FORM 10-Q
United States
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 June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition Period From _______ to ________
Commission File Number 0-20979
INDUSTRIAL SERVICES OF AMERICA, INC.
(Exact Name of Registrant as specified in its Charter)
Florida 59-0712746
(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 such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO _____
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of August 11, 1998: 1,929,600.
<PAGE>
INDUSTRIAL SERVICES OF AMERICA, INC.
INDEX
Page No.
Part I Financial Information
Item 1. Financial Statements
Condensed Balanced Sheet
June 30, 1998 and December 31, 1997 3
Condensed Statement of Operations
three months ended June 30, 1998 5
and 1997
Condensed Statement of Operations
six months ended June 30, 1998 6
and 1997
Condensed Statement of Cash Flows-
six months ended June 30, 1998 7
and 1997
Notes to Condensed Financial
Statements 8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 9
Part II Other Information
Item 4. Submission of Matters to a Vote of Security Holders 11
Item 6. Exhibits and Reports on Form 8-K 11
<PAGE>
Part I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
INDUSTRIAL SERVICES OF AMERICA, INC.
CONDENSED BALANCE SHEETS
(UNAUDITED)
ASSETS
June 30, December 31,
1998 1997
Current assets
Cash and cash equivalents $ 522,358 $495,834
Accounts receivables - trade (after
allowance 6,658,655 5,028,769
for doubtful accounts of $16,000 in 1998
and 1997)
Accounts receivable - related parties 34,667 34,667
Income taxes refund receivable 163,123 164,737
Net investment in sales-type leases 38,656 40,154
Inventories 2,618,609 2,511,826
Deferred income taxes 18,200 18,200
Other 224,599 195,993
------- -------
Total current assets 10,278,867 8,490,180
Net property and equipment 5,038,804 3,642,712
Other Assets
Non-compete agreements, net 400,000 450,000
Intangibles (net of accumulated
amortization of 746,668 773,333
$53,332 and $26,667 in 1998 and 1997,
respectively)
Net investment in sales type leases 129,086 192,154
Other assets 313,652 344,645
------- -------
1,589,406 1,760,132
--------- ---------
$16,907,077 $13,893,024
=========== ===========
See accompanying notes to financial statements.
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INDUSTRIAL SERVICES OF AMERICA, INC.
CONDENSED BALANCE SHEETS
CONTINUED
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
June 30, December 31,
1998 1997
Current liabilities
Notes payable to bank $ $ 1,800,000
-
Notes payable - 800,000
Current maturities of long-term debt 258,972 45,479
Accounts payable 8,669,874 6,176,433
Affiliated companies payable - 23,000
Other current liabilities 333,947 140,818
------- -------
Total current liabilities 9,262,793 8,985,730
--------- ---------
Long-term liabilities
Long-term debt 3,193,707 759,877
Deferred income taxes 257,700 257,700
------- -------
3,451,407 1,017,577
Stockholders' equity
Common stock, $.01 par value,
10,000,000 shares authorized; 1,957,500
shares issued as of June 30, 1998 19,575 19,575
Additional paid-in capital 1,548,750 1,548,750
Retained earnings 2,632,552 2,329,392
Treasury stock, at cost, 27,900 shares (8,000) (8,000)
------ ------
Total stockholders' equity 4,192,877 3,889,717
--------- ---------
$16,907,077 $13,893,024
=========== ===========
See accompanying notes to financial statements.
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INDUSTRIAL SERVICES OF AMERICA, INC.
CONDENSED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
1998 1997
---- ----
Revenue
Recycling $ 5,140,721 $1,681,023
Equipment sales, service and leasing 328,008 345,898
Management services 11,313,976 8,249,376
---------- ---------
Total revenue 16,782,705 10,276,297
Cost of goods sold
Recycling 4,659,418 1,374,131
Equipment sales, service and leasing 183,373 139,083
Management services 10,738,421 7,840,868
---------- ---------
Total cost of sales 15,581,212 9,354,082
---------- ---------
Gross margin 1,201,493 922,215
--------- -------
Selling, general and administrative 918,151 913,345
------- -------
Income from operations 283,342 8,870
Other income (expenses) (41,788) 1,050
------- -----
Income before income taxes 241,554 9,920
Provision for income taxes 91,000 5,000
------ -----
Net income $ 150,554 $ 4,920
============ ===========
Earnings per share $0.08 $0.01
===== =====
Earnings per share, assuming dilution $0.08 $0.01
===== =====
See accompanying notes to financial statements.
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INDUSTRIAL SERVICES OF AMERICA, INC.
CONDENSED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
1998 1997
---- ----
Revenue
Recycling $ 10,008,914 $3,274,576
Equipment sales, service and leasing 751,860 704,752
Management services 20,181,055 15,414,313
---------- ----------
Total revenue 30,941,829 19,393,641
Cost of goods sold
Recycling 9,104,648 2,608,645
Equipment sales, service and leasing 412,065 303,935
Management services 19,115,929 14,570,470
---------- ----------
Total cost of sales 28,632,642 17,483,050
---------- ----------
Gross margin 2,309,187 1,910,591
Selling, general and administrative 1,798,361 1,765,026
--------- ---------
Income from operations 510,826 145,565
Other income (expenses) (22,666) 37,325
Income before income taxes 488,160 182,890
Provision for income taxes 185,000 70,000
------- ------
Net income $ 303,160 $ 112,890
============ ==========
Earnings per share $0.16 $0.06
===== =====
Earnings per share, assuming dilution $0.15 $0.06
===== =====
See accompanying notes to financial statements.
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INDUSTRIAL SERVICES OF AMERICA, INC.
CONDENSED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
1998 1997
---- ----
Operating activities
Net Income $ 303,160 $ 112,890
Adjustments to reconcile net income to
net cash from operating activities:
Depreciation and amortization 401,713 271,897
Change in assets and liabilities
Receivables (1,629,886) 131,885
Inventories (106,783) (204,599)
Other assets 4,001 55,446
Accounts payable 2,493,441 930,478
Other current liabilities 170,129 119,271
------- -------
Net cash from operating activities 1,635,775 1,417,268
Investing activities
Investment in affiliate - (179,778)
Purchase of investments - (134,316)
Purchases of property and equipment (1,721,140) (475,368)
Deposits - (310,415)
---------- --------
Net cash from investing activities (1,721,140) (1,099,877)
Financing activities
Net borrowings from note payable to bank (850,000) -
Proceeds from issuance of long-term debt 900,000 150,000
Payments on long-term debt (2,677) (6,754)
Proceeds from sales-type leases 64,566 4,537
------ -----
Net cash from financing activities 111,889 147,783
------- -------
Net change in cash 26,524 465,174
Cash beginning of period 495,834 1,371,435
------- ---------
Cash at end of period $ 522,358 $ 1,836,609
=========== ===========
See accompanying notes to financial statements.
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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 June 30, 1998 and the results of its
operations and changes in cash flows for the periods ended June 30, 1998
and 1997. Results of operations for the period ended June 30, 1998 are not
necessarily indicative of the results that may be expected for the entire
year. Additional information, including the audited 1997 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, 1997 on file with the Securities and Exchange Commission.
2. Acquisition
Effective June 1, 1998, the Registrant acquired the assets of a scrap
metal recycling facility in Seymour, Indiana. The acquisition of assets
included the purchase of equipment for $900,000. The purchase price was
paid in two installments of $250,000 and $650,000 on June 1, 1998 and July
31, 1998, respectively. The purchase price was financed by a five year
bank loan bearing interest at a rate of 8.58%. For further information,
see the Registrant's Form 8-K filed on August 3, 1998 with the Securities
and Exchange Commission.
3. Inventories
Inventories consist of the following:
June 30, December 31,
1998 1997
Equipment and parts $ 690,814 $ 752,099
Ferrous materials 1,124,595 756,940
Non-ferrous materials 803,200 1,002,787
----------- -----------
Total inventories $ 2,618,609 $ 2,511,826
=========== ===========
4. Subsequent Event
Subsequent to June 30, 1998, the Registrant refinanced certain debt. Under
the refinancing agreements, the debt matures at various points through
June, 2003. Therefore, as of June 30, 1998, debt related to the
refinancing agreements is classified as long-term.
On July 28, 1998, the Registrant entered into an equipment lease and scrap
brokerage agreement with Southern Salvage Scrap Metals (SSSM). The
Registrant will receive monthly rentals of $7,000. Additionally, the
Registrant will market SSSM's scrap materials in exchange for brokerage
fees.
<PAGE>
ITEM 2. MANGEMENT'S DISCUSSTION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Liquidity and Capital Resources
As of June 30, 1998 the Registrant held cash and cash equivalents of
$522,358.
The Registrant derives its revenues from a variety of sources,
including management services, equipment sales and leasing, consulting
fees and from its recycling operations. The recycling operations comprised
approximately 32.3% and 16.9% of the Registrant's revenues for the
six-month period ended June 30, 1998 and 1997, 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 bears interest based at prime rate plus .5% The
maturity date under this credit facility is June 30, 2000. As of June
30, 1998, $950,000 was outstanding under this credit facility. This
line of credit in the amount of $2,000,000 was refinanced.
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:
Six-months ended June 30,
1998 1997
Statements of Operations Data:
Total Revenue...................... 100.0% 100.0%
Cost of Goods Sold................. 92.5% 90.1%
Selling, general and administrative
expenses........................... 5.8% 9.1%
Income from operations............. 1.7% 0.8%
Six months ended June 30, 1998 compared to Six months ended June 30, 1997
Total revenue increased 59.5% from $19,393,641 in 1997 to $30,941,829
in 1998. This increase in total revenue is the result of (i) CWS sales
increasing 30.9% from $15,414,313 in 1997 to $20,181,055 in 1998 and (ii)
an increase of 206% related to the recycling operations of $10,008,914 in
1998 as compared to $3,274,576 in 1997 primarily due to the acquisition of
The Metal Center in the third quarter of 1997.
The 1998 total cost of sales was $28,632,642, increasing $11,149,592
or 63.8% compared to 1997. The cost of goods sold in management services
increased 31.2% versus an increase in recycling costs of goods sold of
249%. This deviation resulted from a declining economy in the Asian
market. Consequently, commodity prices in the United States have decreased
over the past year, thereby tightening our gross margin.
The gross margin was $2,309,187 representing an increase of $398,596
in 1998 or 20.9% from 1997. The gross margin was 7.5% of revenue, which
was 2.4% lower than 1997. A reduced gross margin percentage of 0.3% was
experienced in management services due to the addition of certain fixed
fee contracts which experienced store location growth during the period
along with the assimilation of the shared savings contracts.
Selling, general and administrative expenses increased 1.9% from
$1,765,026 in 1997 to $1,798,361 in 1998. However, as a percentage of
total revenue, selling, general and administrative expenses decreased from
9.1% in 1997 to 5.8% in 1998.
Quarter ended June 30, 1998 compared to quarter ended June 30, 1997
Total revenue increased 63.3% from $10,276,297 in 1997 to $16,782,705
in 1998. This increase in total revenue is the result of (i) CWS sales
increasing 37.1% from $8,249,376 in 1997 to $11,313,976 in 1998 and (ii)
an increase of 206% related to the recycling operations of $5,140,721 in
1998 as compared to $1,681,023 in 1997 primarily due to the acquisition of
The Metal Center in the third quarter of 1997.
The 1998 total cost of sales was $15,581,212 increasing $6,227,130 or
66.6% compared to 1997. The cost of goods sold in management services
increased 37.0% versus an increase in recycling costs of goods sold of
239%. This deviation resulted from a declining economy in the Asian
market. Consequently, commodity prices in the United States have decreased
over the past year, thereby tightening our gross margin.
The gross margin was $1,201,493 representing an increase of $279,278
in 1998 or 30.3% from 1997. The gross margin was 7.2% of revenue, which
was 1.8% lower than 1997. A reduced gross margin percentage of 8.9% was
experienced in recycling due to the declining commodity prices.
Selling, general and administrative expenses remained consistent in
1998 compared to 1997. However, as a percentage of total revenue, selling,
general and administrative expenses decreased from 8.9% in 1997 to 5.5% in
1998.
Financial Condition at June 30, 1998 Compared to December 31, 1997
Accounts receivable-trade increased 32.4% or $1,629,886 from
$5,028,769 as of December 31, 1997 to $6,658,655 at June 30, 1998. The
increase in accounts receivable-trade was primarily due to higher volumes
pertaining to both the recycling operations and from major customers of
CWS.
Accounts payable-trade increased 40.4% or $2,493,442 from $6,176,433
as of December 31, 1997 to $8,669,875 at June 30, 1998. The increase was a
result of additional expenses incurred to generate higher revenue volumes
as noted above.
From December 31, 1997 to June 30, 1998, the Registrant's working
capital increased by $1,511,624 to $1,016,074. The increase in accounts
receivable and payable as noted above, coupled with the refinancing of
short-term notes payable into long term financing arrangements, were major
contributors to the working capital increase.
<PAGE>
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
(a) At the Annual Meeting of Shareholders held on May 21, 1998, the
following proposals were adopted by the margins indicated:
(b) 1. To elect a Board of Directors to hold office until the next
annual meeting of shareholders and until their successors are
elected and qualified.
Number of Shares
Broker
For Withheld Abstentions Non-Votes
Harry Kletter 929,780 500 1,019,444
Sean Garber 929,780 500 1,019,444
Michael Devereaux 929,780 500 1,019,444
Joe Cohen 929,780 500 1,019,444
Dr. Barry Naft 929,280 1,000 1,019,444
2. To confirm Crowe-Chizek & Company, LLP as the Company's
independent auditors.
For 930,980
Withhold Authority 3,600
Abstain 500
Broker Non-Votes 1,014,644
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
(a) None
(b) The Registrant filed a Form 8-K on August 3, 1998 with
respect to the earliest event reported on July 31, 1998. This filing
reports "Item 5-Other Events" from the Form 8-K.
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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: August 11, 1998 /s/ Harry Kletter
Chairman and Chief Executive Officer
(Principal Executive and Financial Officer)
