SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [Fee required]
For the Fiscal Year Ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [No fee required]
For the transition period from N/A to N/A
Commission File Number____________
ISG RESOURCES, INC.
(Exact name of Registrant as specified in its charter)
Texas 87-0327982
(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)
Registrant's telephone number, including area code: (801) 236-9700
---------------------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None None
Securities registered pursuant to Section 12(g) of the Act:
10% Senior Subordinated Notes Due 2008
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No__
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ _ _ ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant on March 29, 1999 was approximately $0.
The number of shares of Common Stock, without par value, outstanding on
March 29, 1999 was 100 shares.
Documents Incorporated by Reference: See Item 14(a) List of Exhibits
<PAGE>
PART I
Item 1. Business
General Development of Business
ISG Resources, Inc.'s predecessor was organized under the laws of the State of
Texas on February 6, 1981. Industrial Services Group, Inc. ("ISG") was formed in
September 1997 by Citicorp Venture Capital, Ltd. ("CVC") and certain members of
ISG Resources, Inc.'s management team to acquire the stock of JTM Industries,
Inc. ("JTM") and its wholly owned subsidiary, KBK Enterprises, Inc. ("KBK") (the
"JTM Acquisition") from Laidlaw Transportation, Inc. ("Laidlaw"). Pursuant to
the JTM Acquisition, JTM became a wholly owned subsidiary of ISG. Subsequently,
JTM changed its name to ISG Resources, Inc. (the "Company").
Through strategic acquisitions over the past fiscal year, the Company acquired
several key competitors serving diverse geographic regions and companies with
products and/or services that complemented the Company's then current products.
On March 4, 1998, the Company acquired the stock of Pozzolanic Resources, Inc.
("Pozzolanic") for $40.0 million, at which time Pozzolanic became a wholly owned
subsidiary of the Company. Pozzolanic is a provider of marketing services for
coal combustion products ("CCPs") in the Pacific Northwest and in the Rocky
Mountain area. On March 20, 1998, the Company acquired the stock of Power Plant
Aggregates of Iowa, Inc. ("PPA") for $6.4 million (net of $2.1 million of cash
acquired, for a total consideration of $8.5 million), at which time PPA became a
wholly owned subsidiary of the Company. PPA and its subsidiary provide the
personnel and equipment to service a large contract recently awarded to the
Company in Iowa. On April 22, 1998, the Company acquired the stock of Michigan
Ash Sales Company, d.b.a. U.S. Ash Company ("U.S. Ash"), U.S. Stabilization,
Inc., and Flo Fil Co., Inc. (collectively the "U.S. Ash Group") for a total
consideration of $24.6 million, at which time the U.S. Ash Group became wholly
owned subsidiaries of the Company. The U.S. Ash Group is a provider of CCP
management services in Michigan, Ohio and Indiana, areas where the Company's
services were limited. On April 22, 1998, the Company acquired the stock of Fly
Ash Products, Inc. ("Fly Ash Products") for a total consideration of $9.5
million, at which time Fly Ash Products became a wholly owned subsidiary of the
Company. Fly Ash Products is a provider of CCP management services in Arkansas.
On May 1, 1998, the Company, through Pneumatic Trucking, Inc. ("Pneumatic"), a
wholly owned subsidiary of U.S. Ash, purchased the rolling stock of a former
related party of U.S. Ash for approximately $885,000.
On August 6, 1998, the Company acquired the exclusive license to make, use and
sell products utilizing the Dynastone(TM) technology. Dynastone(TM) is the
technology used for the production of a unique acid and chemical resistant
cement utilizing high volumes of CCPs. The license creates the opportunity for
the Company to enter the cementitious manufactured concrete products arena,
utilizing its extensive reserve of CCP resources. Based upon available
information, the Company believes it is now the largest manager and marketer of
CCPs in North America. CCPs are the residual materials created by coal-fired
power generation. The Company enters into long-term CCP management contracts,
primarily with coal-fired electric generating utilities. These utilities are
required to manage, or contract to manage, CCPs in accordance with state and
federal environmental regulations. In addition, the Company provides similar
materials management services for other industrial clients.
<PAGE>
Important Developments since Fiscal Year End
Effective January 1, 1999, the Company, Pozzolanic, PPA, the U.S. Ash Group, Fly
Ash Products and KBK merged with and into ISG Resources, Inc., a newly formed
Utah corporation. Prior to the merger, ISG Resources (Utah) had no assets and
was a wholly owned subsidiary of Industrial Services Group, Inc. ("ISG").
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
the Utah corporation. All references to the "Company" herein refer to ISG
Resources, Inc.
(Utah) and all of its predecessors.
As a result of the foregoing merger, all 1999 reports filed pursuant to the
Securities Exchange Act of 1934, as amended, will be filed with ISG Resources,
Inc., the Utah corporation, as the registrant.
On or about January 7, 1999, the Company acquired the issued and outstanding
capital stock of Best Masonry & Tool Supply, Inc. ("Best"). Best is now a wholly
owned subsidiary of the Company.
Principal Products and their Markets
The Company uses CCPs and other industrial materials to make products that
primarily replace manufactured or mined materials, such as portland cement,
lime, agricultural gypsum, fired lightweight aggregate, granite aggregate or
limestone. The Company's focus on CCPs and related industrial materials
development has also created a variety of applications, such as fillers in
asphalt shingles and related products, that extend beyond the traditional uses
of CCPs and related industrial materials. For purposes of this report, the
Company's products are broken down into traditional products and value-added
products. Traditional products are those products that the Company and its
competitors within the industry historically produce with the CCPs. Value-added
products are newer products that have been developed to utilize CCPs and related
materials which in the past were deemed waste products and usually sent to
landfills.
The primary CCPs managed by the Company are fly ash and bottom ash. Fly ash is
the fine residue and bottom ash is the heavier particles that result from the
combustion of coal. Utilities firing boilers with coal first pulverize the coal
and then blow the pulverized coal into a burning chamber where it immediately
ignites to heat the boiler tubes. The heavier bottom ash falls to the bottom of
the burning chamber while the lighter fly ash remains suspended in the exhaust
gases. Before leaving the exhaust stack, the fly ash particles are removed by an
electrostatic precipitator, bag house or other method. The bottom ash is
hydraulically conveyed to a collection area, while the fly ash is pneumatically
conveyed to a storage silo.
<PAGE>
Fly ash is a pozzolan that, in the presence of water, will combine with an
activator (lime, portland cement or kiln dust) to produce a cement-like
material. It is this characteristic that allows fly ash to act as a
cost-competitive substitute for other more expensive cementitious building
materials. Concrete manufacturers can typically use fly ash as a substitute for
15% to 40% of their cement requirements, depending on the quality of the fly ash
and the proposed end-use application for the concrete. In addition to its cost
benefit, fly ash provides greater structural strength and durability in certain
construction applications, such as road construction. Bottom ash is utilized as
an aggregate in concrete block construction and road base construction.
According to the American Coal Ash Association (the "ACAA"), of the
approximately 100 million tons of CCPs that were generated in the United States
during 1996, fly ash accounted for approximately 59%, bottom ash accounted for
approximately 16% and flue gas desulphurization waste ("scrubber sludge") and
boiler slag accounted for approximately 25%.
Traditional Products and Applications
The Company's traditional products are CCPs and related industrial materials
which generally require minimal processing or additives to fulfill their
applications. The Company typically provides these products to its customers
directly from its clients' sites. The Company has been successful in selling
significant portions of the CCPs and other industrial materials it manages to
traditional markets (e.g., the use of fly ash as pozzolan in portland cement
concrete and the use of bottom ash as a lightweight aggregate).
The following is a brief description of the Company's traditional products:
Fly ash is used as (i) a pozzolan to partially replace portland cement in
ready-mix concrete and concrete products (e.g., concrete pipe); (ii) an additive
to portland cement to produce I-P cement and blended cements; (iii) an additive
in downhole cementing of oil wells; and (iv) a primary constituent in flowable
grout used to fill voids under concrete slabs and underground tank voids.
Bottom ash is used as (i) raw feed stock for the manufacture of portland cement
clinker; (ii) a lightweight aggregate for concrete and concrete block; (iii) a
filler in the manufacture of clay brick; and (iv) an aggregate in asphaltic
concrete. It can also be mixed with salt as an additive for ice and snow control
or used as backfill for pipe bedding and dry bed material.
Fluidized bed ash is used (i) for stabilization in mud drying; (ii) as a reagent
to solidify liquid wastes in petrochemical and related areas; and (iii) for soil
stabilization to create more solid foundations for vertical construction.
Scrubber sludge is used as cement stabilized road base material and can be
processed to be used in wallboard manufacture.
Boiler slag is used for a variety of applications, including roofing shingles
and cement.
<PAGE>
Cement and lime kiln dust and related industrial minerals are used as
cementitious binders for chemical fixation/solidification of hazardous and
non-hazardous wastes, soil stabilization and chemical processes.
Value-Added Products and Applications
To diversify its product offerings and ensure that it productively uses the
CCPs, the Company also develops and markets value-added products made from CCPs
and related industrial materials, and it continues to expand the breadth of
markets for these products. Through its research and development program and
certain licenses, the Company has broadened the end use market for CCPs and
related industrial materials by introducing several proprietary products made
from previously non-marketable materials. The Company sells and distributes its
products to cement plants, ready-mix concrete plants, road contractors, carpet
manufacturers, roofing shingle producers, soil stabilization firms, utility
companies and other waste management firms. Several of its proprietary products
have been utilized by government agencies such as the Department of
Transportation, the Federal Aviation Administration, the Army Corps of Engineers
and the U.S. Bureau of Mines.
The following is a list of the Company's value added products and applications:
Powerlite(R) is a pyrite free bottom ash which, when processed by the Company,
produces a high quality aggregate for the concrete block industry. Powerlite(R)
has exhibited superior flow characteristics, often making it more economical to
use than other aggregates. The Company has provided customers in the Atlanta,
Georgia area with more than two million tons of Powerlite7 in the past 15 years.
SAM(TM) (Stabilized Aggregate Material) is manufactured by the Company by
combining several industrial materials received from clients and transforming
them into a well-graded replacement for natural aggregate. SAM(TM) can be used
in many other applications, such as road base, sub-base, parking areas, drainage
media and rip-rap.
Pozzalime(TM)/Envira-Cement(R) are the Company's lime-based pozzolanic materials
that contain significant moisture-reduction properties. Pozzalime(TM) and
Envira-Cement(R) have been successfully utilized in road-base construction,
road-sub-base construction, chemical fixation, soil stabilization, moisture
reduction, mud drying, pH adjustments, acid neutralization, sewage treatment and
mine reclamation.
Gypcem(R) is the Company's processed gypsum, registered and exclusively sold by
the Company, that has characteristics allowing it to be used in the manufacture
of portland cement. With considerable handling capabilities, the product is
often more economical to use than conventional mined gypsum. Under a long-term
contract with Dupont, the Company designed, constructed and currently operates
an on-site processing facility for the 100,000 tons of synthetic gypsum produced
each year.
<PAGE>
Peanut Maker(R) is a gypsum landplaster developed by the Company for use in the
agricultural market as a soil enhancer. During 1997, under a contract with
Dupont, the Company managed 47,000 tons of Dupont's industrial material, which
was historically disposed of. The Company has transformed this previously
unmarketable material into Peanut Maker(R), a beneficial-use, value-added
product. Peanut Maker(R) has been used on over 60,000 acres of peanut crops
annually for the past 10 years. It continues to be in demand because of its high
calcium content. The disassociation rate afforded by Peanut Maker(R) makes it
more effective and economical than traditional calcium supplements. It has been
a recommended source of calcium by the Virginia and North Carolina Extension
Services since its invention.
ALSIL(R)/Orbaloid(R) are industrial fillers developed by the Company from
processed client-generated materials for use in filler applications such as
roofing shingles, carpet and mat backing, and ceramic products. The Company has
two U.S. patents and one Canadian patent for the use of ALSIL(R) in roofing
shingles. The Company has secured multiple contracts with various shingle
manufacturers, with one agreement extending for the life of the customer's
manufacturing plant.
Flexbase(TM) is a mixture of fly ash and scrubber sludge which the Company
processes to form a road-base material.
Stabil-Fill(TM) is a lime-stabilized fly ash that the Company has developed and
sold for use as a fill material in lieu of natural borrow materials. The
resulting mixture is lightweight and compacts with standard construction
equipment. Applications include commercial or industrial property development,
roadway embankment and subgrade for parking lots, airport runways, golf courses
or driving ranges, and athletic fields.
Redi-Fill(TM)/Flo Fil(R) are the Company's processed fly ash and bottom ash,
sold for use as a structural fill and ready-mixed flowable fill.
In addition to these value added products, the Company uses its traditional
products for non-traditional applications. Non-traditional applications of fly
ash include: (i) use as mineral filler to replace fine aggregate in bituminous
coatings for roads (asphalt surface); (ii) use as a primary constituent in
flowable fill to backfill around in-ground pipes and structures; (iii) for
stabilization of soils with high plasticity or low load bearing abilities; (iv)
to produce a filler grade material for a variety of products; and (v) as a
binder with calcium sulfate to replace limestone road base materials.
<PAGE>
Status of any Publicly Announced New Product or Service
On August 6, 1998, the Company acquired the exclusive license to make, use and
sell products utilizing the Dynastone(TM) technology. Dynastone(TM) is the
technology used for the production of a unique acid and chemical resistant
cement utilizing high volumes of CCPs. Since the Company acquired the
Dynastone(TM) license, the Company entered into a contractual agreement with CSR
Hydro Conduit ("CSR"), one of the largest concrete pipe manufacturers in the
United States. Under the agreement, the Company will provide CSR with the
proprietary Dynastone(TM) technology to manufacture acid resistant concrete pipe
using CCPs in addition to traditional cements. The Company has recently
established a laboratory in San Antonio, Texas dedicated to commercialization of
the Dynastone(TM) technology.
Competitive Business Conditions
According to data compiled by the Energy Information Administration of the
United States Department of Energy (the "EIA"), of the 1,996 electric generating
units operating in the United States in 1996, 1,128 were coal-fired and
represented approximately 55% of the total electricity generated, an increase
from approximately 50% in 1995. Coal is the largest indigenous fossil fuel
resource in the United States, with current U.S. annual coal production in
excess of one billion tons. Approximately 80% of the coal produced is for
electric power generation, and its use has grown by almost 25% over the last
decade. The combustion of coal provides cost-effective electricity generation,
but results in a high percentage of residual material, which serves as the "raw
material" for the CCP industry. The industry manages these CCPs and related
materials by developing end-use markets for certain CCPs and providing storage
and disposal services for the remainder of such materials.
In order to sustain its position as a leader in the CCP management industry, the
Company relies on and continues to implement the following competitive
strengths:
Leading Market Position. The Company believes it is a party to more CCP
management contracts and manages more CCP tonnage than any of its competitors.
The Company has aggressively penetrated its service areas and has won contracts
based on its "one-stop" approach to CCP and other industrial materials
management services. This approach combines the Company's marketing, materials
handling and technological capabilities to lower the client's cost of managing
CCPs and other industrial materials in accordance with applicable state and
federal regulations.
Geographic Diversification. The Company believes it is the only company in the
CCP management industry with a national scope. This national scope provides the
Company with several significant competitive benefits, including mitigation of
the effects of cyclical regional economies and weather patterns. In addition,
the Company's national scope and storage capabilities will create incremental
revenue through the ability to shift products among regions to meet market
demand while minimizing transportation costs.
Value-Added Products and Services. The Company's focused new product development
efforts have broadened the end-use market for CCPs and other recyclable
industrial materials. The Company has successfully introduced new patented or
trademarked products made from previously non-marketable materials through
proprietary processes. These product development efforts have reduced the
materials management cost to the Company's clients and improved the Company's
revenue mix and margins.
<PAGE>
Strong Client Relationships. At December 31, 1998, the Company had contractual
relationships with eleven of the largest fifteen coal powered electrical
utilities in the United States, based on total electricity revenues. The Company
has maintained long-term contracts with certain utilities since 1968, and
experienced a renewal or extension rate of greater than 90% since the JTM
Acquisition. The Company's clients rely on its marketing, materials handling and
technological capabilities to extend the useful life of their landfill sites by
creatively managing and marketing a broader range of CCPs than competitors.
Source and Availability of Raw Materials
The Company's primary raw material is CCPs. As long as the majority of
electricity generated in this country comes from the use of coal-fired
generation, the Company believes it will have an adequate supply of raw
materials.
Dependence on Limited Customers
The Company works with a large number of customers and has long-term contracts
with most such customers. The Company's core business is based on long-term
materials management contracts with power producers and industrial clients. As
of December 31, 1998, the Company had 87 materials management contracts, 17 of
which generated more than $1.0 million of annual revenues each. Typical contract
terms are from five to fifteen years. The Company is focused on serving its
current client base and plans to aggressively target additional contract
opportunities to increase both tonnage under management and revenues.
Intellectual Property
The Company owns and has obtained licenses to various domestic and foreign
patents and trademarks related to its products and processes. While these
patents and trademarks in the aggregate are important to the Company's
competitive position, no single patent or trademark is material to the Company.
The Company's license agreements generally have a duration which coincides with
the patents covered thereby.
Government Approval
None.
Effect of Existing or Probable Government Regulation
None.
<PAGE>
Research and Development
In an effort to maximize the percentage of products marketed to end users and
minimize the amount of materials landfilled, the Company's focused research and
development efforts have created or caused the Company to acquire the rights to
value-added products such as ALSIL(R), Powerlite(R), Flexbase(TM), Peanut
Maker(R) and Dynastone(TM). The Company markets CCP tonnage under management to
the building materials and construction related products industry to be used in
engineering applications, such as ready-mix concrete, lightweight aggregate,
stabilized road bases, flowable and structural fill, and roofing shingles. The
Company's major customers for its marketed products include LaFarge Corporation,
Consolidated Sugar Refineries, Elk Corporation of Texas and GS Roofing Products
Company, Inc. The Company's research and development program and other dedicated
efforts have resulted in twelve patented products or processes and two U.S.
patents and five foreign patents pending. Costs incurred for research and
development were not material to the results of operations of the Company in
1998, 1997, or 1996.
Cost of Compliance with Environmental Laws
None.
Employees
The Company has a total of 630 employees, of which 570 are full-time employees.
Item 2. Properties
The Company operates its corporate headquarters in Salt Lake City, Utah in
offices leased under a three year lease expiring in July 2001. The total amount
of leased space in the corporate headquarters is 9,396 square feet. Due to
Company's national scope of operations, it has a number of other properties used
in its operations. The following table sets forth certain information regarding
the Company's other principal facilities as of December 31, 1998:
Location Function Ownership Lease
Termination Date
Kennesaw, GA Offices Leased January 31, 2004
Delle, UT Storage Silos Leased November 1, 2001
Fargo, ND Fly Ash Storage Leased Month to Month
Good Spring, PA Silo Facility Leased August 15, 1999
Valley View, PA Rail Siding Leased December 31, 2015
Chester, VA Office/Rail Spur Leased November 30, 1999
Taylorsville, GA Rail Sidetrack Leased 30 days notice
Taylorsville, GA Lab Facility Owned
Doraville, GA Terminal Facility Leased August 11, 2005
Leland, NC Transfer Facility Owned
Franklin, VA Structural Fill Owned
Clinton, TN Structural Fill Owned
Mercer Island, WA Offices Leased June 30, 1999
Centralia, WA Storage Facility Owned
Ogden, UT Storage Facility Owned
Oregon City, OR Offices Leased Month to Month
Fresno, CA Terminal Facility Leased March 31, 2002
Allentown, PA Offices Leased February 28, 2001
Pomona, CA Rail Terminal Owned
Stafford, TX Offices Leased April 30, 2003
Management believes its facilities are in good condition and that the facilities
are adequate for its operating needs for the foreseeable future without
significant modifications or capital investment.
<PAGE>
Item 3. Legal Proceedings
The Company is a defendant in various lawsuits which are incidental to the
Company's business. Management, after consultation with its legal counsel,
believes that any potential liability as a result of these matters will not have
a material effect upon the Company's results of operations or financial
position.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
The Company's common stock is not publicly traded and is wholly owned by ISG.
Item 6. Selected Financial Data
The following table sets forth summary consolidated financial information of the
Company for each of the five years in the period ended December 31, 1998. Such
information was derived from the audited consolidated financial statements and
notes thereto. The selected consolidated financial information for the periods
prior to October 14, 1997 set forth below is not comparable to subsequent
periods due to the step-up in basis resulting from the JTM Acquisition and the
completion of the Acquisitions.
The selected consolidated financial information set forth below has been derived
from the audited consolidated financial statements of the Company and should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the consolidated financial statements
and notes thereto included elsewhere herein.
<PAGE>
<TABLE>
<CAPTION>
2 1/2 Months 9 1/2 Months
Year Ended Ended Ended
December December 31,October 13, Year Ended December 31,
31,
1998 1997 1997 1996 1995 1994
(Dollars in thousands)
Statement of Income Data:
<S> <C> <C> <C> <C> <C> <C>
Revenue ....................................... $ 117,293 $ 12,643 $ 51,295 $ 62,841 $ 64,986 $60,784
Cost of products and services sold, excl. depr 80,116 9,365 40,701 52,268 51,489 52,356
Depreciation and amortization ................. 9,141 908 5,279 2,285 2,265 1,538
Selling, general and administrative expenses .. 14,145 1,256 3,633 5,667 9,692 -(1)
Income from Operations ........................ 13,891 1,114 1,682 2,621 1,540 6,890
Interest Expense .............................. 9,338 628 4,160 4,853 4,081 17
Net income (loss) before income taxes ......... 4,808 517 (2,478) (2,232) 6,873
Net income (loss) ............................. 2,259 265 (3,090) (1,870) 6,873(1)
Balance Sheet Data:
Working capital (deficiency) .................. 6,786 (21,648) (43,594) (45,804) (42,268) 6,249
Total assets .................................. 191,732 73,270 58,396 62,950 61,779 18,291
Total debt .................................... 110,000 -- -- -- -- 2,976
Shareholder's equity .......................... 27,524 25,265 3,623 6,713 8,033 17,831
Other Data:
Cash flows from operating activities .......... 8,164 1,843 521 603 (1,115) -(1)
Cash flows from investing activities .......... (86,576) (19) (681) (3,869) -(1)
Cash flows from financing activities .......... 75,344 1,189 957 2,844 (4,113) -(1)
EBITDA (2) .................................... 23,287 2,054 6,961 4,906 3,805 8,428
EBITDA margin ................................. 19.9% 16.2% 13.6% 7.8% 5.9% 13.9%
Captial expenditures .......................... 8,131 19 681 4,357 4,589 905
Ratio of earnings to fixed charges (3) ........ 1.42x 1.49x 0.56x 0.68x 0.58x 5.21x
Deficit of earnings to fixed charges .......... -- -- (2,478) (2,232) (2,541) --
</TABLE>
(1) During the year ended December 31, 1994, the Company was a subsidiary of
Union Pacific and was not allocated any SG&A or income tax expense.
(2) EBITDA represents earnings before interest expense, income taxes,
depreciation and amortization. EBITDA should not be considered as an
alternative to net income or any other GAAP measure of performance as an
indicator of the Company's performance or to cash flows provided by
operating, investing or financing activities as an indicator of cash flows
or a measure of liquidity. Management believes that EBITDA is a useful
adjunct to net income and other measurements under GAAP in evaluating the
Company's ability to service its debt and is a conventionally used
financial indicator. However, due to possible inconsistencies in the method
of calculating EBITDA, the EBITDA measures presented may not be comparable
to other similarly titled measures of other companies.
(3) The ratio of earnings to fixed charges is computed by dividing earnings by
fixed charges. For this purpose, earnings include pre-tax income from
continuing operations plus fixed charges. Fixed charges include interest,
whether expensed or capitalized, amortization of debt expense and that
portion of rental expense which is representative of the interest factor in
these rentals.
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and notes thereto of ISG Resources, Inc. and
its predecessor, JTM Industries, Inc. and other financial information appearing
elsewhere herein.
General
The Company is a manager and marketer of CCPs in 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 was founded in 1997 upon the acquisition of JTM by ISG. Subsequently,
the Company acquired Pozzolanic, PPA, the US Ash Group and Fly Ash Products (the
"1998 Acquisitions"). 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. The Company expects to
achieve cost savings and incremental profitability through the integration of
administration, purchasing, insurance, marketing and other operations of its
strategic acquisitions.
Seasonality
The Company's business is subject to seasonal fluctuation. The Company's need
for working capital accelerates moderately during the middle of the year, and
accordingly, total debt levels tend to peak in the second and third quarters,
declining in the fourth quarter of the year. The amount of revenue generated
during the middle of 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
Fiscal year 1998 was the first complete year of operations subsequent to the JTM
Acquisition and, thus, is not comparable to any prior accounting period. For
purposes of discussing the results of operations, fiscal year 1998 is compared
to the period from the JTM Acquisition date to December 31, 1997 and the period
from January 1, 1997 to the JTM Acquisition date, which reflects the results of
the predecessor company. Due to the 1998 Acquisitions and the change in the
capital structure, the financial condition and results of operations are not
directly comparable to that of the predecessor company.
<PAGE>
Fiscal Year 1998 Compared to 2 1/2 Months Ended December 31, 1997 and 9 1/2
Months Ended October 13, 1997
Revenues. Revenues were $117.3 million, $12.6 million and $51.3 million in
fiscal year 1998, the 2 1/2 months ended December 31, 1997 and the 9 1/2 months
ended October 13, 1997, respectively, resulting in average monthly revenues of
$9.8 million, $5.0 million and $5.4 million for the respective periods. The
increase in the average monthly revenues in 1998 is due primarily to the 1998
Acquisitions.
Cost of Products Sold, Excluding Depreciation. Cost of products sold, excluding
depreciation, was $51.9 million, $4.9 million and $20.7 million in fiscal year
1998, the 2 1/2 months ended December 31, 1997 and the 9 1/2 months ended
October 13, 1997, respectively, resulting in cost of products sold, excluding
depreciation, as a percentage of product revenues of 62.5%, 68.9% and 80.8% for
the respective periods. The improvement in margins is due to two factors: (1)
change in product mix from lower margin product sold to the former parent in the
pre-acquisition period as opposed to higher margin product sold to third parties
in the post-acquisition period, and (2) price increases.
Cost of Services Sold, Excluding Depreciation. Cost of services sold, excluding
depreciation was $28.2 million, $4.5 million and $20.0 million in fiscal year
1998, the 2 1/2 months ended December 31, 1997 and the 9 1/2 months ended
October 13, 1997, respectively, resulting in a relatively constant cost of
services sold, excluding depreciation, as a percentage of service revenues of
82.4%, 80.6% and 77.9% for the respective periods.
Depreciation and Amortization. Depreciation and amortization was $9.1 million,
$0.9 million and $5.3 million in fiscal year 1998, the 2 1/2 months ended
December 31, 1997 and the 9 1/2 months ended October 13, 1997, respectively,
resulting in average monthly depreciation and amortization of $0.8 million, $0.4
million and $0.6 million, for the respective periods. The 9 1/2 months ended
October 13, 1997 includes a $3.3 million goodwill write-off by the Company's
former parent in connection with the JTM Acquisition. Excluding this write-off,
average monthly depreciation and amortization for this period would have been
$0.2 million. The increase in average monthly depreciation and amortization for
the 2 1/2 months ended December 31, 1997 over the 9 1/2 months ended October 13,
1997, before the goodwill write-off discussed above, is due primarily to the
amortization of goodwill, contracts, patents and assembled workforce, which were
recorded at fair value upon the JTM Acquisition, as well as the accelerated
amortization rate of goodwill by the Company after its acquisition by ISG. The
increase in average monthly depreciation and amortization for fiscal year 1998
over the 2 1/2 months ended December 31, 1997 is due primarily to the
amortization of goodwill, contracts and assembled workforce, which were recorded
at fair value upon the 1998 Acquisitions.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A") were $14.1 million, $1.3 million and $3.6
million in fiscal year 1998, the 2 1/2 months ended December 31, 1997 and the 9
1/2 months ended October 13, 1997, respectively. For the 9 1/2 months ended
October 13, 1997, management fees were allocated to the Company by Laidlaw based
upon the Company's share of Laidlaw's consolidated revenue. The allocated
charges may not be indicative of the expenses the Company would have incurred if
Laidlaw had not provided the services. The increase in SG&A in fiscal year 1998
is due primarily to three factors: (1) costs associated with the reorganization
of the Company (i.e., consulting, travel, employee relocation) after the 1998
Acquisitions; (2) increased sales and marketing efforts; and (3) an increase in
management incentive compensation.
<PAGE>
Interest Expense. Interest expense was $9.3 million, $0.6 million and $4.2
million in fiscal year 1998, the 2 1/2 months ended December 31, 1997 and the 9
1/2 months ended October 13, 1997, respectively, resulting in average monthly
interest expense of $0.8 million, $0.2 million and $0.4 million for the
respective periods. The decrease in the average monthly interest expense in the
2 1/2 months ended December 31, 1997 as compared to the 9 1/2 months ended
October 13, 1997 is due primarily to a decrease in the Company's outstanding
indebtedness resulting from the elimination of the intercompany indebtedness to
Laidlaw upon the JTM Acquisition. The increase in the average monthly interest
expense in fiscal year 1998 is due primarily to the issuance of Senior
Subordinated Notes in April 1998.
Income Tax Expense. Income tax expense was $2,549,000, $252,000 and $612,000 in
fiscal year 1998, the 2 1/2 months ended December 31, 1997 and the 9 1/2 months
ended October 13, 1997, respectively, resulting in effective tax rates of 53.0%,
48.8% and (24.7%). The negative effective tax rate in the 9 1/2 months ended
October 13, 1997 is due primarily to the large goodwill write-off discussed
above which was not deductible for tax purposes. The increase in the effective
tax rate from the 2 1/2 months ended December 31, 1997 to fiscal year 1998 is
due primarily to the increase in non-deductible amortization of goodwill
recorded upon the 1998 Acquisitions.
Net Income (Loss). As a result of the factors discussed above, net income
increased to $2.3 million and $0.3 million in fiscal year 1998 and the 2 1/2
months ended December 31, 1997, respectively, as compared to a net loss of $3.0
million in the 9 1/2 months ended October 13, 1997.
2 1/2 Months Ended December 31, 1997 and 9 1/2 Months Ended October 13, 1997
Compared to Fiscal Year 1996
Revenues. Revenues were $12.6 million, $51.3 million and $62.8 million in the 2
1/2 months ended December 31, 1997, the 9 1/2 months ended October 13, 1997 and
fiscal year 1996, respectively, resulting in average monthly revenues of $5.0
million, $5.4 million and $5.2 million for the respective periods. The change in
the average monthly revenues between the three periods is due primarily to the
seasonality of the industry. Revenues peak in the second and third quarters,
declining in the fourth and first quarters.
<PAGE>
Cost of Products Sold, Excluding Depreciation. Cost of products sold, excluding
depreciation, was $4.9 million, $20.7 million, and $22.4 million in the 2 1/2
months ended December 31, 1997, the 9 1/2 months ended October 13, 1997 and
fiscal year 1996, respectively, resulting in cost of products sold, excluding
depreciation, as a percentage of product revenues of 68.9%, 80.8%, and 87.8% for
the respective periods. The improvement in margins is due to two factors: (1)
change in product mix from lower margin product sold to the former parent in the
pre-acquisition periods as opposed to higher margin product sold to third
parties in the post-acquisition period, and (2) a $1.0 million settlement of a
lawsuit charged to cost of sales in 1996.
Cost of Services Sold, Excluding Depreciation. Cost of services sold, excluding
depreciation was $4.5 million, $20.0 million and $29.9 million in the 2 1/2
months ended December 31, 1997, the 9 1/2 months ended October 13, 1997 and
fiscal year 1996, respectively, resulting in a relatively constant cost of
services sold, excluding depreciation, as a percentage of service revenues of
80.6%, 77.9%, and 80.0% for the respective periods.
Depreciation and Amortization. Depreciation and amortization was $0.9 million,
$5.3 million, and $2.3 million in the 2 1/2 months ended December 31, 1997, the
9 1/2 months ended October 13, 1997 and fiscal year 1996, respectively,
resulting in average monthly depreciation and amortization of $0.4 million, $0.6
million and $0.2 million for the respective periods. The increase in
depreciation and amortization in the 9 1/2 months ended October 13, 1997 over
the fiscal year 1996 is due primarily to a $3.3 million goodwill write-off by
the Company's former parent in connection with the JTM Acquisition. Excluding
this write-off, average monthly depreciation and amortization for this period
would have been consistent with fiscal year 1996 at $0.2 million. The increase
in average monthly depreciation and amortization for the 2 1/2 months ended
December 31, 1997 over the 9 1/2 months ended October 13, 1997, before the
goodwill write-off discussed above, is due primarily to the amortization of
goodwill, contracts, patents and assembled workforce, which were recorded at
fair value upon the JTM Acquisition, as well as the accelerated amortization
rate of goodwill by the Company after its acquisition by ISG.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A") were $1.3 million, $3.6 million and $5.7
million in the 2 1/2 months ended December 31, 1997, the 9 1/2 months ended
October 13, 1997 and fiscal year 1996, respectively. The decrease from fiscal
year 1996 to the 9 1/2 months ended October 13, 1997 reflects a decrease in
management fees charged by the Company's former parent, from $2.7 million in
fiscal year 1996 to $0.7 million in the 9 1/2 months ended October 13, 1997.
Management fees were allocated to the Company by Laidlaw based upon the
Company's share of Laidlaw's consolidated revenue. The allocated charges may not
be indicative of the expenses the Company would have incurred if Laidlaw had not
provided the services.
Interest Expense. Interest expense was $0.6 million, $4.2 million and $4.8
million in the 2 1/2 months ended December 31, 1997, the 9 1/2 months ended
October 13, 1997 and fiscal year 1996, respectively, resulting in average
monthly interest expense of $0.2 million, $0.4 million and $0.4 million for the
respective periods. The decrease in interest expense in the 2 1/2 months ended
December 31, 1997 as compared to the 9 1/2 months ended October 13, 1997 and
fiscal year 1996 is due primarily to a decrease in the Company's outstanding
indebtedness resulting from the elimination of the inter-company indebtedness to
Laidlaw upon acquisition by ISG.
<PAGE>
Income Tax Benefit (Expense). Income tax expense was $252,000 and $612,000 in
the 2 1/2 months ended December 31, 1997 and the 9 1/2 months ended October 13,
1997 compared to an income tax benefit of $362,000 in fiscal year 1996,
resulting in effective tax rates of 48.8%, (24.7%) and 16.2%. The increase in
income taxes from fiscal year 1996 to the 9 1/2 months ended October 13, 1997
reflects increases in the Company's taxable income, primarily from obtaining
higher margins and SG&A reductions. The negative effective tax rate in the 9 1/2
months ended October 13, 1997 is due primarily to the large goodwill write-off
discussed above which was not deductible for tax purposes.
Net Income (Loss). As a result of the factors discussed above, net income
increased to $0.3 million in the 2 1/2 months ended December 31, 1997 as
compared to net losses of $3.0 million and $1.8 million in the 9 1/2 months
ended October 13, 1997 and fiscal year 1996, respectively.
Liquidity and Capital Resources
The Company financed the JTM Acquisition and the 1998 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 flows from operations and borrowings
under the Secured Credit Facility.
At December 31, 1998, the Company had no cash or cash equivalents and $25.0
million available under the Secured Credit Facility. In addition, the Company
had working capital of approximately $6.8 million, an increase of $28.4 million
from December 31, 1997 resulting primarily from the replacement of a short-term
note with long-term debt.
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 fiscal year 1998, capital
expenditures amounted to approximately $8.1 million, including $0.9 million
expended to purchase the rolling stock of Pneumatic. 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 1999 acquisition of Best Masonry and Tool Supply discussed elsewhere herein
was financed through 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.
<PAGE>
The Year 2000 Issue
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 April 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. The amount
charged to expense during the year ended December 31, 1998, 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
heavily regulated utilities with mandated, 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.
Forward-Looking Information
Statements included in this Management's Discussion and Analysis of Financial
Condition and Results of Operations and other items of this Form 10-K may
contain forward-looking statements. Such forward-looking statements are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Such statements may relate but not be limited to projections
of revenues, income or loss, capital expenditures, plans for growth and future
operations, financing needs, as well as assumptions relating to the foregoing.
Forward-looking statements are inherently subject to risks and uncertainties,
some of which cannot be predicted or quantified. When used in this "Management's
Discussion and Analysis of Financial Condition and Results of Operations", and
elsewhere in this Form 10-K the words "estimates", "expects", "anticipates",
"forecasts", "plans", "intends" and variations of such words and similar
expressions are intended to identify forward-looking statements that involve
risks and uncertainties. Future events and actual results could differ
materially from those set forth in, contemplated by or underlying the
forward-looking statements.
<PAGE>
Item 7a. Qualitative and Quantitative Disclosures about Market Risk
In 1997, the SEC issued new rules (Item 305 of Regulation S-K) which requires
disclosure of material risks as defined by Item 305, related to market risk
sensitive financial instruments. As defined, the Company currently has market
risk sensitive instruments related to interest rates. As disclosed in Note 4 of
the audited consolidated financial statements, the Company has outstanding
long-term debt of $110,000,000 at December 31, 1998. The Company currently has
an average maturity of nine years for long-term debt, $100,000,000 of which is
at a fixed rate of 10% and $10,000,000 of which is at a rate averaging 8.5% for
the year ended December 31, 1998.
The Company does not have significant exposure to changing interest rates on
long-term debt because interest rates for the majority of the debt is fixed. The
Company has not undertaken any additional actions to cover interest rate market
risk and is not a party to any other interest rate market risk management
activities.
A hypothetical 10% change in market interest rates over the next year would not
impact the Company's earnings or cash flows as the interest rate on the majority
of the long-term debt is fixed. A 10% change in market interest rates would have
a material effect (likely increasing or decreasing the fair value by
approximately 50%) on the fair value of the Company's publicly traded long-term
debt due to the volume outstanding at December 31, 1998.
The Company does not purchase or hold any derivative financial instruments for
trading purposes.
<PAGE>
Item 8. Financial Statements and Supplementary Data
The audited financial statements for the year ending December 31, 1998 are
<PAGE>
F-2
INDEX TO FINANCIAL STATEMENTS
ISG Resources, Inc. and Subsidiaries
Audited Consolidated Financial Statements as of December 31, 1998 and 1997 and
for the Year Ended December 31, 1998 and the Period From October 14, 1997 to
December 31, 1997:
Report of Independent Auditors ........................................... F-2
Consolidated Balance Sheets .............................................. F-3
Consolidated Statements of Income ........................................ F-5
Consolidated Statements of Shareholder's Equity .......................... F-6
Consolidated Statements of Cash Flows .................................... F-7
Notes to Consolidated Financial Statements ............................... F-8
JTM Industries, Inc. and Subsidiary (Predecessor to ISG Resources, Inc.)
Audited Consolidated Financial Statements as of October 13, 1997 and for the
Period From January 1, 1997 to October 13, 1997 and the Year Ended December 31,
1996:
Report of Independent Accountants ................................... F-17
Consolidated Balance Sheet .......................................... F-18
Consolidated Statements of Loss and Accumulated Deficit ............. F-19
Consolidated Statements of Cash Flows ............................... F-20
Notes to Consolidated Financial Statements .......................... F-21
Pozzolanic Resources, Inc. and Subsidiaries
Audited Consolidated Financial Statements as of December 31, 1997 and for the
Years Ended December 31, 1997 and 1996:
Report of Independent Auditors ...................................... F-26
Consolidated Balance Sheet .......................................... F-27
Consolidated Statements of Income and Retained Earnings ............. F-29
Consolidated Statements of Cash Flows ............................... F-30
Notes to Consolidated Financial Statements .......................... F-31
Michigan Ash Sales Company (d.b.a. U.S. Ash Company) and Affiliated Companies
Audited Combined Financial Statements as of April 21, 1998 and December 31, 1997
and for the Period From January 1, 1998 to April 21, 1998 and the Years Ended
December 31, 1997 and 1996:
Report of Independent Auditors ........................................ F-34
Combined Balance Sheets ............................................... F-35
Combined Statements of Income and Retained Earnings ................... F-37
Combined Statements of Cash Flows ..................................... F-38
Notes to Combined Financial Statements ................................ F-39
F-1
<PAGE>
Report of Independent Auditors
The Board of Directors
ISG Resources, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of ISG Resources,
Inc. and Subsidiaries as of December 31, 1998 and December 31, 1997, and the
related consolidated statements of income, shareholder's equity and cash flows
for the year ended December 31, 1998 and the period from October 14, 1997 to
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of ISG Resources,
Inc. and Subsidiaries at December 31, 1998 and 1997, and the consolidated
results of their operations and their cash flows for the year ended December 31,
1998 and the period from October 14, 1997 to December 31, 1997 in conformity
with generally accepted accounting principles.
Ernst & Young LLP
Salt Lake City, Utah
March 15, 1999
F-2
<PAGE>
ISG Resources, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31
1998 1997
Assets
Current assets:
Cash and cash equivalents ....................... $ -- $ 3,068,980
Accounts receivable:
Trade, net of allowance for doubtful accounts of
$170,000 in 1998 and $206,000 in 1997 ....... 14,975,729 9,167,788
Retainage receivable ........................... 660,609 517,695
Other .......................................... 296,966 318,271
Deferred tax asset .............................. 251,355 324,608
Other current assets ............................ 1,033,227 216,225
Total current assets ............................. 17,217,886 13,613,567
Property, plant and equipment:
Land and improvements ........................... 1,736,384 1,624,335
Buildings and improvements ...................... 3,610,621 3,145,031
Vehicles and other operating equipment .......... 20,090,872 9,817,148
Furniture, fixtures and office equipment ........ 494,753 1,115,721
25,932,630 15,702,235
Accumulated depreciation ........................ (3,562,086) (453,516)
22,370,544 15,248,719
Construction in progress ........................ 5,768,564 --
28,139,108 15,248,719
Other assets:
Intangible assets, net .......................... 140,835,640 44,385,492
Debt issuance costs, net ........................ 5,192,893 --
Other assets .................................... 346,209 22,335
Total assets ..................................... $ 191,731,736 $ 73,270,113
============= ============
F-3
<PAGE>
December 31
1998 1997
-----------------------
Liabilities and shareholder's equity
Current liabilities:
Accounts payable ................................. $ 4,066,487 $ 1,806,678
Accrued expenses:
Payroll ........................................ 1,801,657 1,693,953
Interest ....................................... 2,106,054 627,704
Other .......................................... 1,534,971 1,604,879
Income taxes payable ............................. 422,963 528,742
Note payable ..................................... -- 29,000,000
Other current liabilities ........................ 500,000 --
----------- -----------
Total current liabilities ........................... 10,432,132 35,261,956
Long-term debt ...................................... 110,000,000 --
Other long-term liabilities ......................... 2,488,954 306,098
Deferred tax liability .............................. 41,286,434 12,437,297
Commitments and contingencies
Shareholder's 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 ................................ 2,524,166 264,712
-----------
-----------
Total shareholder's equity .......................... 27,524,216 25,264,762
Total liabilities and shareholder's equity .......... $191,731,736 $73,270,113
============ ===========
See accompanying notes.
F-4
<PAGE>
ISG Resources, Inc. and Subsidiaries
Consolidated Statements of Income
Period from
Year ended October 14 to
December 31, 1998 December 31, 1997
------------------------------
Revenues:
Product revenues ............................. $ 83,048,721 $ 7,059,063
Service revenues ............................. 34,243,854 5,583,981
------------
------------
117,292,575 12,643,044
Costs and expenses:
Cost of products sold, excluding depreciation 51,878,447 4,864,226
Cost of services sold, excluding depreciation 28,237,385 4,500,892
Depreciation and amortization ................ 9,140,938 908,619
Selling, general and administrative expenses . 14,144,765 1,255,680
------------
103,401,535 11,529,417
------------
13,891,040 1,113,627
Interest income ................................. 183,113 31,286
Interest expense ................................ (9,338,059) (627,704)
Miscellaneous income ............................ 72,386 --
------------
Income before income tax expense ................ 4,808,480 517,209
Income tax expense .............................. 2,549,026 252,497
============
Net income ...................................... $ 2,259,454 $ 264,712
============= ============
See accompanying notes.
F-5
<PAGE>
<TABLE>
<CAPTION>
ISG Resources, Inc. and Subsidiaries
Consolidated Statements of Shareholder's Equity
Common Additional Retained Total
Stock Paid-In Capital Earnings Shareholder's Equity
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at October 14, 1997 ........................ $100 $23,811,429 $ -- $23,811,529
Cash contribution ............................... -- 1,188,521 -- 1,188,521
Net income ...................................... -- -- 264,712 264,712
-----------
Balance at December 31, 1997 ....................... 100 24,999,950 264,712 25,264,762
Net income ...................................... -- -- 2,259,454 2,259,454
===========
Balance at December 31, 1998 ....................... $100 $24,999,950 $2,524,166 $27,524,216
==== =========== ========== ===========
See accompanying notes.
</TABLE>
F-6
<PAGE>
ISG Resources, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Period from
Year ended October 14 to
December 31 December 31
1998 1997
--------------------------------------
Operating activities
Net income ......................................... $ 2,259,454 $ 264,712
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization ................. 9,140,938 908,619
Amortization of debt issuance costs ........... 463,585 --
Deferred income taxes ......................... (1,697,407) (276,245)
Changes in operating assets and liabilities:
Receivables ............................... (1,479,648) 691,534
Other current and non-current assets ...... 140,055 (22,569)
Accounts payable .......................... (606,834) (1,035,993)
Income taxes payable ...................... (245,447) 528,742
Accrued expenses .......................... 759,326 755,913
Other current and non-current liabilities . (570,491) 28,387
---------- -----------
Net cash provided by operating activities .......... 8,163,531 1,843,100
Investing activities
Purchase of businesses, net of
cash acquired of $5,829,695 ....................... (77,753,012) --
Additions to intangible assets ..................... (691,847) --
Purchases of property, plant and equipment ......... (8,131,174) (19,491)
---------- -----------
Net cash used in investing activities .............. (86,576,033) (19,491)
Financing activities
Proceeds from long-term debt ....................... 154,000,000 --
Payments on long-term debt ......................... (73,000,000) --
Debt issuance costs ................................ (5,656,478) --
Cash contributions ................................. -- 1,188,521
----------- -----------
Net cash provided by financing activities .......... 75,343,522 1,188,521
---------- ---------
Net (decrease) increase in cash and cash equivalents (3,068,980) 3,012,130
Cash and cash equivalents at beginning of period ... 3,068,980 56,850
-----------
Cash and cash equivalents at end of period ......... $ $ 3,068,980
==========================
Cash paid for interest ............................. $ 7,396,124 $ --
Cash paid for income taxes ......................... $ 3,989,414 $ --
See accompanying notes.
F-7
<PAGE>
ISG Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1998
1. Basis of Presentation
ISG Resources, Inc. (formerly, JTM Industries, Inc.) (the "Company") is a wholly
owned subsidiary of Industrial Services Group ("ISG"). ISG was formed in
September 1997 to acquire the stock of the Company from Laidlaw Transportation,
Inc. ("Laidlaw") (the "Acquisition"). Pursuant to the Acquisition, the Company
became a wholly owned subsidiary of ISG. Laidlaw received from ISG, as
consideration for the Acquisition, a $29,000,000 senior bridge note (the "Senior
Bridge Note"), a $17,500,000 9% Junior Subordinated Promissory Note due 2005
(the "Junior Subordinated Note") and $5,817,000 in cash. The Senior Bridge Note
was pushed down to the Company as the proceeds of a future debt offering were
used to retire this note. The Junior Subordinated Note was not pushed down to
the Company as such proceeds were not used to retire this note, the Company has
not and does not plan to assume the Junior Subordinated Note, and the Company
does not guarantee or pledge its assets as collateral for this note.
The Acquisition was accounted for under the purchase method of accounting. At
the date of the Acquisition, asset and liability values were recorded at their
fair values with respect to the purchase price, with the difference between the
purchase price and fair value of the net assets recorded as goodwill. In 1998,
the value allocated to goodwill was increased by approximately $879,000 to
reflect certain changes to the fair values of the assets and liabilities
estimated at the acquisition date.
On March 4, 1998, the Company completed the acquisition of all the outstanding
shares of Pozzolanic Resources, Inc. ("Pozzolanic"). The consideration paid
consisted of approximately $40,000,000 in cash. The acquisition has been
accounted for as a purchase and, accordingly, the results of operations of
Pozzolanic have been included in the consolidated financial statements since
March 4, 1998.
On March 20, 1998, the Company completed the acquisition of all the outstanding
shares of Power Plant Aggregates of Iowa, Inc. ("PPA"). The consideration paid
consisted of approximately $8,541,000 in cash. The acquisition has been
accounted for as a purchase and, accordingly, the results of operations of PPA
have been included in the consolidated financial statements since March 20,
1998.
On April 22, 1998, the Company acquired all of the outstanding stock of Michigan
Ash Sales Company, d.b.a. U.S. Ash Company, together with two affiliated
companies, U.S. Stabilization, Inc. and Flo Fil Co., Inc. (collectively, "U.S.
Ash"). The consideration paid consisted of approximately $24,600,000 in cash.
The acquisition has been accounted for as a purchase and, accordingly, the
results of operations of U.S. Ash have been included in the consolidated
financial statements since April 22, 1998.
On April 22, 1998, the Company acquired all of the outstanding stock of Fly Ash
Products, Inc. ("Fly Ash Products"). The consideration paid consisted of
approximately $9,500,000 in cash. The acquisition has been accounted for as a
purchase and, accordingly, the results of operations of Fly Ash Products have
been included in the consolidated financial statements since April 22, 1998.
The purchase prices of the above acquisitions were allocated based on estimated
fair values of assets and liabilities at the respective dates of acquisition.
Amounts allocated to contracts and assembled workforce approximated $70,705,000
and $1,600,000, respectively. Goodwill resulting from the difference between the
purchase prices plus acquisition costs and the net assets of the companies
acquired in 1998 totaled approximately $28,500,000. All recorded goodwill is
being amortized on a straight-line basis over 25 years.
F-8
<PAGE>
ISG Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Basis of Presentation (continued)
The following pro forma combined financial information reflects operations as if
all above acquisitions as well as the debt transactions discussed in Note 4 had
occurred as of January 1, 1997. The pro forma combined financial information
contained herein is presented for illustrative purposes only, does not purport
to be indicative of the Company's results of operations as of the date hereof
and is not necessarily indicative of what the Company's actual results of
operations would have been had the acquisitions and the debt transactions been
consummated on such date. The pro forma combined financial information set forth
below is based on historical financial statements of ISG Resources, Inc.,
Pozzolanic, PPA, U.S. Ash and Fly Ash Products.
Year Ended December 31
1998 1997
------------------- -------------------
Revenues $ 125,061,000 $ 110,337,000
Net income (566,000) (2,651,000)
2. Description of Business and Summary of Significant Accounting Policies
Description of Business
The Company purchases, removes and sells fly ash and other by-products of coal
combustion throughout the United States.
Principles of Consolidation
These financial statements reflect the consolidated position and results of
operations of ISG Resources, Inc. and its wholly owned subsidiary, KBK
Enterprises, Inc. ("KBK") as of and for the year ended December 31, 1998 and the
period from October 14 to December 31, 1997 and the accounts of Pozzolanic, PPA,
U.S. Ash and Fly Ash Products as of December 31, 1998 and for the periods from
their respective dates of acquisition to December 31, 1998 (collectively, the
"Company"). All significant intercompany accounts and transactions have been
eliminated in consolidation.
Revenue Recognition
Product revenues are earned by marketing products created by coal-fired power
generation and related industrial materials to producers and consumers of
building materials and construction related products. Generally, material is
obtained from coal-fired electric utilities and is immediately delivered to the
customer, eliminating the need to inventory products. Product revenues are
recognized when the material is delivered to the customer.
Service revenues include revenues earned under long-term contracts to dispose of
residual materials created by coal-fired power generation and revenues earned in
conjunction with certain construction-related projects, which are incidental to
the primary business. Typical long-term disposal contracts are from five to
fifteen years. Service revenues under the long-term contracts are recognized
concurrent with the removal of the material and are typically based on the
number of tons of material removed at an established price per ton. The
construction-related projects are generally billed on a time and materials
basis; therefore, the revenues and costs are recognized when the time is
incurred and the materials are used.
F-9
<PAGE>
ISG Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Description of Business and Summary of Significant Accounting Policies
(continued)
Cost of products sold are primarily amounts paid to the utilities to purchase
product and transportation costs of delivering the product to the customer. Cost
of services sold include landfill fees and transportation charges to deliver the
product to the landfill. Overhead charges incurred by a facility which generates
both product and service revenues are allocated to cost of products sold and
cost of services sold based on the percentage of revenue.
Concentrations of Credit Risk
Concentrations of credit risk in accounts receivable are limited due to the
large number of customers comprising the Company's customer base throughout the
United States. The Company performs ongoing credit evaluations of its customers,
but does not require collateral to support customer accounts receivable.
Historically, the Company has not had significant uncollectible accounts.
Cash Equivalents
Cash equivalents are highly liquid investments with maturities of three months
or less when purchased.
Property, Plant and Equipment
Property, plant and equipment acquired in the acquisitions described above were
recorded at estimated fair value at the dates of the respective acquisitions.
Property, plant and equipment acquired subsequent thereto, renewals and
betterments are recorded at cost. Maintenance and repairs are expensed as
incurred. Depreciation is provided over the estimated useful lives or lease
terms, if less, using the straight line method as follows:
Land improvements 1 to 15 years
Buildings and improvements 3 to 40 years
Vehicles and other operating equipment 2 to 12 years
Furniture, fixtures and office equipment 1 to 5 years
Depreciation expense was approximately $3,281,000 and $454,000 for the year
ended December 31, 1998 and the period from October 14, 1997 to December 31,
1997, respectively.
Intangible Assets
Intangible assets consist of goodwill, contracts, patents and licenses, and
assembled workforce. Amortization expense was approximately $5,860,000 and
$455,000 for the year ended December 31, 1998 and the period from October 14,
1997 to December 31, 1997, respectively. Amortization is provided over the
estimated period of benefit, using the straight-line method as follows:
Goodwill 25 years
Contracts 20 years
Patents and licenses 13 to 19 years
Assembled workforce 8 years
Debt Issuance Costs
Debt issuance costs relate to costs incurred with the issuance of the Senior
Subordinated Notes and the Secured Credit Facility. These costs are being
amortized over the respective lives of the debt issues on a straight-line basis.
Accumulated amortization at December 31, 1998 was $463,585.
F-10
<PAGE>
ISG Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Description of Business and Summary of Significant Accounting Policies
(continued)
Income Taxes
Deferred tax assets and liabilities are provided for the future tax consequences
attributable to temporary differences between the carrying amounts of assets and
liabilities for financial statement and income tax purposes.
Fair Value of Financial Instruments
The Company's financial instruments, as defined by Statement of Financial
Accounting Standards No. (SFAS) 107, "Disclosure About Fair Value of Financial
Instruments," consist of cash equivalents, accounts receivable, accounts payable
and accrued expenses, long-term debt and notes payable. At December 31, 1998 and
December 31, 1997, the carrying value of cash equivalents, accounts receivable,
accounts payable, accrued expenses and notes payable approximates fair value due
to the short term nature of the instruments. Long-term debt outstanding at
December 31, 1998 also approximates fair value due to the lack of significant
fluctuations in interest rates since the debt was issued.
Long-lived Assets
As required by Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," management evaluates the carrying value of all long-lived assets to
determine recoverability when indicators of impairment are present based
generally on an analysis of undiscounted cash flows. Management believes no
material impairment in the value of long-lived assets exists at December 31,
1998.
Use of Estimates
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.
3. Intangible Assets
Intangible assets consist of the following at December 31, 1998 and 1997:
December 31
1998 1997
------------- ------------
Goodwill $ 44,018,454 $
14,640,584
Contracts 97,960,644 26,700,000
Patents and licenses 2,471,584 2,400,000
Assembled work force 2,700,233 1,100,000
------------- ------------
147,150,915 44,840,584
Less accumulated amortization (6,315,275) (455,092)
============= ============
$ 140,835,640 $ 44,385,492
============= ============
F-11
<PAGE>
ISG Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Debt
Note Payable
The Senior Bridge Note had an original maturity of March 30, 1998, which was
extended to April 30, 1998. The Senior Bridge Note bore interest at 1.5% plus
the prime rate (as determined by The Chase Manhattan Bank, N.A) through March
30, 1998 and 2% plus the prime rate thereafter. The Senior Bridge Note was
repaid with a portion of the proceeds from the Senior Subordinated Notes
discussed below.
Secured Credit Facility
On March 4, 1998, the Company obtained a $42,000,000 Secured Credit Facility
provided by a syndicate of banks. The Secured Credit Facility enables the
Company to obtain revolving secured loans from time to time to finance certain
permitted acquisitions, to repay existing indebtedness, to pay fees and expenses
incurred in connection with certain acquisitions and for working capital and
general corporate purposes.
At the Company's option, the revolving secured loans may be maintained as (a)
Eurodollar Loans (as defined) which will bear interest at a rate equal to the
quotient obtained by dividing LIBOR (as defined) by one minus the reserve
requirement for such Eurodollar Loan, plus a margin of 250 basis points or (b)
Base Rate Loans (as defined) which will have an interest rate equal to the
higher of (i) the Nations Bank N.A. prime rate and (ii) the federal funds rate
plus 0.5%, plus a margin of 125 basis points. The Company will also pay certain
fees with respect to any unused portion of the Secured Credit Facility.
The Secured Credit Facility has a term of five and one-half years from the date
of initial funding, is guaranteed by ISG and existing and future subsidiaries of
the Company (the "Guarantors"), and is secured by a first priority perfected
security interest in all of the capital stock of the Company and all of the
capital stock of each of the Guarantors, as well as certain present and future
assets and properties of the Company and any domestic subsidiaries.
The Secured Credit Facility requires the Company to maintain a maximum leverage
ratio, a minimum interest coverage ratio and minimum consolidated net worth and
certain other financial and nonfinancial covenants, all as defined within the
agreement. The Company was in compliance with all such covenants at December 31,
1998.
Upon completion of the private placement of the Senior Subordinated Notes
discussed below, the Secured Credit Facility was permanently reduced to
$35,000,000.
At December 31, 1998, $10,000,000 was outstanding, with $25,000,000 unused and
available, under the Secured Credit Facility.
Senior Subordinated Notes
On April 22, 1998, the Company completed a private placement of $100,000,000
aggregate principal amount of 10% Senior Subordinated Notes due 2008 (the
"Senior Subordinated Notes"). The proceeds were used to pay the Senior Bridge
Note, a portion of the Secured Credit Facility, consideration and expenses
related to the U.S. Ash and Fly Ash Products acquisitions, and transaction fees.
Interest on the Senior Subordinated Notes is payable semi-annually on April 15
and October 15 of each year, commencing October 15, 1998. The Senior
Subordinated Notes will mature on April 15, 2008 and are guaranteed fully and
unconditionally and on a joint and several basis by all of the Company's
existing and future restricted subsidiaries, as defined in the indenture.
F-12
<PAGE>
ISG Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Debt (continued)
Senior Subordinated Notes (continued)
The Senior Subordinated Notes are redeemable at the option of the Company at
various times throughout the term of the Senior Subordinated Notes at redemption
prices specified in the indenture.
Upon the occurrence of a change of control or an asset sale as defined in the
indenture, the Company is required to make an offer to repurchase all or part of
the Senior Subordinated Notes at prices specified in the indenture.
The payment of principal, interest, and liquidated damages as defined in the
indenture, if any, on the Senior Subordinated Notes is subordinated in right of
payment to the prior payment of all senior indebtedness as defined in the
indenture, whether outstanding on the date of the indenture or thereafter
incurred. The indenture for the Company's Senior Subordinated Notes contains
various limitations on the incurrence of additional indebtedness, the issuance
of preferred stock, consolidations or mergers, sales of assets, and restricted
payments, including dividends, for the Company and restricted subsidiaries as
defined in the indenture.
In connection with the private placement of the Senior Subordinated Notes, the
Company entered into the Registration Rights Agreement pursuant to which the
Company was required to file an exchange offer registration statement with the
Securities and Exchange Commission which was declared effective by the
Securities and Exchange Commission on September 4, 1998.
The aggregate maturities of all long-term debt for the five years subsequent to
December 31, 1998 are as follows: $0 in 1999-2002, $10,000,000 in 2003 and
$100,000,000 thereafter.
5. Accrued Closure Costs
The Company, in the normal course of business, expends funds for site
restoration of certain property utilized for disposal services. The total
anticipated site restoration costs currently are approximately $357,000. As of
December 31, 1998 and 1997, $210,000 and $306,000, respectively, of anticipated
site restoration costs have been accrued.
F-13
<PAGE>
ISG Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. Income Taxes
Income tax expense (benefit) consists of the following for the year ended
December 31, 1998 and the period from October 14, 1997 to December 31, 1997:
1998 1997
------------------------
Current:
U.S. Federal $ 3,542,755 $ 459,626
State 703,678 69,116
---------- ---------
4,246,433 528,742
Deferred:
U.S. Federal (1,416,129) (240,135)
State (281,278) (36,110)
--------- ---------
(1,697,407) (276,245)
Total:
U.S. Federal 2,126,626 219,491
State 422,400 33,006
--------- ----------
$ 2,549,026 $ 252,497
========== =========
Reconciliation of income tax expense at the U.S. statutory rate to the Company's
tax expense for the year ended December 31, 1998 and the period from October 14,
1997 to December 31, 1997 is as follows:
1998 1997
35% of income before income tax $1,682,968 $181,023
Add:
Goodwill amortization 527,208 42,702
Other permanent differences 64,289 7,318
State income taxes, net of federal benefit 274,561 21,454
$2,549,026 $252,497
---------- --------
The major components of the deferred tax assets and liabilities as of December
31, 1998 and 1997 are as follows:
1998 1997
-----------------------------
Deferred Tax Assets:
Bad debt reserves $ 66,572 $ 78,658
Accruals not currently deductible for
tax purposes 307,883 387,053
------------ ------------
Total gross deferred tax assets 374,455 465,711
Deferred Tax Liabilities:
Fixed asset basis differences 3,040,703 1,130,285
Intangible asset basis differences 38,363,602 11,424,094
Other 5,229 24,021
------------- ------------
41,409,534 12,578,400
============= ============
Net deferred tax liabilities $(41,035,079) $(12,112,689)
============= ============
F-14
<PAGE>
ISG Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Employee Benefit Plan
Prior to April 1, 1998, eligible employees of the Company were able to
participate in a 401(k) savings plan (the "Laidlaw Plan") sponsored by Laidlaw
Environmental Services, Inc. ("LESI"), an affiliate of Laidlaw. Under the terms
of the Laidlaw plan, the Company was required to match employee contributions,
as defined, up to 3% of the employees' compensation. Expenses related to the
Laidlaw plan were approximately $59,000 for the period from January 1, 1998 to
March 31, 1998 and $44,000 for the period from October 14, 1997 to December 31,
1997.
Subsequent to April 1, 1998, eligible employees of the Company may participate
in a 401(k) savings plan (the "ISG Plan") sponsored by ISG. The ISG Plan
requires the Company to match employee contributions, as defined, up to 6% of
the employees' compensation. Expenses related to the ISG Plan were approximately
$265,000 for the period from April 1, 1998 to December 31, 1998.
8. Commitments and Contingencies
Lease Obligations
Certain facilities and equipment are leased under non-cancelable operating
leases, which generally have renewal terms, expiring in various years through
2006.
Future minimum payments under leases with initial terms of one year or more
consisted of the following at December 31, 1998:
1999 $ 4,201,000
2000 2,614,000
2001 2,210,000
2002 1,680,000
2003 1,205,000
Thereafter 1,549,000
-------------------
Total minimum lease payments $ 13,459,000
===================
Total rental expense was approximately $6,113,000 for the year ended December
31, 1998 and $1,259,000 for the period from October 14, 1997 to December 31,
1997.
Sale and Purchase Commitments
The Company's contracts with its customers and suppliers require the Company to
make minimum sales and purchases over ensuing years, as follows:
Minimum Minimum
Sales Purchases
------------------------------------
1999 $ 806,000 $ 5,933,000
2000 363,600 6,390,000
2001 371,000 6,914,000
2002 120,000 7,176,000
2003 120,000 3,045,000
Thereafter -- 11,709,000
------------ -----------
$ $ 41,167,000
============ ============
F-15
<PAGE>
ISG Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Commitments and Contingencies (continued)
Sale and Purchase Commitments (continued)
Minimum sales and purchases under contracts with minimum requirements
approximated $800,000 and $4,523,000, respectively, for the year ended December
31, 1998 and $249,000 and $318,000, respectively for the period from October 14,
1997 to December 31, 1997.
Royalty Commitment
The Company has agreed to pay a minimum of $500,000 per year commencing in 1999
and continuing through 2003 for future royalties related to the sale of certain
Class C fly ash. The current portion of this liability is recorded in other
current liabilities and the long-term portion is recorded in other long-term
liabilities in the accompanying balance sheet.
Legal Proceedings
There are various legal proceedings against the Company arising in the normal
course of business. While it is not currently possible to predict or determine
the outcome of these proceedings, it is the opinion of management that the
outcome will not have a material adverse effect on the Company's results of
operations, financial position or liquidity.
Employment Agreements
The Company has employment agreements with certain of its employees. The
employment agreements provide for the total annual base compensation of
approximately $2,067,000 and expire from 2000 to 2003.
Medical Insurance
Effective April 1, 1998, the Company established a self-funded medical insurance
plan for its employees with stop-loss coverage for amounts in excess of $40,000
per individual and approximately $1,300,000 in the aggregate. The Company has
contracted with a third-party administrator to assist in the payment and
administration of claims. Insurance claims are recognized as expenses when
incurred, including an estimate of costs incurred but not reported at the
balance sheet date.
9. Subsequent Events
Effective January 1, 1999, the Company, Pozzolanic, PPA, U.S. Ash, Fly Ash
Products and KBK merged with and into ISG Resources, Inc., a newly formed Utah
corporation. Prior to the merger, ISG Resources, Inc. (Utah) had no assets and
was a wholly owned subsidiary of ISG. Pneumatic Trucking, Inc., a wholly owned
subsidiary of Michigan Ash Sales Company, was not merged into the new Utah
corporation. Consequently, Pneumatic is now a wholly owned subsidiary of ISG
Resources, Inc. (Utah).
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 totaling approximately $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.
F-16
<PAGE>
Report of Independent Accountants
February 16, 1998
To the Board of Directors and
Shareholders of JTM Industries, Inc:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of loss and accumulated deficit and of cash flows
present fairly, in all material respects, the financial position of JTM
Industries, Inc. and its subsidiaries at October 13, 1997, and the results
of their operations and their cash flows for the period ended October 13,
1997 and the year ended December 31, 1996, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits. We
conducted our audits of these statements in accordance with generally
accepted auditing standards, which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for the opinion expressed above.
As discussed in Note 10, Laidlaw, Inc. sold the outstanding shares of JTM
Industries, Inc. on October 14, 1997.
PRICEWATERHOUSECOOPERS LLP
F-17
<PAGE>
JTM INDUSTRIES, INC.
CONSOLIDATED BALANCE SHEET
October 13, 1997
($000's omitted)
ASSETS
Current assets
Trade and other accounts receivable
(net of allowance for doubtful accounts of $406) .................. $ 9,726
Retainage receivable .............................................. 770
Deferred income taxes ............................................. 329
Other current assets .............................................. 354
--------
Total current assets ..................................... 11,179
Fixed assets
Land and improvements ............................................. 1,798
Buildings ......................................................... 3,533
Vehicles and other equipment ...................................... 11,038
Construction in progress .......................................... 886
--------
17,255
Less: Accumulated depreciation .................................... (4,090)
--------
13,165
Goodwill (net of accumulated amortization of $6,095) .............. 34,052
--------
Total assets ............................................. $ 58,396
========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities
Accounts payable .................................................. $ 2,808
Accrued liabilities ............................................... 2,558
Intercompany notes payable ........................................ 49,407
--------
Total current liabilities ................................ 54,773
--------
Commitments and contingencies
Stockholder's equity
Common stock - authorized, issued and outstanding 100 shares ...... 1
Paid in capital ................................................... 10,678
Accumulated deficit ............................................... (7,056)
--------
Total stockholder's equity ............................... 3,623
--------
Total liabilities and stockholder's equity ............... $ 58,396
========
The accompanying notes are an integral part of these financial statements.
F-18
<PAGE>
JTM INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF LOSS AND ACCUMULATED DEFICIT
($000's omitted)
Year to Date Year Ended
October 13, December 31,
1997 1996
------------- --------------
Revenues:
Product revenues ..................................... $ 25,613 $ 25,513
Service revenues ..................................... 25,682 37,328
-------- --------
51,295 62,841
Cost of product revenues, excluding depreciation ..... 20,702 22,397
Cost of service revenues, excluding depreciation ..... 19,999 29,871
Depreciation and amortization ........................ 5,279 2,285
Selling, general and administrative expenses ......... 3,633 5,667
-------- --------
Income from operations ............................... 1,682 2,621
Intercompany interest expense ........................ 4,160 4,845
Interest expense ..................................... -- 8
-------- --------
(2,478) (2,232)
Income tax benefit (expense) ......................... (612) 362
-------- --------
Net loss ............................................. (3,090) (1,870)
Accumulated deficit - beginning of year .............. (3,966) (2,096)
-------- --------
Accumulated deficit - end of year .................... $ (7,056) $ (3,966)
======== ========
The accompanying notes are an integral part of these financial statements.
F-19
<PAGE>
JTM INDUSTRIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($000's omitted)
Year to Date Year Ended
October 13, December 31,
1997 1996
------------ ----------
Net Cash Provided By (Used In):
Operating activities ................................... $ 521 $ 603
Investing activities ................................... (681) (3,869)
-------- --------
Net cash used by operating and investing activities .... (160) (3,266)
Non-cash activities .................................... (797) 422
-------- --------
(957) (2,844)
Intercompany notes payable - beginning of year ......... (48,450) (45,606)
-------- --------
Intercompany notes payable - end of year ............... $(49,407) $(48,450)
======== ========
Operating activities:
Net loss ............................................... $ (3,090) $ (1,870)
Items not affecting cash:
Loss on disposal of fixed assets ..................... 305 --
Depreciation and amortization ........................ 5,279 2,285
Deferred income taxes ................................ 150 266
Cash provided by (used in) financing working capital:
Trade and other accounts receivable .................. (1,898) 685
Other current assets ................................. 87 94
Accounts payable and accrued liabilities ............. (312) (857)
-------- --------
Net cash provided by operating activities .............. $ 521 $ 603
======== ========
Investing activities:
Purchase of fixed assets ............................... $ (681) $ (4,357)
Proceeds from sale of fixed and other assets ........... -- 488
-------- --------
Net cash used in investing activities .................. $ (681) $ (3,869)
======== ========
Supplemental cash flow information:
Noncash transaction:
Transfers of fixed assets from parent ............. $ 107 $ 128
Accounts payable related to fixed assets .......... -- $ 504
Cash paid (received) for:
Interest .......................................... $ 4,160 $ 4,845
Income taxes to (from) parent ..................... $ 462 $ (629)
The accompanying notes are an integral part of these financial statements.
F-20
<PAGE>
JTM INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($000's Omitted)
1. Basis of Presentation of Financial Statements
These financial statements reflect the consolidated financial position
and results of operations of JTM Industries, Inc. and its subsidiary, KBK
Enterprises, Inc. ("the Company") which until October 13, 1997 was an indirect
wholly owned subsidiary of Laidlaw Inc. The Company is involved in materials
management services to coal combustion by-products (CCPs) producing utilities
and marketing products derived from CCPs, principally in the United States.
Interest expense associated with intercompany financing by the
Company's former parent, Laidlaw, Inc. ("Laidlaw"), has been charged to the
Company based on prime rate plus 2% on the average outstanding balance.
The Company is included in the consolidated tax return of Laidlaw.
Income taxes have been calculated using applicable income tax rates on a
separate return basis.
The surplus funds of the Company are regularly transferred to Laidlaw,
and any financing requirements are provided by Laidlaw. Accordingly, no cash or
bank indebtedness balances are reported in these financial statements.
2. Summary of Significant Accounting Policies
a) Basis of Presentation
The consolidated financial statements of the Company have been prepared
in accordance with accounting principles generally accepted in the United States
and all figures are represented in U.S. dollars, as the Company's operating
assets are located in the United States.
The preparation of financial statements in accordance with generally
accepted accounting principles requires the Company to make estimates and
assumptions that affect reported amounts of assets, liabilities, income and
expenses, and disclosure of contingencies. Future events could alter such
estimates in the near term.
b) Consolidation
The consolidated financial statements include the accounts of JTM
Industries, Inc. and KBK Enterprises, Inc., its subsidiary company. All
significant intercompany transactions are eliminated.
c) Fixed assets
Fixed assets are recorded at cost. Depreciation and amortization of
other property and equipment is provided substantially on a straight-line basis
over their estimated useful lives which are as follows:
Buildings......................... 20 to 40 years
Vehicles and other................ 3 to 15 years
The company periodically reviews the carrying values of its fixed
assets to determine whether such values are recoverable. Any resulting write
downs are charged against income. Depreciation expense amounts to $1,191 and
$1,281 for the period ended October 13, 1997 and the year ended December 31,
1996, respectively.
F-21
<PAGE>
JTM INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
($000's Omitted)
2. Summary of Significant Accounting Policies (Continued)
d) Other assets
Goodwill is amortized on a straight-line basis over forty years. The
amount of any impairment is charged against income. In 1997, in connection with
the planned sale of the Company, Laidlaw wrote down the assets of the Company to
fair value which resulted in a charge against goodwill of $3,300.
e) Income taxes
Deferred income taxes are provided for all significant temporary
differences arising from recognizing certain expenses and certain closure
accruals in different periods for income tax and financial reporting purposes.
f) Revenue
Material revenues are earned by marketing products created by
coal-fired power generation and related industrial materials to consumers of
building materials and construction related products. Generally, material is
obtained from coal-fired electric utilities and is immediately delivered to the
customer, eliminating the need to inventory products. Therefore, no inventory
exists at October 13, 1997. Material revenues are recognized when the material
is delivered to the customer.
Service revenues are earned under long-term contracts to dispose of
residual materials created by coal-fired power generation. Typical contract
terms are from five to fifteen years. Service revenues are recognized concurrent
with the removal of the material and are typically based on the number of tons
of material removed at an established price per ton.
Costs of product revenues primarily include amounts paid to the
utilities to purchase the product and transportation charges related to
delivering the product to the customer. Cost of service revenues primarily
include landfill fees and transportation charges related to delivering the
product to the landfill. Overhead charges incurred by a facility which generates
both product and service revenues are allocated to cost of product revenues and
cost of service revenues based on the percentage of each type of revenue to
total revenues. Cost of product revenues and cost of service revenues are
recognized concurrent with the recognition of the related revenue.
g) Concentration of Credit Risk
Concentrations of credit risk in accounts receivable are limited, due
to the large number of customers comprising the Company's customer base
throughout the United Sates. The Company performs ongoing credit evaluations of
its customers, but does not require collateral to support customer accounts
receivable. The Company establishes an allowance for doubtful accounts based on
the credit risk applicable to particular customers, historical trends, and other
relevant information.
3. Benefit Plans
Eligible employees of the Company may participate in a 401(k) savings
plan sponsored by Laidlaw. The 401(k) plan requires the Company to match
employee contributions as defined, up to 3% of the employees' compensation.
Expenses related to the 401(k) plan were approximately $294 and $266 for the
period ended October 13, 1997 and the year ended December 31, 1996,
respectively.
F-22
<PAGE>
JTM INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
($000's Omitted)
4. Lease Commitments
Rental expense incurred under operating leases amounted to $4,334 and
$6,136 for the period ended October 13, 1997 and the year ended December 31,
1996, respectively.
Rentals payable under operating leases for premises and equipment as of
October 13, 1997 are as follows:
1998 .................................................. $ 4,518
1999 .................................................. 3,264
2000 .................................................. 1,553
2001 .................................................. 1,440
2002 .................................................. 753
Thereafter ............................................ 1,600
-------
$13,128
=======
5. Legal proceedings
The Company has various outstanding legal matters arising from the
normal course of business. Although the final outcome cannot be predicted with
certainty, the Company believes the ultimate disposition of the matters will not
have a material impact on the Company's financial position.
In January 1997, a third party filed suit against the Company for
breach of contract. The Company settled this claim for $1,000 in February 1997.
The Company accrued the loss as of December 31, 1996 as a component of cost of
sales.
6. Related party transactions
Included in the financial statements are related party transactions
between the Company and Laidlaw. These related party transactions are as
follows:
Year to Date Year Ended
October 13, December 31,
1997 1996
------------ ------------
Management fees ................................ $ 491 $2,320
Administrative fees ............................ $ 249 $ 423
Intercompany sales ............................. $2,814 $4,953
Allocated insurance expense .................... $ 515 $ 772
Interest expense ............................... $4,160 $4,845
Management and administrative fees have been allocated to the Company
based upon the Company's share of Laidlaw's consolidated revenue. Management and
administrative fees are charged by Laidlaw to each of its operating groups in
order to recover its general and administrative costs. The services provided by
Laidlaw include treasury, taxation and insurance. The allocated charges may not
be indicative of the expenses the Company would have incurred if Laidlaw had not
provided the services.
F-23
<PAGE>
JTM INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
($000's Omitted)
6. Related party transactions (Continued)
In 1996, Laidlaw contributed additional capital of $550 through a
reduction in the intercompany note payable in a non-cash transaction. On May 9,
1997, all of the outstanding shares of the Company were transferred from LESI to
Laidlaw Transportation, Inc., a direct, wholly owned subsidiary of Laidlaw.
In preparation for the disposal of the Company, certain closure
liabilities amounting to $1,650 were transferred to Laidlaw, net of the related
deferred tax asset of $578. Additionally, a long term receivable in the amount
of $1,008, net of an allowance of $963, was transferred to Laidlaw. A deferred
tax asset of $337 related to the allowance was also transferred to Laidlaw.
7. Income taxes
The components of income tax expense for the period from January 1,
1997 to October 13, 1997 and for the year ended December 31, 1996 are as
follows:
Year to Date Year Ended
October 13, December 31,
1997 1996
---------------------------
Current federal provision (benefit) ................ $421 $(676)
Current state provision ............................ 41 48
Deferred federal provision ......................... 150 266
---- -----
Total income tax provision (benefit) ............... $612 $(362)
==== =====
Deferred income taxes arise from temporary differences between the tax
basis of assets and liabilities and their reported amounts in the financial
statements. Components of deferred tax liabilities and assets at October 13,
1997 are as follows:
Deferred tax assets:
Allowance for bad debts .................................. $ 142
Closure reserve .......................................... 97
Other accrued liabilities ................................ 91
Deferred tax liabilities:
Fixed assets ............................................. (1)
-----
Net deferred tax assets .................................... $ 329
=====
The difference between the federal statutory tax rate and the effective
tax rate on continuing operations for the period from January 1, 1997 to October
13, 1997 and for the year ended December 31, 1996 are as follows:
Year to Date Year Ended
October 13, December 31,
1997 1996
-------------------------
Federal statutory tax rate ............................... 35.0% 35.0%
Goodwill amortization not deductible for tax purposes .... (57.7%) (15.7%)
State income taxes ....................................... (1.1%) (1.4%)
Other items - net ........................................ (0.9%) (1.7%)
---- ----
Effective tax rate ....................................... (24.7%) 16.2%
==== ====
F-24
<PAGE>
JTM INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
($000's Omitted)
8. Accrued closure costs
The Company, in the normal course of its business, expends funds for
remediation of certain property. The Company does not expect these expenditures
to have a materially adverse effect on its financial condition or results of
operations, since its business is based upon compliance with environmental laws
and regulations and its services are priced accordingly. The method by which
these costs are accrued involves estimating the total site restoration costs,
determining the total volume of materials the site will hold, and accruing the
site restoration costs concurrently with the filling of the site. The total
anticipated site restoration costs are approximately $1,900.
F-25
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Pozzolanic Resources, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of
Pozzolanic Resources, Inc. and Subsidiaries as of December 31, 1997, and the
related consolidated statements of income and retained earnings and cash flows
for each of the two years in the period ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Pozzolanic Resources, Inc. and Subsidiaries at December 31, 1997, and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
Ernst & Young LLP
Seattle, Washington
February 10, 1998, except for
Note 8, as to which
the date is March 4, 1998
F-26
<PAGE>
POZZOLANIC RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
December 31, 1997
Assets
Current assets:
Cash .......................................................... $ 40,399
Short-term investments at cost ................................ 2,850,330
Accounts receivable, less allowance
for doubtful accounts of $47,000 ............................... 1,925,269
Deferred freight .............................................. 402,958
Other receivables ............................................. 140,065
Amounts due from related parties .............................. 3,760
Prepaid expenses .............................................. 61,023
Current deferred income taxes ................................. 41,250
-----------
Total current assets ............................................ 5,465,054
Property, plant, and equipment:
Land .......................................................... 107,777
Buildings ..................................................... 66,362
Plant equipment ............................................... 5,724,253
Automotive equipment .......................................... 630,700
Office furniture and equipment ................................ 357,848
Leasehold improvements ........................................ 247,406
-----------
7,134,346
Accumulated depreciation and amortization ..................... (5,412,615)
-----------
1,721,731
Other assets:
Fly ash contracts, less accumulated amortization of $789,568 .. 143,358
Deposits and other ............................................ 12,069
Notes receivable .............................................. 9,604
Deferred income taxes ......................................... 58,406
-----------
223,437
-----------
Total assets .................................................... $ 7,410,222
===========
See accompanying notes.
F-27
<PAGE>
POZZOLANIC RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (Continued)
December 31, 1997
Liabilities and shareholders' equity
Current liabilities:
Trade accounts payable ....................................... $ 536,228
Accrued expenses ............................................. 298,025
Advances from suppliers ...................................... 410,509
Income taxes payable ......................................... 4,771
----------
Total current liabilities ...................................... 1,249,533
Deferred gains ................................................. 700,000
Shareholders' equity:
Common stock, Class A, voting, $1 par value:
Authorized shares - 1,000
Issued and outstanding shares - 200 ........................ 200
Preferred stock, Class C, nonvoting, $1 par value:
Authorized shares - 15,000
Issued and outstanding shares - 2,900 ...................... 2,900
Preferred stock, Class D, nonvoting, $1 par value:
Authorized shares - 15,000
Issued and outstanding shares - 5,800 ...................... 5,800
Retained earnings ............................................ 5,451,789
----------
Total shareholders' equity ..................................... 5,460,689
----------
Total liabilities and shareholders' equity ..................... $7,410,222
==========
See accompanying notes.
F-28
<PAGE>
POZZOLANIC RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
Year Ended December 31
1997 1996
-----------------------------------
Sales .......................................... $ 21,263,494 $ 17,993,543
Cost of goods sold ............................. 13,607,238 11,684,111
---------- ----------
Gross profit ................................... 7,656,256 6,309,432
Selling, administrative, and general expenses .. 2,897,974 2,451,703
--------- ---------
Operating income ............................... 4,758,282 3,857,729
Interest income ................................ 37,637 86,578
Other income ................................... 63,542 356,183
------ -------
Income before income taxes ..................... 4,859,461 4,300,490
Provision for federal and state income taxes:
Current ...................................... 1,830,499 1,544,462
Deferred ..................................... (52,241) (1,333)
------- ------
1,778,258 1,543,129
--------- ---------
Net income ..................................... 3,081,203 2,757,361
Retained earnings at beginning of year ......... 6,507,086 3,749,725
Less dividends paid ............................ 4,136,500 --
---------- ------------
Retained earnings at end of year ............... $ 5,451,789 $ 6,507,086
============ ============
See accompanying notes.
F-29
<PAGE>
POZZOLANIC RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31
1997 1996
--------------------------
Operating activities
Collection of trade receivables ................ $ 20,925,826 $ 18,063,627
Payments to suppliers and employees ............ (15,638,348) (13,719,586)
Income taxes paid .............................. (1,400,259) (1,576,602)
Interest received .............................. 34,429 87,324
Dividends received ............................. 17,885 17,115
Interest paid .................................. (8,185) --
Other, net ..................................... (73,322) 266,561
------------
Net cash provided by operating activities ...... 3,858,026 3,138,439
Investing activities
Purchases of property, plant, and equipment .... (401,144) (980,942)
Proceeds from sale of equipment ................ 1,509 4,450
------------
Net cash used in investing activities .......... (399,635) (976,492)
Financing activities
Dividends paid ................................. (4,136,500) --
Line of credit advance ......................... 755,000 --
Line of credit reduction ....................... (755,000) --
------------
Net cash used in financing activities .......... (4,136,500) --
------------
Increase (decrease) in cash
and short-term investments .................... (678,109) 2,161,947
Cash and short-term investments
at beginning of year .......................... 3,568,838 1,406,891
------------
Cash and short-term
investments at end of year .................... $ 2,890,729 $ 3,568,838
============
Reconciliation of net income to net
cash provided by operating activities:
Net income ................................... $ 3,081,203 $ 2,757,361
Adjustments to reconcile net income to
net cash provided by
operating activities:
Depreciation and amortization ............. 701,572 647,059
Loss on disposal of fixed assets .......... -- (3,424)
Other assets .............................. (298) (3)
Note receivable ........................... (9,604) --
Deferred income taxes ..................... 52,240 (1,333)
Net operating working capital items ....... 32,913 (261,221)
------------
Net cash provided by operating activities ...... $ 3,858,026 $ 3,138,439
============
See accompanying notes.
F-30
<PAGE>
POZZOLANIC RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997
1. Organization
Pozzolanic Resources, Inc. ("Resources" or the "Company") is a holding
company for Pozzolanic Northwest, Inc. ("Northwest") and St. Helens Investments,
Inc. ("St. Helens"), d.b.a. Pozzolanic International, whose purpose is the
distribution of fly ash, which is used in the production of concrete. The
companies have been selling fly ash in the western United States and British
Columbia since 1976. Resources also owns all the outstanding stock of Pozzolanic
Northwest Bulk Carriers, Inc. ("Bulk Carriers"). Bulk Carriers operates as a
common carrier, primarily in the Pacific Northwest.
2. Accounting Policies
Financial Statement Presentation
In addition to the accounts of Resources, the consolidated financial
statements include the accounts of Northwest and its wholly owned subsidiary,
Pozzolanic N.W. FSC, Inc. (a Foreign Sales Corporation - "FSC"); St. Helens; and
Bulk Carriers. Significant intercompany transactions and accounts are eliminated
in consolidation.
Revenue Recognition
Revenue is recognized upon delivery of products to the customer.
Deferred Freight
Freight costs incurred moving fly ash to Resources' storage facilities
are deferred until the fly ash is sold. Such deferred freight is allocated to
fly ash sales on an average cost per ton basis.
Property, Plant, and Equipment
Property, plant, and equipment are stated on the basis of cost. The
provision for depreciation is determined by straight-line and accelerated
methods over the estimated useful lives of the assets.
Statements of Cash Flows
For purposes of the statement of cash flows, short-term,
interest-bearing investments with maturities on the date of purchase of less
than three months are considered cash equivalents. The fair values of cash and
short-term investments approximate their carrying values.
Income Taxes
The Company applies the liability method of accounting for income taxes
as prescribed by SFAS No. 109, "Accounting for Income Taxes." Under the
liability method, deferred tax assets and liabilities are recognized for the
expected future tax consequences of existing differences between the financial
reporting and tax reporting bases of assets and liabilities using enacted tax
laws and rates.
Deferred income taxes relate principally to differences in the
treatment between tax and book of depreciation and freight costs.
F-31
<PAGE>
POZZOLANIC RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Accounting Policies (Continued)
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates. The only
significant estimate made by management is the determination of the allowance
for doubtful accounts.
3. Related Parties
On October 1, 1980, Northwest transferred two of its fly ash contracts
to St. Helens. In return, St. Helens issued to Northwest nonvoting common stock
with a par value of $700,000. The related fly ash contracts have an unamortized
carrying value at December 31, 1997 of approximately $143,000. Since Northwest
had no cost basis in the contracts and is not assured of realization of the gain
on this transaction, no gain on the transfer has been recognized.
The above fly ash contracts are being amortized on a straight-line
basis over the lives of the contracts.
4. Commitments and Contingencies
The Company has entered into operating leases for office space, storage
facilities, and rail cars through 2002. Aggregate minimum lease payments
required over the lives of the leases are as follows:
1998 ............................................... $ 720,000
1999 ............................................... 660,000
2000 ............................................... 290,000
2001 ............................................... 180,000
2002 ............................................... 60,000
----------
$1,910,000
==========
Rental expense under operating leases was approximately $560,000 and
$210,00 in 1997 and 1996, respectively.
The Company's contracts with its suppliers require the Company to make
minimum purchases of fly ash over ensuing years as follows:
1998 ................................................... $ 730,000
1999 ................................................... 730,000
2000 ................................................... 730,000
2001 ................................................... 730,000
2002 ................................................... 730,000
2003 and thereafter .................................... 15,000
----------
$3,665,000
==========
Fly ash purchases under supplier contracts with minimum purchase
requirements amounted to $1,010,000 and $1,915,000 in 1997 and 1996,
respectively.
F-32
<PAGE>
POZZOLANIC RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Commitments and Contingencies (Continued)
The supplier contracts provide for adjustment of the minimum purchase
prices based on changes in the specific price of Portland cement.
5. Credit Agreement
Resources entered into a credit agreement with a bank that expires June
30, 1998. The agreement provides for borrowings of up to $2,500,000. Borrowings
under the agreement are secured by accounts receivable and inventories and
require monthly payments of interest at the lending bank's prime rate. There
were no borrowings outstanding under this agreement at December 31, 1997.
6. Capital Stock
Holders of Class A voting common stock are not entitled to receive
dividends. The holders of Class C nonvoting preferred stock and Class D
nonvoting preferred stock shall be entitled to dividends only when declared by
the Board of Directors with the unanimous approval of voting stockholders.
7. Impact of the Year 2000 (Unaudited)
The Company has completed an assessment of its computer programs and
will have to modify or replace portions of its software so that its computer
systems will function properly with respect to dates in the year 2000 and
thereafter. The total Year 2000 project cost is not expected to be significant.
The project is estimated to be completed no later than December 31, 1998, which
is prior to any anticipated impact on its operating systems. The Company
believes that with modifications to existing software, the Year 2000 Issue will
not pose significant operational problems for its computer systems.
8. Subsequent Event
On March 4, 1998, all of the Company's outstanding stock was purchased
by an unrelated third party.
F-33
<PAGE>
Report of Independent Auditors
The Board of Directors and Shareholders Michigan Ash Sales Company (d.b.a. U.S.
Ash Company), U.S. Stabilization, Inc. and Flo Fil Company, Inc.
We have audited the accompanying combined balance sheets of Michigan Ash Sales
Company (d.b.a. U.S. Ash Company), U.S. Stabilization, Inc., and Flo Fil
Company, Inc. (the "Companies") as of April 21, 1998 and December 31, 1997, and
the related combined statements of income and retained earnings and cash flows
for the period from January 1 to April 21, 1998 and for each of the two years in
the period ended December 31, 1997. These financial statements are the
responsibility of the Companies' management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of Michigan Ash Sales
Company (d.b.a. U.S. Ash Company), U.S. Stabilization, Inc., and Flo Fil
Company, Inc. at April 21, 1998 and December 31, 1997, and the combined results
of their operations and their cash flows for the period from January 1 to April
21, 1998 and for each of the two years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
Ernst & Young LLP
Salt Lake City, Utah
December 18, 1998
F-34
<PAGE>
Michigan Ash Sales Company (d.b.a. U.S. Ash Company)
and Affiliated Companies
Combined Balance Sheets
April 21 December 31
1998 1997
--------------- -------------
Assets
Current assets:
Cash and cash equivalents ..................... $ 408,363 $ 3,136,041
Accounts receivable (net of allowance for
doubtful accounts of $15,114 in 1998 and
$34,458 in 1997) ............................ 2,005,693 1,713,409
Other receivables ............................. 51,101 51,901
Inventories ................................... 29,316 21,875
Deferred income tax ........................... 5,928 42,116
----------- -----------
Total current assets ............................... 2,500,401 4,965,342
Property, plant, and equipment
Buildings ..................................... 579,788 578,788
Plant equipment ............................... 207,334 207,334
Vehicles ...................................... 158,474 138,124
----------- -----------
945,596 924,246
Accumulated depreciation ...................... (594,515) (567,369)
----------- -----------
351,081 356,877
=========== ===========
Total assets ....................................... $ 2,851,482 $ 5,322,219
=========== ===========
F-35
<PAGE>
Michigan Ash Sales Company (d.b.a. U.S. Ash Company)
and Affiliated Companies
Combined Balance Sheets (continued)
April 21 December 31
1998 1997
--------------- ------------
Liabilities and shareholder's equity
Current liabilities:
Trade accounts payable .......................... $ 932,417 $ 347,177
Accrued expenses ................................ 32,935 592,309
Payables to affiliates .......................... 386,401 1,942,590
Current income tax payable ...................... 155,251 217,005
---------- ----------
Total current liabilities ............................ 1,507,004 3,099,081
Deferred income tax .................................. 60,805 55,512
Commitments and contingencies
Shareholder's equity:
Common stock
Michigan Ash Sales Company, $1 par value;
50,000 shares authorized;
1,000 shares issued and outstanding ..... 1,000 1,000
U.S. Stabilization, Inc., $1 par value;
50,000 shares authorized;
1,000 shares issued and outstanding ..... 1,000 1,000
Flo Fil Company, Inc., $1 par value;
50,000 shares authorized;
1,000 shares issued and outstanding ..... 1,000 1,000
Retained earnings ............................... 1,280,673 2,164,626
----------
----------
Total shareholder's equity ........................... 1,283,673 2,167,626
========== ==========
Total liabilities and shareholder's equity ........... $2,851,482 $5,322,219
========== ==========
See accompanying notes.
F-36
<PAGE>
Michigan Ash Sales Company (d.b.a. U.S. Ash Company)
and Affiliated Companies
Combined Statements of Income and Retained Earnings
Period from
January 1 to Year ended
April 21 December 31
1998 1997 1996
------------------ -------------- -------------
Revenues:
Materials and services sold ... $ 3,323,405 $ 11,216,477 $ 7,535,232
Commissions ................... 219,827 495,691
------------ -----------
-----------
Total revenues ..................... 3,323,405 11,436,304 8,030,923
Costs and expenses:
Cost of materials and
services sold ............... 2,745,932 10,006,618 6,298,862
Selling, general and
administrative .............. 1,147,377 1,469,009 1,039,363
------------ ------------ -----------
3,893,309 11,475,627 7,338,225
------------ -----------
-----------
(569,904) (39,323) 692,698
Interest income .................... 19,902 92,403 45,403
Other income ....................... 17,452 77,330 4,068
------------ ------------ -----------
Income (loss) before income taxes .. (532,550) 130,410 742,169
Income taxes
Current ........................ (40,078) 44,570 299,712
Deferred ....................... 41,481 4,833 (34,268)
------------ ------------ -----------
1,403 49,403 265,444
------------ ------------ -----------
Net income (loss) .................. (533,953) 81,007 476,725
Shareholder distribution ........... (350,000) (108,367)
Retained earnings at
beginning of year ............... 2,164,626 2,083,619 1,715,261
-----------
============ ============ ===========
Retained earnings at
end of year ..................... $ 1,280,673 $ 2,164,626 $ 2,083,619
============ ============ ===========
See accompanying notes.
F-37
<PAGE>
Michigan Ash Sales Company (d.b.a. U.S. Ash Company)
and Affiliated Companies
Combined Statements of Cash Flows
Period from
January 1 to Year ended
April 21 December 31
1998 1997 1996
-----------------------------------
Operating activities
Net income (loss) ....................... $ (533,953) $ 81,007 $ 476,725
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation ....................... 27,146 63,073 46,025
Deferred income taxes .............. 41,481 4,833 (34,268)
Changes in operating assets and
liabilities:
Accounts receivable ............ (291,484) (597,925) (173,391)
Inventories .................... (7,441) 2,765 (2,778)
Trade accounts payable and
payables to affiliates ....... (970,949) 701,312 (184,845)
Income taxes payable ........... (61,754) (35,621) 243,060
Accrued expenses ............... (559,374) 267,956 37,018
----------
Net cash (used in) provided by
operating activities ................. (2,356,328) 487,400 407,546
Investing activities
Purchases of property, plant
and equipment ........................ (21,350) (116,818)
Proceeds from disposal of property, plant
and equipment ....................... 29,457
----------- ----------- -------
Net cash used in investing activities ... (21,350) (87,361)
Financing activities
Shareholder distribution ................ (350,000) (75,000)
----------- ----------- --------
Net increase (decrease) in cash and
cash equivalents .................... (2,727,678) 400,039 332,546
Cash and cash equivalents at
beginning of period .................. 3,136,041 2,736,002 2,403,456
----------
==========
Cash and cash equivalents at
end of period ........................ $ 408,363 $ 3,136,041 $ 2,736,002
===========
Cash paid during the period
for income taxes ..................... $ 21,677 $ 80,191 $ 56,652
See accompanying notes.
F-38
<PAGE>
Michigan Ash Sales Company (d.b.a. U.S. Ash Company)
and Affiliated Companies
Notes to Combined Financial Statements
April 21, 1998
1. Description of the Business and Significant Accounting Policies
The accompanying combined financial statements include the accounts of Michigan
Ash Sales Company, U.S. Stabilization, Inc. and Flo Fil Company, Inc. (the
Companies). All three companies are wholly-owned by an individual shareholder
and have common management. Significant intercompany accounts and transactions
have been eliminated in combination. The operations of the Companies are
summarized below:
Michigan Ash Sales Company (d.b.a. U.S. Ash Company) - A Michigan
corporation involved primarily in the business of marketing,
transporting and disposing of fly ash and other coal byproducts
generated by utilities, primarily in the states of Michigan, Indiana
and Ohio. Customers of the company consist of concrete manufacturers,
cement manufacturers, construction contractors, and other affiliated
companies.
U.S. Stabilization, Inc. - A Michigan corporation in the business of
mixing fly ash with steel company waste byproducts to comply with
landfill disposal regulations for a steel company in Indiana.
Flo Fil Company, Inc. - A Michigan corporation involved primarily in
the business of mixing and selling a low-cost fly ash based concrete
product for use in applications with lower-grade product requirements.
On March 25, 1998, an agreement was signed to sell all the outstanding stock of
the Companies to an unrelated third party effective April 21, 1998.
Revenue Recognition
Revenues are recognized when materials or services are provided to customers.
Cash and Cash Equivalents
Cash equivalents are highly liquid investments with maturities of three-months
or less when purchased.
F-39
<PAGE>
Michigan Ash Sales Company (d.b.a. U.S. Ash Company)
and Affiliated Companies
Notes to Combined Financial Statements (continued)
1. Significant Accounting Policies (continued)
Property, Plant and Equipment
Property, plant, and equipment are recorded at cost. Major renewals and
improvements are capitalized, while maintenance and repairs are expensed when
incurred. Depreciation is computed using the straight-line method over the
estimated useful lives of 5 to 10 years for vehicles, machinery and equipment
and 40 years for buildings and improvements.
As required by Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of," management evaluates the carrying value of all long-lived assets to
determine recoverability when indicators of impairment are present based
generally on an analysis of undiscounted cash flows. Management believes no
material impairment in the value of long-lived assets exists at April 21, 1998.
Income Taxes
The Companies account for income taxes, using the provisions of Statement of
Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes."
Deferred income taxes result primarily from temporary differences between the
financial statement bases and the tax bases of assets and liabilities using
enacted tax rates.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosure About Fair
Value of Financial Instruments" (SFAS 107) requires the disclosure of the fair
value of financial instruments, both assets and liabilities recognized and not
recognized on the balance sheet, for which it is practicable to estimate fair
value. SFAS 107 defines fair value of a financial instrument as the amount at
which the instrument could be exchanged in a current transaction between willing
parties. At April 21, 1998 and December 31, 1997, the carrying value of all the
Companies' financial instruments (accounts receivable, accounts payable and
accrued expenses) approximates fair value.
Inventories
Inventories consist of spare parts for equipment and are stated at cost.
Use of Estimates
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
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
F-40
<PAGE>
Michigan Ash Sales Company (d.b.a. U.S. Ash Company)
and Affiliated Companies
Notes to Combined Financial Statements (continued)
2. Income Taxes
Reconciliation of income tax expense at the U.S. statutory rate to the
Companies' tax expense follows:
Period from January
1 to April 21
Year ended December 31
1998 1997 1996
34% of income before income tax ................ $(181,067) $ 44,339 $252,337
Add (deduct):
Permanent differences ....................... 175,970 2,954 2,391
Earnings of combined affiliate not subject
to taxation because of S Corporation
status .................................. (629)
State income taxes, net of federal benefit
6,500 2,110 11,345
$ 1,403 $ 49,403 $265,444
--------
The major components of the deferred tax assets and liabilities as of April 21,
1998 and December 31, 1997 are as follows:
1998 1997
--------------------
Deferred Tax Assets:
Bad debt reserves ..................................... $ 5,928 $ 12,251
Accruals not currently deductible for tax purposes .... 17,750
Net operating loss carryforwards ....................... 12,115
------- --------
5,928 42,116
Deferred Tax Liabilities:
Fixed asset basis differences .......................... 60,805 55,512
======== ========
Net deferred tax liabilities ............................. $(54,877) $(13,396)
======== ========
F-41
<PAGE>
<TABLE>
<CAPTION>
Michigan Ash Sales Company (d.b.a. U.S. Ash Company)
and Affiliated Companies
Notes to Combined Financial Statements (continued)
3. Related Party Transactions
The following table summarizes revenues and expenses reported in the
accompanying combined statements of income that were either received or accrued
from, or paid or accrued to, the sole shareholder, individuals affiliated with
the sole shareholder, or companies owned by or affiliated with the sole
shareholder:
Period from
January 1 to Year ended
Nature of April 21 December 31
Related Party Transaction 1998 1997 1996
------------------------------- ----------------------- ---------------- ------------------ --------------
<S> <C> <C> <C> <C> <C>
Commission revenues:
Wirt Transportation, Inc. Commissions on loads
hauled by Wirt
Transportation, Inc. $ - $ 219,827 $ 495,691
Cost of materials and services sold:
Wirt Transportation, Inc. Trucking fees 2,489,134 1,868,055
372,839
Wirt Payroll Services and Fees for leased
JAD Payroll Services employees
1,353,651 1,485,181 1,080,769
JD Ash Equipment Co. Equipment rental and
maintenance
contract fees 157,742 1,045,545 430,415
Sand and Stone Co. Purchases of materials 253,116 148,199
Wirt Trucking Co. Equipment rental 79,479 79,479
Selling, general and administrative:
Sand and Stone Co. Building rental 19,501 93,000 93,000
Bay Dock Company, Inc. Building rental 67,200
</TABLE>
Due to the related nature of these parties, the amounts received and paid may
not have been the same if similar activities had been undertaken with unrelated
parties. All leasing arrangements with related parties are cancelable.
Prior to January 2, 1997, U.S. Stabilization, Inc. was wholly-owned by the
president of Michigan Ash Sales Company and U.S. Stabilization, Inc. In April
1996, the president received two distributions from U.S. Stabilization totaling
$75,000. The remaining undistributed retained earnings of U.S. Stabilization,
Inc. as of December 31, 1996 totaled $33,367 and was accrued as an additional
distribution to the president on that date. The accrued distribution, plus
accrued interest, is included in payables to affiliates in the accompanying
combined balance sheet as of April 21, 1998 and December 31, 1997. On January 2,
1997, the president transferred all the outstanding shares of U.S.
Stabilization, Inc. to the sole shareholder of Michigan Ash Sales Company and
Flo Fil Company, Inc.
F-42
<PAGE>
Michigan Ash Sales Company (d.b.a. U.S. Ash Company)
and Affiliated Companies
Notes to Combined Financial Statements (continued)
4. Commitments and Contingencies
Michigan Ash Sales Company has a commitment to purchase equipment related to
a contract with a supplier. Under this commitment, the company will purchase
approximately $250,000 of equipment and the utility will provide a certain
amount of ash at no cost. The equipment is necessary to fulfill the utility
contract.
5. Concentrations of Credit Risk
The Companies maintain their cash balances at two separate financial
institutions located in Michigan. Accounts at each institution are insured by
the Federal Deposit Insurance Corporation up to $100,000. At April 21, 1998 and
December 31, 1997, the Companies' uninsured cash balances totaled $307,000 and
$2,287,000 respectively.
Generally, the Companies do not require collateral or other security to support
customer trade accounts receivable. The Companies' five largest customers
accounted for approximately 25% of the revenues in 1998, 1997 and 1996.
Customers of the Companies are primarily concentrated in the public utility
industry. Customers are also concentrated in the states of Michigan, Illinois,
Indiana, and Ohio. Historically, the Companies have not had significant
uncollectable accounts.
6. Impact Of The Year 2000 (Unaudited)
The Companies have not completed an assessment of their computer programs to
determine if such programs will have to be modified or replaced so that the
computer systems will function properly with respect to dates in the year 2000
and thereafter. However, because of the limited use of computers and software in
the day to day operations of the Companies business, management does not believe
that the Year 2000 Issue will pose significant operational problems.
<PAGE>
attached hereto at pages F-1 through F-43.
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The Company's directors and executive officers, and their respective ages and
positions with the Company, are set forth below in tabular form. Biographical
information on each person is set forth following the tabular information. There
are no family relationships between any of the Company's directors or executive
officers. The Company's board of directors is currently comprised of five
members, each of whom is elected for a term of one year. At December 31, 1998,
the board had one unoccupied position. Executive officers are chosen by and
serve at the discretion of the board of directors.
Name Age Position with Company
R Steve Creamer .............. 47 Chairman of the Board and Chief Executive
Officer
Raul A. Deju ................. 52 President and Chief Operating Officer,
Assistant Secretary and Director
J.I. Everest, II ............. 42 Chief Financial Officer, Treasurer,
and Assistant Secretary
Clinton W. Pike .............. 46 Executive Vice President
Danny L. Gray ................ 43 Senior Vice President, Eastern Operations
Brett A. Hickman ............. 36 Senior Vice President, General Counsel
and Secretary
Grover C. Dobbins, Jr ........ 50 Senior Vice President, Administration
and Assistant Secretary
Joseph M. Silvestri .......... 37 Director
Richard M. Cashin, Jr ........ 45 Director
R Steve Creamer. Mr. Creamer is the Chairman of the Board and Chief Executive
Officer of the Company and ISG. Immediately prior to his employment with the
Company, Mr. Creamer was CEO (from 1992 to 1997) and the founder of ECDC
Environmental L.C., the largest rail-served industrial waste management facility
in North America. Prior to that, Mr. Creamer served as CEO of Creamer & Noble,
an engineering firm based in St. George, Utah. He earned a B.S. degree in Civil
and Environmental Engineering from Utah State University in 1973. Mr. Creamer is
a P.E.
<PAGE>
Raul A. Deju. Dr. Deju is the President and Chief Operating Officer of the
Company and ISG. Dr. Deju served as a Director of Rockwell Hanford Operations
through 1981, Senior Vice President of International Technologies, Inc. through
1987 and Regional President of several subsidiaries of WMX Technologies, Inc.
through 1995. Dr. Deju served as Chairman and CEO of DGL International through
1997, and retains an ownership position in DGL. Dr. Deju has been on the Board
of Directors of various national and international WMX subsidiaries, Advanced
Sciences, Inc. and Isadra, Inc. Dr. Deju is a member of both the Company and ISG
Boards of Directors. Dr. Deju is an advisor to a committee of the U.S. Secretary
of Commerce and has served on the U.S. Environmental Protection Agency Advisory
Committee. Dr. Deju received a B.S. degree in Mathematics and Physics in 1966
and a Ph.D. degree in Engineering Geology in 1969 from the New Mexico Institute
of Mining and Technology.
J.I. Everest, II. Mr. Everest is the Chief Financial Officer, Treasurer and
Assistant Secretary of the Company and ISG. He is responsible for all financial
functions of the Company. Immediately prior to his employment with the Company,
he served as Vice President of Finance for ECDC Environmental, Inc. (from 1993
to 1997). From 1988 to 1993, Mr. Everest was Director of Financial
Analysis/Treasury of USPCI, Inc. Mr. Everest earned an M.B.A. degree (Finance
Concentration) in 1994 from the University of Texas at Austin and a B.B.A.
degree from Southern Methodist University in 1979. Mr. Everest is a C.P.A.
Clinton W. Pike. Mr. Pike is the Executive Vice President of the Company. Since
he began his service in 1990, Mr. Pike has served as Vice President of Business
Development for the Company, establishing the Business and Product Development
Program, and spearheading nontraditional business advancement and growth through
acquisitions and the development of new markets. Prior to his service with the
Company, he was Coordinator, Fuel and Ash Quality with Georgia Power Company,
where he directed a total CCP management program. Mr. Pike earned a B.S.
degree in Biology (Chemistry minor) from Georgia Southwestern College in 1974.
Danny L. Gray. Mr. Gray is a Senior Vice President of the Company. From July
1994 until 1997, he served principally as President of KBK and also as Vice
President of the Company. Prior to joining the Company, Mr. Gray was a Civil
Engineer with American Electric Power in 1978 and was promoted to Senior
Environmental Engineer, Environmental Department of that company in 1980. Mr.
Gray earned a B.S. degree in Civil Engineering from Virginia Tech in 1977,
graduating with honors.
Brett A. Hickman. Mr. Hickman is the Senior Vice President, General Counsel and
Secretary of the Company. From December 1993 until February 1998, Mr. Hickman
was General Counsel, Western Division of Laidlaw Environmental Services, Inc.
Prior to that, Mr. Hickman was an attorney with Davis & Lavender in Columbia,
South Carolina. Mr. Hickman earned a B.A. degree in Political Science from The
Citadel in 1983 and a J.D. degree from the University of South Carolina in 1986.
Grover C. Dobbins, Jr. Mr. Dobbins is the Senior Vice President, Administration
of the Company. He joined the Company in 1989 as Manager of Project Development.
He began work as Vice President, Corporate Services in January, 1991. From 1992
to 1995, Mr. Dobbins served as Director of Marketing. Effective January 1, 1996,
he was appointed Vice President, Administration. Prior to his service with the
Company, he was a Principal Engineer at Carolina Power and Light Company for 15
years. Mr. Dobbins earned a Master of Civil Engineering degree in 1972 and a
B.S. degree in Civil Engineering in 1971 from North Carolina State University.
<PAGE>
Joseph M. Silvestri. Mr. Silvestri has been a director of the Company since its
acquisition by ISG. Mr. Silvestri has been employed by CVC since 1990 and has
served as a Vice President there since 1995. Mr. Silvestri is a director of
International Media Group, Polyfibron Technologies, Frozen Specialties, Glenoit
Mills, Euramax and Triumph Group.
Richard M. Cashin, Jr. Mr. Cashin was appointed a director of the Company in
March 1998. Mr. Cashin has been employed by CVC since 1980, and has been
President since 1994. Mr. Cashin is a director of Levitz Furniture Incorporated,
Lifestyle Furnishings International, Euramax and Titan Wheel International.
Compliance with Section 16(a) of the Securities Exchange Act of 1934.
Section 16(a) of the Securities Exchange Act of 1934, and the rules and
regulations promulgated thereunder, require the Company's executive officers and
directors, and persons who beneficially own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
and the National Association of Securities Dealers Automated Quotations System
and to furnish the Company with copies thereof. None of the Company's executive
officers and directors and ten percent owners own any shares in the Company.
Accordingly, no such reports have been, or need to be, filed.
Item 11. Executive Compensation
The following table shows the compensation paid by the Company to its current
Chairman and Chief Executive Officer, and the Company's other most highly paid
executive officers.
<PAGE>
<TABLE>
<CAPTION>
Summary Compensation Table
Annual Compensation
Name and Principal Position(1) Fiscal Year Salary (2) Bonus Other Annual
------------------------------ ----------- ---------- -----
Compensation (3)
<S> <C> <C> <C> <C> <C>
R Steve Creamer (4) 1998 $193,747 $130,000 $5,150
Chairman, Chief Executive Officer
1997 24,231 0 0
Clinton W. Pike 1998 160,461 191,700 106,886
Executive Vice President
1997 149,255 119,492 4,374
Raul A. Deju (4) 1998 182,869 121,338 5,150
President and Chief Operating Officer
1997 23,710 0 0
William H. Gehrmann 1998 129,065 162,407 5,882
Vice President
1997 102,000 30,862 5,000
J.I. Everest, II (4) 1998 145,934 108,337 8,092
Treasurer and Chief Financial Officer
1997 28,647 0 0
</TABLE>
- -----------
(1) Positions indicated were as of December 31, 1998.
(2) Includes amounts, if any, deferred by the named individual for the
period in question pursuant to Section 401(k) of the Internal Revenue
Code under the Company's 401(k) Savings Plan (the "401(k) Plan").
(3) Amounts shown under Other Annual Compensation include amounts paid by
the Company as matching and/or profit sharing contributions to the
401(k) Plan, but do not include perquisites and other personal benefits
provided to each of the named executives, the aggregate value of which
did not exceed the lesser of $50,000 or 10% of any such named
executive's annual salary and bonus.
(4) Mr. Creamer, Mr. Deju and Mr. Everest have been employed with the
Company since October 14, 1997, and the 1997 salary reflects the two
and a half months they worked for the Company in 1997.
<PAGE>
<TABLE>
<CAPTION>
Item 12. Security Ownership of Certain Beneficial Owners and Management
The Company is wholly owned by ISG. The following table sets forth the number of
shares of ISG's common stock beneficially owned as of January 29, 1999, (i) by
each person who is known by the Company to own beneficially more than 5% of the
Company's common stock, (ii) by each director and director nominee, (iii) by
each of the Company's named executive officers, and (iv) by all directors,
director nominees and executive officers, as a group, as reported by each such
person.
Beneficial Ownership of Beneficial Ownership of
Common Stock Preferred Stock
Name and Address of Beneficial Owner Number of Number of
Shares Percent Shares Percent
<S> <C> <C> <C> <C> <C>
Citicorp Venture Capital, Ltd. (1).......................................... 187,425 37.9 26,813 38.3
R Steve Creamer (2)(3)...................................................... 150,266 30.4 25,351 36.2
J.I. Everest, II (3)........................................................ 49,467 10.0 6,925 9.9
CCT Partners IV, LP (4)..................................................... 33,075 6.7 4,732 6.8
Richard M. Cashin, Jr....................................................... 7,840 1.6 1,122 1.6
Raul A. Deju ............................................................... 45,317 9.2 2,023 2.9
Joseph M. Silvestri......................................................... 980 0.2 140 0.2
Brett A. Hickman............................................................ 4,950 1.0 700 1.0
Clinton W. Pike (5)......................................................... -
Danny L. Gray (5)........................................................... -
All directors and executive officers as a group
(8 persons) (2)(3)(5)....................................................... 258,820 52.4 36,261 51.8
</TABLE>
- -----------
(1) The address of Citicorp Venture Capital, Ltd. is: 399 Park Avenue, 14th
Floor, New York, NY 10043.
(2) Includes 112,700 shares owned by Mr. Creamer's adult son and three
minor children.
(3) Messrs. Creamer and Everest beneficially own shares in ISG through
RACT, Inc., a Utah corporation ("RACT"), which directly owns shares in
ISG. The business address of RACT is: 136 East South Temple, Suite
1300, Salt Lake City, Utah 84111.
(4) The address of CCT Partners IV, LP is the same as that of Citicorp
Venture Capital, Ltd.
(5) Messrs. Pike and Gray, pursuant to their employment contracts, have
each been granted an economic interest in one percent of all
outstanding shares of the Company's stock as of the date of their
respective employment agreements. See "Management Employment
Agreements."
<PAGE>
Item 13. Certain Relationships and Related Transactions
None.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Exhibits.
Exhibits
*3.1 Articles of Incorporation of JTM Industries, Inc.
*3.1a Articles of Amendment of Articles of Incorporation of JTM
Industries, Inc.
*3.2 By Laws of JTM Industries, Inc.
*3.3 Articles of Incorporation of KBK Enterprises, Inc.
*3.4 By Laws of KBK Enterprises, Inc.
*3.5 Articles of Incorporation of Pozzolanic Resources, Inc.
*3.6 By Laws of Pozzolanic Resources, Inc.
*3.7 Articles of Incorporation of Power Plant Aggregates of Iowa, Inc.
*3.8 By Laws of Power Plant Aggregates of Iowa, Inc.
*3.9 Articles of Incorporation of Michigan Ash Sales Company, d.b.a.
U.S. Ash Company.
*3.10 By Laws of Michigan Ash Sales Company, d.b.a. U.S. Ash Company.
*3.11 Articles of Incorporation of Flo Fil Co., Inc.
*3.12 By Laws of Flo Fil Co., Inc.
*3.13 Articles of Incorporation of U.S. Stabilization, Inc.
*3.14 By Laws of U.S. Stabilization, Inc.
*3.15 Articles of Incorporation of Fly Ash Products, Inc.
*3.16 By Laws of Fly Ash Products, Inc.
*4.1 Indenture, dated as of April 22, 1998, by and among JTM
Industries, Inc., the Subsidiary Guarantors and U.S. Bank
National Association, as Trustee.
*5.1 Opinion and consent of Morgan, Lewis & Bockius LLP as to the
legality of the securities being registered.
*10.1Purchase Agreement dated as of April 17, 1998 by and among JTM
Industries, Inc., the Subsidiary Guarantors and NationsBanc
Montgomery Securities LLC and CIBC Oppenheimer Corp.
*10.2 Registration Rights Agreement dated as of April 22, 1998, by and
among JTM Industries, Inc., the Subsidiary Guarantors and
NationsBanc Montgomery Securities LLC and CIBC Oppenheimer Corp.
*10.3 Purchase Agreement dated as of February 27, 1998 by and among
JTM Industries, Inc., Pozzolanic Resources, Inc. and Gerald
Peabody, Penelope Peabody and Kokan Company Limited.
<PAGE>
*10.4 Stock Purchase Agreement from Power Plant Aggregates of Iowa,
Inc.
*10.5 Purchase Agreement dated as of March 1998 between JTM
Industries, Inc. and Jack Wirt
*10.6 Purchase Agreement dated as of March 27, 1998, between JTM
Industries, Inc., Donald A. Thomas, Phyllis S. Thomas and Donald
W. Birge.
*10.7 Secured Credit Facility dated March 4, 1998 among JTM Industries,
Inc. and a syndicate of banks with NationsBank, N.A., as
administrative agent, and Canadian Imperial Bank of Commerce, as
documentation agent.
*10.8First Amendment dated as of May 29, 1998 to the Credit Agreement
dated March 4, 1998 among JTM Industries, Inc. and a syndicate of
banks with NationsBank, N.A. as administrative agent, and
Canadian Imperial Bank of Commerce, as documentation agent.
**12.1 Statement re Computation of Ratio of Earnings to Fixed Charges.
*21.1 Subsidiaries of JTM Industries, Inc.
*24 Powers of Attorney
*25.1Statement of Eligibility of U.S. Bank National Association, as
Trustee, on Form T-1.
**27.1 Financial Data Schedule
*99.1 Form of Letter of Transmittal respecting the exchange of the 10%
Senior Subordinated Notes due 2008 which have been registered
under the United States Securities Act of 1933 for 10% Senior
Subordinated Notes due 2008.
*99.2 Form of Notice of Guaranteed Delivery.
- -----------
* Previously Filed.
** Filed herewith.
(b) Reports on Form 8-K.
None.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
ISG Resources, Inc.
(Registrant)
Date: March 31, 1999 By:/s/R. Steve Creamer
R Steve Creamer, Chairman and Chief Executive
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/R. Steve Creamer Chairman and March 31, 1999
- --------------------------- Chief Executive Officer
R Steve Creamer
/s/Raul A. Deju President, March 31, 1999
- --------------------------- Chief Operating Officer
Raul A. Deju Assistant Secretary and Director
/s/J.I. Everest, II Chief Financial Officer, March 31, 1999
- --------------------------- Treasurer and
J.I. Everest, II Assistant Secretary
/s/Joseph M. Silvestri Director March 31, 1999
- ---------------------------
Joseph M. Silvestri
Director March 31, 1999
Richard M. Cashin
<TABLE>
<CAPTION>
Year 2 1/2 Months 9 1/2 Months
Ended Ended Ended
December 31, December 31, October 13, Year Ended December 31,
-------------------------------
--------- --------- ---------
1998 1997 1997 1996 1995 1994
-------------- ------------- ------------- --------- --------- ---------
Fixed Charges:
<S> <C> <C> <C> <C> <C> <C>
Interest on debt $ 8,874 $ 628 $ 4,160 $ 4,853 $ 4,081 $ 17
Amortization of debt issuance costs 464 - - - - -
Interest portion of rental expense 2,038 420 1,448 2,045 2,016 1,616
-------------- ------------- ------------- --------- --------- ---------
============== ============= ============= ========= ========= =========
Total fixed charges $ 11,376 $ 1,048 $ 5,608 $ 6,898 $ 6,097 $ 1,633
============== ============= ============= ========= ========= =========
Earnings:
Pre-tax income (loss) from continuing operations$ 4,808 $ 517 $ (2,478) $ (2,232) $ (2,541) $ 6,873
Add back fixed charges 11,376 1,048 5,608 6,898 6,097 1,633
-------------- ------------- ------------- --------- --------- ---------
============== ============= ============= ========= ========= =========
Total earnings $ 16,184 $ 1,565 $ 3,130 $ 4,666 $ 3,556 $ 8,506
============== ============= ============= ========= ========= =========
Ratio of Earnings to Fixed Charges 1.42 1.49 0.56 0.68 0.58 5.21
============== ============= ============= ========= ========= =========
Deficit of Earnings to Fixed Charges $ - $ - $ 2,478 $ 2,232 $ 2,541 $ -
============== ============= ============= ========= ========= =========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
(Replace this text with the legend)
</LEGEND>
<CIK> 0001063018
<NAME> ISG Resources, Inc.
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-1-1998
<PERIOD-END> Dec-31-1998
<EXCHANGE-RATE> 1.00
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 14,975,729
<ALLOWANCES> 170,000
<INVENTORY> 0
<CURRENT-ASSETS> 17,217,886
<PP&E> 28,139,108
<DEPRECIATION> 3,562,086
<TOTAL-ASSETS> 191,731,736
<CURRENT-LIABILITIES> 10,432,132
<BONDS> 110,000,000
0
0
<COMMON> 100
<OTHER-SE> 27,524,116
<TOTAL-LIABILITY-AND-EQUITY> 191,731,736
<SALES> 83,048,721
<TOTAL-REVENUES> 117,292,575
<CGS> 51,878,447
<TOTAL-COSTS> 103,401,535
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,338,059
<INCOME-PRETAX> 4,808,480
<INCOME-TAX> 2,549,026
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 2,259,454
<NET-INCOME> 0
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
