SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
[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, 1999
-----------------
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 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)
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, 2000 was approximately $0.
The number of shares of Common Stock outstanding on March 29, 2000 was
100 shares.
Documents Incorporated by Reference: See Item 14(a) List of Exhibits
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) 1. Financial Statements
See Index to Financial Statements on page F-1.
2. Financial Statement Schedules
All financial statement schedules have been omitted because
either they are not required or the information required to be
set forth therein is included in the consolidated financial
statements or notes thereto.
3. Exhibits
Exhibits
*2.1 Plan of Merger for January 1, 1999 Merger.
*2.2 Plan of Merger for July 31, 1999 Merger.
*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.
*3.17 Articles of Incorporation of ISG Resources, Inc.
*3.18 Bylaws of ISG Resources, Inc.
*3.19 Articles of Merger for ISG Resources, Inc. (1/1/99 Merger)
*3.20 Articles of Merger filed in Texas. (1/1/99 Merger)
*3.21 Articles of Merger filed in Pennsylvania. (1/1/99 Merger)
*3.22 Articles of Merger for Pozzolanic Resources, Inc. (1/1/99 Merger)
*3.23 Articles of Merger for St. Helens Investments, Inc. (1/1/99 Merger)
*3.24 Articles of Merger for Pozzolanic Northwest, Inc. (1/1/99 Merger)
*3.25 Articles of Merger for Pozzolanic Northwest Bulk Carriers, Inc.
(1/1/99 Merger)
*3.26 Articles of Merger filed in Iowa. (1/1/99 Merger)
*3.27 Articles of Merger filed in Michigan. (1/1/99 Merger)
*3.28 Articles of Merger filed in Arkansas. (1/1/99 Merger)
*3.29 Articles of Merger for ISG Resources, Inc. (1/1/99 Merger)
*3.30 Articles of Merger filed in Montana. (7/1/99 Merger)
*3.31 Articles of Merger filed in Ohio. (7/1/99 Merger)
*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.
*10.1 Purchase 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.
*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.
*10.8 First 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.
*10.9 Stock Purchase Agreement dated January 1999, among ISG Resources,
Inc., James M. Isaac and Tommy C. Isaac.
*10.10 Purchase Agreement dated October 26, 1999, between ISG Resources,
Inc. and Mary Ellen Dentis, Trustee.
*10.11 Purchase Agreement dated November 1999, among ISG Resources, Inc.
and Bill E. Nichols, John W. Nichols and Debbie Dickie
*10.12 Stock Purchase Agreement between William Leslie & ISG Resources,
Inc.
*10.13 Partnership Regulations for Don's Building Supply, LLP.
*10.14 Employment Agreement between JTM Industries, Inc. (predecessor to
ISG Resources, Inc.) and Clinton W. Pike, Sr.
*10.14(a) Amendment to Mr. Pike's Employment Agreement.
*10.14(b) Second Amendment to Mr. Pike's Employment Agreement.
*10.15 Employment Agreement between ISG Resources, Inc. and R Steve
Creamer.
*10.16 Employment Agreement between ISG Resources, Inc. and Raul A. Deju.
*10.17 Employment Agreement between ISG Resources, Inc. and Jean I.
Everest, II.
*10.18 Employment Agreement between ISG Resources, Inc. and Brett A.
Hickman.
*10.19 Stock Purchase Agreement dated October 1999 between ISG Resources,
Inc. and WEBE Enterprises, Ltd.
*10.20 Stock Purchase Agreement dated June 2, 1999 between Koch Carbon,
Inc. and ISG Resources, Inc.
*12.1 Statement re Computation of Ratio of Earnings to Fixed Charges.
*21.1 Subsidiaries of ISG Resources, Inc.
*21.2 Subsidiaries of the Registrant (As of March 30, 2000)
*24 Powers of Attorney.
*25.1 Statement 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: April 25, 2000 By: /s/ R Steve Creamer
-------------- ---------------------------------------------
R Steve Creamer, Chairman and Chief Executive
Officer
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 Chief Executive Officer April 25, 2000
- -----------------------
R Steve Creamer
/s/ Raul A Deju President and Chief Operating Officer April 25, 2000
- -----------------------
Raul A. Deju
/s/ J.I. Everest, II Chief Financial Officer, Treasurer and April 25, 2000
- ----------------------- Assistant Secretary
J.I. Everest, II
/s/ Joseph M. Silvestri Director April 25, 2000
- -----------------------
Joseph M. Silvestri
<PAGE>
F-1
INDEX TO FINANCIAL STATEMENTS
ISG Resources, Inc. and Subsidiaries
Audited Consolidated Financial Statements as of December 31, 1999 and 1998 and
for the Years Ended December 31, 1999 and 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 Operations...................... 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 for the Period From January 1, 1997 to
October 13, 1997:
Report of Independent Accountants.......................... F-22
Consolidated Statement of Loss and Accumulated Deficit..... F-23
Consolidated Statement of Cash Flows....................... F-24
Notes to Consolidated Financial Statements................. F-25
<PAGE>
F-2
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, 1999 and 1998 and the related
consolidated statements of operations, shareholder's equity and cash flows for
the years ended December 31, 1999 and 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 auditing standards generally accepted
in the United States. 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, 1999 and 1998, and the consolidated
results of their operations and their cash flows for the years ended December
31, 1999 and 1998 and the period from October 14, 1997 to December 31, 1997 in
conformity with accounting principles generally accepted in the United States.
Ernst & Young LLP
Salt Lake City, Utah
March 3, 2000
<PAGE>
F-3
ISG Resources, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31
1999 1998
Assets
Current assets:
Accounts receivable:
Trade, net of allowance for doubtful
accounts of $329,000 in 1999 and
$170,000 in 1998 $ 21,167,616 $ 14,975,729
Retainage receivable 176,000 660,609
Other 502,058 296,966
Deferred tax asset 316,161 251,355
Inventories 4,055,425 387,258
Other current assets 829,661 645,969
Total current assets 27,046,921 17,217,886
Property, plant and equipment:
Land and improvements 4,371,197 1,736,384
Buildings and improvements 6,839,777 3,610,621
Vehicles and other operating equipment 27,189,160 20,090,872
Furniture, fixtures and office equipment 1,161,456 494,753
39,561,590 25,932,630
Accumulated depreciation (7,893,374) (3,562,086)
31,668,216 22,370,544
Construction in progress 1,915,972 5,768,564
33,584,188 28,139,108
Other assets:
Intangible assets, net 153,952,547 140,835,640
Debt issuance costs, net 4,826,010 5,192,893
Other assets 1,052,845 346,209
Total assets $ 220,462,511 $191,731,736
----------------------------------------------================================
<PAGE>
F-4
December 31
1999 1998
-------------------------------------
Liabilities and shareholder's equity
Current liabilities:
Accounts payable $ 10,409,583 $ 4,066,487
Accrued expenses:
Payroll 1,288,732 1,801,657
Interest 2,190,471 2,106,054
Other 1,828,537 1,534,971
Income taxes payable 1,705,678 422,963
Other current liabilities 652,119 500,000
----------------- -------------
Total current liabilities 18,075,120 10,432,132
Long-term debt 133,500,000 110,000,000
Deferred tax liabilities 39,158,249 41,286,434
Payable to Industrial Services Group 643,983 -
Other liabilities 1,923,355 2,488,954
Commitments and contingencies
Shareholder's equity:
Common stock, no par in 1999 and
par value of $1 per share in 1998;
100 shares authorized, issued and
outstanding 25,000,050 100
Additional paid-in capital - 24,999,950
Retained earnings 2,161,754 2,524,166
-------------------------------------
Total shareholder's equity 27,161,804 27,524,216
-------------------------------------
Total liabilities and shareholder's equity $ 220,462,511 $191,731,736
=====================================
See accompanying notes.
<PAGE>
F-5
ISG Resources, Inc. and Subsidiaries
Consolidated Statements of Operations
Period from
October 14 to
Year ended December 31 December 31
1999 1998 1997
---------------------------------------------
Revenues:
Product revenues $120,319,575 $ 83,048,721 $ 7,059,063
Service revenues 35,885,697 34,243,854 5,583,981
---------------------------------------------
156,205,272 117,292,575 12,643,044
Costs and expenses:
Cost of products sold,
excluding depreciation 83,442,725 51,878,447 4,864,226
Cost of services sold,
excluding depreciation 25,221,695 28,237,385 4,500,892
Depreciation and amortization 13,091,131 9,140,938 908,619
Selling, general and
administrative expenses 18,962,157 14,144,765 1,255,680
New product development 2,166,218 - -
---------------------------------------------
142,883,926 103,401,535 11,529,417
---------------------------------------------
13,321,346 13,891,040 1,113,627
Interest income 44,100 183,113 31,286
Interest expense (13,391,944) (9,338,059) (627,704)
Miscellaneous income, net 311,675 72,386 -
---------------------------------------------
Income before income tax expense 285,177 4,808,480 517,209
Income tax expense 647,589 2,549,026 252,497
---------------------------------------------
Net income (loss) $ (362,412) $ 2,259,454 $ 264,712
=============================================
See accompanying notes.
<PAGE>
F-6
ISG Resources, Inc. and Subsidiaries
Consolidated Statements of Shareholder's Equity
Additional Total
Common Paid-In Retained Shareholder's
Stock Capital Earnings Equity
--------------------------------------------------
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
Change to no par value 24,999,950 (24,999,950) - -
Net loss - - (362,412) (362,412)
--------------------------------------------------
Balance at December 31, 1999 $25,000,050 $ - $2,161,754 $27,161,804
==================================================
See accompanying notes.
<PAGE>
<TABLE>
<CAPTION>
F-7
ISG Resources, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Period from
October 14 to
Year ended December 31 December 31
1999 1998 1997
----------------------------------
Operating activities
<S> <C> <C> <C>
Net income (loss) $ (362,412) $ 2,259,454 $264,712
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization 13,091,131 9,140,938 908,619
Amortization of debt issuance costs 702,032 463,585 -
Deferred income taxes (2,229,539) (1,697,407) (276,245)
Loss on sale of assets 24,168 46,513 -
Gain on sale of subsidiary (333,749) - -
Changes in operating assets and
liabilities:
Receivables (2,755,382) (1,479,648) 691,534
Inventories (1,733,832) 231,658 -
Other current and non-current assets (879,189) (91,603) (22,569)
Accounts payable 4,485,877 (606,834) (1,035,993)
Income taxes payable 1,257,583 (245,447) 528,742
Accrued expenses (929,504) 759,326 755,913
Other current and non-current
liabilities (132,821) (570,491) 28,387
---------------------------------------
Net cash provided by operating activities 10,204,363 8,210,044 1,843,100
Investing activities
Purchase of businesses, net of cash acquired (24,866,989) (77,753,012) -
Proceeds from sale of subsidiary 750,000 - -
Additions to intangible assets (877,349) (691,847) -
Purchases of property, plant and equipment (8,790,870) (8,574,086) (19,491)
Proceeds from sales of property, plant
and equipment 415,994 396,399 -
---------------------------------------
Net cash used in investing activities (33,369,214) (86,622,546) (19,491)
Financing activities
Proceeds from long-term debt 127,000,000 154,000,000 -
Payments on long-term debt (103,500,000) (73,000,000) -
Debt issuance costs (335,149) (5,656,478) -
Cash contributions - - 1,188,521
--------------------------------------
Net cash provided by financing activities 23,164,851 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 $ 12,605,495 $ 7,396,124 $ -
=======================================
Cash paid for income taxes $ 902,123 $ 3,989,414 $ -
=======================================
See accompanying notes.
</TABLE>
<PAGE>
F-8
ISG Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999
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 (the "Merger"). Pneumatic Trucking, Inc., a wholly owned subsidiary of
Michigan Ash Sales Company, was not merged into the Company. Consequently,
Pneumatic became a wholly owned subsidiary of the Company.
On January 7, 1999, the Company acquired all of the outstanding stock of Best
Masonry and Tool Supply ("Best") for approximately $13,300,000 in cash and paid
off outstanding debt of Best totaling approximately $2,400,000.
On May 27, 1999, the Company acquired all of the outstanding stock of Mineral
Specialties, Inc. ("Specialties") for approximately $1,314,000 in cash.
On June 2, 1999, the Company acquired all of the outstanding stock of Irvine Fly
Ash, Inc. ("Irvine") for approximately $6,321,000 in cash.
On October 26, 1999, the Company acquired all of the outstanding stock of Lewis
W. Osborne, Inc. ("Osborne") and United Terrazzo Supply Co., Inc. ("Terrazzo")
for approximately $1,219,000 in cash.
On December 1, 1999, the Company acquired all of the outstanding stock of Magna
Wall, Inc. ("Magna Wall") for approximately $1,542,000 in cash.
Each of the above acquisitions was accounted for under the purchase method of
accounting and, accordingly the results of operations of each acquisition have
been included in the consolidated financial statements since the respective date
of acquisition.
The purchase prices of the above acquisitions were allocated based on estimated
fair values of assets and liabilities at the respective dates of acquisition.
Goodwill resulting from the difference between the purchase prices plus
acquisition costs and the net assets of the companies acquired in 1999 totaled
approximately $20,073,000. All recorded goodwill is being amortized on a
straight-line basis over 20 to 25 years.
<PAGE>
F-9
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 of the above acquisitions and the related financing transactions had
occurred as of January 1, 1998. 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 acquisitions and the financing transactions been consummated on such
date.
Year Ended December 31
1999 1998
------------------- -------------------
Revenues $ 164,840,000 $ 155,313,000
Net loss $ (409,878) $ (1,652,000)
On November 29, 1999, the Company sold all of the outstanding stock of Pneumatic
Trucking, Inc., a wholly owned subsidiary of the Company, for approximately
$750,000 in cash. The Company recognized a gain of approximately $334,000 on
this sale which is included in miscellaneous income in the consolidated
statement of operations.
2. Description of Business and Summary of Significant Accounting Policies
Description of Business
The Company operates two principal lines of business: 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. The building materials division
manufactures and distributes masonry construction materials to residential and
commercial contractors in Texas, California, Georgia and Florida.
Principles of Consolidation
These financial statements reflect the consolidated financial position and
results of operations of ISG Resources, Inc. and its wholly owned subsidiaries.
All significant intercompany accounts and transactions have been eliminated in
consolidation. Certain reclassifications have been made to the prior years'
amounts to conform to the current year presentation.
Revenue Recognition
Revenue from the sale of products is recognized primarily upon passage of title
to the customer, which generally coincides with physical delivery and
acceptance. CCP product revenues generally include transportation charges
associated with delivering the material.
<PAGE>
F-10
ISG Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Description of Business and Summary of Significant Accounting Policies
(continued)
Revenue Recognition (continued)
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.
Cost of CCP products sold are primarily amounts paid to the utility companies to
purchase product and transportation costs of delivering the product to the
customer. Cost of services sold includes 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. No single customer provides 10 percent or more of the Company's
revenue. 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.
New Product Development
New product development costs consist of scientific research and development and
market development expenditures. Expenditures of $1,796,032 for the year ended
December 31, 1999 were made for research and development activities covering
basic scientific research and application of scientific advances to the
development of new and improved products and processes. Expenditures of $370,186
for the year ended December 31, 1999 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 when they are incurred. The Company incurred no new product
development costs in the year ended December 31, 1998 or the period from October
14, 1997 to December 31, 1997.
<PAGE>
F-11
ISG Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Description of Business and Summary of Significant Accounting Policies
(continued)
Inventories
The Company accounts for inventory balances using the lower of cost or market
method on a first-in, first-out basis. Inventories consist of the following at
December 31:
1999 1998
--------------------- ---------------------
Raw materials $ 234,073 $ -
Finished goods 3,821,352 387,258
--------------------- ---------------------
$ 4,055,425 $ 387,258
===================== =====================
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 20 years
Buildings and improvements 3 to 40 years
Vehicles and other operating equipment 2 to 12 years
Furniture, fixtures and office equipment 1 to 7 years
Depreciation expense was approximately $4,996,000, $3,281,000 and $454,000 for
the years ended December 31, 1999 and 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 $8,095,000,
$5,860,000 and $455,000 for the years ended December 31, 1999 and 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 20 to 25 years
Contracts 10 to 20 years
Patents and licenses 13 to 19 years
Assembled workforce 8 years
<PAGE>
F-12
ISG Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Description of Business and Summary of Significant Accounting Policies
(continued)
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 to interest expense over the respective lives of the debt issues on a
straight-line basis. Amortization expense was approximately $702,000, $464,000
and $0 for the years ended December 31, 1999 and 1998 and the period from
October 14, 1997 to December 31, 1997, respectively.
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
Financial instruments included in various categories within the accompanying
balance sheet consist of the following at December 31:
1999 1998
----------------------------------------------------
Carrying Fair Carrying Fair
Value Value Value Value
----------------------------------------------------
Short-term assets $ 21,845,674 $ 21,845,674 $ 15,933,304 $ 15,933,304
Short-term liabilities 16,369,442 16,369,442 10,009,169 10,009,169
Long-term debt:
Senior subordinated notes 100,000,000 85,000,000 100,000,000 99,000,000
Secured credit facility 33,500,000 33,500,000 10,000,000 10,000,000
Other liabilities 1,613,393 1,255,000 2,103,856 1,531,000
The carrying value of short-term assets and liabilities approximate fair value
due to the short-term nature of the instruments. The carrying value of the
secured credit facility approximates the fair value due to the variable interest
rate features of the instrument. The fair value of the senior subordinated notes
is based on quoted market prices. The fair value of other liabilities is based
on the present value of future cash flows discounted at the Company's
incremental borrowing rate.
<PAGE>
F-13
ISG Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Description of Business and Summary of Significant Accounting Policies
(continued)
Long-lived Assets
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 compared to net book value. The Company also
evaluates amortization periods of assets, including goodwill and other
intangible assets, to determine if events or circumstances warrant revised
estimates of useful lives. Management believes no material impairment in the
value of long-lived assets exists at December 31, 1999.
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:
1999 1998
------------------ -----------------
Goodwill $ 64,313,512 $ 44,018,454
Contracts 98,522,146 97,960,644
Patents and licenses 2,787,431 2,471,584
Assembled work force 2,700,233 2,700,233
------------------ -----------------
168,323,322 147,150,915
Less accumulated amortization (14,370,775) (6,315,275)
------------------ -----------------
$ 153,952,547 $ 140,835,640
================== =================
4. Long-term Debt
Secured Credit Facility
On March 4, 1998, the Company obtained a 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 pay fees and expenses incurred in connection with certain
acquisitions, to repay existing indebtedness, and for working capital and
general corporate purposes.
<PAGE>
F-14
ISG Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Long-term Debt (continued)
Secured Credit Facility (continued)
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 Bank of America 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,
1999.
On April 30, 1999, the Secured Credit Facility was increased to $50,000,000 from
$35,000,000. At December 31, 1999, $33,500,000 was outstanding, with $16,500,000
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") to finance the 1998 Acquisitions. Interest on the
Senior Subordinated Notes is payable semi-annually on April 15 and October 15 of
each year. 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.
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.
<PAGE>
F-15
ISG Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Long-term Debt (continued)
Senior Subordinated Notes (continued)
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, 1999 are as follows: $0 in 2000-2002, $33,500,000 in 2003, $0 in
2004 and $100,000,000 thereafter.
5. Employee Benefit Plan
Prior to April 1, 1998, eligible employees of the Company were able to
participate in a 401(k) savings plan (the "JTM Plan") sponsored by an affiliate
of the former owner of JTM. Under the terms of the JTM plan, the Company was
required to match employee contributions, as defined, up to 3% of the employees'
compensation. Expenses related to the JTM 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
$458,000 and $265,000 for the year ended December 31, 1999 and the period from
April 1, 1998 to December 31, 1998, respectively.
<PAGE>
F-16
ISG Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. Income Taxes
Income tax expense (benefit) consists of the following:
Period from
October 14 to
Year ended December 31 December 31
1999 1998 1997
----------------------------------------------------------
Current:
U.S. Federal $ 2,150,860 $ 3,542,755 $ 459,626
State 726,268 703,678 69,116
----------------------------------------------------------
2,877,128 4,246,433 528,742
Deferred:
U.S. Federal (1,847,270) (1,416,129) (240,135)
State (382,269) (281,278) (36,110)
----------------------------------------------------------
(2,229,539) (1,697,407) (276,245)
Total:
U.S. Federal 303,590 2,126,626 219,491
State 343,999 422,400 33,006
----------------------------------------------------------
$ 647,589 $ 2,549,026 $ 252,497
==========================================================
Reconciliation of income tax expense at the U.S. statutory rate to the Company's
tax expense is as follows:
Period from
October 14 to
Year ended December 31 December 31
1999 1998 1997
------------------------------------------
35% of income before income tax $ 99,812 $ 1,682,968 $ 181,023
Add:
Non-deductible goodwill 901,551 527,208 42,702
Other, net (353,774) 338,850 28,772
------------------------------------------
$ 647,589 $ 2,549,026 $ 252,497
==========================================
<PAGE>
F-17
ISG Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. Income Taxes (continued)
The major components of the deferred tax assets and liabilities as of December
31 are as follows:
1999 1998
------------------------------------
Deferred Tax Assets:
Bad debt reserves $ 128,602 $ 66,572
Accruals not currently deductible for
tax purposes 362,217 307,883
------------------------------------
Total gross deferred tax assets 490,819 374,455
Deferred Tax Liabilities:
Fixed asset basis differences 2,980,762 3,040,703
Intangible asset basis differences 36,274,790 38,363,602
Other 77,355 5,229
------------------------------------
Total gross deferred tax liabilities 39,332,907 41,409,534
------------------------------------
Net deferred tax liabilities $ (38,842,088) $ (41,035,079)
====================================
7. 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, 1999:
2000 $ 5,006,179
2001 4,446,385
2002 3,418,469
2003 2,413,442
2004 1,203,922
Thereafter 595,361
-------------------
Total minimum lease payments $ 17,083,758
===================
Total rental expense was approximately $7,595,000 for the year ended December
31, 1999, $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.
<PAGE>
F-18
ISG Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Commitments and Contingencies (continued)
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, approximated as follows:
Minimum Minimum
Sales Purchases
------------------------------------
2000 $ 363,000 $ 6,387,000
2001 371,000 6,911,000
2002 120,000 7,173,000
2003 120,000 3,042,000
2004 120,000 1,842,000
Thereafter - 10,174,000
------------------------------------
$ 1,094,000 $ 35,529,000
====================================
Minimum sales and purchases under contracts with minimum requirements
approximated $806,000 and $5,930,000, respectively, for the year ended December
31, 1999 and $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 Commitments
In connection with a 1998 acquisition, the Company agreed to pay a minimum of
$500,000 per year commencing in 1999 and continuing through 2003 for 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 sheets.
In 1999, the Company entered into a license agreement for certain technology for
which the Company agreed to pay a minimum of $200,000 in 2001, $300,000 in 2002,
$400,000 in 2003 and $500,000 per year thereafter for as long as the license
agreement is effective. The payments are for future royalties on net sales and
sub-license or royalty revenue received related to this license and will be
expensed in the period the related revenue is recognized.
<PAGE>
F-19
ISG Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Commitments and Contingencies (continued)
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 terms
of these agreements begin to expire in 2000 with annual extensions to be
exercised by mutual consent of both parties. Without considering these
extensions, these employment agreements provide for total annual base
compensation of approximately $2,256,000 in 2000, $1,301,000 in 2001, $771,000
in 2002 and $134,000 in 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 $1,530,000 in the aggregate for the current
plan period ended December 31, 1999. 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 dates. In the
accompanying balance sheets, $112,000 and $324,000 has been accrued as of
December 31, 1999 and 1998, respectively, related to this liability.
8. 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 four legal entities, Best, Osborne,
Terrazzo and Magna Wall. 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
<PAGE>
F-20
ISG Resources, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Reportable Segments (continued)
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 are generally
accounted for at cost and are eliminated in consolidation.
The building materials division includes financial data for Best from January 1
through December 31, 1999, Osborne and Terrazzo for the period from October 26
to December 31, 1999 and Magna Wall for the month of December 1999. Amounts
included in the "Other" column include financial information for the Company's
corporate, R&D and other administrative business units.
The Company did not report segment information prior to the year ended December
31, 1999, as it operated in only one significant business segment prior to 1999.
Information about reportable segments, and reconciliation of such information to
the consolidated totals as of and for the year ended December 31, 1999, is as
follows:
Building Consolidated
CCP Materials Other Total
------------ -------------- ------------- ---------------
Revenue $134,631,711 $20,821,159 $ 752,402 $156,205,272
EBITDA 32,096,154 2,811,482 (8,139,384) 26,768,252
Total Assets 49,929,505 6,683,098 163,849,908 220,462,511
Expenditures for PP&E 7,520,689 350,610 919,571 8,790,870
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. Segment assets reflect those
specifically attributable to the individual segments and include accounts
receivable, inventory and property, plant and equipment. All other assets are
included in the "Other" column.
9. Related Party Transactions
The Company's parent, ISG, files a consolidated income tax return including the
Company and all of its subsidiaries. As the Company records all tax payments and
receipts, a payable to ISG for $643,983 has been recorded to reflect amounts
owed to ISG relating to ISG's interest deductions included in the 1998
consolidated tax return filed in 1999.
<PAGE>
F-21
10. Subsequent Event
On March 2, 2000, the Company acquired directly and indirectly through ISG
Manufactured Products, Inc., a newly formed wholly owned subsidiary of the
Company, 100% of the partnership interests in Don's Building Supply L.L.P.
("Don's") for a purchase price of $6,000,000 in cash. The Company expects the
purchase price to increase or decrease within sixty days of the closing date
based on 1999 EBITDA, as defined, and working capital as of February 29, 2000.
Don's is engaged in the retail and wholesale distribution of construction
materials to residential and commercial contractors.
<PAGE>
F-22
Report of Independent Accountants
---------------------------------
To the Board of Directors and
Shareholders of JTM Industries, Inc:
In our opinion, the consolidated statements of loss and accumulated deficit
and cash flows for the period from January 1, 1997 to October 13, 1997
(appearing on pages F-23 through F-31 in this Form 10-K) present fairly, in
all material respects, the results of operations and cash flows of JTM
Industries, Inc. and its subsidiary for the period from January 1, 1997 to
October 13, 1997, 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 audit. We conducted our audit 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 audit provides a reasonable basis for the opinion expressed above.
We have not audited the consolidated financial statements of JTM
Industries, Inc. for any period subsequent to October 13, 1997.
PRICEWATERHOUSECOOPERS LLP
February 16, 1998
Charlotte, North Carolina
<PAGE>
F-23
JTM INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF LOSS AND ACCUMULATED DEFICIT
($000's omitted)
Period from
January 1 to
October 13,
1997
-------------------
Revenues:
Product revenues........................................... $ 25,613
Service revenues........................................... 25,682
-------------------
51,295
Cost of product revenues, excluding depreciation........... 20,702
Cost of service revenues, excluding depreciation........... 19,999
Depreciation and amortization.............................. 5,279
Selling, general and administrative expenses................ 3,633
-------------------
Income from operations..................................... 1,682
Intercompany interest expense.............................. 4,160
Interest expense............................................ -
-------------------
(2,478)
Income tax expense......................................... (612)
-------------------
Net loss................................................... (3,090)
Accumulated deficit - beginning of period.................. (3,966)
-------------------
Accumulated deficit - end of period....................... $ (7,056)
===================
The accompanying notes are an integral part of these financial statements.
<PAGE>
F-24
JTM INDUSTRIES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
($000's omitted)
Period from
January 1 to
October 13,
1997
------------------
Net Cash Provided By (Used In):
Operating activities......................................... $ 521
Investing activities......................................... (681)
------------------
Net cash used by operating and investing activities.......... (160)
Non-cash activities.......................................... (797)
------------------
(957)
Intercompany notes payable - beginning of period............. (48,450)
------------------
Intercompany notes payable - end of period................... $ (49,407)
==================
Operating activities:
Net loss..................................................... $ (3,090)
Items not affecting cash:
Loss on disposal of fixed assets........................... 305
Depreciation and amortization.............................. 5,279
Deferred income taxes...................................... 150
Cash provided by (used in) financing working capital:
Trade and other accounts receivable........................ (1,898)
Other current assets....................................... 87
Accounts payable and accrued liabilities................... (312)
------------------
Net cash provided by operating activities.................... $ 521
==================
Investing activities:
Purchase of fixed assets..................................... $ (681)
Proceeds from sale of fixed and other assets................. -
------------------
Net cash used in investing activities........................ $ (681)
==================
Supplemental cash flow information:
Noncash transaction:
Transfers of fixed assets from parent................... $ 107
Accounts payable related to fixed assets................ -
Cash paid (received) for:
Interest................................................ $ 4,160
Income taxes to (from) parent........................... $ 462
The accompanying notes are an integral part of these financial statements.
<PAGE>
F-25
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.
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 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.
<PAGE>
F-26
JTM INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
($000's Omitted)
2. Summary of Significant Accounting Policies (Continued)
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
for the period from January 1, 1997 to October 13, 1997.
d) Other assets
Goodwill is amortized on a straight-line basis over forty years. The
amount of any impairment is charged against income. During the period from
January 1, 1997 to October 13, 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.
<PAGE>
F-27
JTM INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
($000's Omitted)
2. Summary of Significant Accounting Policies (Continued)
f) Revenue (continued)
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 for the period from
January 1, 1997 to October 13, 1997.
<PAGE>
F-28
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 for
the period from January 1, 1997 to October 13, 1997.
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.
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:
Period from
January 1 to
October 13,
1997
----------------------
Management fees................... $ 491
Administrative fees............... $ 249
Intercompany sales................ $ 2,814
Allocated insurance expense....... $ 515
Interest expense.................. $ 4,160
<PAGE>
F-29
JTM INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
($000's Omitted)
6. Related party transactions (Continued)
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.
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 are as follows:
Current federal provision (benefit).............. $ 421
Current state provision.......................... 41
Deferred federal provision....................... 150
---------------
Total income tax provision (benefit)............. $ 612
===============
<PAGE>
F-30
JTM INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
($000's Omitted)
7. Income taxes (continued)
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 are as follows:
Federal statutory tax rate.............................. 35.0%
Goodwill amortization not deductible for tax purposes... (57.7%)
State income taxes...................................... (1.1%)
Other items - net....................................... (0.9%)
----------------
Effective tax rate...................................... (24.7%)
================
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.
9. Subsequent Event
On October 14, 1997, Laidlaw, Inc. sold all of the outstanding shares
of the Company for $5,817,000 in cash, a $29,000,000 senior bridge note and a
$17,500,000 9% Junior Subordinated Promissory Note due 2005.
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