10-Q 1 a10qending63002.txt ISG RESOURCES FORM 10Q 06/30/02 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2002 -------------------------- or [ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ----------- ----------- Commission File Number: ----------- ISG Resources, Inc. ------------------------------------ (Exact name of registrant as specified in its charter) Utah 87-0619697 --------------------------------- ------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 136 East South Temple, Suite 1300, Salt Lake City, Utah 84111 ------------------------------------------------------------------ (Address of principal executive offices) (Zip Code) (801) 236-9700 -------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) [ X ] Yes [ ] No, and (2) has been subject to such filing requirements for the past 90 days [ X ] Yes [ ] No. Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. As of July 25, 2002 : Classes of Common Stock Number of shares outstanding -------------------------------------- ---------------------------------- Common Stock, no par value 100 ISG Resources, Inc. ------------ INDEX TO FORM 10-Q PART I -- FINANCIAL INFORMATION

See accompanying notes.

See accompanying notes. ISG Resources, Inc. and Subsidiaries Unaudited Consolidated Statement of Comprehensive Income ----------------------------------- Three months ended June 30 2002 2001 ----------------------------------- Net income $2,070,288 $703,573 Other comprehensive income net of tax: Foreign currency translation adjustment 27,231 13,230 ----------------------------------- Comprehensive income $2,097,519 $716,803 =================================== See accompanying notes. ISG Resources, Inc. and Subsidiaries Unaudited Consolidated Statement of Comprehensive Income (Loss) -------------------------------- Six months ended June 30 2002 2001 -------------------------------- Net income (loss) $721,706 $(3,007,344) Other comprehensive income (loss) net of tax: Foreign currency translation adjustment (10,307) 25,361 -------------------------------- Comprehensive income (loss) $711,399 $(2,981,983) ================================ See accompanying notes.

See accompanying notes. ISG RESOURCES, INC. NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation ISG Resources, Inc., a Utah corporation (the "Company"), is a wholly owned subsidiary of Industrial Services Group, Inc. ("ISG"). ISG was formed in September 1997 and, through merger and acquistion, acquired the following entities: JTM Industries, Inc. ("JTM"); 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"); Fly Ash Products, Inc. ("Fly Ash Products); 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"); Magna Wall, Inc. ("Magna Wall"); Don's Building Supply L.L.P. ("Don's); Palestine Concrete Tile Company, Inc. and certain associated real property (collectively, "Palestine"); and certain fixed and intangible assets from Hanson Aggregates West, Inc. ("Hanson"). In 2000, ISG Canada Limited, Inc. ("ISG Canada") was formed and became a wholly owned foreign subsidiary of the Company, with fly ash operations beginning in the second half of 2000. 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. 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 accompanying unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes in the Company's Form 10-K for the fiscal year ended December 31, 2001. 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 $414,085 and $510,883 for the three months ended June 30, 2002 and June 30, 2001, respectively, and expenditures of $993,994 and $1,027,518 for the six months ended June 30, 2002 and June 30, 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 $56,236 and $58,717 for the three months ended June 30, 2002 and June 30, 2001, respectively, and expenditures of $126,036 and $137,300 for the six months ended June 30, 2002 and June 30, 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: June 30, December 31, 2002 2001 --------------------- --------------------- Raw Materials $ 999,119 $ 958,796 Finished Goods 7,661,122 7,570,180 --------------------- --------------------- $ 8,660,241 $ 8,528,976 ===================== ===================== 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:

The following table as of June 30, 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:

The total intangible amortization expense for these assets for the six months ended June 30, 2002 and 2001 was $2.8 million and $3.2 million, respectively. 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. The Company completed Step 1 described above, which indicated a possible impairment. The Company is therefore required to complete Step 2, however, as a result of the pending merger of the Company as described further in note 9 below, the completion of Step 2 in the process is still pending. 6. Long-term Debt Long-term debt consists of the following: June 30, December 31, 2002 2001 ---------------- -------------------- 10% Senior Subordinated Notes due 2008 $100,000,000 $ 100,000,000 Secured Credit Facility 63,573,900 64,643,900 ---------------- -------------------- $163,573,900 $ 164,643,900 ================ ==================== At June 30, 2002, $63,573,900 million of the Secured Credit Facility was outstanding, with no amount being unused and available. 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 and six months ended June 30, 2001 has been restated to conform to this revised presentation. Information about reportable segments, and reconciliation of such information to the consolidated totals as of and for the three months and six months ended June 30, 2002 and June 30, 2001, is as follows:

9. Subsequent Events On July 16, 2002, ISG, the parent company of ISG Resources, signed a definitive agreement with Headwaters, Inc. to be acquired by Headwaters in exchange for consideration which is currently estimated to be 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 and ISG Resources debt, and direct costs to be incurred by Headwaters to consummate the acquisition of approximately $4,000,000. It is anticipated that the transaction will close during the year 2002. Further information regarding the transaction is available in documents filed with the Securities and Exchange Commission on Form 8-K, on July 18, 2002. After the merger, Headwaters, Inc. will allocate goodwill among the reporting units based on fair market value at the close of the merger. On July 2, 2002, as part of an amendment to an employment agreement, and in connection with the aforementioned merger agreement, an agreement was reached with an employee who had earlier been granted a phantom stock right. The agreement is to waive the phantom stock right contingent upon the successful completion of the merger. 10. Condensed Consolidating Financial Information The Company's debt facilities are guaranteed by 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.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of financial condition and results of operations should be read in conjunction with the Unaudited Condensed Consolidated Financial Statements and Notes thereto included elsewhere herein. General ISG Resources, Inc., a Utah corporation (the "Company"), is a wholly owned subsidiary of Industrial Services Group, Inc. ("ISG"). ISG was formed in September 1997 and, through merger and acquistion, acquired the following entities: JTM Industries, Inc. ("JTM"); 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"); Fly Ash Products, Inc. ("Fly Ash Products); 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"); Magna Wall, Inc. ("Magna Wall"); Don's Building Supply L.L.P. ("Don's); Palestine Concrete Tile Company, Inc. and certain associated real property (collectively, "Palestine"); and certain fixed and intangible assets from Hanson Aggregates West, Inc. ("Hanson"). In 2000, ISG Canada Limited, Inc. ("ISG Canada") was formed and became a wholly owned foreign subsidiary of the Company, with fly ash operations beginning in the second half of 2000. The Acquisitions were accounted for under the purchase method of accounting and, accordingly, the results of operations of the respective companies have been included in the consolidated financial statements since the respective acquisition dates. Accordingly, the financial condition and results of operations of the Company after the Acquisitions are not directly comparable to the historical financial condition or results of operations. The Company operates two principal business segments: coal combustion product (CCP) management and building materials manufacturing and distribution. The CCP division purchases, removes and sells fly ash and other by-products of coal combustion to producers and consumers of building materials and construction related products throughout the United States and Canada. The building materials division manufactures and distributes masonry construction materials to residential and commercial contractors primarily in Texas, California, Georgia and Florida. The Company's revenues are subject to a pattern of seasonal fluctuation, concurrent with the construction industry. Because the Company's products are used as raw materials in other products, the amount of revenue generated during the year generally depends upon a number of factors, including the level of road and other construction using concrete, weather conditions affecting the level of construction, general economic conditions, and other factors beyond the Company's control. Results of Operations Three Months Ended June 30, 2002 compared to Three Months Ended June 30, 2001 Revenues. Revenues were $62.1 million in the second quarter of 2002, representing an increase of $2.0 million or 3.4%, as compared to revenues of $60.1 million in the second quarter of 2001. Product revenues increased to $54.7 million in the second quarter of 2002 from $51.4 million in the second quarter of 2001, representing an increase of $3.3 million or 6.4%. Service revenues decreased to $7.4 million in the second quarter of 2002 from $8.7 million in the second quarter of 2001, representing a decrease of $1.3 million or 14.6%. The increase in product revenues results from 1) increased revenue in the California market due to new terminals opening; and 2) other overall revenue increases from new customers in certain markets. The decrease in service revenues is due primarily to a decrease in construction services during the second quarter of 2002 as compared to the second quarter of 2001. Cost of Product Revenues, Excluding Depreciation. Cost of product revenues, excluding depreciation, was $39.8 million in the second quarter of 2002, representing an increase of $1.4 million or 3.7%, as compared to cost of product revenues, excluding depreciation, of $38.4 million in the second quarter of 2001. The increase in the cost of product revenues is as a result of an increase in volume noted above. As a percentage of product revenues, cost of product revenues, excluding depreciation, decreased to 72.7% in the second quarter of 2002 from 74.6% in the second quarter of 2001. This increase in product margins is primarily due to higher margins related to higher quality ash production, with an increased focus on enhancing margins, together with manufactured product division margin increases as a result of better pricing and product cost control. Cost of Service Revenues, Excluding Depreciation. Cost of service revenues, excluding depreciation remained relatively consistent at $5.7 million in the second quarter of 2002, as compared to cost of service revenues, excluding depreciation, of $5.6 million in the second quarter of 2001. Costs remained almost identical as a result of costs in service revenues being mostly fixed in nature as opposed to variable costs. As a percentage of service revenues, cost of service revenues, excluding depreciation, increased to 77.2% in the second quarter of 2002 from 64.6% in the second quarter of 2001. This decline in margin is primarily the result of continuing fixed costs as applied against declining revenues. Depreciation and Amortization. Depreciation and amortization was $2.9 million in the second quarter of 2002, representing a decrease of $1.0 million or 24.3%, as compared to depreciation and amortization of $3.9 million in the second quarter of 2001. This decrease resulted primarily from the adoption of SFAS No. 142 as described below. See also the notes to the financial statement. Selling, General and Administrative Expenses. Selling, general and administrative expenses ("SG&A") were $6.4 million in the second quarter of 2002, representing an increase of $0.4 million or 6.3%, as compared to SG&A expenses of $6.0 million in the second quarter of 2001. SG&A expenses as a percent to total revenues remained relatively consistent at 10.0% in 2002 and 10.3% in 2001. New Product Development. New product development costs consist of scientific research and development and market development expenditures. Expenditures for scientific research and development in the second quarter of 2002 were $0.4 million compared to $0.5 million in the second quarter of 2001. Expenditures for new market development in the second quarter of 2002 and 2001 remained fairly constant at $0.06 million. The continuation of new product development costs demonstrates the Company's commitment to developing and marketing value added products that utilize CCPs and related materials. Interest Expense. Interest expense decreased to $3.6 million in the second quarter of 2002 from $4.0 million in the second quarter of 2001, primarily as a result of a decrease in interest rates on the Company's lines of credit and the decrease in outstanding indebtedness on the line of credit. The average interest rate on the Company's lines of credit during the second quarter of 2002 was 5.4% as compared to 8.7% during the same quarter of 2001. Income Taxes. Income tax expense was $1.4 million in the second quarter of 2002, representing an increase of $0.4 million as compared to income tax expense of $1.0 million in the second quarter of 2001. This increase in income tax expense reflects an increase in the income before taxes in the second quarter of 2002, primarily resulting from decreased interest expense, increased revenues, and a decrease in the cost of product revenues. Net Income. As a result of the factors discussed above, net income increased to $2.1 million in the second quarter of 2002 from a $0.7 million net income in the second quarter of 2001. Six Months Ended June 30, 2002 compared to Six Months Ended June 30, 2001 Revenues. Revenues were $106.7 million in the first six months of 2002, representing an increase of $4.9 million or 4.8%, as compared to revenues of $101.8 million in the first six months of 2001. Product revenues increased to $92.6 million in the first six months of 2002 from $85.2 million in the first six months of 2001, representing an increase of $7.4 million or 8.7%. Service revenues decreased to $14.1 million in the first six months of 2002 from $16.6 million in the first six months of 2001, representing a decrease of $2.5 million or 15.1%. The increase in product revenue results from 1) increased revenue in the California market due to new terminals opening; and 2) other overall revenue increases from new customers in certain markets. The decrease in service revenues is due primarily to a decrease in construction services during the first six months of 2002 as compared to the same period of 2001. Cost of Product Revenues, Excluding Depreciation. Cost of product revenues, excluding depreciation, was $68.5 million in the first six months of 2002, representing an increase of $3.1 million or 4.8%, as compared to cost of product revenues, excluding depreciation, of $65.4 million in the first six months of 2001. The increase in the cost of product revenues is as a result of an increase in volume noted above. As a percentage of product revenues, cost of product revenues, excluding depreciation, decreased to 74.0% in the first six months of 2002 from 76.7% in the first six months of 2001. This increase in product margins is primarily due to higher margins related to higher quality ash production, with an increased focus on enhancing margins, together with manufactured product division margin increases as a result of better pricing and product cost control. Cost of Service Revenues, Excluding Depreciation. Cost of service revenues, excluding depreciation was $10.7 million in the first six months of 2002, representing a decrease of $0.3 million or 3.1%, as compared to cost of service revenues, excluding depreciation, of $11.0 million in the first six months of 2001. This decrease is due primarily to a decrease in revenue as discussed above. As a percentage of service revenues, cost of service revenues, excluding depreciation, increased to 75.6% in the first six months of 2002 from 66.2% in the first six months of 2001. This decline in margin is primarily the result of continuing fixed costs as applied against declining revenues. Depreciation and Amortization. Depreciation and amortization was $5.9 million in the first six months of 2002, representing a decrease of $2.1 million or 26.4%, as compared to depreciation and amortization of $8.0 million in the first six months of 2001. This decrease resulted primarily from the adoption of SFAS No. 142 as described below. See also the notes to the financial statement. Selling, General and Administrative Expenses. Selling, general and administrative expenses ("SG&A") were $12.5 million in the first six months of 2002, representing an increase of $0.6 million or 5.1%, as compared to SG&A expenses of $11.9 million in the first six months of 2001. SG&A expenses as a percent to total revenues were 11.7% in 2001 and 2002. New Product Development. New product development costs consist of scientific research and development and market development expenditures. Expenditures for scientific research and development in the first six months of 2002 were $1.1 million compared to $1.0 million in the first six months of 2001. Expenditures for new market development in the first six months of 2002 and 2001 also remained fairly constant at $0.1 million. The continuation of new product development costs demonstrates the Company's commitment to developing and marketing value added products that utilize CCPs and related materials. Interest Expense. Interest expense decreased to $7.3 million in the first six months of 2002 from $8.4 million in the first six months of 2001, primarily as a result of a decrease in interest rates on the Company's lines of credit and the decrease in outstanding indebtedness on the line of credit. The average interest rate on the Company's lines of credit during the first six months of 2002 was 5.3% as compared to 9.5% during the first six months of 2001. Income Taxes. Income tax expense was $0.6 million in the first six months of 2002, representing a decrease of $1.4 million as compared to income tax benefit of $0.8 million in the first six months of 2001. This increase in income tax expense reflects a increase in the income before taxes in the first six months of 2002, primarily resulting from decreased interest expense, increased revenues, and a decrease in the cost of product revenues. Net Income. As a result of the factors discussed above, net income increased to $.7 million in the first six months of 2002 from a $3.0 million net loss in the first six months of 2001. Liquidity and Capital Resources The Company financed the 1998 and 1999 Acquisitions through the issuance of $100.0 million, 10% Senior Subordinated Notes due in 2008 and borrowings on its Secured Credit Facility (as subsequently amended and restated). The Company financed the acquisition of Palestine by obtaining a $15.0 million increase in the Secured Credit Facility on May 26, 2000 (discussed below) and receiving an equity contribution of approximately $9.7 million from ISG on April 19, 2000. Operating and capital expenditures have been financed primarily through cash flow from operations and borrowings under the Secured Credit Facility. The Secured Credit Facility has been amended a number of times. On May 26, 2000, the Secured Credit Facility was amended and restated to, among other things, increase the borrowings available to the Company from $50.0 million to $65.0 million. On August 8, 2000, the amended and restated secured credit agreement dated May 26, 2000 was amended in order to modify certain debt covenants contained in the credit agreement. Primarily, a minimum consolidated Earnings Before Interest Expense, Income Tax Expense, Depreciation Expense, and Amortization Expense (EBITDA) debt covenant was added. The minimum consolidated EBITDA covenant requires the Company to maintain a minimum EBITDA amount as of the last day of every fiscal quarter through June 30, 2003 at levels set forth in the agreement. On March 30, 2001, the amended and restated secured credit agreement dated May 26, 2000 and subsequently amended on August 8, 2000, was amended in order to modify certain debt covenants contained in the agreement. The amended and restated secured credit facility continues to require the Company to not exceed a maximum leverage ratio, to not drop below a minimum interest coverage ratio, to not drop below a minimum consolidated EBITDA level, and to comply with certain other financial and non-financial covenants. 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. As further detailed in Subsequent Events below, a definitive agreement was reached on July 16, 2002 between ISG, the parent of ISG Resources, to merge with Headwaters, Inc. The debt of ISG and ISG Resources will be retired upon the successful closing of the merger. At June 30, 2002, the Company had $10.9 million in cash and cash equivalents and $63.6 million of the Secured Credit Facility was outstanding, with no amount being unused and available. The Company had working capital of approximately $31 million, which is the same amount of working capital at December 31, 2001. The Company intends to make capital expenditures over the next several years principally to construct storage, loading and processing facilities for CCPs and to replace existing capital equipment. During the six months ended June 30, 2002, capital expenditures amounted to approximately $5.5 million, as $2.5 million was expended in the three months ended June 30, 2002. The Company typically expends cash in the first four or five months of the year as terminals and other facilities are built and replaced in preparation for the construction season beginning in May. The Company expects that capital expenditures made in the ordinary course of business will be funded by cash flow from operations. The Company anticipates that its principal use of cash will be for working capital requirements, debt service requirements and capital expenditures. Based upon current and anticipated levels of operations, the Company believes that its cash flow from operations will be adequate to meet its anticipated requirements for working capital, capital expenditures and interest payments for the next several years. There can be no assurance, however, that cash flow from operations will be sufficient to service the Company's debt and the Company may be required to refinance all or a portion of its existing debt or to obtain additional financing. These increased borrowings may result in higher interest payments. There can be no assurance that any such refinancing would be possible or that any additional financing could be obtained. The inability to obtain additional financing could have a material adverse effect on the Company. Critical Accounting Policies The Company has not had significant changes to its accounting policies with the exception of the adoption of SFAS No. 142, "Goodwill and Other Intangible Assets," and SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." Under SFAS No. 142, the Company no longer amortizes its goodwill. However, the Company is required to assess goodwill for impairment at least annually at a level within the Company referred to as a reporting unit, as defined by SFAS No. 142. Impairment of goodwill is deemed to exist when the carrying amount of the goodwill for the reporting unit exceeds its implied fair value. In order to determine if such impairment exists, the Company is required to complete Step 1 (determining and comparing the fair value of the reporting units to the reporting units' carrying value) impairment test. Note that in the year of adoption, the Company is required to complete Step 1 within six months of adopting SFAS No. 142. If Step 1 of the goodwill impairment test is failed in any of the Company's reporting units, thereby indicating a potential impairment, the Company is required to complete Step 2 of the impairment test as soon as possible. In the year of adoption, this is required to be completed no later than the end of the year of adoption (December 31, 2002 for the Company). Under Step 2, the Company is required to calculate the implied fair value of goodwill and compare it to the carrying value of goodwill. The Company has completed Step 1 of the transitional accounting provisions of SFAS No. 142 as required above, and determined that a possible impairment existed. However, due to the transaction between Headwaters, Inc. and Industrial Services Group, Inc. (the parent company of ISG Resources), the completion of Step 2 of the process is still pending. After the merger, Headwaters, Inc. will allocate goodwill among the reporting units based on fair market value at the close of the merger. Under SFAS No. 144, the Company evaluates its long-lived assets other than goodwill (amortizable intangible assets, property, plant and equipment, and other such assets) for impairment. In order to perform this evaluation, the Company groups its long-lived assets with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Consistent with SFAS No. 121, the Company continues to consider whether indicators of impairment of long-lived assets are present. If indicators exist, the Company determines whether the sum of the estimated undiscounted future cash flows attributable to the assets in question are less than their carrying amount. If so, the Company recognizes an impairment loss based on the excess of the carrying amount of the assets over their respective fair values. The Company currently has no indicators of impairment of any of its long-lived assets. 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 financial statements. Subsequent Events On July 16, 2002, ISG, the parent company of ISG Resources, signed a definitive agreement with Headwaters, Inc. to be acquired by Headwaters in exchange for consideration which is currently estimated to be 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 and ISG Resources debt, and direct costs to be incurred by Headwaters to consummate the acquisition of approximately $4,000,000. It is anticipated that the transaction will close during the year 2002. Further information regarding the transaction is available in documents filed with the Securities and Exchange Commission on Form 8-K, on July 18, 2002. ISG Resources, Inc. ------------- PART II - OTHER INFORMATION Item 1. Legal Proceedings None Item 2. Changes in Securities and Use of Proceeds None Item 3. Defaults upon Senior Securities None Item 4. Submission of Matters to a Vote of Security Holders None Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Item Exhibit No. Item Title No. (2) Plan of acquisition, reorganization, arrangement, liquidation or succession: Incorporated by reference to Form 8-K filed July 18, 2002 (3) Articles of Incorporation and By-Laws: Not Applicable (4) Instruments defining the rights of security holders, including indentures: Not Applicable (10) Material Contracts: Not Applicable (11) Statement regarding computation of per share earnings is not required because the relevant computations can be clearly determined from the material contained in the Financial Statements included herein. (15) Letter re unaudited interim financial information: Not Applicable (18) Letter re change in accounting principles: Not Applicable (19) Report furnished to security holders: Not Applicable (22) Published report regarding matters submitted to vote of security holders: Not Applicable (23) Consents of expert and counsel: Not Applicable (99) Other Exhibits: Incorporated by reference to Form 8-K filed July 18, 2002 99.1 Certification of CEO 99.2 Certification of CFO (b) Reports on Form 8-K A report on Form 8-K was filed on July 18, 2002 to announce the acquisition of Industrial Services Group, Inc., the parent company of ISG Resources by Headwaters, Inc. The items reported on that Form 8-K included: Item 2 - Probable Acquisition by Headwaters Inc. and Item 7 - Financial Statements and Exhibits. The financial statements and exhibits included: 1. Audited financial statements of Industrial Services Group, Inc. and Subsidiaries for the years ended December 31, 2001, 2000, and 1999 2. Unaudited financial statements of Industrial Services Group, Inc. and subsidiaries for the quarter ended March 31, 2002 3. Unaudited pro forma financial information for Headwaters Inc. with combined financial statements for the quarter and six months ended March 31, 2002 and the year ended September 30, 2001. 4. Exhibit 10.75 - Agreement and plan of merger between Headwaters and Industrial Services Group, Inc. dated July 15, 2002 5. Exhibit 10.75.1 - Form of Registration Rights Agreement between Headwaters and Stockholders of Industrial Services Group, to be dated as of Closing. 6. Exhibit 99 - Press release announcing signing of a definitive agreement with Industrial Services Group, Inc. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: August 9, 2002 ISG RESOURCES, INC. /s/ J. I. Everest, II ---------------------------------------- J. I. Everest, II Chief Financial Officer and Treasurer (As both a duly authorized officer of the Company and as principal financial officer of the Company)

ISG RESOURCES INC 10-Q