UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000
-----------------
or
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to _________
Commission File Number: 333-56217.
ISG Resources, Inc.
(Exact name of registrant as specified in its charter)
Utah 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)
(801) 236-9700
--------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) [ X ] Yes [ ] No, and (2) has been
subject to such filing requirements for the past 90 days [ X ] Yes [ ] No.
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date. As of July 31, 2000:
Classes of Common Stock Number of shares outstanding
------------------------------------ --------------------------------
Common Stock, no par value 100
<PAGE>
ISG Resources, Inc.
------------
INDEX TO FORM 10-Q
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements Page
-------------------- ----
Unaudited Condensed Consolidated Balance Sheets --
June 30, 2000 and December 31, 1999 ................................ 1
Unaudited Condensed Consolidated Statements of Operations
and Comprehensive Income -- Three months ended June 30, 2000
and 1999 and Six months ended June 30, 2000 and 1999................ 2
Unaudited Condensed Consolidated Statements of Cash Flows --
Six months ended June 30, 2000 and 1999 ............................ 4
Notes to Unaudited Condensed Consolidated Financial Statements ..... 5
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ..................... 10
Item 3. Quantitative and Qualitative Disclosure about Market Risk
There have been no significant changes since the annual report Form
10-K filed for the year ended December 31, 1999.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K ................................. 15
<PAGE>
<TABLE>
ISG Resources, Inc. and Subsidiaries
Unaudited Condensed Consolidated Balance Sheets
<CAPTION>
June 30, December 31,
Assets 2000 1999
Current assets:
<S> <C> <C>
Cash and cash equivalents $ - $ -
Accounts receivable:
Trade, net of allowance for doubtful accounts of
$454,000 and $329,000, respectively 29,729,133 21,167,616
Retainage 172,590 176,000
Other 668,021 502,058
Deferred tax asset 358,081 316,161
Inventories 5,774,552 4,055,425
Other current assets 830,832 829,661
Total current assets 37,533,209 27,046,921
Property, plant and equipment, net of accumulated depreciation of
$10,322,357 and $7,893,374, respectively 37,386,845 33,584,188
Intangible assets, net 169,070,945 153,952,547
Debt issuance costs, net 4,794,126 4,826,010
Other assets 1,627,924 1,052,845
Total assets $250,413,049 $220,462,511
=================================================
Liabilities and shareholders' equity
Current liabilities:
Accounts payable $ 13,139,735 $10,409,583
Accrued liabilities:
Payroll 1,238,015 1,288,732
Interest 2,260,612 2,190,471
Other 1,709,348 1,828,537
Income taxes payable 1,293,968 1,705,678
Other current liabilities 545,450 652,119
Total current liabilities 20,187,128 18,075,120
Long-term debt 157,000,000 133,500,000
Deferred tax liability 37,993,252 39,158,249
Payable to Industrial Services Group 643,983 643,983
Other liabilities 1,675,207 1,923,355
Shareholders' equity:
Common stock, no par value; 100 shares authorized, issued and
outstanding 34,745,050 25,000,050
Cumulative foreign currency translation adjustment (5,612) -
Retained earnings (deficit) (1,825,959) 2,161,754
Total shareholders' equity 32,913,479 27,161,804
Total liabilities and shareholders' equity $250,413,049 $220,462,511
---------------------------------------------------------------------===============================================
</TABLE>
See accompanying notes
<PAGE>
<TABLE>
ISG Resources, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Operations and
Comprehensive Income
<CAPTION>
Three Months
Ended June 30,
------------------------------------------
2000 1999
------------------------------------------
Revenues:
<S> <C> <C>
Product revenues $ 39,030,534 $ 31,087,379
Service revenues 7,662,029 9,044,679
------------------------------------------
46,692,563 40,132,058
Costs and expenses:
Cost of product revenues, excluding depreciation 27,494,928 21,051,260
Cost of service revenues, excluding depreciation 5,486,319 6,329,610
Depreciation and amortization 3,579,052 3,026,875
Selling, general and administrative expenses 6,735,458 4,987,001
New product development 465,433 509,988
------------------------------------------
43,761,190 35,904,734
------------------------------------------
Operating income 2,931,373 4,227,324
Interest income 14,049 11,547
Interest expense (3,862,582) (3,333,461)
Other income and expense 164,512 (18,545)
------------------------------------------
Income (loss) before income taxes (752,648) 886,865
Income tax expense (74,649) (567,936)
------------------------------------------
Net income (loss) (827,297) 318,929
Other comprehensive loss, net of tax:
Foreign currency translation adjustment (5,612)
------------------------------------------
Comprehensive income (loss) $ (832,909) $ 318,929
==========================================
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
ISG Resources, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Operations and
Comprehensive Income
<CAPTION>
Six Months
Ended June 30,
------------------------------------------
2000 1999
------------------------------------------
Revenues:
<S> <C> <C>
Product revenues $ 63,497,790 $ 52,470,939
Service revenues 15,712,977 17,097,611
------------------------------------------
79,210,767 69,568,550
Costs and expenses:
Cost of product revenues, excluding depreciation 46,616,008 36,112,752
Cost of service revenues, excluding depreciation 11,102,731 12,219,151
Depreciation and amortization 6,866,098 6,095,111
Selling, general and administrative expenses 11,536,727 9,782,872
New product development 1,077,122 842,899
------------------------------------------
77,198,686 65,052,785
------------------------------------------
Operating income 2,012,081 4,515,765
Interest income 21,574 21,178
Interest expense (7,401,086) (6,521,372)
Other income and expense 205,602 (5,099)
------------------------------------------
Loss before income taxes (5,161,829) (1,989,528)
Income tax benefit 1,174,116 464,834
------------------------------------------
Net loss (3,987,713) (1,524,694)
Other comprehensive loss, net of tax:
Foreign currency translation adjustment (5,612) -
------------------------------------------
Comprehensive loss $ (3,993,325) $ (1,524,694)
==========================================
</TABLE>
See accompanying notes.
<PAGE>
<TABLE>
ISG Resources, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
<CAPTION>
Six Months
Ended June 30,
2000 1999
Operating activities
<S> <C> <C>
Net loss $ (3,987,713) $ (1,524,694)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization 6,866,098 6,095,111
Amortization of debt issuance costs 370,867 343,298
Loss on sale of fixed assets 7,090 32,522
Deferred income taxes (1,113,757) (721,239)
Changes in operating assets and liabilities:
Receivables (5,125,275) (8,766,192)
Inventories 156,865 (1,037,935)
Other current and non-current assets (506,479) (276,873)
Accounts payable 1,927,795 5,734,197
Accrued expenses (2,237,495) 2,040,439
Other current and non-current liabilities (1,763,657) 1,118,673
Net cash provided by (used in) operating activities (5,405,661) 3,037,307
Investing activities
Purchases of property, plant and equipment (4,542,960) (4,996,113)
Proceeds on sale of property, plant and equipment 199,344 29,076
Acquisitions of businesses, net of cash acquired (23,031,686) (22,750,012)
Purchase of intangible assets (119,442) (985,109)
Net cash used in investing activities (27,494,744) (28,702,158)
Financing activities
Cash contribution from parent 9,745,000 -
Proceeds from long-term debt 120,000,000 58,000,000
Payments on notes payable and long-term debt (96,500,000) (32,000,000)
Debt issuance costs incurred (338,983) (335,149)
Net cash provided by financing activities 32,906,017 25,664,851
Effect of exchange rate changes on cash (5,612) -
Net change in cash and cash equivalents - -
Cash and cash equivalents at beginning of period - -
Cash and cash equivalents at end of period $ - $ -
====================================
Cash paid for interest $ 6,879,256 $ 6,068,934
Cash paid (received) for income taxes $ 1,235,409 $ (1,000,000)
------------------------------------------------------------------------=====================================
</TABLE>
See accompanying notes.
<PAGE>
ISG RESOURCES, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
ISG Resources, Inc., a Utah corporation (the "Company"), is a wholly owned
subsidiary of Industrial Services Group, Inc. ("ISG"). ISG was formed in
September 1997 and acquired the stock of JTM Industries, Inc. ("JTM") on October
14, 1997. In 1998, JTM acquired the stock of Pozzolanic Resources, Inc.
("Pozzolanic"), Power Plant Aggregates of Iowa, Inc. ("PPA"), Michigan Ash Sales
Company d.b.a. U.S. Ash Company, together with two affiliated companies, U.S.
Stabilization, Inc. and Flo Fil Company, Inc. (collectively, "U.S. Ash"), and
Fly Ash Products, Inc. ("Fly Ash Products") (collectively, the "1998
Acquisitions"). Effective January 1, 1999, JTM, Pozzolanic, PPA, U.S. Ash, Fly
Ash Products and their wholly owned subsidiaries merged with and into the
Company. Pneumatic Trucking, Inc. ("Pneumatic"), a wholly owned subsidiary of
Michigan Ash Sales Company, was not merged into ISG Resources, Inc. Therefore,
Pneumatic became a wholly owned subsidiary of the Company.
In 1999, the Company acquired the stock of Best Masonry & Tool Supply ("Best"),
Mineral Specialties, Inc. ("Specialties"), Irvine Fly Ash, Inc. ("Irvine"),
Lewis W. Osborne, Inc. ("Osborne"), United Terrazzo Supply Co., Inc.
("Terrazzo"), and Magna Wall, Inc. ("Magna Wall") and sold all of the
outstanding stock of Pneumatic.
On March 2, 2000, the Company acquired directly and indirectly through ISG
Manufactured Products, Inc., a newly formed wholly-owned subsidiary of the
Company, all of the partnership interest of Don's Building Supply L.L.P.
("Don's") for approximately $5.9 million in cash. Don's is engaged in the retail
and wholesale distribution of construction materials to residential and
commercial contractors primarily in the State of Texas.
The purchase price of Don's was allocated based on estimated fair values of
assets and liabilities at the date of acquisition. Goodwill resulting from the
difference between the purchase price plus acquisition costs and the net assets
acquired totaled approximately $4.3 million and is being amortized on a
straight-line basis over 20 years.
On May 31, 2000, the Company completed the acquisition of all outstanding stock
of Palestine Concrete Tile Company, Inc. and certain associated real property
(collectively, "Palestine") for approximately $17.9 million in cash, subject to
future purchase price adjustments as specified within the purchase agreement.
Additionally, the Company paid off outstanding debt of Palestine for
approximately $1.0 million. Palestine is a Texas corporation primarily engaged
in the manufacture and distribution of concrete block. The Company financed the
acquisition of Palestine by obtaining a $15,000,000 increase in the Secured
Credit Facility on May 26, 2000 and receiving an equity contribution of
$9,745,000 from ISG on April 19, 2000.
The purchase price of Palestine was allocated based on estimated fair values of
assets and liabilities at the date of acquisition. Goodwill resulting from the
difference between the purchase price plus acquisition costs and the net assets
acquired totaled approximately $14.9 million, and is being amortized on a
straight-line basis over 20 years.
The following pro forma combined financial information reflects operations as if
the acquisition of Don's and Palestine and the related financing transactions
had occurred as of January 1, 1999. The pro forma combined financial information
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 acquisition and the financing transactions been consummated on
such date.
<PAGE>
Three Months Ended June 30
2000 1999
------------------ --------------------
Revenues $ 50,037 $ 46,728
Net income (loss) $ ( 982) $ 612
Six Months Ended June 30
2000 1999
------------------ --------------------
Revenues $ 88,325 $ 82,322
Net loss $ (3,932) $ (917)
These financial statements reflect the consolidated financial position and
results of operations of the Company and its wholly owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements reflect all adjustments, consisting of normal recurring
adjustments, necessary to present fairly the financial position, results of
operations and cash flows of the Company, for the respective periods presented.
The results of operations for the three and six-month periods ended June 30,
2000 are not necessarily indicative of the results which may be expected for any
other interim period or for the year as a whole.
The preparation of financial statements, in conformity with generally accepted
accounting principles, requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Certain information and footnote disclosures normally included in financial
statements presented in accordance with generally accepted accounting principles
have been condensed or omitted. The accompanying unaudited interim condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes in the Company's Form 10-K for the
fiscal year ended December 31, 1999.
In December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulleting (SAB) 101, Revenue Recognition in Financial Statements. The effective
date of SAB 101 is the fourth quarter of fiscal years beginning after December
15, 1999. This SAB clarifies proper methods of revenue recognition given certain
circumstances surrounding sales transactions. The Company continues to evaluate
the impact of SAB 101, but believes it is in compliance with the provisions of
the SAB and accordingly, does not expect SAB 101 to have a material effect on
its financial statements.
The consolidated balance sheet at December 31, 1999 was derived from audited
consolidated financial statements, but does not include all disclosures required
under generally accepted accounting principles. Certain amounts have been
reclassified to conform to the June 30, 2000 presentation.
2. Description of Business
The Company operates two principal business segments: coal combustion product
(CCP) management and building materials manufacturing and distribution. The CCP
division purchases, removes and sells fly ash and other by-products of coal
combustion to producers and consumers of building materials and construction
related products throughout the United States and parts of Canada. The building
materials division manufactures and distributes masonry construction materials
to residential and commercial contractors primarily in Texas, California,
Georgia and Florida.
<PAGE>
3. New Product Development Costs
New product development costs consist of scientific research and development and
market development expenditures. Expenditures of $1,077,122 and $465,433 for the
six months and quarter ended June 30, 2000, respectively, were made for research
and development activities covering basic scientific research and the
application of scientific advances to the development of new and improved
products and processes. Expenditures of $842,899 and $509,988 for the six months
and quarter ended June 30, 1999, respectively, were made for market development
activities related to promising new and improved products and processes
identified during research and development activities. The Company expenses all
new product development costs as they are incurred.
4. Inventories
Inventories are valued at lower of cost (computed on the average, first-in,
first-out method), or net realizable value. Inventories consist of:
June 30, December 31,
2000 1999
--------------------- ---------------------
Raw Materials $ 457,474 $ 234,073
Finished Goods 5,317,078 3,821,352
--------------------- ---------------------
$5,774,552 $ 4,055,425
===================== =====================
5. Intangible Assets
Intangible assets consist of the following:
June 30, December 31,
2000 1999
--------------------- -------------------
Goodwill $ 83,566,208 $ 64,313,512
Contracts 98,641,588 98,522,146
Patents and licenses 2,787,431 2,787,431
Assembled work force 2,700,233 2,700,233
--------------------- -------------------
187,695,460 168,323,322
Less accumulated amortization (18,624,515) (14,370,775)
--------------------- -------------------
$ 169,070,945 $153,952,547
===================== ===================
Amortization is provided over the estimated period of benefit, using the
straight-line method, ranging from 8 to 25 years.
6. Long-term Debt
Long-term debt consists of the following:
June 30, December 31,
2000 1999
------------------ -------------------
10% Senior Subordinated Notes due 2008 $100,000,000 $ 100,000,000
Secured Credit Facility 57,000,000 33,500,000
------------------ -------------------
$157,000,000 $ 133,500,000
================== ===================
The Company financed the 1998 and 1999 Acquisitions through the issuance of
$100.0 million of 10% Senior Subordinated Notes due 2008 and borrowings on its
Secured Credit Facility (as subsequently amended and restated). The Company
financed the acquisition of Palestine by obtaining a $15,000,000 increase in the
Secured Credit Facility on May 26, 2000 (discussed below). Operating and capital
expenditures have been financed primarily through cash flow from operations and
borrowings under the Secured Credit Facility.
<PAGE>
On May 26, 2000, the Secured Credit Facility was amended and restated to, among
other things, increase the borrowings available to the Company from $50.0
million to $65.0 million.
This increase in the funds available to the Company was accomplished through the
addition of a Tranche B feature, pursuant to which two of the existing lenders,
Bank of America, N.A. and Zions First National Bank (the "Tranche B Lenders")
agreed to provide the additional $15.0 million in funding. No amount is
available pursuant to the Tranche B revolving loans unless all amounts under the
Tranche A (existing) revolving loans have been borrowed in full and are
outstanding. Under the amended and restated Secured Credit Facility, at the
option of the Company, both the Tranche A Revolving Loans and the Tranche B
Revolving Loans may be maintained as Eurodollar Loans or Base Rate Loans.
Eurodollar loans will bear interest at a per annum rate equal to the rate per
annum (rounded upwards, if necessary, to the nearest 1/100 of 1 percent)
determined by the Administrative Agent to be equal to the quotient by dividing
(a) Interbank Offered Rate for such Eurodollar Loan for such Interest Period by
(b) 1 minus the Reserve Requirement for such Eurodollar Loan for such Interest
Period, and by then adding thereto the applicable LIBOR margin (which is a
percentage ranging from 1.75% to 2.50%, depending primarily upon the Company's
Leverage Ratio). All capitalized terms are defined in the Secured Credit
Facility.
Base Rate Loans will bear interest at a per annum rate equal to the rate which
is the higher of (a) the Federal Funds rate for such day plus one-half of one
percent (0.5%) and (b) the Prime rate for such day and by then adding thereto
the applicable ABR Margin (which is a percentage ranging from 0.50% to 1.25%
depending primarily upon the Company's Leverage Ratio). Any change in the Base
Rate due to a change in the Federal Funds Rate or to the Prime Rate shall be
effective on the effective date of such change. All capitalized terms are as
defined in the Secured Credit Facility.
The Company will also pay certain fees with respect to any unused portion of the
amended and restated Secured Credit Facility.
The amended and restated Secured Credit Facility maintains the term of the
original Secured Credit Facility obtained on March 4, 1998, is guaranteed by
ISG, existing, and future subsidiaries of the Company (the "Guarantors"), and is
secured by a first priority 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 amended and restated Secured Credit Facility continues to require the
Company to maintain a maximum leverage ratio, a minimum interest coverage ratio,
a minimum consolidated net worth and to comply with certain other financial and
non-financial covenants, as defined in the agreement. The Company was in
compliance with all such covenants as of June 30, 2000.
At June 30, 2000, $8.0 million was unused and available under the Secured Credit
Facility.
7. Reportable Segments
As discussed in note 2, the Company operates in two reportable segments: the CCP
division and the building materials division. The CCP division consists
primarily of three operating units that manage and market CCPs in North America.
The building materials division consists of six legal entities, Best, Osborne,
Terrazzo, Magna Wall, Don's, and Palestine. The Company's two reportable
segments are managed separately based on fundamental differences in their
operations.
The Company evaluates performance based on profit or loss from operations before
depreciation, amortization, income taxes and interest expense (EBITDA). The
Company derives a majority of its revenues from CCP sales and the chief
operating decision makers rely on EBITDA to assess the performance of the
segments and make decisions about resources to be allocated to the segments.
Accordingly, EBITDA is included in the information reported below. Certain
expenses are maintained at the Company's corporate headquarters and are not
allocated to the segments. Such expenses primarily include interest expense,
corporate overhead costs, certain non-recurring gains and losses and intangible
asset amortization. Inter-segment sales, which historically have not been
material, are generally accounted for at cost and are eliminated in
consolidation.
<PAGE>
The building materials division includes financial data for Best only for the
three and six months ended June 30, 1999, as Osborne, Terrazzo, Magna Wall,
Don's and Palestine were acquired subsequent to the second quarter of 1999. The
building materials division includes financial data for Don's and Palestine for
the three and six months ended June 30, 2000 from their respective acquisition
dates. Amounts included in the "Other" column include financial information for
the Company's corporate, R&D and other administrative business units.
Information about reportable segments, and reconciliation of such information to
the consolidated totals as of and for the three and six months ended June 30,
2000 and June 30, 1999, is as follows:
<TABLE>
<CAPTION>
Building
CCP Materials Other Consolidated
Total
---------------- ---------------- ----------------- -------------------
Three months ended 6/30/00:
<S> <C> <C> <C> <C>
Revenue $ 36,106,233 $ 10,501,268 $ 85,062 $ 46,692,563
EBITDA 8,624,602 1,472,074 (3,407,690) 6,688,986
Total Assets 53,930,444 47,190,860 149,291,745 250,413,049
Expenditures for PP&E 1,433,176 794,112 79,765 2,307,053
Three months ended 6/30/99:
Revenue $ 34,434,193 $ 5,333,023 $ 364,842 $ 40,132,058
EBITDA 8,795,247 864,157 (2,412,203) 7,247,201
Total Assets 53,563,412 18,050,824 154,701,311 226,315,547
Expenditures for PP&E 1,846,958 105,194 117,460 2,069,612
</TABLE>
<TABLE>
<CAPTION>
Building
CCP Materials Other Consolidated
Total
---------------- ---------------- ----------------- -------------------
Six months ended 6/30/00:
<S> <C> <C> <C> <C>
Revenue $ 61,052,222 $ 17,963,171 $ 195,374 $ 79,210,767
EBITDA 12,778,754 2,294,243 (5,967,642) 9,105,355
Total Assets 53,930,444 47,190,860 149,291,745 250,413,049
Expenditures for PP&E 3,393,602 882,822 266,536 4,542,960
Six months ended 6/30/99:
Revenue $58,834,917 $ 10,101,906 $ 631,727 $ 69,568,550
EBITDA 13,235,758 1,701,475 (4,310,278) 10,626,955
Total Assets 53,563,412 18,050,824 154,701,311 226,315,547
Expenditures for PP&E 4,542,921 113,951 339,241 4,996,113
</TABLE>
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and results of
operations should be read in conjunction with the Unaudited Condensed
Consolidated Financial Statements and Notes thereto included elsewhere herein.
General
ISG Resources, Inc. (the "Company") is the leading manager and marketer of coal
combustion products ("CCPs") throughout North America. The Company generates
revenues from marketing products to its customers and providing materials
management, engineering and construction services to its clients. The Company's
strategic objectives include the maintenance and expansion of long-term
contractual relationships, the increase in product sales and applications
through cross-marketing and further technological advances and the pursuit of
strategic acquisitions.
In 1999, the Company acquired the stock of Best Masonry & Tool Supply ("Best"),
Mineral Specialties, Inc. ("Specialties"), Irvine Fly Ash, Inc. ("Irvine"),
Lewis W. Osborne, Inc. ("Osborne"), United Terrazzo Supply Co., Inc.
("Terrazzo"), and Magna Wall, Inc. ("Magna Wall") and sold all of the
outstanding stock of Pneumatic.
On March 2, 2000, the Company acquired directly and indirectly through ISG
Manufactured Products, Inc., a newly formed wholly-owned subsidiary of the
Company, all of the partnership interest of Don's Building Supply L.L.P. (Don's)
for approximately $5.9 million in cash.
On May 31, 2000, the Company completed the acquisition of all outstanding stock
of Palestine Concrete Tile Company, Inc. and certain associated real property
(collectively, "Palestine") for approximately $17.9 million in cash, subject to
future purchase price adjustments as specified within the purchase agreement.
Additionally, the Company paid off outstanding debt of Palestine of
approximately $1.0 million. Palestine is a Texas corporation primarily engaged
in the manufacture and distribution of concrete block. The Company financed the
acquisition of Palestine by obtaining a $15,000,000 increase in the Secured
Credit Facility on May 26, 2000 and receiving an equity contribution of
$9,745,000 from its parent, Industrial Services Group, Inc. ("ISG") on April 19,
2000.
The Palestine and Don's acquisitions (the "2000 Acquisitions"), as well as the
acquisitions of Best, Mineral Specialties, Irvine, Osborne, Terrazzo, and Magna
Wall (the "1999 Acquisitions"), were accounted for under the purchase method of
accounting and, accordingly, the results of operations of the respective
companies have been included in the consolidated financial statements since the
respective acquisition dates. Accordingly, the financial condition and results
of operations of the Company after the Acquisitions is not directly comparable
to the historical financial condition or results of operations.
The Company's revenues are subject to a pattern of seasonal fluctuation,
concurrent with the construction industry. Because certain of the Company's
products are used as raw materials in other products, the amount of revenue
generated during the year generally depends upon a number of factors, including
the level of road and other construction using concrete, weather conditions
affecting the level of construction, general economic conditions, and other
factors beyond the Company's control.
Results of Operations
Three Months Ended June 30, 2000 compared to Three Months Ended June 30, 1999
Revenues. Revenues were $46.7 million in the second quarter of 2000,
representing an increase of $6.6 million or 16.3%, as compared to revenues of
$40.1 million in the second quarter of 1999. Product revenues increased to $39.0
million in the second quarter of 2000 from $31.1 million in the second quarter
of 1999, representing an increase of $7.9 million or 25.6%. Service revenues
decreased to $7.7 million in the second quarter of 2000 from $9.0 million in the
second quarter of 1999, representing a decrease of $1.3 million or 15.3%. The
increase in product revenues in the second quarter of 2000 is due primarily to
the 1999 and 2000 Acquisitions. The decrease in service revenues in the second
quarter of 2000 is due primarily to a decrease in revenues generated from
construction projects due to the conclusion of several of these projects in 1999
or early 2000.
<PAGE>
Cost of Product Revenues, Excluding Depreciation. Cost of product revenues,
excluding depreciation, was $27.5 million in the second quarter of 2000,
representing an increase of $6.4 million or 30.6% , as compared to cost of
product revenues, excluding depreciation, of $21.1 million in the second quarter
of 1999. This increase is due primarily to two factors: 1) the inclusion of cost
of product revenues of the 1999 and 2000 Acquisitions since their respective
dates of acquisition; and 2) the increased cost of material in the CCP division.
As a percentage of product revenues, cost of product revenues, excluding
depreciation, increased to 70.4% in the second quarter of 2000 from 67.7% in the
second quarter of 1999. This increase was primarily due to lower margins on
product revenues derived from the 1999 and 2000 Acquisitions and lower margins
in the CCP division due to the increase in the cost of materials.
Cost of Service Revenues, Excluding Depreciation. Cost of service revenues,
excluding depreciation, was $5.5 million in the second quarter of 2000,
representing a decrease of $0.8 million or 13.3%, as compared to cost of service
revenues, excluding depreciation, of $6.3 million in the second quarter of 1999.
This decrease reflects the decrease in total service revenues earned in the
second quarter of 2000 as compared to the total service revenues earned in the
second quarter of 1999. As a percentage of service revenues, cost of service
revenues, excluding depreciation, remained fairly constant at 71.6% in the
second quarter of 2000 as compared to 70.0% in the second quarter of 1999.
Depreciation and Amortization. Depreciation and amortization was $3.6 million in
the second quarter of 2000, representing an increase of $0.6 million or 18.2%,
as compared to depreciation and amortization of $3.0 million in the second
quarter of 1999. This increase resulted primarily from increased depreciation of
fixed assets and amortization of goodwill and other intangible assets recorded
as a result of the 1999 and 2000 Acquisitions.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A") were $6.7 million in the second quarter of
2000, representing an increase of $1.7 million or 35.1%, as compared to SG&A
expenses of $5.0 million in the second quarter of 1999. This increase in SG&A
expenses reflects incremental SG&A costs resulting from the operation of the
1999 and 2000 Acquisitions as well as an increase in sales and marketing
efforts.
New Product Development. New product development costs consist of scientific
research and development and market development expenditures. Expenditures for
scientific research and development during the second quarter of 2000 decreased
slightly to $357,000 as compared to $406,000 during the second quarter of 1999.
Expenditures of $108,000 were made for market development during the second
quarter of 2000 as compared to $104,000 during the second quarter of 1999.
Continuing expenditures for new product development costs demonstrates the
Company's commitment to developing and marketing value added products that
utilize CCPs and related materials.
Interest Expense. Interest expense increased to $3.9 million in the second
quarter of 2000 from $3.3 million in the second quarter of 1999, primarily as a
result of an increase in outstanding indebtedness and an increase in interest
rates.
Income Taxes. Income tax expense was $0.1 million in the second quarter of 2000,
representing a decrease of $0.5 million or 86.9%, as compared to income tax
expense of $0.6 million in the second quarter of 1999. This decrease reflects
the decrease in taxable income in the second quarter of 2000. Taxable income is
calculated considering non-deductible amortization expense related to most of
the Company's acquisitions.
Net Income. As a result of the factors discussed above, a net loss of $0.8
million for the second quarter of 2000 was reported as compared to $0.3 million
of net income reported in the second quarter of 1999.
<PAGE>
Six Months Ended June 30, 2000 compared to Six Months Ended June 30, 1999
Revenues. Revenues were $79.2 million in the first six months of 2000,
representing an increase of $9.6 million or 13.9%, as compared to revenues of
$69.6 million in the first six months of 1999. Product revenues increased to
$63.5 million in the first six months of 2000 from $52.5 million in the first
six months of 1999, representing an increase of $11.0 million or 21.0%. Service
revenues decreased to $15.7 million in the first six months of 2000 from $17.1
million in the first six months of 1999, representing a decrease of $1.4 million
or 8.1%. The increase in product revenues in the first six months of 2000 is due
primarily to the addition of product revenue related to the 1999 and 2000
Acquisitions. The decrease in service revenues reflects a decrease in revenues
generated from construction projects due to the conclusion of several of these
projects in 1999 and early 2000.
Cost of Product Revenues, Excluding Depreciation. Cost of product revenues,
excluding depreciation, was $46.6 million in the first six months of 2000,
representing an increase of $10.5 million or 29.1%, as compared to cost of
product revenues, excluding depreciation, of $36.1 million in the first six
months of 1999. This increase is due primarily to two factors: 1) the inclusion
of cost of product revenues of the 1999 and 2000 Acquisitions since their
respective dates of acquisition; and 2) the increased cost of material in the
CCP division. As a percentage of product revenues, cost of product revenues,
excluding depreciation, increased to 73.4% in the first six months of 2000 from
68.8% in the first six months of 1999. This increase was primarily due to lower
margins on product revenues derived from the 1999 and 2000 Acquisitions and
lower margins in the CCP division due to the increase in the cost of materials.
Cost of Service Revenues, Excluding Depreciation. Cost of service revenues,
excluding depreciation, was $11.1 million in the first six months of 2000,
representing a decrease of $1.1 million or 9.1%, as compared to cost of service
revenues, excluding depreciation, of $12.2 million in the first six months of
1999. This decrease reflects the decrease in total service revenues earned in
the second quarter of 2000 as compared to the total service revenues earned in
the second quarter of 1999. As a percentage of service revenues, cost of service
revenues, excluding depreciation, remained fairly constant at 70.7% in the first
six months of 2000 as compared to 71.5% in the first six months of 1999.
Depreciation and Amortization. Depreciation and amortization was $6.9 million in
the first six months of 2000, representing an increase of $0.8 million or 12.6%,
as compared to depreciation and amortization of $6.1 million in the first six
months of 1999. This increase resulted primarily from increased depreciation of
fixed assets and amortization of goodwill and other intangible assets recorded
as a result of the 1999 and 2000 Acquisitions.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses ("SG&A") were $11.5 million in the first six months of
2000, representing an increase of $1.7 million or 17.9%, as compared to SG&A
expenses of $9.8 million in the first half of 1999. This increase in SG&A
expenses reflects incremental SG&A costs resulting from the operation of the
1999 and 2000 Acquisitions as well as an increase in sales and marketing
efforts.
New Product Development. New product development costs consist of scientific
research and development and market development expenditures. Expenditures of
$868,000 were made for scientific research and development during the first six
months of 2000 as compared to $661,000 during the first half of 1999.
Expenditures of $209,000 were made for market development during the first six
months of 2000, as compared to $182,000 during the first six months of 1999. The
increase in new product development costs demonstrates the Company's commitment
to developing and marketing value added products that utilize CCPs and related
materials.
Interest Expense. Interest expense increased to $7.4 million in the first six
months of 2000 from $6.5 million in the first six months of 1999, primarily as a
result of an increase in outstanding indebtedness and an increase in interest
rates.
<PAGE>
Income Taxes. Income tax benefit was $1.2 million for the first six months of
2000, as compared to the income tax benefit of $0.5 million in the first six
months of 1999. This change reflects the decrease in taxable income in the first
half of 2000, primarily resulting from increased interest expense as well as
decreasing product margins. Taxable income is calculated considering
non-deductible amortization expense related to most of the Company's
acquisitions.
Net Income. As a result of the factors discussed above, the net loss was $4.0
million in the first six months of 2000 as compared to a net loss of $1.5
million in the first six months of 1999.
Liquidity and Capital Resources
The Company financed the 1998 and 1999 Acquisitions through the issuance of
$100.0 million of 10% Senior Subordinated Notes due 2008 and borrowings on its
Secured Credit Facility (as subsequently amended and restated). The Company
financed the acquisition of Palestine by obtaining a $15,000,000 increase in the
Secured Credit Facility on May 26, 2000 (discussed below). Operating and capital
expenditures have been financed primarily through cash flow from operations and
borrowings under the Secured Credit Facility.
The Secured Credit Facility has been amended a number of times. Most recently,
on May 26, 2000, the Secured Credit Facility was amended and restated to, among
other things, increase the borrowings available to the Company from $50.0
million to $65.0 million.
This increase in the funds available to the Company was accomplished through the
addition of a Tranche B feature, pursuant to which two of the existing lenders,
Bank of America, N.A. and Zions First National Bank (the "Tranche B Lenders")
agreed to provide the additional $15.0 million in funding. No amount is
available pursuant to the Tranche B revolving loans unless all amounts under the
Tranche A (existing) revolving loans have been borrowed in full and are
outstanding. Under the amended and restated Secured Credit Facility, at the
option of the Company, both the Tranche A Revolving Loans and the Tranche B
Revolving Loans may be maintained as Eurodollar Loans or Base Rate Loans.
Eurodollar loans will bear interest at a per annum rate equal to the rate per
annum (rounded upwards, if necessary, to the nearest 1/100 of 1 percent)
determined by the Administrative Agent to be equal to the quotient by dividing
(a) Interbank Offered Rate for such Eurodollar Loan for such Interest Period by
(b) 1 minus the Reserve Requirement for such Eurodollar Loan for such Interest
Period, and by then adding thereto the applicable LIBOR margin (which is a
percentage ranging from 1.75% to 2.50%, depending primarily upon the Company's
Leverage Ratio). All capitalized terms are defined in the Secured Credit
Facility.
Base Rate Loans will bear interest at a per annum rate equal to the rate which
is the higher of (a) the Federal Funds rate for such day plus one-half of one
percent (0.5%) and (b) the Prime rate for such day and by then adding thereto
the applicable ABR Margin (which is a percentage ranging from 0.50% to 1.25%
depending primarily upon the Company's Leverage Ratio). Any change in the Base
Rate due to a change in the Federal Funds Rate or to the Prime Rate shall be
effective on the effective date of such change. All capitalized terms are as
defined in the Secured Credit Facility.
The Company will also pay certain fees with respect to any unused portion of the
amended and restated Secured Credit Facility.
The amended and restated Secured Credit Facility maintains the term of the
original Secured Credit Facility obtained on March 4, 1998, and is guaranteed by
ISG and existing future subsidiaries of the Company (the "Guarantors"), and is
secured by a first priority 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 amended and restated Secured Credit Facility continues to require the
Company to maintain a maximum leverage ratio, a minimum interest coverage ratio,
a minimum consolidated net worth and to comply with certain other financial and
non-financial covenants, as defined in the agreement. The Company was in
compliance with all such covenants as of June 30, 2000.
<PAGE>
At June 30, 2000, the Company had no cash and cash equivalents and $8.0 million
in availability under the Secured Credit Facility. In addition, the Company had
working capital of approximately $17.4 million, an increase of $8.4 million from
December 31, 1999. The Company intends to make capital expenditures over the
next several years principally to construct storage, loading and processing
facilities for CCPs and to replace existing capital equipment. During the six
months ended June 30, 2000, capital expenditures amounted to approximately $4.5
million. Capital expenditures made in the ordinary course of business will be
funded by cash flow from operations and borrowings under the Secured Credit
Facility.
The Company anticipates that its principal use of cash will be for working
capital requirements, debt service requirements and capital expenditures. Based
upon current and anticipated levels of operations, the Company believes that its
cash flow from operations, together with amounts available under the Secured
Credit Facility, will be adequate to meet its anticipated requirements for
working capital, capital expenditures and interest payments for the next several
years. There can be no assurance, however, that cash flow from operations will
be sufficient to service the Company's debt and the Company may be required to
refinance all or a portion of its existing debt or to obtain additional
financing. These increased borrowings may result in higher interest payments.
There can be no assurance that any such refinancing would be possible or that
any additional financing could be obtained. The inability to obtain additional
financing could have a material adverse effect on the Company.
<PAGE>
ISG Resources, Inc.
-------------
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities and Use of Proceeds
None
Item 3. Defaults upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Item Exhibit
No. Item Title No.
--- ----------------------------------------- ---
(2) Plan of acquisition, reorganization,
arrangement, liquidation or succession:
Not Applicable
(3) Articles of Incorporation and By-Laws:
Not Applicable
(4) Instruments defining the rights of
security holders, including indentures:
Not Applicable
(10) Material Contracts: Not Applicable
(11) Statement regarding computation of per share earnings is
not required because the relevant computations can be
clearly determined from the material contained in the
Financial Statements included herein.
<PAGE>
(15) Letter re unaudited interim financial
information: Not Applicable
(18) Letter re change in accounting
principles: Not Applicable
(19) Report furnished to security holders:
Not Applicable
(22) Published report regarding matters
submitted to vote of security holders:
Not Applicable
(23) Consents of expert and counsel:
Not Applicable
(24) Power of attorney: Not Applicable
(27) Financial Data Schedule 27.1
(99) Additional Exhibits: Amended and
Restated Secured Credit Facility and
Exhibits
(b) Reports on Form 8-K
Two reports on Form 8-K were filed by Registrant during the
three months ended June 30, 2000. The first is Form 8-K/A filed on May
16, 2000 in connection with the acquisition of Don's Building Supply,
L.L.P. on March 2, 2000. The second Form 8-K relates to the acquisition
of Palestine Concrete Tile Company and was filed on June 15, 2000.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 14, 2000 ISG RESOURCES, INC.
/s/ J. I. Everest, II
-------------------------------------
J. I. Everest, II
Chief Financial Officer and Treasurer
(As both a duly authorized officer of the
Company and as principal financial officer
of the Company)
