10-Q 1 f10q-3qtr_2003.txt THIRD QUARTER 2003 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 _______________ FORM 10-Q (Mark One) [X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended September 30, 2003 or [_] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period ______ to ______ Commission File Number 333-32518 Better Minerals & Aggregates Company (Exact Name of Registrant As Specified in its Charter) Delaware 55-0749125 (State or Other Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) Route 522 North, P.O. Box 187 Berkeley Springs, West Virginia 25411 (Address of Principal Executive Offices) (Zip Code) Registrant's telephone number, including area code (304) 258-2500 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 reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes [_] No [X] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: Class Outstanding as of November 1, 2003 ----- ---------------------------------- Common Stock 100 shares Better Minerals & Aggregates Company Form 10-Q Index Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets as of September 30, 2003 (unaudited) and December 31, 2002....................................... 1 Condensed Consolidated Statements of Operations for the quarter and nine months ended September 30, 2003 and September 30, 2002 (unaudited).......................................... 3 Condensed Consolidated Statements of Stockholder's Equity for the quarter and nine months ended September 30, 2003 and September 30, 2002 (unaudited).......................................... 4 Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2003 and September 30, 2002 (unaudited)............. 5 Notes to Condensed Consolidated Financial Statements.................... 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................. 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk. 18 Item 4. Controls and Procedures.................................... 18 PART II. OTHER INFORMATION Item 1. Legal Proceedings.......................................... 18 Item 6. Exhibits and Reports on Form 8-K........................... 19 Signatures Exhibits PART I. FINANCIAL INFORMATION Item 1. Financial Statements BETTER MINERALS & AGGREGATES COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in Thousands)

The accompanying notes are an integral part of these statements. 1 BETTER MINERALS & AGGREGATES COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (Dollars in Thousands)

The accompanying notes are an integral part of these statements. 2 BETTER MINERALS & AGGREGATES COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in Thousands) (Unaudited)

The accompanying notes are an integral part of these statements. 3 BETTER MINERALS & AGGREGATES COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (Dollars in Thousands) (Unaudited)

The accompanying notes are an integral part of these statements. 4 BETTER MINERALS & AGGREGATES COMPANY AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Thousands) (Unaudited)

The accompanying notes are an integral part of these statements. 5 BETTER MINERALS & AGGREGATES COMPANY AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) 1. Accounting Policies The unaudited interim condensed consolidated financial statements of Better Minerals & Aggregates Company (the "Company") have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. As a result, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. In the opinion of management, the statements reflect all adjustments necessary for a fair presentation of the results of the reported interim periods. The statements should be read in conjunction with the summary accounting policies and notes to the audited financial statements of the Company included in the Company's 2002 Annual Report on Form 10-K for the year ended December 31, 2002 (the "Form 10-K"). Operating results are not necessarily indicative of the results to be expected for the full year or any other interim period, due to the seasonal, weather-related conditions in certain aspects of the Company's business. 2. Discontinued Operations On April 10, 2003, the Company signed an agreement for the sale of its aggregates business, Better Materials Corporation, to a subsidiary of Hanson Building Materials America, Inc. ("Hanson"). On July 18, 2003, the Company completed the sale, receiving total cash consideration of $158.3 million including an estimated adjustment for changes in the closing balance sheet of the aggregates business. Final cash consideration is subject to Hanson's review and acceptance of the closing balance sheet and may increase or decrease upon completion of that review, which is expected to occur in the fourth quarter. Proceeds have not been reduced for the effect of a $2.0 million contingent liability to Hanson that will be eliminated when certain post-closing zoning and permit objectives are achieved. The Company believes achievement of these objectives will be reached within the five-year term of the contingency. As a result of the sale, the financial statements have been restated to reflect discontinued operations. Sales from discontinued operations were $7.5 million and $42.9 million for the three months ended September 30, 2003 and 2002, respectively and $47.7 million and $104.0 million for the nine months ended September 30, 2003 and 2002, respectively. Income (loss) before income taxes for these operations were $3.2 million loss and $3.5 million income for the three months ended September 30, 2003 and 2002, respectively and $15.6 million loss and $3.7 million loss for the nine months ended September 30, 2003 and 2002, respectively. Significant categories of assets and liabilities from discontinued operations are included in the following table: December 31, (In thousands) 2002 ---- Accounts receivable $ 18,551 Inventories 14,776 Property, plant, and equipment, net 170,000 Other assets 6,224 -------- Total assets 209,551 -------- Book overdraft 956 Accounts payable and accrued liabilities 7,778 Deferred income taxes 43,919 Other liabilities 8,534 -------- Total liabilities 61,187 -------- Net assets $148,364 ======== 6 3. Inventories At September 30, 2003 and December 31, 2002, inventory consisted of the following: September 30, December 31, 2003 2002 ---- ---- (In thousands) Supplies (net of $102 and $98 obsolescence reserve) $ 9,568 $ 9,448 Raw materials and work in process 3,870 3,852 Finished goods 3,357 3,806 ------- ------- $16,795 $17,106 4. Segment Information The Company formerly operated in the industrial minerals and aggregates business segments which are more fully described in the Form 10-K. As a result of the sale of the aggregates segment, as discussed above, the financial statements have been prepared with the aggregates segment presented as discontinued operations. Accordingly, segment information is no longer applicable. 5. Impact of Recent Accounting Standards Effective January 1, 2003, the Company adopted Statement of Financial Accounting Standards No. 143 (FAS 143), Accounting for Asset Retirement Obligations. FAS 143 establishes accounting and reporting standards for obligations associated with the retirement of tangible long-lived assets. Previously, the Company provided for this obligation as described in Note 2.j. in the Form 10-K and, as a result, recognized a $335,000 gain, net of income taxes of $191,000, as a cumulative effect of a change in accounting principle as of January 1, 2003. As of September 30, 2003, the Company reported a liability of $7.0 million in other noncurrent liabilities related to this obligation. As of January 1, 2003, the liability was $8.6 million, which included $1.9 million from discontinued operations. The liability was increased by $317,000 in additional expense for the nine months ended September 30, 2003. Effective January 1, 2002 the Company adopted Statement of Financial Accounting Standards No. 142 (FAS 142), Goodwill and Other Intangible Assets. FAS 142 eliminates goodwill amortization and requires an evaluation of potential goodwill impairment upon adoption, as well as subsequent annual valuations, or more frequently if circumstances indicate a possible impairment. Adoption of FAS 142 eliminated annual goodwill amortization expense of approximately $1.2 million. The adoption of FAS 142, effective January 1, 2002, resulted in goodwill impairment of $8.6 million, net of income taxes of $6.1 million, and represented the elimination of the entire amount of goodwill previously reported on the balance sheet. In accordance with FAS 142, this amount was recorded as a cumulative effect of accounting change as of the beginning of the 2002. The Company performed its assessment of goodwill and other intangible assets by comparing the fair value of the aggregates segment, which has been determined to be the only reporting unit that had goodwill, to its net book value in accordance with the provisions of FAS 142. The Company estimated the fair value of the reporting unit based upon a combination of several valuation methods including residual income, replacement cost and market approaches, giving appropriate weighting to such methods in arriving at an estimate of fair value. The Company's equity is not subject to market quotations. 6. Contingencies The Company's principal operating subsidiary, U.S. Silica Company, was named as a defendant in an estimated 17,620 new product liability claims filed between January 1, 2003 and September 30, 2003, as compared to an estimated 2,000 claims filed between January 1, 2002 and September 30, 2002. During the nine month period ended September 30, 2003, new claims filed by state were 12,491 claims in Mississippi, 3,928 claims in Texas, 731 claims in Louisiana, 316 claims in Ohio, 76 claims in Oklahoma, 67 claims in Pennsylvania, 2 claims in California, 1 claim in Minnesota and 1 claim in Indiana. U.S. Silica was named as a defendant in 5,100 similar claims in 2002, with 3,100 of these claims filed in November and December, 2002. Total open claims as of September 30, 2003 were an estimated 23,936, as compared to an estimated 7,141 open claims as of December 31, 2002 and an estimated 3,676 open claims as of September 30, 2002. 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 against it and numerous other defendants. 7 The plaintiffs, who allege that they are employees or former employees of U.S. Silica's customers, claim that its silica products were defective or that it acted negligently in selling its 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 its 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 the Company's 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 September 30, 2003 and December 31, 2002, this accrual amounted to $1.9 million and $1.9 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, U.S. Silica has not sought coverage under these policies. However, as a named insured, it believes that coverage under these policies will be available to it. 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 U.S. Silica will continue to have silica-related product liability claims filed against it, including claims that allege silica exposure for periods after January 1, 1986. The Company cannot guarantee that the 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 U.S. Silica 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 the Company's consolidated financial position, results of operations or cash flows, if such developments occur. In the past, U.S. Silica recorded amounts for product liability claims based on estimates of its 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 it began warning its 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, U.S. Silica determined it was no longer sufficient for management to solely estimate the product liability claims that might be filed against the Company, and it 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 it. The actuary relied on generally accepted actuarial methodologies and on information provided by U.S. Silica, including the history of reported claims, insurance coverages and indemnity protections available to it 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 the actuary to calculate a range of expected outcomes. As previously discussed, U.S. Silica has available to it 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, the 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 2002, especially in the fourth quarter, and based on the study performed by the actuary, U.S. Silica 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 it expects 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. 8 No additional charges to income were recorded in the nine month period ended September 30, 2003. However, due to the uncertainty of the outcome of the petition for review filed with the Texas Supreme Court in the Tompkins case (see Part II, Item 1, Legal Proceedings in this Quarterly Report on Form 10-Q), U.S. Silica has increased the amount of both the long term liability for third party product liability claims and the non-current asset for probable insurance and indemnity recoveries each by $6.0 million. In addition, it paid $8.4 million in defense and settlement costs, and invoiced ITT Industries $5.8 million under the terms of the indemnity agreement with them resulting in retained losses to us of $2.6 million in the period. For the comparable nine-month period ended September 30, 2002, the Company paid $3.0 million in defense and settlement costs, and invoiced ITT Industries $2.4 million, resulting in retained losses to the Company of $0.6 million. The balance in the long term liability for third party product liability claims was $66.8 million at September 30, 2003 and non-current asset for probable insurance and indemnity recoveries was $40.6 million as of that date. On an annual basis, the actuary has calculated that U.S. Silica's 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, U.S. Silica has incurred approximately $1.0 million per year in retained losses in 2001 and 2002. 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. The actuary's report is based to a large extent on the assumption that U.S. Silica's past experience is predictive of future experience. Unanticipated changes in factors such as judicial decisions, future legal judgments against U.S. Silica, 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, U.S. Silica plans to have these projections periodically updated based on its actual claims experience and other relevant factors such as changes in the judicial system and legislative actions. The Company will record any required adjustments that result from the completion of an updated actuarial study during the fourth quarter of 2003. The results of such updated actuarial study can not be estimated at this time, however such amounts could be significant to the Company's results of operations. 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 the 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 U.S. Silica's customers' use of its silica products. The actual or perceived health risks of mining, processing and handling silica could materially and adversely affect silica producers, including U.S. Silica, 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 U.S. Silica and its customers or reduced financing sources available to the silica industry. 7. Senior Subordinated Notes Subsidiary Guarantees Except for the Company's Canadian subsidiary, which is an inactive company with an immaterial amount of assets and liabilities, each of the Company's subsidiaries has fully and unconditionally guaranteed the Senior Subordinated Notes on a joint and several basis. The separate financial statements of the subsidiary guarantors are not included in this report because (a) the Company is a holding company with no assets or operations other than its investments in its subsidiaries, (b) the subsidiary guarantors each are wholly owned by the Company, comprise all of the direct and indirect subsidiaries of the Company (other than inconsequential subsidiaries) and have jointly and severally guaranteed the Company's obligations under the Senior Subordinated Notes on a full and unconditional basis, (c) the aggregate assets, liabilities, earnings and equity of the subsidiary guarantors are substantially equivalent to the assets, liabilities, earnings and equity of the Company on a consolidated basis and (d) management has determined that separate financial statements and other disclosures concerning the subsidiary guarantors are not material to investors. 8. New Credit Agreement On September 12, 2003, the Company, through its operating subsidiary U. S. Silica Company, completed a new $30.0 million, asset-based revolving line of credit agreement with Wachovia Bank, National Association ("Wachovia"), a copy of which is attached as Exhibit 10 to the Current Report on Form 8-K, filed September 12, 2003. Proceeds from the new revolving credit agreement were used to repay all remaining amounts due under, and terminate, the previously 9 outstanding senior secured credit agreement with BNP Paribas, provide the Company with a $10.0 million line for letters of credit and to fund its general liquidity needs. Under the terms of the new revolving credit agreement, which expires June 30, 2008, the Company has pledged as security all of its personal property, inventory, and accounts receivable, along with first mortgage liens on its Berkeley Springs, West Virginia, Montpelier, Virginia and Pacific, Missouri plant operations as collateral for the loan. The revolving credit agreement includes certain conditions to borrowings, representations and covenants, including required minimum fixed charge coverage and maximum leverage covenant ratios that are measured quarterly, other covenants that impose significant restrictions on the Company, and certain events of default, including an event of default upon the occurrence of a material adverse change. Advances under the new credit agreement bear interest at either LIBOR plus 250 basis points, or prime plus 125 basis points, at our option. Monthly borrowing availability (the borrowing base) is determined by a formula, taking into consideration eligible accounts receivable and inventory, reduced by any outstanding letters of credit and a pro-rata reduction for future interest payments due with respect to the senior subordinated notes. Each day, all cash receipts are automatically applied as a reduction against any advances made by Wachovia to the Company, and, subject to the satisfaction or waiver of the conditions to borrowing set forth in the revolving credit agreement, Wachovia will advance at the Company's request new borrowings to meet its daily cash requirements, up to the amount available under the borrowing base. If the monthly borrowing base is less than the $30.0 million total line of credit, then, at Wachovia's sole discretion, advances in excess of the borrowing base may be made up to the full amount of the $30.0 million line of credit. U.S. Silica's obligations under the revolving credit agreement are unconditionally and irrevocably guaranteed, jointly and severally, by the Company's parent company, the Company, and the Company's domestic subsidiaries. As of September 30, 2003 the available borrowing base was $27.0 million, with $12.7 million drawn as of that date and $8.1 million allocated for letters of credit, leaving $6.2 million available for general corporate use under this revolving credit agreement. As of this date, total debt outstanding was approximately $164.0 million, consisting of the $12.7 million drawn under the revolver, $150.0 million of 13% senior subordinated notes due 2009 and $1.3 million in miscellaneous other debt including capital leases. Projected cash interest expense on the Company's debt is approximately $20.5 million over the next 12 months. Although the final maturity date of the revolving credit agreement is June 30, 2008, as required under generally accepted accounting principles, the borrowings under this facility have been classified on the balance sheet as a current liability due to the fact that Wachovia has the right to declare the occurrence of a material adverse change at its sole discretion, which could result in all borrowings outstanding under this agreement to be declared immediately due and payable by Wachovia. 9. Debt Covenants As of June 30, 2003 the Company was not in compliance with the financial covenants of the senior secured credit agreement as amended on April 17, 2003, and accordingly was in default under the senior secured credit agreement. As a result of the sale of the aggregates segment and the subsequent debt refinancing, all defaults under the senior secured credit agreement were cured and the agreement was terminated. As of September 30, 2003, the Company is in compliance with its financial covenants under the new revolving credit facility described in note 8 above. 10. Income Taxes In accordance with generally accepted accounting principles, it is the Company's practice at the end of each interim reporting period to make its best estimate of the effective tax rate expected to be applicable for the full fiscal year. Estimates are revised as additional information becomes available. 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following information should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and the notes thereto included in Item 1 of this Quarterly Report on Form 10-Q, and the audited consolidated financial statements and the notes thereto and management's discussion and analysis of financial condition and results of operations contained in our Annual Report on Form 10-K for the year ended December 31, 2002. Unless otherwise indicated or the context otherwise requires, all references in this quarterly report to "we," "us," "our" or similar terms refer to Better Minerals & Aggregates Company and its direct and indirect subsidiaries. Overview We mine, process and market industrial minerals, principally industrial silica, in the eastern and midwestern United States. We are a holding company that conducts substantially all our operations through our subsidiaries. Our end use markets for our silica products 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. We operate a network of 16 production facilities in 14 states. On April 10, 2003, we signed an agreement for the sale of our aggregates business, Better Materials Corporation, to a subsidiary of Hanson Building Materials America, Inc. ("Hanson") as discussed in more detail under "Liquidity and Capital Resources" that follows. On July 18, 2003, we completed the sale, receiving total cash consideration of $158.3 million before fees and expenses. The current and historical results from operations of our aggregates business are being reported as discontinued operations, net of all applicable taxes, in our management's discussion and analysis that follows, and the financial statements included in this report have been restated accordingly. Critical Accounting Policies In our opinion, we do not have any individual accounting policy that 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 "Management's Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies" in our Annual Report on Form 10-K for the year ended December 31, 2002. Three Months Ended September 30, 2003 Compared with Three Months Ended September 30, 2002 Sales. Sales decreased $1.1 million, or 2.3%, to $46.3 million in the three months ended September 30, 2003 from $47.4 million in the three months ended September 30, 2002 primarily from decreased shipments to the glass, foundry and fillers and extenders market segments, only partially offset by increased shipments to the oil & gas extraction market segment. Transportation revenue, which is provided as a service to our customers but has no gross margin impact to us, was $7.5 million in both the three months ended September 30, 2003 and the three months ended September 30, 2002. Cost of Goods Sold. Cost of goods sold decreased $1.2 million, or 3.3%, to $35.2 million in the three months ended September 30, 2003 from $36.4 million in the three months ended September 30, 2002, primarily due to the reduction in sales volume noted earlier, partially offset by a $0.5 million increase in the price of drier fuel. Depreciation, Depletion and Amortization. Depreciation, depletion and amortization decreased $0.3 million, or 7.3%, to $3.8 million in the three months ended September 30, 2003 from $4.1 million in the three months ended September 30, 2002 as several capital assets have become fully depreciated without a corresponding reinvestment. Selling, General and Administrative. Selling, general and administrative expenses increased $1.4 million, or 28.6%, to $6.3 million in the three months ended September 30, 2003 from $4.9 million in the three months ended September 30, 2002. The increase in selling, general and administrative expenses was primarily due to $1.6 million in costs incurred related to our efforts to sell the aggregates business and complete our debt refinancing, and $0.9 million in accrued separation payments for several executive officers, partially offset by a $1.0 million decrease in the costs recorded for silica litigation. Changes in silica litigation accruals and expense will be made periodically when we update or revise the third party studies that estimate our future exposure to third party products liability litigation. The Company will record any required adjustments that result from the completion of an updated actuarial study during the fourth quarter of 2003. The results of such updated actuarial study can not 11 be estimated at this time, however such amount could be significant to the Company's results of operations. See "Significant Factors Affecting Our Business - Silica Health Risks and Litigation May Have a Material Adverse Effect on Our Business" included elsewhere in this Quarterly Report on Form 10-Q. Operating Income. Operating income incurred for the three months ended September 30, 2003 was $1.0 million as compared to operating income of $2.0 million in the three months ended September 30, 2002 as a result of the factors noted earlier. Interest Expense. Interest expense decreased $1.2 million, or 15.4%, to $6.6 million in the three months ended September 30, 2003 from $7.8 million in the three months ended September 30, 2002 due primarily to a decrease in the total amount of our debt. Loss on Early Extinguishment of Debt. We recorded an expense of $7.0 million for the early extinguishment of debt in the three months ended September 30, 2003 consisting of $3.5 million in previously capitalized debt issuance costs written off, $2.4 million in prepayment penalties, and $1.1 million to cancel interest rate hedges on the senior secured debt upon the repayment and retirement of our senior secured credit facility on September 12, 2003. Other Income. Other income increased $0.4 million to $0.8 million for the three months ended September 30, 2003 from $0.4 million for the three months ended September 30, 2002 as a result of a gain on sale of idle land. Benefit of Income Taxes. The benefit for income taxes on continuing operations for the three months ended September 30, 2003 reflects an estimated benefit for the first nine months of the year using an annual effective tax rate of 25%. The benefit for income taxes for the three months of continuing operations ended September 30, 2002 reflected an annual effective rate of 60%. The effective tax rate declined in the current year primarily due to a tax valuation allowance recorded in the current year that reduced the book value of our deferred tax credits and net operating loss carry-forwards to the amounts reasonably expected to be utilized in the future. Net Loss From Continuing Operations. Net loss from continuing operations increased $6.2 million to $11.7 million for the three months ended September 30, 2003, from a net loss of $5.5 million for the three months ended September 30, 2002 as a result of the early extinguishment of debt and the other factors noted earlier. Gain on Sale of Discontinued Operations. A gain of $6.4 millionon the sale of the aggregates business was realized for the three month period ended September 30, 2003. The recorded gain was computed against the revised book value of the aggregates business, after taking into effect the $107.9 million asset impairment charge for the aggregates business previously recorded in 2002. Neither the current year gain, nor the asset impairment charge recorded in 2002, have any tax effect, due to offsetting tax valuation allowances. Income/Loss from Operations of Discontinued Operations. Net loss from our discontinued aggregates business segment was $3.3 million in the three months ended September 30, 2003 as compared to net income of $6.5 million in the three months ended September 30, 2002, due primarily to the seasonality of the aggregates business and completion of the divestiture prior to the normal seasonal earnings period of that business. Net Loss. Net loss for the three month period ended September 30, 2003 was $6.8 million as compared to net income of $2.5 million for the three month period ended September 30, 2002 as a result of the factors noted earlier. Nine Months Ended September 30, 2003 Compared with Nine Months Ended September 30, 2002 Sales. Sales decreased $0.3 million, or 0.2%, to $138.2 million in the nine months ended September 30, 2003 from $138.5 million in the nine months ended September 30, 2002. Increased shipments totaling $2.4 million to the oil & gas-fracturing, and glass market segments were offset by $2.8 million in reduced shipments to the foundry and fillers and extenders market segments. Transportation revenue, which is provided as a service to our customers but has no gross margin impact to us, decreased $0.3 million to $22.7 million for the nine months ended September 30, 2003 from $22.4 million for the nine months ended September 30, 2002. Cost of Goods Sold. Cost of goods sold increased $1.6 million, or 1.5%, to $106.6 million in the nine months ended September 30, 2003 from $105.0 million in the nine months ended September 30, 2002, primarily from a $2.4 million increase in the price of drier fuel, partially offset by reduced sales volume and miscellaneous cost reductions at various operating sites. 12 Depreciation, Depletion and Amortization. Depreciation, depletion and amortization was $11.8 million in both the nine months ended September 30, 2003 and the nine months ended September 30, 2002, as several capital assets have become fully depreciated without a corresponding reinvestment. Selling, General and Administrative. Selling, general and administrative expenses increased $3.9 million, or 27.5%, to $18.1 million in the nine months ended September 30, 2003 from $14.2 million in the nine months ended September 30, 2002. The increase in selling, general and administrative expenses was primarily due to accrued separation expenses of $4.0 million for several of our former executive officers including our former Chief Executive Officer, $1.3 million in compensation expense related to the sale of Better Materials Corporation, $1.7 million in fees and expenses related to our efforts to complete our new debt refinancing, and other inflationary cost increases, partially offset by a $0.4 million decrease in bad debt accruals, a $2.1 million decrease in the costs recorded for silica litigation and other miscellaneous cost reductions. Changes in silica litigation accruals and expense will be made periodically when we update or revise the third party studies that estimate our future exposure to third party products liability litigation. The Company will record any required adjustments that result from the completion of an updated actuarial study during the fourth quarter of 2003. The results of such updated actuarial study can not be estimated at this time, however such amount could be significant to the Company's results of operations. See "Significant Factors Affecting Our Business - Silica Health Risks and Litigation May Have a Material Adverse Effect on Our Business" included elsewhere in this Quarterly Report on Form 10-Q. Operating Income. Operating income for the nine months ended September 30, 2003 was $1.6 million as compared to $7.6 million for the nine months ended September 30, 2002 as a result of the factors noted earlier. Interest Expense. Interest expense decreased $0.9 million, or 3.8%, to $23.0 million in the nine months ended September 30, 2003 from $23.9 million in the nine months ended September 30, 2002 due primarily to an increase in the total amount of our debt. Loss on Early Extinguishment of Debt. We recorded an expense of $7.0 million for the early extinguishment of debt in the nine months ended September 30, 2003 consisting of $3.5 million in previously capitalized debt issuance costs written off, $2.4 million in prepayment penalties, and $1.1 million to cancel interest rate hedges on the senior secured debt upon the repayment and retirement of our senior secured credit facility on September 12, 2003. Benefit of Income Taxes. The benefit for income taxes on continuing operations for the nine months ended September 30, 2003 reflected an effective tax rate expected to be realizable for the year of approximately 25%. The benefit for income taxes on continuing operations for the nine month period ended September 30, 2002 reflected an effective tax rate of 60%. Net Loss From Continuing Operations. Net loss from continuing operations increased $13.3 million to $20.1 million for the nine months ended September 30, 2003, from a net loss of $6.8 million for the nine months ended September 30, 2002 primarily as a result of the early extinguishment of debt and the other factors noted earlier. Gain on Sale of Discontinued Operations. A gain of $6.4 million on the sale of the aggregates business was realized for the nine month period ended September 30, 2003. The recorded gain was computed against the book value of the aggregates business, after taking into effect the $107.9 million asset impairment charge for the aggregates business previously recorded in 2002. Loss/Income from Operations of Discontinued Operations. Net loss from our discontinued aggregates business segment was $12.2 million in the nine months ended September 30, 2003 as compared to a net income of $2.9 million in the nine months ended September 30, 2002, due primarily to a 44% reduction in asphalt volume shipped prior to divestiture and the completion of the divestiture prior to the normal seasonal earnings period of that business. Cumulative Effect of Change in Accounting for Asset Retirement Obligations. Under Statement of Financial Accounting Standards Number 143, Accounting for Asset Retirement Obligations, new standards were developed to account for the obligation incurred by the Company for the ultimate retirement of tangible long-lived assets. Upon adoption of this accounting standard, we recorded a $0.3 million after tax credit in the nine month period ended September 30, 2003. Under Statement of Financial Accounting Standards No. 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. The $8.6 million expense recorded in the nine months ended September 30, 2002 is net of applicable income taxes of $6.1 million. 13 Net Loss. Net loss for the nine month period ended September 30, 2003 was $25.6 million as compared to a net loss of $12.5 million for the nine month period ended September 30, 2002 as a result of the factors noted earlier. 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 various revolving credit facilities. Conversely, we have funded our acquisitions through borrowings and equity investments. Our total debt as of September 30, 2003 was $164.0 million and our total stockholder's deficit as of that date was $78.6 million, giving us total debt representing approximately 192% of total capitalization. Our debt level makes us more vulnerable to economic downturns and adverse developments in our business. Net cash used in operating activities including our discontinued aggregates business was $15.8 million for the nine months ended September 30, 2003 compared to $0.6 million of net cash provided by operations for the nine months ended September 30, 2002. Cash used by operating activities increased $16.4 million in 2003 due primarily to $18.3 million in decreased earnings at our discontinued operating segment. Net cash provided by investing activities was $153.5 million for the nine month period ended September 30, 2003 primarily from $154.6 million in net cash proceeds received from the sale of our aggregates business and $3.4 million in net cash proceeds from the sale of idle land, partially offset by $3.1 million in capital expenditures at our discontinued operations and $1.5 million of capital expenditures in our continuing operations. Cash used for investing activities in the nine month period ended September 30, 2002 totaled $11.6 million, primarily due to $9.1 million in capital expenditures made in our discontinued operations and $2.9 million of capital expenditures made in our continuing operations. Cash flow used for financing activities was $138.7 million for the nine months ended September 30, 2003 as compared to $9.1 million of cash provided by financing activities for the nine months ended September 30, 2002. The $147.8 million increase in cash used for financing activities is due to a $130.6 million net reduction in our debt, $2.4 million in prepayment penalties related to that debt reduction and $1.1 million to cancel interest rate hedges on the senior debt, in the nine month period ended September 30, 2003 as compared to a $14.1 million increase in long-term debt in the nine months ended September 30, 2002. Interest payments on our 13% senior subordinated notes due 2009 ($150 million outstanding as of September 30, 2003), which are unconditionally and irrevocably guaranteed, jointly and severally, by our domestic subsidiaries, debt service for the amounts outstanding under our revolving 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. On April 10, 2003, we entered into an agreement to sell our aggregates business to Hanson. On July 18, 2003, we completed the sale, receiving total cash consideration of $158.3 million before fees and expenses including an estimated adjustment for changes in the closing balance sheet of our aggregates business. Final cash consideration is subject to Hanson's review and acceptance of the closing balance sheet and may increase or decrease upon completion of that review. Proceeds have not been reduced for the effect of a $2.0 million contingent liability to Hanson that will be eliminated if certain post-closing zoning and permit objectives are achieved. We believe achievement of these objectives will be reached within the five-year term of the contingency. Proceeds from the sale are less than we originally anticipated due to a $3.0 million purchase price reduction, reflecting an estimate of the damages and losses caused by an incident that occurred on June 25, 2003 at one of the operating sites included in the sale. While we believe that some portion of this loss will be recoverable under our insurance policies, there is no guarantee that we will receive any reimbursement for the claim. Net proceeds from the sale, after deducting $4.9 million in fees, expenses and interest on our previously outstanding senior secured term loans, were $153.4 million, which were used to permanently reduce and eliminate our tranche A and tranche B term loans under our prior senior secured credit agreement, totalling $107.9 million in the aggregate, and $45.5 million of the $50.0 million available to us under the related revolving credit facility, including $5.5 million in cash collateral for outstanding letters of credit. 14 On September 12, 2003, through our operating subsidiary U. S. Silica Company, we completed a new $30.0 million, asset-based revolving line of credit agreement with Wachovia Bank, National Association ("Wachovia"), a copy of which is attached as Exhibit 10 to our Current Report on Form 8-K, filed September 12, 2003. Proceeds from the new revolving credit agreement were used to repay all remaining amounts due under, and terminate, our previously outstanding senior secured credit agreement with BNP Paribas, provide us with a $10.0 million line for letters of credit and to fund our general liquidity needs. Under the terms of the new revolving credit agreement, which expires June 30, 2008, we have pledged as security all of our personal property, inventory, and accounts receivable, along with first mortgage liens on our Berkeley Springs, West Virginia, Montpelier, Virginia and Pacific, Missouri plant operations as collateral for the loan. The revolving credit agreement includes certain conditions to borrowings, representations and covenants, including required minimum fixed charge coverage and maximum leverage covenant ratios that are measured quarterly, other covenants that impose significant restrictions on us, and certain events of default, including an event of default upon the occurrence of a material adverse change. Advances under the new credit agreement bear interest at either LIBOR plus 250 basis points, or prime plus 125 basis points, at our option. Monthly borrowing availability (the borrowing base) is determined by a formula, taking into consideration eligible accounts receivable and inventory, reduced by any outstanding letters of credit and a pro-rata reduction for future interest payments due with respect to our senior subordinated notes. Each day, all cash receipts are automatically applied as a reduction against any advances made by Wachovia to us, and, subject to the satisfaction or waiver of the conditions to borrowing set forth in the revolving credit agreement, Wachovia will advance at our request new borrowings to meet our daily cash requirements, up to the amount available under the borrowing base. If the monthly borrowing base is less than the $30.0 million total line of credit, then, at Wachovia's sole discretion, advances in excess of the borrowing base may be made up to the full amount of the $30.0 million line of credit. U.S. Silica's obligations under the revolving credit agreement are unconditionally and irrevocably guaranteed, jointly and severally, by our parent company, us, and our domestic subsidiaries. As of September 30, 2003 our available borrowing base was $27.0 million, with $12.7 million drawn as of that date, and $8.1 million allocated for letters of credit leaving $6.2 million available for our general corporate use under this revolving credit agreement. As of this date, our total debt outstanding was approximately $164.0 million, consisting of the $12.7 million drawn under the revolver, $150.0 million of 13% senior subordinated notes due 2009 and $1.3 million in miscellaneous other debt including capital leases. Projected cash interest expense on our debt is approximately $20.5 million over the next 12 months. Capital expenditures decreased $7.4 million to $4.6 million in the nine months ended September 30, 2003 from $12.0 million in the nine months ended September 30, 2002. Our expected capital expenditure and mine development expenditures for 2003 are $8.0 million. 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. As a result of the completion of the sale of our aggregates business, our cash flow from operations are dependent on the results of our industrial minerals segment. We believe that based on current levels of operations from our industrial minerals business, cash flow will be adequate for at least the next twelve months to meet operating requirements. There can be no assurance that our business will generate sufficient cash flow from operations or that future borrowings will be available under the revolving credit agreement 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 senior subordinated 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 Our Annual Report on Form 10-K for the year ended December 31, 2002 contains a description of some of the more significant factors affecting our business under "Management's Discussion and Analysis of Financial Condition and Results of Operations - Significant Factors Affecting Our Business". The following is an update to these significant factors. 15 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, end-stage renal disease and chronic obstructive pulmonary disease. One of our subsidiaries, U.S. Silica, was named as a defendant in an estimated 17,620 new product liability claims filed between January 1, 2003 and September 30, 2003, as compared to an estimated 2,000 claims filed between January 1, 2002 and September 30, 2002. During the nine month period ended September 30, 2003, new claims filed by state were 12,491 claims in Mississippi, 731 claims in Louisiana, 3,928 claims in Texas, 316 claims in Ohio, 76 claims in Oklahoma, 67 claims in Pennsylvania 2 claims in California, 1 claim in Minnesota and 1 claim in Indiana. U.S. Silica was named as a defendant in 5,100 similar claims in 2002, with 3,100 of these claims filed in November and December, 2002. Total open claims as of September 30, 2003 were an estimated 23,936, as compared to an estimated 7,141 open claims as of December 31, 2002 and an estimated 3,676 open claims as of September 30, 2002. 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 against us and numerous other defendants. 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 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 16 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 2002, 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. No additional charges to income were recorded in the nine month period ended September 30, 2003. However, due to the uncertainty of the outcome of the petition for review filed with the Texas Supreme Court in the Tompkins case (see Part II, Item 1, Legal Proceedings in this Quarterly Report on Form 10-Q ), we have increased the amount of both the long term liability for third party product liability claims and the non-current asset for probable insurance and indemnity recoveries each by $6.0 million. In addition, we paid $8.4 million in defense and settlement costs in the nine month period ended September 30, 2003, and invoiced ITT Industries $5.8 million under the terms of the indemnity agreement with them resulting in retained losses to us of $2.6 million in the nine months ended September 30, 2003. For the comparable nine month period ended September 30, 2002 we paid $3.0 million in defense and settlement costs, and invoiced ITT Industries $2.4 million, resulting in retained losses to us of $0.6 million. The amount recorded for the long term liability for third party product liability claims was $66.8 million at September 30, 2003 and the non-current asset for probable insurance and indemnity recoveries was $40.6 million as of that date. 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 in 2001 and 2002. 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. We will record any required adjustments that result from the completion of an updated actuarial study during the fourth quarter of 2003. The results of such updated actuarial study can not be estimated at this time, however such amounts could be significant to our results of operations. 17 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. Forward-Looking Statements This quarterly report, including this management's discussion and analysis of financial condition and results of operations section, includes "forward- looking statements." 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 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 these forward-looking statements: (1) general and regional economic conditions, including the economy in the states in which we have production facilities and in which we sell our products; (2) demand for residential and commercial construction; (3) demand for automobiles and other vehicles; (4) the competitive nature of the industrial minerals industry; (5) operating risks typical of the industrial minerals industry; (6) fluctuations in prices for, and availability of, transportation, power, petroleum based products and other energy products; (7) unfavorable weather conditions; (8) regulatory compliance, including compliance with environmental and silica exposure regulations, by us and our customers; (9) litigation affecting our customers; (10) product liability litigation by our customers' employees affecting us, including the adequacy of indemnity and insurance coverage and of the reserves we have recorded relating to current and future litigation; (11) changes in the demand for our products due to the availability of substitutes for products of our customers; (12) labor unrest; and (13) interest rate changes and changes in financial markets generally. Item 3. Quantitative and Qualitative Disclosures About Market Risk Information regarding our financial instruments that are sensitive to changes in interest rates is contained in our Annual Report on Form 10-K for the year ended December 31, 2002. This information has not changed materially in the interim period since December 31, 2002. Item 4. Controls and Procedures Based on their review and evaluation, as of September 30, 2003, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures (as defined in Rule 15d-15(e) under the Securities Exchange Act of 1934) were effective. There was no change in our internal control over financial reporting (as defined in Rule 15d-15(f) under the Securities Exchange Act of 1934) identified in connection with the evaluation of our disclosure controls and procedures referred to in the preceding sentence that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. PART II. OTHER INFORMATION Item 1. Legal Proceedings 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 in our Annual Report on Form 10-K for the year ended December 31, 2002 and elsewhere in this Quarterly Report on Form 10-Q. 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 18 petition for review was filed with the Texas Supreme Court. In August, the Texas Supreme Court requested the parties submit full briefs on the merits of the case. Our brief was filed on October 27, 2003 and the plaintiffs have until late November to respond. We have no indication when the Texas Supreme Court will rule on the case. 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" discussed in our Annual Report on Form 10-K for the year ended December 31, 2002 and elsewhere in this Quarterly Report on Form 10-Q. Item 6. Exhibits and Reports on Form 8-K A. Exhibits EXHIBIT EXHIBIT NUMBER Credit Agreement dated as of September 8, 2003 among U.S. Silica Company, as Borrower, BMAC Holdings, Inc., Better Minerals & Aggregates Company, The Fulton Land and Timber Company, Ottawa Silica Company, Pennsylvania Glass Sand Corporation, George F. Pettinos, LLC 10 and BMAC Services Co., Inc., each as Affiliate Guarantors, the financial institutions identified as Lenders on the signature pages thereto, and Wachovia Bank, National Association, as Administrative Agent and Swingline Lender (incorporated by reference from Exhibit 10 to our Current Report on Form 8-K dated September 12, 2003) 31.1 Certification of Chief Executive Officer Pursuant to Rule 15d-14(a) 31.2 Certification of Chief Financial Officer Pursuant to Rule 15d-14(a) 32.1 Statement of Chief Executive Officer Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code. 32.2 Statement of Chief Financial Officer Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code. B. Reports on Form 8-K A Current Report on Form 8-K dated July 18, 2003 was filed with the Securities and Exchange Commission by us reporting information under Item 2 (Acquisition or Disposition of Assets), Item 5 (Other Events and Required FD Disclosure), Item 7 (Financial Statements, Pro Forma Financial Information and Exhibits) and Item 12 (Results of Operations and Financial Condition). A Current Report on Form 8-K dated August 1, 2003 was filed with the Securities and Exchange Commission by us reporting information under Item 12 (Results of Operations and Financial Condition). A Current Report on Form 8-K dated September 12, 2003 as filed with the Securities and Exchange Commission by us reporting information under Item 5 (Other Events and Required FD Disclosure) and Item 7 (Financial Statements, Pro Forma Financial Information and Exhibits). 19 Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. November 13, 2003 Better Minerals & Aggregates Company By: /s/ Gary E. Bockrath -------------------- Name: Gary E. Bockrath Title: Vice President and Chief Financial Officer 20 INDEX TO EXHIBITS EXHIBIT EXHIBIT NUMBER Credit Agreement dated as of September 8, 2003 among U.S. Silica Company, as Borrower, BMAC Holdings, Inc., Better Minerals & Aggregates Company, The Fulton Land and Timber Company, Ottawa Silica Company, Pennsylvania Glass Sand Corporation, George F. Pettinos, LLC 10 and BMAC Services Co., Inc., each as Affiliate Guarantors, the financial institutions identified as Lenders on the signature pages thereto, and Wachovia Bank, National Association, as Administrative Agent and Swingline Lender (incorporated by reference from Exhibit 10 to our Current Report on Form 8-K dated September 12, 2003) 31.1 Certification of Chief Executive Officer Pursuant to Rule 15d-14(a) 31.2 Certification of Chief Financial Officer Pursuant to Rule 15d-14(a) 32.1 Statement of Chief Executive Officer Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code. 32.2 Statement of Chief Financial Officer Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code. 21 Exhibit 31.1 CERTIFICATION I, John A. Ulizio, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Better Minerals & Aggregates Company; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 13, 2003 /s/John A. Ulizio ----------------- John A. Ulizio President and Chief Executive Officer 22 Exhibit 31.2 CERTIFICATION I, Gary E. Bockrath, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Better Minerals & Aggregates Company; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the end of the period covered by this report based on such evaluation; and c) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: November 13, 2003 /s/Gary E. Bockrath ------------------- Gary E. Bockrath Vice President and Chief Financial Officer 23 Exhibit 32.1 STATEMENT OF CHIEF EXECUTIVE OFFICER In connection with the filing of the Quarterly Report of Better Minerals & Aggregates Company (the "Company") on Form 10-Q for the quarterly period ended September 30, 2003 (the "Report"), I, John A. Ulizio, the chief executive officer of the Company, certify for the purpose of section 1350 of chapter 63 of title 18 of the United States Code that, to the best of my knowledge: (i) the Report fully complies with the requirements of section 15(d) of the Securities Exchange Act of 1934; and (ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. November 13, 2003 By: /S/ John A. Ulizio ------------------------------ John A. Ulizio President and Chief Executive Officer of Better Minerals & Aggregates Company 24 Exhibit 32.2 STATEMENT OF CHIEF FINANCIAL OFFICER In connection with the filing of the Quarterly Report of Better Minerals & Aggregates Company (the "Company") on Form 10-Q for the quarterly period ended September 30, 2003 (the "Report"), I, Gary E. Bockrath, the chief financial officer of the Company, certify for the purpose of section 1350 of chapter 63 of title 18 of the United States Code that, to the best of my knowledge: (i) the Report fully complies with the requirements of section 15(d) of the Securities Exchange Act of 1934; and (ii) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. November 13, 2003 By: /S/ GARY E. BOCKRATH ------------------------------ Gary E. Bockrath Vice President and Chief Financial Officer of Better Minerals & Aggregates Company 25

BETTER MINERALS & AGGREGATES CO 10-Q