UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
___________________
or
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _________ to ___________
Commission File Number: _________
ISG Resources, Inc.
-------------------
(Exact name of registrant as specified in its charter)
Utah 87-0619697
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
136 East South Temple, Suite 1300, Salt Lake City, Utah 84111
-------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(801) 236-9700
-------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) [ X ] Yes [ ] No, and (2) has been
subject to such filing requirements for the past 90 days [ X ] Yes [ ] No.
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date. As of April 30,
1999:
Classes of Common Stock Number of shares outstanding
- -------------------------- ----------------------------
Common Stock, $1 par value 100
<PAGE>
ISG Resources, Inc.
------------
INDEX TO FORM 10-Q
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements Page
Unaudited Condensed Consolidated Balance Sheets --
March 31, 1999 and December 31, 1998................................. 1
Unaudited Condensed Consolidated Statements of Operations --
Three months ended March 31, 1999 and 1998 ...........................2
Unaudited Condensed Consolidated Statements of Cash Flows --
Three months ended March 31, 1999 and 1998 ...........................3
Notes to Unaudited Condensed Consolidated Financial Statements .......4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ........................6
Item 3. Quantitative and Qualitative Disclosure about Market Risk
There have been no significant changes since the annual report Form
10-K filed for the year ended December 31, 1998.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K .....................................9
<PAGE>
<TABLE>
<CAPTION>
ISG Resources, Inc. and Subsidiaries
Unaudited Condensed Consolidated Balance Sheets
March 31, December 31,
1999 1998
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 295,503
$
-
Accounts receivable:
Trade, net of allowance for doubtful accounts of
$196,000 and $170,000, respectively 18,459,421 14,975,729
Retainage 417,465 660,609
Other 459,470 296,966
Deferred tax asset 198,766 251,355
Inventory 2,653,974 387,258
Other current assets 611,338 645,969
Total current assets 23,095,937 17,217,886
Property, plant and equipment, net of accumulated depreciation of
$4,688,074 and $3,562,086,
respectively 31,736,222 28,139,108
Intangible assets, net 152,131,607 140,835,640
Other assets 5,333,654 5,539,102
Total assets $ 212,297,420 $ 191,731,736
- -------------------------------------------------------------------=================================================
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 7,039,185 $ 4,066,487
Accrued liabilities:
Payroll 2,192,083 1,801,657
Interest 4,670,495 2,106,054
Other 1,694,001 1,534,971
Income taxes payable 481,542 422,963
Other current liabilities 760,427 500,000
-----------------------------------------------
Total current liabilities 16,837,733 10,432,132
Long-term debt 126,500,000 110,000,000
Deferred tax liability 41,069,105 41,286,434
Other liabilities 2,209,989 2,488,954
Shareholders' equity:
Common stock, par value $1 per share; 100 shares authorized,
issued and outstanding 100 100
Additional paid-in capital 24,999,950 24,999,950
Retained earnings 680,543 2,524,166
-----------------------------------------------
Total shareholders' equity 25,680,593 27,524,216
-----------------------------------------------
Total liabilities and shareholders' equity $ 212,297,420 $ 191,731,736
===============================================
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ISG Resources, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Operations
Three Months Ended
March 31,
------------------------------------------
1999 1998
------------------------------------------
<S> <C> <C>
Revenues:
Product revenues $ 21,383,560 $ 8,911,965
Service revenues 8,052,932 6,482,555
------------------------------------------
29,436,492 15,394,520
Costs and expenses:
Cost of product revenues, excluding depreciation 15,157,523 6,687,720
Cost of service revenues, excluding depreciation 5,927,801 5,186,044
Depreciation and amortization 3,068,236 1,185,872
Selling, general and administrative expenses 4,994,491 1,651,099
------------------------------------------
29,148,051 14,710,735
------------------------------------------
Operating income 288,441 683,785
Interest income 9,631 52,104
Interest expense (3,187,911) (976,304)
Other income 13,446 1,122
------------------------------------------
Loss before income taxes (2,876,393) (239,293)
Income tax benefit (expense) 1,032,770 (11,675)
==========================================
Net loss $ (1,843,623) $ (250,968)
==========================================
See accompanying notes.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ISG Resources, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
Three Months Ended
March 31,
1999 1998
<S> <C> <C>
Operating activities
Net loss $ (1,843,623) $ (250,968)
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization 3,068,236 1,185,872
Amortization of debt issuance costs 162,261 12,987
Gain on disposal of fixed assets (1,950) -
Deferred income taxes (164,740) (368,379)
Changes in operating assets and liabilities:
Receivables (1,867,866) (1,110,197)
Inventory (961,247) 28,510
Other current and non-current assets 130,167 104,109
Accounts payable and accrued expenses 4,451,273 501,226
Other current and non-current liabilities (2,488,336) 488,478
Net cash provided by operating activities 484,175 591,638
Investing activities
Purchases of property, plant and equipment (2,926,501) (536,080)
Proceeds on sale of property, plant and equipment - 118,896
Acquisitions of businesses, net of cash acquired (13,077,884) (43,691,366)
Purchase of intangible assets (684,287) -
Acquisition costs incurred on future acquisitions - (119,754)
Net cash used in investing activities (16,688,672) (44,228,304)
Financing activities
Proceeds from long-term debt 26,500,000 42,000,000
Payments on long-term debt (10,000,000) -
Debt issuance costs incurred - (1,027,854)
Net cash provided by financing activities 16,500,000 40,972,146
Net increase (decrease) in cash and cash equivalents 295,503 (2,664,520
Cash and cash equivalents at beginning of period - 3,068,980
Cash and cash equivalents at end of period $ 295,503 $ 404,460
====================================
Cash paid for interest $ 461,493 $ 57,164
====================================
Cash paid (received) for income taxes $ (923,445) $ 465,707
- -------------------------------------------------------------------------====================================
See accompanying notes.
</TABLE>
<PAGE>
ISG RESOURCES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
Effective January 1, 1999, ISG Resources, Inc. (the "Company") and its wholly
owned subsidiaries Pozzolanic Resources, Inc., Power Plant Aggregates of Iowa,
Inc., Michigan Ash Sales Company, d.b.a. U.S. Ash Company ("U.S. Ash"), U.S
Stabilization, Inc., Flo Fil Co., Inc., Fly Ash Products, Inc. and KBK
Enterprises, Inc. merged with and into ISG Resources, Inc., a newly formed Utah
corporation. Prior to the merger, ISG Resources, Inc. had no assets and was a
wholly owned subsidiary of Industrial Services Group. Pneumatic Trucking, Inc.
("Pneumatic"), a wholly owned subsidiary of U.S. Ash, was not merged into the
new Utah corporation. Consequently, Pneumatic is now a wholly owned subsidiary
of ISG Resources, Inc.
On January 7, 1999, the Company completed the acquisition of all outstanding
stock of Best Masonry and Tool Supply ("Best"). The consideration paid consisted
of approximately $13,300,000 in cash. Additionally, the Company paid off
outstanding debt of Best approximating $2,400,000. The acquisition has been
accounted for as a purchase and, accordingly, the results of operations of Best
have been included in the consolidated financial statements since January 7,
1999.
These financial statements reflect the consolidated financial position and
results of operations of the Company, and its wholly owned subsidiaries,
Pneumatic and Best, as of and for the quarter ended March 31, 1999. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements reflect all adjustments, consisting of normal recurring
adjustments, necessary to present fairly the financial position, results of
operations and cash flows of the Company, for the respective periods presented.
The results of operations for an interim period are not necessarily indicative
of the results which may be expected for any other interim period or for the
year as a whole.
The preparation of financial statements, in conformity with generally accepted
accounting principles, requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Certain information and footnote disclosures normally included in financial
statements presented in accordance with generally accepted accounting principles
have been condensed or omitted. The accompanying unaudited interim condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes in the Company's Form 10-K for the
fiscal year ended December 31, 1998.
The consolidated balance sheet at December 31, 1998 was derived from audited
consolidated financial statements, but does not include all disclosures required
under generally accepted accounting principles. Certain amounts have been
reclassified to conform to the March 31, 1999 presentation.
2. Inventory
Inventory is valued at lower of cost (computed on the average, first-in,
first-out or last-in, first-out method), or net realizable value. Inventories
consist of:
March 31, December 31,
1999 1998
-------------------------------------------
Raw Materials $ 180,000 $ -
Finished Goods 2,473,974 387,258
-------------------------------------------
$ 2,653,974 $ 387,258
===========================================
3. Intangible Assets
Intangible assets consist of the following:
March 31, December 31,
1999 1998
---------------------------------------
Goodwill $ 56,713,361 $ 44,018,454
Contracts 98,201,947 97,960,644
Patents and licenses 2,771,584 2,471,584
Assembled work force 2,700,233 2,700,233
---------------------------------------
160,387,125 147,150,915
Less accumulated amortization (8,255,518) (6,315,275)
---------------------------------------
$ 152,131,607 $ 140,835,640
=======================================
Amortization is provided over the estimated period of benefit, using the
straight-line method, ranging from 8 to 25 years.
4. Long-term Debt
Long-term debt consists of the following:
March 31, December 31,
1999 1998
---------------------------------------
10% Senior Subordinated Notes
due 2008 $ 100,000,000 $ 100,000,000
Secured Credit Facility 26,500,000 10,000,000
---------------------------------------
$ 126,500,000 $ 110,000,000
=======================================
At March 31, 1999, $8,500,000 was unused and available under the Secured Credit
Facility. On April 30, 1999, the Secured Credit Facility was increased from
$35,000,000 to $50,000,000.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and results of
operations should be read in conjunction with the Unaudited Condensed
Consolidated Financial Statements and Notes thereto included elsewhere herein.
GENERAL
ISG Resources, Inc. (the "Company") is the leading manager and marketer of coal
combustion products ("CCPs") throughout North America. The Company generates
revenues from marketing products to its customers and providing materials
management, engineering and construction services to its clients. The Company's
strategic objectives include the maintenance and expansion of long-term
contractual relationships, the increase in product sales and applications
through cross-marketing and further technological advances and the pursuit of
strategic acquisitions.
On January 7, 1999, the Company acquired all of the outstanding stock of Best
Masonry and Tool Supply ("Best") for approximately $13,300,000 and paid off
outstanding debt of Best approximating $2,400,000. Best is engaged in the retail
and wholesale distribution of masonry construction materials to residential and
commercial contractors from its Texas and Georgia locations. Best also produces
its own brand named formulas of manufactured masonry products. With the
acquisition of Best, the Company is expanding its activities to the manufacture
and retail sale of products that include CCPs as raw materials and, thus,
increasing the demand and usage of CCPs in various building products industries.
During 1998, the Company completed the acquisitions of several CCP companies, as
discussed in Form 10-K for the year ended December 31, 1998. These acquisitions,
as well as the acquisition of Best (collectively, the "Acquisitions") were
accounted for under the purchase method of accounting and, accordingly, the
results of operations of the respective companies have been included in the
consolidated financial statements since the respective acquisition dates.
Accordingly, the financial condition and results of operations of the Company
after the Acquisitions is not directly comparable to the historical financial
condition or results of operations.
The Company's revenues are subject to a pattern of seasonal fluctuation,
concurrent with the construction industry. Because the Company's products are
used as raw materials in other products, the amount of revenue generated during
the year generally depends upon a number of factors, including the level of road
and other construction using concrete, weather conditions affecting the level of
construction, general economic conditions, and other factors beyond the
Company's control.
RESULTS OF OPERATIONS
Three Months Ended March 31, 1999 compared to Three Months Ended March 31, 1998
Revenues. Revenues were $29.4 million in the first quarter of 1999, representing
an increase of $14.0 million or 90.9%, as compared to revenues of $15.4 million
in the first quarter of 1998. Product revenues increased to $21.4 million in the
first quarter of 1999 from $8.9 million in the first quarter of 1998,
representing an increase of $12.5 million or 140.5%. Service revenues increased
to $8.1 million in the first quarter of 1999 from $6.5 million in the first
quarter of 1998, representing an increase of $1.6 million or 24.6%. The increase
in product revenues in the first quarter of 1999 is due primarily to the
Acquisitions. The increase in service revenues reflects an increased emphasis in
providing construction and other services.
Cost of Product Revenues, Excluding Depreciation. Cost of product revenues,
excluding depreciation, was $15.2 million in the first quarter of 1999,
representing an increase of $8.5 million or 126.9% , as compared to cost of
product revenues, excluding depreciation, of $6.7 million in the first quarter
of 1998. This increase is due primarily to the inclusion of cost of product
revenues of the Acquisitions since their respective dates of acquisition. As a
percentage of product revenues, cost of product revenues excluding depreciation,
decreased 4.0% in the first quarter of 1999 from 75.0% in the first quarter of
1998. This improvement in margin was primarily due to price increases.
Cost of Service Revenues, Excluding Depreciation. Cost of service revenues,
excluding depreciation was $5.9 million in the first quarter of 1999,
representing a increase of $0.7 million or 13.5%, as compared to cost of service
revenues, excluding depreciation, of $5.2 million in the first quarter of 1998.
This increase is due primarily to the increase in service revenues during the
same time period. As a percentage of service revenues, excluding depreciation,
cost of service revenues, excluding depreciation, decreased 6.0% in the first
quarter of 1999 from 80.0% in the first quarter of 1998. This improvement in
margin was primarily due to an increase in higher margin services, such as
construction and engineering.
Depreciation and Amortization. Depreciation and amortization was $3.1 million in
the first quarter of 1999, representing an increase of $1.9 million or 158.3%,
as compared to depreciation and amortization of $1.2 million in the first
quarter of 1998. This increase resulted primarily from the depreciation of fixed
assets and amortization of goodwill and other intangible assets recorded as a
result of the Acquisitions.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A") were $5.0 million in the first quarter of 1999,
representing an increase of $3.3 million or 194.1%, as compared to SG&A expenses
of $1.7 million in the first quarter of 1998. This increase in SG&A expenses
reflects incremental SG&A costs resulting from the operation of the Acquisitions
as well as an increase in sales and marketing efforts.
Interest Expense. Interest expense increased to $3.2 million in the first
quarter of 1999 from $1.0 million in the first quarter of 1998, primarily as a
result of an increase in outstanding indebtedness.
Income Taxes. Income tax benefit was $1.0 million in the first quarter of 1999,
representing a decrease of $1.0 million or 833.3%, as compared to income tax
expense of $12,000 in the first quarter of 1998. This decrease reflects the
decrease in taxable income in the first quarter of 1999, primarily resulting
from increased interest expense.
Net Income. As a result of the factors discussed above, net loss increased to
$1.8 million in the first quarter of 1999 from $0.3 million in the first quarter
of 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company financed the Acquisitions through the issuance of $100.0 million of
10% Senior Subordinated Notes due 2008 and borrowings on its Secured Credit
Facility. Operating and capital expenditures have been financed primarily
through cash flow from operations and borrowings under the Secured Credit
Facility.
At March 31, 1999, the Company had $295,503 in cash and cash equivalents and
$8.5 million in availability under the Secured Credit Facility. On April 30,
1999, the Secured Credit Facility was increased from $35,000,000 to $50,000,000.
In addition, the Company had working capital of approximately $6.3 million, a
decrease of $0.5 million from December 31, 1998. The Company intends to make
capital expenditures over the next several years principally to construct
storage, loading and processing facilities for CCPs and to replace existing
capital equipment. During the three months ended March 31, 1999, capital
expenditures amounted to approximately $2.9 million. Capital expenditures made
in the ordinary course of business will be funded by cash flow from operations
and borrowings under the Secured Credit Facility.
The Company anticipates that its principal use of cash will be for working
capital requirements, debt service requirements and capital expenditures. Based
upon current and anticipated levels of operations, the Company believes that its
cash flow from operations, together with amounts available under the Secured
Credit Facility, will be adequate to meet its anticipated requirements for
working capital, capital expenditures and interest payments for the next several
years. There can be no assurance, however, that cash flow from operations will
be sufficient to service the Company's debt and the Company may be required to
refinance all or a portion of its existing debt or to obtain additional
financing. These increased borrowings may result in higher interest payments.
There can be no assurance that any such refinancing would be possible or that
any additional financing could be obtained. The inability to obtain additional
financing could have a material adverse effect on the Company.
YEAR 2000 DATE CONVERSION
In general, the Year 2000 issue relates to computers and other systems
being unable to distinguish between the years 1900 and 2000 because they use two
digits, rather than four, to define the applicable year. Systems that fail to
properly recognize such information will likely generate erroneous data or cause
a system to fail possibly resulting in a disruption of operations. The Company's
products do not incorporate such date coding so the Company's efforts to address
the Year 2000 issue fall in the following three areas: (i) the Company's
information technology ("IT") systems; (ii) the Company's non-IT systems (i.e.,
machinery, equipment and devices which utilize technology which is "built in"
such as embedded microcontrollers); and (iii) third-party customers.
The Company is currently working to resolve the potential impact of the
Year 2000 issue on the processing of date-sensitive data by the Company's
computerized information systems. Specifically, the Company has commenced
installation of new accounting and financial software and anticipates that this
process will be complete by the end of July, 1999. The Company is also acquiring
and installing Year 2000 compliant software upgrades in all scales used in its
operations. The Company is analyzing all other IT and non-IT systems to
determine if any other modifications or upgrades are necessary to be Year 2000
compliant. The amount charged to expense during the three months ended March 31,
1999, as well as the amounts anticipated to be charged to expense related to the
Year 2000 computer modifications, have not been and are not expected to be
material to the Company's financial position, results of operations or cash
flows.
The Company is also evaluating and taking steps to resolve Year 2000
compliance issues that may be created by customers, suppliers and financial
institutions with whom the Company does business. Because many of the Company's
suppliers are in the heavily regulated utility arena, the Company does not
expect these suppliers to experience problems. The Company is examining
customers and may send out confirmation letters of Year 2000 compliance if the
Company determines such action is necessary. The Company cannot guarantee that
the systems of other entities will be converted on a timely basis.
The foregoing statements are based upon management's current assumptions.
However, there can be no guarantee that these assumptions have addressed all
relevant uncertainties.
ISG Resources, Inc.
_____________
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Item Exhibit
No. Item Title No.
---- ------------------------------------------ -------
(2) Plan of acquisition, reorganization,
arrangement, liquidation or succession:
Not Applicable
(3) Articles of Incorporation and By-Laws:
Not Applicable
(4) Instruments defining the rights of
security holders, including indentures:
Not Applicable
(10) Material Contracts: Not Applicable
(11) Statement regarding computation of per
share earnings is not required because
the relevant computations can be clearly
determined from the material contained
in the Financial Statements included
herein.
(15) Letter re unaudited interim financial
information: Not Applicable
(18) Letter re change in accounting
principles: Not Applicable
(19) Report furnished to security holders:
Not Applicable
(22) Published report regarding matters
submitted to vote of security holders:
Not Applicable
(23) Consents of expert and counsel:
Not Applicable
(24) Power of attorney: Not Applicable
(27) Financial Data Schedule 27
(99) Additional Exhibits: Not Applicable
(b) Reports on Form 8-K
No Reports on Form 8-K were filed by Registrant during the
three months ended March 31, 1999.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 17, 1999 ISG RESOURCES, INC.
/s/
-------------------------------------
J. I. Everest, II
Chief Financial Officer and Treasurer
(As both a duly authorized officer
of the Company and as principal
financial officer of the Company)
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001063018
<NAME> ISG RESOURCES, INC.
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<EXCHANGE-RATE> 1.000
<CASH> 295,503
<SECURITIES> 0
<RECEIVABLES> 18,655,814
<ALLOWANCES> 196,393
<INVENTORY> 2,653,974
<CURRENT-ASSETS> 23,095,937
<PP&E> 36,424,296
<DEPRECIATION> 4,688,074
<TOTAL-ASSETS> 212,297,420
<CURRENT-LIABILITIES> 16,837,733
<BONDS> 100,000,000
0
0
<COMMON> 100
<OTHER-SE> 25,680,493
<TOTAL-LIABILITY-AND-EQUITY> 212,297,420
<SALES> 21,383,560
<TOTAL-REVENUES> 29,436,492
<CGS> 15,157,523
<TOTAL-COSTS> 21,085,324
<OTHER-EXPENSES> 8,062,727
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<INTEREST-EXPENSE> 3,187,911
<INCOME-PRETAX> (2,876,393)
<INCOME-TAX> 1,032,770
<INCOME-CONTINUING> (1,843,623)
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