FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
[ [ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From to
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Commission File Number 0-20979
INDUSTRIAL SERVICES OF AMERICA, INC.
------------------------------------
(Exact Name of Registrant as specified in its Charter)
Florida 59-0712746
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(State or other jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
7100 Grade Lane, PO Box 32428
-----------------------------
Louisville, Kentucky 40232
--------------------------
(Address of principal executive offices)
(502) 368-1661
--------------
(Registrant's Telephone Number, Including Area Code)
Check 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
past 12 months (or for shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements
for the past 90 days. YES X NO
------- -------
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of May 13, 1997: 1,929,600.
---------
1
<PAGE>
INDUSTRIAL SERVICES OF AMERICA, INC.
INDEX
Page No.
Part I Financial Information
Condensed Balanced Sheet
March 31, 1997 and December 31, 1996 3
Condensed Statement of Operations
three months ended March 31, 1997
and 1996 5
Condensed Statement of Cash Flows-
three months ended March 31, 1997
and 1996 6
Notes to Condensed Consolidated
financial statements 7
Management's Discussion and Analysis
of Financial Condition and Results
of Operations 8
Part II Other Information
Item 5 10
2
<PAGE>
PART I - FINANCIAL INFORMATION
INDUSTRIAL SERVICES OF AMERICA, INC.
CONDENSED BALANCE SHEETS
(UNAUDITED)
ASSETS
------
<TABLE>
<CAPTION>
March 31, December 31,
--------- ------------
1997 1996
---- ----
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 74,436 $1,371,435
Receivables:
Trade, net of allowance for
doubtful accounts of $16,000
in 1997 and 1996 3,814,003 3,300,728
Related parties 156,126 100,360
Income taxes refunds 1,203,900 1,203,900
Other 7,500 10,599
---------- ----------
Total receivables 5,181,529 4,615,587
Net investment in sales-type leases 6,502 8,435
Inventories 545,861 433,103
Deferred income taxes 45,400 45,400
Other 146,266 158,385
---------- ----------
Total current assets 5,999,994 6,632,345
Net property and equipment 2,713,445 2,704,192
Investment in joint venture 0 15,684
Other assets 330,503 87,247
---------- ----------
TOTAL ASSETS $9,043,942 $9,439,468
========== ==========
</TABLE>
See accompanying notes
3
<PAGE>
INDUSTRIAL SERVICES OF AMERICA, INC.
CONDENSED BALANCE SHEETS
CONTINUED
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31, December 31,
--------- ------------
1997 1996
---- ----
<S> <C> <C>
CURRENT LIABILITIES
Current maturities of long-term debt $ 8,238 $ 611,774
Payables:
Accounts payable 4,144,036 4,790,710
Income taxes payable 65,000 0
Affiliated company 164,818 179,778
---------- ----------
Total payables 4,382,092 5,582,262
Other 178,695 82,019
---------- ----------
Total current liabilities 4,560,787 5,664,281
Long-term debt 605,356 5,356
Deferred income taxes 161,000 161,000
STOCKHOLDERS' EQUITY
Common stock, $.01 par value,
10,000,000 shares authorized;
1,957,500 shares issued as of
March 31, 1997 19,575 19,575
Additional paid-in capital 1,405,000 1,405,000
Retained earnings 2,300,224 2,192,256
Treasury stock, at cost, 27,900 shares (8,000) (8,000)
---------- ----------
Total stockholders' equity 3,716,799 3,608,831
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $9,043,942 $9,439,468
========== ==========
</TABLE>
See accompanying notes
4
<PAGE>
INDUSTRIAL SERVICES OF AMERICA, INC.
CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
<TABLE>
1997 1996
---- ----
<S> <C> <C>
REVENUE
Net equipment and scrap sales $2,079,680 $2,647,253
Service and consulting revenue 6,834,424 5,018,917
Rental income 139,217 93,393
---------- ----------
Total revenue 9,053,321 7,759,563
COST AND EXPENSES
Costs of sales:
Equipment and scrap 1,041,218 1,483,621
Service and consulting 6,546,995 4,768,218
---------- ----------
Total cost of sales 7,588,213 6,251,839
Direct expenses applicable to
rental income 31,435 22,160
Selling, general and administrative
expenses 1,277,849 1,068,027
---------- ----------
Total cost and expenses 8,897,497 7,342,026
---------- ----------
Income from operations 155,824 417,537
Other income, net 17,144 15,271
---------- ----------
Income before provision for
income taxes 172,968 432,808
Provision for income taxes 65,000 164,000
---------- ----------
Net income $ 107,968 $ 268,808
========== ==========
EARNINGS PER COMMON SHARE
Primary $0.06 $0.14
===== =====
Fully diluted $0.06 $0.14
===== =====
WEIGHTED AVERAGE SHARES
Primary 1,963,813 1,894,586
========= =========
Fully diluted 1,952,175 1,897,342
========= =========
</TABLE>
See accompanying notes
5
<PAGE>
INDUSTRIAL SERVICES OF AMERICA, INC.
CONDENSED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1997 AND 1996
(UNAUDITED)
<TABLE>
1997 1996
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 107,968 $ 268,808
Adjustments to reconcile net income
to net cash used in operating
activities:
Depreciation and amortization 137,723 109,582
Increase (decrease) in cash
resulting from changes in:
Receivables (565,942) (156,054)
Inventories (112,758) (19,467)
Other assets 5,698 (64,901)
Accounts payable (646,674) (191,498)
Income taxes payable 65,000 23,970
Other current liabilities 81,716 (102,475)
---------- ----------
Net cash used in operating activities (927,269) (132,035)
INVESTING ACTIVITIES
Payments/deposits for property and
equipment (368,127) (118,153)
---------- ----------
Net cash used in investing activities (368,127) (118,153)
FINANCING ACTIVITIES
Payments on long-term debt (3,536) (5,322)
Proceeds from sales-type leases 1,933 7,318
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Net cash provided by financing activities (1,603) 1,996
---------- ----------
Net (decrease) increase in cash and cash
equivalents (1,296,999) (248,192)
Cash and cash equivalents at
beginning of period 1,371,435 507,889
---------- ----------
CASH AND CASH EQUIVALENTS AT
END OF PERIOD $ 74,436 $ 259,697
========== ==========
</TABLE>
See accompanying notes
6
<PAGE>
INDUSTRIAL SERVICES OF AMERICA, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
1. Basis of Presentation
---------------------
The accompanying unaudited financial statements have been
prepared in accordance with generally accepted accounting
principles for interim financial reporting. They do not include
all information and footnotes required by generally accepted
accounting principles for complete financial statements. The
information furnished includes all adjustments which are, in the
opinion of management, necessary to present fairly the
Registrant's financial position as of March 31, 1997 and the
results of its operations and changes in cash flows for the
periods ended March 31, 1997 and 1996. Results of operations for
the period ended March 31, 1997 are not necessarily indicative of
the results that may be expected for the entire year. Additional
information, including the audited 1996 Financial Statements and
the Summary of Significant Accounting Policies, is included in
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1996 on file with the Securities and Exchange
Commission.
2. Inventories
-----------
Inventories consist of the following:
<TABLE>
March 31, December 31,
--------- ------------
1997 1996
---- ----
<S> <C> <C>
Equipment and parts $129,010 $ 84,858
Scrap materials 416,851 348,245
-------- --------
Total inventories $545,861 $433,103
======== ========
</TABLE>
3. Commitments
-----------
The Registrant has purchase agreements with Industrial Hydraulics
for a GC-K 100 Baler and a H-L 800 shear/baler/logger. As of
March 31, 1997, deposits made toward this equipment totaled
$221,151. Remaining commitments relating to these purchase
agreements, as of March 31, 1997, total $818,660.
4. Subsequent Event
----------------
Subsequent to March 31, 1997, the Registrant refinanced certain
debt. Under the refinance agreement this debt matures in June
1998. Therefore, as of March 31, 1997, debt related to the
refinance agreement is classified as long-term.
7
<PAGE>
MANGEMENT'S DISCUSSTION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Liquidity and Capital Resources
- -------------------------------
As of March 31, 1997 the Registrant held cash and cash
equivalents of $74,436.
The Registrant derives its revenues from a variety of
sources, including customer services, equipment sales, consulting
fees and from its scrap metal and recycling operations. The
scrap metal and recycling operations comprised approximately 85%
and 60% of the Registrant's income before provision for income
taxes for the quarters ended March 31, 1997 and 1996
respectively.
The Registrant currently maintains a working capital line of
credit with the Mid-America Bank of Louisville and Trust Company
(the "Bank") in the amount of $2,000,000. Outstanding principal
under this credit facility (the "Credit Facility") bears interest
based at prime rate plus a fee of .005. The maturity date under
this Credit Facility is June 30, 1998. As of March 31, 1997,
approximately $600,000 was outstanding under this Credit
Facility.
Results of Operations
- ---------------------
The following table presents, for the periods indicated, the
percentage relationship which certain captioned items in the
Registrant's Statements of Operations bear to total revenues and
other pertinent data:
<TABLE>
Quarter ended March 31,
-----------------------
1997 1996
---- ----
<S> <C> <C>
Statements of Operations Data:
Total Revenue.................. 100.0% 100.0%
Cost of Sales.................. 83.9% 80.6%
Direct expenses applicable to
rental income.................. 00.3% 00.3%
Selling, general and administrative
expenses....................... 14.1% 13.8%
Income from operations......... 01.7% 05.4%
</TABLE>
Quarter ended March 31, 1997 compared to quarter ended March 31,
- ----------------------------------------------------------------
1996
- ----
Total revenue increased 17% from $7,759,563 in 1996 to
$9,053,321 in 1997. This increase in total revenue is the result
of (i) CWS sales increasing 36% from $5,018,917 in 1996 to
$6,834,424 in 1997 and (ii) an increase in volume related to the
scrap recycling operations and corrugated paper recycling
operations, which offset the decrease in market prices in 1997 as
compared to 1996. Rental income increased 49% from $93,393 in
1996 to $139,217 in 1997 due to an increase in the number of
equipment units leased by the Registrant to customers. Net
equipment and scrap sales decreased 21% from $2,647,253 in 1996
to $2,079,680 in 1997.
8
<PAGE>
Cost of sales increased 21% from $6,251,839 in 1996 to
$7,588,213 in 1997. As a percentage of total revenue, these
costs were 81% and 84% in 1996 and 1997, respectively. This
increase was primarily related to CWS costs increasing 37% from
$4,768,218 in 1996 to $6,546,995 in 1997. Equipment and scrap
cost of sales decreased 30% from $1,483,621 in 1996 to $1,041,218
in 1997.
Direct expenses applicable to rental income increased 42%
from $22,160 in 1996 to $31,435 in 1997, primarily due to the
increase in the units of equipment leased by the Registrant to
customers. As a percentage of rental income, these costs were
24% and 23% in 1996 and 1997, respectively.
Selling, general and administrative expenses increased 20%
from $1,068,027 in 1996 to $1,277,849 in 1997. However, as a
percentage of total revenue, selling, general and administrative
expenses remained constant at 14% in 1996 and 1997. Depreciation
expense increased 26% from $109,582 in 1996 to $137,723 in 1997
due to the purchase of new operational and rental fleet equipment
totaling $146,976. Interest expense increased 27% from $11,039
in 1996 to $14,018 in 1997 due to increased financing related to
the purchase of new equipment.
Expenses to related parties increased 4% from $121,624 in
1996 to $126,850 in 1997. The commissions expense decreased 42%
from $76,624 in 1996 to $44,350 in 1997. Rent expense increased
83% from $45,000 in 1996 to $82,500 in 1997, primarily due to the
Registrant renting additional properties from K & R due to the
continuing growth of business.
Financial Condition at March 31, 1997 Compared to December 31,
- --------------------------------------------------------------
1996
- ----
Accounts receivable-trade increased $513,275 from $3,300,728
as of December 31, 1996 to $3,814,003 as of March 31, 1997. The
increase in accounts receivable-trade was due to higher volumes
related to the scrap recycling operations, corrugated paper
recycling operations, CWS operations and WESSCO operations.
Accounts payable-trade decreased $646,674 from $4,790,710 as
of December 31, 1996 to $4,144,036 as of March 31, 1997.
Working Capital increased $471,143 from $968,064 as of
December 31, 1996 to $1,439,207 as of March 31, 1997. This
increase was primarily due to inventories increasing $112,758
from $443,103 as of December 31, 1996 to $545,861 as of March 31,
1997 and current maturities of long-term debt of $600,000 are
being reclassified as long-term debt. This reclassification is
based on a new credit agreement that expires June 30, 1998.
9
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
- ----------------------------
None
Item 2. Changes in Securities
- --------------------------------
None
Item 3. Defaults upon Senior Securities
- ------------------------------------------
None
Item 4. Submission of Matters to a Vote of Security Holders
- --------------------------------------------------------------
None
Item 5. Other Information
- ----------------------------
On March 24, 1997 K & R Corporation ("K&R"), MGM Services, Inc.
("MGM") and the Registrant entered into a binding letter
agreement (the "MGM Letter Agreement") pursuant to which K&R
would acquire all of the outstanding common stock of MGM for
three hundred fifty thousand (350,000) shares of the Registrant's
common stock beneficially owned by K&R, subject to adjustment.
Subsequent to the execution of the MGM Letter Agreement, the
parties thereto have agreed in principal that the Registrant, not
K&R, shall acquire no more than ninety (90%) of MGM's outstanding
common stock and shall buy-out the remaining shares of MGM for a
cash payment which has yet to be agreed upon. This transaction
is subject to formal documentation and is scheduled to close
prior to July 1, 1997.
Effective May 1, 1997, Registrant and MGM entered into a
Management Agreement (the "Management Agreement") whereby
Registrant, for a one year term (subject to earlier termination,
for among other reasons, at the election of MGM after the failure
of its shareholders to approve the transaction described in the
above paragraph), shall manage and be responsible for the day-to-
day business operations of MGM and its subsidiaries including,
without limitation, the management of all accounts receivable and
accounts payable. In consideration for Registrants services, MGM
shall pay Registrant a management fee (the "Management Fee") as
follows: (i) a monthly fee in the sum of twelve thousand
($12,000) dollars for May, June and July; and (ii) for each month
thereafter, the sum of ten thousand ($10,000) dollars plus an
amount equal to fifty (50%) percent of MGM's total operating
income for such month. For the purpose of the Management
Agreement, "total operating income" means MGM's total income less
cost of goods, services, operating expenses, general expenses and
principal payments for all capital lease payments.
On April 25, 1997, Registrant entered into a binding letter
agreement with TMG Enterprises, Inc. Fetra Investments, Mr. John
Fellonneau and Mr. Mark Trakhtenberg (the "Sellers") to purchase
certain assets, other than real property, which includes a
ferrous and non-ferrous facility owned and operated by Sellers.
K&R, simultaneously, will purchase real property and improvements
10
<PAGE>
(the "Real Property") from the Sellers. K&R is intending on
leasing the Real Property to Registrant upon the consummation of
the Real Property transaction. The terms of such lease shall be
negotiated by Registrant and K&R at that time. As consideration
for the purchase of these assets, Registrant shall pay Sellers
two million one hundred thousand ($2,100,000) dollars based on a
combination of shares of Registrant's common stock and cash.
Item 6. Exhibits and Reports on Form 8-K
- -------------------------------------------
(a) None
(b) None
11
<PAGE>
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, thereunto duly authorized.
INDUSTRIAL SERVICES OF AMERICA, INC.
DATE: May 15, 1997 /s/ Harry Kletter
------------------------------------
President and Chief Executive Officer
(Principal Executive and Financial
Officer)
12
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 74,436
<SECURITIES> 0
<RECEIVABLES> 5,181,529
<ALLOWANCES> 16,000
<INVENTORY> 545,861
<CURRENT-ASSETS> 5,999,994
<PP&E> 4,079,113
<DEPRECIATION> 1,365,668
<TOTAL-ASSETS> 9,043,942
<CURRENT-LIABILITIES> 4,560,787
<BONDS> 613,594
0
0
<COMMON> 19,575
<OTHER-SE> 3,697,224
<TOTAL-LIABILITY-AND-EQUITY> 9,043,942
<SALES> 8,914,104
<TOTAL-REVENUES> 9,053,321
<CGS> 7,588,213
<TOTAL-COSTS> 8,897,497
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,018
<INCOME-PRETAX> 172,968
<INCOME-TAX> 65,000
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 107,968
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
