-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, W10TgJrRUR/oBQdm6YWc0tPfF0G9bIIJNTaWVu6T42mlpBvvtyBKRcRTTccaCdqj m403Z5YJtYvCaXKzTYzePg== 0001020488-99-000016.txt : 19990403 0001020488-99-000016.hdr.sgml : 19990403 ACCESSION NUMBER: 0001020488-99-000016 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990401 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ISG RESOURCES INC CENTRAL INDEX KEY: 0001063018 STANDARD INDUSTRIAL CLASSIFICATION: STEEL WORKS, BLAST FURNACES ROLLING MILLS (COKE OVENS) [3312] IRS NUMBER: 742164490 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 333-56217 FILM NUMBER: 99585304 BUSINESS ADDRESS: STREET 1: 136 EAST SOUTH TEMPLE STREET 2: SUITE 1300 CITY: SALT LAKE CITY STATE: UT ZIP: 84111 BUSINESS PHONE: 8012369700 MAIL ADDRESS: STREET 1: 136 EAST SOUTH TEMPLE STREET 2: SUITE 1300 CITY: SALT LAKE CITY STATE: UT ZIP: 84111 FORMER COMPANY: FORMER CONFORMED NAME: JTM INDUSTRIES INC DATE OF NAME CHANGE: 19980604 10-K 1 ANNUAL REPORT FOR 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, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [No fee required] For the transition period from N/A to N/A Commission File Number____________ ISG RESOURCES, INC. (Exact name of Registrant as specified in its charter) Texas 87-0327982 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 136 East South Temple, Suite 1300, Salt Lake City, Utah 84111 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (801) 236-9700 --------------------------- Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered None None Securities registered pursuant to Section 12(g) of the Act: 10% Senior Subordinated Notes Due 2008 (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No__ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ _ _ ] The aggregate market value of the voting stock held by non-affiliates of the registrant on March 29, 1999 was approximately $0. The number of shares of Common Stock, without par value, outstanding on March 29, 1999 was 100 shares. Documents Incorporated by Reference: See Item 14(a) List of Exhibits PART I Item 1. Business General Development of Business ISG Resources, Inc.'s predecessor was organized under the laws of the State of Texas on February 6, 1981. Industrial Services Group, Inc. ("ISG") was formed in September 1997 by Citicorp Venture Capital, Ltd. ("CVC") and certain members of ISG Resources, Inc.'s management team to acquire the stock of JTM Industries, Inc. ("JTM") and its wholly owned subsidiary, KBK Enterprises, Inc. ("KBK") (the "JTM Acquisition") from Laidlaw Transportation, Inc. ("Laidlaw"). Pursuant to the JTM Acquisition, JTM became a wholly owned subsidiary of ISG. Subsequently, JTM changed its name to ISG Resources, Inc. (the "Company"). Through strategic acquisitions over the past fiscal year, the Company acquired several key competitors serving diverse geographic regions and companies with products and/or services that complemented the Company's then current products. On March 4, 1998, the Company acquired the stock of Pozzolanic Resources, Inc. ("Pozzolanic") for $40.0 million, at which time Pozzolanic became a wholly owned subsidiary of the Company. Pozzolanic is a provider of marketing services for coal combustion products ("CCPs") in the Pacific Northwest and in the Rocky Mountain area. On March 20, 1998, the Company acquired the stock of Power Plant Aggregates of Iowa, Inc. ("PPA") for $6.4 million (net of $2.1 million of cash acquired, for a total consideration of $8.5 million), at which time PPA became a wholly owned subsidiary of the Company. PPA and its subsidiary provide the personnel and equipment to service a large contract recently awarded to the Company in Iowa. On April 22, 1998, the Company acquired the stock of Michigan Ash Sales Company, d.b.a. U.S. Ash Company ("U.S. Ash"), U.S. Stabilization, Inc., and Flo Fil Co., Inc. (collectively the "U.S. Ash Group") for a total consideration of $24.6 million, at which time the U.S. Ash Group became wholly owned subsidiaries of the Company. The U.S. Ash Group is a provider of CCP management services in Michigan, Ohio and Indiana, areas where the Company's services were limited. On April 22, 1998, the Company acquired the stock of Fly Ash Products, Inc. ("Fly Ash Products") for a total consideration of $9.5 million, at which time Fly Ash Products became a wholly owned subsidiary of the Company. Fly Ash Products is a provider of CCP management services in Arkansas. On May 1, 1998, the Company, through Pneumatic Trucking, Inc. ("Pneumatic"), a wholly owned subsidiary of U.S. Ash, purchased the rolling stock of a former related party of U.S. Ash for approximately $885,000. On August 6, 1998, the Company acquired the exclusive license to make, use and sell products utilizing the Dynastone(TM) technology. Dynastone(TM) is the technology used for the production of a unique acid and chemical resistant cement utilizing high volumes of CCPs. The license creates the opportunity for the Company to enter the cementitious manufactured concrete products arena, utilizing its extensive reserve of CCP resources. Based upon available information, the Company believes it is now the largest manager and marketer of CCPs in North America. CCPs are the residual materials created by coal-fired power generation. The Company enters into long-term CCP management contracts, primarily with coal-fired electric generating utilities. These utilities are required to manage, or contract to manage, CCPs in accordance with state and federal environmental regulations. In addition, the Company provides similar materials management services for other industrial clients. Important Developments since Fiscal Year End Effective January 1, 1999, the Company, Pozzolanic, PPA, the U.S. Ash Group, Fly Ash Products and KBK merged with and into ISG Resources, Inc., a newly formed Utah corporation. Prior to the merger, ISG Resources (Utah) had no assets and was a wholly owned subsidiary of Industrial Services Group, Inc. ("ISG"). Pneumatic, a wholly owned subsidiary of U.S. Ash, was not merged into the new Utah corporation. Consequently, Pneumatic is now a wholly owned subsidiary of the Utah corporation. All references to the "Company" herein refer to ISG Resources, Inc. (Utah) and all of its predecessors. As a result of the foregoing merger, all 1999 reports filed pursuant to the Securities Exchange Act of 1934, as amended, will be filed with ISG Resources, Inc., the Utah corporation, as the registrant. On or about January 7, 1999, the Company acquired the issued and outstanding capital stock of Best Masonry & Tool Supply, Inc. ("Best"). Best is now a wholly owned subsidiary of the Company. Principal Products and their Markets The Company uses CCPs and other industrial materials to make products that primarily replace manufactured or mined materials, such as portland cement, lime, agricultural gypsum, fired lightweight aggregate, granite aggregate or limestone. The Company's focus on CCPs and related industrial materials development has also created a variety of applications, such as fillers in asphalt shingles and related products, that extend beyond the traditional uses of CCPs and related industrial materials. For purposes of this report, the Company's products are broken down into traditional products and value-added products. Traditional products are those products that the Company and its competitors within the industry historically produce with the CCPs. Value-added products are newer products that have been developed to utilize CCPs and related materials which in the past were deemed waste products and usually sent to landfills. The primary CCPs managed by the Company are fly ash and bottom ash. Fly ash is the fine residue and bottom ash is the heavier particles that result from the combustion of coal. Utilities firing boilers with coal first pulverize the coal and then blow the pulverized coal into a burning chamber where it immediately ignites to heat the boiler tubes. The heavier bottom ash falls to the bottom of the burning chamber while the lighter fly ash remains suspended in the exhaust gases. Before leaving the exhaust stack, the fly ash particles are removed by an electrostatic precipitator, bag house or other method. The bottom ash is hydraulically conveyed to a collection area, while the fly ash is pneumatically conveyed to a storage silo. Fly ash is a pozzolan that, in the presence of water, will combine with an activator (lime, portland cement or kiln dust) to produce a cement-like material. It is this characteristic that allows fly ash to act as a cost-competitive substitute for other more expensive cementitious building materials. Concrete manufacturers can typically use fly ash as a substitute for 15% to 40% of their cement requirements, depending on the quality of the fly ash and the proposed end-use application for the concrete. In addition to its cost benefit, fly ash provides greater structural strength and durability in certain construction applications, such as road construction. Bottom ash is utilized as an aggregate in concrete block construction and road base construction. According to the American Coal Ash Association (the "ACAA"), of the approximately 100 million tons of CCPs that were generated in the United States during 1996, fly ash accounted for approximately 59%, bottom ash accounted for approximately 16% and flue gas desulphurization waste ("scrubber sludge") and boiler slag accounted for approximately 25%. Traditional Products and Applications The Company's traditional products are CCPs and related industrial materials which generally require minimal processing or additives to fulfill their applications. The Company typically provides these products to its customers directly from its clients' sites. The Company has been successful in selling significant portions of the CCPs and other industrial materials it manages to traditional markets (e.g., the use of fly ash as pozzolan in portland cement concrete and the use of bottom ash as a lightweight aggregate). The following is a brief description of the Company's traditional products: Fly ash is used as (i) a pozzolan to partially replace portland cement in ready-mix concrete and concrete products (e.g., concrete pipe); (ii) an additive to portland cement to produce I-P cement and blended cements; (iii) an additive in downhole cementing of oil wells; and (iv) a primary constituent in flowable grout used to fill voids under concrete slabs and underground tank voids. Bottom ash is used as (i) raw feed stock for the manufacture of portland cement clinker; (ii) a lightweight aggregate for concrete and concrete block; (iii) a filler in the manufacture of clay brick; and (iv) an aggregate in asphaltic concrete. It can also be mixed with salt as an additive for ice and snow control or used as backfill for pipe bedding and dry bed material. Fluidized bed ash is used (i) for stabilization in mud drying; (ii) as a reagent to solidify liquid wastes in petrochemical and related areas; and (iii) for soil stabilization to create more solid foundations for vertical construction. Scrubber sludge is used as cement stabilized road base material and can be processed to be used in wallboard manufacture. Boiler slag is used for a variety of applications, including roofing shingles and cement. Cement and lime kiln dust and related industrial minerals are used as cementitious binders for chemical fixation/solidification of hazardous and non-hazardous wastes, soil stabilization and chemical processes. Value-Added Products and Applications To diversify its product offerings and ensure that it productively uses the CCPs, the Company also develops and markets value-added products made from CCPs and related industrial materials, and it continues to expand the breadth of markets for these products. Through its research and development program and certain licenses, the Company has broadened the end use market for CCPs and related industrial materials by introducing several proprietary products made from previously non-marketable materials. The Company sells and distributes its products to cement plants, ready-mix concrete plants, road contractors, carpet manufacturers, roofing shingle producers, soil stabilization firms, utility companies and other waste management firms. Several of its proprietary products have been utilized by government agencies such as the Department of Transportation, the Federal Aviation Administration, the Army Corps of Engineers and the U.S. Bureau of Mines. The following is a list of the Company's value added products and applications: Powerlite(R) is a pyrite free bottom ash which, when processed by the Company, produces a high quality aggregate for the concrete block industry. Powerlite(R) has exhibited superior flow characteristics, often making it more economical to use than other aggregates. The Company has provided customers in the Atlanta, Georgia area with more than two million tons of Powerlite7 in the past 15 years. SAM(TM) (Stabilized Aggregate Material) is manufactured by the Company by combining several industrial materials received from clients and transforming them into a well-graded replacement for natural aggregate. SAM(TM) can be used in many other applications, such as road base, sub-base, parking areas, drainage media and rip-rap. Pozzalime(TM)/Envira-Cement(R) are the Company's lime-based pozzolanic materials that contain significant moisture-reduction properties. Pozzalime(TM) and Envira-Cement(R) have been successfully utilized in road-base construction, road-sub-base construction, chemical fixation, soil stabilization, moisture reduction, mud drying, pH adjustments, acid neutralization, sewage treatment and mine reclamation. Gypcem(R) is the Company's processed gypsum, registered and exclusively sold by the Company, that has characteristics allowing it to be used in the manufacture of portland cement. With considerable handling capabilities, the product is often more economical to use than conventional mined gypsum. Under a long-term contract with Dupont, the Company designed, constructed and currently operates an on-site processing facility for the 100,000 tons of synthetic gypsum produced each year. Peanut Maker(R) is a gypsum landplaster developed by the Company for use in the agricultural market as a soil enhancer. During 1997, under a contract with Dupont, the Company managed 47,000 tons of Dupont's industrial material, which was historically disposed of. The Company has transformed this previously unmarketable material into Peanut Maker(R), a beneficial-use, value-added product. Peanut Maker(R) has been used on over 60,000 acres of peanut crops annually for the past 10 years. It continues to be in demand because of its high calcium content. The disassociation rate afforded by Peanut Maker(R) makes it more effective and economical than traditional calcium supplements. It has been a recommended source of calcium by the Virginia and North Carolina Extension Services since its invention. ALSIL(R)/Orbaloid(R) are industrial fillers developed by the Company from processed client-generated materials for use in filler applications such as roofing shingles, carpet and mat backing, and ceramic products. The Company has two U.S. patents and one Canadian patent for the use of ALSIL(R) in roofing shingles. The Company has secured multiple contracts with various shingle manufacturers, with one agreement extending for the life of the customer's manufacturing plant. Flexbase(TM) is a mixture of fly ash and scrubber sludge which the Company processes to form a road-base material. Stabil-Fill(TM) is a lime-stabilized fly ash that the Company has developed and sold for use as a fill material in lieu of natural borrow materials. The resulting mixture is lightweight and compacts with standard construction equipment. Applications include commercial or industrial property development, roadway embankment and subgrade for parking lots, airport runways, golf courses or driving ranges, and athletic fields. Redi-Fill(TM)/Flo Fil(R) are the Company's processed fly ash and bottom ash, sold for use as a structural fill and ready-mixed flowable fill. In addition to these value added products, the Company uses its traditional products for non-traditional applications. Non-traditional applications of fly ash include: (i) use as mineral filler to replace fine aggregate in bituminous coatings for roads (asphalt surface); (ii) use as a primary constituent in flowable fill to backfill around in-ground pipes and structures; (iii) for stabilization of soils with high plasticity or low load bearing abilities; (iv) to produce a filler grade material for a variety of products; and (v) as a binder with calcium sulfate to replace limestone road base materials. Status of any Publicly Announced New Product or Service On August 6, 1998, the Company acquired the exclusive license to make, use and sell products utilizing the Dynastone(TM) technology. Dynastone(TM) is the technology used for the production of a unique acid and chemical resistant cement utilizing high volumes of CCPs. Since the Company acquired the Dynastone(TM) license, the Company entered into a contractual agreement with CSR Hydro Conduit ("CSR"), one of the largest concrete pipe manufacturers in the United States. Under the agreement, the Company will provide CSR with the proprietary Dynastone(TM) technology to manufacture acid resistant concrete pipe using CCPs in addition to traditional cements. The Company has recently established a laboratory in San Antonio, Texas dedicated to commercialization of the Dynastone(TM) technology. Competitive Business Conditions According to data compiled by the Energy Information Administration of the United States Department of Energy (the "EIA"), of the 1,996 electric generating units operating in the United States in 1996, 1,128 were coal-fired and represented approximately 55% of the total electricity generated, an increase from approximately 50% in 1995. Coal is the largest indigenous fossil fuel resource in the United States, with current U.S. annual coal production in excess of one billion tons. Approximately 80% of the coal produced is for electric power generation, and its use has grown by almost 25% over the last decade. The combustion of coal provides cost-effective electricity generation, but results in a high percentage of residual material, which serves as the "raw material" for the CCP industry. The industry manages these CCPs and related materials by developing end-use markets for certain CCPs and providing storage and disposal services for the remainder of such materials. In order to sustain its position as a leader in the CCP management industry, the Company relies on and continues to implement the following competitive strengths: Leading Market Position. The Company believes it is a party to more CCP management contracts and manages more CCP tonnage than any of its competitors. The Company has aggressively penetrated its service areas and has won contracts based on its "one-stop" approach to CCP and other industrial materials management services. This approach combines the Company's marketing, materials handling and technological capabilities to lower the client's cost of managing CCPs and other industrial materials in accordance with applicable state and federal regulations. Geographic Diversification. The Company believes it is the only company in the CCP management industry with a national scope. This national scope provides the Company with several significant competitive benefits, including mitigation of the effects of cyclical regional economies and weather patterns. In addition, the Company's national scope and storage capabilities will create incremental revenue through the ability to shift products among regions to meet market demand while minimizing transportation costs. Value-Added Products and Services. The Company's focused new product development efforts have broadened the end-use market for CCPs and other recyclable industrial materials. The Company has successfully introduced new patented or trademarked products made from previously non-marketable materials through proprietary processes. These product development efforts have reduced the materials management cost to the Company's clients and improved the Company's revenue mix and margins. Strong Client Relationships. At December 31, 1998, the Company had contractual relationships with eleven of the largest fifteen coal powered electrical utilities in the United States, based on total electricity revenues. The Company has maintained long-term contracts with certain utilities since 1968, and experienced a renewal or extension rate of greater than 90% since the JTM Acquisition. The Company's clients rely on its marketing, materials handling and technological capabilities to extend the useful life of their landfill sites by creatively managing and marketing a broader range of CCPs than competitors. Source and Availability of Raw Materials The Company's primary raw material is CCPs. As long as the majority of electricity generated in this country comes from the use of coal-fired generation, the Company believes it will have an adequate supply of raw materials. Dependence on Limited Customers The Company works with a large number of customers and has long-term contracts with most such customers. The Company's core business is based on long-term materials management contracts with power producers and industrial clients. As of December 31, 1998, the Company had 87 materials management contracts, 17 of which generated more than $1.0 million of annual revenues each. Typical contract terms are from five to fifteen years. The Company is focused on serving its current client base and plans to aggressively target additional contract opportunities to increase both tonnage under management and revenues. Intellectual Property The Company owns and has obtained licenses to various domestic and foreign patents and trademarks related to its products and processes. While these patents and trademarks in the aggregate are important to the Company's competitive position, no single patent or trademark is material to the Company. The Company's license agreements generally have a duration which coincides with the patents covered thereby. Government Approval None. Effect of Existing or Probable Government Regulation None. Research and Development In an effort to maximize the percentage of products marketed to end users and minimize the amount of materials landfilled, the Company's focused research and development efforts have created or caused the Company to acquire the rights to value-added products such as ALSIL(R), Powerlite(R), Flexbase(TM), Peanut Maker(R) and Dynastone(TM). The Company markets CCP tonnage under management to the building materials and construction related products industry to be used in engineering applications, such as ready-mix concrete, lightweight aggregate, stabilized road bases, flowable and structural fill, and roofing shingles. The Company's major customers for its marketed products include LaFarge Corporation, Consolidated Sugar Refineries, Elk Corporation of Texas and GS Roofing Products Company, Inc. The Company's research and development program and other dedicated efforts have resulted in twelve patented products or processes and two U.S. patents and five foreign patents pending. Costs incurred for research and development were not material to the results of operations of the Company in 1998, 1997, or 1996. Cost of Compliance with Environmental Laws None. Employees The Company has a total of 630 employees, of which 570 are full-time employees. Item 2. Properties The Company operates its corporate headquarters in Salt Lake City, Utah in offices leased under a three year lease expiring in July 2001. The total amount of leased space in the corporate headquarters is 9,396 square feet. Due to Company's national scope of operations, it has a number of other properties used in its operations. The following table sets forth certain information regarding the Company's other principal facilities as of December 31, 1998: Location Function Ownership Lease Termination Date Kennesaw, GA Offices Leased January 31, 2004 Delle, UT Storage Silos Leased November 1, 2001 Fargo, ND Fly Ash Storage Leased Month to Month Good Spring, PA Silo Facility Leased August 15, 1999 Valley View, PA Rail Siding Leased December 31, 2015 Chester, VA Office/Rail Spur Leased November 30, 1999 Taylorsville, GA Rail Sidetrack Leased 30 days notice Taylorsville, GA Lab Facility Owned Doraville, GA Terminal Facility Leased August 11, 2005 Leland, NC Transfer Facility Owned Franklin, VA Structural Fill Owned Clinton, TN Structural Fill Owned Mercer Island, WA Offices Leased June 30, 1999 Centralia, WA Storage Facility Owned Ogden, UT Storage Facility Owned Oregon City, OR Offices Leased Month to Month Fresno, CA Terminal Facility Leased March 31, 2002 Allentown, PA Offices Leased February 28, 2001 Pomona, CA Rail Terminal Owned Stafford, TX Offices Leased April 30, 2003 Management believes its facilities are in good condition and that the facilities are adequate for its operating needs for the foreseeable future without significant modifications or capital investment. Item 3. Legal Proceedings The Company is a defendant in various lawsuits which are incidental to the Company's business. Management, after consultation with its legal counsel, believes that any potential liability as a result of these matters will not have a material effect upon the Company's results of operations or financial position. Item 4. Submission of Matters to a Vote of Security Holders None. PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters The Company's common stock is not publicly traded and is wholly owned by ISG. Item 6. Selected Financial Data The following table sets forth summary consolidated financial information of the Company for each of the five years in the period ended December 31, 1998. Such information was derived from the audited consolidated financial statements and notes thereto. The selected consolidated financial information for the periods prior to October 14, 1997 set forth below is not comparable to subsequent periods due to the step-up in basis resulting from the JTM Acquisition and the completion of the Acquisitions. The selected consolidated financial information set forth below has been derived from the audited consolidated financial statements of the Company and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and notes thereto included elsewhere herein.
2 1/2 Months 9 1/2 Months Year Ended Ended Ended December December 31,October 13, Year Ended December 31, 31, 1998 1997 1997 1996 1995 1994 (Dollars in thousands) Statement of Income Data: Revenue ....................................... $ 117,293 $ 12,643 $ 51,295 $ 62,841 $ 64,986 $60,784 Cost of products and services sold, excl. depr 80,116 9,365 40,701 52,268 51,489 52,356 Depreciation and amortization ................. 9,141 908 5,279 2,285 2,265 1,538 Selling, general and administrative expenses .. 14,145 1,256 3,633 5,667 9,692 -(1) Income from Operations ........................ 13,891 1,114 1,682 2,621 1,540 6,890 Interest Expense .............................. 9,338 628 4,160 4,853 4,081 17 Net income (loss) before income taxes ......... 4,808 517 (2,478) (2,232) 6,873 Net income (loss) ............................. 2,259 265 (3,090) (1,870) 6,873(1) Balance Sheet Data: Working capital (deficiency) .................. 6,786 (21,648) (43,594) (45,804) (42,268) 6,249 Total assets .................................. 191,732 73,270 58,396 62,950 61,779 18,291 Total debt .................................... 110,000 -- -- -- -- 2,976 Shareholder's equity .......................... 27,524 25,265 3,623 6,713 8,033 17,831 Other Data: Cash flows from operating activities .......... 8,164 1,843 521 603 (1,115) -(1) Cash flows from investing activities .......... (86,576) (19) (681) (3,869) -(1) Cash flows from financing activities .......... 75,344 1,189 957 2,844 (4,113) -(1) EBITDA (2) .................................... 23,287 2,054 6,961 4,906 3,805 8,428 EBITDA margin ................................. 19.9% 16.2% 13.6% 7.8% 5.9% 13.9% Captial expenditures .......................... 8,131 19 681 4,357 4,589 905 Ratio of earnings to fixed charges (3) ........ 1.42x 1.49x 0.56x 0.68x 0.58x 5.21x Deficit of earnings to fixed charges .......... -- -- (2,478) (2,232) (2,541) --
(1) During the year ended December 31, 1994, the Company was a subsidiary of Union Pacific and was not allocated any SG&A or income tax expense. (2) EBITDA represents earnings before interest expense, income taxes, depreciation and amortization. EBITDA should not be considered as an alternative to net income or any other GAAP measure of performance as an indicator of the Company's performance or to cash flows provided by operating, investing or financing activities as an indicator of cash flows or a measure of liquidity. Management believes that EBITDA is a useful adjunct to net income and other measurements under GAAP in evaluating the Company's ability to service its debt and is a conventionally used financial indicator. However, due to possible inconsistencies in the method of calculating EBITDA, the EBITDA measures presented may not be comparable to other similarly titled measures of other companies. (3) The ratio of earnings to fixed charges is computed by dividing earnings by fixed charges. For this purpose, earnings include pre-tax income from continuing operations plus fixed charges. Fixed charges include interest, whether expensed or capitalized, amortization of debt expense and that portion of rental expense which is representative of the interest factor in these rentals. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis should be read in conjunction with the consolidated financial statements and notes thereto of ISG Resources, Inc. and its predecessor, JTM Industries, Inc. and other financial information appearing elsewhere herein. General The Company is a manager and marketer of CCPs in North America. The Company generates revenues from marketing products to its customers and providing materials management, engineering and construction services to its clients. The Company was founded in 1997 upon the acquisition of JTM by ISG. Subsequently, the Company acquired Pozzolanic, PPA, the US Ash Group and Fly Ash Products (the "1998 Acquisitions"). The Company's strategic objectives include the maintenance and expansion of long-term contractual relationships, the increase in product sales and applications through cross-marketing and further technological advances and the pursuit of strategic acquisitions. The Company expects to achieve cost savings and incremental profitability through the integration of administration, purchasing, insurance, marketing and other operations of its strategic acquisitions. Seasonality The Company's business is subject to seasonal fluctuation. The Company's need for working capital accelerates moderately during the middle of the year, and accordingly, total debt levels tend to peak in the second and third quarters, declining in the fourth quarter of the year. The amount of revenue generated during the middle of the year generally depends upon a number of factors, including the level of road and other construction using concrete, weather conditions affecting the level of construction, general economic conditions, and other factors beyond the Company's control. Results of Operations Fiscal year 1998 was the first complete year of operations subsequent to the JTM Acquisition and, thus, is not comparable to any prior accounting period. For purposes of discussing the results of operations, fiscal year 1998 is compared to the period from the JTM Acquisition date to December 31, 1997 and the period from January 1, 1997 to the JTM Acquisition date, which reflects the results of the predecessor company. Due to the 1998 Acquisitions and the change in the capital structure, the financial condition and results of operations are not directly comparable to that of the predecessor company. Fiscal Year 1998 Compared to 2 1/2 Months Ended December 31, 1997 and 9 1/2 Months Ended October 13, 1997 Revenues. Revenues were $117.3 million, $12.6 million and $51.3 million in fiscal year 1998, the 2 1/2 months ended December 31, 1997 and the 9 1/2 months ended October 13, 1997, respectively, resulting in average monthly revenues of $9.8 million, $5.0 million and $5.4 million for the respective periods. The increase in the average monthly revenues in 1998 is due primarily to the 1998 Acquisitions. Cost of Products Sold, Excluding Depreciation. Cost of products sold, excluding depreciation, was $51.9 million, $4.9 million and $20.7 million in fiscal year 1998, the 2 1/2 months ended December 31, 1997 and the 9 1/2 months ended October 13, 1997, respectively, resulting in cost of products sold, excluding depreciation, as a percentage of product revenues of 62.5%, 68.9% and 80.8% for the respective periods. The improvement in margins is due to two factors: (1) change in product mix from lower margin product sold to the former parent in the pre-acquisition period as opposed to higher margin product sold to third parties in the post-acquisition period, and (2) price increases. Cost of Services Sold, Excluding Depreciation. Cost of services sold, excluding depreciation was $28.2 million, $4.5 million and $20.0 million in fiscal year 1998, the 2 1/2 months ended December 31, 1997 and the 9 1/2 months ended October 13, 1997, respectively, resulting in a relatively constant cost of services sold, excluding depreciation, as a percentage of service revenues of 82.4%, 80.6% and 77.9% for the respective periods. Depreciation and Amortization. Depreciation and amortization was $9.1 million, $0.9 million and $5.3 million in fiscal year 1998, the 2 1/2 months ended December 31, 1997 and the 9 1/2 months ended October 13, 1997, respectively, resulting in average monthly depreciation and amortization of $0.8 million, $0.4 million and $0.6 million, for the respective periods. The 9 1/2 months ended October 13, 1997 includes a $3.3 million goodwill write-off by the Company's former parent in connection with the JTM Acquisition. Excluding this write-off, average monthly depreciation and amortization for this period would have been $0.2 million. The increase in average monthly depreciation and amortization for the 2 1/2 months ended December 31, 1997 over the 9 1/2 months ended October 13, 1997, before the goodwill write-off discussed above, is due primarily to the amortization of goodwill, contracts, patents and assembled workforce, which were recorded at fair value upon the JTM Acquisition, as well as the accelerated amortization rate of goodwill by the Company after its acquisition by ISG. The increase in average monthly depreciation and amortization for fiscal year 1998 over the 2 1/2 months ended December 31, 1997 is due primarily to the amortization of goodwill, contracts and assembled workforce, which were recorded at fair value upon the 1998 Acquisitions. Selling, General and Administrative Expenses. Selling, general and administrative expenses ("SG&A") were $14.1 million, $1.3 million and $3.6 million in fiscal year 1998, the 2 1/2 months ended December 31, 1997 and the 9 1/2 months ended October 13, 1997, respectively. For the 9 1/2 months ended October 13, 1997, management fees were allocated to the Company by Laidlaw based upon the Company's share of Laidlaw's consolidated revenue. The allocated charges may not be indicative of the expenses the Company would have incurred if Laidlaw had not provided the services. The increase in SG&A in fiscal year 1998 is due primarily to three factors: (1) costs associated with the reorganization of the Company (i.e., consulting, travel, employee relocation) after the 1998 Acquisitions; (2) increased sales and marketing efforts; and (3) an increase in management incentive compensation. Interest Expense. Interest expense was $9.3 million, $0.6 million and $4.2 million in fiscal year 1998, the 2 1/2 months ended December 31, 1997 and the 9 1/2 months ended October 13, 1997, respectively, resulting in average monthly interest expense of $0.8 million, $0.2 million and $0.4 million for the respective periods. The decrease in the average monthly interest expense in the 2 1/2 months ended December 31, 1997 as compared to the 9 1/2 months ended October 13, 1997 is due primarily to a decrease in the Company's outstanding indebtedness resulting from the elimination of the intercompany indebtedness to Laidlaw upon the JTM Acquisition. The increase in the average monthly interest expense in fiscal year 1998 is due primarily to the issuance of Senior Subordinated Notes in April 1998. Income Tax Expense. Income tax expense was $2,549,000, $252,000 and $612,000 in fiscal year 1998, the 2 1/2 months ended December 31, 1997 and the 9 1/2 months ended October 13, 1997, respectively, resulting in effective tax rates of 53.0%, 48.8% and (24.7%). The negative effective tax rate in the 9 1/2 months ended October 13, 1997 is due primarily to the large goodwill write-off discussed above which was not deductible for tax purposes. The increase in the effective tax rate from the 2 1/2 months ended December 31, 1997 to fiscal year 1998 is due primarily to the increase in non-deductible amortization of goodwill recorded upon the 1998 Acquisitions. Net Income (Loss). As a result of the factors discussed above, net income increased to $2.3 million and $0.3 million in fiscal year 1998 and the 2 1/2 months ended December 31, 1997, respectively, as compared to a net loss of $3.0 million in the 9 1/2 months ended October 13, 1997. 2 1/2 Months Ended December 31, 1997 and 9 1/2 Months Ended October 13, 1997 Compared to Fiscal Year 1996 Revenues. Revenues were $12.6 million, $51.3 million and $62.8 million in the 2 1/2 months ended December 31, 1997, the 9 1/2 months ended October 13, 1997 and fiscal year 1996, respectively, resulting in average monthly revenues of $5.0 million, $5.4 million and $5.2 million for the respective periods. The change in the average monthly revenues between the three periods is due primarily to the seasonality of the industry. Revenues peak in the second and third quarters, declining in the fourth and first quarters. Cost of Products Sold, Excluding Depreciation. Cost of products sold, excluding depreciation, was $4.9 million, $20.7 million, and $22.4 million in the 2 1/2 months ended December 31, 1997, the 9 1/2 months ended October 13, 1997 and fiscal year 1996, respectively, resulting in cost of products sold, excluding depreciation, as a percentage of product revenues of 68.9%, 80.8%, and 87.8% for the respective periods. The improvement in margins is due to two factors: (1) change in product mix from lower margin product sold to the former parent in the pre-acquisition periods as opposed to higher margin product sold to third parties in the post-acquisition period, and (2) a $1.0 million settlement of a lawsuit charged to cost of sales in 1996. Cost of Services Sold, Excluding Depreciation. Cost of services sold, excluding depreciation was $4.5 million, $20.0 million and $29.9 million in the 2 1/2 months ended December 31, 1997, the 9 1/2 months ended October 13, 1997 and fiscal year 1996, respectively, resulting in a relatively constant cost of services sold, excluding depreciation, as a percentage of service revenues of 80.6%, 77.9%, and 80.0% for the respective periods. Depreciation and Amortization. Depreciation and amortization was $0.9 million, $5.3 million, and $2.3 million in the 2 1/2 months ended December 31, 1997, the 9 1/2 months ended October 13, 1997 and fiscal year 1996, respectively, resulting in average monthly depreciation and amortization of $0.4 million, $0.6 million and $0.2 million for the respective periods. The increase in depreciation and amortization in the 9 1/2 months ended October 13, 1997 over the fiscal year 1996 is due primarily to a $3.3 million goodwill write-off by the Company's former parent in connection with the JTM Acquisition. Excluding this write-off, average monthly depreciation and amortization for this period would have been consistent with fiscal year 1996 at $0.2 million. The increase in average monthly depreciation and amortization for the 2 1/2 months ended December 31, 1997 over the 9 1/2 months ended October 13, 1997, before the goodwill write-off discussed above, is due primarily to the amortization of goodwill, contracts, patents and assembled workforce, which were recorded at fair value upon the JTM Acquisition, as well as the accelerated amortization rate of goodwill by the Company after its acquisition by ISG. Selling, General and Administrative Expenses. Selling, general and administrative expenses ("SG&A") were $1.3 million, $3.6 million and $5.7 million in the 2 1/2 months ended December 31, 1997, the 9 1/2 months ended October 13, 1997 and fiscal year 1996, respectively. The decrease from fiscal year 1996 to the 9 1/2 months ended October 13, 1997 reflects a decrease in management fees charged by the Company's former parent, from $2.7 million in fiscal year 1996 to $0.7 million in the 9 1/2 months ended October 13, 1997. Management fees were allocated to the Company by Laidlaw based upon the Company's share of Laidlaw's consolidated revenue. The allocated charges may not be indicative of the expenses the Company would have incurred if Laidlaw had not provided the services. Interest Expense. Interest expense was $0.6 million, $4.2 million and $4.8 million in the 2 1/2 months ended December 31, 1997, the 9 1/2 months ended October 13, 1997 and fiscal year 1996, respectively, resulting in average monthly interest expense of $0.2 million, $0.4 million and $0.4 million for the respective periods. The decrease in interest expense in the 2 1/2 months ended December 31, 1997 as compared to the 9 1/2 months ended October 13, 1997 and fiscal year 1996 is due primarily to a decrease in the Company's outstanding indebtedness resulting from the elimination of the inter-company indebtedness to Laidlaw upon acquisition by ISG. Income Tax Benefit (Expense). Income tax expense was $252,000 and $612,000 in the 2 1/2 months ended December 31, 1997 and the 9 1/2 months ended October 13, 1997 compared to an income tax benefit of $362,000 in fiscal year 1996, resulting in effective tax rates of 48.8%, (24.7%) and 16.2%. The increase in income taxes from fiscal year 1996 to the 9 1/2 months ended October 13, 1997 reflects increases in the Company's taxable income, primarily from obtaining higher margins and SG&A reductions. The negative effective tax rate in the 9 1/2 months ended October 13, 1997 is due primarily to the large goodwill write-off discussed above which was not deductible for tax purposes. Net Income (Loss). As a result of the factors discussed above, net income increased to $0.3 million in the 2 1/2 months ended December 31, 1997 as compared to net losses of $3.0 million and $1.8 million in the 9 1/2 months ended October 13, 1997 and fiscal year 1996, respectively. Liquidity and Capital Resources The Company financed the JTM Acquisition and the 1998 Acquisitions through the issuance of $100.0 million of 10% Senior Subordinated Notes due 2008 and borrowings on its Secured Credit Facility. Operating and capital expenditures have been financed primarily through cash flows from operations and borrowings under the Secured Credit Facility. At December 31, 1998, the Company had no cash or cash equivalents and $25.0 million available under the Secured Credit Facility. In addition, the Company had working capital of approximately $6.8 million, an increase of $28.4 million from December 31, 1997 resulting primarily from the replacement of a short-term note with long-term debt. The Company intends to make capital expenditures over the next several years principally to construct storage, loading and processing facilities for CCPs and to replace existing capital equipment. During fiscal year 1998, capital expenditures amounted to approximately $8.1 million, including $0.9 million expended to purchase the rolling stock of Pneumatic. Capital expenditures made in the ordinary course of business will be funded by cash flow from operations and borrowings under the Secured Credit Facility. The 1999 acquisition of Best Masonry and Tool Supply discussed elsewhere herein was financed through borrowings under the Secured Credit Facility. The Company anticipates that its principal use of cash will be for working capital requirements, debt service requirements and capital expenditures. Based upon current and anticipated levels of operations, the Company believes that its cash flow from operations, together with amounts available under the Secured Credit Facility, will be adequate to meet its anticipated requirements for working capital, capital expenditures and interest payments for the next several years. There can be no assurance, however, that cash flow from operations will be sufficient to service the Company's debt and the Company may be required to refinance all or a portion of its existing debt or to obtain additional financing. These increased borrowings may result in higher interest payments. There can be no assurance that any such refinancing would be possible or that any additional financing could be obtained. The inability to obtain additional financing could have a material adverse effect on the Company. The Year 2000 Issue In general, the Year 2000 issue relates to computers and other systems being unable to distinguish between the years 1900 and 2000 because they use two digits, rather than four, to define the applicable year. Systems that fail to properly recognize such information will likely generate erroneous data or cause a system to fail possibly resulting in a disruption of operations. The Company's products do not incorporate such date coding so the Company's efforts to address the Year 2000 issue fall in the following three areas: (i) the Company's information technology ("IT") systems; (ii) the Company's non-IT systems (i.e., machinery, equipment and devices which utilize technology which is "built in" such as embedded microcontrollers); and (iii) third-party customers. The Company is currently working to resolve the potential impact of the Year 2000 issue on the processing of date-sensitive data by the Company's computerized information systems. Specifically, the Company has commenced installation of new accounting and financial software and anticipates that this process will be complete by the end of April 1999. The Company is also acquiring and installing Year 2000 compliant software upgrades in all scales used in its operations. The Company is analyzing all other IT and non-IT systems to determine if any other modifications or upgrades are necessary. The amount charged to expense during the year ended December 31, 1998, as well as the amounts anticipated to be charged to expense related to the Year 2000 computer modifications, have not been and are not expected to be material to the Company's financial position, results of operations or cash flows. The Company is also evaluating and taking steps to resolve Year 2000 compliance issues that may be created by customers, suppliers and financial institutions with whom the Company does business. Because many of the Company's suppliers are heavily regulated utilities with mandated, the Company does not expect these suppliers to experience problems. The Company is examining customers and may send out confirmation letters of Year 2000 compliance if the Company determines such action is necessary. The Company cannot guarantee that the systems of other entities will be converted on a timely basis. The foregoing statements are based upon management's current assumptions. However, there can be no guarantee that these assumptions have addressed all relevant uncertainties. Forward-Looking Information Statements included in this Management's Discussion and Analysis of Financial Condition and Results of Operations and other items of this Form 10-K may contain forward-looking statements. Such forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements may relate but not be limited to projections of revenues, income or loss, capital expenditures, plans for growth and future operations, financing needs, as well as assumptions relating to the foregoing. Forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified. When used in this "Management's Discussion and Analysis of Financial Condition and Results of Operations", and elsewhere in this Form 10-K the words "estimates", "expects", "anticipates", "forecasts", "plans", "intends" and variations of such words and similar expressions are intended to identify forward-looking statements that involve risks and uncertainties. Future events and actual results could differ materially from those set forth in, contemplated by or underlying the forward-looking statements. Item 7a. Qualitative and Quantitative Disclosures about Market Risk In 1997, the SEC issued new rules (Item 305 of Regulation S-K) which requires disclosure of material risks as defined by Item 305, related to market risk sensitive financial instruments. As defined, the Company currently has market risk sensitive instruments related to interest rates. As disclosed in Note 4 of the audited consolidated financial statements, the Company has outstanding long-term debt of $110,000,000 at December 31, 1998. The Company currently has an average maturity of nine years for long-term debt, $100,000,000 of which is at a fixed rate of 10% and $10,000,000 of which is at a rate averaging 8.5% for the year ended December 31, 1998. The Company does not have significant exposure to changing interest rates on long-term debt because interest rates for the majority of the debt is fixed. The Company has not undertaken any additional actions to cover interest rate market risk and is not a party to any other interest rate market risk management activities. A hypothetical 10% change in market interest rates over the next year would not impact the Company's earnings or cash flows as the interest rate on the majority of the long-term debt is fixed. A 10% change in market interest rates would have a material effect (likely increasing or decreasing the fair value by approximately 50%) on the fair value of the Company's publicly traded long-term debt due to the volume outstanding at December 31, 1998. The Company does not purchase or hold any derivative financial instruments for trading purposes. Item 8. Financial Statements and Supplementary Data The audited financial statements for the year ending December 31, 1998 are F-2 INDEX TO FINANCIAL STATEMENTS ISG Resources, Inc. and Subsidiaries Audited Consolidated Financial Statements as of December 31, 1998 and 1997 and for the Year Ended December 31, 1998 and the Period From October 14, 1997 to December 31, 1997: Report of Independent Auditors ........................................... F-2 Consolidated Balance Sheets .............................................. F-3 Consolidated Statements of Income ........................................ F-5 Consolidated Statements of Shareholder's Equity .......................... F-6 Consolidated Statements of Cash Flows .................................... F-7 Notes to Consolidated Financial Statements ............................... F-8 JTM Industries, Inc. and Subsidiary (Predecessor to ISG Resources, Inc.) Audited Consolidated Financial Statements as of October 13, 1997 and for the Period From January 1, 1997 to October 13, 1997 and the Year Ended December 31, 1996: Report of Independent Accountants ................................... F-17 Consolidated Balance Sheet .......................................... F-18 Consolidated Statements of Loss and Accumulated Deficit ............. F-19 Consolidated Statements of Cash Flows ............................... F-20 Notes to Consolidated Financial Statements .......................... F-21 Pozzolanic Resources, Inc. and Subsidiaries Audited Consolidated Financial Statements as of December 31, 1997 and for the Years Ended December 31, 1997 and 1996: Report of Independent Auditors ...................................... F-26 Consolidated Balance Sheet .......................................... F-27 Consolidated Statements of Income and Retained Earnings ............. F-29 Consolidated Statements of Cash Flows ............................... F-30 Notes to Consolidated Financial Statements .......................... F-31 Michigan Ash Sales Company (d.b.a. U.S. Ash Company) and Affiliated Companies Audited Combined Financial Statements as of April 21, 1998 and December 31, 1997 and for the Period From January 1, 1998 to April 21, 1998 and the Years Ended December 31, 1997 and 1996: Report of Independent Auditors ........................................ F-34 Combined Balance Sheets ............................................... F-35 Combined Statements of Income and Retained Earnings ................... F-37 Combined Statements of Cash Flows ..................................... F-38 Notes to Combined Financial Statements ................................ F-39 F-1 Report of Independent Auditors The Board of Directors ISG Resources, Inc. and Subsidiaries We have audited the accompanying consolidated balance sheets of ISG Resources, Inc. and Subsidiaries as of December 31, 1998 and December 31, 1997, and the related consolidated statements of income, shareholder's equity and cash flows for the year ended December 31, 1998 and the period from October 14, 1997 to December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of ISG Resources, Inc. and Subsidiaries at December 31, 1998 and 1997, and the consolidated results of their operations and their cash flows for the year ended December 31, 1998 and the period from October 14, 1997 to December 31, 1997 in conformity with generally accepted accounting principles. Ernst & Young LLP Salt Lake City, Utah March 15, 1999 F-2 ISG Resources, Inc. and Subsidiaries Consolidated Balance Sheets December 31 1998 1997 Assets Current assets: Cash and cash equivalents ....................... $ -- $ 3,068,980 Accounts receivable: Trade, net of allowance for doubtful accounts of $170,000 in 1998 and $206,000 in 1997 ....... 14,975,729 9,167,788 Retainage receivable ........................... 660,609 517,695 Other .......................................... 296,966 318,271 Deferred tax asset .............................. 251,355 324,608 Other current assets ............................ 1,033,227 216,225 Total current assets ............................. 17,217,886 13,613,567 Property, plant and equipment: Land and improvements ........................... 1,736,384 1,624,335 Buildings and improvements ...................... 3,610,621 3,145,031 Vehicles and other operating equipment .......... 20,090,872 9,817,148 Furniture, fixtures and office equipment ........ 494,753 1,115,721 25,932,630 15,702,235 Accumulated depreciation ........................ (3,562,086) (453,516) 22,370,544 15,248,719 Construction in progress ........................ 5,768,564 -- 28,139,108 15,248,719 Other assets: Intangible assets, net .......................... 140,835,640 44,385,492 Debt issuance costs, net ........................ 5,192,893 -- Other assets .................................... 346,209 22,335 Total assets ..................................... $ 191,731,736 $ 73,270,113 ============= ============ F-3 December 31 1998 1997 ----------------------- Liabilities and shareholder's equity Current liabilities: Accounts payable ................................. $ 4,066,487 $ 1,806,678 Accrued expenses: Payroll ........................................ 1,801,657 1,693,953 Interest ....................................... 2,106,054 627,704 Other .......................................... 1,534,971 1,604,879 Income taxes payable ............................. 422,963 528,742 Note payable ..................................... -- 29,000,000 Other current liabilities ........................ 500,000 -- ----------- ----------- Total current liabilities ........................... 10,432,132 35,261,956 Long-term debt ...................................... 110,000,000 -- Other long-term liabilities ......................... 2,488,954 306,098 Deferred tax liability .............................. 41,286,434 12,437,297 Commitments and contingencies Shareholder's equity: Common stock, par value $1 per share; 100 shares authorized, issued and outstanding ............ 100 100 Additional paid-in capital ....................... 24,999,950 24,999,950 Retained earnings ................................ 2,524,166 264,712 ----------- ----------- Total shareholder's equity .......................... 27,524,216 25,264,762 Total liabilities and shareholder's equity .......... $191,731,736 $73,270,113 ============ =========== See accompanying notes. F-4 ISG Resources, Inc. and Subsidiaries Consolidated Statements of Income Period from Year ended October 14 to December 31, 1998 December 31, 1997 ------------------------------ Revenues: Product revenues ............................. $ 83,048,721 $ 7,059,063 Service revenues ............................. 34,243,854 5,583,981 ------------ ------------ 117,292,575 12,643,044 Costs and expenses: Cost of products sold, excluding depreciation 51,878,447 4,864,226 Cost of services sold, excluding depreciation 28,237,385 4,500,892 Depreciation and amortization ................ 9,140,938 908,619 Selling, general and administrative expenses . 14,144,765 1,255,680 ------------ 103,401,535 11,529,417 ------------ 13,891,040 1,113,627 Interest income ................................. 183,113 31,286 Interest expense ................................ (9,338,059) (627,704) Miscellaneous income ............................ 72,386 -- ------------ Income before income tax expense ................ 4,808,480 517,209 Income tax expense .............................. 2,549,026 252,497 ============ Net income ...................................... $ 2,259,454 $ 264,712 ============= ============ See accompanying notes. F-5
ISG Resources, Inc. and Subsidiaries Consolidated Statements of Shareholder's Equity Common Additional Retained Total Stock Paid-In Capital Earnings Shareholder's Equity ---------------------------------------------------------------------------- Balance at October 14, 1997 ........................ $100 $23,811,429 $ -- $23,811,529 Cash contribution ............................... -- 1,188,521 -- 1,188,521 Net income ...................................... -- -- 264,712 264,712 ----------- Balance at December 31, 1997 ....................... 100 24,999,950 264,712 25,264,762 Net income ...................................... -- -- 2,259,454 2,259,454 =========== Balance at December 31, 1998 ....................... $100 $24,999,950 $2,524,166 $27,524,216 ==== =========== ========== =========== See accompanying notes.
F-6 ISG Resources, Inc. and Subsidiaries Consolidated Statements of Cash Flows Period from Year ended October 14 to December 31 December 31 1998 1997 -------------------------------------- Operating activities Net income ......................................... $ 2,259,454 $ 264,712 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ................. 9,140,938 908,619 Amortization of debt issuance costs ........... 463,585 -- Deferred income taxes ......................... (1,697,407) (276,245) Changes in operating assets and liabilities: Receivables ............................... (1,479,648) 691,534 Other current and non-current assets ...... 140,055 (22,569) Accounts payable .......................... (606,834) (1,035,993) Income taxes payable ...................... (245,447) 528,742 Accrued expenses .......................... 759,326 755,913 Other current and non-current liabilities . (570,491) 28,387 ---------- ----------- Net cash provided by operating activities .......... 8,163,531 1,843,100 Investing activities Purchase of businesses, net of cash acquired of $5,829,695 ....................... (77,753,012) -- Additions to intangible assets ..................... (691,847) -- Purchases of property, plant and equipment ......... (8,131,174) (19,491) ---------- ----------- Net cash used in investing activities .............. (86,576,033) (19,491) Financing activities Proceeds from long-term debt ....................... 154,000,000 -- Payments on long-term debt ......................... (73,000,000) -- Debt issuance costs ................................ (5,656,478) -- Cash contributions ................................. -- 1,188,521 ----------- ----------- Net cash provided by financing activities .......... 75,343,522 1,188,521 ---------- --------- Net (decrease) increase in cash and cash equivalents (3,068,980) 3,012,130 Cash and cash equivalents at beginning of period ... 3,068,980 56,850 ----------- Cash and cash equivalents at end of period ......... $ $ 3,068,980 ========================== Cash paid for interest ............................. $ 7,396,124 $ -- Cash paid for income taxes ......................... $ 3,989,414 $ -- See accompanying notes. F-7 ISG Resources, Inc. and Subsidiaries Notes to Consolidated Financial Statements December 31, 1998 1. Basis of Presentation ISG Resources, Inc. (formerly, JTM Industries, Inc.) (the "Company") is a wholly owned subsidiary of Industrial Services Group ("ISG"). ISG was formed in September 1997 to acquire the stock of the Company from Laidlaw Transportation, Inc. ("Laidlaw") (the "Acquisition"). Pursuant to the Acquisition, the Company became a wholly owned subsidiary of ISG. Laidlaw received from ISG, as consideration for the Acquisition, a $29,000,000 senior bridge note (the "Senior Bridge Note"), a $17,500,000 9% Junior Subordinated Promissory Note due 2005 (the "Junior Subordinated Note") and $5,817,000 in cash. The Senior Bridge Note was pushed down to the Company as the proceeds of a future debt offering were used to retire this note. The Junior Subordinated Note was not pushed down to the Company as such proceeds were not used to retire this note, the Company has not and does not plan to assume the Junior Subordinated Note, and the Company does not guarantee or pledge its assets as collateral for this note. The Acquisition was accounted for under the purchase method of accounting. At the date of the Acquisition, asset and liability values were recorded at their fair values with respect to the purchase price, with the difference between the purchase price and fair value of the net assets recorded as goodwill. In 1998, the value allocated to goodwill was increased by approximately $879,000 to reflect certain changes to the fair values of the assets and liabilities estimated at the acquisition date. On March 4, 1998, the Company completed the acquisition of all the outstanding shares of Pozzolanic Resources, Inc. ("Pozzolanic"). The consideration paid consisted of approximately $40,000,000 in cash. The acquisition has been accounted for as a purchase and, accordingly, the results of operations of Pozzolanic have been included in the consolidated financial statements since March 4, 1998. On March 20, 1998, the Company completed the acquisition of all the outstanding shares of Power Plant Aggregates of Iowa, Inc. ("PPA"). The consideration paid consisted of approximately $8,541,000 in cash. The acquisition has been accounted for as a purchase and, accordingly, the results of operations of PPA have been included in the consolidated financial statements since March 20, 1998. On April 22, 1998, the Company acquired all of the outstanding stock of Michigan Ash Sales Company, d.b.a. U.S. Ash Company, together with two affiliated companies, U.S. Stabilization, Inc. and Flo Fil Co., Inc. (collectively, "U.S. Ash"). The consideration paid consisted of approximately $24,600,000 in cash. The acquisition has been accounted for as a purchase and, accordingly, the results of operations of U.S. Ash have been included in the consolidated financial statements since April 22, 1998. On April 22, 1998, the Company acquired all of the outstanding stock of Fly Ash Products, Inc. ("Fly Ash Products"). The consideration paid consisted of approximately $9,500,000 in cash. The acquisition has been accounted for as a purchase and, accordingly, the results of operations of Fly Ash Products have been included in the consolidated financial statements since April 22, 1998. The purchase prices of the above acquisitions were allocated based on estimated fair values of assets and liabilities at the respective dates of acquisition. Amounts allocated to contracts and assembled workforce approximated $70,705,000 and $1,600,000, respectively. Goodwill resulting from the difference between the purchase prices plus acquisition costs and the net assets of the companies acquired in 1998 totaled approximately $28,500,000. All recorded goodwill is being amortized on a straight-line basis over 25 years. F-8 ISG Resources, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. Basis of Presentation (continued) The following pro forma combined financial information reflects operations as if all above acquisitions as well as the debt transactions discussed in Note 4 had occurred as of January 1, 1997. The pro forma combined financial information contained herein is presented for illustrative purposes only, does not purport to be indicative of the Company's results of operations as of the date hereof and is not necessarily indicative of what the Company's actual results of operations would have been had the acquisitions and the debt transactions been consummated on such date. The pro forma combined financial information set forth below is based on historical financial statements of ISG Resources, Inc., Pozzolanic, PPA, U.S. Ash and Fly Ash Products. Year Ended December 31 1998 1997 ------------------- ------------------- Revenues $ 125,061,000 $ 110,337,000 Net income (566,000) (2,651,000) 2. Description of Business and Summary of Significant Accounting Policies Description of Business The Company purchases, removes and sells fly ash and other by-products of coal combustion throughout the United States. Principles of Consolidation These financial statements reflect the consolidated position and results of operations of ISG Resources, Inc. and its wholly owned subsidiary, KBK Enterprises, Inc. ("KBK") as of and for the year ended December 31, 1998 and the period from October 14 to December 31, 1997 and the accounts of Pozzolanic, PPA, U.S. Ash and Fly Ash Products as of December 31, 1998 and for the periods from their respective dates of acquisition to December 31, 1998 (collectively, the "Company"). All significant intercompany accounts and transactions have been eliminated in consolidation. Revenue Recognition Product revenues are earned by marketing products created by coal-fired power generation and related industrial materials to producers and consumers of building materials and construction related products. Generally, material is obtained from coal-fired electric utilities and is immediately delivered to the customer, eliminating the need to inventory products. Product revenues are recognized when the material is delivered to the customer. Service revenues include revenues earned under long-term contracts to dispose of residual materials created by coal-fired power generation and revenues earned in conjunction with certain construction-related projects, which are incidental to the primary business. Typical long-term disposal contracts are from five to fifteen years. Service revenues under the long-term contracts are recognized concurrent with the removal of the material and are typically based on the number of tons of material removed at an established price per ton. The construction-related projects are generally billed on a time and materials basis; therefore, the revenues and costs are recognized when the time is incurred and the materials are used. F-9 ISG Resources, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. Description of Business and Summary of Significant Accounting Policies (continued) Cost of products sold are primarily amounts paid to the utilities to purchase product and transportation costs of delivering the product to the customer. Cost of services sold include landfill fees and transportation charges to deliver the product to the landfill. Overhead charges incurred by a facility which generates both product and service revenues are allocated to cost of products sold and cost of services sold based on the percentage of revenue. Concentrations of Credit Risk Concentrations of credit risk in accounts receivable are limited due to the large number of customers comprising the Company's customer base throughout the United States. The Company performs ongoing credit evaluations of its customers, but does not require collateral to support customer accounts receivable. Historically, the Company has not had significant uncollectible accounts. Cash Equivalents Cash equivalents are highly liquid investments with maturities of three months or less when purchased. Property, Plant and Equipment Property, plant and equipment acquired in the acquisitions described above were recorded at estimated fair value at the dates of the respective acquisitions. Property, plant and equipment acquired subsequent thereto, renewals and betterments are recorded at cost. Maintenance and repairs are expensed as incurred. Depreciation is provided over the estimated useful lives or lease terms, if less, using the straight line method as follows: Land improvements 1 to 15 years Buildings and improvements 3 to 40 years Vehicles and other operating equipment 2 to 12 years Furniture, fixtures and office equipment 1 to 5 years Depreciation expense was approximately $3,281,000 and $454,000 for the year ended December 31, 1998 and the period from October 14, 1997 to December 31, 1997, respectively. Intangible Assets Intangible assets consist of goodwill, contracts, patents and licenses, and assembled workforce. Amortization expense was approximately $5,860,000 and $455,000 for the year ended December 31, 1998 and the period from October 14, 1997 to December 31, 1997, respectively. Amortization is provided over the estimated period of benefit, using the straight-line method as follows: Goodwill 25 years Contracts 20 years Patents and licenses 13 to 19 years Assembled workforce 8 years Debt Issuance Costs Debt issuance costs relate to costs incurred with the issuance of the Senior Subordinated Notes and the Secured Credit Facility. These costs are being amortized over the respective lives of the debt issues on a straight-line basis. Accumulated amortization at December 31, 1998 was $463,585. F-10 ISG Resources, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. Description of Business and Summary of Significant Accounting Policies (continued) Income Taxes Deferred tax assets and liabilities are provided for the future tax consequences attributable to temporary differences between the carrying amounts of assets and liabilities for financial statement and income tax purposes. Fair Value of Financial Instruments The Company's financial instruments, as defined by Statement of Financial Accounting Standards No. (SFAS) 107, "Disclosure About Fair Value of Financial Instruments," consist of cash equivalents, accounts receivable, accounts payable and accrued expenses, long-term debt and notes payable. At December 31, 1998 and December 31, 1997, the carrying value of cash equivalents, accounts receivable, accounts payable, accrued expenses and notes payable approximates fair value due to the short term nature of the instruments. Long-term debt outstanding at December 31, 1998 also approximates fair value due to the lack of significant fluctuations in interest rates since the debt was issued. Long-lived Assets As required by Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," management evaluates the carrying value of all long-lived assets to determine recoverability when indicators of impairment are present based generally on an analysis of undiscounted cash flows. Management believes no material impairment in the value of long-lived assets exists at December 31, 1998. Use of Estimates The preparation of financial statements, in conformity with generally accepted accounting principles, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 3. Intangible Assets Intangible assets consist of the following at December 31, 1998 and 1997: December 31 1998 1997 ------------- ------------ Goodwill $ 44,018,454 $ 14,640,584 Contracts 97,960,644 26,700,000 Patents and licenses 2,471,584 2,400,000 Assembled work force 2,700,233 1,100,000 ------------- ------------ 147,150,915 44,840,584 Less accumulated amortization (6,315,275) (455,092) ============= ============ $ 140,835,640 $ 44,385,492 ============= ============ F-11 ISG Resources, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 4. Debt Note Payable The Senior Bridge Note had an original maturity of March 30, 1998, which was extended to April 30, 1998. The Senior Bridge Note bore interest at 1.5% plus the prime rate (as determined by The Chase Manhattan Bank, N.A) through March 30, 1998 and 2% plus the prime rate thereafter. The Senior Bridge Note was repaid with a portion of the proceeds from the Senior Subordinated Notes discussed below. Secured Credit Facility On March 4, 1998, the Company obtained a $42,000,000 Secured Credit Facility provided by a syndicate of banks. The Secured Credit Facility enables the Company to obtain revolving secured loans from time to time to finance certain permitted acquisitions, to repay existing indebtedness, to pay fees and expenses incurred in connection with certain acquisitions and for working capital and general corporate purposes. At the Company's option, the revolving secured loans may be maintained as (a) Eurodollar Loans (as defined) which will bear interest at a rate equal to the quotient obtained by dividing LIBOR (as defined) by one minus the reserve requirement for such Eurodollar Loan, plus a margin of 250 basis points or (b) Base Rate Loans (as defined) which will have an interest rate equal to the higher of (i) the Nations Bank N.A. prime rate and (ii) the federal funds rate plus 0.5%, plus a margin of 125 basis points. The Company will also pay certain fees with respect to any unused portion of the Secured Credit Facility. The Secured Credit Facility has a term of five and one-half years from the date of initial funding, is guaranteed by ISG and existing and future subsidiaries of the Company (the "Guarantors"), and is secured by a first priority perfected security interest in all of the capital stock of the Company and all of the capital stock of each of the Guarantors, as well as certain present and future assets and properties of the Company and any domestic subsidiaries. The Secured Credit Facility requires the Company to maintain a maximum leverage ratio, a minimum interest coverage ratio and minimum consolidated net worth and certain other financial and nonfinancial covenants, all as defined within the agreement. The Company was in compliance with all such covenants at December 31, 1998. Upon completion of the private placement of the Senior Subordinated Notes discussed below, the Secured Credit Facility was permanently reduced to $35,000,000. At December 31, 1998, $10,000,000 was outstanding, with $25,000,000 unused and available, under the Secured Credit Facility. Senior Subordinated Notes On April 22, 1998, the Company completed a private placement of $100,000,000 aggregate principal amount of 10% Senior Subordinated Notes due 2008 (the "Senior Subordinated Notes"). The proceeds were used to pay the Senior Bridge Note, a portion of the Secured Credit Facility, consideration and expenses related to the U.S. Ash and Fly Ash Products acquisitions, and transaction fees. Interest on the Senior Subordinated Notes is payable semi-annually on April 15 and October 15 of each year, commencing October 15, 1998. The Senior Subordinated Notes will mature on April 15, 2008 and are guaranteed fully and unconditionally and on a joint and several basis by all of the Company's existing and future restricted subsidiaries, as defined in the indenture. F-12 ISG Resources, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 4. Debt (continued) Senior Subordinated Notes (continued) The Senior Subordinated Notes are redeemable at the option of the Company at various times throughout the term of the Senior Subordinated Notes at redemption prices specified in the indenture. Upon the occurrence of a change of control or an asset sale as defined in the indenture, the Company is required to make an offer to repurchase all or part of the Senior Subordinated Notes at prices specified in the indenture. The payment of principal, interest, and liquidated damages as defined in the indenture, if any, on the Senior Subordinated Notes is subordinated in right of payment to the prior payment of all senior indebtedness as defined in the indenture, whether outstanding on the date of the indenture or thereafter incurred. The indenture for the Company's Senior Subordinated Notes contains various limitations on the incurrence of additional indebtedness, the issuance of preferred stock, consolidations or mergers, sales of assets, and restricted payments, including dividends, for the Company and restricted subsidiaries as defined in the indenture. In connection with the private placement of the Senior Subordinated Notes, the Company entered into the Registration Rights Agreement pursuant to which the Company was required to file an exchange offer registration statement with the Securities and Exchange Commission which was declared effective by the Securities and Exchange Commission on September 4, 1998. The aggregate maturities of all long-term debt for the five years subsequent to December 31, 1998 are as follows: $0 in 1999-2002, $10,000,000 in 2003 and $100,000,000 thereafter. 5. Accrued Closure Costs The Company, in the normal course of business, expends funds for site restoration of certain property utilized for disposal services. The total anticipated site restoration costs currently are approximately $357,000. As of December 31, 1998 and 1997, $210,000 and $306,000, respectively, of anticipated site restoration costs have been accrued. F-13 ISG Resources, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 6. Income Taxes Income tax expense (benefit) consists of the following for the year ended December 31, 1998 and the period from October 14, 1997 to December 31, 1997: 1998 1997 ------------------------ Current: U.S. Federal $ 3,542,755 $ 459,626 State 703,678 69,116 ---------- --------- 4,246,433 528,742 Deferred: U.S. Federal (1,416,129) (240,135) State (281,278) (36,110) --------- --------- (1,697,407) (276,245) Total: U.S. Federal 2,126,626 219,491 State 422,400 33,006 --------- ---------- $ 2,549,026 $ 252,497 ========== ========= Reconciliation of income tax expense at the U.S. statutory rate to the Company's tax expense for the year ended December 31, 1998 and the period from October 14, 1997 to December 31, 1997 is as follows: 1998 1997 35% of income before income tax $1,682,968 $181,023 Add: Goodwill amortization 527,208 42,702 Other permanent differences 64,289 7,318 State income taxes, net of federal benefit 274,561 21,454 $2,549,026 $252,497 ---------- -------- The major components of the deferred tax assets and liabilities as of December 31, 1998 and 1997 are as follows: 1998 1997 ----------------------------- Deferred Tax Assets: Bad debt reserves $ 66,572 $ 78,658 Accruals not currently deductible for tax purposes 307,883 387,053 ------------ ------------ Total gross deferred tax assets 374,455 465,711 Deferred Tax Liabilities: Fixed asset basis differences 3,040,703 1,130,285 Intangible asset basis differences 38,363,602 11,424,094 Other 5,229 24,021 ------------- ------------ 41,409,534 12,578,400 ============= ============ Net deferred tax liabilities $(41,035,079) $(12,112,689) ============= ============ F-14 ISG Resources, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 7. Employee Benefit Plan Prior to April 1, 1998, eligible employees of the Company were able to participate in a 401(k) savings plan (the "Laidlaw Plan") sponsored by Laidlaw Environmental Services, Inc. ("LESI"), an affiliate of Laidlaw. Under the terms of the Laidlaw plan, the Company was required to match employee contributions, as defined, up to 3% of the employees' compensation. Expenses related to the Laidlaw plan were approximately $59,000 for the period from January 1, 1998 to March 31, 1998 and $44,000 for the period from October 14, 1997 to December 31, 1997. Subsequent to April 1, 1998, eligible employees of the Company may participate in a 401(k) savings plan (the "ISG Plan") sponsored by ISG. The ISG Plan requires the Company to match employee contributions, as defined, up to 6% of the employees' compensation. Expenses related to the ISG Plan were approximately $265,000 for the period from April 1, 1998 to December 31, 1998. 8. Commitments and Contingencies Lease Obligations Certain facilities and equipment are leased under non-cancelable operating leases, which generally have renewal terms, expiring in various years through 2006. Future minimum payments under leases with initial terms of one year or more consisted of the following at December 31, 1998: 1999 $ 4,201,000 2000 2,614,000 2001 2,210,000 2002 1,680,000 2003 1,205,000 Thereafter 1,549,000 ------------------- Total minimum lease payments $ 13,459,000 =================== Total rental expense was approximately $6,113,000 for the year ended December 31, 1998 and $1,259,000 for the period from October 14, 1997 to December 31, 1997. Sale and Purchase Commitments The Company's contracts with its customers and suppliers require the Company to make minimum sales and purchases over ensuing years, as follows: Minimum Minimum Sales Purchases ------------------------------------ 1999 $ 806,000 $ 5,933,000 2000 363,600 6,390,000 2001 371,000 6,914,000 2002 120,000 7,176,000 2003 120,000 3,045,000 Thereafter -- 11,709,000 ------------ ----------- $ $ 41,167,000 ============ ============ F-15 ISG Resources, Inc. and Subsidiaries Notes to Consolidated Financial Statements (continued) 8. Commitments and Contingencies (continued) Sale and Purchase Commitments (continued) Minimum sales and purchases under contracts with minimum requirements approximated $800,000 and $4,523,000, respectively, for the year ended December 31, 1998 and $249,000 and $318,000, respectively for the period from October 14, 1997 to December 31, 1997. Royalty Commitment The Company has agreed to pay a minimum of $500,000 per year commencing in 1999 and continuing through 2003 for future royalties related to the sale of certain Class C fly ash. The current portion of this liability is recorded in other current liabilities and the long-term portion is recorded in other long-term liabilities in the accompanying balance sheet. Legal Proceedings There are various legal proceedings against the Company arising in the normal course of business. While it is not currently possible to predict or determine the outcome of these proceedings, it is the opinion of management that the outcome will not have a material adverse effect on the Company's results of operations, financial position or liquidity. Employment Agreements The Company has employment agreements with certain of its employees. The employment agreements provide for the total annual base compensation of approximately $2,067,000 and expire from 2000 to 2003. Medical Insurance Effective April 1, 1998, the Company established a self-funded medical insurance plan for its employees with stop-loss coverage for amounts in excess of $40,000 per individual and approximately $1,300,000 in the aggregate. The Company has contracted with a third-party administrator to assist in the payment and administration of claims. Insurance claims are recognized as expenses when incurred, including an estimate of costs incurred but not reported at the balance sheet date. 9. Subsequent Events Effective January 1, 1999, the Company, Pozzolanic, PPA, U.S. Ash, Fly Ash Products and KBK merged with and into ISG Resources, Inc., a newly formed Utah corporation. Prior to the merger, ISG Resources, Inc. (Utah) had no assets and was a wholly owned subsidiary of ISG. Pneumatic Trucking, Inc., a wholly owned subsidiary of Michigan Ash Sales Company, was not merged into the new Utah corporation. Consequently, Pneumatic is now a wholly owned subsidiary of ISG Resources, Inc. (Utah). On January 7, 1999, the Company acquired all of the outstanding stock of Best Masonry and Tool Supply ("Best") for approximately $13,300,000 and paid off outstanding debt of Best totaling approximately $2,400,000. Best is engaged in the retail and wholesale distribution of masonry construction materials to residential and commercial contractors from its Texas and Georgia locations. Best also produces its own brand named formulas of manufactured masonry products. F-16 Report of Independent Accountants February 16, 1998 To the Board of Directors and Shareholders of JTM Industries, Inc: In our opinion, the accompanying consolidated balance sheet and the related consolidated statements of loss and accumulated deficit and of cash flows present fairly, in all material respects, the financial position of JTM Industries, Inc. and its subsidiaries at October 13, 1997, and the results of their operations and their cash flows for the period ended October 13, 1997 and the year ended December 31, 1996, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As discussed in Note 10, Laidlaw, Inc. sold the outstanding shares of JTM Industries, Inc. on October 14, 1997. PRICEWATERHOUSECOOPERS LLP F-17 JTM INDUSTRIES, INC. CONSOLIDATED BALANCE SHEET October 13, 1997 ($000's omitted) ASSETS Current assets Trade and other accounts receivable (net of allowance for doubtful accounts of $406) .................. $ 9,726 Retainage receivable .............................................. 770 Deferred income taxes ............................................. 329 Other current assets .............................................. 354 -------- Total current assets ..................................... 11,179 Fixed assets Land and improvements ............................................. 1,798 Buildings ......................................................... 3,533 Vehicles and other equipment ...................................... 11,038 Construction in progress .......................................... 886 -------- 17,255 Less: Accumulated depreciation .................................... (4,090) -------- 13,165 Goodwill (net of accumulated amortization of $6,095) .............. 34,052 -------- Total assets ............................................. $ 58,396 ======== LIABILITIES AND STOCKHOLDER'S EQUITY Current liabilities Accounts payable .................................................. $ 2,808 Accrued liabilities ............................................... 2,558 Intercompany notes payable ........................................ 49,407 -------- Total current liabilities ................................ 54,773 -------- Commitments and contingencies Stockholder's equity Common stock - authorized, issued and outstanding 100 shares ...... 1 Paid in capital ................................................... 10,678 Accumulated deficit ............................................... (7,056) -------- Total stockholder's equity ............................... 3,623 -------- Total liabilities and stockholder's equity ............... $ 58,396 ======== The accompanying notes are an integral part of these financial statements. F-18 JTM INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF LOSS AND ACCUMULATED DEFICIT ($000's omitted) Year to Date Year Ended October 13, December 31, 1997 1996 ------------- -------------- Revenues: Product revenues ..................................... $ 25,613 $ 25,513 Service revenues ..................................... 25,682 37,328 -------- -------- 51,295 62,841 Cost of product revenues, excluding depreciation ..... 20,702 22,397 Cost of service revenues, excluding depreciation ..... 19,999 29,871 Depreciation and amortization ........................ 5,279 2,285 Selling, general and administrative expenses ......... 3,633 5,667 -------- -------- Income from operations ............................... 1,682 2,621 Intercompany interest expense ........................ 4,160 4,845 Interest expense ..................................... -- 8 -------- -------- (2,478) (2,232) Income tax benefit (expense) ......................... (612) 362 -------- -------- Net loss ............................................. (3,090) (1,870) Accumulated deficit - beginning of year .............. (3,966) (2,096) -------- -------- Accumulated deficit - end of year .................... $ (7,056) $ (3,966) ======== ======== The accompanying notes are an integral part of these financial statements. F-19 JTM INDUSTRIES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS ($000's omitted) Year to Date Year Ended October 13, December 31, 1997 1996 ------------ ---------- Net Cash Provided By (Used In): Operating activities ................................... $ 521 $ 603 Investing activities ................................... (681) (3,869) -------- -------- Net cash used by operating and investing activities .... (160) (3,266) Non-cash activities .................................... (797) 422 -------- -------- (957) (2,844) Intercompany notes payable - beginning of year ......... (48,450) (45,606) -------- -------- Intercompany notes payable - end of year ............... $(49,407) $(48,450) ======== ======== Operating activities: Net loss ............................................... $ (3,090) $ (1,870) Items not affecting cash: Loss on disposal of fixed assets ..................... 305 -- Depreciation and amortization ........................ 5,279 2,285 Deferred income taxes ................................ 150 266 Cash provided by (used in) financing working capital: Trade and other accounts receivable .................. (1,898) 685 Other current assets ................................. 87 94 Accounts payable and accrued liabilities ............. (312) (857) -------- -------- Net cash provided by operating activities .............. $ 521 $ 603 ======== ======== Investing activities: Purchase of fixed assets ............................... $ (681) $ (4,357) Proceeds from sale of fixed and other assets ........... -- 488 -------- -------- Net cash used in investing activities .................. $ (681) $ (3,869) ======== ======== Supplemental cash flow information: Noncash transaction: Transfers of fixed assets from parent ............. $ 107 $ 128 Accounts payable related to fixed assets .......... -- $ 504 Cash paid (received) for: Interest .......................................... $ 4,160 $ 4,845 Income taxes to (from) parent ..................... $ 462 $ (629) The accompanying notes are an integral part of these financial statements. F-20 JTM INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ($000's Omitted) 1. Basis of Presentation of Financial Statements These financial statements reflect the consolidated financial position and results of operations of JTM Industries, Inc. and its subsidiary, KBK Enterprises, Inc. ("the Company") which until October 13, 1997 was an indirect wholly owned subsidiary of Laidlaw Inc. The Company is involved in materials management services to coal combustion by-products (CCPs) producing utilities and marketing products derived from CCPs, principally in the United States. Interest expense associated with intercompany financing by the Company's former parent, Laidlaw, Inc. ("Laidlaw"), has been charged to the Company based on prime rate plus 2% on the average outstanding balance. The Company is included in the consolidated tax return of Laidlaw. Income taxes have been calculated using applicable income tax rates on a separate return basis. The surplus funds of the Company are regularly transferred to Laidlaw, and any financing requirements are provided by Laidlaw. Accordingly, no cash or bank indebtedness balances are reported in these financial statements. 2. Summary of Significant Accounting Policies a) Basis of Presentation The consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States and all figures are represented in U.S. dollars, as the Company's operating assets are located in the United States. The preparation of financial statements in accordance with generally accepted accounting principles requires the Company to make estimates and assumptions that affect reported amounts of assets, liabilities, income and expenses, and disclosure of contingencies. Future events could alter such estimates in the near term. b) Consolidation The consolidated financial statements include the accounts of JTM Industries, Inc. and KBK Enterprises, Inc., its subsidiary company. All significant intercompany transactions are eliminated. c) Fixed assets Fixed assets are recorded at cost. Depreciation and amortization of other property and equipment is provided substantially on a straight-line basis over their estimated useful lives which are as follows: Buildings......................... 20 to 40 years Vehicles and other................ 3 to 15 years The company periodically reviews the carrying values of its fixed assets to determine whether such values are recoverable. Any resulting write downs are charged against income. Depreciation expense amounts to $1,191 and $1,281 for the period ended October 13, 1997 and the year ended December 31, 1996, respectively. F-21 JTM INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ($000's Omitted) 2. Summary of Significant Accounting Policies (Continued) d) Other assets Goodwill is amortized on a straight-line basis over forty years. The amount of any impairment is charged against income. In 1997, in connection with the planned sale of the Company, Laidlaw wrote down the assets of the Company to fair value which resulted in a charge against goodwill of $3,300. e) Income taxes Deferred income taxes are provided for all significant temporary differences arising from recognizing certain expenses and certain closure accruals in different periods for income tax and financial reporting purposes. f) Revenue Material revenues are earned by marketing products created by coal-fired power generation and related industrial materials to consumers of building materials and construction related products. Generally, material is obtained from coal-fired electric utilities and is immediately delivered to the customer, eliminating the need to inventory products. Therefore, no inventory exists at October 13, 1997. Material revenues are recognized when the material is delivered to the customer. Service revenues are earned under long-term contracts to dispose of residual materials created by coal-fired power generation. Typical contract terms are from five to fifteen years. Service revenues are recognized concurrent with the removal of the material and are typically based on the number of tons of material removed at an established price per ton. Costs of product revenues primarily include amounts paid to the utilities to purchase the product and transportation charges related to delivering the product to the customer. Cost of service revenues primarily include landfill fees and transportation charges related to delivering the product to the landfill. Overhead charges incurred by a facility which generates both product and service revenues are allocated to cost of product revenues and cost of service revenues based on the percentage of each type of revenue to total revenues. Cost of product revenues and cost of service revenues are recognized concurrent with the recognition of the related revenue. g) Concentration of Credit Risk Concentrations of credit risk in accounts receivable are limited, due to the large number of customers comprising the Company's customer base throughout the United Sates. The Company performs ongoing credit evaluations of its customers, but does not require collateral to support customer accounts receivable. The Company establishes an allowance for doubtful accounts based on the credit risk applicable to particular customers, historical trends, and other relevant information. 3. Benefit Plans Eligible employees of the Company may participate in a 401(k) savings plan sponsored by Laidlaw. The 401(k) plan requires the Company to match employee contributions as defined, up to 3% of the employees' compensation. Expenses related to the 401(k) plan were approximately $294 and $266 for the period ended October 13, 1997 and the year ended December 31, 1996, respectively. F-22 JTM INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ($000's Omitted) 4. Lease Commitments Rental expense incurred under operating leases amounted to $4,334 and $6,136 for the period ended October 13, 1997 and the year ended December 31, 1996, respectively. Rentals payable under operating leases for premises and equipment as of October 13, 1997 are as follows: 1998 .................................................. $ 4,518 1999 .................................................. 3,264 2000 .................................................. 1,553 2001 .................................................. 1,440 2002 .................................................. 753 Thereafter ............................................ 1,600 ------- $13,128 ======= 5. Legal proceedings The Company has various outstanding legal matters arising from the normal course of business. Although the final outcome cannot be predicted with certainty, the Company believes the ultimate disposition of the matters will not have a material impact on the Company's financial position. In January 1997, a third party filed suit against the Company for breach of contract. The Company settled this claim for $1,000 in February 1997. The Company accrued the loss as of December 31, 1996 as a component of cost of sales. 6. Related party transactions Included in the financial statements are related party transactions between the Company and Laidlaw. These related party transactions are as follows: Year to Date Year Ended October 13, December 31, 1997 1996 ------------ ------------ Management fees ................................ $ 491 $2,320 Administrative fees ............................ $ 249 $ 423 Intercompany sales ............................. $2,814 $4,953 Allocated insurance expense .................... $ 515 $ 772 Interest expense ............................... $4,160 $4,845 Management and administrative fees have been allocated to the Company based upon the Company's share of Laidlaw's consolidated revenue. Management and administrative fees are charged by Laidlaw to each of its operating groups in order to recover its general and administrative costs. The services provided by Laidlaw include treasury, taxation and insurance. The allocated charges may not be indicative of the expenses the Company would have incurred if Laidlaw had not provided the services. F-23 JTM INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ($000's Omitted) 6. Related party transactions (Continued) In 1996, Laidlaw contributed additional capital of $550 through a reduction in the intercompany note payable in a non-cash transaction. On May 9, 1997, all of the outstanding shares of the Company were transferred from LESI to Laidlaw Transportation, Inc., a direct, wholly owned subsidiary of Laidlaw. In preparation for the disposal of the Company, certain closure liabilities amounting to $1,650 were transferred to Laidlaw, net of the related deferred tax asset of $578. Additionally, a long term receivable in the amount of $1,008, net of an allowance of $963, was transferred to Laidlaw. A deferred tax asset of $337 related to the allowance was also transferred to Laidlaw. 7. Income taxes The components of income tax expense for the period from January 1, 1997 to October 13, 1997 and for the year ended December 31, 1996 are as follows: Year to Date Year Ended October 13, December 31, 1997 1996 --------------------------- Current federal provision (benefit) ................ $421 $(676) Current state provision ............................ 41 48 Deferred federal provision ......................... 150 266 ---- ----- Total income tax provision (benefit) ............... $612 $(362) ==== ===== Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements. Components of deferred tax liabilities and assets at October 13, 1997 are as follows: Deferred tax assets: Allowance for bad debts .................................. $ 142 Closure reserve .......................................... 97 Other accrued liabilities ................................ 91 Deferred tax liabilities: Fixed assets ............................................. (1) ----- Net deferred tax assets .................................... $ 329 ===== The difference between the federal statutory tax rate and the effective tax rate on continuing operations for the period from January 1, 1997 to October 13, 1997 and for the year ended December 31, 1996 are as follows: Year to Date Year Ended October 13, December 31, 1997 1996 ------------------------- Federal statutory tax rate ............................... 35.0% 35.0% Goodwill amortization not deductible for tax purposes .... (57.7%) (15.7%) State income taxes ....................................... (1.1%) (1.4%) Other items - net ........................................ (0.9%) (1.7%) ---- ---- Effective tax rate ....................................... (24.7%) 16.2% ==== ==== F-24 JTM INDUSTRIES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) ($000's Omitted) 8. Accrued closure costs The Company, in the normal course of its business, expends funds for remediation of certain property. The Company does not expect these expenditures to have a materially adverse effect on its financial condition or results of operations, since its business is based upon compliance with environmental laws and regulations and its services are priced accordingly. The method by which these costs are accrued involves estimating the total site restoration costs, determining the total volume of materials the site will hold, and accruing the site restoration costs concurrently with the filling of the site. The total anticipated site restoration costs are approximately $1,900. F-25 REPORT OF INDEPENDENT AUDITORS The Board of Directors Pozzolanic Resources, Inc. and Subsidiaries We have audited the accompanying consolidated balance sheet of Pozzolanic Resources, Inc. and Subsidiaries as of December 31, 1997, and the related consolidated statements of income and retained earnings and cash flows for each of the two years in the period ended December 31, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Pozzolanic Resources, Inc. and Subsidiaries at December 31, 1997, and the consolidated results of their operations and their cash flows for each of the two years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Ernst & Young LLP Seattle, Washington February 10, 1998, except for Note 8, as to which the date is March 4, 1998 F-26 POZZOLANIC RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET December 31, 1997 Assets Current assets: Cash .......................................................... $ 40,399 Short-term investments at cost ................................ 2,850,330 Accounts receivable, less allowance for doubtful accounts of $47,000 ............................... 1,925,269 Deferred freight .............................................. 402,958 Other receivables ............................................. 140,065 Amounts due from related parties .............................. 3,760 Prepaid expenses .............................................. 61,023 Current deferred income taxes ................................. 41,250 ----------- Total current assets ............................................ 5,465,054 Property, plant, and equipment: Land .......................................................... 107,777 Buildings ..................................................... 66,362 Plant equipment ............................................... 5,724,253 Automotive equipment .......................................... 630,700 Office furniture and equipment ................................ 357,848 Leasehold improvements ........................................ 247,406 ----------- 7,134,346 Accumulated depreciation and amortization ..................... (5,412,615) ----------- 1,721,731 Other assets: Fly ash contracts, less accumulated amortization of $789,568 .. 143,358 Deposits and other ............................................ 12,069 Notes receivable .............................................. 9,604 Deferred income taxes ......................................... 58,406 ----------- 223,437 ----------- Total assets .................................................... $ 7,410,222 =========== See accompanying notes. F-27 POZZOLANIC RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (Continued) December 31, 1997 Liabilities and shareholders' equity Current liabilities: Trade accounts payable ....................................... $ 536,228 Accrued expenses ............................................. 298,025 Advances from suppliers ...................................... 410,509 Income taxes payable ......................................... 4,771 ---------- Total current liabilities ...................................... 1,249,533 Deferred gains ................................................. 700,000 Shareholders' equity: Common stock, Class A, voting, $1 par value: Authorized shares - 1,000 Issued and outstanding shares - 200 ........................ 200 Preferred stock, Class C, nonvoting, $1 par value: Authorized shares - 15,000 Issued and outstanding shares - 2,900 ...................... 2,900 Preferred stock, Class D, nonvoting, $1 par value: Authorized shares - 15,000 Issued and outstanding shares - 5,800 ...................... 5,800 Retained earnings ............................................ 5,451,789 ---------- Total shareholders' equity ..................................... 5,460,689 ---------- Total liabilities and shareholders' equity ..................... $7,410,222 ========== See accompanying notes. F-28 POZZOLANIC RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS Year Ended December 31 1997 1996 ----------------------------------- Sales .......................................... $ 21,263,494 $ 17,993,543 Cost of goods sold ............................. 13,607,238 11,684,111 ---------- ---------- Gross profit ................................... 7,656,256 6,309,432 Selling, administrative, and general expenses .. 2,897,974 2,451,703 --------- --------- Operating income ............................... 4,758,282 3,857,729 Interest income ................................ 37,637 86,578 Other income ................................... 63,542 356,183 ------ ------- Income before income taxes ..................... 4,859,461 4,300,490 Provision for federal and state income taxes: Current ...................................... 1,830,499 1,544,462 Deferred ..................................... (52,241) (1,333) ------- ------ 1,778,258 1,543,129 --------- --------- Net income ..................................... 3,081,203 2,757,361 Retained earnings at beginning of year ......... 6,507,086 3,749,725 Less dividends paid ............................ 4,136,500 -- ---------- ------------ Retained earnings at end of year ............... $ 5,451,789 $ 6,507,086 ============ ============ See accompanying notes. F-29 POZZOLANIC RESOURCES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31 1997 1996 -------------------------- Operating activities Collection of trade receivables ................ $ 20,925,826 $ 18,063,627 Payments to suppliers and employees ............ (15,638,348) (13,719,586) Income taxes paid .............................. (1,400,259) (1,576,602) Interest received .............................. 34,429 87,324 Dividends received ............................. 17,885 17,115 Interest paid .................................. (8,185) -- Other, net ..................................... (73,322) 266,561 ------------ Net cash provided by operating activities ...... 3,858,026 3,138,439 Investing activities Purchases of property, plant, and equipment .... (401,144) (980,942) Proceeds from sale of equipment ................ 1,509 4,450 ------------ Net cash used in investing activities .......... (399,635) (976,492) Financing activities Dividends paid ................................. (4,136,500) -- Line of credit advance ......................... 755,000 -- Line of credit reduction ....................... (755,000) -- ------------ Net cash used in financing activities .......... (4,136,500) -- ------------ Increase (decrease) in cash and short-term investments .................... (678,109) 2,161,947 Cash and short-term investments at beginning of year .......................... 3,568,838 1,406,891 ------------ Cash and short-term investments at end of year .................... $ 2,890,729 $ 3,568,838 ============ Reconciliation of net income to net cash provided by operating activities: Net income ................................... $ 3,081,203 $ 2,757,361 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization ............. 701,572 647,059 Loss on disposal of fixed assets .......... -- (3,424) Other assets .............................. (298) (3) Note receivable ........................... (9,604) -- Deferred income taxes ..................... 52,240 (1,333) Net operating working capital items ....... 32,913 (261,221) ------------ Net cash provided by operating activities ...... $ 3,858,026 $ 3,138,439 ============ See accompanying notes. F-30 POZZOLANIC RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1997 1. Organization Pozzolanic Resources, Inc. ("Resources" or the "Company") is a holding company for Pozzolanic Northwest, Inc. ("Northwest") and St. Helens Investments, Inc. ("St. Helens"), d.b.a. Pozzolanic International, whose purpose is the distribution of fly ash, which is used in the production of concrete. The companies have been selling fly ash in the western United States and British Columbia since 1976. Resources also owns all the outstanding stock of Pozzolanic Northwest Bulk Carriers, Inc. ("Bulk Carriers"). Bulk Carriers operates as a common carrier, primarily in the Pacific Northwest. 2. Accounting Policies Financial Statement Presentation In addition to the accounts of Resources, the consolidated financial statements include the accounts of Northwest and its wholly owned subsidiary, Pozzolanic N.W. FSC, Inc. (a Foreign Sales Corporation - "FSC"); St. Helens; and Bulk Carriers. Significant intercompany transactions and accounts are eliminated in consolidation. Revenue Recognition Revenue is recognized upon delivery of products to the customer. Deferred Freight Freight costs incurred moving fly ash to Resources' storage facilities are deferred until the fly ash is sold. Such deferred freight is allocated to fly ash sales on an average cost per ton basis. Property, Plant, and Equipment Property, plant, and equipment are stated on the basis of cost. The provision for depreciation is determined by straight-line and accelerated methods over the estimated useful lives of the assets. Statements of Cash Flows For purposes of the statement of cash flows, short-term, interest-bearing investments with maturities on the date of purchase of less than three months are considered cash equivalents. The fair values of cash and short-term investments approximate their carrying values. Income Taxes The Company applies the liability method of accounting for income taxes as prescribed by SFAS No. 109, "Accounting for Income Taxes." Under the liability method, deferred tax assets and liabilities are recognized for the expected future tax consequences of existing differences between the financial reporting and tax reporting bases of assets and liabilities using enacted tax laws and rates. Deferred income taxes relate principally to differences in the treatment between tax and book of depreciation and freight costs. F-31 POZZOLANIC RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2. Accounting Policies (Continued) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. The only significant estimate made by management is the determination of the allowance for doubtful accounts. 3. Related Parties On October 1, 1980, Northwest transferred two of its fly ash contracts to St. Helens. In return, St. Helens issued to Northwest nonvoting common stock with a par value of $700,000. The related fly ash contracts have an unamortized carrying value at December 31, 1997 of approximately $143,000. Since Northwest had no cost basis in the contracts and is not assured of realization of the gain on this transaction, no gain on the transfer has been recognized. The above fly ash contracts are being amortized on a straight-line basis over the lives of the contracts. 4. Commitments and Contingencies The Company has entered into operating leases for office space, storage facilities, and rail cars through 2002. Aggregate minimum lease payments required over the lives of the leases are as follows: 1998 ............................................... $ 720,000 1999 ............................................... 660,000 2000 ............................................... 290,000 2001 ............................................... 180,000 2002 ............................................... 60,000 ---------- $1,910,000 ========== Rental expense under operating leases was approximately $560,000 and $210,00 in 1997 and 1996, respectively. The Company's contracts with its suppliers require the Company to make minimum purchases of fly ash over ensuing years as follows: 1998 ................................................... $ 730,000 1999 ................................................... 730,000 2000 ................................................... 730,000 2001 ................................................... 730,000 2002 ................................................... 730,000 2003 and thereafter .................................... 15,000 ---------- $3,665,000 ========== Fly ash purchases under supplier contracts with minimum purchase requirements amounted to $1,010,000 and $1,915,000 in 1997 and 1996, respectively. F-32 POZZOLANIC RESOURCES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 4. Commitments and Contingencies (Continued) The supplier contracts provide for adjustment of the minimum purchase prices based on changes in the specific price of Portland cement. 5. Credit Agreement Resources entered into a credit agreement with a bank that expires June 30, 1998. The agreement provides for borrowings of up to $2,500,000. Borrowings under the agreement are secured by accounts receivable and inventories and require monthly payments of interest at the lending bank's prime rate. There were no borrowings outstanding under this agreement at December 31, 1997. 6. Capital Stock Holders of Class A voting common stock are not entitled to receive dividends. The holders of Class C nonvoting preferred stock and Class D nonvoting preferred stock shall be entitled to dividends only when declared by the Board of Directors with the unanimous approval of voting stockholders. 7. Impact of the Year 2000 (Unaudited) The Company has completed an assessment of its computer programs and will have to modify or replace portions of its software so that its computer systems will function properly with respect to dates in the year 2000 and thereafter. The total Year 2000 project cost is not expected to be significant. The project is estimated to be completed no later than December 31, 1998, which is prior to any anticipated impact on its operating systems. The Company believes that with modifications to existing software, the Year 2000 Issue will not pose significant operational problems for its computer systems. 8. Subsequent Event On March 4, 1998, all of the Company's outstanding stock was purchased by an unrelated third party. F-33 Report of Independent Auditors The Board of Directors and Shareholders Michigan Ash Sales Company (d.b.a. U.S. Ash Company), U.S. Stabilization, Inc. and Flo Fil Company, Inc. We have audited the accompanying combined balance sheets of Michigan Ash Sales Company (d.b.a. U.S. Ash Company), U.S. Stabilization, Inc., and Flo Fil Company, Inc. (the "Companies") as of April 21, 1998 and December 31, 1997, and the related combined statements of income and retained earnings and cash flows for the period from January 1 to April 21, 1998 and for each of the two years in the period ended December 31, 1997. These financial statements are the responsibility of the Companies' management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of Michigan Ash Sales Company (d.b.a. U.S. Ash Company), U.S. Stabilization, Inc., and Flo Fil Company, Inc. at April 21, 1998 and December 31, 1997, and the combined results of their operations and their cash flows for the period from January 1 to April 21, 1998 and for each of the two years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Ernst & Young LLP Salt Lake City, Utah December 18, 1998 F-34 Michigan Ash Sales Company (d.b.a. U.S. Ash Company) and Affiliated Companies Combined Balance Sheets April 21 December 31 1998 1997 --------------- ------------- Assets Current assets: Cash and cash equivalents ..................... $ 408,363 $ 3,136,041 Accounts receivable (net of allowance for doubtful accounts of $15,114 in 1998 and $34,458 in 1997) ............................ 2,005,693 1,713,409 Other receivables ............................. 51,101 51,901 Inventories ................................... 29,316 21,875 Deferred income tax ........................... 5,928 42,116 ----------- ----------- Total current assets ............................... 2,500,401 4,965,342 Property, plant, and equipment Buildings ..................................... 579,788 578,788 Plant equipment ............................... 207,334 207,334 Vehicles ...................................... 158,474 138,124 ----------- ----------- 945,596 924,246 Accumulated depreciation ...................... (594,515) (567,369) ----------- ----------- 351,081 356,877 =========== =========== Total assets ....................................... $ 2,851,482 $ 5,322,219 =========== =========== F-35 Michigan Ash Sales Company (d.b.a. U.S. Ash Company) and Affiliated Companies Combined Balance Sheets (continued) April 21 December 31 1998 1997 --------------- ------------ Liabilities and shareholder's equity Current liabilities: Trade accounts payable .......................... $ 932,417 $ 347,177 Accrued expenses ................................ 32,935 592,309 Payables to affiliates .......................... 386,401 1,942,590 Current income tax payable ...................... 155,251 217,005 ---------- ---------- Total current liabilities ............................ 1,507,004 3,099,081 Deferred income tax .................................. 60,805 55,512 Commitments and contingencies Shareholder's equity: Common stock Michigan Ash Sales Company, $1 par value; 50,000 shares authorized; 1,000 shares issued and outstanding ..... 1,000 1,000 U.S. Stabilization, Inc., $1 par value; 50,000 shares authorized; 1,000 shares issued and outstanding ..... 1,000 1,000 Flo Fil Company, Inc., $1 par value; 50,000 shares authorized; 1,000 shares issued and outstanding ..... 1,000 1,000 Retained earnings ............................... 1,280,673 2,164,626 ---------- ---------- Total shareholder's equity ........................... 1,283,673 2,167,626 ========== ========== Total liabilities and shareholder's equity ........... $2,851,482 $5,322,219 ========== ========== See accompanying notes. F-36 Michigan Ash Sales Company (d.b.a. U.S. Ash Company) and Affiliated Companies Combined Statements of Income and Retained Earnings Period from January 1 to Year ended April 21 December 31 1998 1997 1996 ------------------ -------------- ------------- Revenues: Materials and services sold ... $ 3,323,405 $ 11,216,477 $ 7,535,232 Commissions ................... 219,827 495,691 ------------ ----------- ----------- Total revenues ..................... 3,323,405 11,436,304 8,030,923 Costs and expenses: Cost of materials and services sold ............... 2,745,932 10,006,618 6,298,862 Selling, general and administrative .............. 1,147,377 1,469,009 1,039,363 ------------ ------------ ----------- 3,893,309 11,475,627 7,338,225 ------------ ----------- ----------- (569,904) (39,323) 692,698 Interest income .................... 19,902 92,403 45,403 Other income ....................... 17,452 77,330 4,068 ------------ ------------ ----------- Income (loss) before income taxes .. (532,550) 130,410 742,169 Income taxes Current ........................ (40,078) 44,570 299,712 Deferred ....................... 41,481 4,833 (34,268) ------------ ------------ ----------- 1,403 49,403 265,444 ------------ ------------ ----------- Net income (loss) .................. (533,953) 81,007 476,725 Shareholder distribution ........... (350,000) (108,367) Retained earnings at beginning of year ............... 2,164,626 2,083,619 1,715,261 ----------- ============ ============ =========== Retained earnings at end of year ..................... $ 1,280,673 $ 2,164,626 $ 2,083,619 ============ ============ =========== See accompanying notes. F-37 Michigan Ash Sales Company (d.b.a. U.S. Ash Company) and Affiliated Companies Combined Statements of Cash Flows Period from January 1 to Year ended April 21 December 31 1998 1997 1996 ----------------------------------- Operating activities Net income (loss) ....................... $ (533,953) $ 81,007 $ 476,725 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation ....................... 27,146 63,073 46,025 Deferred income taxes .............. 41,481 4,833 (34,268) Changes in operating assets and liabilities: Accounts receivable ............ (291,484) (597,925) (173,391) Inventories .................... (7,441) 2,765 (2,778) Trade accounts payable and payables to affiliates ....... (970,949) 701,312 (184,845) Income taxes payable ........... (61,754) (35,621) 243,060 Accrued expenses ............... (559,374) 267,956 37,018 ---------- Net cash (used in) provided by operating activities ................. (2,356,328) 487,400 407,546 Investing activities Purchases of property, plant and equipment ........................ (21,350) (116,818) Proceeds from disposal of property, plant and equipment ....................... 29,457 ----------- ----------- ------- Net cash used in investing activities ... (21,350) (87,361) Financing activities Shareholder distribution ................ (350,000) (75,000) ----------- ----------- -------- Net increase (decrease) in cash and cash equivalents .................... (2,727,678) 400,039 332,546 Cash and cash equivalents at beginning of period .................. 3,136,041 2,736,002 2,403,456 ---------- ========== Cash and cash equivalents at end of period ........................ $ 408,363 $ 3,136,041 $ 2,736,002 =========== Cash paid during the period for income taxes ..................... $ 21,677 $ 80,191 $ 56,652 See accompanying notes. F-38 Michigan Ash Sales Company (d.b.a. U.S. Ash Company) and Affiliated Companies Notes to Combined Financial Statements April 21, 1998 1. Description of the Business and Significant Accounting Policies The accompanying combined financial statements include the accounts of Michigan Ash Sales Company, U.S. Stabilization, Inc. and Flo Fil Company, Inc. (the Companies). All three companies are wholly-owned by an individual shareholder and have common management. Significant intercompany accounts and transactions have been eliminated in combination. The operations of the Companies are summarized below: Michigan Ash Sales Company (d.b.a. U.S. Ash Company) - A Michigan corporation involved primarily in the business of marketing, transporting and disposing of fly ash and other coal byproducts generated by utilities, primarily in the states of Michigan, Indiana and Ohio. Customers of the company consist of concrete manufacturers, cement manufacturers, construction contractors, and other affiliated companies. U.S. Stabilization, Inc. - A Michigan corporation in the business of mixing fly ash with steel company waste byproducts to comply with landfill disposal regulations for a steel company in Indiana. Flo Fil Company, Inc. - A Michigan corporation involved primarily in the business of mixing and selling a low-cost fly ash based concrete product for use in applications with lower-grade product requirements. On March 25, 1998, an agreement was signed to sell all the outstanding stock of the Companies to an unrelated third party effective April 21, 1998. Revenue Recognition Revenues are recognized when materials or services are provided to customers. Cash and Cash Equivalents Cash equivalents are highly liquid investments with maturities of three-months or less when purchased. F-39 Michigan Ash Sales Company (d.b.a. U.S. Ash Company) and Affiliated Companies Notes to Combined Financial Statements (continued) 1. Significant Accounting Policies (continued) Property, Plant and Equipment Property, plant, and equipment are recorded at cost. Major renewals and improvements are capitalized, while maintenance and repairs are expensed when incurred. Depreciation is computed using the straight-line method over the estimated useful lives of 5 to 10 years for vehicles, machinery and equipment and 40 years for buildings and improvements. As required by Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," management evaluates the carrying value of all long-lived assets to determine recoverability when indicators of impairment are present based generally on an analysis of undiscounted cash flows. Management believes no material impairment in the value of long-lived assets exists at April 21, 1998. Income Taxes The Companies account for income taxes, using the provisions of Statement of Financial Accounting Standards (SFAS) No. 109, "Accounting for Income Taxes." Deferred income taxes result primarily from temporary differences between the financial statement bases and the tax bases of assets and liabilities using enacted tax rates. Fair Value of Financial Instruments Statement of Financial Accounting Standards No. 107, "Disclosure About Fair Value of Financial Instruments" (SFAS 107) requires the disclosure of the fair value of financial instruments, both assets and liabilities recognized and not recognized on the balance sheet, for which it is practicable to estimate fair value. SFAS 107 defines fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. At April 21, 1998 and December 31, 1997, the carrying value of all the Companies' financial instruments (accounts receivable, accounts payable and accrued expenses) approximates fair value. Inventories Inventories consist of spare parts for equipment and are stated at cost. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. F-40 Michigan Ash Sales Company (d.b.a. U.S. Ash Company) and Affiliated Companies Notes to Combined Financial Statements (continued) 2. Income Taxes Reconciliation of income tax expense at the U.S. statutory rate to the Companies' tax expense follows: Period from January 1 to April 21 Year ended December 31 1998 1997 1996 34% of income before income tax ................ $(181,067) $ 44,339 $252,337 Add (deduct): Permanent differences ....................... 175,970 2,954 2,391 Earnings of combined affiliate not subject to taxation because of S Corporation status .................................. (629) State income taxes, net of federal benefit 6,500 2,110 11,345 $ 1,403 $ 49,403 $265,444 -------- The major components of the deferred tax assets and liabilities as of April 21, 1998 and December 31, 1997 are as follows: 1998 1997 -------------------- Deferred Tax Assets: Bad debt reserves ..................................... $ 5,928 $ 12,251 Accruals not currently deductible for tax purposes .... 17,750 Net operating loss carryforwards ....................... 12,115 ------- -------- 5,928 42,116 Deferred Tax Liabilities: Fixed asset basis differences .......................... 60,805 55,512 ======== ======== Net deferred tax liabilities ............................. $(54,877) $(13,396) ======== ======== F-41
Michigan Ash Sales Company (d.b.a. U.S. Ash Company) and Affiliated Companies Notes to Combined Financial Statements (continued) 3. Related Party Transactions The following table summarizes revenues and expenses reported in the accompanying combined statements of income that were either received or accrued from, or paid or accrued to, the sole shareholder, individuals affiliated with the sole shareholder, or companies owned by or affiliated with the sole shareholder: Period from January 1 to Year ended Nature of April 21 December 31 Related Party Transaction 1998 1997 1996 ------------------------------- ----------------------- ---------------- ------------------ -------------- Commission revenues: Wirt Transportation, Inc. Commissions on loads hauled by Wirt Transportation, Inc. $ - $ 219,827 $ 495,691 Cost of materials and services sold: Wirt Transportation, Inc. Trucking fees 2,489,134 1,868,055 372,839 Wirt Payroll Services and Fees for leased JAD Payroll Services employees 1,353,651 1,485,181 1,080,769 JD Ash Equipment Co. Equipment rental and maintenance contract fees 157,742 1,045,545 430,415 Sand and Stone Co. Purchases of materials 253,116 148,199 Wirt Trucking Co. Equipment rental 79,479 79,479 Selling, general and administrative: Sand and Stone Co. Building rental 19,501 93,000 93,000 Bay Dock Company, Inc. Building rental 67,200
Due to the related nature of these parties, the amounts received and paid may not have been the same if similar activities had been undertaken with unrelated parties. All leasing arrangements with related parties are cancelable. Prior to January 2, 1997, U.S. Stabilization, Inc. was wholly-owned by the president of Michigan Ash Sales Company and U.S. Stabilization, Inc. In April 1996, the president received two distributions from U.S. Stabilization totaling $75,000. The remaining undistributed retained earnings of U.S. Stabilization, Inc. as of December 31, 1996 totaled $33,367 and was accrued as an additional distribution to the president on that date. The accrued distribution, plus accrued interest, is included in payables to affiliates in the accompanying combined balance sheet as of April 21, 1998 and December 31, 1997. On January 2, 1997, the president transferred all the outstanding shares of U.S. Stabilization, Inc. to the sole shareholder of Michigan Ash Sales Company and Flo Fil Company, Inc. F-42 Michigan Ash Sales Company (d.b.a. U.S. Ash Company) and Affiliated Companies Notes to Combined Financial Statements (continued) 4. Commitments and Contingencies Michigan Ash Sales Company has a commitment to purchase equipment related to a contract with a supplier. Under this commitment, the company will purchase approximately $250,000 of equipment and the utility will provide a certain amount of ash at no cost. The equipment is necessary to fulfill the utility contract. 5. Concentrations of Credit Risk The Companies maintain their cash balances at two separate financial institutions located in Michigan. Accounts at each institution are insured by the Federal Deposit Insurance Corporation up to $100,000. At April 21, 1998 and December 31, 1997, the Companies' uninsured cash balances totaled $307,000 and $2,287,000 respectively. Generally, the Companies do not require collateral or other security to support customer trade accounts receivable. The Companies' five largest customers accounted for approximately 25% of the revenues in 1998, 1997 and 1996. Customers of the Companies are primarily concentrated in the public utility industry. Customers are also concentrated in the states of Michigan, Illinois, Indiana, and Ohio. Historically, the Companies have not had significant uncollectable accounts. 6. Impact Of The Year 2000 (Unaudited) The Companies have not completed an assessment of their computer programs to determine if such programs will have to be modified or replaced so that the computer systems will function properly with respect to dates in the year 2000 and thereafter. However, because of the limited use of computers and software in the day to day operations of the Companies business, management does not believe that the Year 2000 Issue will pose significant operational problems. attached hereto at pages F-1 through F-43. Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure None. PART III Item 10. Directors and Executive Officers of the Registrant The Company's directors and executive officers, and their respective ages and positions with the Company, are set forth below in tabular form. Biographical information on each person is set forth following the tabular information. There are no family relationships between any of the Company's directors or executive officers. The Company's board of directors is currently comprised of five members, each of whom is elected for a term of one year. At December 31, 1998, the board had one unoccupied position. Executive officers are chosen by and serve at the discretion of the board of directors. Name Age Position with Company R Steve Creamer .............. 47 Chairman of the Board and Chief Executive Officer Raul A. Deju ................. 52 President and Chief Operating Officer, Assistant Secretary and Director J.I. Everest, II ............. 42 Chief Financial Officer, Treasurer, and Assistant Secretary Clinton W. Pike .............. 46 Executive Vice President Danny L. Gray ................ 43 Senior Vice President, Eastern Operations Brett A. Hickman ............. 36 Senior Vice President, General Counsel and Secretary Grover C. Dobbins, Jr ........ 50 Senior Vice President, Administration and Assistant Secretary Joseph M. Silvestri .......... 37 Director Richard M. Cashin, Jr ........ 45 Director R Steve Creamer. Mr. Creamer is the Chairman of the Board and Chief Executive Officer of the Company and ISG. Immediately prior to his employment with the Company, Mr. Creamer was CEO (from 1992 to 1997) and the founder of ECDC Environmental L.C., the largest rail-served industrial waste management facility in North America. Prior to that, Mr. Creamer served as CEO of Creamer & Noble, an engineering firm based in St. George, Utah. He earned a B.S. degree in Civil and Environmental Engineering from Utah State University in 1973. Mr. Creamer is a P.E. Raul A. Deju. Dr. Deju is the President and Chief Operating Officer of the Company and ISG. Dr. Deju served as a Director of Rockwell Hanford Operations through 1981, Senior Vice President of International Technologies, Inc. through 1987 and Regional President of several subsidiaries of WMX Technologies, Inc. through 1995. Dr. Deju served as Chairman and CEO of DGL International through 1997, and retains an ownership position in DGL. Dr. Deju has been on the Board of Directors of various national and international WMX subsidiaries, Advanced Sciences, Inc. and Isadra, Inc. Dr. Deju is a member of both the Company and ISG Boards of Directors. Dr. Deju is an advisor to a committee of the U.S. Secretary of Commerce and has served on the U.S. Environmental Protection Agency Advisory Committee. Dr. Deju received a B.S. degree in Mathematics and Physics in 1966 and a Ph.D. degree in Engineering Geology in 1969 from the New Mexico Institute of Mining and Technology. J.I. Everest, II. Mr. Everest is the Chief Financial Officer, Treasurer and Assistant Secretary of the Company and ISG. He is responsible for all financial functions of the Company. Immediately prior to his employment with the Company, he served as Vice President of Finance for ECDC Environmental, Inc. (from 1993 to 1997). From 1988 to 1993, Mr. Everest was Director of Financial Analysis/Treasury of USPCI, Inc. Mr. Everest earned an M.B.A. degree (Finance Concentration) in 1994 from the University of Texas at Austin and a B.B.A. degree from Southern Methodist University in 1979. Mr. Everest is a C.P.A. Clinton W. Pike. Mr. Pike is the Executive Vice President of the Company. Since he began his service in 1990, Mr. Pike has served as Vice President of Business Development for the Company, establishing the Business and Product Development Program, and spearheading nontraditional business advancement and growth through acquisitions and the development of new markets. Prior to his service with the Company, he was Coordinator, Fuel and Ash Quality with Georgia Power Company, where he directed a total CCP management program. Mr. Pike earned a B.S. degree in Biology (Chemistry minor) from Georgia Southwestern College in 1974. Danny L. Gray. Mr. Gray is a Senior Vice President of the Company. From July 1994 until 1997, he served principally as President of KBK and also as Vice President of the Company. Prior to joining the Company, Mr. Gray was a Civil Engineer with American Electric Power in 1978 and was promoted to Senior Environmental Engineer, Environmental Department of that company in 1980. Mr. Gray earned a B.S. degree in Civil Engineering from Virginia Tech in 1977, graduating with honors. Brett A. Hickman. Mr. Hickman is the Senior Vice President, General Counsel and Secretary of the Company. From December 1993 until February 1998, Mr. Hickman was General Counsel, Western Division of Laidlaw Environmental Services, Inc. Prior to that, Mr. Hickman was an attorney with Davis & Lavender in Columbia, South Carolina. Mr. Hickman earned a B.A. degree in Political Science from The Citadel in 1983 and a J.D. degree from the University of South Carolina in 1986. Grover C. Dobbins, Jr. Mr. Dobbins is the Senior Vice President, Administration of the Company. He joined the Company in 1989 as Manager of Project Development. He began work as Vice President, Corporate Services in January, 1991. From 1992 to 1995, Mr. Dobbins served as Director of Marketing. Effective January 1, 1996, he was appointed Vice President, Administration. Prior to his service with the Company, he was a Principal Engineer at Carolina Power and Light Company for 15 years. Mr. Dobbins earned a Master of Civil Engineering degree in 1972 and a B.S. degree in Civil Engineering in 1971 from North Carolina State University. Joseph M. Silvestri. Mr. Silvestri has been a director of the Company since its acquisition by ISG. Mr. Silvestri has been employed by CVC since 1990 and has served as a Vice President there since 1995. Mr. Silvestri is a director of International Media Group, Polyfibron Technologies, Frozen Specialties, Glenoit Mills, Euramax and Triumph Group. Richard M. Cashin, Jr. Mr. Cashin was appointed a director of the Company in March 1998. Mr. Cashin has been employed by CVC since 1980, and has been President since 1994. Mr. Cashin is a director of Levitz Furniture Incorporated, Lifestyle Furnishings International, Euramax and Titan Wheel International. Compliance with Section 16(a) of the Securities Exchange Act of 1934. Section 16(a) of the Securities Exchange Act of 1934, and the rules and regulations promulgated thereunder, require the Company's executive officers and directors, and persons who beneficially own more than ten percent of a registered class of the Company's equity securities, to file reports of ownership and changes in ownership with the Securities and Exchange Commission and the National Association of Securities Dealers Automated Quotations System and to furnish the Company with copies thereof. None of the Company's executive officers and directors and ten percent owners own any shares in the Company. Accordingly, no such reports have been, or need to be, filed. Item 11. Executive Compensation The following table shows the compensation paid by the Company to its current Chairman and Chief Executive Officer, and the Company's other most highly paid executive officers.
Summary Compensation Table Annual Compensation Name and Principal Position(1) Fiscal Year Salary (2) Bonus Other Annual ------------------------------ ----------- ---------- ----- Compensation (3) R Steve Creamer (4) 1998 $193,747 $130,000 $5,150 Chairman, Chief Executive Officer 1997 24,231 0 0 Clinton W. Pike 1998 160,461 191,700 106,886 Executive Vice President 1997 149,255 119,492 4,374 Raul A. Deju (4) 1998 182,869 121,338 5,150 President and Chief Operating Officer 1997 23,710 0 0 William H. Gehrmann 1998 129,065 162,407 5,882 Vice President 1997 102,000 30,862 5,000 J.I. Everest, II (4) 1998 145,934 108,337 8,092 Treasurer and Chief Financial Officer 1997 28,647 0 0
- ----------- (1) Positions indicated were as of December 31, 1998. (2) Includes amounts, if any, deferred by the named individual for the period in question pursuant to Section 401(k) of the Internal Revenue Code under the Company's 401(k) Savings Plan (the "401(k) Plan"). (3) Amounts shown under Other Annual Compensation include amounts paid by the Company as matching and/or profit sharing contributions to the 401(k) Plan, but do not include perquisites and other personal benefits provided to each of the named executives, the aggregate value of which did not exceed the lesser of $50,000 or 10% of any such named executive's annual salary and bonus. (4) Mr. Creamer, Mr. Deju and Mr. Everest have been employed with the Company since October 14, 1997, and the 1997 salary reflects the two and a half months they worked for the Company in 1997.
Item 12. Security Ownership of Certain Beneficial Owners and Management The Company is wholly owned by ISG. The following table sets forth the number of shares of ISG's common stock beneficially owned as of January 29, 1999, (i) by each person who is known by the Company to own beneficially more than 5% of the Company's common stock, (ii) by each director and director nominee, (iii) by each of the Company's named executive officers, and (iv) by all directors, director nominees and executive officers, as a group, as reported by each such person. Beneficial Ownership of Beneficial Ownership of Common Stock Preferred Stock Name and Address of Beneficial Owner Number of Number of Shares Percent Shares Percent Citicorp Venture Capital, Ltd. (1).......................................... 187,425 37.9 26,813 38.3 R Steve Creamer (2)(3)...................................................... 150,266 30.4 25,351 36.2 J.I. Everest, II (3)........................................................ 49,467 10.0 6,925 9.9 CCT Partners IV, LP (4)..................................................... 33,075 6.7 4,732 6.8 Richard M. Cashin, Jr....................................................... 7,840 1.6 1,122 1.6 Raul A. Deju ............................................................... 45,317 9.2 2,023 2.9 Joseph M. Silvestri......................................................... 980 0.2 140 0.2 Brett A. Hickman............................................................ 4,950 1.0 700 1.0 Clinton W. Pike (5)......................................................... - Danny L. Gray (5)........................................................... - All directors and executive officers as a group (8 persons) (2)(3)(5)....................................................... 258,820 52.4 36,261 51.8
- ----------- (1) The address of Citicorp Venture Capital, Ltd. is: 399 Park Avenue, 14th Floor, New York, NY 10043. (2) Includes 112,700 shares owned by Mr. Creamer's adult son and three minor children. (3) Messrs. Creamer and Everest beneficially own shares in ISG through RACT, Inc., a Utah corporation ("RACT"), which directly owns shares in ISG. The business address of RACT is: 136 East South Temple, Suite 1300, Salt Lake City, Utah 84111. (4) The address of CCT Partners IV, LP is the same as that of Citicorp Venture Capital, Ltd. (5) Messrs. Pike and Gray, pursuant to their employment contracts, have each been granted an economic interest in one percent of all outstanding shares of the Company's stock as of the date of their respective employment agreements. See "Management Employment Agreements." Item 13. Certain Relationships and Related Transactions None. PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K (a) Exhibits. Exhibits *3.1 Articles of Incorporation of JTM Industries, Inc. *3.1a Articles of Amendment of Articles of Incorporation of JTM Industries, Inc. *3.2 By Laws of JTM Industries, Inc. *3.3 Articles of Incorporation of KBK Enterprises, Inc. *3.4 By Laws of KBK Enterprises, Inc. *3.5 Articles of Incorporation of Pozzolanic Resources, Inc. *3.6 By Laws of Pozzolanic Resources, Inc. *3.7 Articles of Incorporation of Power Plant Aggregates of Iowa, Inc. *3.8 By Laws of Power Plant Aggregates of Iowa, Inc. *3.9 Articles of Incorporation of Michigan Ash Sales Company, d.b.a. U.S. Ash Company. *3.10 By Laws of Michigan Ash Sales Company, d.b.a. U.S. Ash Company. *3.11 Articles of Incorporation of Flo Fil Co., Inc. *3.12 By Laws of Flo Fil Co., Inc. *3.13 Articles of Incorporation of U.S. Stabilization, Inc. *3.14 By Laws of U.S. Stabilization, Inc. *3.15 Articles of Incorporation of Fly Ash Products, Inc. *3.16 By Laws of Fly Ash Products, Inc. *4.1 Indenture, dated as of April 22, 1998, by and among JTM Industries, Inc., the Subsidiary Guarantors and U.S. Bank National Association, as Trustee. *5.1 Opinion and consent of Morgan, Lewis & Bockius LLP as to the legality of the securities being registered. *10.1Purchase Agreement dated as of April 17, 1998 by and among JTM Industries, Inc., the Subsidiary Guarantors and NationsBanc Montgomery Securities LLC and CIBC Oppenheimer Corp. *10.2 Registration Rights Agreement dated as of April 22, 1998, by and among JTM Industries, Inc., the Subsidiary Guarantors and NationsBanc Montgomery Securities LLC and CIBC Oppenheimer Corp. *10.3 Purchase Agreement dated as of February 27, 1998 by and among JTM Industries, Inc., Pozzolanic Resources, Inc. and Gerald Peabody, Penelope Peabody and Kokan Company Limited. *10.4 Stock Purchase Agreement from Power Plant Aggregates of Iowa, Inc. *10.5 Purchase Agreement dated as of March 1998 between JTM Industries, Inc. and Jack Wirt *10.6 Purchase Agreement dated as of March 27, 1998, between JTM Industries, Inc., Donald A. Thomas, Phyllis S. Thomas and Donald W. Birge. *10.7 Secured Credit Facility dated March 4, 1998 among JTM Industries, Inc. and a syndicate of banks with NationsBank, N.A., as administrative agent, and Canadian Imperial Bank of Commerce, as documentation agent. *10.8First Amendment dated as of May 29, 1998 to the Credit Agreement dated March 4, 1998 among JTM Industries, Inc. and a syndicate of banks with NationsBank, N.A. as administrative agent, and Canadian Imperial Bank of Commerce, as documentation agent. **12.1 Statement re Computation of Ratio of Earnings to Fixed Charges. *21.1 Subsidiaries of JTM Industries, Inc. *24 Powers of Attorney *25.1Statement of Eligibility of U.S. Bank National Association, as Trustee, on Form T-1. **27.1 Financial Data Schedule *99.1 Form of Letter of Transmittal respecting the exchange of the 10% Senior Subordinated Notes due 2008 which have been registered under the United States Securities Act of 1933 for 10% Senior Subordinated Notes due 2008. *99.2 Form of Notice of Guaranteed Delivery. - ----------- * Previously Filed. ** Filed herewith. (b) Reports on Form 8-K. None. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ISG Resources, Inc. (Registrant) Date: March 31, 1999 By:/s/R. Steve Creamer R Steve Creamer, Chairman and Chief Executive Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Signature Title Date /s/R. Steve Creamer Chairman and March 31, 1999 - --------------------------- Chief Executive Officer R Steve Creamer /s/Raul A. Deju President, March 31, 1999 - --------------------------- Chief Operating Officer Raul A. Deju Assistant Secretary and Director /s/J.I. Everest, II Chief Financial Officer, March 31, 1999 - --------------------------- Treasurer and J.I. Everest, II Assistant Secretary /s/Joseph M. Silvestri Director March 31, 1999 - --------------------------- Joseph M. Silvestri Director March 31, 1999 Richard M. Cashin EX-12 2 STATEMENT
Year 2 1/2 Months 9 1/2 Months Ended Ended Ended December 31, December 31, October 13, Year Ended December 31, ------------------------------- --------- --------- --------- 1998 1997 1997 1996 1995 1994 -------------- ------------- ------------- --------- --------- --------- Fixed Charges: Interest on debt $ 8,874 $ 628 $ 4,160 $ 4,853 $ 4,081 $ 17 Amortization of debt issuance costs 464 - - - - - Interest portion of rental expense 2,038 420 1,448 2,045 2,016 1,616 -------------- ------------- ------------- --------- --------- --------- ============== ============= ============= ========= ========= ========= Total fixed charges $ 11,376 $ 1,048 $ 5,608 $ 6,898 $ 6,097 $ 1,633 ============== ============= ============= ========= ========= ========= Earnings: Pre-tax income (loss) from continuing operations$ 4,808 $ 517 $ (2,478) $ (2,232) $ (2,541) $ 6,873 Add back fixed charges 11,376 1,048 5,608 6,898 6,097 1,633 -------------- ------------- ------------- --------- --------- --------- ============== ============= ============= ========= ========= ========= Total earnings $ 16,184 $ 1,565 $ 3,130 $ 4,666 $ 3,556 $ 8,506 ============== ============= ============= ========= ========= ========= Ratio of Earnings to Fixed Charges 1.42 1.49 0.56 0.68 0.58 5.21 ============== ============= ============= ========= ========= ========= Deficit of Earnings to Fixed Charges $ - $ - $ 2,478 $ 2,232 $ 2,541 $ - ============== ============= ============= ========= ========= =========
EX-27 3 FINANCIAL DATA SCHEDULE
5 (Replace this text with the legend) 0001063018 ISG Resources, Inc. 1 U.S. Dollars YEAR Dec-31-1998 Jan-1-1998 Dec-31-1998 1.00 0 0 14,975,729 170,000 0 17,217,886 28,139,108 3,562,086 191,731,736 10,432,132 110,000,000 0 0 100 27,524,116 191,731,736 83,048,721 117,292,575 51,878,447 103,401,535 0 0 9,338,059 4,808,480 2,549,026 0 0 0 2,259,454 0 0 0
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