10-K 1 a10k3-02.txt ISG RESOURCES, INC. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [Fee required] For the Fiscal Year Ended December 31, 2001 --------------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [No fee required] For the transition period from N/A to N/A ---------------- ----------- Commission File Number ISG RESOURCES, INC. (Exact name of Registrant as specified in its charter) Utah 87-0619697 ------------------------------ ------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 136 East South Temple, Suite 1300, Salt Lake City, Utah 84111 ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) 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: None (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 18, 2002 was approximately $0. The number of shares of Common Stock outstanding on March 18, 2002 was 100 shares. Documents Incorporated by Reference: See Item 14(a) List of Exhibits PART I Item 1. Business General Development of Business 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"). 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. The Company financed the acquisitions through the private placement of $100,000,000 of 10% Senior Subordinated Notes due 2008. 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 that was declared effective by the Securities and Exchange Commission on September 4, 1998. 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. In 2000, ISG Canada Limited, Inc. ("ISG Canada") was formed and became a wholly-owned foreign subsidiary of the Company, with fly ash operations beginning in the second half of 2000. The Company acquired all of the partnership interest of Don's Building Supply L.L.P. ("Don's"), acquired the stock of Palestine Concrete Tile Company, Inc. ("Palestine"), and acquired certain fixed and intangible assets from Hanson Aggregates West, Inc. ("Hanson"). Each of the above acquisitions was accounted for under the purchase method of accounting and, accordingly the results of operations of each acquired company 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 fair value of the net assets of the companies acquired in 1999 totaled approximately $20,073,000. Goodwill resulting from the difference between the purchase prices plus acquisition costs and the fair value of the net assets of the companies acquired in 2000 totaled approximately $19,297,000. All recorded goodwill is being amortized on a straight-line basis over 20 to 25 years. The Company's core business is based on long-term materials management contracts with power producing utilities and industrial clients. Typical contract terms for coal combustion products (CCP) management contracts are from five to fifteen years, with most contracts being renewed upon expiration. The Company's business strategy has been to pursue key acquisitions with the primary intent of acquiring specific materials management contracts controlled by the entity acquired as well as complement the Company's planned geographic expansion. Therefore, the contracts recorded as intangible assets are essential to the continuing success of the Company. The Company devotes significant resources to maintaining and expanding these long-term contractual relationships. In addition, the Company is focused on serving its client base by enhancing the Company's existing product offerings with the benefits of its research and development programs, by cross-marketing patented products in new geographical markets, and by continuing to develop new applications for CCPs and related industrial materials. Description of Business The Company operates two principal business segments: CCP management and manufacturing products distribution. See Footnote 8 in the consolidated financial statements and notes thereto included elsewhere herein for segment reporting information. 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. Based upon available information, the Company believes it is now the largest manager and marketer of CCPs in North America. The Company enters into long-term CCP management contracts, primarily with coal-fired electric generating utilities. These utilities are required to manage, or contract to manage, CCPs in accordance with state and federal environmental regulations. In addition, the Company provides similar materials management services for other industrial clients. The manufacturing products division manufactures and distributes building materials to residential and commercial contractors, primarily in Texas, California, Georgia, Florida and Louisiana. While the 1998 acquisition strategy focused on geographical diversification of the CCP division, the 1999 and 2000 acquisition strategy focused on vertical integration into selected building products manufacturers (especially in key geographical areas) that utilize significant amounts of CCPs as raw materials in their products. This strategy has secured an outlet for a portion of previously unutilized CCPs while promoting the increased use of CCPs as components of building products in the future. Unlike most of its competitors, the Company has dedicated significant resources to the acquisition and development of new technologies for the use of CCPs in building products applications. Principal Products and their Markets by Division CCP Division The Company uses CCPs and other industrial materials to make products that primarily replace manufactured or mined materials, such as portland cement, lime, agricultural gypsum, fired lightweight aggregate, granite aggregate or limestone. The Company's focus on CCPs and related industrial materials development created a variety of applications, such as fillers in asphalt shingles and related products, that extend beyond the traditional uses of CCPs and related industrial materials. For purposes of this report, the Company's CCP-related products are broken down into traditional products and value-added products. Traditional products are those products that the Company and its competitors within the industry historically produce with the CCPs. Value-added products are products that have been developed to utilize CCPs and related materials, which in the past were deemed waste products and usually sent to landfills. The primary CCPs managed by the Company are fly ash and bottom ash. Fly ash is the fine residue and bottom ash is the fraction composed of the heavier particles that result from the combustion of coal. Utilities firing boilers with coal first pulverize the coal and then blow the pulverized coal into a burning chamber where it immediately ignites to heat the boiler tubes. The heavier bottom ash falls to the bottom of the burning chamber while the lighter fly ash remains suspended in the exhaust gases. Before leaving the exhaust stack, the fly ash particles are generally removed by an electrostatic precipitator, bag house or other collection method. The bottom ash is hydraulically conveyed to a collection area, while the fly ash is pneumatically conveyed to a storage silo. Fly ash is a pozzolan that, in the presence of water, will combine with an activator (lime, portland cement or kiln dust) to produce a cement-like material. It is this characteristic that allows fly ash to act as a cost-competitive substitute for other more expensive cementitious building materials. Concrete manufacturers can typically use fly ash as a substitute for 15% to 40% of their cement requirements, depending on the quality of the fly ash and the proposed end-use application for the concrete. In addition to its cost-benefit, fly ash provides greater structural strength and durability in certain construction applications, such as road construction. Bottom ash is utilized as an aggregate in concrete block construction and for road base construction. According to the American Coal Ash Association (the "ACAA"), of the approximately 108 million tons of CCPs that were generated in the United States during 2000, fly ash accounted for approximately 58%, bottom ash accounted for approximately 16% and flue gas desulphurization waste ("scrubber sludge") and boiler slag accounted for approximately 26%. Traditional Products and Applications Traditional CCP products are industrial materials that generally require minimal processing or additives to fulfill their intended applications. The Company typically provides these products to its customers directly from its clients' sites or from terminals owned or leased by the Company. The Company has been successful in selling significant portions of the CCPs and other industrial materials it manages to traditional markets (e.g., the use of fly ash as pozzolan in portland cement concrete and the use of bottom ash as a lightweight aggregate). The following is a brief description of the CCP division's traditional products: Fly ash is used as (i) a pozzolan to partially replace portland cement in ready-mix concrete and concrete products (e.g., concrete pipe); (ii) an additive to portland cement to produce I-P cement and blended cements; (iii) an additive in downhole cementing of oil wells; (iv) a primary constituent in flowable grout used to fill voids in trenches, under concrete slabs and underground tanks, and pipe voids; and (v) raw feed stock in the manufacture of portland cement clinker. Bottom ash is used as (i) raw feed stock for the manufacture of portland cement clinker; (ii) a lightweight aggregate for concrete and concrete block; (iii) a filler in the manufacture of clay brick; and (iv) an aggregate in asphaltic concrete. It can also be mixed with salt as an additive for ice and snow control or used as backfill for pipe bedding and dry bed material. Fluidized bed ash is used (i) for stabilization in mud drying; (ii) as a reagent to solidify liquid wastes in petrochemical and related areas; and (iii) for soil stabilization to create more solid foundations for vertical construction. Scrubber sludge is used as cement stabilized road base material and can be processed to be used in wallboard manufacture. Boiler slag is used for a variety of applications, including roofing shingles and cement. Value-added Products and Applications To diversify its product offerings and ensure that it productively uses the CCPs, the Company also develops and markets value-added products made from CCPs and related industrial materials, and it continues to expand the breadth of markets for these products. Through its research and development program and certain licenses, the Company has broadened the end use market for CCPs and related industrial materials by introducing several proprietary products made from previously non-marketable materials. The Company sells and distributes its products to cement plants, ready-mix concrete plants, road contractors, roofing shingle producers, soil stabilization firms, utility companies and waste management firms. Several of its proprietary products have been utilized by government agencies such as the Department of Transportation, the Federal Aviation Administration, the Army Corps of Engineers and the U.S. Bureau of Mines. The following is a list of the Company's value added products and applications: Powerlite(R) is a pyrite free bottom ash which, when processed by the Company, produces a high quality aggregate for the concrete block industry. Powerlite(R) has exhibited superior flow characteristics, often making it more economical to use than other aggregates. The Company has provided customers in the Atlanta, Georgia area with more than two million tons of Powerlite(R) in the past 15 years. SAM(TM) (Stabilized Aggregate Material) is manufactured by the Company by combining several industrial materials received from clients and transforming them into a well-graded replacement for natural aggregate. SAM(TM) can be used in many other applications, such as road base, sub-base, parking areas, drainage media and rip-rap. Pozzalime(TM)/Envira-Cement(R) are the Company's lime-based pozzolanic materials that contain significant moisture-reduction properties. Pozzalime(TM) and Envira-Cement(R) have been successfully utilized in road-base construction, road-sub-base construction, chemical fixation, soil stabilization, moisture reduction, mud drying, pH adjustments, acid neutralization, sewage treatment and mine reclamation. Gypcem(R) is the Company's processed gypsum, registered and exclusively sold by the Company, that has characteristics allowing it to be used in the manufacture of portland cement. With considerable handling capabilities, the product is often more economical to use than conventional mined gypsum. Under a long-term contract with Dupont, the Company designed, constructed and currently operates an on-site processing facility for the 100,000 tons of Gypcem(R) produced each year. Peanut Maker(R) is a gypsum landplaster developed by the Company for use in the agricultural market as a soil enhancer. The Company has transformed this previously unmarketable material into Peanut Maker(R), a beneficial-use, value-added product. Peanut Maker(R) has been used on over 60,000 acres of peanut crops annually for the past 10 years. It continues to be in demand because of its high calcium content. The disassociation rate afforded by Peanut Maker(R) makes it more effective and economical than traditional calcium supplements. It has been a recommended source of calcium by the Virginia and North Carolina Extension Services since its invention. ALSIL(R)/Orbaloid(R) are industrial fillers developed by the Company from processed client-generated materials for use in filler applications such as roofing shingles, carpet and mat backing, and ceramic products. The Company has two U.S. patents and one Canadian patent for the use of ALSIL(R) in roofing shingles. The Company has secured multiple contracts with various shingle manufacturers, with one agreement extending for the life of the customer's manufacturing plant. Flexbase(TM) is a mixture of fly ash and scrubber sludge which the Company processes to form a road-base material. Stabil-Fill(TM) is a lime-stabilized fly ash that the Company has developed and sold for use as a fill material in lieu of natural borrow materials. The resulting mixture is lightweight and compacts with standard construction equipment. Applications include commercial or industrial property development, roadway embankment and subgrade for parking lots, airport runways, golf courses or driving ranges, and athletic fields. Redi-Fill(TM)/Flo Fil(R) are the Company's processed fly ash and bottom ash, sold for use as a structural fill and ready-mixed flowable fill. C-Stone(R) is a crushed manufactured aggregate produced from Class C fly ash. Possessing cementitious properties, C-Stone is an economical base material used in a variety of paving operations, including feedlots, storage pads, and machine shed floors. In addition to these value added products, the Company uses its traditional products for non-traditional applications. Non-traditional applications of fly ash include: (i) use as mineral filler to replace fine aggregate in bituminous coatings for roads (asphalt surface); (ii) for stabilization of soils with high plasticity or low load bearing abilities; (iii) to produce a filler grade material for a variety of products; and (iv) as a binder with calcium sulfate to replace limestone road base materials. Manufacturing Products Division The manufacturing products division operates principally in Texas, California, Georgia and Florida. Its products include standard masonry and stucco construction materials and supplies, as well as packaged products, many of which incorporate technologies acquired or developed by the Company. Selected packaged products sold today based on the Company's owned and leased technologies include: MagnaWall(R) One Coat Stucco MagnaWall(R) Three Coat Stucco Best One Coat Stucco Best Masonry(TM) Cement Type N Best Scratch and Brown Stucco Cement Best White Masonry Cement Type N Best Masonry(TM) Cement Type S Best Mortar Cement Type N Best Finish Stucco Hill Country Mortar(TM) Type N MagnaWall stucco brands feature national building code approvals and sales are increasing nationwide through distributorships and private label manufacturing arrangements. New Product Development New product development costs consist of scientific research and development and market development expenditures. Expenditures of $2,092,124, $1,837,076 and $1,796,032 for the years ended December 31, 2001, 2000, and 1999, respectively, 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 $215,886, $494,434, and $370,186 for the years ended December 31, 2001, 2000, and 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 and market development costs when they are incurred. In an effort to maximize the percentage of products marketed to end users and minimize the amount of materials landfilled, the Company's focused research and development efforts have created or caused the Company to acquire the rights to various new technologies. Two of the most promising of these new technologies are as follows: Swiftcrete(TM) is a Company-developed technology to produce a rapid setting, high strength concrete and asphalt repair material and cement. The Company is currently developing applications for the technology in military, homeowner, and large scale paving and paving repair markets. Flexcrete(TM) is a Company-developed fiber reinforced, non-autoclaved aerated concrete that utilizes large volumes of CCPs and requires low energy and capital cost to produce. This technology produces an aerated concrete panel or block with excellent flexural strength, thermal and acoustic insulation properties and flame resistance. It is ideal for a variety of residential and commercial construction applications. In addition to developing new technologies that utilize large volumes of CCPs, the Company's research and development program develops technologies that maintain or improve the quality of CCPs, thereby enhancing their marketability. Two of these technologies are: Carbon fixation is a technology that increases the marketability of fly ash with high or unpredictable levels of residual carbon. The technology is based on application of a liquid chemical additive. Low capital costs are required for installation of application equipment. The company has exclusive rights to market this patented technology within the United States. Ammonia removal is a Company-developed patented technology that cost-effectively removes ammonia from fly ash that has been contaminated by pollution control devices or natural operating conditions. The technology is based on application of a dry chemical additive. Low capital costs are required for installation of application equipment. Competitive Business Conditions Coal is the largest indigenous fossil fuel resource in the United States, with current U.S. annual coal production in excess of one billion tons. Approximately 80% of coal produced is used for electric power generation, and its use has grown by almost 25% over the last decade. The combustion of coal provides cost-effective electricity generation, but results in a high percentage of residual material, which serves as the "raw material" for the CCP industry. The industry manages these CCPs and related materials by developing end-use markets for certain CCPs and providing storage and disposal services for the remainder of such materials. In order to sustain its position as a leader in the CCP management industry, the Company relies on and continues to implement the following competitive strengths: Leading Market Position. The Company believes it is a party to more CCP management contracts and manages more CCP tonnage than any of its competitors. The Company has aggressively penetrated its service areas and has won contracts based on its "one-stop" approach to CCP and other industrial materials management services. This approach combines the Company's marketing, materials handling and technological capabilities to lower the client's cost of managing CCPs and other industrial materials in accordance with applicable state and federal regulations. Geographic Diversification. The Company believes it is the only company in the CCP management industry with a national scope. This national scope provides the Company with several significant competitive benefits, including mitigation of the effects of cyclical regional economies and weather patterns. In addition, the Company's national scope and storage capabilities will create incremental revenue through the ability to shift products among regions to meet market demand while minimizing transportation costs. Superior Transportation and Logistics Network. The Company's national footprint features a transportation and logistics infrastructure that supports long distance movements of CCPs to key markets, as well as materials storage capabilities that enhance product availability and reliability. These factors have allowed the Company to develop national purchasing power with railroads and other freight transportation providers and national purchasing contracts with major CCP end-users. Value-Added Products and Services. The Company's new product development efforts have broadened the end-use market for CCPs and other recyclable industrial materials. The Company has successfully introduced new patented or trademarked products made from previously non-marketable materials through proprietary processes. These product development efforts have reduced the materials management cost to the Company's clients and improved the Company's revenue mix and margins. Strong Client Relationships. At December 31, 2001, the Company had contractual relationships with most of the largest coal powered electrical utilities in the United States, based on total electricity revenues. The Company has maintained long-term contracts with certain utilities since 1978, and experienced a renewal or extension rate of greater than 90% since current management completed the acquisition of JTM in 1997. The Company's clients rely on its marketing, materials handling and technological capabilities to extend the useful life of their landfill sites by creatively managing and marketing a broader range of CCPs than competitors. Source and Availability of Raw Materials The Company's primary raw materials are CCPs. According to the American Coal Ash Association, more than two-thirds of CCPs produced in 2000 were disposed in landfills, providing ample opportunities for continuing increases in CCP utilization. As long as the majority of electricity generated in this country comes from the use of coal-fired generation, the Company believes it will have an adequate supply of raw materials. Electric Utility Deregulation The process of electric utility deregulation has slowed substantially from previous years' predictions. The impact that full deregulation of the industry will have on the Company is something that cannot be accurately projected. The major area of impact is to the individual source of CCPs that the Company uses to supply materials and products to various markets. Deregulation could result in some sources being put out of service because they are not economically competitive. On the other hand, deregulation efforts have spurred renewed interest in construction of new coal-fired electricity generating capacity. The Company believes that no significant changes to the sources of CCPs under contract will occur. However, since this change to the industry continues to evolve, the Company could be materially adversely affected if major changes occur to specific sources. Impact of Clean Air Act Amendments on Coal Consumption The Federal Clean Air Act of 1970 ("Clean Air Act") and Amendments to the Clean Air Act ("Clean Air Act Amendments"), and corresponding state laws that regulate the emissions of materials into the air, affect the coal industry both directly and indirectly. The coal industry may be directly affected by Clean Air Act permitting requirements and/or emissions control requirements relating to particulate matter (e.g., "fugitive dust"). The coal industry may also be impacted by future regulation of fine particulate matter measuring 2.5 micrometers in diameter or smaller. In July 1997, the United States Environmental Protective Agency ("EPA") adopted new, more stringent National Ambient Air Quality Standards ("NAAQS") for particulate matter and ozone. As a result, states will be required to implement changes to their existing state implementation plans to attain and maintain compliance with the new NAAQS. Because electric utilities emit nitrogen oxides, which are precursors to ozone, the Company's utility customers are likely to be affected when the revisions to the NAAQS are implemented by the states. State and federal regulations relating to fugitive dust and coal combustion emissions regulations relating to implementation of the new NAAQS may reduce the Company's sources for its products. The extent of the potential impact of the new NAAQS on the coal industry will depend on the policies and control strategies associated with the state implementation process under the Clean Air Act, as well as on pending legislative proposals to delay or eliminate aspects of the standard. Nonetheless, the new NAAQS could have a material adverse effect on the Company's financial condition and results of operations. The Clean Air Act indirectly affects the Company's operations by extensively regulating the air emissions of sulfur dioxides and other compounds emitted by coal-fired utility power plants. Title IV of the Clean Air Act Amendments places limits on sulfur dioxide emissions from electric power generation plants. The limits set baseline emission standards for such facilities. Reductions in such emissions will occur in two phases; the first began in 1995 ("Phase I"), and applies only to certain identified facilities and the second began on January 1, 2000 ("Phase II') and will apply to most remaining facilities, including those subject to the 1995 restrictions. The affected utilities have been and may be able to meet these requirements by, among other ways, switching to lower sulfur fuels, installing pollution control devices such as scrubbers, reducing electricity generating levels or purchasing or trading "pollution credits." Specific emission sources will receive these credits, which utilities and other industrial concerns can trade or sell to allow other units to emit higher levels of sulfur dioxide. The Clean Air Act Amendments also require utilities, that are currently major sources of nitrogen oxides in moderate or higher ozone nonattainment areas, to install reasonably available control technology for nitrogen oxides, which are precursors of ozone. In addition, the EPA currently plans to implement the recently issued, stricter ozone standards (discussed above) by 2003. The Ozone Transport Assessment Group ("OTAG"), formed to make recommendations to the EPA for addressing ozone problems in the eastern United States, submitted its final recommendations to the EPA in June 1997. Based on the OTAG's recommendations, the EPA announced a proposal (the "SIP call") that would require 22 eastern states to make substantial reductions in nitrogen oxide emissions. Under this proposal, the EPA expects that states will achieve these reductions by requiring power plants to make substantial reductions in their nitrogen oxide emissions. Installation of reasonably available control technology and additional control measures required under the SIP call will make it more costly to operate coal-fired utility power plants and, depending on the requirements of individual state attainment plans and the development of revised new source performance standards, could make coal a less attractive fuel alternative in the planning and building of utility power plants in the future. Any reduction in coal's share of the capacity for power generation could have a material adverse effect on the Company's financial condition and results of operations. The effect such regulation or other requirements that may be imposed in the future could have on the coal industry in general and on the Company cannot be predicted with certainty. No assurance can be given that the implementation of the Clean Air Act Amendments or any future regulatory provisions will not materially adversely affect the Company. Unburned carbon often remains in fly ash in small amounts. Under certain conditions, that carbon can interfere with concrete's ability to entrain correct amounts of air. Concrete producers often deal with this situation by adding air entraining chemicals. However, these chemicals are expensive and must be constantly monitored to guard against over or underdosing. The Company is affected by the Phase I and Phase II emission standards as the quality of fly ash produced as a result of the utilization of lower sulfur fuels is reduced. As utilities take steps to meet more stringent emissions control guidelines, residual carbon in fly ash becomes a growing problem for the Company. The Company cannot fully utilize this lower quality fly ash in some products and applications. Therefore, the Company has aggressively pursued technology and research and development activities to develop a carbon fixation process to treat fly ash that normally cannot be used due to its quality. The Company's carbon fixation technology, for which a patent has been applied, uses a liquid reagent to coat unburned carbon particles and hinder their impact on the concrete mix. Carbon is not removed, but its effects on air entrainment are minimized, thus allowing concrete producers to use significantly less chemicals at the job site. The technology also renders some ash products usable for the first time without having any negative impact on the quality of the finished concrete. The Company is successfully working with several utilities utilizing this technology. The Company has filed a provisional patent application for a technology to control ammonia in fly ash. Ammonia is another emerging challenge in the ash marketing industry. As utilities implement more stringent air pollution controls, many are treating boiler exhaust gases with ammonia to remove nitrous oxides. Some of the unreacted ammonia is deposited on fly ash particles. To address this challenge, the Company's new technology uses a chemical reagent to mitigate ammonia effects. When water is added to the concrete mix containing ammoniated fly ash, the reagent converts ammonia to harmless compounds. The treatment reagent can be added and blended with the dry fly ash at any point between the fly ash collection process at the power plant and the final delivery to the concrete producer. Reagent dosage rates depend upon the ammonia concentration. Reagents can also be added directly to the concrete mix. The Company is currently working with two utilities to implement the technology. Material Quality and Quantity Coal-fired boilers have been impacted by the Clean Air Act and the Clean Air Act Amendments, which established specific emissions levels concerning sulfur dioxide (SO2) and nitrous oxides (NO) that each utility must meet. These emission levels have required utilities to undertake many of the following changes: change their fuel source(s), add scrubbers to capture SO2, add new boiler burner systems to control NO, add or modify fuel pulverizers/air handling systems to control NO, introduce flue gas conditioning materials to control particulate emissions in conjunction with meeting SO2 emissions targets and in some very isolated cases shut down a plant. Amendments to existing particulate matter standards may require retrofitting of baghouses to control particulate emissions. All of these changes can impact the quantity and quality of CCPs produced at a power plant and can add to the costs of operating a power plant. Further, inappropriate use of material can result in faulty end products. Since most of the products marketed by the Company typically consist of a mixture of client-supplied materials, the Company does not exclusively control the quality of the final end product, but shares such control with the manufacturer of the ingredient materials. Therefore, there is a risk of liability regarding the quality of materials and end products marketed by the Company. In cases where the Company is responsible for end-product quality, such as structural fill (where material is used to fill a cavity or designated area), the Company depends solely on its own quality assurance / quality control programs. Dependence on Limited Customers The Company works with a large number of customers and has long-term contracts with most such customers. The Company's core business is based on long-term materials management contracts with power producers and industrial clients. As of December 31, 2001, the Company had over 101 materials management contracts, 40 of which generated more than $1.0 million of annual revenues each. Typical contract terms are from five to fifteen years, with most contracts being renewed upon expiration. The Company is focused on serving its current client base and plans to aggressively target additional contract opportunities to increase both tonnage under management and revenues. Intellectual Property The Company owns and has obtained licenses to various domestic and foreign patents and trademarks related to its products and processes. While these patents and trademarks in the aggregate are important to the Company's competitive position, no single patent or trademark is material to the Company. The Company's license agreements generally have a duration that coincides with the patents covered thereby. Government Approval None. Effect of Existing or Probable Government Regulation See discussion above under the headings "Impact of Clean Air Act Amendments on Coal Consumption" and "Material Quality and Quantity". Cost of Compliance with Environmental Laws None. Employees The Company has a total of 734 employees, of which 713 are full-time employees. Item 2. Properties The Company operates its corporate headquarters in Salt Lake City, Utah in offices leased under a three-year lease expiring in July 2002. The total amount of leased space in the corporate headquarters is 12,202 square feet. Due to the Company's national scope of operations, it has a number of other properties used in its operations. The following table sets forth certain information regarding the Company's other principal facilities as of December 31, 2001:
Lease Location Function Ownership Termination Date -------- -------- --------- ---------------- Bay City, MI Offices Leased August 31, 2004 Kennesaw, GA Offices Leased January 31, 2004 Houston, TX Offices Leased August 30, 2004 Pine Bluff, AR Offices Leased September 30, 2004 Tukwila, WA Offices Leased June 30, 2004 Acworth, GA Production Facility Leased Month to Month Apex, NV Terminal Facility Leased July 18, 2020 Carlin, NV Terminal Facility Leased Month to Month Delta, UT Storage Silos Leased Month to Month Denver, CO Terminal Facility Leased Month to Month Doraville, GA Terminal Facility Leased August 11, 2005 Duluth, GA Building Material Store Leased Month to Month Fargo, ND Fly Ash Storage Leased Month to Month Fresno, CA Terminal Facility Leased March 31, 2002 Good Springs, PA Silo Facility Leased Month to Month Houston, TX Production Facility Leased July 31, 2004 La Mirada, CA Terminal Facility Leased January, 31, 2003 Lewisville, Texas Terminal Facility Leased February 28, 2017 Sacramento, CA Terminal Facility Leased February 22, 2003 Salt Lake City, UT Production Facility Leased Month to Month San Antonio, TX Production Facility Leased May 31, 2004 Stockton, CA Terminal Facility Leased September 30, 2010 Clinton, TN Staging Facility Owned Centralia, WA Storage Facility Owned Dallas, TX - Don's Production Facility Owned Dallas, TX - Palestine Production Facility Owned Franklin, VA Staging Facility Owned LaMirada, CA Production Facility Owned Leland, NC Transfer Facility Owned Ogden, UT Storage Facility Owned Pacolet, SC Terminal Facility Owned Palestine, TX Production Facility Owned Pomona, CA Rail Terminal Owned San Antonio, TX Production Facility Owned Taylorsville, GA Lab Facility Owned Winnebago, MN Storage Facility Owned
Management believes its facilities are in good condition and that the facilities are adequate for its operating needs for the foreseeable future without significant modifications or capital investment. Item 3. Legal Proceedings The Company is a defendant in various lawsuits which are incidental to the Company's business. Management, after consultation with its legal counsel, believes that any potential liability as a result of these matters will not have a material effect upon the Company's results of operations or financial position. Item 4. Submission of Matters to a Vote of Security Holders None. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The Company's common stock is not publicly traded and is wholly owned by ISG. Item 6. Selected Financial Data The following table sets forth summary consolidated financial information of the Company for each of the five years in the period ended December 31, 2001. Such information was derived from the audited consolidated financial statements and notes thereto and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and notes thereto included elsewhere herein. The selected consolidated financial information for the periods prior to October 14, 1997 set forth below is not comparable to subsequent periods due to the step-up in basis resulting from the acquisition of JTM by ISG in 1997. Additionally, the information set forth below may not be comparable due to accounting for the 1998, 1999 and 2000 acquisitions using the purchase method of accounting. Therefore, only information for each acquisition from the respective acquisition date is included.
2 1/2 Months 9 1/2 months Years Ended Ended Ended December 31, December 31, December 31, December 31, December 31, October 13, 2001 2000 1999 1998 1997 1997 ---- ---- ---- ---- ---- ---- Statement of Income Data: Revenue $216,231 $180,902 $156,205 $117,293 $12,643 $51,295 Cost of products and services sold, excl. depr. 158,228 133,093 108,664 80,116 9,365 40,701 Depreciation and amortization 15,810 14,954 13,091 9,141 908 5,279 Selling, general and administrative expenses 25,019 26,326 18,962 14,145 1,256 3,633 New product development costs 2,308 2,332 2,166 - - - Operating income 14,866 2,672 13,321 13,891 1,114 1,682 Interest expense 16,968 15,804 13,392 9,338 629 4,160 Net income (loss) before income taxes (1,626) (12,749) 285 4,808 517 (2,478) Net income (loss) (2,541) (9,755) (362) 2,259 265 (3,090) Balance Sheet Data: Working capital (deficiency) 31,411 24,127 8,972 6,786 (21,648) (43,594) Total assets 253,819 252,334 220,463 191,732 73,270 58,396 Total debt 164,644 165,000 133,500 110,000 - - Shareholder's equity 24,555 27,122 27,162 27,524 25,265 3,623 Other Data: Cash flows from operating activities 14,711 684 10,204 8,210 1,843 521 Cash flows from investing activities (5,744) (35,983) (33,369) (86,623) (19) (681) Cash flows from financing activities 1,796 42,315 23,165 75,344 1,189 957 EBITDA (1) 31,153 18,010 26,768 23,287 2,054 6,961 EBITDA margin 14.4% 10.0% 17.1% 19.9% 16.2% 13.6% Capital expenditures 6,422 8,186 8,791 8,574 19 681 Ratio of earnings to fixed charges (2) .92x .31x 1.02x 1.42x 1.49x 0.56x Deficit of earnings to fixed charges (1,626) (12,749) - - - (2,478)
(1) EBITDA represents earnings before interest expense, income taxes, depreciation and amortization. EBITDA should not be considered as an alternative to net income or any other GAAP measure of performance as an indicator of the Company's performance or to cash flows provided by operating, investing or financing activities as an indicator of cash flows or a measure of liquidity. Management believes that EBITDA is a useful adjunct to net income and other measurements under GAAP in evaluating the Company's ability to service its debt and is a conventionally used financial indicator. However, due to possible inconsistencies in the method of calculating EBITDA, the EBITDA measures presented may not be comparable to other similarly titled measures of other companies. (2) The ratio of earnings to fixed charges is computed by dividing earnings by fixed charges. For this purpose, earnings include pre-tax income from continuing operations plus fixed charges. Fixed charges include interest, whether expensed or capitalized, amortization of debt expense and that portion of rental expense that is representative of the interest factor in these rentals. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis should be read in conjunction with the consolidated financial statements and notes thereto of ISG Resources, Inc. and its predecessor, JTM Industries, Inc. and other financial information appearing elsewhere herein. General The Company is a manager and marketer of CCPs in North America. The Company also manufactures and distributes building materials to residential and commercial contractors. The Company generates revenues from marketing and distributing products to its customers and providing materials management, engineering and construction services to its clients. The Company was founded in 1997 upon the acquisition of JTM by ISG (the "JTM Acquisition"). In 1998, the Company acquired Pozzolanic, PPA, the US Ash Group and Fly Ash Products (the "1998 Acquisitions"). In 1999, the Company acquired Specialties and Irvine in the CCP division and Best, Osborne, Terrazzo and Magna Wall in the building materials division (the "1999 Acquisitions"). In 2000, the Company acquired Don's and Palestine in the building materials division and Hanson in the CCP division (the "2000 Acquisitions"). The Company's strategic objectives include the maintenance and expansion of long-term contractual relationships with electric utilities, the increase in product sales and applications through cross-marketing and vertical integration, and further technological advances. Seasonality The Company's business is subject to seasonal fluctuation. The Company's need for working capital accelerates moderately during the middle of the year, and accordingly, total debt levels tend to peak in the second and third quarters, and decline in the fourth quarter of the year. The amount of revenue generated during the middle of the year generally depends upon a number of factors, including the level of road and other construction using concrete, weather conditions affecting the level of construction, general economic conditions, and other factors beyond the Company's control. Results of Operations Year Ended December 31, 2001 compared to Year Ended December 31, 2000 Product Revenues. Product revenues increased to $184.2 million in 2001 from $146.8 million in 2000, an increase of $37.4 million or 25.5%. This increase is primarily due to two factors: (1) the revenue added by the Palestine, Don's and Hanson acquisitions; and (2) internal growth in the CCP division. The results from the Palestine acquistion were included in operations from June 1, 2000, Don's from March 1, 2000, and Hanson from September 15, 2000. The year ended December 31, 2001 included a full year of results for these acquisitions. Growth in the CCP division included price increases and growth in certain regions of the country from sales to customers. Service Revenues. Service revenues decreased to $32.1 million in 2001 from $34.1 million in 2000, a decrease of $2.0 million or 5.9%. This decrease is primarily due to a decrease in construction related services and other disposal services. Cost of Products Sold, Excluding Depreciation. Cost of products sold, excluding depreciation, was $135.8 million in 2001 as compared to $108.4 million in 2000, resulting in cost of products sold, excluding depreciation, as a percentage of product revenues of 73.7% and 73.8% for the respective periods. Product margins were affected by increased transportation costs and cost of fly ash offset by decreased product costs in the MP division as a percentage of revenue. Cost of Services Sold, Excluding Depreciation. Cost of services sold, excluding depreciation was $22.4 million in 2001 as compared to $24.7 million in 2000, resulting in cost of services sold, excluding depreciation, as a percentage of service revenues of 69.8% and 72.4% for the respective periods. The increase in service margins is the result of a sharp decrease in disposal costs for sub-contracted trucking services in 2001, which followed a large increase in the prior year. Depreciation and Amortization. Depreciation and amortization was $15.8 million in 2001 as compared to $15.0 million in 2000, an increase of $0.8 million or 5.3%. This increase is due primarily to an increase in amortization expense of goodwill related to the 2000 Acquisitions. Selling, General and Administrative Expenses. Selling, general and administrative expenses (SG&A) decreased to $25.0 million in 2001 as compared to $26.3 million in 2000, a decrease of $1.3 million or 4.9%. This decrease is a result of reducing the labor force to become more efficient in administration, and a reduction in the travel and communication costs. Travel and communication costs declined from tighter expense control. New Product Development. New product development costs consist of scientific research and development and market development expenditures. The Company spent $2.1 million during 2001 and $1.8 million during 2000, on research and development activities covering basic scientific research and application of scientific advances to the development of new and improved products and processes. The Company spent $0.2 million and $0.5 million for the years ended December 31, 2001 and 2000, respectively, on market development activities related to promising new and improved products and processes identified during research and development activities. Interest Expense. Interest expense was $17.0 million and $15.8 million in 2001 and 2000, respectively, an increase of $1.2 million or 7.6%. The increase is due primarily to an increase in the Company's outstanding indebtedness resulting from the 2000 Acquisitions offset by a decrease in interest rates. Income Tax Expense/Benefit. Income tax expense was $0.9 million in 2001 and income tax benefit was $3.0 million in 2000. The increase in the income tax expense in 2001 is primarily due to a decrease in the net loss before income taxes incurred for the 2001 period which resulted in the Company having taxable income. The difference in the effective rate as compared to the statutory tax rate is largely the result of non-deductible goodwill amortization. Net Income (loss). As a result of the factors discussed above, the net loss for 2001 was $2.5 million as compared to 2000 net loss of $9.8 million. Year Ended December 31, 2000 Compared to Year Ended December 31, 1999 Product Revenues. Product revenues increased to $146.8 million in 2000 from $120.3 million in 1999, an increase of $26.5 million or 22.0%. This increase is primarily due to two factors: (1) the revenue added by the 2000 Acquisitions; and (2) internal growth in the CCP division, primarily as a result of price increases and value growth. Service Revenues. Service revenues decreased to $34.1 million in 2000 from $35.9 million in 1999, a decrease of $1.8 million or 5.0%. This decrease is primarily due to a decrease in construction related services and other disposal services. Cost of Products Sold, Excluding Depreciation. Cost of products sold, excluding depreciation, was $108.4 million in 2000 as compared to $83.4 million in 1999, resulting in cost of products sold, excluding depreciation, as a percentage of product revenues of 73.8% and 69.3% for the respective periods. The decrease in product margins as a percent of revenue is primarily due to lower margins on product revenues derived from the 1999 and 2000 Acquisitions in the building materials division and an increase in the share of revenue paid to utilities for materials in the CCP division. Cost of Services Sold, Excluding Depreciation. Cost of services sold, excluding depreciation was $24.7 million in 2000 as compared to $25.2 million in 1999, resulting in cost of services sold, excluding depreciation, as a percentage of service revenues of 72.4% and 70.2% for the respective periods. The slight decrease in service margins is primarily due to an increase in disposal costs for sub-contracted trucking services in 2000. Depreciation and Amortization. Depreciation and amortization was $15.0 million in 2000 as compared to $13.1 million in 1999, an increase of $1.9 million or 14.2%. This increase is due primarily to an increase in amortization expense of goodwill related to the 2000 Acquisitions and an increase in depreciation expense related to new acquisitions of property, plant and equipment during 2000. Selling, General and Administrative Expenses. Selling, general and administrative expenses (SG&A) increased $7.4 million or 38.8% to $26.3 million in 2000 as compared to $19.0 million in 1999. This increase is primarily due to five factors: (1) a full year of SG&A in 2000 related to the 1999 Acquisitions as compared to 1999, which only included SG&A from the respective dates of acquisition forward; (2) the SG&A added by the 2000 Acquisitions; (3) an increase in total personnel costs associated with the Company's self-funded health insurance plan and an increase in incentive and other compensation associated with the 1999 and 2000 Acquisitions; (4) an increase in property, automobile and general liability insurance costs associated with the 1999 and 2000 Acquisitions; and (5) an increase in sales and marketing efforts. Unsuccessful Acquisition Costs. Costs of $1.5 million incurred related to unsuccessful business acquisitions were charged to expense in 2000 when the Company determined that such acquisitions would not occur. No such costs were expensed in 1999. On February 24, 1999, the Company entered into an option agreement to acquire the stock of Tatum Industries, Inc. (Tatum). As part of that agreement, the Company agreed to loan Tatum approximately $50,000 per month for operating expenses and loan servicing. Tatum's note to the Company accrued interest at 8% and was payable on demand. Additionally, the Company leased Tatum's building, transferred certain equipment and incurred approximately $0.1 million of leasehold improvements to the property. On October 27, 2000, the Company advised Tatum that the Company was terminating the option agreement and the Company advised Tatum that the note to the Company, totaling approximately $1.1 million, would be due and payable on March 1, 2001. In December 2000, Tatum advised the Company that they would not be able to repay the note and the Company's attempt to purchase the outstanding stock of Tatum was unsuccessful. As a result, in 2000, the Company expensed approximately $1.1 million in unsuccessful acquisition costs, which is included in the $1.5 million discussed above. However, the Company continued to lease the building from Tatum and use the equipment in its operations. In 2001, in conjunction with the Company's decision to abandon its production operations at Tatum's facility, the Company recognized $291,000 as an impairment loss on the owned assets, based upon an offer the Company received to purchase the assets. This loss is recognized in operating income and is included in the aggregate total of selling, general and administrative expense. These assets were sold in December 2001. New Product Development. New product development costs consist of scientific research and development and market development expenditures. The Company spent $1.8 million for each of the years ended December 31, 2000 and 1999, respectively, on research and development activities covering basic scientific research and application of scientific advances to the development of new and improved products and processes. The Company spent $0.5 million and $0.4 million for the years ended December 31, 2000 and 1999, respectively, on market development activities related to promising new and improved products and processes identified during research and development activities. Interest Expense. Interest expense was $15.8 million and $13.4 million in 2000 and 1999, respectively, an increase of $2.4 million or 17.9%. The increase is due primarily to an increase in the Company's outstanding indebtedness resulting from the 2000 Acquisitions and an increase in interest rates. Income Tax Expense/Benefit. Income tax benefit was $3.0 million in 2000 and income tax expense was $0.6 million in 1999, resulting in effective tax rates of 23.5% and 227.1%. The decrease in the effective tax rate in 2000 is primarily due to an increase in the net loss before income taxes incurred for the 2000 period. The difference in the effective rate as compared to the statutory tax rate is largely the result of non-deductible goodwill amortization. Net Income (loss). As a result of the factors discussed above, the net loss for 2000 was $9.8 million as compared to 1999 net loss of $.4 million. 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 $15.0 increase in the Secured Credit Facility on May 26, 2000 (discussed below). Operating and capital expenditures and the acquisitions of Don's and Hanson 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 (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 3.5% for the Tranche A and 1.75% to 2.5% for the Tranche B, 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 2.25% for the Tranche A and 0.50% to 1.25% for the Tranche B 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 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. On August 8, 2000, the amended and restated secured credit agreement dated May 26, 2000 was amended in order to modify certain debt covenants contained in the credit agreement. Primarily, a minimum consolidated Earnings Before Interest Expense, Income Tax Expense, Depreciation Expense, and Amortization Expense (EBITDA) debt covenant was added. The minimum consolidated EBITDA covenant requires the Company to maintain a minimum EBITDA amount as of the last day of every fiscal quarter through June 30, 2003 at levels set forth in the agreement. On March 30, 2001, the amended and restated secured credit agreement dated May 26, 2000 and subsequently amended on August 8, 2000, was amended in order to modify certain debt covenants contained in the credit agreement. The amended and restated secured credit facility continues to require the Company to not exceed a maximum leverage ratio, to not drop below a minimum interest coverage ratio, to not drop below a minimum consolidated EBITDA level, and to comply with certain other financial and non-financial covenants. At December 31, 2001 the Company had $17.7 million in cash or cash equivalents and $64.6 million of the Secured Credit Facility was outstanding, with no amount being unused and available. The Company had working capital of approximately $31.4 million, an increase of $7.3 million over the working capital of $24.1 million as of December 31, 2000 due to an increase in cash, trade accounts receivable, inventories, and a decrease in accrued interest, offset in part by increases in accounts payable, accrued payroll, and a decrease in an income tax receivable. Accounts receivable and inventories have increased as a result of growth in the CCP division, while the decrease in accrued interest represents decreasing interest rates. The increase in accounts payable results from growth in the CCP division. 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 2001, capital expenditures amounted to approximately $6.4 million. Future capital expenditures made in the ordinary course of business will be funded by cash flow from operations. The Company anticipates that its principal use of cash will be for working capital requirements, debt service requirements, capital expenditures and its contractual obligations and commercial commitments as set forth below. Based upon anticipated levels of operations, the Company believes that its cash flow from operations, will be adequate to meet its anticipated requirements for working capital, capital expenditures, interest payments and other obligations and commitments 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 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. Contractual Obligations and Commercial Commitments The Company has various contractual obligations as outlined by the table below. The Company's long-term debt consists of a Secured Credit Facility provided by a syndicate of banks, due in 2003, and of Senior Subordinated Notes, due in 2008. The Company's operating lease obligations represent rent for buildings, equipment, vehicles, and railcars. See Notes 4 and 7 in the audited financial statements for additional information regarding contractual obligations.
Contractual Obligations Payments Due by Period (in thousands) ------------------------------------ --------- --------- ---------- ---------- ---------- ----------- ----------- Total 2002 2003 2004 2005 2006 Thereafter ------------------------------------ --------- --------- ---------- ---------- ---------- ----------- ----------- Long Term Debt $164,644 $ - $64,644 $ - $ - $ - $100,000 ------------------------------------ --------- --------- ---------- ---------- ---------- ----------- ----------- Operating Leases 30,306 8,457 7,099 4,829 2,761 1,659 5,501 ------------------------------------ --------- --------- ---------- ---------- ---------- ----------- ----------- Unconditional Purchase Obligations 42,405 8,043 8,170 6,977 3,063 2,902 13,250 ------------------------------------ --------- --------- ---------- ---------- ---------- ----------- ----------- Unconditional Sales Obligations 7,800 720 840 960 960 720 3,600 ------------------------------------ --------- --------- ---------- ---------- ---------- ----------- ----------- Other Contractual Obligations 2,990 2,154 759 - - - - ------------------------------------ --------- --------- ---------- ---------- ---------- ----------- -----------
Critical Accounting Principles and Estimates In response to the SEC's Release numbers 33-8040 "Cautionary Advice Regarding Disclosure About Critical Accounting Policies" and 33-8056, "Commission Statement about Management's Discussion and Analysis of Financial Condition and Results of Operations," the Company has identified the following critical accounting policies that affect the more significant judgments and estimates used in the preparation of the consolidated financial statements. The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States requires the Company to make estimates and judgments that affect the Company's reported amounts of assets and liabilities, revenues and expenses and related disclosures. The Company's significant accounting policies are included in Note 2 to the Consolidated Financial Statements. The Company evaluates its estimates and judgments on an on-going basis. The Company bases its estimates on historical experience and on assumptions that it believes to be reasonable under the circumstances. The Company's experience and assumptions form the basis for its judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may vary from what the Company anticipates and different assumptions or estimates about the future could change its reported results. The Company believes the following accounting policies are the most critical to the Company, in that they are important to the portrayal of its financial statements and they require the Company's most difficult, subjective or complex judgments in the preparation of its consolidated financial statements: Revenue Recognition The Company recognizes revenue from the sale of product when persuasive evidence of a sale exists, the product has been shipped, the sales price is fixed and determinable and collection of the resulting receivable is reasonably assured. Revenues are generated from the sales of both product and services. CCP Product revenues generally include transportation charges associated with delivering the material. Service revenues under long-term contracts are recognized concurrent with the removal of the material and are generally based on the number of tons of material removed at an established price per ton. Service revenue from construction-related projects are billed on a time and materials basis such that revenues and costs are recognized when the time is incurred and the materials are used. Service revenues are incidental to the Company's primary business. Allowances for Doubtful Accounts Allowances for doubtful accounts are estimated at the individual operating divisions based on estimates of losses related to customer receivable balances and reviewed by the corporate office for reasonableness. The Company develops estimates by using standard quantitative measures based on historical knowledge, the current economic conditions and, in some cases, evaluating specific customer accounts for risk of loss. The establishment of reserves requires the use of judgment and assumptions regarding the potential for losses on receivable balances. Though the Company considers these balances adequate and proper, changes in economic conditions in specific markets in which the Company operates could have a material effect on reserve balances required. Property, Plant and Equipment Property, plant and equipment acquired as part of the acquisitions were recorded at estimated fair market value at the dates of the respective acquisitions. Property, plant and equipment acquired subsequent thereto, renewals and betterments are recorded at cost and are depreciated on a straight-line basis over the estimated useful lives of such assets. Maintenance and repairs are expensed as incurred. Upon sale or retirement, the costs and related accumulated depreciation are eliminated from property, plant and equipment and any resulting gain or loss is included in income. Depreciation is provided over the estimated useful lives or lease terms, if less, using the straight-line method. Changes in circumstances such as technological advances, changes to the Company's business model or changes in the Company's capital strategy can result in the actual useful lives differing from the Company's estimates. In those cases where the Company determines that the useful life of property, plant and equipment should be shortened, the Company would depreciate the net book value in excess of the salvage value, over its revised remaining useful life thereby increasing depreciation expense. See further discussion below with regard to impairment testing. Impairment Testing of Long-Lived Assets, Including Fixed Assets, Goodwill and Other Acquired Intangible Assets The Company has made acquisitions in the past that included a significant amount of fixed assets, goodwill and other intangible assets. The cost of acquired companies was allocated first to identifiable assets based on estimated fair values. Cost allocated to identifiable assets, including fixed assets, are amortized on a straight-line basis over the remaining estimated useful lives of the assets, as determined principally by the underlying characteristics of the assets acquired, net of assumed liabilities. Intangible assets consist of goodwill, contracts, patents and licenses, and assembled workforce. Effective in 2002, as discussed in New Accounting Pronouncements, goodwill will no longer be amortized but will be subject to an annual (or, under certain circumstances, more frequent) impairment test based on its estimated fair value. Other intangible assets will generally continue to be amortized over their useful lives and also will be subject to an impairment test based on estimated fair value. Estimated fair value is typically less than values based on undiscounted operating earnings because fair value estimates include a discount factor in valuing future cash flows. There are many assumptions and estimates underlying the determination of an impairment loss. Another estimate using different, but still reasonable, assumptions could produce a significantly different result. Therefore, additional impairment losses could be recorded in the future. Fixed assets are not included in the new accounting pronouncement; thus, the fixed asset policies noted above are not expected to change in adopting the new accounting pronouncement. Currently, the Company assesses the impairment of fixed assets, identifiable intangibles and goodwill whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors the Company considers important that could trigger an impairment review include the following: o A significant underperformance relative to expected historical or projected future operating results; o A significant change in the manner of our use of the acquired asset or the strategy for our overall business; o A significant negative industry or economic trend; When the Company determines that one or more of the above indicators of impairment exists, the Company evaluates the carrying amounts of the affected assets. The evaluation, which involves significant management judgment, is based on various analyses including cash flow and profitability projections. To the extent such projections indicate that future undiscounted cash flows are not sufficient to recover the carrying amounts of the related long-lived assets, the carrying amount of the underlying assets will be reduced, with the reduction charged to expense, so that the carrying amount is equal to fair value, primarily determined based on future discounted cash flows, using a discount rate determined by management to be commensurate with the risk inherent in the Company's current business model. Net intangible assets, and goodwill amounted to $157.2 million as of December 31, 2001. Net fixed assets amounted to $38.1 million as of December 31, 2001. The effect of eliminating amortization for goodwill and assembled workforce will approximate $4.1 million annually. For further information, see the discussion under New Accounting Pronouncements. Inventory The Company's inventories are valued at the lower of cost or market method on a first-in, first-out basis. Under certain market conditions, estimates and judgments regarding the valuation of inventory are employed by the Company to properly value inventory. Accounting for Income Taxes The provision for income taxes is based upon the Company's estimate of taxable income or loss for each respective accounting period. The Company recognizes an asset or liability for the deferred tax consequences of temporary differences between the tax bases of assets and liabilities and their reported amounts in the financial statements. These temporary differences will result in taxable or deductible amounts in future years when the reported amounts of assets are recovered or liabilities are settled. The Company also recognizes as deferred tax assets the future tax benefits from net operating loss carryforwards. New Accounting Pronouncements In 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which was subsequently amended by SFAS No. 137 "Accounting for Derivative Financial Instruments and Hedging Activities - Deferral of the Effective Date of SFAS No. 133" and SFAS No. 138 "Accounting for Certain Derivative Instruments and Certain Hedging Activities." SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument, including certain derivative instruments embedded in other contracts, be recorded in the balance sheet as either an asset or liability and measured at its fair value. The statement also requires that changes in the derivative's fair value be recognized in earnings unless specific hedge accounting criteria are met. SFAS No. 133, as amended by SFAS No. 137 and SFAS No. 138, is effective for all fiscal years beginning after June 15, 2000. As expected, the adoption of SFAS No. 133 did not have a material impact on the Company's financial condition or results of operations. In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards (SFAS) No. 141, "Business Combinations," and No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Use of the pooling-of-interests method is no longer permitted. SFAS No. 141 also includes guidance on the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination that is completed after June 30, 2001. SFAS No. 142 no longer permits the amortization of goodwill and indefinite-lived intangible assets. Instead, these assets must be reviewed annually (or more frequently under certain conditions) for impairment in accordance with this statement. This impairment test uses a fair value approach rather than the undiscounted cash flows approach previously required by SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Intangible assets that do not have indefinite lives will continue to be amortized over their useful lives and reviewed for impairment in accordance with SFAS No. 121 or SFAS No. 142 (see discussion below), which the Company is required to adopt effective January 1, 2002. The Company is currently evaluating its intangible assets in relation to the provisions of SFAS No. 142 to determine the impact that adoption of SFAS No. 142 will have on its results of operations or financial position. In accordance with SFAS No. 142, the Company anticipates that the amounts classified as assembled workforce will be reclassified to goodwill. The Company anticipates that all amortization of goodwill and all amortization of assembled workforce will no longer be recorded in the financial statements. The effect of eliminating amortization for goodwill and assembled workforce will approximate $4,100,000 in the year ending December 31, 2002. The useful lives of the intangible contracts are presently being evaluated and it is possible that the Company may determine that the useful lives of the intangible contracts should change after evaluation. The Company is uncertain as to the net impact, if any, such evaluation will have on amortization expense for the year ending December 31, 2002. In the future, goodwill will be evaluated by the fair value method, comparing the estimated fair value with the recorded value of the assets and liabilities, as recommended in the Statement. The effect of impairment of goodwill, if any, has not yet been evaluated. The Statement requires recognition of any impairment of goodwill in the first quarter of the fiscal year. A restatement of quarterly financial results may be required for the year ended December 31, 2002 if the two-step valuation process is not completed by the filing of the first quarter financial statements. The effect of any impairment recognized at transition to the Statement will be recognized as a change in accounting principle. In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 143, "Accounting for Asset Retirement Obligations". SFAS No. 143 requires alternative accounting treatment of assets which are in the process of retirement. The Company is required to adopt SFAS No. 143 effective January 1, 2002. The Company anticipates that there will not be a significant effect on results of operations or financial position. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This Statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This Statement supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations and Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business (as previously defined in that Opinion). This Statement also amends ARB No. 51, "Consolidated Financial Statements," to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary. This Statement is effective for years beginning after December 15, 2001 (i.e. January 1, 2002 for calendar year companies). The Company anticipates that there will not be a significant effect on results of operations or financial position. Forward-Looking Information Statements included in this Management's Discussion and Analysis of Financial Condition and Results of Operations and other items of this Form 10-K may contain forward-looking statements. Such forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements may relate, but not be limited to, projections of revenues, income or loss, capital expenditures, plans for growth and future operations, financing needs, as well as assumptions relating to the foregoing. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. When used in this "Management's Discussion and Analysis of Financial Condition and Results of Operations", and elsewhere in this Form 10-K the words "estimates", "expects", "anticipates", "forecasts", "plans", "intends" and variations of such words and similar expressions are intended to identify forward-looking statements that involve risks and uncertainties. Future events and actual results could differ materially from those set forth in, contemplated by or underlying the forward-looking statements. Item 7a. Qualitative and Quantitative Disclosures about Market Risk In 1997, the SEC issued new rules (Item 305 of Regulation S-K) which requires disclosure of material risks as defined by Item 305, related to market risk sensitive financial instruments. As defined, the Company currently has market risk sensitive instruments related to interest rates. As disclosed in Note 4 of the audited consolidated financial statements, the Company has outstanding long-term debt of $164.6 million at December 31, 2001. The Company currently has a maturity of approximately six years for $100.0 million of long term debt, which is at a fixed rate of 10.0%. The remainder of long term debt ($64.6 million) is at a rate averaging 8.2% for the year ended December 31, 2001 as compared to 9.7% for the year ended December 31, 2000. A hypothetical 10% change in market interest rates over the next year could impact the Company's earnings or cash flows as the interest rate on a large portion of the long-term debt is variable. The Company believes a 10% change in market interest rates would not have a material effect on the fair value of the Company's publicly traded long-term debt. The Company does not purchase or hold any derivative financial instruments for trading purposes. The Company has not undertaken any additional actions to cover interest rate market risk and is not a party to any other interest rate market risk management activities. Item 8. Consolidated Financial Statements and Supplementary Data The consolidated audited financial statements for the year ending December 31, 2001 are attached hereto at pages F-1 through F-32. Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure None. PART III Item 10. Directors and Executive Officers of the Registrant The Company's directors and executive officers, and their respective ages and positions with the Company, are set forth below in tabular form. Biographical information on each person is set forth following the tabular information. There are no family relationships between any of the Company's directors or executive officers. The Company's board of directors is currently comprised of two members, each of whom is elected for a term of one year. Executive officers are chosen by and serve at the discretion of the board of directors. Name Age Position with Company R Steve Creamer....... 50 Chairman of the Board and Chief Executive Officer Raul A. Deju.......... 56 President and Chief Operating Officer J.I. Everest, II...... 45 Chief Financial Officer, Treasurer, and Assistant Secretary Brett A. Hickman...... 40 Senior Vice President, General Counsel and Secretary Joseph M. Silvestri... 40 Director R Steve Creamer. Mr. Creamer is the Chairman of the Board and Chief Executive Officer of the Company and ISG. Immediately prior to his employment with the Company, Mr. Creamer was CEO (from 1992 to 1997) and the founder of ECDC Environmental L.C., the largest rail-served industrial waste management facility in North America. Prior to that, Mr. Creamer served as CEO of Creamer & Noble, an engineering firm based in St. George, Utah. He earned a B.S. degree in Civil and Environmental Engineering from Utah State University in 1973. Mr. Creamer is a Professional Engineer. Raul A. Deju. Dr. Deju is the President and Chief Operating Officer of the Company and ISG. Dr. Deju served as a Director of Rockwell Hanford Operations through 1981, Senior Vice President of International Technologies, Inc. through 1987 and Regional President of several subsidiaries of WMX Technologies, Inc. through 1995. Dr. Deju served as Chairman and CEO of DGL International through 1997, and Board Chairman of Isadra, Inc. Dr. Deju has been on the Board of Directors of various national and international WMX subsidiaries, Advanced Sciences, Inc. and Isadra, Inc. Dr. Deju is a member of ISG's Boards of Directors. Dr. Deju is an advisor to a committee of the U.S. Secretary of Commerce and has served on the U.S. Environmental Protection Agency Advisory Committee. Dr. Deju received a B.S. degree in Mathematics and Physics in 1966 and a Ph.D. degree in Engineering Geology in 1969 from the New Mexico Institute of Mining and Technology. J.I. Everest, II. Mr. Everest is the Chief Financial Officer, Treasurer and Assistant Secretary of the Company and ISG. He is responsible for all financial functions of the Company. Immediately prior to his employment with the Company, he served as Vice President of Finance for ECDC Environmental, Inc. (from 1993 to 1997). From 1988 to 1993, Mr. Everest was Director of Financial Analysis/Treasury of USPCI, Inc. Mr. Everest earned an M.B.A. degree (Finance Concentration) in 1994 from the University of Texas at Austin and a B.B.A. degree from Southern Methodist University in 1979. Mr. Everest is a C.P.A. Brett A. Hickman. Mr. Hickman is the Senior Vice President, General Counsel and Secretary of the Company. From December 1993 until February 1998, Mr. Hickman was General Counsel, Western Division of Laidlaw Environmental Services, Inc. Prior to that, Mr. Hickman was an attorney with Davis & Lavender in Columbia, South Carolina. Mr. Hickman earned a B.A. degree in Political Science from The Citadel in 1983 and a J.D. degree from the University of South Carolina in 1986. Joseph M. Silvestri. Mr. Silvestri has been a director of the Company since its acquisition by ISG. Mr. Silvestri has been employed by Citibank Venture Capital Ltd. (CVC) since 1990 and has served as a Vice President there since 1995. Mr. Silvestri is a director of ISG, International Media Group, Polyfibron Technologies, Frozen Specialties, Glenoit Mills, Euramax and Triumph Group. Compliance with Section 16(a) of the Securities Exchange Act of 1934. Section 16(a) of the Securities Exchange Act of 1934, and the rules and regulations promulgated thereunder, require the Company's executive officers and directors, and persons who beneficially own more than ten percent of a registered class of the Company's equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission and the National Association of Securities Dealers Automated Quotations System and to furnish the Company with copies thereof. None of the Company's executive officers and directors and ten-percent owners of ISG own any shares in the Company. Accordingly, no such reports have been, or need to be, filed. Item 11. Executive Compensation The following table shows the compensation paid by the Company to its current Chairman and Chief Executive Officer, and the Company's other most highly paid executive officers.
Summary Compensation Table Annual Compensation Other Annual Name and Principal Position(1) Fiscal Year Salary (2) Bonus Compensation (3) ------------------------------ ----------- ---------- ----- ---------------- R Steve Creamer 2001 $285,516 $ -0- $5,000 Chairman and Chief Executive Officer 2000 262,340 65,000 5,000 1999 260,000 34,667 5,000 Raul A. Deju 2001 270,782 -0- $5,000 President and Chief Operating Officer 2000 250,016 62,500 5,000 1999 250,016 33,333 5,000 J.I. Everest, II 2001 218,339 -0- $5,000 Chief Financial Officer, Treasurer and 2000 204,310 50,000 5,000 Assistant Secretary 1999 204,561 26,667 5,000 Brett Hickman 2001 162,469 -0- $5,000 Senior Vice President, General Counsel and 2000 159,010 37,500 5,000 Secretary 1999 150,010 20,000 5,000 Jerry B. Smith 2001 126,793 55,569 $5,000 Vice President 2000 126,463 10,000 5,000 1999 118,958 8,760 5,000 (1) Positions indicated were as of December 31, 2001. (2) Includes amounts, if any, deferred by the named individual for the period in question pursuant to Section 401(k) of the Internal Revenue Code under the Company's 401(k) Savings Plan (the "401(k) Plan"). (3) Amounts shown under Other Annual Compensation include amounts paid by the Company as matching and/or profit sharing contributions to the 401(k) Plan, but do not include perquisites and other personal benefits provided to each of the named executives, the aggregate value of which did not exceed the lesser of $50,000 or 10% of any such named executive's annual salary and bonus.
Item 12. Security Ownership of Certain Beneficial Owners and Management The Company is wholly owned by ISG. The following table sets forth the number of shares of ISG's common stock beneficially owned as of March 18, 2002, (i) by each person who is known by the Company to own beneficially more than 5% of the Company's common stock, (ii) by each director and director nominee, (iii) by each of the Company's named executive officers, and (iv) by all directors, director nominees and executive officers, as a group, as reported by each such person.
Beneficial Ownership of Beneficial Ownership of Common Stock Preferred Stock (7) ------------ ------------------- Name and Address of Beneficial Owner Number of Number of ------------------------------------ Shares Percent Shares Percent ------ ------- ------ ------- Citicorp Venture Capital, Ltd. (1)................. 187,425 37.9 41,813 41.8 R Steve Creamer (2)(3)............................. 150,266 30.4 34,052 34.0 J.I. Everest, II (3)............................... 49,467 10.0 9,925 9.9 CCT Partners IV, LP (4)............................ 33,075 6.7 4,732 4.7 Raul A. Deju ...................................... 45,317 9.2 5,023 5.0 Joseph M. Silvestri................................ 980 0.2 140 0.1 Brett A. Hickman................................... 4,950 1.0 1,001 1.0 All directors and executive officers as a group (8 persons) (2)(3)(5)(6)........................... 252,341 50.81 50,141 50.1
(1) The address of Citicorp Venture Capital, Ltd. is: 399 Park Avenue, 14th Floor, New York, NY 10043. (2) Includes 112,700 shares owned by Mr. Creamer's two adult sons and one minor child. (3) Messrs. Creamer and Everest beneficially own shares in ISG through Creamer Investments, Inc., a Nevada corporation, ("Creamer"), successor to RACT, Inc., a Utah corporation, which directly owns shares in ISG. The business address of Creamer is: 136 East South Temple, Suite 1300, Salt Lake City, Utah 84111. (4) The address of CCT Partners IV, LP is the same as that of Citicorp Venture Capital, Ltd. (5) An employee, pursuant to his employment contract, has been granted an economic interest in one percent of all outstanding shares of the Company's common stock as of the date of his employment agreement. This economic interest vested immediately upon execution of the employment agreement, but the right is contingent upon the occurrence of certain future events. Because such events have not occurred as of December 31, 2001, and management presently believes that such events are unlikely to occur, no compensation expense has been calculated or recorded. (6) Certain key executives, pursuant to the ISG 1999 Stock Option Plan, have 1,360.75 options exercisable within 60 days, with 4,083 shares exercisable in the future. (7) Effective January 29, 2002, ISG issued 30,000 shares of newly authorized Preferred Stock for $3,000,000 in order to raise funds to eliminate certain obligations of ISG. Such Preferred Stock is included in the above ownership totals. Item 13. Certain Relationships and Related Transactions None. 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 Exhibit Number Description of Exhibit *2.1 Amended and Restated Secured Credit Facility dated May 26, 2000 and Exhibits. *2.2 First Amendment dated August 8, 2000 to the Amended and Restated Credit Agreement dated May 26, 2000. *2.3 Third Amendment and Limited Waiver dated March 30, 2001 to the Amended and Restated Credit Agreement dated May 26, 2000. *3.1 Purchase Agreement dated March 2, 2000 by and between ISG Resources, Inc. ISG Manufactured Products, Inc. and Charlie A. Meador, Stephen D. Smith, Victoria L. Smith, Deanna R. Smith, Charlie E. Meador and Blake A. Meador for the purchase of the Don's Building Supply limited liability partnership. *3.2 Stock Purchase Agreement dated April 30, 2000 and the Amendment to the Stock Purchase Agreement dated May 16, 2000 by and between ISG Resources, Inc. and Dale & Brenda, Ltd., Dan & Dorenda, Ltd., Daniel Andrew Smith Family Trust and the Dale Wayne Smith Family Trust and Dale W. Smith and Danny A. Smith for the purchase of the outstanding stock of Palestine Concrete Tile Company. *3.3 Asset Purchase Agreement dated September 5, 2000 by and between ISG Resources, Inc. and Hanson Aggregates West, Inc. **12.1 Statement re Computation of Ratio of Earnings to Fixed Charges. ---------- * Previously Filed. ** Filed herewith. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ISG Resources, Inc. (Registrant) Date: March 20, 2002 By: /s/ R Steve Creamer --------------------------------- R Steve Creamer, Chairman and Chief Executive Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date --------- ----- ---- /s/ R Steve Creamer Chairman and Chief Executive Officer March 20, 2002 -------------------- R Steve Creamer /s/ Raul A Deju President and Chief Operating Officer March 20, 2002 ------------------------ Raul A. Deju /s/ J.I. Everest, II Chief Financial Officer, Treasurer March 20, 2002 ------------------------ and Assistant Secretary J.I. Everest, II /s/ Joseph M. Silvestri Director March 20, 2002 ------------------------ Joseph M. Silvestri CONSOLIDATED FINANCIAL STATEMENTS ISG Resources, Inc. and Subsidiaries Years Ended December 31, 2001 and 2000 and for Each of the Three Years in the Period Ended December 31, 2001 with Report of Independent Auditors ISG Resources, Inc. and Subsidiaries Consolidated Financial Statements Years Ended December 31, 2001 and 2000 and for Each of the Three Years in the Period Ended December 31, 2001 Contents Report of Independent Auditors .............................................F-1 Audited Consolidated Financial Statements Consolidated Balance Sheets ................................................F-2 Consolidated Statements of Operations ......................................F-4 Consolidated Statements of Comprehensive Loss...............................F-5 Consolidated Statements of Shareholder's Equity.............................F-6 Consolidated Statements of Cash Flows ......................................F-7 Notes to Consolidated Financial Statements .................................F-8 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, 2001 and 2000 and the related consolidated statements of operations, comprehensive loss, shareholder's equity and cash flows for each of the three years in the period ended December 31, 2001. 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, 2001 and 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States. Salt Lake City, Utah March 8, 2001 F-1 ISG Resources, Inc. and Subsidiaries Consolidated Balance Sheets December 31 2001 2000 ------------------------------------- Assets Current assets: Cash and cash equivalents $ 17,724,156 $ 6,986,725 Accounts receivable: Trade, net of allowance for doubtful accounts of $440,000 in 2001 and $501,000 in 2000 25,302,639 24,321,302 Retainage receivable 257,989 146,000 Income taxes receivable - 2,196,988 Other receivables 692,828 686,684 Deferred tax assets 630,178 851,325 Inventories 8,528,976 6,663,633 Other current assets 1,604,691 1,057,890 ------------------------------------- Total current assets 54,741,457 42,910,547 Property, plant and equipment: Land and improvements 6,167,877 4,536,470 Buildings and improvements 10,718,413 8,795,437 Vehicles and other operating equipment 36,973,546 32,299,254 Furniture, fixtures and office equipment 1,269,968 1,238,316 ------------------------------------- 55,129,804 46,869,477 Accumulated depreciation (18,126,675) (12,777,609) ------------------------------------- 37,003,129 34,091,868 Construction in progress 1,115,423 3,668,688 ------------------------------------- 38,118,552 37,760,556 Other assets: Intangible assets, net 157,177,699 167,076,486 Debt issuance costs, net 3,687,475 4,524,473 Other assets 93,706 62,313 ------------------------------------- Total assets $253,818,889 $252,334,375 ===================================== F-2 December 31 2001 2000 ------------------------------------- Liabilities and shareholder's equity Current liabilities: Accounts payable $ 14,287,253 $ 10,704,637 Accrued expenses: Payroll 2,775,553 2,406,172 Interest 2,380,899 2,849,902 Other 1,924,450 1,826,232 Income taxes payable 10,872 -- Other current liabilities 1,951,850 996,153 ------------------------------------- Total current liabilities 23,330,877 18,783,096 Long-term debt 164,643,900 165,000,000 Deferred tax liabilities 35,726,641 37,702,524 Payable to Industrial Services Group 4,796,444 2,244,022 Other liabilities 766,004 1,482,848 Commitments and contingencies Shareholder's equity: Common stock, no par value; 100 shares authorized, issued and outstanding 34,745,050 34,745,050 Cumulative foreign currency translation adjustment (55,636) (29,904) Retained deficit (10,134,391) (7,593,261) ------------------------------------- Total shareholder's equity 24,555,023 27,121,885 ------------------------------------- Total liabilities and shareholder's equity $253,818,889 $252,334,375 ===================================== See accompanying notes. F-3
ISG Resources, Inc. and Subsidiaries Consolidated Statements of Operations Year Ended December 31 2001 2000 1999 --------------------------------------------------------------- Revenues: Product revenues $184,160,729 $146,818,172 $120,319,575 Service revenues 32,070,030 34,083,689 35,885,697 --------------------------------------------------------------- 216,230,759 180,901,861 156,205,272 Costs and expenses: Cost of products sold, excluding depreciation 135,810,469 108,368,626 83,442,725 Cost of services sold, excluding depreciation 22,417,139 24,723,948 25,221,695 Depreciation and amortization 15,809,569 14,954,431 13,091,131 Unsuccessful acquisition costs - 1,525,386 - Selling, general and administrative expenses 25,019,279 26,326,402 18,962,157 New product development 2,308,010 2,331,510 2,166,218 --------------------------------------------------------------- 201,364,466 178,230,303 142,883,926 --------------------------------------------------------------- Operating income 14,866,293 2,671,558 13,321,346 Interest income 455,265 172,708 44,100 Interest expense (16,968,174) (15,804,378) (13,391,944) Miscellaneous income, net 20,895 211,420 311,675 --------------------------------------------------------------- Income (loss) before income tax expense (benefit) (1,625,721) (12,748,692) 285,177 Income tax expense (benefit) 915,409 (2,993,677) 647,589 --------------------------------------------------------------- Net loss $ (2,541,130) $ (9,755,015) $ (362,412) ===============================================================
See accompanying notes. F-4 ISG Resources, Inc. and Subsidiaries Consolidated Statements of Comprehensive Loss Year ended December 31 2001 2000 1999 ------------------------------------------ Net loss $(2,541,130) $(9,755,015) $(362,412) Other comprehensive loss, net of tax: Foreign currency translation adjustment (25,732) (29,904) - ------------------------------------------ Comprehensive loss $(2,566,862) $(9,784,919) $(362,412) ======================================---- See accompanying notes. F-5
ISG Resources, Inc. and Subsidiaries Consolidated Statements of Shareholder's Equity Cumulative Foreign Currency Retained Total Additional Translation (Deficit) Shareholder's Common Stock Paid-In Capital Adjustment Earnings Equity ------------------------------------------------------------------------------------------- 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 Contribution from parent 9,745,000 - - - 9,745,000 Foreign currency translation adjustment - - (29,904) - (29,904) Net loss - - - (9,755,015) (9,755,015) ------------------------------------------------------------------------------------------- Balance at December 31, 2000 34,745,050 - (29,904) (7,593,261) 27,121,885 Foreign currency translation adjustment - - (25,732) - (25,732) Net loss - - - (2,541,130) (2,541,130) ------------------------------------------------------------------------------------------- Balance at December 31, 2001 $34,745,050 $ - $(55,636) $(10,134,391) $24,555,023 ===========================================================================================
See accompanying notes. F-6
ISG Resources, Inc. and Subsidiaries Consolidated Statements of Cash Flows Year ended December 31 2001 2000 1999 ------------------------------------------------------ Operating activities Net loss $ (2,541,130) $ (9,755,015) $ (362,412) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 15,809,569 14,954,431 13,091,131 Amortization of debt issuance costs 937,451 831,145 702,032 Deferred income taxes (1,754,736) (1,897,729) (2,229,539) Loss on sale of assets 575,122 69,298 24,168 Gain on sale of subsidiary - - (333,749) Changes in operating assets and liabilities: Receivables (1,099,470) 290,482 (2,755,382) Inventories (1,865,343) (732,216) (1,733,832) Other current and non-current assets (578,194) 832,073 (879,189) Accounts payable 3,582,616 (427,303) 4,485,877 Income taxes 2,207,860 (3,902,666) 1,257,583 Accrued expenses (1,404) 1,296,436 (929,504) Other current and non-current liabilities (561,147) (875,141) (776,804) ------------------------------------------------------ Net cash provided by operating activities 14,711,194 683,795 9,560,380 Investing activities Purchase of businesses, net of cash acquired - (27,130,514) (24,866,989) Proceeds from sale of subsidiary - - 750,000 Additions to intangible assets - (1,275,703) (877,349) Purchases of property, plant and equipment (6,421,602) (8,185,589) (8,790,870) Proceeds from sales of property, plant and equipment 677,702 609,210 415,994 ------------------------------------------------------ Net cash used in investing activities (5,743,900) (35,982,596) (33,369,214) Financing activities Proceeds from long-term debt - 168,500,000 127,000,000 Payments on other liabilities (300,000) - - Payments on long-term debt (356,100) (137,000,000) (103,500,000) Debt issuance costs (100,453) (529,609) (335,149) Increase in payable to Industrial Services Group 2,552,422 1,600,039 643,983 Cash contributions from Parent - 9,745,000 - ------------------------------------------------------ Net cash provided by financing activities 1,795,869 42,315,430 23,808,834 Effect of exchange rate changes on cash and cash equivalents (25,732) (29,904) - ------------------------------------------------------ Net increase in cash and cash equivalents 10,737,431 6,986,725 - Cash and cash equivalents at beginning of period 6,986,725 - - ------------------------------------------------------ Cash and cash equivalents at end of period $ 17,724,156 $ 6,986,725 $ - ====================================================== Cash paid for interest $ 16,449,462 $ 14,293,589 $ 12,605,495 ====================================================== Cash paid for income taxes $ 408,856 $ 1,276,277 $ 902,123 ====================================================== See accompanying notes.
F-7 ISG Resources, Inc. and Subsidiaries Notes to 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 (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. 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. In 2000, ISG Canada Limited, Inc. ("ISG Canada") was formed and became a wholly-owned foreign subsidiary of the Company, with fly ash operations beginning in the second half of 2000. During 2000, the Company acquired all of the partnership interest of Don's Building Supply L.L.P. ("Don's), acquired the stock of Palestine Concrete Tile Company, Inc. and acquired certain fixed and intangible assets from Hanson Aggregates West, Inc. ("Hanson"). Each of the above acquisitions was accounted for under the purchase method of accounting and, accordingly the results of operations of each acquired company are 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 fair value of the net assets of the companies acquired in 1999 totaled approximately $20,073,000. Goodwill resulting from the difference between the purchase prices plus acquisition costs and the fair value of the net assets of the companies acquired in 2000 totaled approximately $19,297,000. All recorded goodwill is being amortized on a straight-line basis over 20 to 25 years. F-8 ISG Resources, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. Basis of Presentation (continued) The following pro forma combined financial information for the year ended December 31, 2000 reflects operations as if all of the above acquisitions and the related financing transactions had occurred as of January 1, 2000. 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 would have been had the acquisitions and the financing transactions been consummated on such date. Revenues $ 196,468,000 Net loss $ (8,914,000) 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 manufacturing products division manufactures and distributes masonry construction materials to residential and commercial contractors primarily located in Texas, California, Georgia and Florida. Principles of Consolidation 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. Reclassifications Certain reclassifications have been made to the prior years' amounts to conform to the current year presentation. Cash and Cash Equivalents Cash and cash equivalents include cash on hand, bank deposits, and highly liquid financial instruments purchased with original maturities of three months or less. F-9 ISG Resources, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. Description of Business and Summary of Significant Accounting Policies (continued) Foreign Currency Translation The results of operations for the Company's foreign subsidiary, ISG Canada, are translated into U.S dollars using average exchange rates during each period; assets and liabilities are translated using exchange rates at the end of each period. Translation gains and losses are reported as a component of other comprehensive income in the Company's consolidated statements of comprehensive income. 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. 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, with most contracts being renewed upon expiration. 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 together with storage 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. F-10 ISG Resources, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. Description of Business and Summary of Significant Accounting Policies (continued) 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 $2,092,124, $1,837,076 and $1,796,032 for the years ended December 31, 2001, 2000, and 1999, respectively, 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 $215,886, $494,434, and $370,186 for the years ended December 31, 2001, 2000, and 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 and market development costs when they are incurred. 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: 2001 2000 ------------------- ------------------- Raw materials $ 958,796 $1,062,436 Finished goods 7,570,180 5,601,197 ------------------- ------------------- $8,528,976 $6,663,633 =================== =================== 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. F-11 ISG Resources, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. Description of Business and Summary of Significant Accounting Policies (continued) Property, Plant and Equipment (continued) Maintenance and repairs are expensed as incurred. Upon sale or retirement, the costs and related accumulated depreciation are eliminated from property, plant and equipment and any resulting gain or loss is included in income. 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 $5,930,000, $5,482,000 and $4,996,000 for the years ended December 31, 2001, 2000 and 1999, respectively. Intangible Assets The cost of acquired companies is allocated first to identifiable assets based on estimated fair values. Costs allocated to identifiable intangible assets are amortized on a straight- line basis over the remaining estimated useful lives of the assets, as determined principally by the underlying terms of the contracts and patents acquired and the underlying characteristics of the assembled workforce acquired. The excess of the purchase price over the fair value of identifiable assets acquired, net of liabilities assumed, is recorded as goodwill and amortized on a straight-line basis over the estimated useful life. The estimated useful life for goodwill is determined based on the individual characteristics of the acquired entity and ranges from 20 years for the Company's building materials acquisitions to 25 years for the Company's fly ash acquisitions. Intangible assets consist of goodwill, contracts, patents and licenses, and assembled workforce. Amortization expense was approximately $9,880,000, $8,994,000, and $8,095,000 for the years ended December 31, 2001, 2000 and 1999, respectively and 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 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, which approximates the effective interest method. Amortization expense was approximately $937,000, $831,000 and $702,000 for the years ended December 31, 2001, 2000 and 1999, respectively. Income Taxes Provisions for federal and state income taxes are calculated based on current tax laws. Deferred taxes are provided to recognize the income tax effect of amounts that are included in different reporting periods for financial statement and tax purposes. The Company files a consolidated income tax return with its parent, ISG. Deductions of ISG are used to offset taxable income or increase taxable losses, thereby increasing net operating loss carryovers, of the Company. As a result, the Company and ISG have an informal arrangement whereby the Company compensates ISG for the tax effect of the use of ISG's deductions. This arrangement is reflected in the Company's payable to ISG. Fair Value of Financial Instruments Financial instruments included in various categories within the accompanying consolidated balance sheets consist of the following at December 31:
2001 2000 Carrying Fair Carrying Fair Value Value Value Value ------------- ------------ ------------ ------------- Short-term assets $43,977,612 $43,977,612 $32,140,711 $32,140,711 Short-term liabilities 23,320,005 23,320,005 18,783,096 18,783,096 Long-term debt: Senior subordinated notes 100,000,000 88,000,000 100,000,000 65,000,000 Secured credit facility 64,643,900 64,643,900 65,000,000 65,000,000 Other liabilities 400,300 313,365 1,241,769 979,310
F-13 ISG Resources, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. Description of Business and Summary of Significant Accounting Policies (continued) Fair Value of Financial Instruments (continued) 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 certain other liabilities is based on the present value of future cash flows discounted at the Company's estimated incremental borrowing rate. Long-lived Assets The Company regularly evaluates the carrying amounts of long-lived assets, including goodwill and other intangible assets, as well as the related amortization periods, to determine whether adjustments to these amounts or to the useful lives are required based on current circumstances or events. The evaluation, which involves significant management judgment, is based on various analyses including cash flow and profitability projections. To the extent such projections indicate that future undiscounted cash flows are not sufficient to recover the carrying amounts of the related long-lived assets, the carrying amount of the underlying assets will be reduced, with the reduction charged to expense, so that the carrying amount is equal to fair value, primarily determined based on future discounted cash flows. No impairment of the Company's intangible assets has been indicated to date. However, the Company has recorded impairment of certain fixed assets as discussed below. During the year ended December 31, 2001, the Company recorded an impairment loss of approximately $291,000 on property which was no longer used in operations. The loss was recognized in operating income and was included in the aggregate total of selling, general and administrative expenses in the Company's consolidated statements of operations for 2001. During the year ended December 31, 2000, an impairment loss of approximately $478,000 was recognized on property that related to construction of a carbon ash burnout unit. The loss was recognized in operating income and was included in the aggregate total for depreciation and amortization in the Company's consolidated statements of operations for 2000. F-14 ISG Resources, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. Description of Business and Summary of Significant Accounting Policies (continued) Use of Estimates The preparation of financial statements, in conformity with accounting principles generally accepted in the United States, 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. New Accounting Pronouncements In 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which was subsequently amended by SFAS No. 137 "Accounting for Derivative Financial Instruments and Hedging Activities - Deferral of the Effective Date of SFAS No. 133" and SFAS No. 138 "Accounting for Certain Derivative Instruments and Certain Hedging Activities." SFAS No. 133 establishes accounting and reporting standards requiring that every derivative instrument, including certain derivative instruments embedded in other contracts, be recorded in the balance sheet as either an asset or liability and measured at its fair value. The statement also requires that changes in the derivative's fair value be recognized in earnings unless specific hedge accounting criteria are met. SFAS No. 133, as amended by SFAS No. 137 and SFAS No. 138, is effective for all fiscal years beginning after June 15, 2000. As expected, the adoption of SFAS No. 133 did not have a material impact on the Company's financial condition or results of operations. In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards (SFAS) No. 141, "Business Combinations," and No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that the purchase method of accounting be used for all business combinations initiated after June 30, 2001. Use of the pooling-of-interests method is no longer permitted. SFAS No. 141 also includes guidance on the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination that is completed after June 30, 2001. F-15 ISG Resources, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. Description of Business and Summary of Significant Accounting Policies (continued) New Accounting Pronouncements (continued) SFAS No. 142 no longer permits the amortization of goodwill and indefinite-lived intangible assets. Instead, these assets must be reviewed annually (or more frequently under certain conditions) for impairment in accordance with this statement. This impairment test uses a fair value approach rather than the undiscounted cash flows approach previously required by SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Intangible assets that do not have indefinite lives will continue to be amortized over their useful lives and reviewed for impairment in accordance with SFAS No. 121 or SFAS No. 142 (see discussion below), which the Company is required to adopt effective January 1, 2002. The Company is currently evaluating its intangible assets in relation to the provisions of SFAS No. 142 to determine the impact that adoption of SFAS No. 142 will have on its results of operations or financial position. In accordance with SFAS No. 142, the Company anticipates that the amounts classified as assembled workforce will be reclassified to goodwill. The Company anticipates that all amortization of goodwill and all amortization of assembled workforce will no longer be recorded in the financial statements. The effect of eliminating amortization for goodwill and assembled workforce will approximate $4,100,000 in the year ending December 31, 2002. The useful lives of the intangible contracts are presently being evaluated and it is possible that the Company may determine that the useful lives of the intangible contracts should change after evaluation. The Company is uncertain as to the net impact, if any, such evaluation will have on amortization expense for the year ending December 31, 2002. In the future, goodwill will be evaluated by the fair value method, comparing the estimated fair value with the recorded value of the assets and liabilities, as recommended in the Statement. The effect of impairment of goodwill, if any, has not yet been evaluated. The Statement requires recognition of any impairment of goodwill in the first quarter of the fiscal year. A restatement of quarterly financial results for the year ended December 31, 2002 may be required if the two-step valuation process is not completed by the filing of the first quarter financial statements. The effect of any impairment recognized at transition to the Statement will be recognized as a change in accounting principle. In July 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 143, "Accounting for Asset Retirement Obligations". SFAS No. 143 requires alternative accounting treatment of assets which are in the process of retirement. The Company is required to adopt SFAS No. 143 effective January 1, 2002. The Company anticipates that there will not be a significant effect on results of operations or financial position. F-16 ISG Resources, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. Description of Business and Summary of Significant Accounting Policies (continued) New Accounting Pronouncements (continued) In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." This Statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This Statement supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations and Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of a segment of a business (as previously defined in that Opinion). This Statement also amends ARB No. 51, "Consolidated Financial Statements," to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary. This Statement is effective for years beginning after December 15, 2001 (i.e. January 1, 2002 for calendar year companies). The Company anticipates that there will not be a significant effect on results of operations or financial position. 3. Intangible Assets Intangible assets consist of the following at December 31: 2001 2000 ------------------ ------------------ Goodwill $ 83,610,925 $ 83,610,925 Contracts 100,227,490 100,227,490 Patents and licenses 3,446,584 3,787,431 Assembled work force 2,815,233 2,815,233 ------------------ ------------------ 190,100,232 190,441,079 Less accumulated amortization (32,922,533) (23,364,593) ------------------ ------------------ $157,177,699 $167,076,486 ================== ================== F-17 ISG Resources, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 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, which matures September 4, 2003, 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. The Company financed the acquisitions through the issuance of $100,000,000 of 10% Senior Subordinated Notes due 2008 (discussed below) and borrowings on its Secured Credit Facility (as subsequently amended, restated, and increased). Operating and capital expenditures have been financed primarily through cash flow from operations and borrowings under the Secured Credit Facility. On May 26, 2000, the Secured Credit Facility was amended and restated to, among other things, increase the borrowings available to the Company from $50,000,000 to $65,000,000. 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 (the "Tranche B Lenders"), agreed to provide the additional $15,000,000 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) the London 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 3.50% for the Tranche A and 1.75% to 2.50% for the Tranche B, primarily depending upon the Company's Leverage Ratio). All capitalized terms are defined in the Secured Credit Facility. F-18 ISG Resources, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 4. Long-term Debt (continued) Secured Credit Facility (continued) 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 2.25% for the Tranche A and .50% to 1.25% for the Tranche B, primarily depending 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 domestic 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. On August 8, 2000, the amended and restated secured credit agreement dated May 26, 2000 was amended in order to modify certain debt covenants contained in the credit agreement. Primarily, a minimum consolidated Earnings Before Interest Expense, Interest Income, Income Tax Expense, Depreciation Expense, and Amortization Expense (EBITDA) debt covenant was added. The minimum consolidated EBITDA covenant requires the Company to maintain a minimum EBITDA amount for every fiscal quarter through June 30, 2003 at levels set forth in the agreement. On March 30, 2001, the amended and restated secured credit agreement dated May 26, 2000 and subsequently amended on August 8, 2000, was amended in order to modify certain debt covenants contained in the credit agreement. The amended and restated secured credit facility continues to require the Company to not exceed a maximum leverage ratio, to not drop below a minimum interest coverage ratio, to not drop below a minimum consolidated EBITDA level, and to comply with certain other financial and non-financial covenants, as defined in the amended agreement. At December 31, 2001, $64,643,900 of the Secured Credit Facility was outstanding, with no amount being unused and available. F-19 ISG Resources, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 4. Long-term Debt (continued) 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 domestic subsidiaries, as defined in the indenture. See Note 11. The Senior Subordinated Notes are redeemable at the option of the Company at various times throughout the term of the Senior Subordinated Notes at redemption prices specified in the indenture. Upon the occurrence of a change of control or an asset sale as defined in the indenture, the Company is required to make an offer to repurchase all or part of the Senior Subordinated Notes at prices specified in the indenture. The payment of principal, interest, and liquidated damages as defined in the indenture, if any, on the Senior Subordinated Notes is subordinated in right of payment to the prior payment of all senior indebtedness as defined in the indenture, whether outstanding on the date of the indenture or thereafter incurred. The indenture for the Company's Senior Subordinated Notes contains various limitations on the incurrence of additional indebtedness, the issuance of preferred stock, consolidations or mergers, sales of assets, and restricted payments, including dividends, for the Company and restricted subsidiaries as defined in the indenture. In connection with the private placement of the Senior Subordinated Notes, the Company entered into the Registration Rights Agreement pursuant to which the Company was required to file an exchange offer registration statement with the Securities and Exchange Commission that 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, 2001 are as follows: $0 in 2002, $64,643,900 in 2003, $0 in 2004, $0 in 2005 and 2006, and $100,000,000 thereafter. F-20 ISG Resources, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 5. Employee Benefit Plan Eligible employees of the Company may participate in a 401(k) savings plan (the "Plan") sponsored by the Company. The Plan requires the Company to match employee contributions, as defined, up to 6% of the employees' compensation. Expenses related to the Plan were approximately $572,000, $488,000 and $458,000 for the years ended December 31, 2001, 2000, and 1999, respectively. 6. Income Taxes Income tax expense (benefit) consists of the following: Year ended December 31 2001 2000 1999 ------------------------------------------------------------ Current: U.S. federal $ 1,800,701 $ (961,266) $ 2,150,860 State 869,444 (134,682) 726,268 ------------------------------------------------------------ 2,670,145 (1,095,948) 2,877,128 Deferred: U.S. federal (1,096,766) (1,853,840) (1,847,270) State (657,970) (43,889) (382,269) ------------------------------------------------------------ (1,754,736) (1,897,729) (2,229,539) Total: U.S. federal 703,935 (2,815,106) 303,590 State 211,474 (178,571) 343,999 ------------------------------------------------------------ $ 915,409 $ (2,993,677) $ 647,589 ============================================================ F-21 ISG Resources, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 6. Income Taxes (continued) Reconciliation of income tax expense (benefit) at the U.S. statutory rate to the Company's tax expense (benefit) is as follows: Year ended December 31 2001 2000 1999 ------------------------------------------------ 35% of income (loss) before income tax $(569,002) $(4,461,308) $ 99,812 Add: Non-deductible goodwill 1,215,772 1,170,888 901,551 Other, net 268,639 296,743 (353,774) ------------------------------------------------ $ 915,409 $(2,993,677) $ 647,589 ================================================ The major components of the deferred tax assets and liabilities as of December 31 are as follows: 2001 2000 ------------------------------------ Deferred tax assets: Bad debt reserves $ 170,957 $ 193,873 State NOL Carryforward 202,224 - Accruals not currently deductible for tax purposes 256,997 696,570 ------------------------------------ Total gross deferred tax assets 630,178 890,443 Deferred tax liabilities: Fixed asset basis differences 2,645,189 2,862,317 Intangible asset basis differences 33,050,193 34,878,740 Other 31,259 585 ------------------------------------ Total gross deferred tax liabilities 35,726,641 37,741,642 ------------------------------------ Net deferred tax liabilities $(35,096,463) $(36,851,199) ==================================== In 2000, the Company generated state neg loss carryforwards of approximately $3,111,000. These carryforwards, if not used, will expire in 2007. F-22 ISG Resources, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 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 2011. Future minimum payments under leases with initial terms of one year or more consisted of the following: 2002 $ 8,457,157 2003 7,099,524 2004 4,828,602 2005 2,760,660 2006 1,659,488 Thereafter 5,501,000 ------------------- Total minimum lease payments $30,306,431 =================== Total rental expense was approximately $10,353,000, $8,067,000, and $7,595,000 for the years ended December 31, 2001, 2000 and 1999 respectively. Sale and Purchase Commitments Certain of 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 ------------------------------------- 2002 $ 720,000 $ 8,043,120 2003 840,000 8,169,840 2004 960,000 6,976,560 2005 960,000 3,063,280 2006 720,000 2,902,000 Thereafter 3,600,000 13,250,000 ------------------------------------- $7,800,000 $42,404,800 ===================================== F-23 ISG Resources, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 7. Commitments and Contingencies (continued) Sale and Purchase Commitments (continued) Actual minimum sales and purchases under contracts with minimum requirements approximated the following for the years ended December 31: Minimum Minimum Sales Purchases ------------------------------------- 1999 $806,000 $5,930,000 2000 $364,000 $6,637,000 2001 $240,000 $8,562,060 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. An amendment to this agreement changed the terms to a payment of $50,000 per month through March 1, 2003. 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 consolidated balance sheets. In 2000, the Company entered into a license agreement for certain technology for which the Company agreed to pay a minimum of $40,000 in 2000, $220,000 in 2001, $327,000 in 2002, and $500,000 in 2003 for royalties on net sales. The license agreement states that if the Company terminates the license agreement prior to December 31, 2003, the Company will still have an obligation to pay the licensor the minimum royalty each month through and including December 2003, as if the agreement had never been terminated. Other Obligations In 2001, the Company entered into a consulting agreement for certain technology for which the Company agreed to pay $25,000 per month from October 1, 2001 to September 1, 2002. In addition, the Company entered into a consulting agreement for marketing fly ash in conjunction with a supply contract for which the Company agreed to pay $10,000 per month from October 1, 2001 to June 1, 2003. F-24 ISG Resources, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 7. Commitments and Contingencies (continued) Other Obligations (continued) In connection with the purchase of land for total consideration of $1.5 million during the second quarter of 2001, the Company incurred a purchase money obligation of $1.1 million. The total outstanding balance of $800,000 is classified in other current liabilities on the consolidated balance sheet at December 31, 2001 and will be paid in full in 2002. The $1.1 million is treated as a non-cash item on the statement of cash flows. 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 began to expire in 2001 with annual extensions to be exercised by mutual consent of both parties. Considering these extensions, these employment agreements provide for total annual base compensation of approximately $2,279,000 in 2002, $1,668,000 in 2003, and $86,000 in 2004. An employee, pursuant to his employment contract, has been granted an economic interest in one percent of all outstanding shares of the Company's common stock as of the date of his employment agreement. This economic interest vested immediately upon execution of the employment agreement, but the right is contingent upon the occurrence of certain future events. Because such events have not occurred as of December 31, 2001, and management believes that such events are unlikely to occur, no compensation expense has been calculated or recorded. 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 $3,678,000 in the aggregate for the current plan period ended December 30, 2001 and $2,792,000 in the aggregate for the plan period ended December 31, 2000. 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 consolidated balance sheets, $238,000 and $508,000 has been accrued as of December 31, 2001and 2000, respectively, related to this liability. F-25 ISG Resources, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 8. Reportable Segments As discussed in note 2, the Company operates in two reportable segments: the CCP division and the manufacturing products division. The CCP division consists primarily of three operating units that manage and market CCPs in North America. The manufacturing products 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. Inter-segment sales, which historically have not been material, are generally accounted for at cost and are eliminated in consolidation. The manufacturing products division includes financial data for the six legal entities from their respective dates of acquisition through December 31, 2001. Thus, the manufacturing products division segment information is not comparable for the 1999, 2000, and 2001 periods. Best financial data is included from January 1, 1999, Osborne and Terrazzo from October 26, 1999, Magna Wall from December 1, 1999, Don's from March 1, 2000 and Palestine from June 1, 2000. Amounts included in the "Other" column include financial information for the Company's corporate, research and development, and other administrative business units. In anticipation of the Company's adoption of SFAS No. 142, the Company has reevaluated the allocation of certain intangible assets to the segments. Information as of and for the years ended December 31, 2000 and 1999 have been restated to conform to this revised breakout. F-26 ISG Resources, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 8. Reportable Segments (continued) Information about reportable segments, and reconciliation of such information to the consolidated totals as of and for the year indicated, is as follows:
For the Year Ended Manufactured Consolidated December 31, 2001 CCP Products Other Total --------------- --------------- ---------------- --------------- Revenue $167,228,203 $48,662,571 $339,985 $216,230,759 EBITDA 36,626,349 4,862,850 (10,337,177) 31,152,022 Depreciation and amortization 13,099,713 2,440,193 269,663 15,809,569 Total assets 182,068,540 46,796,876 24,953,473 253,818,889 Expenditures for PP&E 4,699,635 1,525,085 196,882 6,421,602 For the Year Ended December 31, 2000 Revenue $139,470,096 $41,009,405 $422,360 $180,901,861 EBITDA 27,674,818 4,026,257 (13,690,958) 18,010,117 Depreciation and amortization 12,734,938 1,964,370 255,123 14,954,431 Total assets 188,957,876 46,481,590 16,894,909 252,334,375 Expenditures for PP&E 5,123,317 2,133,579 928,693 8,185,589 For the Year Ended December 31, 1999 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 Depreciation and amortization 11,862,017 1,005,779 223,335 13,091,131 Total assets 189,672,793 6,683,098 24,106,620 220,462,511 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 and intangible assets. All other assets are included in the "Other" column. F-27 ISG Resources, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 9. Related Party Transactions The Company's parent, ISG, files a consolidated income tax return including the Company and all of its subsidiaries as discussed in Note 2. As the Company records all tax payments and receipts, a payable to ISG for $4,796,444 and $2,244,422 has been recorded as of December 31, 2001 and 2000, respectively, to reflect amounts owed to ISG relating to ISG's interest deductions included in the 1997, 1998, 1999, and 2000 consolidated tax returns, and an estimate of what will be included in the 2001 consolidated income tax returns. The tax information included in Note 6 above has been prepared as if the Company filed a separate tax return. 10. Unsuccessful Acquisition Costs Costs of $1.5 million incurred related to unsuccessful business acquisitions were charged to expense in 2000 when the Company determined that such acquisitions would not occur. No such costs were expensed in 2001. On February 24, 1999, the Company entered into an option agreement to acquire the stock of Tatum Industries, Inc. (Tatum). As part of that agreement, the Company agreed to loan Tatum approximately $50,000 per month for operating expenses and loan servicing. Tatum's note to the Company accrued interest at 8% and was payable on demand. Additionally, the Company leased Tatum's building, transferred certain equipment and incurred approximately $0.1 million of leasehold improvements to the property. On October 27, 2000, the Company advised Tatum that the Company was terminating the option agreement and the Company advised Tatum that the note to the Company, totaling approximately $1.1 million, would be due and payable on March 1, 2001. In December 2000, Tatum advised the Company that they would not be able to repay the note and the Company's attempt to purchase the outstanding stock of Tatum was unsuccessful. As a result, in 2000, the Company expensed approximately $1.1 million in unsuccessful acquisition costs, which is included in the $1.5 million discussed above. However, the Company continued to lease the building from Tatum and use the equipment in its operations. In 2001, in conjunction with the Company's decision to abandon its production operations at Tatum's facility, the Company recognized $291,000 as an impairment loss on the owned assets, based upon an offer the Company received to purchase the assets. This loss is recognized in operating income and is included in the aggregate total of selling, general and administrative expense. These assets were sold in December 2001. F-28 ISG Resources, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 11. Condensed Consolidating Financial Information The Company's debt facilities are guaranteed by domestic subsidiaries only, as discussed above. ISG Canada was formed in 2000 and had minimal operations in comparison to consolidated results. Because ISG Canada's operations have increased during 2001, it is no longer considered a "minor" subsidiary as defined under Regulation S-X Rule 3-10. As such, the Company is required to disclose condensed consolidating financial information. The condensed consolidating balance sheet as of December 31, 2001 is as follows:
ISG Manufactured ISG Consolidated Eliminations Resources Products Canada --------------------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents $17,724,156 $ - $ 17,002,493 $ 477,075 $ 244,588 Accounts receivable 26,253,456 - 20,182,923 5,875,011 195,522 Inventories 8,528,976 - 3,923,243 4,544,632 61,101 Other current assets 2,234,869 - 2,095,752 139,117 - --------------------------------------------------------------------------------- Total current assets 54,741,457 - 43,204,411 11,035,835 501,211 Property, plant and equipment 38,118,552 - 30,533,497 6,745,493 839,562 Intangible assets, net 160,865,174 - 131,849,626 29,015,548 - Investment in subsidiaries - $(45,476,666) 45,476,666 - - Other assets 93,706 - 93,706 - - --------------------------------------------------------------------------------- Total assets $253,818,889 $(45,476,666) $251,157,906 $46,796,876 $1,340,773 ================================================================================= Liabilities and shareholder's Current liabilities: Accounts payable $14,287,253 $ - $12,411,354 $1,875,899 $ - Accrued expenses 7,080,902 - 6,875,103 205,799 - Other current liabilities 1,962,722 - 1,427,299 505,484 29,939 -------------------------------------------------------------------------------- Total current liabilities 23,330,877 - 20,713,756 2,587,182 29,939 Long-term debt 164,643,900 - 164,643,900 - - Deferred tax liabilities 35,726,641 - 35,726,641 - - Payable to Parent 4,796,444 - 4,796,444 - - Intercompany account payable - 23,201 27,888 (1,120,636) 1,069,547 Other liabilities 766,004 - 638,618 127,386 - Shareholder's equity: Common stock 34,745,050 (28,496) 34,745,050 28,496 - Cumulative translation adjustment (55,636) (38,829) - - (16,807) Additional paid in capital - (40,960,169) - 40,533,259 426,910 Retained (deficit) earnings (10,134,391) (4,472,373) (10,134,391) 4,641,189 (168,816) --------------------------------------------------------------------------------- Total shareholder's equity 24,555,023 (45,499,867) 24,610,659 45,202,944 241,287 --------------------------------------------------------------------------------- Total liabilities and shareholder's equity $253,818,889 $(45,476,666) $251,157,906 $46,796,876 $1,340,773 =================================================================================
F-29 ISG Resources, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 11. Condensed Consolidating Financial Information (continued) The condensed consolidating balance sheet as of December 31, 2000 is as follows:
ISG Manufactured ISG Consolidated Eliminations Resources Products Canada ----------------------------------------------------------------------------- Assets Current assets: Cash and cash equivalents $ 6,986,725 $ - $ 5,954,992 $ 1,054,079 $ (22,346) Accounts receivable 25,153,986 - 19,742,002 5,152,357 259,627 Income tax receivable 2,196,988 - 2,208,061 (11,073) - Inventories 6,663,633 - 1,815,138 4,584,187 264,308 Other current assets 1,909,215 - 1,811,949 97,266 - ----------------------------------------------------------------------------- Total current assets 42,910,547 - 31,532,142 10,876,816 501,589 Property, plant and equipment 37,760,556 - 31,859,149 4,914,902 986,505 Intangible assets, net 171,600,956 - 140,921,426 30,679,530 - Investment in subsidiaries - (43,078,999) 43,078,999 - - Other assets 62,316 - 51,974 10,342 - ----------------------------------------------------------------------------- Total assets $252,334,375 $(43,078,999) $247,443,690 $46,481,590 $1,488,094 ============================================================================= Liabilities and shareholder's Current liabilities: Accounts payable $10,704,637 $ - $8,561,809 $2,082,000 $60,828 Accrued expenses 7,082,306 - 6,743,155 287,260 51,891 Other current liabilities 996,153 - 678,564 317,589 - ----------------------------------------------------------------------------- Total current liabilities 18,783,096 - 15,983,528 2,686,849 112,719 Long-term debt 165,000,000 - 165,000,000 - - Deferred tax liabilities 37,702,524 - 37,702,524 - - Payable to Parent 2,244,022 - 2,244,022 - - Intercompany account payable - 22,774 (1,904,021) 738,496 1,142,751 Other liabilities 1,482,848 - 1,265,848 217,000 - Shareholder's equity: Common Stock 34,745,050 (28,496) 34,745,050 28,496 - Cumulative translation adjustment (29,904) (15,959) - - (13,945) Additional paid in capital - (40,825,606) - 40,552,265 273,341 Retained (deficit) earnings (7,593,261) (2,231,712) (7,593,261) 2,258,484 (26,772) ----------------------------------------------------------------------------- Total shareholder's equity 27,121,885 (43,101,773) 27,151,789 42,839,245 232,624 ----------------------------------------------------------------------------- Total liabilities and shareholder's equity $252,334,375 $(43,078,999) $247,443,690 $46,481,590 $1,488,094 =============================================================================
F-30 ISG Resources, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 11. Condensed Consolidating Financial Information (continued) The condensed consolidating statement of operations for the year ended December 31, 2001 is as follows:
ISG Manufactured ISG Consolidated Eliminations Resources Products Canada -------------- ----------------- -------------- ------------------------------ Revenues $216,230,759 $ - $ 165,930,603 $ 48,662,571 $ 1,637,585 Costs and expenses: Cost of products and services, excluding depreciation 158,227,608 - 118,169,420 38,477,953 1,580,235 Depreciation and amortization 15,809,569 - 13,268,749 2,440,193 100,627 Selling, general and administrative expenses 25,019,279 - 19,379,292 5,546,746 93,241 New product development 2,308,010 - 2,308,010 - - -------------- ----------------- -------------- ------------------------------ 201,364,466 - 153,125,471 46,464,892 1,774,103 -------------- ----------------- -------------- ------------------------------ Operating income (loss) 14,866,293 - 12,805,132 2,197,679 (136,518) Equity interest in subsidiary income - (2,240,661) 2,240,661 - - Interest expense (16,968,174) - (16,928,222) (39,952) - Other income (expense), net 476,160 - 256,708 224,978 (5,526) -------------- ----------------- -------------- ------------------------------ Income (loss) before income tax (1,625,721) (2,240,661) (1,625,721) 2,382,705 (142,044) Income tax expense 915,409 - 915,409 - - -------------- ----------------- -------------- ------------------------------ Net income (loss) $(2,541,130) $(2,240,661) $(2,541,130) $2,382,705 $(142,044) ============== ================= ============== ==============================
The condensed consolidating statement of operations for the year ended December 31, 2000 is as follows:
ISG Manufactured ISG Consolidated Eliminations Resources Products Canada -------------- ----------------- -------------- ------------------------------ Revenues $ 180,901,861 $ - $ 139,218,939 $ 41,009,405 $ 673,517 Costs and expenses: Cost of products and services sold, excluding depreciation 133,092,574 - 100,334,508 32,215,869 542,197 Depreciation and amortization 14,954,431 - 12,984,578 1,964,370 5,483 Unsuccessful acquisition costs 1,525,386 - 1,525,386 - - Selling, general, and administrative expenses 26,326,402 - 21,219,591 4,954,151 152,660 New product development 2,331,510 - 2,331,510 - - -------------- ----------------- -------------- ------------------------------ 178,230,303 - 138,395,573 39,134,390 700,340 -------------- ----------------- -------------- ------------------------------ Operating income (loss) 2,671,558 - 823,366 1,875,015 (26,823) Equity interest in subsidiary income - (2,014,930) 2,014,930 - - Interest expense (15,804,378) - (15,784,193) (20,185) - Miscellaneous income, net 384,128 - 197,205 186,872 51 -------------- ----------------- -------------- ------------------------------ Income (loss) before income tax (12,748,692) (2,014,930) (12,748,692) 2,041,702 (26,772) Income tax expense (benefit) (2,993,677) - (2,993,677) - - -------------- ----------------- -------------- ------------------------------ Net income (loss) $ (9,755,015) $ (2,014,930) $ (9,755,015) $ 2,041,702 $ (26,772) ============== ================= ============== ==============================
F-31 ISG Resources, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 11. Condensed Consolidating Financial Information (continued) The condensed consolidating statement of cash flow information for the year ended December 31, 2001 is as follows:
ISG Manufactured ISG Consolidated Eliminations Resources Products Canada ------------- -------------- -------------- -------------- ------------ Net cash provided by operating activities $ 14,711,194 $ (777,045) $ 12,900,807 $ 2,444,315 $ 143,117 Net cash provided by (used in) investing activities (5,743,900) 799,915 (3,649,175) (3,021,319) 126,679 Net cash provided by financing activities 1,795,869 - 1,795,869 - - Effect of exchange rate changes on cash and cash equivalents (25,732) (22,870) - - (2,862) ------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 10,737,431 - 11,047,501 (577,004) 266,934 Cash and cash equivalents at beginning of period 6,986,725 - 5,954,992 1,054,079 (22,346) ------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 17,724,156 $ - $ 17,002,493 $ 477,075 $ 244,588 =========================================================================
The condensed consolidating statement of cash flow information for the year ended December 31, 2000 is as follows:
ISG Manufactured ISG Consolidated Eliminations Resources Products Canada ------------- -------------- -------------- -------------- ------------- Net cash provided by (used in) operating activities $ 683,795 $ (770,097) $ (515,406) $ 2,401,804 $ (432,506) Net cash provided by (used in) investing activities (35,982,596) 786,056 (35,845,032) (1,347,725) 424,105 Net cash provided by financing activities 42,315,430 - 42,315,430 - - Effect of exchange rate changes on cash and cash equivalents (29,904) (15,959) - (13,945) -------------------------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 6,986,725 - 5,954,992 1,054,079 (22,346) Cash and cash equivalents at beginning of period - - - - - -------------------------------------------------------------------------- Cash and cash equivalents at end of period $ 6,986,725 $ - $ 5,954,992 $ 1,054,079 $ (22,346) ==========================================================================
F-32