UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
July 15, 2002
------------------------------------------------
Date of Report (Date of earliest event reported)
HEADWATERS INCORPORATED
----------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 0-27808 87-0547337
- ------------------------------- ------------------------ -------------------
(State or other jurisdiction of (Commission File Number) (IRS Employer
incorporation) Identification No.)
11778 South Election Road, Suite 210
Draper, UT 84020
----------------------------------------
(Address of principal executive offices)
(Zip Code)
(801) 984-9400
---------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
-------------------------------------------------------------
(Former name or former address, if changed since last report.)
Certain statements in this Report constitute forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995. As such,
actual results may vary materially from such expectations. For a discussion of
certain factors that could cause actual results to differ from expectations,
please see the information set forth under the caption entitled "Forward-Looking
Statements" in PART I, ITEM 2 of Headwaters' Quarterly Report on Form 10-Q for
the quarter ended March 31, 2002. There can be no assurance that Headwaters'
results of operations will not be adversely affected by such factors. Headwaters
undertakes no obligation to revise or publicly release the results of any
revision to these forward-looking statements. Readers are cautioned not to place
undue reliance on these forward-looking statements, which reflect management's
opinion only as of the date hereof.
Item 2. Probable Acquisition of Industrial Services Group, Inc.
As described in Exhibit 99, attached hereto, Headwaters has signed a definitive
agreement to acquire 100% of the stock of Industrial Services Group, Inc. Under
the terms of the agreement, Headwaters has agreed to issue two million shares of
Headwaters common stock and to pay $31 million in cash. In addition, Headwaters
will assume approximately $181 million of indebtedness of ISG and ISG Resources.
All of ISG's stockholders approved the acquisition at the time the definitive
agreement was executed. The ISG stockholders will have certain registration
rights with respect to resales of the shares of Headwaters common stock to be
issued to them.
The definitive agreement provides for standard conditions to closing, including
consummation of the proposed bank financing. Headwaters has obtained a
commitment for a bank credit facility in the amount of $245 million. The terms
of the commitment provide for a five year term loan in the amount of $220
million to be used to fund the ISG acquisition and a $25 million revolving line
of credit that will not be drawn at closing but will be available for general
corporate purposes. As much as $181 million of the bank credit facility will be
used to repay existing higher interest debt of ISG, including up to $100 million
of ISG Resources, Inc. 10% Senior Notes due 2008. ISG has agreed to commence a
tender offer and consent solicitation for its 10% Senior Notes at a price of
101% of par, plus accrued interest, and has obtained a commitment from holders
of more than 50% of the Senior Notes to participate in the tender offer and
consent solicitation.
Headwaters intends to file pursuant to Form 10-K/A its amended annual report to
provide for the filing of the re-audit of the Company's financial statements for
the fiscal years ended September 30, 2000 and 2001. PricewaterhouseCoopers LLP
advised Headwaters that it has completed its re-audit of Headwaters' fiscal 2000
and fiscal 2001 financial statements subject to its required communications with
the Company's prior outside auditors, Arthur Andersen LLP.
Item 7. Financial Statements and Exhibits
(a) The following consolidated financial statements of Industrial
Services Group, Inc. and Subsidiaries are included herein:
Audited Financial Statements:
Report of Independent Auditors
Consolidated Balance Sheets as of December 31, 2001 and 2000
Consolidated Statements of Operations for the Years Ended
December 31, 2001, 2000 and 1999
Consolidated Statements of Comprehensive Loss for the Years
Ended December 31, 2001, 2000 and 1999
2
Consolidated Statements of Shareholders' Equity (Deficit) for
the Years Ended December 31, 2001, 2000 and 1999
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2001, 2000 and 1999
Notes to Consolidated Financial Statements
Unaudited Financial Statements:
Condensed Consolidated Balance Sheets as of March 31, 2002 and
December 31, 2001
Condensed Consolidated Statements of Operations for the Three
Months Ended March 31, 2002 and 2001
Condensed Consolidated Statements of Comprehensive Loss for
the Three Months Ended March 31, 2002 and 2001
Condensed Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 2002 and 2001
Notes to Condensed Consolidated Financial Statements
Note: Industrial Services Group, Inc. is not an SEC
registrant. ISG Resources, Inc., a wholly-owned subsidiary of
Industrial Services Group, Inc., has been and is an SEC
registrant. As such, ISG Resources, Inc. has made various
filings in accordance with the rules and regulations of the
SEC. The consolidated financial statements of Industrial
Services Group, Inc. included in this Form 8-K include ISG
Resources, Inc., but are not comparable to the consolidated
financial statements of ISG Resources, Inc. included in
previous SEC filings.
(b) The following unaudited pro forma financial information for
Headwaters Incorporated is included herein:
Introduction to Pro Forma Financial Information
Pro Forma Condensed Combined Balance Sheet as of
March 31, 2002
Pro Forma Condensed Combined Statement of Income for the Year
Ended September 30, 2001
Pro Forma Condensed Combined Statement of Income for the Six
Months Ended March 31, 2002
Notes to Pro Forma Condensed Combined Financial Information
(c) The following exhibits are included herein:
10.75 Agreement and Plan of Merger between Headwaters and
Industrial Services Group, Inc. dated July 15, 2002
10.75.1 Form of Registration Rights Agreement between
Headwaters and the Stockholders of Industrial
Services Group, to be dated as of Closing
99 Press release announcing signing of a definitive
agreement with Industrial Services Group, Inc.
3
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
HEADWATERS INCORPORATED
-----------------------------
Registrant
Date: July 17, 2002 /s/ Kirk A. Benson
------------------------------
Kirk A. Benson
Chief Executive Officer and
Principal Executive Officer
4
CONSOLIDATED FINANCIAL STATEMENTS
Industrial Services Group, Inc. and Subsidiaries
Years Ended December 31, 2001 and 2000 and for Each of the
Three Years in the Period Ended December 31, 2001
with Report of Independent Auditors
Industrial Services Group, Inc. and Subsidiaries
Consolidated Financial Statements
Years Ended December 31, 2001 and 2000 and
for Each of the Three Years in the Period Ended December 31, 2001
Contents
Report of Independent Auditors ............................................F-1
Audited Consolidated Financial Statements
Consolidated Balance Sheets ...............................................F-2
Consolidated Statements of Operations .....................................F-4
Consolidated Statements of Comprehensive Loss..............................F-5
Consolidated Statements of Shareholder's Equity (Deficit)..................F-6
Consolidated Statements of Cash Flows .....................................F-7
Notes to Consolidated Financial Statements ................................F-8
Report of Independent Auditors
The Board of Directors
Industrial Services Group, Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Industrial
Services Group, Inc. and Subsidiaries as of December 31, 2001 and 2000 and the
related consolidated statements of operations, comprehensive loss, shareholders'
equity (deficit) and cash flows for each of the three years in the period ended
December 31, 2001. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Industrial
Services Group, Inc. and Subsidiaries at December 31, 2001 and 2000, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2001 in conformity with accounting
principles generally accepted in the United States.
/s/ Ernst & Young
Ernst & Young, LLP
Salt Lake City, Utah
June 11, 2002
F-1
Industrial Services Group, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31
2001 2000
----------------- ----------------
Assets
Current assets:
Cash and cash equivalents $ 17,724,156 $ 6,986,725
Accounts receivable:
Trade, net of allowance for doubtful accounts of
$440,000 in 2001 and $501,000 in 2000 25,302,639 24,321,302
Retainage receivable 257,989 146,000
Income taxes receivable 720,234 3,136,571
Other receivables 692,828 686,684
Deferred tax assets 630,178 851,325
Inventories 8,528,976 6,663,633
Other current assets 1,604,691 1,057,890
----------------- ----------------
Total current assets 55,461,691 43,850,130
Property, plant and equipment:
Land and improvements 6,167,877 4,536,470
Buildings and improvements 10,718,413 8,795,437
Vehicles and other operating equipment 36,973,546 32,299,254
Furniture, fixtures and office equipment 1,269,968 1,238,316
----------------- ----------------
55,129,804 46,869,477
Accumulated depreciation (18,126,675) (12,777,609)
----------------- ----------------
37,003,129 34,091,868
Construction in progress 1,115,423 3,668,688
----------------- ----------------
38,118,552 37,760,556
Other assets:
Intangible assets, net 157,177,699 167,076,486
Debt issuance costs, net 3,855,350 4,743,348
Other assets 93,706 62,313
----------------- ----------------
Total assets $ 254,706,998 $ 253,492,833
================= ================
F-2
Industrial Services Group, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31
2001 2000
----------------- ----------------
Liabilities and shareholders' deficit
Current liabilities:
Accounts payable $ 14,287,253 $ 10,704,637
Accrued expenses:
Payroll 2,775,553 2,406,172
Interest 3,570,486 3,873,984
Other 1,924,450 1,826,232
Other current liabilities 1,951,850 996,153
----------------- ----------------
Total current liabilities 24,509,592 19,807,178
Long-term debt 164,643,900 165,000,000
Deferred tax liabilities 35,726,641 37,702,524
CMP note payable 13,676,310 11,100,000
Debt discount (1,966,086) (3,062,196)
Laidlaw note payable 24,807,465 22,716,939
Other liabilities 766,004 1,482,848
----------------- ----------------
Total liabilities 262,163,826 254,747,293
Series A redeemable preferred stock, 35,050 shares 6,204,559 5,419,290
authorized, issued and outstanding at December 31, 2001
and 2000, respectively
Series B redeemable preferred stock, 35,000 shares 6,195,708 5,411,559
authorized, issued and outstanding at December 31, 2001
and 2000, respectively
Shareholders' deficit:
Class A common stock, $.01 par value; 500,000 shares
authorized, 495,000 issued and outstanding 4,950 4,950
Class B common stock, $.01 par value; 500,000 shares
authorized, none issued and outstanding
- -
Additional paid in capital in excess of par value of
common stock 4,304,320 4,304,320
Cumulative foreign currency translation adjustment
(55,636) (29,904)
Retained deficit (24,110,729) (16,364,675)
----------------- ----------------
Total shareholders' deficit (19,857,095) (12,085,309)
----------------- ----------------
Total liabilities and shareholders' deficit $ 254,706,998 $ 253,492,833
================= ================
See accompanying notes.
F-3
Industrial Services Group, Inc. and Subsidiaries
Consolidated Statements of Operations
Year Ended December 31
2001 2000 1999
------------- ------------- -------------
Revenues:
Product revenues $ 184,160,729 $ 146,818,172 $ 120,319,575
Service revenues 32,070,030 34,083,689 35,885,697
------------- ------------- -------------
216,230,759 180,901,861 156,205,272
Costs and expenses:
Cost of products sold, excluding depreciation
135,810,469 108,368,626 83,442,725
Cost of services sold, excluding depreciation
22,417,139 24,723,948 25,221,695
Depreciation and amortization 15,809,569 14,954,431 13,091,131
Unsuccessful acquisition costs - 1,525,386 -
Selling, general and administrative expenses
25,019,279 26,326,402 18,962,157
New product development 2,308,010 2,331,510 2,166,218
------------- ------------- -------------
201,364,466 178,230,303 142,883,926
------------- ------------- -------------
Operating income 14,866,293 2,671,558 13,321,346
Interest income 455,265 172,708 44,100
Interest expense (22,947,624) (20,161,570) (15,184,534)
Miscellaneous income, net 20,895 211,420 311,675
------------- ------------- -------------
Loss before income tax benefit (7,605,171) (17,105,884) (1,507,413)
Income tax benefit (1,428,535) (4,701,696) (55,106)
------------- ------------- -------------
Net loss $ (6,176,636) $ (12,404,188) $ (1,452,307)
Preferred dividends (1,569,418) (1,370,740) (1,197,281)
------------- ------------- -------------
Net loss attributable to common
shareholders $ (7,746,054) $ (13,774,928) $ (2,649,588)
------------- ------------- -------------
Basic and diluted net loss per share $ (15.65) $ (27.83) $ (5.35)
------------- ------------- -------------
Weighted average number of shares used in
calculating basic and diluted net loss per
share 495,000 495,000 495,000
------------- ------------- -------------
See accompanying notes.
F-4
Industrial Services Group, Inc. and Subsidiaries
Consolidated Statements of Comprehensive Loss
Year ended December 31
2001 2000 1999
------------- ------------- -------------
Net loss $ (6,176,636) $ (12,404,188) $ (1,452,307)
Other comprehensive loss, net of tax:
Foreign currency translation adjustment (25,732) (29,904) -
------------- ------------- -------------
Comprehensive loss $ (6,202,368) $ (12,434,092) $ (1,452,307)
============= ============= =============
See accompanying notes.
F-5
Industrial Services Group, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity (Deficit)
Cumulative
Foreign
Shares Additional Currency Retained Total
Of Common Common Paid-In Translation (Deficit) Shareholders'
Stock Stock Capital Adjustment Earnings Equity (Deficit)
----------------------------------------------------------------------------------------
Balance at December 31, 1998 495,000 $ 4,950 $ 490,100 $ - $ 59,841 $ 554,891
Net loss - - - - (1,452,307) (1,452,307)
Accretion of dividends on Series A
and Series B redeemable preferred
stock - - - - (1,197,281) (1,197,281)
----------------------------------------------------------------------------------------
Balance at December 31, 1999 495,000 4,950 490,100 - (2,589,747) (2,094,697)
Foreign currency translation adjustment - - - (29,904) - (29,904)
CMP warrant valuation - - 3,814,220 - - 3,814,220
Net loss - - - - (12,404,188) (12,404,188)
Accretion of dividends on Series A
and Series B redeemable preferred
stock - - - - (1,370,740) (1,370,740)
----------------------------------------------------------------------------------------
Balance at December 31, 2000 495,000 4,950 4,304,320 (29,904) (16,364,675) (12,085,309)
Foreign currency translation adjustment - - - (25,732) - (25,732)
Net loss - - - - (6,176,636) (6,176,636)
----------------------------------------------------------------------------------------
Accretion of dividends on Series A
and Series B redeemable preferred
stock - - - - (1,569,418) (1,569,418)
Balance at December 31, 2001 495,000 $ 4,950 $ 4,304,320 $ (55,636) $(24,110,729) $(19,857,095)
========================================================================================
See accompanying notes.
F-6
Industrial Service Group, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Year ended December 31
2001 2000 1999
-------------- -------------- -------------
Operating activities
Net loss $ (6,176,636) $ (12,404,188) $ (1,452,307)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization 15,809,569 14,954,431 13,091,131
Amortization of debt issuance costs 988,451 867,270 702,032
Amortization of debt discount 1,096,110 752,024 -
Noncash interest expense 4,832,341 3,569,043 1,792,590
Deferred income taxes (1,754,736) (1,897,729) (2,229,539)
Loss on sale of assets 575,122 69,298 24,168
Gain on sale of subsidiary - - (333,749)
Changes in operating assets and liabilities:
Receivables (1,099,470) 290,482 (2,755,382)
Inventories (1,865,343) (732,216) (1,733,832)
Other current and non-current assets (578,194) 832,073 (879,189)
Accounts payable 3,582,616 (427,303) 4,485,877
Income taxes 2,416,337 (4,010,646) 1,198,871
Accrued expenses (1,404) 1,296,436 (929,504)
Other current and non-current liabilities (561,147) (875,141) (776,804)
-------------- -------------- -------------
Net cash provided by operating activities 17,263,616 2,283,834 10,204,363
Investing activities
Purchase of businesses, net of cash acquired - (27,130,514) (24,866,989)
Proceeds from sale of subsidiary - - 750,000
Additions to intangible assets - (1,275,703) (877,349)
Purchases of property, plant and equipment (6,421,602) (8,185,589) (8,790,870)
Proceeds from sales of property, plant and
equipment 677,702 609,210 415,994
-------------- -------------- -------------
Net cash used in investing activities (5,743,900) (35,982,596) (33,369,214)
Financing activities
Proceeds from long-term debt - 178,500,000 127,000,000
Payments on other liabilities (300,000) - -
Payments on long-term debt (356,100) (137,000,000) (103,500,000)
Debt issuance costs (100,453) (784,609) (335,149)
-------------- -------------- -------------
Net cash (used in) provided by financing activities (756,553) 40,715,391 23,164,851
Effect of exchange rate changes on cash and cash
equivalents (25,732) (29,904) -
-------------- -------------- -------------
Net increase in cash and cash equivalents 10,737,431 6,986,725 -
Cash and cash equivalents at beginning of period 6,986,725 - -
-------------- -------------- -------------
Cash and cash equivalents at end of period $ 17,724,156 $ 6,986,725 $ -
============== ============== =============
Cash paid for interest $ 16,449,462 $ 14,293,589 $ 12,605,495
============== ============== =============
Cash paid for income taxes $ 408,856 $ 1,276,277 $ 902,123
============== ============== =============
See accompanying notes.
F-7
Industrial Services Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
1. Basis of Presentation
Industrial Quality Services, Inc. was formed in September 1997 by Citicorp
Venture Capital, Ltd. ("CVC") and certain members of the management team of JTM
Industries, Inc. ("JTM") to acquire the stock of JTM from Laidlaw
Transportation, Inc. Pursuant to the acquisition, Industrial Quality Services
acquired the stock of JTM on October 14, 1997 and JTM became a wholly owned
subsidiary of Industrial Quality Services. In January, 1998, Industrial Quality
Services changed its name to Industrial Services Group, Inc. ("the Company"). In
1998, JTM acquired the stock of Pozzolanic Resources, Inc. ("Pozzolanic"), Power
Plant Aggregates of Iowa, Inc. ("PPA"), Michigan Ash Sales Company, d.b.a. U. S.
Ash Company, together with two affiliated companies, U.S. Stabilization, Inc.
and Flo Fil Company, Inc., (collectively, "U.S. Ash"), and Fly Ash Products,
Inc. ("Fly Ash Products") (collectively, the "1998 Acquisitions"). Effective
January 1, 1999, JTM, Pozzolanic, PPA, U.S. Ash, Fly Ash Products and their
wholly owned subsidiaries merged with and into ISG Resources ("ISG Resources"),
a newly formed entity (the "Merger"). Pneumatic Trucking, Inc., a wholly owned
subsidiary of Michigan Ash Sales Company, was not merged into ISG Resources.
Consequently, Pneumatic became a wholly owned subsidiary of the ISG Resources.
In 1999, ISG Resources acquired the stock of Best Masonry & Tool Supply
("Best"), Mineral Specialties, Inc. ("Specialties"), Irvine Fly Ash, Inc.
("Irvine"), Lewis W. Osborne, Inc. ("Osborne"), United Terrazzo Supply Co., Inc.
("Terrazzo"), and Magna Wall, Inc. ("Magna Wall") and sold all of the
outstanding stock of Pneumatic.
In 2000, ISG Canada Limited, Inc. ("ISG Canada") was formed and became a
wholly-owned foreign subsidiary of ISG Resources, with fly ash operations
beginning in the second half of 2000. During 2000, ISG Resources acquired all of
the partnership interest of Don's Building Supply L.L.P. ("Don's), acquired the
stock of Palestine Concrete Tile Company, Inc. and acquired certain fixed and
intangible assets from Hanson Aggregates West, Inc. ("Hanson").
Each of the above acquisitions was accounted for under the purchase method of
accounting and, accordingly the results of operations of each acquired company
are included in the consolidated financial statements since the respective date
of acquisition.
The purchase prices of the above acquisitions were allocated based on estimated
fair values of assets and liabilities at the respective dates of acquisition.
Goodwill resulting from the difference between the purchase prices plus
acquisition costs and the fair value of the net assets of the companies acquired
in 1999 totaled approximately $20,073,000. Goodwill resulting from the
difference between the purchase prices plus acquisition costs
F-8
Industrial Services Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Basis of Presentation (continued)
and the fair value of the net assets of the companies acquired in 2000 totaled
approximately $19,297,000. All recorded goodwill is being amortized on a
straight-line basis over 20 to 25 years.
The following pro forma combined financial information for the year ended
December 31, 2000 reflects operations as if all of the above acquisitions and
the related financing transactions had occurred as of January 1, 2000. The pro
forma combined financial information is presented for illustrative purposes
only, does not purport to be indicative of the Company's results of operations
as of the date hereof, and is not necessarily indicative of what the Company's
actual results would have been had the acquisitions and the financing
transactions been consummated on such date.
Revenues $ 196,468,000
Net loss $ (11,563,000)
2. Description of Business and Summary of Significant Accounting Policies
Description of Business
The Company operates two principal lines of business: coal combustion product
(CCP) management and building materials manufacturing and distribution. The CCP
division purchases, removes and sells fly ash and other by-products of coal
combustion to producers and consumers of building materials and construction
related products throughout the United States. The manufacturing products
division manufactures and distributes masonry construction materials to
residential and commercial contractors primarily located in Texas, California,
Georgia and Florida.
Principles of Consolidation
These financial statements reflect the consolidated financial position and
results of operations of the Company and its subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Reclassifications
Certain reclassifications have been made to the prior years' amounts to conform
to the current year presentation.
F-9
Industrial Services Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Description of Business and Summary of Significant Accounting Policies
(continued)
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, bank deposits, and highly liquid
financial instruments purchased with original maturities of three months or
less.
Foreign Currency Translation
The results of operations for ISG Resources' foreign subsidiary, ISG Canada, are
translated into U.S dollars using average exchange rates during each period;
assets and liabilities are translated using exchange rates at the end of each
period. Translation gains and losses are reported as a component of other
comprehensive income in the Company's consolidated statements of comprehensive
income.
Revenue Recognition
Revenue from the sale of products is recognized primarily upon passage of title
to the customer, which generally coincides with physical delivery and
acceptance. CCP product revenues generally include transportation charges
associated with delivering the material.
Service revenues include revenues earned under long-term contracts to dispose of
residual materials created by coal-fired power generation and revenues earned in
conjunction with certain construction-related projects, which are incidental to
the primary business. Typical long-term disposal contracts are from five to
fifteen years, with most contracts being renewed upon expiration. Service
revenues under the long-term contracts are recognized concurrent with the
removal of the material and are typically based on the number of tons of
material removed at an established price per ton. The construction-related
projects are generally billed on a time and materials basis; therefore, the
revenues and costs are recognized when the time is incurred and the materials
are used.
Cost of CCP products sold are primarily amounts paid to the utility companies to
purchase product together with storage and transportation costs of delivering
the product to the customer. Cost of services sold includes landfill fees and
transportation charges to deliver the product to the landfill. Overhead charges
incurred by a facility which generates both product and service revenues are
allocated to cost of products sold and cost of services sold based on the
percentage of revenue.
F-10
Industrial Services Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Description of Business and Summary of Significant Accounting Policies
(continued)
Concentrations of Credit Risk
Concentrations of credit risk in accounts receivable are limited due to the
large number of customers comprising the Company's customer base throughout the
United States. No single customer provides 10 percent or more of the Company's
revenue. The Company performs ongoing credit evaluations of its customers, but
does not require collateral to support customer accounts receivable.
Historically, the Company has not had significant uncollectible accounts.
New Product Development
New product development costs consist of scientific research and development and
market development expenditures. Expenditures of $2,092,124, $1,837,076 and
$1,796,032 for the years ended December 31, 2001, 2000, and 1999, respectively,
were made for research and development activities covering basic scientific
research and application of scientific advances to the development of new and
improved products and processes. Expenditures of $215,886, $494,434, and
$370,186 for the years ended December 31, 2001, 2000, and 1999 respectively,
were made for market development activities related to promising new and
improved products and processes identified during research and development
activities. The Company expenses all new product and market development costs
when they are incurred.
Inventories
The Company accounts for inventory balances using the lower of cost or market
method on a first-in, first-out basis. Inventories consist of the following at
December 31:
2001 2000
---------- ----------
Raw materials $ 958,796 $1,062,436
Finished goods 7,570,180 5,601,197
---------- ----------
$8,528,976 $6,663,633
========== ==========
Property, Plant and Equipment
Property, plant and equipment acquired in the acquisitions described above were
recorded at estimated fair value at the dates of the respective acquisitions.
Property, plant and equipment acquired subsequent thereto, renewals and
betterments are recorded at cost.
F-11
Industrial Services Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Description of Business and Summary of Significant Accounting Policies
(continued)
Property, Plant and Equipment (continued)
Maintenance and repairs are expensed as incurred. Upon sale or retirement, the
costs and related accumulated depreciation are eliminated from property, plant
and equipment and any resulting gain or loss is included in income. Depreciation
is provided over the estimated useful lives or lease terms, if less, using the
straight-line method as follows:
Land improvements 1 to 20 years
Buildings and improvements 3 to 40 years
Vehicles and other operating equipment 2 to 12 years
Furniture, fixtures and office equipment 1 to 7 years
Depreciation expense was approximately $5,930,000, $5,482,000 and $4,996,000 for
the years ended December 31, 2001, 2000 and 1999, respectively.
Intangible Assets
The cost of acquired companies is allocated first to identifiable assets based
on estimated fair values. Costs allocated to identifiable intangible assets are
amortized on a straight- line basis over the remaining estimated useful lives of
the assets, as determined principally by the underlying terms of the contracts
and patents acquired and the underlying characteristics of the assembled
workforce acquired. The excess of the purchase price over the fair value of
identifiable assets acquired, net of liabilities assumed, is recorded as
goodwill and amortized on a straight-line basis over the estimated useful life.
The estimated useful life for goodwill is determined based on the individual
characteristics of the acquired entity and ranges from 20 years for the
Company's building materials acquisitions to 25 years for the Company's fly ash
acquisitions.
Intangible assets consist of goodwill, contracts, patents and licenses, and
assembled workforce. Amortization expense was approximately $9,880,000,
$8,994,000, and $8,095,000 for the years ended December 31, 2001, 2000 and 1999,
respectively and is provided over the estimated period of benefit, using the
straight-line method as follows:
Goodwill 20 to 25 years
Contracts 10 to 20 years
Patents and licenses 13 to 19 years
Assembled workforce 8 years
F-12
Industrial Services Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Description of Business and Summary of Significant Accounting Policies
(continued)
Debt Issuance Costs
Debt issuance costs relate to costs incurred with the issuance of the CMP Note,
the Senior Subordinated Notes, and the Secured Credit Facility. These costs are
being amortized to interest expense over the respective lives of the debt issues
on a straight-line basis, which approximates the effective interest method.
Amortization expense was approximately $988,000, $867,000 and $702,000 for the
years ended December 31, 2001, 2000 and 1999, respectively.
Income Taxes
Provisions for federal and state income taxes are calculated based on current
tax laws. Deferred taxes are provided to recognize the income tax effect of
amounts that are included in different reporting periods for financial statement
and tax purposes.
Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," (SFAS 123) defines a fair value-based method of accounting for
and measuring compensation expense related to stock-based compensation plans and
encourages adoption of the standard. However, the Statement allows entities to
continue to measure compensation expense for stock-based plans using the
intrinsic value-based method prescribed by Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees". The Company has
elected to continue to account for stock-based compensation plans using the
provisions of APB Opinion No. 25. Pro forma footnote disclosure of net income
has been made as if the fair value-based method of accounting defined in SFAS
123 had been applied.
Earnings Per Share
Vested and outstanding options to purchase 2,723 and 1,362 shares of Class B
Common Stock in 2001 and 2000 were not included in the computation of diluted
earnings per share as the effect would be antidilutive because of the net loss
attributable to common shareholders recorded in each period. There were no
vested options in 1999.
F-13
Industrial Services Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Description of Business and Summary of Significant Accounting Policies
(continued)
Fair Value of Financial Instruments
Financial instruments included in various categories within the accompanying
consolidated balance sheets consist of the following at December 31:
2001 2000
Carrying Value Fair Value Carrying Value Fair Value
---------------- ------------------- ------------------- -----------------
Short-term assets $ 43,977,612 $43,977,612 $ 32,140,711 $32,140,711
Short-term liabilities 24,510,092 24,510,092 19,807,178 19,807,178
Long-term debt:
Senior subordinated notes 100,000,000 88,000,000 100,000,000 65,000,000
Secured credit facility 64,643,900 64,643,900 65,000,000 65,000,000
Laidlaw note 25,370,221 15,584,497 23,232,271 12,552,243
CMP note 14,303,141 14,303,141 11,608,750 11,608,750
Other liabilities 400,300 313,365 1,241,769 979,310
The carrying value of short-term assets and liabilities approximate fair value
due to the short-term nature of the instruments. The carrying value of the
secured credit facility approximates the fair value due to the variable interest
rate features of the instrument. The fair value of the senior subordinated notes
is based on quoted market prices. The fair value of the Laidlaw note is
determined using the stated interest rate of the CMP note as this is deemed to
be the Company's estimated incremental borrowing rate. The carrying value and
the fair value include accrued interest as of December 31, 2001 and 2000.
Because the rate on the CMP note is deemed to be the Company's estimated
incremental borrowing rate, the carrying value of the CMP note approximates its
fair value. The carrying value and the fair value include accrued interest as of
December 31, 2001 and 2000. The fair value of certain other liabilities is based
on the present value of future cash flows discounted at the Company's estimated
incremental borrowing rate.
Long-lived Assets
The Company regularly evaluates the carrying amounts of long-lived assets,
including goodwill and other intangible assets, as well as the related
amortization periods, to determine whether adjustments to these amounts or to
the useful lives are required based
F-14
Industrial Services Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Description of Business and Summary of Significant Accounting Policies
(continued)
Long-lived Assets (continued)
on current circumstances or events. The evaluation, which involves significant
management judgment, is based on various analyses including cash flow and
profitability projections. To the extent such projections indicate that future
undiscounted cash flows are not sufficient to recover the carrying amounts of
the related long-lived assets, the carrying amount of the underlying assets will
be reduced, with the reduction charged to expense, so that the carrying amount
is equal to fair value, primarily determined based on future discounted cash
flows. No impairment of the Company's intangible assets has been indicated to
date. However, the Company has recorded impairment of certain fixed assets as
discussed below.
During the year ended December 31, 2001, the Company recorded an impairment loss
of approximately $291,000 on property which was no longer used in operations.
The loss was recognized in operating income and was included in the aggregate
total of selling, general and administrative expenses in the Company's
consolidated statements of operations for 2001.
During the year ended December 31, 2000, an impairment loss of approximately
$478,000 was recognized on property that related to construction of a carbon ash
burnout unit. The loss was recognized in operating income and was included in
the aggregate total for depreciation and amortization in the Company's
consolidated statements of operations for 2000.
Use of Estimates
The preparation of financial statements, in conformity with accounting
principles generally accepted in the United States, requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
New Accounting Pronouncements
In 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," which was
subsequently amended by
F-15
Industrial Services Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Description of Business and Summary of Significant Accounting Policies
(continued)
New Accounting Pronouncements (continued)
SFAS No. 137 "Accounting for Derivative Financial Instruments and Hedging
Activities - Deferral of the Effective Date of SFAS No. 133" and SFAS No. 138
"Accounting for Certain Derivative Instruments and Certain Hedging Activities."
SFAS No. 133 establishes accounting and reporting standards requiring that every
derivative instrument, including certain derivative instruments embedded in
other contracts, be recorded in the balance sheet as either an asset or
liability and measured at its fair value. The statement also requires that
changes in the derivative's fair value be recognized in earnings unless specific
hedge accounting criteria are met. SFAS No. 133, as amended by SFAS No. 137 and
SFAS No. 138, is effective for all fiscal years beginning after June 15, 2000.
As expected, the adoption of SFAS No. 133 did not have a material impact on the
Company's financial condition or results of operations.
In June 2001, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards (SFAS) No. 141, "Business Combinations," and No.
142, "Goodwill and Other Intangible Assets."
SFAS No. 141 requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001. Use of the
pooling-of-interests method is no longer permitted. SFAS No. 141 also includes
guidance on the initial recognition and measurement of goodwill and other
intangible assets acquired in a business combination that is completed after
June 30, 2001.
SFAS No. 142 no longer permits the amortization of goodwill and indefinite-lived
intangible assets. Instead, these assets must be reviewed annually (or more
frequently under certain conditions) for impairment in accordance with this
statement. This impairment test uses a fair value approach rather than the
undiscounted cash flows approach previously required by SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of." Intangible assets that do not have indefinite lives will
continue to be amortized over their useful lives and reviewed for impairment in
accordance with SFAS No. 121 or SFAS No. 142 (see discussion below), which the
Company is required to adopt effective January 1, 2002.
The Company is currently evaluating its intangible assets in relation to the
provisions of SFAS No. 142 to determine the impact that adoption of SFAS No. 142
will have on its results of operations or financial position. In accordance with
SFAS No. 142, the
F-16
Industrial Services Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Description of Business and Summary of Significant Accounting Policies
(continued)
New Accounting Pronouncements (continued)
Company anticipates that the amounts classified as assembled workforce will be
reclassified to goodwill. All amortization of goodwill and all amortization of
assembled workforce will no longer be recorded in the financial statements. The
effect of eliminating amortization for goodwill and assembled workforce will
approximate $4,100,000 in the year ending December 31, 2002. The useful lives of
the intangible contracts are presently being evaluated and it is possible that
the Company may determine that the useful lives of the intangible contracts
should change after evaluation. The Company is uncertain as to the net impact,
if any, such evaluation will have on amortization expense for the year ending
December 31, 2002.
In the future, goodwill will be evaluated by the fair value method, comparing
the estimated fair value with the recorded value of the assets and liabilities,
as recommended in the Statement. The effect of impairment of goodwill, if any,
has not yet been evaluated. The Statement requires recognition of any impairment
of goodwill in the first quarter of the fiscal year. A restatement of quarterly
financial results for the year ended December 31, 2002 may be required if the
two-step valuation process is not completed by the filing of the first quarter
financial statements. The effect of any impairment recognized at transition to
the Statement will be recognized as a change in accounting principle.
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 143, "Accounting for Asset Retirement
Obligations". SFAS No. 143 requires alternative accounting treatment of assets
which are in the process of retirement. The Company is required to adopt SFAS
No. 143 effective January 1, 2002. The Company anticipates that there will not
be a significant effect on results of operations or financial position.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This Statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. This
Statement supersedes FASB Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations and Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," for the disposal of a segment of a business (as
F-17
Industrial Services Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Description of Business and Summary of Significant Accounting Policies
(continued)
New Accounting Pronouncements (continued)
previously defined in that Opinion). This Statement is effective for years
beginning after December 15, 2001 (i.e. January 1, 2002 for calendar year
companies). The Company anticipates that there will not be a significant effect
on results of operations or financial position.
3. Intangible Assets
Intangible assets consist of the following at December 31:
2001 2000
------------ ------------
Goodwill $ 83,610,925 $ 83,610,925
Contracts 100,227,490 100,227,490
Patents and licenses 3,446,584 3,787,431
Assembled work force 2,815,233 2,815,233
------------ ------------
190,100,232 190,441,079
Less accumulated amortization (32,922,533) (23,364,593)
------------ ------------
$157,177,699 $167,076,486
============ ============
4. Long-term Debt
Laidlaw Note
On October 14, 1997, the Company acquired ISG Resources, Inc. (formerly JTM
Industries, Inc.) from Laidlaw Transportation, Inc. As consideration for this
transaction, Laidlaw received a $29 million Senior Bridge Loan, a $17.5 million
Junior Subordinated Promissory Note due in 2005 (with interest accruing in
payment in kind ("PIK") notes), and $5.8 million in cash. Subsequently, the
Senior Bridge Loan was pushed down to ISG Resources and repaid through the
issuance of Senior Subordinated Notes in 1998.
The Junior Subordinated Promissory Note is due on October 14, 2005 and accrues
interest at 9% per annum. Interest is paid in arrears semiannually on March 30
and September 30 if cash interest payment is permitted under the debt agreements
of ISG
F-18
Industrial Services Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Long-term Debt (continued)
Laidlaw Note (continued)
Resources, Inc. Because the interest payments are not permitted as a result of
the Junior status of the note, secondary notes were issued, as provided in the
agreement, for the amount of the interest. The cumulative amount of the
secondary PIK notes and accrued interest issued in payment of the interest on
December 31, 2001 and 2000 were approximately $7,870,000 and $5,732,000
respectively. (See Note 12 - Subsequent Events for further discussion)
Citicorp Mezzanine Partners (CMP) Note
On April 17, 2000, ISG Inc. reached an agreement with Citicorp Mezzanine
Partners, L.P. (CMP) to provide a mezzanine III note (the mezzanine note) in the
amount of $10,000,000 which is due and payable on April 17, 2005. Interest
accrues on the note at the rate of 12% per annum or at 14% per annum if the
Company elects to pay interest by adding PIK notes in lieu of cash payment,
which the Company plans to do. As part of the agreement, a stock warrant was
issued for the purchase of 55,555.55 shares of Class B common stock at an
exercise price of $0.01 with a term of 10 years. In accordance with APB 14,
Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants,
the Company allocated the $10,000,000 proceeds to the warrant and mezzanine note
based on their relative fair values. The fair value of the warrant was
determined using the Black-Scholes method and the following assumptions;
volatility of 70%; term of 10 years; risk free interest rate of 6.31%; and a
dividend rate of zero. The amount allocated to the warrant of approximately
$3,814,000 has been recorded as a discount to the related note and is amortized
to interest expense over the term of the note using the effective interest
method.
The warrant was issued as an inducement to CMP to enter into the credit
agreement for the Company and contains certain anti-dilution clauses that may
change the number of shares to be issued and the exercise price. In the event
that the Company repays the mezzanine note in cash, the Company has agreed to
repurchase the warrant at an aggregate price equal to an amount that will
increase the total internal rate of return to CMP on the notes and warrant by
8%, compounded semi-annually. In consideration of the expected warrant
redemption, the Company accrues interest on the note at the rate of 22% per
annum, which represents 14% stated rate plus 8% incremental interest rate. As of
December 31, 2001 and 2000, the accrued interest amounted to approximately
$4,303,000 and $1,609,000 respectively.
F-19
Industrial Services Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Long-term Debt (continued)
Secured Credit Facility
On March 4, 1998, ISG Resources obtained a Secured Credit Facility provided by a
syndicate of banks. The Secured Credit Facility, which matures September 4,
2003, enables ISG Resources to obtain revolving secured loans from time to time
to finance certain permitted acquisitions, to pay fees and expenses incurred in
connection with certain acquisitions, to repay existing indebtedness, and for
working capital and general corporate purposes. ISG Resources financed the
acquisitions through the issuance of $100,000,000 of 10% Senior Subordinated
Notes due 2008 (discussed below) and borrowings on its Secured Credit Facility
(as subsequently amended, restated, and increased). Operating and capital
expenditures have been financed primarily through cash flow from operations and
borrowings under the Secured Credit Facility. On May 26, 2000, the Secured
Credit Facility was amended and restated to, among other things, increase the
borrowings available to ISG Resources from $50,000,000 to $65,000,000.
This increase in the funds available to ISG Resources was accomplished through
the addition of a Tranche B feature, pursuant to which two of the existing
lenders (the "Tranche B Lenders"), agreed to provide the additional $15,000,000
in funding. No amount is available pursuant to the Tranche B revolving loans
unless all amounts under the Tranche A (existing) revolving loans have been
borrowed in full and are outstanding. Under the amended and restated Secured
Credit Facility, at the option of ISG Resources, both the Tranche A Revolving
Loans and the Tranche B Revolving Loans may be maintained as Eurodollar Loans or
Base Rate Loans.
Eurodollar loans will bear interest at a per annum rate equal to the rate per
annum (rounded upwards, if necessary, to the nearest 1/100 of 1 percent)
determined by the Administrative Agent to be equal to the quotient by dividing
(a) the London Interbank Offered Rate for such Eurodollar Loan for such Interest
Period by (b) 1 minus the Reserve Requirement for such Eurodollar Loan for such
Interest Period, and by then adding thereto the applicable LIBOR margin (which
is a percentage ranging from 1.75% to 3.50% for the Tranche A and 1.75% to 2.50%
for the Tranche B, primarily depending upon the Company's Leverage Ratio). All
capitalized terms are defined in the Secured Credit Facility.
Base Rate Loans will bear interest at a per annum rate equal to the rate which
is the higher of (a) the Federal Funds rate for such day plus one-half of one
percent (0.50%) and (b) the Prime rate for such day and by then adding thereto
the applicable ABR Margin (which is a percentage ranging from 0.50% to 2.25% for
the Tranche A and 0.50% to
F-20
Industrial Services Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Long-term Debt (continued)
Secured Credit Facility (continued)
1.25% for the Tranche B, primarily depending upon ISG Resources' Leverage
Ratio). Any change in the Base Rate due to a change in the Federal Funds Rate or
to the Prime Rate shall be effective on the effective date of such change. All
capitalized terms are as defined in the Secured Credit Facility.
ISG Resources will also pay certain fees with respect to any unused portion of
the amended and restated Secured Credit Facility.
The amended and restated Secured Credit Facility maintains the term of the
original Secured Credit Facility obtained on March 4, 1998; is guaranteed by the
Company, existing, and future domestic subsidiaries of ISG Resources (the
"Guarantors"); and is secured by a first priority security interest in all of
the capital stock of ISG Resources and all of the capital stock of each of the
Guarantors, as well as certain present and future assets and properties of ISG
Resources and any domestic subsidiaries.
On August 8, 2000, the amended and restated secured credit agreement dated May
26, 2000 was amended in order to modify certain debt covenants contained in the
credit agreement. Primarily, a minimum consolidated Earnings Before Interest
Expense, Interest Income, Income Tax Expense, Depreciation Expense, and
Amortization Expense (EBITDA) debt covenant was added. The minimum consolidated
EBITDA covenant requires the Company to maintain a minimum EBITDA amount for
every fiscal quarter through June 30, 2003 at levels set forth in the agreement.
On March 30, 2001, the amended and restated secured credit agreement dated May
26, 2000 and subsequently amended on August 8, 2000, was amended in order to
modify certain debt covenants contained in the credit agreement. The amended and
restated secured credit facility continues to require ISG Resources to not
exceed a maximum leverage ratio, to not drop below a minimum interest coverage
ratio, to not drop below a minimum consolidated EBITDA level, and to comply with
certain other financial and non-financial covenants, as defined in the amended
agreement.
At December 31, 2001, $64,643,900 of the Secured Credit Facility was
outstanding, with no amount being unused and available. At December 31, 2001 the
Company was in compliance with all debt covenants under the Secured Credit
Facility.
F-21
Industrial Services Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Long-term Debt (continued)
Senior Subordinated Notes
On April 22, 1998, ISG Resources completed a private placement of $100,000,000
aggregate principal amount of 10% Senior Subordinated Notes due 2008 (the
"Senior Subordinated Notes") to finance the 1998 Acquisitions. Interest on the
Senior Subordinated Notes is payable semi-annually on April 15 and October 15 of
each year. The Senior Subordinated Notes will mature on April 15, 2008 and are
guaranteed fully and unconditionally and on a joint and several basis by all of
ISG Resources' existing and future restricted domestic subsidiaries, as defined
in the indenture. See Note 11.
The Senior Subordinated Notes are redeemable at the option of ISG Resources 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, ISG Resources 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 ISG Resources' 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 ISG Resources and restricted subsidiaries as
defined in the indenture.
In connection with the private placement of the Senior Subordinated Notes, ISG
Resources entered into the Registration Rights Agreement pursuant to which ISG
Resources was required to file an exchange offer registration statement with the
Securities and Exchange Commission that was declared effective by the Securities
and Exchange Commission on September 4, 1998.
The contracted aggregate maturities of all long-term debt for the five years
subsequent to December 31, 2001 are as follows: $0 in 2002, $64,643,900 in 2003,
$0 in 2004, $34,807,000 in 2005, $0 in 2006, and $112,400,000 thereafter.
However, as discussed in Note 12, the Laidlaw note was repaid subsequent to year
end for $3,000,000. At December 31, 2001, the Company was in compliance with all
applicable loan covenants under the notes.
F-22
Industrial Services Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
5. Employee Benefit Plan
Eligible employees of ISG Resources may participate in a 401(k) savings plan
(the "Plan") sponsored by ISG Resources. The Plan requires ISG Resources to
match employee contributions, as defined, up to 6% of the employees'
compensation. Expenses related to the Plan were approximately $572,000, $488,000
and $458,000 for the years ended December 31, 2001, 2000, and 1999,
respectively.
6. Income Taxes
Income tax expense (benefit) consists of the following:
Year ended December 31
2001 2000 1999
-------------------------------------------------
Current:
U.S. federal $ (292,106) $ (2,486,283) $ 1,523,453
State 618,307 (317,684) 650,980
------------ ------------ ------------
326,201 (2,803,967) 2,174,433
Deferred:
U.S. federal (1,096,766) (1,853,840) (1,847,270)
State (657,970) (43,889) (382,269)
------------ ------------ ------------
(1,754,736) (1,897,729) (2,229,539)
Total:
U.S. federal (1,388,872) (4,340,123) (323,817)
State (39,663) (361,573) 268,711
------------ ------------ ------------
$ (1,428,535) $ (4,701,696) $ (55,106)
============ ============ ============
Reconciliation of income tax expense (benefit) at the U.S. statutory rate to the
Company's tax expense (benefit) is as follows:
Year ended December 31
2001 2000 1999
-------------------------------------------
35% of income (loss) before income
tax $ (2,661,810) $(5,987,059) $ (527,595)
Add:
Non-deductible goodwill 1,215,772 1,170,888 901,551
Other, net 17,503 114,475 (429,062)
------------ ----------- ----------
$ (1,428,535) $(4,701,696) $ (55,106)
============ =========== ==========
F-23
Industrial Services Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. Income Taxes (continued)
The major components of the deferred tax assets and liabilities as of December
31 are as follows:
2001 2000
------------ ------------
Deferred tax assets:
Bad debt reserves $ 170,957 $ 193,873
State NOL Carryforward 202,224 -
Accruals not currently deductible for
tax purposes 256,997 657,452
------------ ------------
Total gross deferred tax assets 630,178 851,325
Deferred tax liabilities:
Fixed asset basis differences 2,645,189 2,862,317
Intangible asset basis differences 33,050,193 34,878,740
Other 31,259 (38,533)
------------ ------------
Total gross deferred tax liabilities 35,726,641 37,702,524
------------ ------------
Net deferred tax liabilities $(35,096,463) $(36,851,199)
============ ============
In 2000, ISG Resources generated state net operating loss carryforwards of
approximately $3,111,000. These carryforwards, if not used, will expire in 2007.
7. Commitments and Contingencies
Lease Obligations
Certain facilities and equipment are leased under non-cancelable operating
leases, which generally have renewal terms, expiring in various years through
2011. Future minimum payments under leases with initial terms of one year or
more consisted of the following:
2002 $ 8,457,157
2003 7,099,524
2004 4,828,602
2005 2,760,660
2006 1,659,488
Thereafter 5,501,000
-----------
Total minimum lease payments $30,306,431
===========
F-24
Industrial Services Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Commitments and Contingencies (continued)
Lease Obligations (continued)
Total rental expense was approximately $10,353,000, $8,067,000, and $7,595,000
for the years ended December 31, 2001, 2000 and 1999 respectively.
Sale and Purchase Commitments
Certain of ISG Resources' contracts with its customers and suppliers require ISG
Resources to make minimum sales and purchases over ensuing years, approximated
as follows:
Minimum Minimum
Sales Purchases
---------- -----------
2002 $ 720,000 $ 8,043,120
2003 840,000 8,169,840
2004 960,000 6,976,560
2005 960,000 3,063,280
2006 720,000 2,902,000
Thereafter 3,600,000 13,250,000
---------- -----------
$7,800,000 $42,404,800
========== ===========
Actual minimum sales and purchases under contracts with minimum requirements
approximated the following for the years ended December 31:
Minimum Minimum
Sales Purchases
---------- -----------
1999 $806,000 $5,930,000
2000 $364,000 $6,637,000
2001 $240,000 $8,562,060
Royalty Commitments
In connection with a 1998 acquisition, ISG Resources agreed to pay a minimum of
$500,000 per year commencing in 1999 and continuing through 2003 for royalties
related to the sale of certain Class C fly ash. An amendment to this agreement
changed the terms to a payment of $50,000 per month through March 1, 2003. The
current portion of this
F-25
Industrial Services Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Commitments and Contingencies (continued)
Royalty Commitments (continued)
liability is recorded in other current liabilities and the long-term portion is
recorded in other long-term liabilities in the accompanying consolidated balance
sheets.
In 2000, ISG Resources entered into a license agreement for certain technology
for which ISG Resources agreed to pay a minimum of $40,000 in 2000, $220,000 in
2001, $327,000 in 2002, and $500,000 in 2003 for royalties on net sales. The
license agreement states that if ISG Resources terminates the license agreement
prior to December 31, 2003, ISG Resources will still have an obligation to pay
the licensor the minimum royalty each month through and including December 2003,
as if the agreement had never been terminated.
Other Obligations
In 2001, ISG Resources entered into a consulting agreement for certain
technology for which ISG Resources agreed to pay $25,000 per month from October
1, 2001 to September 1, 2002. In addition, ISG Resources entered into a
consulting agreement for marketing fly ash in conjunction with a supply contract
for which ISG Resources agreed to pay $10,000 per month from October 1, 2001 to
June 1, 2003.
In connection with the purchase of land for total consideration of $1.5 million
during the second quarter of 2001, ISG Resources incurred a purchase money
obligation of $1.1 million. The total outstanding balance of $800,000 is
classified in other current liabilities on the consolidated balance sheet at
December 31, 2001 and will be paid in full in 2002. The $1.1 million is treated
as a non-cash item on the statement of cash flows.
Legal Proceedings
There are various legal proceedings against the Company arising in the normal
course of business. While it is not currently possible to predict or determine
the outcome of these proceedings, it is the opinion of management that the
outcome will not have a material adverse effect on the Company's results of
operations, financial position or liquidity.
Employment Agreements
ISG Resources has employment agreements with certain of its employees. The terms
of these agreements began to expire in 2001 with annual extensions to be
exercised by
F-26
Industrial Services Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Commitments and Contingencies (continued)
Employment Agreements (continued)
mutual consent of both parties. Considering these extensions, these employment
agreements provide for total annual base compensation of approximately
$2,279,000 in 2002, $1,668,000 in 2003, and $86,000 in 2004. In addition, one
employee, pursuant to his employment contract, has been granted an economic
interest in one percent of all outstanding shares of ISG Resources' common stock
as of the date of his employment agreement. This economic interest vested
immediately upon execution of the employment agreement, but the right is
contingent upon the occurrence of certain future events, one of which is a sale
of the Company. Because such events have not occurred as of December 31, 2001,
no compensation expense has been calculated or recorded. (See Note 12 -
Subsequent Events)
Medical Insurance
Effective April 1, 1998, ISG Resources established a self-funded medical
insurance plan for its employees with stop-loss coverage for amounts in excess
of $40,000 per individual and approximately $3,678,000 in the aggregate for the
current plan period ended December 30, 2001 and $2,792,000 in the aggregate for
the plan period ended December 31, 2000. ISG Resources has contracted with a
third-party administrator to assist in the payment and administration of claims.
Insurance claims are recognized as expenses when incurred, including an estimate
of costs incurred but not reported at the balance sheet dates. In the
accompanying consolidated balance sheets, $238,000 and $508,000 has been accrued
as of December 31, 2001 and 2000, respectively, related to this liability.
8. Reportable Segments
As discussed in Note 2, the Company operates in two reportable segments: the CCP
division and the manufacturing products division. The CCP division consists
primarily of three operating units that manage and market CCPs in North America.
The manufacturing products division consists of six legal entities: Best,
Osborne, Terrazzo, Magna Wall, Don's and Palestine. The Company's two reportable
segments are managed separately based on fundamental differences in their
operations.
The Company evaluates performance based on profit or loss from operations before
depreciation, amortization, income taxes and interest expense (EBITDA). The
Company derives a majority of its revenues from CCP sales and the chief
operating decision makers rely on EBITDA to assess the performance of the
segments and make decisions about
F-27
Industrial Services Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Reportable Segments (continued)
resources to be allocated to the segments. Accordingly, EBITDA is included in
the information reported below. Certain expenses are maintained at the Company's
corporate headquarters and are not allocated to the segments. Such expenses
primarily include interest expense, corporate overhead costs, certain
non-recurring gains and losses. Inter-segment sales, which historically have not
been material, are generally accounted for at cost and are eliminated in
consolidation. The manufacturing products division includes financial data for
the six legal entities from their respective dates of acquisition through
December 31, 2001. Thus, the manufacturing products division segment information
is not comparable for the 1999, 2000, and 2001 periods. Best financial data is
included from January 1, 1999, Osborne and Terrazzo from October 26, 1999, Magna
Wall from December 1, 1999, Don's from March 1, 2000 and Palestine from June 1,
2000.
Amounts included in the "Other" column include financial information for the
Company's corporate, research and development, and other administrative business
units.
In anticipation of the Company's adoption of SFAS No. 142, the Company has
reevaluated the allocation of certain intangible assets to the segments.
Information as of and for the years ended December 31, 2000 and 1999 have been
restated to conform to this revised breakout.
F-28
Industrial Services Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Reportable Segments (continued)
Information about reportable segments, and reconciliation of such information to
the consolidated totals as of and for the year indicated, is as follows:
Manufactured Consolidated
CCP Products Other Total
----------------- ------------------- ---------------- ------------------
For the Year Ended
December 31, 2001
- ------------------
Revenue $167,228,203 $48,662,571 $ 339,985 $216,230,759
EBITDA 36,626,349 4,862,850 (10,337,177) 31,152,022
Depreciation and amortization 13,099,713 2,440,193 269,663 15,809,569
Total assets 182,068,540 46,796,876 25,841,582 254,706,998
Expenditures for PP&E 4,699,635 1,525,085 196,882 6,421,602
For the Year Ended
December 31, 2000
- -----------------
Revenue $139,470,096 $41,009,405 $ 422,360 $180,901,861
EBITDA 27,674,818 4,026,257 (13,690,958) 18,010,117
Depreciation and amortization
12,734,938 1,964,370 255,123 14,954,431
Total assets 188,957,876 46,481,590 18,053,367 253,492,833
Expenditures for PP&E 5,123,317 2,133,579 928,693 8,185,589
For the Year Ended
December 31, 1999
- ------------------
Revenue $134,631,711 $20,821,159 $ 752,402 $156,205,272
EBITDA 32,096,154 2,811,482 (8,139,384) 26,768,252
Depreciation and amortization 11,862,017 1,005,779 223,335 13,091,131
Total assets 189,672,793 6,683,098 24,106,620 220,462,511
Expenditures for PP&E 7,520,689 350,610 919,571 8,790,870
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies. Segment assets reflect those
specifically attributable to the individual segments and include accounts
receivable, inventory and property, plant and equipment and intangible assets.
All other assets are included in the "Other" column.
F-29
Industrial Services Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. Stock Options
The Company adopted the 1999 Stock Option Plan ("the Plan") in December 1999.
Under the Plan, 19,800 shares of the common stock of the Company have been
reserved for issuance. Generally, stock options vest ratably over four years,
but may only be exercised after the occurrence of a "corporate change," which is
defined as (i) the sale of all of the common stock or substantially all of the
assets of the Company; or (ii) the Company's capital stock becoming publicly
traded as a result of a public offering of securities of the Corporation under
the Securities Act of 1933, as amended. Because no such corporate changes have
occurred, no options are exercisable as of December 31, 2001 or 2000. The Plan
expires December 16, 2009, or when all the shares available under the plan have
been issued. Information for the fiscal years 1999 through 2001 with respect to
the Plan is as follows:
Weighted Average
Number of Shares Exercise Price
----------------- ------------------
Options granted 7,424 $111
-----------------
Outstanding at December 31, 1999 7,424 111
Options expired and forfeited (1,980) 111
-----------------
Outstanding at December 31, 2000 and 2001 5,444 $111
=================
The remaining contractual life of the outstanding options as of December 31,
2001 is 8 years. There were 14,356 options available for future grant as of
December 31, 2001.
Generally, the Company applies Accounting Principles Board Opinion No. 25
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for its option plans. However, because the number of shares that will
ultimately be exercisable is dependent upon a future "corporate change" and
therefore, the number of shares to be issued is not known, these options are
considered variable and any increases in intrinsic value would be recorded to
compensation expense. As of December 31, 2001 and 2000, the fair value of the
common stock was less than the exercise price of the options. Therefore, no
compensation expense has been recognized in the accompanying consolidated
financial statements.
F-30
Industrial Services Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Shareholders' Equity (Deficit)
As stated in the Description of Business, the Company was formed on October 14,
1997 to acquire the stock of JTM from Laidlaw Transportation, Inc. As
consideration for this transaction, Laidlaw received a $29 million senior bridge
note (which was pushed down to ISG Resources and which was subsequently repaid
through the issuance of Senior Subordinated Notes in 1998), a $17.5 million 9%
Junior Subordinated Promissory Note due in 2005 (with interest accruing in PIK
notes), and $5.8 million in cash. The equity investment in the Company in
connection with the purchase was made by the investors through the purchase of
common and preferred stock and warrants of the Company for an aggregate purchase
price of approximately $7.5 million, the proceeds of which were distributed to
ISG Resources (formerly JTM Industries) in order to capitalize this subsidiary.
This information was set forth in the registration statement on Form S-4 for the
Senior Subordinated Notes for ISG Resources that was declared effective by the
SEC in September 1998.
As part of the agreement, 500,000 shares of Class A Common Stock (par value
$.01) were authorized and 495,000 shares were issued for a total of $495,000.
Also, 500,000 shares of Class B Common Stock were authorized. No shares of Class
B Common Stock are issued and outstanding. Each share of Class A Common Stock
may be converted to a share of Class B Common Stock at the option of the holder.
In accordance with the agreement, 35,050 shares of Series A Preferred Stock (par
value $.01) were authorized for a stated value of $100 each and issued for a
total of $3,505,001. Also in accordance with the agreement, 35,000 shares of
Series B Preferred Stock (par value $.01) were authorized with a stated value of
$100 each and issued for a total of $3,500,000. The Series A and Series B
Preferred Stock rank pari passu with each other.
Dividends on both Series A and Series B Preferred Stock accrue from the date of
issuance until redemption or payment. The dividends accrue at a 14% per annum
rate and are payable semiannually on August 31 and February 28 of each year when
profits are legally available for dividend payment. As of December 31, 2001 and
2000, cumulative unpaid dividends for Series A Preferred Stock totaled
$2,699,558 and $1,914,289 respectively. As of December 31, 2001 and 2000,
cumulative unpaid dividends for Series B Preferred Stock totaled $2,695,708 and
$1,911,559 respectively. In the event of a liquidation, before any payment shall
be made to holders of common stock, the holders of Series A and Series B
Preferred Stock shall be entitled to receive an amount per share equal to the
original stated value of $100 per share of such preferred stock plus accrued
dividends on the date of distribution.
F-31
Industrial Services Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Shareholders' Equity (Deficit) (Continued)
The Company has the option to redeem at any time some or all of the outstanding
shares of Series A or Series B Preferred Stock at a redemption price equal to
the initial stated value of $100 per share plus all accrued and unpaid
dividends. On September 30, 2007, the Company shall redeem for cash all of the
Series A Preferred Stock at a redemption price equal to the initial stated value
$100 per share plus any accrued dividends, as long as the $17.5 million 9%
Junior Subordinated Promissory Note and all accrued interest has been paid in
full. On September 30, 2018 the Company shall redeem for cash all of the Series
B Preferred Stock at a redemption price equal to the initial stated value of
$100 per share plus any accrued dividends, as long as the $17.5 million 9%
Junior Subordinated Promissory Note and all accrued interest has been paid in
full.
Also in accordance with the agreement, the Company authorized and issued 5,000
stock purchase warrants (the Series A Stock Purchase Warrants) to purchase an
aggregate of 5,000 shares of Class A Common Stock or Class B Common Stock, at
the holder's option at an exercise price of $1.00.
11. Unsuccessful Acquisition Costs
Costs of $1.5 million incurred related to unsuccessful business acquisitions
were charged to expense in 2000 when ISG Resources determined that such
acquisitions would not occur. No such costs were expensed in 2001.
On February 24, 1999, ISG Resources entered into an option agreement to acquire
the stock of Tatum Industries, Inc. (Tatum). As part of that agreement, ISG
Resources agreed to loan Tatum approximately $50,000 per month for operating
expenses and loan servicing. Tatum's note to ISG Resources accrued interest at
8% and was payable on demand. Additionally, ISG Resources leased Tatum's
building, transferred certain equipment and incurred approximately $0.1 million
of leasehold improvements to the property. On October 27, 2000, ISG Resources
advised Tatum that ISG Resources was terminating the option agreement and ISG
Resources advised Tatum that the note to ISG Resources, totaling approximately
$1.1 million, would be due and payable on March 1, 2001. In December 2000, Tatum
advised ISG Resources that they would not be able to repay the note and ISG
Resources' attempt to purchase the outstanding stock of Tatum was unsuccessful.
As a result, in 2000, ISG Resources expensed approximately $1.1 million in
unsuccessful acquisition costs, which is included in the $1.5 million discussed
above. However, ISG Resources continued to lease the building from Tatum and use
the equipment in its operations.
F-32
Industrial Services Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. Unsuccessful Acquisition Costs (Continued)
In 2001, in conjunction with ISG Resources decision to abandon its production
operations at Tatum's facility, ISG Resources recognized $291,000 as an
impairment loss on the owned assets, based upon an offer ISG Resources received
to purchase the assets. This loss is recognized in operating income and is
included in the aggregate total of selling, general and administrative expense.
These assets were sold in December 2001.
12. Subsequent Events
On January 30, 2002 the Company authorized and issued 15,000 shares of Series A
Preferred Stock and 15,000 shares of Series B Preferred Stock for $3,000,000 by
amendment to the by-laws of the Company. The issuance of the preferred stock was
made to retire the Laidlaw note as described further in this section.
On May 8, 2002, the Company reached agreement with its Lenders on a fifth
amendment to the secured credit facility. Among other considerations, the
amendment authorizes up to $10 million for any asset impairment which may result
from the adoption of new accounting pronouncements.
On January 11, 2002, an offer to retire the Laidlaw Note for $3 million in cash
to be paid on January 30, 2002 was made to American National Insurance
Corporation, the current holder of the notes. The offer was accepted by American
National and payment was made on the note on January 30, 2002. The note will be
retired and a gain on extinguishment will be recognized during the year 2002 in
the amount of approximately $22,560,000.
The Company is in negotiations with a third party for the sale of the Company.
No definitive agreement has been reached but negotiations are continuing.
13. Subsequent Events (Unaudited)
On July 16, 2002, the Company signed a definitive agreement with Headwaters,
Inc. to be acquired by Headwaters in exchange for consideration which is
currently estimated to approximately $246,000,000 consisting of cash of
approximately $31,000,000, the issuance of 2,000,000 shares of Headwaters common
stock with an assumed value of $30,000,000, cash requirements of approximately
$181,000,000 to retire ISG debt, and direct costs to e incurred by Headwaters to
consummate the acquisition of approximately $4,000,000. It is anticipated that
the transaction will close during the year 2002.
F-33
Industrial Services Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
14. Condensed Consolidating Financial Information
ISG resources' debt facilities are guaranteed by its domestic subsidiaries only.
ISG Canada was formed in 2000 and had minimal operations in comparison to
consolidated results. Because ISG Canada's operations have increased during
2001, it is no longer considered a "minor" subsidiary as defined under
Regulation S-X Rule 3-10. As such, the Company is required to disclose condensed
consolidating financial information in its periodic reports. ISG resources and
its subsidiaries do not guarantee any of the debt of Industrial Services Group,
Inc. nor are any of their assets or stock pledged as collateral for such debt.
The condensed consolidating balance sheet as of December 31, 2001 is as follows:
ISG ISG Manufactured ISG
Consolidated Eliminations Inc. Resources Products Canada
------------ ----------- ------------ ------------ ----------- ----------
Assets
Current assets:
Cash and cash equivalents $ 17,724,156 $ - $ - $ 17,002,493 $ 477,075 $ 244,588
Accounts receivable 26,253,456 - - 20,182,923 5,875,011 195,522
Inventories 8,528,976 - - 3,923,243 4,544,632 61,101
Other current assets 2,955,103 (10,872) 731,106 2,095,752 139,117 -
------------ ------------ ------------ ------------ ----------- ----------
Total current assets 55,461,691 (10,872) 731,106 43,204,411 11,035,835 501,211
Property, plant and equipment 38,118,552 - - 30,533,497 6,745,493 839,562
Investment in ISG Resources - (24,555,023) 24,555,023 - - -
Intangible assets, net 157,177,699 - - 128,162,151 29,015,548 -
Debt issuance costs 3,855,350 - 167,875 3,687,475 - -
Investment in subsidiaries - (45,476,666) - 45,476,666 - -
Other assets 93,706 - - 93,706 - -
------------ ------------ ------------ ------------ ----------- ----------
Total assets $254,706,998 $(70,042,561) $ 25,454,004 $251,157,906 $46,796,876 $1,340,773
============ ============ ============ ============ =========== ==========
F-34
Industrial Services Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
ISG ISG Manufactured ISG
Consolidated Eliminations Inc. Resources Products Canada
------------ ----------- ------------ ------------ ----------- ----------
Liabilities and shareholders'
equity (deficit)
Current liabilities:
Accounts payable $ 14,287,253 $ - $ - $ 12,411,354 $ 1,875,899 $ -
Accrued expenses 8,270,489 - 1,189,587 6,875,103 205,799 -
Other current liabilities 1,951,850 (10,872) - 1,427,299 505,484 29,939
------------ ------------ ------------ ------------ ----------- ----------
Total current liabilities 24,509,592 (10,872) 1,189,587 20,713,756 2,587,182 29,939
Long-term debt 201,161,589 - 36,517,689 164,643,900 - -
Deferred tax liabilities 35,726,641 - - 35,726,641 - -
Payable to Parent - - (4,796,444) 4,796,444 - -
Intercompany account payable - 23,201 - 27,888 (1,120,636) 1,069,547
Other liabilities 766,004 - - 638,618 127,386 -
------------ ------------ ------------ ------------ ----------- ----------
Total liabilities 262,163,826 12,329 32,910,832 226,547,247 1,593,932 1,099,486
Series A redeemable preferred stock 6,204,559 - 6,204,559 - - -
Series B redeemable preferred stock 6,195,708 - 6,195,708 - - -
Shareholders' equity (deficit):
Common stock 4,950 (34,773,546) 4,950 34,745,050 28,496 -
Cumulative translation adjustment (55,636) 16,807 (55,636) - - (16,807)
Additional paid in capital 4,304,320 (40,960,169) 4,304,320 - 40,533,259 426,910
Retained (deficit) earnings (24,110,729) 5,662,018 (24,110,729) (10,134,391) 4,641,189 (168,816)
------------ ------------ ------------ ------------ ----------- ----------
Total shareholders' equity (deficit) (19,857,095) (70,054,890) (19,857,095) 24,610,659 45,202,944 241,287
------------ ------------ ------------ ------------ ----------- ----------
Total liabilities and
shareholders' equity (deficit) $254,706,998 $(70,042,561) $ 25,454,004 $251,157,906 $46,796,876 $1,340,773
============ ============ ============ ============ =========== ==========
F-35
Industrial Services Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
14. Condensed Consolidating Financial Information (continued)
The condensed consolidating balance sheet as of December 31, 2000 is as follows:
ISG ISG Manufactured ISG
Consolidated Eliminations Inc. Resources Products Canada
------------ ----------- ------------ ------------ ----------- ----------
Assets
Current assets:
Cash and cash equivalents $ 6,986,725 $ - $ - $ 5,954,992 $ 1,054,079 $ (22,346)
Accounts receivable 25,153,986 - - 19,742,002 5,152,357 259,627
Income tax receivable 3,136,571 939,583 - 2,208,061 (11,073) -
Inventories 6,663,633 - - 1,815,138 4,584,187 264,308
Other current assets 1,909,215 - - 1,811,949 97,266 -
------------ ------------ ------------ ------------ ----------- ----------
Total current assets 43,850,130 939,583 - 31,532,142 10,876,816 501,589
Property, plant and equipment 37,760,556 - - 31,859,149 4,914,902 986,505
Investment in ISG Resources - (27,121,885) 27,121,885 - - -
Intangible assets, net 167,076,486 - - 136,396,956 30,679,530 -
Debt issuance costs 4,743,348 - 218,875 4,524,473 - -
Investment in subsidiaries - (43,078,999) - 43,078,999 - -
Other assets 62,313 - - 51,971 10,342 -
------------ ------------ ------------ ------------ ----------- ----------
Total assets $253,492,833 $(69,261,301) $ 27,340,760 $247,443,690 $46,481,590 $1,488,094
============ ============ ============ ============ =========== ==========
F-36
Industrial Services Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
ISG ISG Manufactured ISG
Consolidated Eliminations Inc. Resources Products Canada
------------ ----------- ------------ ------------ ----------- ----------
Liabilities and shareholders'
equity (deficit)
Current liabilities:
Accounts payable $ 10,704,637 $ - $ - $ 8,561,809 $ 2,082,000 $ 60,828
Accrued expenses 8,106,388 - 1,024,082 6,743,155 287,260 51,891
Other current liabilities 996,153 - - 678,564 317,589 -
------------ ------------ ------------ ------------ ----------- ----------
Total current liabilities 19,807,178 - 1,024,082 15,983,528 2,686,849 112,719
Long-term debt 195,754,743 - 30,754,743 165,000,000 - -
Deferred tax liabilities 37,702,524 - - 37,702,524 - -
Payable to Parent - 939,583 (3,183,605) 2,244,022 - -
Intercompany account payable - 22,774 - (1,904,021) 738,496 1,142,751
Other liabilities 1,482,848 - - 1,265,848 217,000 -
------------ ------------ ------------ ------------ ----------- ----------
Total liabilities 254,747,293 962,357 28,595,220 220,291,901 3,642,345 1,255,470
Series A redeemable preferred stock 5,419,290 - 5,419,290 - - -
Series B redeemable preferred stock 5,411,559 - 5,411,559 - - -
Shareholders' equity (deficit):
Common stock 4,950 (34,773,546) 4,950 34,745,050 28,496 -
Cumulative translation adjustment (29,904) 13,945 (29,904) - - (13,945)
Additional paid in capital 4,304,320 (40,825,606) 4,304,320 - 40,552,265 273,341
Retained (deficit) earnings (16,364,675) 5,361,549 (16,364,675) (7,593,261) 2,258,484 (26,772)
------------ ------------ ------------ ------------ ----------- ----------
Total shareholders' equity (deficit) (12,085,309) (70,223,658) (12,085,309) 27,151,789 42,839,245 232,624
------------ ------------ ------------ ------------ ----------- ----------
Total liabilities and
shareholders' equity (deficit) $253,492,833 $(69,261,301) $ 27,340,760 $247,443,690 $46,481,590 $1,488,094
============ ============ ============ ============ =========== ==========
F-37
Industrial Services Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
14. Condensed Consolidating Financial Information (continued)
The condensed consolidating statement of operations for the year ended December
31, 2001 is as follows:
ISG ISG Manufactured ISG
Consolidated Eliminations Inc. Resources Products Canada
------------ ----------- ------------ ------------ ----------- ----------
Revenues $216,230,759 $ - $ - $165,930,603 $48,662,571 $1,637,585
Costs and expenses:
Cost of products and services,
excluding depreciation 158,227,608 - - 118,169,420 38,477,953 1,580,235
Depreciation and amortization 15,809,569 - - 13,268,749 2,440,193 100,627
Selling, general and
administrative expenses 25,019,279 - - 19,379,292 5,546,746 93,241
New product development 2,308,010 - - 2,308,010 - -
------------ ------------ ------------ ------------ ----------- ----------
201,364,466 - - 153,125,471 46,464,892 1,774,103
------------ ------------ ------------ ------------ ----------- ----------
Operating income (loss) 14,866,293 - - 12,805,132 2,197,679 (136,518)
Equity interest in subsidiary
income - 300,469 (2,541,130) 2,240,661 - -
Interest expense (22,947,624) - (5,979,450) (16,928,222) (39,952) -
Other income (expense), net 476,160 - - 256,708 224,978 (5,526)
------------ ------------ ------------ ------------ ----------- ----------
Income (loss) before income tax (7,605,171) (8,520,580) (1,625,721) 2,382,705 (142,044)
300,469
Income tax expense (benefit) (1,428,535) - (2,343,944) 915,409 - -
------------ ------------ ------------ ------------ ----------- ----------
Net income (loss) $ (6,176,636) $ 300,469 $ (6,176,636) $ (2,541,130) $ 2,382,705 $ (142,044)
Preferred dividends (1,569,418) - (1,569,418) - - -
------------ ------------ ------------ ------------ ----------- ----------
Net income (loss) attributable to
common shareholders $ (7,746,054) $ 300,469 $ (7,746,054) $ (2,541,130) $ 2,382,705 $ (142,044)
============ ============ ============ ============ =========== ==========
F-38
Industrial Services Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The condensed consolidating statement of operations for the year ended December
31, 2000 is as follows:
ISG ISG Manufactured ISG
Consolidated Eliminations Inc. Resources Products Canada
------------ ----------- ------------ ------------ ----------- ----------
Revenues $180,901,861 $ - $ - $139,218,939 $41,009,405 $ 673,517
Costs and expenses:
Cost of products and services sold,
excluding depreciation 133,092,574 - - 100,334,508 32,215,869 542,197
Depreciation and amortization 14,954,431 - - 12,984,578 1,964,370 5,483
Unsuccessful acquisition costs 1,525,386 - - 1,525,386 - -
Selling, general, and
administrative expenses 26,326,402 - - 21,219,591 4,954,151 152,660
New product development 2,331,510 - - 2,331,510 - -
------------ ------------ ------------ ------------ ----------- ----------
178,230,303 - - 138,395,573 39,134,390 700,340
------------ ------------ ------------ ------------ ----------- ----------
Operating income (loss) 2,671,558 - - 823,366 1,875,015 (26,823)
Equity interest in subsidiary
income - 7,740,085 (9,755,015) 2,014,930 - -
Interest expense (20,161,570) - (4,357,192) (15,784,193) (20,185) -
Miscellaneous income, net 384,128 - - 197,205 186,872 51
------------ ------------ ------------ ------------ ----------- ----------
Income (loss) before income tax (17,105,884) 7,740,085 (14,112,207) (12,748,692) 2,041,702 (26,772)
Income tax benefit (4,701,696) - (1,708,019) (2,993,677) - -
------------ ------------ ------------ ------------ ----------- ----------
Net income (loss) $(12,404,188) $ 7,740,085 $(12,404,188) $ (9,755,015) $ 2,041,702 $ (26,772)
Preferred dividends (1,370,740) - (1,370,740) - - -
------------ ------------ ------------ ------------ ----------- ----------
Net income (loss) attributable to
common shareholders $(13,774,928) $ 7,740,085 $(13,774,928) $ (9,755,015) $ 2,041,702 $ (26,772)
============ ============ ============ ============ =========== ==========
F-39
Industrial Services Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
14. Condensed Consolidating Financial Information (continued)
The condensed consolidating statement of cash flow information for the year
ended December 31, 2001 is as follows:
ISG ISG Manufactured ISG
Consolidated Eliminations Inc. Resources Products Canada
------------ ----------- ------------ ------------ ----------- ----------
Net cash provided by operating
activities $ 17,263,616 $ (777,045) $ 2,552,422 $ 12,900,807 $ 2,444,315 $ 143,117
Net cash provided by (used in)
investing activities (5,743,900) 799,915 - (3,649,175) (3,021,319) 126,679
Net cash provided by (used in)
financing activities (756,553) - (2,552,422) 1,795,869 - -
Effect of exchange rate changes on
cash and cash equivalents (25,732) (22,870) - - - (2,862)
------------ ------------ ------------ ------------ ----------- ----------
Net increase (decrease) in cash
and cash equivalents 10,737,431 - - 11,047,501 (577,004) 266,934
Cash and cash equivalents at
beginning of period 6,986,725 - - 5,954,992 1,054,079 (22,346)
------------ ------------ ------------ ------------ ----------- ----------
Cash and cash equivalents at
end of period $ 17,724,156 $ - $ - $ 17,002,493 $ 477,075 $ 244,588
============ ============ ============ ============ =========== ==========
F-40
Industrial Services Group, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The condensed consolidating statement of cash flow information for the year
ended December 31, 2000 is as follows:
ISG ISG Manufactured ISG
Consolidated Eliminations Inc. Resources Products Canada
------------ ----------- ------------ ------------ ----------- ----------
Net cash provided by (used in)
operating activities $ 2,283,834 $ (770,097) $ 1,600,039 $ (515,406) $ 2,401,804 $ (432,506)
Net cash provided by (used in)
investing activities (35,982,596) 786,056 - (35,845,032) (1,347,725) 424,105
Net cash provided by (used in)
financing activities 40,715,391 - (1,600,039) 42,315,430 - -
Effect of exchange rate changes
on cash and cash equivalents (29,904) (15,959) - - (13,945)
------------ ------------ ------------ ------------ ----------- ----------
Net increase (decrease) in cash
and cash equivalents 6,986,725 - - 5,954,992 1,054,079 (22,346)
Cash and cash equivalents at
beginning of period - - - - - -
------------ ------------ ------------ ------------ ----------- ----------
Cash and cash equivalents at
end of period $ 6,986,725 $ - $ - $ 5,954,992 $ 1,054,079 $ (22,346)
============ ============ ============ ============ =========== ==========
F-41
Industrial Services Group, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
March 31, December 31,
2002 (Unaudited) 2001
---------------- ------------
Assets
Current assets:
Cash and cash equivalents $ 14,422,927 $ 17,724,156
Accounts receivable:
Trade, net of allowance for doubtful accounts of
$526,741 and $440,000, respectively 26,444,739 25,302,639
Retainage receivable 268,025 257,989
Other receivables 605,912 692,828
Deferred tax assets 630,178 630,178
Income tax receivable 1,644,321 720,234
Inventories 9,966,946 8,528,976
Other current assets 1,579,519 1,604,691
------------ ------------
Total current assets 55,562,567 55,461,691
Property, plant and equipment, net of accumulated depreciation of
$19,649,904 and $18,126,675, respectively 39,557,771 38,118,552
Intangible assets, net 81,945,200 83,329,546
Goodwill 73,848,153 73,848,153
Debt issuance costs, net 3,630,330 3,855,350
Other assets 93,706 93,706
------------ ------------
Total assets $254,637,727 $254,706,998
============ ============
F-42
Industrial Services Group, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
March 31, December 31,
2002 (Unaudited) 2001
---------------- ------------
Liabilities and shareholders' equity (deficit)
Current liabilities:
Accounts payable $ 15,314,158 $ 14,287,253
Accrued liabilities:
Payroll 1,902,263 2,775,553
Interest 6,165,632 3,570,486
Other 1,033,482 1,924,450
Income taxes payable - -
Other current liabilities 2,020,559 1,951,850
------------ ------------
Total current liabilities 26,436,094 24,509,592
Long-term debt 164,043,900 164,643,900
Deferred tax liability 35,268,499 35,726,641
CMP note 13,676,310 13,676,310
Debt discount (1,698,564) (1,966,086)
Laidlaw note - 24,807,465
Other liabilities 928,227 766,004
------------ ------------
Total liabilities 238,654,466 262,163,826
Series A redeemable preferred stock, 50,050 shares authorized,
issued and outstanding at March 31, 2002 and
35,050 shares at December 31, 2001 respectively 7,948,781 6,204,559
Series B redeemable preferred stock, 50,000 shares
authorized, issued and outstanding at March 31, 2002 and
35,000 shares at December 31, 2001 respectively 7,939,631 6,195,708
Shareholders' equity (deficit):
Class A common stock, $.01 par value; 500,000 shares
authorized, 495,000 issued and outstanding 4,950 4,950
Class B common stock, $.01 par value; 500,000 shares
authorized, none issued and outstanding - -
Additional paid in capital in excess of par value of common
stock 4,304,320 4,304,320
Cumulative foreign currency translation adjustment (93,174) (55,636)
Retained deficit (4,121,247) (24,110,729)
------------ ------------
Total shareholders' equity (deficit) 94,849 (19,857,095)
------------ ------------
Total liabilities and shareholders' equity (deficit) $254,637,727 $254,706,998
============ ============
See accompanying notes.
F-43
Industrial Services Group, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Operations
Three Months Ended
March 31,
-------------------------------------
2002 2001
----------------- ----------------
Revenues:
Product revenues $ 37,865,410 $ 33,743,400
Service revenues 6,690,566 7,941,985
----------------- ----------------
44,555,976 41,685,385
Costs and expenses:
Cost of product revenues, excluding depreciation 28,739,832 27,014,293
Cost of service revenues, excluding depreciation 4,944,213 5,407,058
Depreciation and amortization 2,970,985 4,144,787
New product development 649,709 595,218
Selling, general and administrative expenses 6,079,294 5,852,402
----------------- ----------------
43,384,033 43,013,758
----------------- ----------------
Operating income (loss) 1,171,943 (1,328,373)
Interest income 58,336 147,813
Interest expense (4,895,665) (5,752,096)
Other income 282,365 33,997
----------------- ----------------
Loss before income taxes and extraordinary item (3,383,021) (6,898,659)
Income tax benefit (1,302,757) (2,345,551)
----------------- ----------------
Loss before extraordinary item (2,080,264) (4,553,108)
Gain on extinguishment of debt 22,557,891 -
----------------- ----------------
Net income (loss) 20,477,627 (4,553,108)
Preferred dividends (488,145) (365,743)
----------------- ----------------
Net income (loss) attributable to common shareholders $ 19,989,482 $ (4,918,851)
================= ================
Basic and diluted loss per share before extraordinary item $ (4.20) $ (9.20)
================= ================
Basic and diluted net income (loss) per share attributable
to common shareholders $ 40.38 $ (9.94)
================= ================
Weighted average number of shares used in calculating
basic and diluted net income (loss) per share 495,000 495,000
================= ================
See accompanying notes.
F-44
Industrial Services Group, Inc. and Subsidiaries
Unaudited Consolidated Statement of Comprehensive Income (Loss)
Three months ended March 31
2002 2001
----------- -----------
Net income (loss) $20,477,627 $(4,553,108)
Other comprehensive income (loss) net of tax:
Foreign currency translation adjustment 37,538 (12,131)
----------- -----------
Comprehensive income (loss) $20,515,165 $(4,565,239)
=========== ===========
F-45
Industrial Services Group, Inc. and Subsidiaries
Unaudited Condensed Consolidated Statements of Cash Flows
Three Months Ended
March 31,
---------------------------------
2002 2001
-------------- ------------
Operating activities
Net income (loss) $ 20,477,627 $ (4,553,108)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization 2,970,985 4,144,787
Amortization of debt issuance costs 266,446 233,663
Amortization of debt discount 267,522 266,413
Noncash interest expense 923,152 1,106,019
Gain on disposal of fixed assets (4,927) (6,078)
Gain on extinguishment of debt (22,557,891) -
Deferred income taxes (458,142) (380,295)
Changes in operating assets and liabilities:
Receivables (1,065,220) (745,608)
Inventory (1,437,970) (976,214)
Other current and non-current assets 25,172 53,980
Accounts payable and accrued expenses 1,685,067 5,571,080
Other current and non-current liabilities (693,155) (957,773)
-------------- ------------
Net cash provided by operating activities 398,666 3,756,866
Investing activities
Purchases of property, plant and equipment (3,058,431) (2,501,651)
Proceeds on sale of property, plant and equipment 37,500 34,782
-------------- ------------
Net cash used in investing activities (3,020,931) (2,466,869)
Financing activities
Cash contributions from shareholders 3,000,000 -
Payments on long-term debt (3,600,000) -
Debt issuance costs incurred (41,426) -
-------------- ------------
Net cash used in financing activities (641,426) -
Effect of exchange rate changes on cash and
cash equivalents (37,538) 12,131
-------------- ------------
Net increase (decrease) in cash and cash equivalents (3,301,229) 1,302,128
Cash and cash equivalents at beginning of period 17,724,156 6,986,725
-------------- ------------
Cash and cash equivalents at end of period $ 14,422,927 $ 8,288,853
============== ===========
Cash paid for interest $ 971,486 $ 370,957
Cash paid (received) for income taxes $ 57,995 $ (415,403)
See accompanying notes.
F-46
Industrial Services Group, Inc.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
Industrial Quality Services, Inc. was formed in September 1997 by Citicorp
Venture Capital, Ltd. ("CVC") and certain members of the management team of JTM
Industries, Inc ("JTM") to acquire the stock of JTM from Laidlaw Transportation,
Inc. Pursuant to the acquisition, Industrial Quality Services acquired the stock
of JTM on October 14, 1997 and JTM became a wholly owned subsidiary of
Industrial Quality Services. In January, 1998, Industrial Quality Services
changed their name to Industrial Services Group, Inc. ("the Company"). In 1998,
JTM acquired the stock of Pozzolanic Resources, Inc. ("Pozzolanic"), Power Plant
Aggregates of Iowa, Inc. ("PPA"), Michigan Ash Sales Company, d.b.a. U. S. Ash
Company, together with two affiliated companies, U.S. Stabilization, Inc. and
Flo Fil Company, Inc., (collectively, "U.S. Ash"), and Fly Ash Products, Inc.
("Fly Ash Products") (collectively, the "1998 Acquisitions"). Effective January
1, 1999, JTM, Pozzolanic, PPA, U.S. Ash, Fly Ash Products and their wholly owned
subsidiaries merged with and into ISG Resources ("ISG Resources") a newly formed
entity (the "Merger"). Pneumatic Trucking, Inc., a wholly owned subsidiary of
Michigan Ash Sales Company, was not merged into ISG Resources. Consequently,
Pneumatic became a wholly owned subsidiary of the ISG Resources.
In 1999, ISG Resources acquired the stock of Best Masonry & Tool Supply
("Best"), Mineral Specialties, Inc. ("Specialties"), Irvine Fly Ash, Inc.
("Irvine"), Lewis W. Osborne, Inc. ("Osborne"), United Terrazzo Supply Co., Inc.
("Terrazzo"), and Magna Wall, Inc. ("Magna Wall") and sold all of the
outstanding stock of Pneumatic.
In 2000, ISG Canada Limited, Inc. ("ISG Canada") was formed and became a
wholly-owned foreign subsidiary of ISG Resources, with fly ash operations
beginning in the second half of 2000. During 2000, ISG Resources acquired all of
the partnership interest of Don's Building Supply L.L.P. ("Don's), acquired the
stock of Palestine Concrete Tile Company, Inc. and acquired certain fixed and
intangible assets from Hanson Aggregates West, Inc. ("Hanson").
Each of the above acquisitions was accounted for under the purchase method of
accounting and, accordingly, the results of operations of each acquired company
have been included in the consolidated financial statements since the respective
date of acquisition.
These financial statements reflect the consolidated financial position and
results of operations of the Company and its wholly owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements reflect all adjustments, consisting of normal recurring
adjustments, necessary to present fairly the financial position, results of
operations and cash flows of the Company, for the respective periods presented.
The results of operations for an interim period are not necessarily indicative
of the results, which may be expected for any other interim period or for the
year as a whole.
F-47
1. Basis of Presentation (continued)
The preparation of financial statements, in conformity with accounting
principles generally accepted in the United States, requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Certain information and footnote disclosures normally included in financial
statements presented in accordance with generally accepted accounting principles
have been condensed or omitted.
The consolidated balance sheet at December 31, 2001 was derived from audited
consolidated financial statements, but does not include all disclosures required
under generally accepted accounting principles.
2. Description of Business
The Company operates two principal business segments: coal combustion product
(CCP) management and building materials manufacturing and distribution. The CCP
division purchases, removes and sells fly ash and other by-products of coal
combustion to producers and consumers of building materials and construction
related products throughout the United States. The building materials division
manufactures and distributes masonry construction materials to residential and
commercial contractors primarily in Texas, California, Georgia and Florida.
3. New Product Development Costs
New product development costs consist of scientific research and development and
market development expenditures. Expenditures of $579,909 and $516,635 for the
three months ended March 31, 2002 and March 31, 2001, respectively, were made
for research and development activities covering basic scientific research and
application of scientific advances to the development of new and improved
products and processes. Expenditures of $69,800 and $78,583 for the three months
ended March 31, 2002 and March 31, 2001, respectively, were made for market
development activities related to promising new and improved products and
processes identified during research and development activities. The Company
expenses all new product development costs as they are incurred.
4. Inventories
The Company accounts for inventory balances using the lower of cost or market
method on a first-in, first-out basis. Inventories consist of:
March 31, December 31,
2002 2001
------------ ------------
Raw Materials $ 1,148,481 $ 958,796
Finished Goods 8,818,465 7,570,180
------------ ------------
$ 9,966,946 $ 8,528,976
============ ============
F-48
5. Goodwill and Other Intangible Assets
Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets". In accordance with the guidelines of this accounting
principle, goodwill and indefinite lived intangible assets are no longer
amortized, but will be assessed for impairment on at least an annual basis.
Pursuant to SFAS No. 142, the Company completed its reassessment of previously
recognized intangible assets including evaluation of the remaining useful lives
of its intangibles. The Company believes the useful lives of its intangible
assets are appropriate.
Provided below is a reconciliation of previously reported financial statement
information to adjusted amounts that reflect the elimination of goodwill
amortization:
March 31, March 31,
2002 2001
------------- -------------
Net loss before extraordinary item:
As reported $ (2,080,264) $ (4,553,108)
Add back: Goodwill amortization, net of tax - 1,013,853
------------- -------------
Adjusted loss before extraordinary item $ (2,080,264) $ (3,539,255)
============= =============
Adjusted loss per share before extraordinary item $ (4.20) $ (7.15)
============= =============
Net income (loss):
As reported $ 20,477,627 $ (4,553,108)
Add back: Goodwill amortization, net of tax - 1,013,853
------------- -------------
Adjusted net income (loss) 20,477,627 (3,539,255)
Preferred dividends (488,145) (365,743)
------------- -------------
Adjusted net income (loss) attributable to common
shareholders $ 19,989,482 $ (3,904,998)
============= =============
Adjusted net income (loss) per share $ 40.38 $ (7.89)
============= =============
The following table as of March 31, 2002, summarizes the gross carrying value
and accumulated amortization for each major class of intangible asset based on
the Company's reassessment of previously recognized intangible assets and their
remaining amortization lives in accordance with the adoption of SFAS No. 142:
Accumulated Amortizable
Gross Carrying Amount Amortization Life
----------------------- --------------- -----------------
Supply contracts $100,227,490 $20,679,785 10 to 20 years
Patents 2,446,583 574,088 19 years
Licenses 1,000,000 475,000 40 months
------------ -----------
Total amortizable intangible assets $103,674,073 $21,728,873
============ ===========
The total intangible amortization expense for these assets for the quarters
ended March 31, 2002 and 2001 was $1.4 million and $1.7 million, respectively.
F-49
5. Goodwill and Other Intangible Assets (continued)
The estimated amortization expense for the next five fiscal years beginning
January 1, 2002 is as follows:
For the year ended December 31, 2002 $5,497,213
For the year ended December 31, 2003 5,497,213
For the year ended December 31, 2004 5,197,213
For the year ended December 31, 2005 5,197,213
For the year ended December 31, 2006 5,197,213
The transitional accounting provisions of SFAS No. 142 require the Company to
identify and measure goodwill impairment at each of its reporting units. For
purposes of this measurement, the Company identified three reporting units. The
Company is in the process of evaluating the impairment, if any, of the goodwill,
in these three reporting units. Under the transitional accounting provisions of
SFAS No. 142, the Company is required to complete Step 1 (determining and
comparing the fair value of the reporting units to the reporting units' carrying
value) of the transitional impairment test within six months of adopting SFAS
No. 142. If Step 1 of the goodwill impairment test is failed in any of the
reporting units, thereby indicating a potential impairment, the Company is
required to complete Step 2 of the test for that reporting unit as soon as
possible, but no later than the end of 2002. Under Step 2, the Company is
required to calculate the implied fair value of goodwill and compare it to the
carrying value of goodwill.
6. Long-term Debt
Long-term debt consists of the following:
March 31, December 31,
2002 2001
------------ ------------
10% Senior Subordinated Notes due 2008 $100,000,000 $100,000,000
Secured Credit Facility 64,043,900 64,643,900
CMP Note 13,676,310 13,676,310
Debt Discount (1,698,564) (1,966,086)
Laidlaw Note - 24,807,465
------------ ------------
$176,021,646 $201,161,589
============ ============
At March 31, 2002, $64,043,900 million of the Secured Credit Facility was
outstanding, with no amount being unused and available.
On January 11, 2002, an offer to retire the Laidlaw Note for $3 million in cash
to be paid on January 30, 2002 was made to American National Insurance
Corporation, the current holder of the notes. The offer was accepted by American
National and payment was made on the note on January 30, 2002. The note was
retired and a gain on extinguishment was recognized during the quarter ended
March 31, 2002 in the amount of approximately $22,560,000. The extraordinary
gain did not result in additional tax expense for the quarter because the gain
was treated as a reduction of the original purchase price of JTM for tax
purposes, which has created a permanent tax difference. As a result of the
different treatment of the gain for book and tax purposes, the extraordinary
gain was not stated net of tax effect on the accompanying statement of
operations.
F-50
7. Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 143, "Accounting for Asset Retirement
Obligations". SFAS No. 143 requires alternative accounting treatment of assets
which are in the process of retirement. The Company was required to adopt SFAS
No. 143 effective January 1, 2002. As expected, there was no significant effect
on results of operations or financial position.
In August 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". This Statement addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. This
Statement supersedes FASB Statement No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of ," and the
accounting and reporting provisions of APB Opinion No. 30, "Reporting the
Results of Operations and Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual, and Infrequently Occurring Events and
Transactions," for the disposal of a segment of a business (as previously
defined in that opinion). The Company was required to adopt SFAS No. 144
effective January 1, 2002. The Company currently has no indicators of impairment
of any of its long-lived assets. As such, adoption of this statement had no
impact on the Company's financial statements.
8. Reportable Segments
As discussed in note 2, the Company operates in two reportable segments: the CCP
division and the manufacturing products division. The CCP division consists
primarily of three operating regions that manage and market CCPs in North
America. The manufacturing products division consists of six legal entities:
Best, Osborne, Terrazzo, Magna Wall, Palestine, and Don's. The Company's two
reportable segments are managed separately based on fundamental differences in
their operations.
The Company evaluates financial performance based on earnings from operations
before interest expense, income taxes, depreciation, and amortization (EBITDA).
The Company derives a majority of its revenues from CCP sales and the chief
operating decision makers rely on EBITDA to assess the performance of the
segments and make decisions about resources to be allocated to the segments.
Accordingly, EBITDA is included in the information reported below. Certain
expenses are maintained at the Company's corporate headquarters and are not
allocated to the segments. Such expenses primarily include interest expense,
corporate overhead costs, and certain non-recurring gains and losses.
Inter-segment sales are generally accounted for at cost and are eliminated in
consolidation.
Amounts included in the "Other" column include financial information for the
Company's corporate, R&D and other administrative business units.
In adopting SFAS No. 142, the Company reevaluated the allocation of certain
intangible assets to the segments. Information for the three months ended March
31, 2001 has been restated to conform to this revised presentation.
F-51
8. Reportable Segments (continued)
Information about reportable segments, and reconciliation of such information to
the consolidated totals as of and for the three months ended March 31, 2002 and
March 31, 2001, is as follows:
Manufacturing Consolidated
CCP Products Other Total
------------------ ----------------- ------------------ -------------------
Three months ended 3/31/02:
Revenue $ 33,015,134 $11,471,686 $ 69,156 $ 44,555,976
EBITDA 5,933,595 1,152,543 (2,602,509) 4,483,629
Depreciation and
Amortization 2,712,053 185,800 73,132 2,970,985
Goodwill 44,832,605 29,015,548 - 73,848,153
Total Assets 184,363,598 48,260,959 22,013,170 254,637,727
Expenditures for PP&E 2,761,632 126,248 170,551 3,058,431
Three months ended 3/31/01:
Revenue $ 30,015,729 $11,606,355 $ 63,301 $ 41,685,385
EBITDA 4,734,279 976,288 (2,712,343) 2,998,224
Depreciation and
Amortization 3,468,665 613,925 62,196 4,144,787
Goodwill 46,626,175 30,263,536 - 76,889,711
Total Assets 189,989,829 47,400,620 18,378,397 255,768,846
Expenditures for PP&E 2,101,980 324,211 75,460 2,501,651
9. Condensed Consolidating Financial Information
ISG Resources' debt facilities are guaranteed by its domestic subsidiaries only.
ISG Canada was formed in 2000 and had minimal operations in comparison to
consolidated results. Because ISG Canada's operations increased during 2001, it
is no longer considered a "minor" subsidiary as defined under Regulation S-X
Rule 3-10. As such, the Company is required to disclose condensed consolidating
financial information in its periodic reports. ISG Resources and its
subsidiaries do not guarantee any of the debt of Industrial Services Group, Inc.
nor are any of their assets or stock pledged as collateral for such debt.
F-52
The condensed consolidating balance sheet as of March 31, 2002 is as follows:
ISG ISG Manufactured ISG
Consolidated Eliminations Inc. Resources Products Canada
------------ ----------- ------------ ------------ ----------- ----------
Assets
Current assets:
Cash and cash equivalents $ 14,422,927 $ - $ - $ 13,540,881 $ 724,837 $ 157,209
Accounts receivable 27,318,676 - - 20,439,142 6,776,577 102,957
Inventories 9,966,946 - - 4,684,274 4,960,534 322,138
Other current assets 3,854,018 - 1,202,848 2,525,083 123,922 2,165
------------ ------------ ------------ ------------ ----------- ----------
Total current assets 55,562,567 - 1,202,848 41,189,380 12,585,870 584,469
Property, plant and equipment 39,557,771 - - 32,085,385 6,659,541 812,845
Investment in ISG Resources - (23,168,903) 23,168,903 - - -
Intangible assets, net 81,945,200 - - 81,945,200 - -
Goodwill 73,848,153 - - 44,832,605 29,015,548 -
Debt issuance costs 3,630,330 - 155,125 3,475,205 - -
Investment in subsidiaries - (46,519,157) - 46,519,157 - -
Other assets 93,706 - - 93,706 - -
------------ ------------ ------------ ------------ ----------- ----------
Total assets $254,637,727 $(69,688,060) $ 24,526,876 $250,140,638 $48,260,959 $1,397,314
============ ============ ============ ============ =========== ==========
F-53
ISG ISG Manufactured ISG
Consolidated Eliminations Inc. Resources Products Canada
------------ ----------- ------------ ------------ ----------- ----------
Liabilities and shareholders'
equity
Current liabilities:
Accounts payable $ 15,314,158 $ - $ - $ 12,487,532 $ 2,826,626 $ -
Accrued expenses 9,101,377 - 1,362,313 7,656,787 80,739 1,538
Other current liabilities 2,020,559 - - 1,356,978 656,512 7,069
------------ ------------ ------------ ------------ ----------- ----------
Total current liabilities 26,436,094 - 1,362,313 21,501,297 3,563,877 8,607
Long-term debt 176,021,646 - 11,977,746 164,043,900 - -
Deferred tax liabilities 35,268,499 - - 35,268,499 - -
Payable to Parent - - (4,796,444) 4,796,444 - -
Intercompany account payable - 36,509 - 921,117 (2,070,887) 1,113,261
Other liabilities 928,227 - - 347,304 580,923 -
------------ ------------ ------------ ------------ ----------- ----------
Total liabilities 238,654,466 36,509 8,543,615 226,878,561 2,073,913 1,121,868
Series A redeemable preferred stock 7,948,781 - 7,948,781 - - -
Series B redeemable preferred stock 7,939,631 - 7,939,631 - - -
Shareholders' equity:
Common stock 4,950 (34,773,546) 4,950 34,745,050 28,496 -
Cumulative translation adjustment (93,174) 16,765 (93,174) - - (16,765)
Additional paid in capital 4,304,320 (41,049,814) 4,304,320 - 40,552,264 497,550
Retained (deficit) earnings (4,121,247) 6,082,026 (4,121,247) (11,482,973) 5,606,286 (205,339)
------------ ------------ ------------ ------------ ----------- ----------
Total shareholders' equity 94,849 (69,724,569) 94,849 23,262,077 46,187,046 275,446
------------ ------------ ------------ ------------ ----------- ----------
Total liabilities and
shareholders' equity $254,637,727 $(69,688,060) $24,526,876 $250,140,638 $48,260,959 $1,397,314
============ ============ =========== ============ =========== ==========
F-54
The condensed consolidating balance sheet as of December 31, 2001 is as follows:
ISG ISG Manufactured ISG
Consolidated Eliminations Inc. Resources Products Canada
------------ ----------- ------------ ------------ ----------- ----------
Assets
Current assets:
Cash and cash equivalents $ 17,724,156 $ - $ - $ 17,002,493 $ 477,075 $ 244,588
Accounts receivable 26,253,456 - - 20,182,923 5,875,011 195,522
Inventories 8,528,976 - - 3,923,243 4,544,632 61,101
Other current assets 2,955,103 (10,872) 731,106 2,095,752 139,117 -
------------ ------------ ------------ ------------ ----------- ----------
Total current assets 55,461,691 (10,872) 731,106 43,204,411 11,035,835 501,211
Property, plant and equipment 38,118,552 - - 30,533,497 6,745,493 839,562
Investment in ISG Resources - (24,555,023) 24,555,023 - - -
Intangible assets, net 157,177,699 - - 128,162,151 29,015,548 -
Debt issuance costs 3,855,350 - 167,875 3,687,475 - -
Investment in subsidiaries - (45,476,666) - 45,476,666 - -
Other assets 93,706 - - 93,706 - -
------------ ------------ ------------ ------------ ----------- ----------
Total assets $254,706,998 $(70,042,561) $ 25,454,004 $251,157,906 $46,796,876 $1,340,773
============ ============ ============ ============ =========== ==========
F-55
ISG ISG Manufactured ISG
Consolidated Eliminations Inc. Resources Products Canada
------------ ----------- ------------ ------------ ----------- ----------
Liabilities and shareholders'
equity (deficit)
Current liabilities:
Accounts payable $ 14,287,253 $ - $ - $ 12,411,354 $ 1,875,899 $ -
Accrued expenses 8,270,489 - 1,189,587 6,875,103 205,799 -
Other current liabilities 1,951,850 (10,872) - 1,427,299 505,484 29,939
------------ ------------ ------------ ------------ ----------- ----------
Total current liabilities 24,509,592 (10,872) 1,189,587 20,713,756 2,587,182 29,939
Long-term debt 201,161,589 - 36,517,689 164,643,900 - -
Deferred tax liabilities 35,726,641 - - 35,726,641 - -
Payable to Parent - - (4,796,444) 4,796,444 - -
Intercompany account payable - 23,201 - 27,888 (1,120,636) 1,069,547
Other liabilities 766,004 - - 638,618 127,386 -
------------ ------------ ------------ ------------ ----------- ----------
Total liabilities 262,163,826 12,329 32,910,832 226,547,247 1,593,932 1,099,486
Series A redeemable preferred stock 6,204,559 - 6,204,559 - - -
Series B redeemable preferred stock 6,195,708 - 6,195,708 - - -
Shareholders' equity (deficit):
Common stock 4,950 (34,773,546) 4,950 34,745,050 28,496 -
Cumulative translation adjustment (55,636) 16,807 (55,636) - - (16,807)
Additional paid in capital 4,304,320 (40,960,169) 4,304,320 - 40,533,259 426,910
Retained (deficit) earnings (24,110,729) 5,662,018 (24,110,729) (10,134,391) 4,641,189 (168,816)
------------ ------------ ------------ ------------ ----------- ----------
Total shareholders' equity (deficit) (19,857,095) (70,054,890) (19,857,095) 24,610,659 45,202,944 241,287
------------ ------------ ------------ ------------ ----------- ----------
Total liabilities and shareholders'
equity (deficit) $254,706,998 $(70,042,561) $ 25,454,004 $251,157,906 $46,796,876 $1,340,773
============ ============ ============ ============ =========== ==========
F-56
The condensed consolidating statement of operations for the quarter ended March
31, 2002 is as follows:
ISG ISG Manufactured ISG
Consolidated Eliminations Inc. Resources Products Canada
------------ ----------- ------------ ------------ ----------- ----------
Revenues $ 44,555,976 $ - $ - $ 32,977,756 $11,471,686 $ 106,534
Costs and expenses:
Cost of products and services,
excluding depreciation 33,684,045 - - 24,593,636 8,984,971 105,438
Depreciation and amortization 2,970,985 - - 2,760,486 185,800 24,699
Selling, general and
administrative expenses 6,079,294 - - 4,691,434 1,382,094 5,766
New product development 649,709 - - 649,709 - -
------------ ------------ ------------ ------------ ----------- ----------
43,384,033 - - 32,695,265 10,552,865 135,903
------------ ------------ ------------ ------------ ----------- ----------
Operating income (loss) 1,171,943 - - 282,491 918,821 (29,369)
Equity interest in subsidiary income - 420,467 (1,348,582) 928,115 - -
Interest expense (4,895,665) - (1,203,424) (3,682,982) (1,646) (7,613)
Other income, net 340,701 - - 292,779 47,922
------------ ------------ ------------ ------------ ----------- ----------
Income (loss) before income taxes
and extraordinary item (3,383,021) 420,467 (2,552,006) (2,179,597) 965,097 (36,982)
Income tax benefit (1,302,757) - (471,742) (831,015) - -
------------ ------------ ------------ ------------ ----------- ----------
Income (loss) before extraordinary
item (2,080,264) 420,467 (2,080,264) (1,348,582) 965,097 (36,982)
Gain on extinguishment of debt 22,557,891 - 22,557,891 - - -
------------ ------------ ------------ ------------ ----------- ----------
Net income (loss) 20,477,627 420,467 20,477,627 (1,348,582) 965,097 (36,982)
Preferred dividends (488,145) - (488,145) - - -
------------ ------------ ------------ ------------ ----------- ----------
Net income attributable to
common shareholders $ 19,989,482 $ 420,467 $ 19,989,482 $ (1,348,582) $ 965,097 $ (36,982)
============ ============ ============ ============ =========== ==========
F-57
The condensed consolidating statement of operations for the quarter ended March
31, 2001 is as follows:
ISG ISG Manufactured ISG
Consolidated Eliminations Inc. Resources Products Canada
------------ ----------- ------------ ------------ ----------- ----------
Revenues $ 41,685,385 $ (88,809) $ - $ 29,974,419 $11,606,355 $ 193,420
Costs and expenses:
Cost of products and services
sold, excluding depreciation 32,421,351 - - 22,990,252 9,252,547 178,552
Depreciation and amortization 4,144,787 - - 3,514,777 613,925 16,085
Selling, general, and
administrative expenses 5,852,402 - - 4,457,152 1,386,473 8,777
New product development 595,218 - - 595,218 - -
------------ ------------ ------------ ------------ ----------- ----------
43,013,758 - - 31,557,399 11,252,945 203,414
------------ ------------ ------------ ------------ ----------- ----------
Operating income (loss) (1,328,373) (88,809) - (1,582,980) 353,410 (9,994)
Equity interest in subsidiary
income - 3,355,909 (3,710,917) 355,008 - -
Interest expense (5,752,096) - (1,385,182) (4,366,914) - -
Other income, net 181,810 88,809 - 81,409 11,592 -
------------ ------------ ------------ ------------ ----------- ----------
Income (loss) before income tax (6,898,659) 3,355,909 (5,096,099) (5,513,477) 365,002 (9,994)
Income tax benefit (2,345,551) - (542,991) (1,802,560) - -
------------ ------------ ------------ ------------ ----------- ----------
Net income (loss) (4,553,108) 3,355,909 (4,553,108) (3,710,917) 365,002 (9,994)
Preferred dividends (365,743) - (365,743) - - -
------------ ------------ ------------ ------------ ----------- ----------
Net income (loss) attributable
to common shareholders $ (4,918,851) $ 3,355,909 $ (4,918,851) $ (3,710,917) $ 365,002 $ (9,994)
============ ============ ============ ============ =========== ==========
F-58
The condensed consolidating statement of cash flow information for the quarter
ended March 31, 2002 is as follows:
ISG ISG Manufactured ISG
Consolidated Eliminations Inc. Resources Products Canada
------------ ----------- ------------ ------------ ----------- ----------
Net cash provided by (used in)
operating activities $ 398,666 $ 72,027 $ - $ 252,177 $ 278,715 $ (204,253)
Net cash provided by (used in)
investing activities (3,020,931) (34,448) - (3,072,363) (30,953) 116,833
Net cash used in financing
activities (641,426) - - (641,426) - -
Effect of exchange rate changes
on cash and cash equivalents (37,538) (37,579) - - - 41
------------ ------------ ------------ ------------ ----------- ----------
Net increase (decrease) in cash
and cash equivalents (3,301,229) - - (3,461,612) 247,762 (87,379)
Cash and cash equivalents at
beginning of period 17,724,156 - - 17,002,493 477,075 244,588
------------ ------------ ------------ ------------ ----------- ----------
Cash and cash equivalents at
end of period $ 14,422,927 $ - $ - $ 13,540,881 $ 724,837 $ 157,209
============ ============ ============ ============ =========== ==========
F-59
The condensed consolidating statement of cash flow information for the quarter
ended March 31, 2001 is as follows:
ISG ISG Manufactured ISG
Consolidated Eliminations Inc. Resources Products Canada
------------ ----------- ------------ ------------ ----------- ----------
Net cash provided by (used in)
operating activities $ 3,756,866 $ (84,394) $ - $ 3,708,395 $ 242,577 $ (109,712)
Net cash provided by (used in)
investing activities (2,466,869) 69,242 - (2,315,856) (527,205) 306,950
Effect of exchange rate changes
on cash and cash equivalents 12,131 15,152 - - (3,021)
------------ ------------ ------------ ------------ ----------- ----------
Net increase (decrease) in cash
and cash equivalents 1,302,128 - - 1,392,539 (284,628) 194,217
Cash and cash equivalents at
beginning of period 6,986,725 - - 5,954,992 1,054,079 (22,346)
------------ ------------ ------------ ------------ ----------- ----------
Cash and cash equivalents at
end of period $ 8,288,853 $ - $ - $ 7,347,531 $ 769,451 $ 171,871
============ ============ ============ ============ =========== ==========
F-60
HEADWATERS INCORPORATED
INTRODUCTION TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION
(dollar and share amounts in thousands)
On July 15, 2002, Headwaters signed a definitive agreement to acquire 100% of
the stock of Industrial Services Group, Inc. ("ISG"). ISG is headquartered in
Salt Lake City and is engaged primarily in the management of long-term contracts
for coal combustion products and the distribution of related building materials
and construction products throughout the United States through its wholly-owned
subsidiary, ISG Resources, Inc. Total consideration at closing is currently
estimated to be approximately $246,000 consisting of cash of approximately
$31,000, the issuance of 2,000 shares of Headwaters common stock with an assumed
value of $30,000, cash requirements of approximately $181,000 to retire ISG
debt, and direct costs to be incurred by Headwaters to consummate the
acquisition of approximately $4,000. In order to obtain the cash necessary to
acquire ISG, including the retirement of the ISG debt, the pro forma financial
information assumes Headwaters will issue $220,000 of new debt consisting of a
loan with an assumed five-year term and a floating interest rate. Headwaters
expects to incur approximately $7,000 of debt issuance costs to place the new
debt, which is assumed to have an effective interest rate of 7.0%.
The value of Headwaters' 2,000 shares of common stock to be issued will be
determined using the average market price of Headwaters' stock over a five-day
period, consisting of the day the terms of acquisition are agreed to and two
days prior to and two days subsequent to that day. For purposes of the pro forma
information, a price of $15.00 per share was used, which is an estimate of what
that amount could be.
The ISG acquisition will be accounted for using the purchase method of
accounting as required by Statement of Financial Accounting Standards No.141,
"Business Combinations." Assets acquired and liabilities assumed will be
recorded at their estimated fair values as of the actual acquisition date. For
purposes of the accompanying pro forma information, approximately $109,000 of
the assumed purchase price was allocated to identifiable intangible assets
consisting primarily of contracts with an estimated combined useful life of 20
years. The remaining purchase price not attributable to the tangible and
identifiable intangible assets will be allocated to goodwill. Because the
acquisition has not yet been consummated, the actual consideration to be paid
can not yet be determined. Additionally, the actual allocation of the amount of
such consideration will likely differ from that reflected in these unaudited pro
forma condensed combined financial statements after final valuations and other
procedures have been completed.
The following pro forma combined balance sheet gives effect to the acquisition
of ISG as if it had been completed as of March 31, 2002 and combines the
historical March 31, 2002 balance sheets for both Headwaters and ISG. The pro
forma combined statements of operations for the year ended September 30, 2001
and the six months ended March 31, 2002 give effect to the acquisition as if it
had occurred on October 1, 2000. The pro forma combined statement of operations
for the year ended September 30, 2001 combines Headwaters' historical results
for the year ended September 30, 2001 with ISG's historical results for the year
ended December 31, 2001. The pro forma combined statement of operations for the
six months ended March 31, 2002 combines both Headwaters' and ISG's historical
results for that six-month period. Accordingly, ISG's historical results for the
three-month period from October 1, 2001 to December 31, 2001 are included in
both the pro forma combined statement of operations for the year ended September
30, 2001 and the pro forma combined statement of operations for the six months
ended March 31, 2002.
The pro forma combined financial statements are presented for illustrative
purposes only. Such information does not purport to be indicative of the results
of operations or financial position which actually would have resulted had the
acquisition occurred on the dates indicated, nor is it indicative of the results
that may be expected in future periods. The pro forma adjustments are based upon
information and assumptions available at the time of filing this Form 8-K. The
pro forma information should be read in conjunction with the accompanying notes
thereto.
F-61
HEADWATERS INCORPORATED
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
as of March 31, 2002
Historical
------------------------------- Pro Forma Pro Forma
(thousands of dollars) Headwaters ISG Adjustments Combined
- ------------------------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 5,099 $ 14,423 $ (215,637) A
220,000 B
(7,000) C $ 16,885
Short-term investments 13,113 13,113
Trade receivables, net 17,525 26,445 43,970
Inventories 600 9,967 10,567
Other current assets 1,608 4,728 6,336
--------- --------- ---------- ---------
Total current assets 37,945 55,563 (2,637) 90,871
--------- --------- ---------- ---------
Property, plant and equipment, net of accumulated depreciation 2,787 39,558 42,345
Other assets:
Notes and accrued interest receivable 5,588 5,588
Deferred income taxes 4,036 (4,036) D -
Intangible assets, net of accumulated amortization 10,345 81,945 27,055 E 119,345
Goodwill 1,016 73,848 (73,848) F
106,592 G 107,608
Other assets 3,290 3,724 7,000 C
(3,630) H
(407) I 9,977
--------- --------- ---------- ---------
Total other assets 24,275 159,517 58,726 242,518
--------- --------- ---------- ---------
Total assets $ 65,007 $ 254,638 $ 56,089 $ 375,734
========= ========= ========== =========
(continued)
See accompanying notes.
F-62
HEADWATERS INCORPORATED
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET, continued
as of March 31, 2002
Historical
------------------------------- Pro Forma Pro Forma
(thousands of dollars) Headwaters ISG Adjustments Combined
- ------------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 3,149 $ 15,314 $ 18,463
Accrued personnel costs 2,575 1,902 4,477
Other accrued liabilities 6,562 9,220 15,782
Unamortized portion of non-refundable license fees 1,179 1,179
Short-term borrowings 90 90
--------- --------- ---------- ---------
Total current liabilities 13,555 26,436 39,991
--------- --------- ---------- ---------
Long-term liabilities:
Long-term debt 107 176,021 $ (176,021) J
220,000 B 220,107
Deferred income taxes 35,269 (4,036) D
2,130 K 33,363
Other long-term liabilities 117 928 1,045
Unamortized portion of non-refundable license fees 6,001 6,001
--------- --------- ---------- ---------
Total long-term liabilities 6,225 212,218 42,073 260,516
--------- --------- ---------- ---------
Total liabilities 19,780 238,654 42,073 300,507
--------- --------- ---------- ---------
Redeemable preferred stock 15,889 (15,889) L -
Stockholders' equity:
Common stock 25 5 2 M
(5) N 27
Capital in excess of par value 87,158 4,304 29,998 M
(4,304) N 117,156
Accumulated deficit (38,518) (4,121) 4,121 O (38,518)
Other, primarily treasury stock (3,438) (93) 93 P (3,438)
--------- --------- ---------- ---------
Total stockholders' equity 45,227 95 29,905 75,227
--------- --------- ---------- ---------
Total liabilities and stockholders' equity $ 65,007 $ 254,638 $ 56,089 $ 375,734
========= ========= ========== =========
See accompanying notes.
F-63
HEADWATERS INCORPORATED
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
For the year ended September 30, 2001
Historical
-------------------------------------- Pro Forma Pro Forma
(thousands of dollars and shares, except per share amounts) Headwaters ISG Adjustments Combined
- ------------------------------------------------------------------------------------------------------------------------------------
(Year ended (Year ended
September 30, 2001) December 31, 2001)
Revenue:
License fees $ 20,765 $ 20,765
Product sales 22,407 $ 184,161 206,568
Service revenues 990 32,070 33,060
Other 1,302 1,302
--------- --------- -------- ----------
Total revenue 45,464 216,231 261,695
--------- --------- -------- ----------
Operating costs and expenses:
Cost of products sold, excluding depreciation 14,524 135,810 150,334
Cost of services sold and other operating costs,
excluding depreciation 2,858 22,417 25,275
Depreciation and amortization 261 15,810 $ 266 Q
(4,041) R 12,296
Selling, general and administrative 5,790 25,019 30,809
Research and development 2,400 2,308 4,708
--------- --------- -------- ----------
Total operating costs and expenses 25,833 201,364 (3,775) 223,422
--------- --------- -------- ----------
Operating income 19,631 14,867 3,775 38,273
--------- --------- -------- ----------
Other income (expense):
Interest and net investment income 726 455 1,181
Interest expense (224) (22,948) 22,232 S
(15,400) T (16,340)
Losses on notes receivable and equity investments (6,265) (6,265)
Other, net 600 21 621
--------- --------- -------- ----------
Total other expense, net (5,163) (22,472) 6,832 (20,803)
--------- --------- -------- ----------
Income (loss) before income taxes 14,468 (7,605) 10,607 17,470
Income tax (provision) benefit 7,049 1,428 (2,626) U 5,851
--------- --------- -------- ----------
Net income (loss) $ 21,517 $ (6,177) $ 7,980 $ 23,320
========= ========= ======== ==========
Basic net income per common share $ 0.94 $ 0.94
========= ==========
Diluted net income per common share $ 0.87 $ 0.88
========= ==========
Weighted-average shares outstanding:
Basic 22,787 2,000 V 24,787
========= ======== ==========
Diluted 24,637 2,000 V 26,637
========= ======== ==========
See accompanying notes.
F-64
HEADWATERS INCORPORATED
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME
For the six months ended March 31, 2002
Historical
-------------------------------------- Pro Forma Pro Forma
(thousands of dollars and shares, except per share amounts) Headwaters ISG Adjustments Combined
- ------------------------------------------------------------------------------------------------------------------------------------
Revenue:
License fees $ 12,441 $ 12,441
Product sales 27,287 $ 81,641 108,928
Service revenues 3,199 14,136 17,335
Other 751 751
--------- ---------- --------- ---------
Total revenue 43,678 95,777 139,455
--------- ---------- --------- ---------
Operating costs and expenses:
Cost of products sold, excluding depreciation 18,869 59,861 78,730
Cost of services sold and other operating costs,
excluding depreciation 4,659 10,417 15,076
Depreciation and amortization 549 6,890 $ 133 Q
(1,002) R 6,570
Selling, general and administrative 3,786 13,036 16,822
Research and development 1,198 1,303 2,501
--------- ---------- --------- ---------
Total operating costs and expenses 29,061 91,507 (869) 119,699
--------- ---------- --------- ---------
Operating income 14,617 4,270 869 19,756
--------- ---------- --------- ---------
Other income (expense):
Interest and net investment income 2 161 163
Interest expense (56) (10,691) 10,603 S
(7,700) T (7,844)
Other, net 2,093 154 2,247
--------- ---------- --------- ---------
Total other income (expense), net 2,039 (10,376) 2,903 (5,434)
--------- ---------- --------- ---------
Income (loss) before income taxes and extraordinary item 16,656 (6,106) 3,772 14,322
Income tax (provision) benefit (6,470) 1,818 (1,108) U (5,760)
--------- ---------- --------- ---------
Net income (loss) before extraordinary item $ 10,186 $ (4,288) $ 2,664 $ 8,562
========= ========== ========= =========
Basic net income per common share $ 0.43 $ 0.33
========= =========
Diluted net income per common share $ 0.40 $ 0.31
========= =========
Weighted-average shares outstanding:
Basic 23,758 2,000 V 25,758
========= ========= =========
Diluted 25,334 2,000 V 27,334
========= ========= =========
See accompanying notes.
F-65
HEADWATERS INCORPORATED
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS
(dollar and share amounts in thousands, except per share amounts)
1. Basis of Presentation
The pro forma condensed combined financial statements included herein have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and certain footnote disclosures normally
included in financial statements prepared in accordance with accounting
principles generally accepted in the United States have been condensed or
omitted pursuant to such rules and regulations; however, management believes
that the disclosures are adequate to make the information presented not
misleading.
2. Probable Acquisition of Industrial Services Group, Inc.
On July 15, 2002, Headwaters signed a definitive agreement to acquire 100% of
the stock of Industrial Services Group, Inc. ("ISG"). ISG is headquartered in
Salt Lake City and is engaged primarily in the management of long-term contracts
for coal combustion products and the distribution of related building materials
and construction products throughout the United States through its wholly-owned
subsidiary, ISG Resources, Inc. Total consideration at closing is currently
estimated to be approximately $246,000 consisting of cash of approximately
$31,000, the issuance of 2,000 shares of Headwaters common stock with an assumed
value of $30,000, cash requirements of approximately $181,000 to retire ISG
debt, and direct costs to be incurred by Headwaters to consummate the
acquisition of approximately $4,000. In order to obtain the cash necessary to
acquire ISG, including the retirement of the ISG debt, the pro forma financial
information assumes Headwaters will issue $220,000 of new debt consisting of a
loan with an assumed five-year term and a floating interest rate. Headwaters
expects to incur approximately $7,000 of debt issuance costs to place the new
debt, which is assumed to have an effective interest rate of 7.0%. The following
table sets forth the estimated consideration to be exchanged at closing to
acquire ISG:
Estimated consideration at closing:
Fair value of Headwaters stock (2,000 shares
at $15.00 per share) $ 30,000
Cash paid to ISG stockholders 31,000
Cash paid to retire ISG debt 181,044
Estimated direct costs 4,000
--------
Total $246,044
========
The value of Headwaters' 2,000 shares of common stock to be issued will be
determined using the average market price of Headwaters' stock over a five-day
period, consisting of the day the terms of acquisition are agreed to and two
days prior to and two days subsequent to that day. For purposes of the pro forma
information, a price of $15.00 per share was used, which is an estimate of what
that amount could be.
The following table sets forth a preliminary allocation of the total assumed
estimated consideration to the tangible and intangible assets to be acquired and
liabilities to be assumed:
F-66
Purchase price allocation:
Tangible assets acquired, net of liabilities assumed $ 67,851
Intangible assets acquired:
Contracts 106,000
Patents 3,000
Goodwill 106,592
Deferred income taxes, primarily related to intangible assets (37,399)
--------
Total estimated consideration at closing $246,044
========
The ISG acquisition will be accounted for using the purchase method of
accounting as required by Statement of Financial Accounting Standards No.141,
"Business Combinations." Assets acquired and liabilities assumed will be
recorded at their estimated fair values as of the actual acquisition date. For
purposes of the accompanying pro forma information, approximately $109,000 of
the assumed purchase price was allocated to identifiable intangible assets
consisting primarily of contracts with an estimated combined average useful life
of 20 years. The remaining purchase price not attributable to the tangible and
identifiable intangible assets will be allocated to goodwill. Because the
acquisition has not yet been consummated, the actual consideration to be paid
can not yet be determined. Additionally, the actual allocation of the amount of
such consideration will likely differ from that reflected in these unaudited pro
forma condensed combined financial statements after final valuations and other
procedures have been completed.
Due to the provisions of Statement of Financial Accounting Standards No.142,
"Goodwill and Other Intangible Assets," which require that amortization of
goodwill be discontinued, amortization of the new goodwill has not been
reflected in the pro forma information for any period presented. Also, the
goodwill amortization recorded in ISG's results of operations has been
eliminated. Accordingly, there is no goodwill amortization reflected in the pro
forma information for any period presented.
3. Pro Forma Financial Statements and Adjustments
The following pro forma combined balance sheet gives effect to the acquisition
of ISG as if it had been completed as of March 31, 2002 and combines the
historical March 31, 2002 balance sheets for both Headwaters and ISG. The pro
forma combined statements of operations for the year ended September 30, 2001
and the six months ended March 31, 2002 give effect to the acquisition as if it
had occurred on October 1, 2000. The pro forma combined statement of operations
for the year ended September 30, 2001 combines Headwaters' historical results
for the year ended September 30, 2001 with ISG's historical results for the year
ended December 31, 2001. The pro forma combined statement of operations for the
six months ended March 31, 2002 combines both Headwaters' and ISG's historical
results for that six-month period. Accordingly, ISG's historical results for the
three-month period from October 1, 2001 to December 31, 2001 are included in
both the pro forma combined statement of operations for the year ended September
30, 2001 and the pro forma combined statement of operations for the six months
ended March 31, 2002. ISG revenues and net loss for the three-month period ended
December 31, 2001 which were included in both of these periods were $51,221 and
$2,208, respectively.
The pro forma combined financial statements are presented for illustrative
purposes only. Such information does not purport to be indicative of the results
of operations or financial position which actually would have resulted had the
acquisition occurred on the dates indicated, nor is it indicative of the results
that may be expected in future periods. The pro forma adjustments are based upon
information and assumptions available at the time of filing this Form 8-K.
F-67
The pro forma condensed combined financial statements give effect to the
following pro forma adjustments:
A Cash component of purchase price to be paid at closing,
including transaction costs, ($34,593) plus cash to be paid to
retire ISG's long-term debt, including applicable premiums
($181,044).
B New issuance of long-term debt by Headwaters.
C Estimate of debt issuance costs related to new issuance of
long-term debt by Headwaters.
D Reclassification of Headwaters' non-current deferred tax asset
against ISG's larger non-current deferred tax liability in
order to reflect a single non-current deferred tax balance.
E Adjustment to increase identifiable intangible assets of ISG
to estimated fair value at acquisition date.
F Elimination of ISG's historical goodwill.
G Adjustment to record new goodwill, based on assumed fair
values of ISG assets to be acquired and liabilities to be
assumed.
H Elimination of ISG's debt issuance costs related to debt to be
retired as of acquisition date.
I Reclassification of direct costs incurred by Headwaters
related to acquisition of ISG.
J Elimination of ISG's long-term debt which will be assumed and
retired by Headwaters at acquisition date.
K Adjustment to record additional deferred income taxes on
increased value of identifiable intangible assets of ISG.
L Elimination of ISG's redeemable preferred stock, which will be
redeemed as part of the acquisition.
M Headwaters common stock to be issued at closing.
N Elimination of ISG's capital accounts.
O Elimination of ISG's accumulated deficit.
P Elimination of ISG's other equity.
Q Amortization on increase in recorded value of ISG's
identifiable intangible assets, calculated using the
straight-line method and a 20-year life.
F-68
R Elimination of ISG's historical non-deductible goodwill
amortization. There is no amortization of the assumed
goodwill, due to the implementation requirements of SFAS 142.
S Elimination of ISG's interest on long-term debt to be retired
by Headwaters at closing and on additional ISG debt that was
extinguished in January 2002.
T Adjustment to record interest on new $220,000 long-term debt
issuance by Headwaters, calculated using an assumed 7.0%
effective interest rate, which includes the amortization of
estimated debt issuance costs of $7,000. The effect of a 1/8%
change in the interest rate would be $275 per year.
U Income tax effect of P&L-related pro forma adjustments,
calculated using a combined effective federal and state income
tax rate of approximately 40%.
V The pro forma combined net income per share amounts are based
on (i) Headwaters' historical weighted-average number of
common shares outstanding, plus (ii) the shares to be issued
at the acquisition date (2,000).
F-69