UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

Commission File Number 0-4197

United States Lime & Minerals, Inc.

(Exact name of Registrant as specified in its charter)

Registrant’s telephone number, including area code:

972-991-8400

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.10 par value

      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 þ          No o

      Indicate by a 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 Form 10-K or any amendment of this Form 10-K.     þ

      Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Act).     Yes o          No þ

      The aggregate market value of Common Stock held by non-affiliates computed as of the last business day of the Registrant’s quarter ended June 30, 2004: $19,865,733.

      Number of shares of Common Stock outstanding as of March 23, 2005: 5,876,338.

DOCUMENTS INCORPORATED BY REFERENCE

      Part III incorporates information by reference from the Registrant’s definitive Proxy Statement to be filed for its 2005 Annual Meeting of Shareholders. Part IV incorporates certain exhibits by reference from the Registrant’s previous filings.

TABLE OF CONTENTS

PART I

ITEM 1.     BUSINESS.

     

General. The business of United States Lime & Minerals, Inc. (the “Company” or the “Registrant”), which was incorporated in 1950, is the production and sale of lime and limestone products. The Company extracts high-quality limestone from its quarries and processes it for sale as pulverized limestone, quicklime, hydrated lime and lime slurry. These operations were conducted during 2004 by five wholly-owned subsidiaries of the Company: Arkansas Lime Company, Colorado Lime Company, Texas Lime Company, U.S. Lime Company — Houston and U.S. Lime Company — Shreveport.

      The Company’s principal corporate office is located at 13800 Montfort Drive, Suite 330, Dallas, Texas 75240. The Company’s telephone number is (972) 991-8400, and its internet address is www.uslm.com. The Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge on or through the Company’s website as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the Securities and Exchange Commission.

     

Business and Products. The Company extracts high-quality limestone from its quarries and then processes it for sale as pulverized limestone, quicklime, hydrated lime and lime slurry. Pulverized limestone (also referred to as ground calcium carbonate) is a dried product ground to granular and finer sizes. Quicklime (calcium oxide) is produced by heating limestone to very high temperatures in kilns in a process called calcination. Hydrated lime (calcium hydroxide) is produced by reacting quicklime with water in a controlled process. Lime slurry (milk of lime) is a suspended solution of calcium hydroxide produced by mixing quicklime with water in a lime slaker.

      Pulverized limestone is used primarily in the production of construction materials such as roofing shingles and asphalt paving, as an additive to agriculture feeds, in the production of glass, as a soil enhancement and for mine safety dust in coal mining operations. Quicklime is used primarily in metal processing, the flue gas desulphurization process for utilities, soil stabilization for highway and building construction, the manufacturing of paper products and in sanitation and water treatment systems. Hydrated lime is used primarily in municipal sanitation and water treatment, in soil stabilization for highway and building construction, in the production of chemicals and in the production of construction materials such as stucco, plaster and mortar. Lime slurry is used primarily in soil stabilization for highway and building construction.

     

Product Sales. In 2004, the Company sold most of its products in the states of Arkansas, Colorado, Indiana, Kansas, Louisiana, Mississippi, Missouri, New Mexico, Oklahoma, Pennsylvania, Tennessee, Texas and West Virginia. Sales are made primarily by the Company’s eight sales employees who call on potential customers and solicit orders which are generally made on a purchase-order basis. The Company also receives orders in response to bids that it prepares and submits to potential customers.

      Principal customers for the Company’s lime and limestone products are highway, street and parking lot contractors, steel producers, municipal sanitation and water treatment facilities, paper manufacturers, chemical producers, roofing shingle manufacturers, poultry and cattle feed producers and glass manufacturers. During 2004, the strongest demand for the Company’s lime and limestone products was from highway, street and parking lot contractors, steel producers and roofing shingle manufacturers.

      Approximately 675 customers accounted for the Company’s sales of lime and limestone products during 2004. No single customer accounted for more than 10% of such sales. The Company is generally not subject to significant customer risks as its customers are considerably diversified as to geographic location and industrial concentration. However, given the nature of the lime and limestone industry, the Company’s profits are very sensitive to changes in sales volume.

      Lime and limestone products are transported by truck and rail to customers generally within a radius of 400 miles of each of the Company’s processing plants. All of the Company’s sales are made within the United States.

     

Order Backlog. The Company does not believe that backlog information accurately reflects anticipated annual revenues or profitability from year to year.

     

Seasonality. The Company’s sales have historically reflected seasonal trends, with the largest percentage of total annual shipments and revenues being realized in the second and third quarters. Lower seasonal demand normally results in reduced shipments and revenues in the first and fourth quarters. Inclement weather conditions generally have a negative impact on the demand for lime and limestone products supplied to construction related customers, as well as on the Company’s open-pit mining operations.

     

Limestone Reserves. The Company has two subsidiaries that extract limestone from open-pit quarries: Texas Lime Company, which is located 14 miles from Cleburne, Texas, and Arkansas Lime Company, which is located near Batesville, Arkansas. A third subsidiary, Colorado Lime Company, owns limestone resources at Monarch Pass located 15 miles west of Salida, Colorado. No mining took place on the Colorado property in 2004. Existing crushed stone stockpiles on the property were used to provide feedstock to the plant in Salida. Access to all locations is provided by paved roads.

      Texas Lime Company operates upon a tract of land containing approximately 470 acres, including the Cleburne Quarry. The Company owns approximately 2,700 acres adjacent to the quarry. Both the quarry and the adjacent land contain known high-quality limestone reserves in a bed averaging 28 feet in thickness, with an overburden that ranges from 0 to 50 feet. The Company also has mineral interests in approximately 560 acres of land adjacent to the northwest boundary of the Company’s property. The calculated reserves, as of December 31, 2004, were approximately 34,000,000 tons of proven reserves plus approximately 91,000,000 tons of probable reserves. Assuming the current level of production and recovery rate is maintained, the Company estimates that these reserves are sufficient to sustain operations for approximately 80 years.

      Arkansas Lime Company operates the Batesville Quarry and has hydrated lime and limestone production facilities on a second site linked to the quarry by its own standard-gauge railroad. The active quarry operations cover approximately 725 acres of land containing a known deposit of high-quality limestone. The average thickness of the high-quality limestone deposit is approximately 70 feet, with an average overburden thickness of 35 feet. The Company also owns approximately 325 additional acres containing additional high-quality limestone deposits adjacent to the present quarry, but separated from it by a public highway. The average thickness of this second high-quality limestone deposit is approximately 55 feet, with an average overburden of 20 feet. The calculated reserves, as of December 31, 2004, were approximately 18,000,000 tons of proven reserves plus an additional 33,500,000 tons of probable reserves. Assuming the current level of production and recovery rate is maintained, the Company estimates that reserves are sufficient to sustain operations for approximately 40 years.

      Colorado Lime Company acquired the Monarch Pass Quarry in November 1995 and has not carried out any mining on the property. A review of the potential limestone resources has been completed by independent geologists; however, the Company has not initiated a drilling program. Consequently, it is not possible to identify and categorize reserves. The Monarch Pass Quarry, which had been operated for many years until its closure in the early nineties, contains a mixture of limestone types, including high-quality calcium limestone and dolomite. The Company expects to continue to utilize remaining crushed stone stockpiles on the property to supply its processing plant in nearby Salida.

     

Mining. The Company extracts limestone by the open-pit method at its Texas and Arkansas quarries. Monarch Pass is also an open-pit quarry, but is not being mined at this time. The open-pit method consists of removing any overburden comprising soil, trees and other substances, including inferior limestone, and then extracting the exposed high-quality limestone. Open-pit mining is generally less expensive than underground mining. The principal disadvantage of the open-pit method is that operations are subject to inclement weather. The limestone is extracted by drilling and blasting, utilizing standard mining equipment. After extraction, limestone is crushed, screened and ground in the case of pulverized limestone, or further processed in kilns and hydrators in the case of quicklime and hydrated lime, before shipment. The Company has no knowledge of any recent changes in the physical quarrying conditions on any of its properties which have materially affected its mining operations, and no such changes are anticipated.

     

Plants and Facilities. The Company produces lime and/or limestone products at three plants, one terminal and one slurry facility:

      The Cleburne, Texas plant has an annual capacity of approximately 470,000 tons of quicklime from rotary kilns. The plant also has pulverized limestone equipment which, depending on the product mix, has the capacity to produce approximately 1,000,000 tons of pulverized limestone annually.

      The Arkansas plant is situated at the Batesville Quarry. The plant’s limestone and hydratimg facilities are situated on a tract of 290 acres located approximately two miles from the Batesville Quarry, to which it is connected by a Company-owned, standard-gauge railroad. Utilizing two rotary kilns, including a new kiln completed in the first quarter 2004, this plant has an annual capacity of approximately 420,000 tons of quicklime. The plant also has two grinding systems which, depending on the product mix, have the capacity to produce 400,000 tons of pulverized limestone annually.

      In 1999, the Company commenced a modernization and expansion of the Arkansas facility, which was designed to expand production and improve quality and service. The first of two phases of the Arkansas modernization and expansion project began in the fourth quarter 1999. Phase I involved the redevelopment of the quarry plant, rebuilding of the railroad to standard gauge, the purchase of a facility to establish an out-of-state terminal in Shreveport, Louisiana, the installation of a rotary kiln with preheater and increased product storage and loading capacity. The Company completed Phase I in the second quarter 2001.

      The Phase II expansion doubled the Arkansas plant’s quicklime production capacity through the installation of a second preheater rotary kiln and additional kiln-run storage capacity substantially identical to the kiln system built in Phase I. Construction of the second kiln system commenced in the third quarter 2003 and was completed with lime production from the new kiln beginning in late February 2004. The plans for Phase II also included refurbishing the distribution terminal in Shreveport, Louisiana, which is connected to a railroad, to provide lime storage, hydrating and distribution capacity to service markets in Louisiana and East Texas. This terminal began operations in December 2004.

      The Company maintains lime hydrating equipment and limestone drying and pulverizing equipment at both the Texas and Arkansas plants. Storage facilities for lime and pulverized limestone products at each plant consist primarily of cylindrical tanks, which are considered by the Company to be adequate to protect its lime and limestone products and to provide an available supply for customers’ needs at the existing volume of shipments. Equipment is maintained at each plant to load trucks, and at the Arkansas plant to load railroad cars.

      Colorado Lime Company operates a limestone drying, grinding and bagging facility, with an annual capacity of approximately 50,000 tons, on 8 acres of land in Salida, Colorado. The property is leased from the Union Pacific Railroad for a five-year term, ending June 2009, with a renewal option for an additional five years. This plant’s facilities also include a small rotary lime kiln which is permitted for operation, but is presently dormant. A mobile stone crushing and screening plant is also situated at the Monarch Pass Quarry, to produce agricultural grade limestone, with an annual capacity of up to 40,000 tons.

      U.S. Lime Company-Houston commenced operations in March 2004 and services the Greater Houston area construction market. This facility uses quicklime to produce lime slurry.

      The Company believes that its processing plants are adequately maintained and insured. Both the Texas and Arkansas plants have recently been modernized and expanded. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Financial Condition.”

      Employees. The Company employed, at December 31, 2004, 211 persons, 25 of whom are engaged in administrative and management activities, and eight of whom are engaged in sales activities. Of the Company’s 178 production employees, 118 are covered by two collective bargaining agreements. The agreement for the Arkansas facility expires in January 2008, and the agreement for the Texas facility expires in November 2005.

      Competition. The lime industry is highly regionalized and competitive, with quality, price, ability to meet customer demand, proximity to customers, personal relationships and timeliness of deliveries being the prime competitive factors. The Company’s competitors are predominantly private companies.

      The lime industry is characterized by high barriers to entry, including: the scarcity of high-quality limestone deposits on which the required zoning and permits for extraction can be obtained; the need for lime plants to be located close to markets and railroad networks to enable cost-effective production and distribution; clean air and anti-pollution legislation which has made it more difficult to obtain permitting for new sources of emissions, such as lime kilns; and the high capital cost of the facilities. These considerations reinforce the premium value of operations having permitted, long-term, high-quality mineral reserves and good locations relative to markets.

      Producers tend to be concentrated on known limestone formations where competition takes place on a regional basis. The industry as a whole has expanded its customer base and, while the steel industry is still the largest market sector, it also counts environmental-related users, chemical users and other industrial users, including pulp and paper producers and road builders, among its major customers.

      There is a continuing trend of consolidation in the lime and limestone industry, with the three largest lime companies now accounting for more than two-thirds of North American lime production capacity. In addition to the consolidations, and often in conjunction with them, many lime producers have undergone modernization and expansion projects to upgrade their processing equipment in an effort to improve operating efficiency. The Company’s Texas and Arkansas modernization and expansion projects should allow it to continue to remain competitive, protect its markets and position itself for the future. In addition, the Company will continue to evaluate external opportunities for expansion. However, the Company may have to revise its strategy, or otherwise find ways to enhance the value of the Company, including entering into strategic partnerships, mergers, acquisitions, or other transactions.

      Impact of Environmental Laws and Liabilities. The Company owns or controls large areas of land, upon which it operates limestone quarries and/or processing plants, with inherent environmental responsibilities and environmental compliance costs, including capital, maintenance and operating costs with respect to pollution control facilities, the cost of ongoing monitoring programs and other similar costs.

      The Company’s operations are subject to various federal, state, and local laws and regulations relating to the environment, health and safety, and other regulatory matters including the Clear Air Act, the Clean Water Act, the Resource Conservation and Recovery Act, and the Comprehensive Environmental Response, Compensation, and Liability Act, as well as the Toxic Substances Control Act (“Environmental Laws”). These Environmental Laws grant the United States Environmental Protection Agency (“EPA”) and state governmental agencies the authority to promulgate regulations that could result in substantial expenditures on pollution control and waste management. The rate of change of Environmental Laws has been rapid over the last decade, and compliance can require significant expenditures. For example, federal legislation required Texas Lime Company and Arkansas Lime Company to apply for “Title V” operating permits that have significant ongoing compliance monitoring costs. In addition to the Title V permits, other environmental operating permits are required for the Company’s operations, and such permits are subject to modification, renewal and revocation. Also, raw materials and fuels used to manufacture lime and calcium contain chemicals and compounds, such as trace metals, that may be classified as hazardous substances. The EPA implemented the lime maximum achievable control technology (“MACT”) regulations on January 5, 2004 to control emissions of hazardous air pollutants from lime plants. Existing plants must determine how the rules apply, then develop and implement a plan to be in compliance by January 5, 2008. The MACT regulations will require additional performance testing, monitoring of operations, reporting, and development and implementation of startup, shutdown and malfunction plans for the Company’s lime plants.

      Carbon dioxide (“CO₂”) emission reductions remain an issue for the Company and other similar manufacturing companies. The consequences of CO₂ reduction measures are potentially significant, as the production of CO₂ is inherent in the manufacture of lime (calcination of limestone) and some other products, such as cement. The Company and other lime manufacturers, through the National Lime Association, the leading industry trade association, committed to the Department of Energy (“DOE”) and EPA to reduce the

production of greenhouse gases, such as CO₂. The commitment focuses on achieving energy-related reductions in emissions intensity, as it was understood that the lime industry cannot reduce emissions from the calcination of limestone. Although the DOE’s and EPA’s current efforts to decrease greenhouse gas emissions are voluntary, there is no assurance that a change in the law will not be adopted that would have a material adverse effect on our financial condition, results of operations, cash flows or competitive position.

      In part in response to requirements of environmental regulatory agencies, the Company incurred capital expenditures related to environmental activities of approximately $410,000 in 2004 and $400,000 in 2003. The Company’s recurring costs associated with managing and disposing of potentially hazardous substances (such as fuels and lubricants used in operations) and maintaining pollution control equipment amounted to approximately $590,000 in 2004 and $400,000 in 2003. The Company has not been named as a potentially responsible party in any federal superfund cleanup site or state-lead cleanup site.

      The Company records environmental accruals, based on studies and estimates, when it is probable that it has incurred a reasonably estimable liability. The accruals are adjusted when further information warrants an adjustment. The Company believes that its accrual for environmental costs at December 31, 2004 is reasonable.

ITEM 2.     PROPERTIES.

      Reference is made to Item 1 of this Report for a description of the properties of the Company, and such description is hereby incorporated by reference in answer to this Item 2. As discussed in Note 3 of Notes to Consolidated Financial Statements, the Company’s plant facilities and mineral reserves are subject to encumbrances to secure the Company’s loans.

ITEM 3.     LEGAL PROCEEDINGS.

      Information regarding legal proceedings is set forth in Note 9 of Notes to Consolidated Financial Statements and is hereby incorporated by reference in answer to this Item 3.

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

      The Company did not submit any matters to a vote of security holders during the fourth quarter 2004.

PART II

      The Company’s common stock is quoted on the Nasdaq National Market® under the symbol “USLM.” As of March 23, 2005, the Company had approximately 500 stockholders of record

      As of March 23, 2005, the Company had 500,000 shares of $5.00 par value preferred stock authorized; however, none has been issued.

      The Company did not pay any dividends during 2004, and does not plan on paying dividends in 2005.

      The low and high sales prices for the Company’s common stock, as well as dividends declared in 2003 on the common stock, for the periods indicated were:

      See “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Notes to Consolidated Financial Statements.

FORWARD-LOOKING STATEMENTS.

      Any statements contained in this Report that are not statements of historical fact are forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements in this Report, including without limitation statements relating to management’s plans, strategies, objectives, expectations, intentions and adequacy of resources, are identified by such words as “will,” “could,” “should,” “believe,” “expect,” “intend,” “plan,” “schedule,” “estimate,” “anticipate” and “project.” We undertake no obligation to publicly update or revise any forward-looking statements. We caution that forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from expectations, including without limitation the following: (i) our plans, strategies, objectives, expectations and intentions are subject to change at any time in our discretion; (ii) our plans and the results of our operations will be affected by our ability to manage our growth; (iii) our ability to meet short-term and long-term liquidity demands, including servicing our debt; (iv) inclement weather conditions; (v) increased fuel costs; (vi) unanticipated delays or additional cost overruns in completing construction projects; (vii) reduced demand for our products; and (viii) other risks and uncertainties set forth below or indicated from time to time in our filings with the Securities and Exchange Commission.

OVERVIEW.

      We produce and sell pulverized limestone, quicklime, hydrated lime and lime slurry. The principal factors affecting our success are the level of demand for our products, and whether we are able to maintain sufficient production levels and product quality while controlling costs.

      Inclement weather conditions generally reduce the demand for lime and limestone products supplied to construction-related customers that account for a significant amount of our revenues. Inclement weather also interferes with our open-pit mining operations and can disrupt our plant production, as in the case of flooding and winter ice storms in Texas in recent years.

      Demand for our products in our market areas is also affected by general economic conditions, the pace of home construction and the demand for steel, as well as the level of governmental funding for highway construction. In recent years, the demand, especially by the steel industry, and prices for lime and limestone products have continued to improve.

      The Transportation Equity Act for the 21st Century, which was the federal highway bill, expired on September 30, 2003. The general provisions of TEA-21 have been retained under continuing resolutions, most recently through May 31, 2005, to provide federal funding for highway construction. New six-year bills have been proposed by Congress, including a bill that was passed by the House of Representatives on March 10, 2005, and the Administration that would increase the funding levels. Due to wide bi-partisan support, a new bill is expected to pass; therefore, we believe there will be a continuing strong level of demand for lime and limestone products used in highway construction for the next few years.

      Our recent modernization and expansion projects in Texas and Arkansas, beginning in 1997, have positioned us to meet the demand for high-quality lime and limestone products in our markets, with our lime out-put capacity nearly doubling and our limestone production capacity increasing approximately 50% since 1998. These projects have also equipped us with up-to-date, fuel-efficient plant facilities, which should result in lower production costs and greater operating efficiencies, thus enhancing our competitive position. In order for our plants to operate at peak efficiency, we must meet operational challenges that arise from time to time, including bringing new facilities on line as well as operating existing facilities.

      Our primary variable cost is energy. Natural gas prices remain high, and solid fuel costs are also increasing. We have been able to mitigate to some degree the adverse impact of those increases by varying the mixes of fuel used in our kilns, and by passing on some of our increased energy costs to our customers through higher prices and/or surcharges on certain products. We have not, to date, engaged in any significant hedging activity in an effort to control our energy costs. We have, however, entered into forward purchase contracts for natural gas for the winter months, in order to provide greater predictability to this cost component, and we may do so again in the future. We have also entered into pricing agreements for coal and petroleum coke for 2005 that include price increases averaging approximately 20% for 2005 compared with 2004 prices. In addition, we experienced delays in rail delivery of some of our coal requirements during 2004 due to the problems a major rail carrier experienced with its rail system. This resulted in our having to purchase higher priced coal from sources other than our normal provider.

      We financed our Texas and Arkansas modernization and expansion projects through a combination of a common stock rights offering to our shareholders, debt financing, including the issuance in August 2003 of $14,000,000 of unsecured subordinate notes, due 2008, and cash flows from operations. Given our increased level of debt, we must generate sufficient cash flows to cover ongoing capital and debt service needs. During 2004, our cash flows from operations were strong, enabling us to prepay $7,000,000 (50% of the original principal amount) of the notes. All of our remaining long-term debt becomes due in 2008 and 2009, and we will need to refinance our debt prior to maturity if not fully repaid by then.

      With the second kiln and related storage capacity at Arkansas completed, and the Shreveport, Louisiana distribution terminal refurbished, we have completed Phase II of our Arkansas modernization and expansion project. As a result of our Texas and Arkansas projects, our yearly depreciation, depletion and amortization expense included in cost of revenues increased from $2,788,000 in 1998 to $7,423,000 in 2004, while our gross profit increased from $7,061,000 to $17,020,000 over the same period. In addition, over that period, our interest expense has increased from $26,000 in 1998 to $5,630,000 in 2004 (excluding approximately $445,000 of interest capitalized in 2004), as the amount of our borrowings has increased. During 2004, we reduced our debt and future debt service needs, by refinancing our bank debt, reducing our interest rate to approximately 5.62% from approximately 9.25%, and the $7,000,000 prepayment of our subordinated notes, which bear a 14% interest rate.

      In order for us to continue to increase our profitability in the face of these increased fixed costs, we must maintain our revenues and cash flows, and continue to control our operational and selling, general and administrative expenses, including new corporate governance compliance costs resulting from the Sarbanes-Oxley Act of 2002 and associated regulatory requirements. We also continue to explore ways to expand our operations and production capacity through additional capital projects and/or acquisitions.

      As of May 28, 2004, we entered into an eighteen-month oil and gas lease agreement with EOG Resources, Inc. (“EOG”) with respect to oil and gas rights on our Cleburne, Texas property. The lease may be extended so long as EOG is continuously developing the leased property as set forth in the lease. Pursuant to the lease, we have received lease bonus payments totaling $1,328,000, which are reflected in other income for 2004. In addition, we retained a 20% royalty interest in oil and gas produced from any successful wells drilled on the leased property and an option to participate in any well drilled on the leased property as a 20% working interest owner, provided we elect to participate prior to the commencement of each well. As of the date of this report, EOG has not commenced drilling on the leased property.

      We believe that the enhanced production capacity resulting from our modernization and expansion efforts at the Texas and Arkansas plants and the operational strategies that we have implemented have allowed us to increase production, improve product quality, better serve existing customers, attract new customers and control our costs. There can be no assurance, however, that demand and prices for our lime and limestone products will remain strong, that our production will not be adversely affected by weather-related or other operational problems, that our results will not be adversely affected by continued increases in energy costs or new environmental requirements, or that our production capacity, revenues, net income and cash flows will continue to be strong.

CRITICAL ACCOUNTING POLICIES.

      The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent liabilities, at the date of our financial statements. Actual results may differ from these estimates and judgments under different assumptions or conditions.

      Critical accounting policies are defined as those that are reflective of significant management judgments and uncertainties, and potentially result in materially different results under different assumptions and conditions. We believe the following critical accounting policies require the most significant management judgments and estimates used in the preparation of our consolidated financial statements.

      Accounts receivable. We are required to estimate the collectability of our trade receivables. A considerable amount of judgment is required in assessing the ultimate realization of these receivables and determining our allowance for doubtful accounts. The majority of our trade receivables are unsecured. Payment terms for our trade receivables are based on underlying purchase orders, contracts or purchase agreements. Credit losses relating to these receivables consistently have been within management expectations.

      Revenue recognition. We recognize revenue in accordance with the terms of purchase orders, contracts or purchase agreements, which are generally upon shipment, and payment is considered probable.

      Long-lived assets. We review long-term assets for impairment in accordance with the guidelines of Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”). SFAS 144 requires that, when events or circumstances indicate that the carrying amount of an asset may not be recoverable, we should determine if impairment of value exists. If the estimated undiscounted future net cash flows are less than the carrying amount of the asset, an impairment exists and an impairment loss must be calculated and recorded. If an impairment exists, the impairment loss is calculated based on the excess of the carrying amount of the asset over the asset’s fair value. Any impairment loss is treated as a permanent reduction in the carrying value of the asset.

      Deferred tax assets. We record a valuation allowance to reduce deferred tax assets to the amount that is more likely than not to be realized. We consider future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance. In the event that we determine that deferred tax assets would be realizable in the future in excess of the net recorded amount, an adjustment to deferred tax assets would increase income in the period such determination was made. Conversely, should we determine that all or part of the net deferred tax assets would not be realizable in the future, an adjustment to deferred tax assets would be charged to income in the period such determination was made.

      Environmental costs. We record environmental accruals, based on studies and estimates, when it is probable that we have incurred a reasonably estimable liability. The accruals are adjusted when further information warrants an adjustment. Environmental expenditures that extend the life, increase the capacity or improve the safety or efficiency of Company-owned assets or are incurred to mitigate or prevent future environmental contamination are capitalized. Other environmental costs are expensed when incurred.

      Contingencies. We are party to proceedings, lawsuits and claims arising in the normal course of business relating to environmental, labor, product and other matters. We are required to estimate the likelihood of any adverse judgments or outcomes to these matters, as well as potential ranges of probable losses. A determination of the amount of reserves required, if any, for these contingencies is made after careful analysis of each individual issue, including coverage under our insurance policies. This determination may change in the future because of new developments.

      Derivatives. We record the fair value of our gas forward purchase contracts on our balance sheet, with the offsetting entry to other operating expense. Any subsequent mark-to-market adjustments result in an increase or decrease of other operating expense. We record the fair value of our interest rate hedge on our balance sheet and include any changes in fair value in other comprehensive income/loss.

      Warrant share put liability. We estimate the fair value of our warrant share put liability quarterly based on the per share average closing price of our common stock for the last 30 days of the quarter compared to the $3.84 per share exercise price. The difference between the fair value and the carrying value of the warrant share put liability is being accreted, and the effect on fair value of future changes in the repurchase price for each share are accreted or decreted, over the five-year period from the date of issuance to August 5, 2008, after which the warrant holders may require us to repurchase any or all shares acquired through exercise of the warrants. Therefore, increases in our per share common stock price result in an increased liability and increased interest expense from accretion.

      Pension plan. We have one noncontributory defined benefit pension plan. All benefits for participants in the plan were frozen as of July 31, 1997. Our costs, credits and funded status for this plan are developed from actuarial valuations. Inherent in these valuations are key assumptions, including discount rates and expected long-term return on plan assets. Future costs, credits and funded status for this plan may change should conditions warrant changes in the assumptions.

RESULTS OF OPERATIONS.

      The following table sets forth certain financial information expressed as a percentage of revenues for the periods indicated:

2004 vs. 2003

      Revenues increased to $55,679,000 in 2004 from $45,256,000 in 2003, an increase of $10,423,000, or 23.0%. For 2004, the increases in revenues primarily resulted from increased sales resulting from lime production from the new kiln at our Arkansas plant, which came on line in late February 2004. Prices for our products increased approximately 2.5%, on average, in 2004 compared to 2003. Revenues increased in 2004 in spite of higher than normal levels of rainfall in our Texas market area in the third quarter which resulted in reduced construction demand for products from our Cleburne, Texas plant.

      Due in part to continuing lime shortages principally in the eastern half of the United States, we sold substantially all of the increased lime production at Arkansas during 2004. These shortages were primarily due to increased consumption of lime for steel-related uses and the closing of three lime plants in the Midwest in 2003.

      Our gross profit increased to $17,020,000 for 2004 from $13,062,000 for 2003, an increase of $3,958,000, or 30.3%. Compared to 2003, gross profit and gross profit margins increased in 2004 primarily due to the increase in lime sales volume, partially offset by a $1,320,000 increase in depreciation primarily attributable to depreciation of the new Arkansas kiln. Gross profit margin as a percentage of revenues increased to 30.6% in 2004 compared to 28.8% in 2003 primarily due to the 23.0% increase in sales volume, reducing our per unit production costs by spreading our fixed costs over larger production volumes.

      Selling, general and administrative expenses (“SG&A”) increased to $5,040,000 in 2004 from $4,488,000 in 2003, an increase of $552,000, or 12.3%. As a percentage of sales, SG&A declined to 9.0% in 2004 from 9.9% in 2003. The increase in SG&A in 2004 was primarily attributable to increases in employee compensation and benefits, increased reserves for bad debts and increased audit and other professional fees.

      Interest expense in 2004 increased to $5,630,000 from $4,577,000 in 2003, an increase of $1,053,000, or 23.0%. The increase in interest expense in 2004 primarily resulted from the $235,000 prepayment penalty and the expensing of $632,000 unamortized prepaid financing costs, both of which resulted from our debt refinancing in August 2004, and the private placement of $14,000,000 unsecured subordinated notes (the “Sub Notes”) in August 2003. In 2004, interest expense related to the Sub Notes, including non-cash interest costs and net of capitalized interest, was approximately $1,765,000 compared to approximately $582,000 in 2003. These were partially offset by the $7,500,000 of net repayments of our debt during 2004 and reduced

interest rates resulting from the August 2004 debt refinancing. Approximately $445,000 of interest was capitalized in 2004 as part of the Arkansas Phase II expansion p