence and real estate surveys at certain of our aggregates operating sites, obtaining the consent of our senior secured lenders and obtaining the release of the guarantees of our aggregates subsidiaries of the obligations under the indenture relating to our senior subordinated notes. We expect these conditions to be satisfied. However, it is possible that the required regulatory approvals will be delayed or will not be obtained, or that satisfaction of the other conditions may not occur in the timeframe we expect or not at all.

Inflation

We do not believe that inflation has had a material impact on our financial position or results of operations during the periods covered by the financial statements included in this Annual Report on Form 10-K.

Seasonality

Our aggregates business is seasonal, due primarily to the effect of weather conditions in winter months on construction

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activity in our Pennsylvania and New Jersey markets. Due to this, peak sales of aggregates occur primarily in the months of April through November. Accordingly, our results of operations in any individual quarter may not be indicative of our results of operations for the full year.

Environmental and Related Matters

We discuss certain environmental matters relating to our various production and other facilities, certain regulatory requirements relating to human exposure to crystalline silica and our mining activity and how such matters may affect our business in the future under “Business—Government Regulation.”

Recent Accounting Pronouncements

Statement of Financial Accounting Standards No. 143 (SFAS 143), Accounting for Asset Retirement Obligations, was issued in June 2001. SFAS 143 establishes accounting and reporting standards for obligations associated with the retirement of tangible long-lived assets. We currently provide for this obligation based on units of production over the life of our mining property and as of December 31, 2002 reported a liability of $9.9 million in other noncurrent liabilities related to this obligation. Effective January 1, 2003, we will adopt SFAS 143 which requires the liability to be determined based on legal obligations that will be incurred when an asset is retired. We estimate that our obligations under the new Standard will result in a liability of $8.6 million and an asset of $4.3 million. The resulting $5.6 million pre-tax gain from adoption will be reported net of tax as a cumulative effect of a change in accounting principle as of January 1, 2003.

In 2002 we adopted Statement of Financial Accounting Standard No. 144 “Accounting for Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”). SFAS No. 144 addresses significant issues relating to the implementation of FASB Statement No. 121 “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of” (“SFAS No. 121”), and the development of a single accounting model, based on the framework established in SFAS No. 121, for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired.

In November 2002, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” Interpretation No. 45 requires the disclosure of certain guarantees existing at December 31, 2002. In addition, Interpretation No. 45 requires the recognition of a liability for the fair value of the obligation of qualifying guarantee activities that are initiated or modified after December 31, 2002. Accordingly, we will apply the recognition provisions of Interpretation No. 45 prospectively to guarantee activities initiated after December 31, 2002.

We do not expect to enter into financial instruments for trading purposes. We anticipate periodically entering into interest rate swap agreements to effectively convert all or a portion of our floating-rate debt to fixed-rate debt in order to reduce our exposure to movements in interest rates. Such agreements would involve the exchange of fixed and floating interest rate payments over the life of the agreement without the exchange of the underlying principal amounts. The impact of fluctuations in interest rates on the interest rate swap agreements is expected to be offset by the opposite impact on the related debt. We record the payments or receipts on the agreements as adjustments to interest expense. Swap agreements will only be entered into with syndicate banks. In addition, we may enter into interest rate cap agreements, which limit our variable rate interest to a specified level. In the future, we may enter into natural gas and other energy related hedge arrangements in order to reduce our exposure to changes in commodity energy prices. As of March 31, 2003, we have no energy hedge agreements outstanding.

We are exposed to various market risks, including changes in interest rates. Market risk related to interest rates is the potential loss arising from adverse changes in interest rates.

At December 31, 2002 and December 31, 2001, we had an outstanding interest rate swap agreement maturing in 2004 with a notional principal amount of $30.0 million. At December 31, 1999, we had outstanding interest rate swap agreements maturing in 2001 with an aggregate notional principal amount of $30.0 million. These swaps effectively convert the variable interest rates on the notional principal amounts to a fixed interest rate. In addition, we had interest rate cap agreements at December 31, 2002, 2001 and 2000 with aggregate notional principal amounts of $41.0 million, $46.0 million, and $57.0 million, respectively. These agreements effectively limit the variable interest rate on the notional principal amount of variable rate debt to 6.5%.

The fair value of interest rate swap and cap agreements represents the estimated receipts or payments that we would

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make to terminate the agreements. At December 31, 2002, we would have paid $1.7 million to terminate the interest rate swap agreement and received $17,000 to terminate the interest rate cap agreements.

The fair market value of our long-term fixed interest rate debt is subject to interest rate risk. Generally, the fair market value of the fixed interest rate debt will increase as the interest rates fall and decrease as interest rates rise. At December 31, 2002, the estimated fair value of our fixed interest rate long-term debt (including current portion) was approximately $96 million less than its carrying value of $150.0 million due to changes in market conditions for the senior subordinated notes, which were trading at 36% of their face value as of December 31, 2002.

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Report of Independent Accountants

To the Board of Directors and Stockholder of Better Minerals & Aggregates Company:

In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) on page 69 present fairly, in all material respects, the financial position of Better Minerals & Aggregates Company and subsidiaries at December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) on page 69 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which 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.

As discussed in Note 2 to the consolidated financial statements, effective January 1, 2002, the Company adopted Statement of Financial Accounting Standard No. 142, “Goodwill and Other Intangible Assets.”

As discussed in Note 6, the lenders under the Company’s Senior Secured Credit Facilities approved an amendment on April 17, 2003 which revised certain financial covenants through January 1, 2004, however, the covenants for March 31, 2004 are substantially more restrictive than those provided for in the April 17, 2003 amendment. It is probable that the Company will need to seek amendments or waivers to avoid violating these more restrictive covenants. In the event that the Company is unable to obtain amendments or waivers the lenders could declare all of the funds borrowed thereunder, together with accrued interest, immediately due and payable. Similarly, if the lenders take this action the Company would be in default under the indenture related to its Senior Subordinated Notes. In the event the debt becomes due and payable it is unlikely that the Company will be able to repay amounts due and it could be required to sell assets to generate cash or the lenders could foreclose on the pledged stock of the Company’s subsidiaries and the assets in which they have been granted a security interest. In addition, as discussed in Note 17, on April 10, 2003, the Company entered into an agreement to sell its aggregates business. The Company’s plans with respect to these matters are discussed in Note 6.

PricewaterhouseCoopers LLP

New York, New York

April 17, 2003

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Better Minerals & Aggregates Company

Consolidated Balance Sheets

(Dollars in thousands)