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 September 30, 1999
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 preceding 12
months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES X
-------
NO
--------
Indicate the number of shares outstanding of each of the
issuer's classes of common stock, as of November 1, 1999:
1,929,600.
- ---------
INDUSTRIAL SERVICES OF AMERICA, INC.
INDEX
Page No.
Part I Financial Information
ITEM 1. Consolidated Financial Statements
Condensed Consolidated Balance Sheets
September 30, 1999 and December 31, 1998 3
Condensed Consolidated Statements of
Income Three months ended September 30,
1999 and 1998 5
Condensed Consolidated Statements of
Income Nine months ended September 30,
1999 and 1998 6
Condensed Consolidated Statements of
Cash Flows Nine months ended September 30,
1999 and 1998 7
Notes to Condensed Consolidated
Financial Statements 8
ITEM 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 10
Part II Other Information
ITEM 5. Other 14
Part I - FINANCIAL INFORMATION
ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS
INDUSTRIAL SERVICES OF AMERICA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
ASSETS
------
<TABLE>
September 30, December 31,
------------- ------------
1999 1998
---- ----
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,050,152 $ 1,014,068
Accounts receivable - trade
(after allowance for doubtful
accounts of $86,522 in 1999
and $116,000 in 1998) 7,771,072 7,474,473
Accounts receivable - related parties - 26,259
Income tax refund receivable 45,735 113,000
Net investment in sales-type leases 240,006 35,270
Inventories 2,226,150 2,515,352
Deferred income taxes 42,700 52,000
Other 141,762 309,692
----------- -----------
Total current assets 11,517,577 11,540,114
Net property and equipment 5,424,771 5,063,576
Other Assets
Non-compete agreements, net 658,837 810,604
Intangibles (net of accumulated
amortization of $120,000 and
$80,000 in 1999 and 1998, respectively) 680,000 720,000
Deferred Income Taxes 219,100 359,800
Other Assets 66,073 153,439
----------- -----------
1,624,010 2,043,843
----------- -----------
$18,566,358 $18,647,533
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
3
INDUSTRIAL SERVICES OF AMERICA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
CONTINUED
(UNAUDITED)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
September 30, December 31,
------------- ------------
1999 1998
---- ----
<S> <C> <C>
CURRENT LIABILITIES
Notes payable to bank $ - $ 1,850,000
Current maturities of long-term debt 490,698 460,654
Accounts payable 11,320,788 9,746,536
Affiliated companies payable - 22,000
Other current liabilities 243,244 120,921
----------- -----------
Total current liabilities 12,054,730 12,200,111
Long-term liabilities
Long-term debt 2,259,722 2,612,519
Deferred income taxes 423,400 411,800
----------- -----------
2,683,122 3,024,319
STOCKHOLDERS' EQUITY
Common stock, $.01 par value,
10,000,000 shares authorized
1,957,500 shares issued as of
September 30, 1999 19,575 19,575
Additional paid-in capital 1,649,761 1,589,155
Retained earnings 2,167,170 1,822,373
Treasury stock, at cost, 27,900 shares (8,000) (8,000)
----------- -----------
Total stockholders' equity 3,828,506 3,423,103
----------- -----------
$18,566,358 $18,647,533
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
INDUSTRIAL SERVICES OF AMERICA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
1999 1998
---- ----
<S> <C> <C>
REVENUE
Recycling $ 5,161,836 $ 4,949,650
Equipment sales, service and leasing 572,023 531,661
Management services 13,962,589 12,064,941
----------- -----------
Total revenue 19,696,448 17,546,252
Cost of goods sold
Recycling 4,537,255 4,084,557
Equipment sales, service and leasing 393,427 364,395
Management services 13,317,621 11,495,482
----------- -----------
Total cost of sales 18,248,303 15,944,434
----------- -----------
GROSS MARGIN 1,448,145 1,601,818
Selling, general and administrative 1,308,656 1,588,389
----------- -----------
INCOME FROM OPERATIONS 139,489 13,429
Other income (expenses) 73,772 (70,781)
----------- -----------
Income before income taxes 213,261 (57,352)
Provision for income taxes 88,964 (63,236)
----------- -----------
NET INCOME $ 124,297 $ 5,884
=========== ===========
Earnings per share $0.06 $0.01
===== =====
Earnings per share, assuming dilution $0.06 $0.01
===== =====
</TABLE>
See accompanying notes to consolidated financial statements.
5
INDUSTRIAL SERVICES OF AMERICA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
1999 1998
---- ----
<S> <C> <C>
REVENUE
Recycling $14,167,388 $14,958,564
Equipment sales, service and leasing 1,792,145 1,283,521
Management services 40,252,754 32,245,996
----------- -----------
Total revenue 56,212,287 48,488,081
Cost of goods sold
Recycling 12,276,418 13,189,205
Equipment sales, service and leasing 1,225,019 776,460
Management services 38,141,632 30,611,411
----------- -----------
Total cost of sales 51,643,069 44,577,076
----------- -----------
GROSS MARGIN 4,569,218 3,911,005
Selling, general and administrative 3,932,126 3,386,748
----------- -----------
INCOME FROM OPERATIONS 637,092 524,257
Other income (expenses) (62,431) (93,447)
----------- -----------
Income before income taxes 574,661 430,810
Provision for income taxes 229,864 121,764
----------- -----------
NET INCOME $ 344,797 $ 309,046
=========== ===========
Earnings per share $0.18 $0.16
===== =====
Earnings per share, assuming dilution $0.18 $0.15
===== =====
</TABLE>
See accompanying notes to consolidated financial statements.
6
INDUSTRIAL SERVICES OF AMERICA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(UNAUDITED)
<TABLE>
1999 1998
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 344,797 $ 309,046
Adjustments to reconcile net income to
net cash from operating activities:
Provision for doubtful accounts 142,652 100,000
Deferred income tax 153,700 (123,580)
Loss from sale of fixed assets 4,749 -
Depreciation and amortization 1,161,947 882,461
Stock options granted for services 60,606 20,203
Change in assets and liabilities
Receivables (420,995) (2,831,222)
Inventories 289,202 (251,546)
Other assets (72,362) 158,957
Accounts payable 1,552,251 3,747,077
Other current liabilities 205,488 230,210
----------- -----------
Net cash from operating activities 3,422,035 2,241,606
INVESTING ACTIVITIES
Proceeds from sale of property
and equipment 213,937 -
Payments/deposits for property
and equipment (1,439,358) (2,022,865)
----------- -----------
Net cash from investing activities (1,225,421) (2,022,865)
FINANCING ACTIVITIES
(Payments)/borrowings on note
payable to bank (1,850,000) (800,000)
Payments on long-term debt (322,752) 1,045,983
Proceeds from sales-type leases 12,222 25,647
----------- -----------
Net cash from financing activities (2,160,530) 271,630
Net change in cash 36,084 490,371
Cash beginning of period 1,014,068 495,834
----------- -----------
CASH AT END OF PERIOD $ 1,050,152 $ 986,205
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
7
INDUSTRIAL SERVICES OF AMERICA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
---------------------
The accompanying unaudited consolidated 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 consolidated 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
September 30, 1999 and the results of its operations and changes in
cash flows for the periods ended September 30, 1999 and 1998. Results
of operations for the period ended September 30, 1999 are not
necessarily indicative of the results that may be expected for the
entire year. Additional information, including the audited 1998
Consolidated 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, 1998 on file with the
Securities and Exchange Commission.
2. Segment Information
-------------------
The Company's operations include three primary segments: ISA
Recycling, Computerized Waste Systems (CWS), and Waste Equipment Sales
& Service (WESSCO). ISA recycling provides products and services to
meet the needs of its customers related to ferrous, non-ferrous and
fiber recycling at two locations in the Midwest. CWS provides waste
disposal services including contract negotiations with vendors,
centralized billing, invoice auditing, and centralized dispatching.
WESSCO sells, leases, and services waste handling and recycling
equipment.
The Company's three reportable segments are determined by the products
and services that each offers. The recycling segment generates its
revenues based on buying and selling of ferrous and non-ferrous scrap,
CWS's revenues consist of management fees charged to customers at a
percentage of the total service provided, and WESSCO sales and lease
income comprise the primary source of revenue for this segment.
The Company evaluates segment performance based on profit or loss
before income taxes and the evaluation process for each segment
includes only direct expenses omitting any selling, general and
administrative costs.
8
<TABLE>
WASTE
COMPUTERIZED EQUIPMENT
FOR THE NINE MONTHS ENDING ISA WASTE SALES & SEGMENT
SEPTEMBER 30, 1999 RECYCLING SYSTEMS SERVICES TOTALS
------------------ --------- ------- -------- ------
<S> <C> <C> <C> <C>
Recycling revenues $ 14,167,388 $ - $ - $ 14,167,388
Equipment sales,
service and leasing
revenues - 1,792,145 1,792,145
Management fees - 40,252,754 - 40,252,754
Cost of goods sold (12,276,418) (38,141,632) (1,225,019) (51,643,069)
------------ ----------- ----------- ------------
Segment gross margin $ 1,890,970 $ 2,111,122 $ 567,126 $ 4,569,218
============ =========== =========== ============
WASTE
COMPUTERIZED EQUIPMENT
FOR THE NINE MONTHS ENDING ISA WASTE SALES & SEGMENT
SEPTEMBER 30, 1998 RECYCLING SYSTEMS SERVICES TOTALS
------------------ --------- ------- -------- ------
Recycling revenues $ 14,958,564 $ - $ - $ 14,958,564
Equipment sales,
service and leasing
revenues - 1,283,521 1,283,521
Management fees - 32,245,996 - 32,245,996
Cost of goods sold (13,189,205) (30,611,411) (776,460) (44,577,076)
------------ ----------- ----------- ------------
Segment gross margin $ 1,769,359 $ 1,634,585 $ 507,061 $ 3,911,005
============ =========== =========== ============
</TABLE>
3. Inventories
-----------
Inventories consist of the following:
September 30, December 31,
------------- ------------
1999 1998
---- ----
Equipment and parts $ 105,546 $ 761,780
Ferrous materials 1,088,446 1,131,045
Non-ferrous materials 1,034,158 622,527
---------- ----------
Total inventories $2,226,150 $2,515,352
========== ==========
9
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Liquidity and Capital Resources
- -------------------------------
As of September 30, 1999, the Registrant held cash and cash
equivalents of $1,050,152.
The Registrant derives its revenues from several sources,
including management services, equipment sales and leasing and
from its recycling operations. Management services comprised
approximately 71.6% and 66.5% of the Registrant's total revenues
for the nine months ended September 30, 1999 and 1998,
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 at the Bank's prime
rate and the line matures in June 2000. As of September 30,
1999, there was no outstanding balance 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 Condensed Consolidated Statements of Income bear to
total revenues and other pertinent data:
Nine Months ended September 30,
1999 1998
Statements of Operations Data:
Total Revenue 100.0% 100.0%
Cost of goods sold 91.9% 91.9%
Selling, general and administrative
and miscellaneous expenses 7.0% 7.0%
Income from operations 1.1% 1.1%
Nine months ended September 30, 1999 compared to nine months
- ------------------------------------------------------------
ended September 30, 1998
- ------------------------
Total revenue increased 15.9% from $48,488,081 in 1998 to
$56,212,287 in 1999. This increase in total revenue is the
result of (i) management services sales increasing 24.8% from
$32,245,996 in 1998 to $40,252,754 in 1999 and (ii) an increase
of 39.6% related to the equipment sales, service and leasing
operations of $1,792,145 in 1999 as compared to $1,283,521 in
1998. Revenue gains in these two segments were somewhat offset
by a decline in recycling revenues of 5.3% as 1999 revenue was
$14,167,388 compared to $14,958,564 in 1998. Commodity prices of
the ferrous and non-ferrous markets began to decline during the
second half of 1998 and remained at a lower level (although
stabilizing) during most of the first nine months of 1999. In
the ferrous market, 18% more gross tons were shipped during the
first nine months of 1999 compared to the same period last year,
but generated 8.0% less revenue due to the 22% decline in average
10
selling prices. Non-ferrous pounds shipped in the first three
quarters of this year declined approximately 11.0% and combined
with an average selling price decrease of 4.2% yielded revenues
at 14.5% less than the same time period last year.
The first nine months of 1999 total cost of sales was
$51,643,069 increasing $7,065,993 or 15.9% compared to 1998. The
cost of goods sold in management services increased 24.6% which
directly reflects the revenue increase of 24.8%. Cost of sales
in the recycling operations was 86.7% during the first nine
months of 1999 whereas it was 88.2% last year for the first nine
months. Cost of sales in the equipment leasing and sales segment
increased from 60.4% to 68.4% as the mix of equipment sales
versus rentals increased over last year.
The gross margin was $4,569,218 representing an increase of
$658,213 or a 16.8% increase from 1998. The gross margin was
8.1% for the first nine months of 1999 and 1998. The gross
margin in management services was 5.2% during the first three
quarters of 1999 versus 5.1% in 1998. Gross profit in the
recycling segment climbed to 13.3% in the first three quarters of
1999 versus 11.8% in the first nine months of 1998. This is due
primarily to the commodity price stabilization in the first nine
months of 1999 following a period of declining ferrous and non-
ferrous prices. Commodity purchase prices leveled during the
first three quarters of 1999 and selling prices recovered
slightly resulting in an increase in gross margin as a percentage
of sales.
Selling, general and administrative expenses increased 16.1%
from $3,386,748 in the first nine months of 1998 to $3,932,126 in
1999, and as a percentage of sales, remained the same at 7.0%.
Expenses were recorded in the first three quarters for ISA
Indiana, Inc. which did not begin operations until the second
half of 1998. Accrual adjustments also had an impact on the first
three quarters of 1999. The Registrant's comparable operating
expenses in the first three quarters of 1999 were favorable by 8%
over the first three quarters of 1998.
Quarter ended September, 30 1999 compared to quarter ended
- ----------------------------------------------------------
September 30, 1998
- ------------------
Total revenue increased 12.3% from $17,546,252 in 1998 to
$19,696,448 in 1999. This increase in total revenue is the
result of (i) management services increasing 15.7% from
$12,064,941 in 1998 to $13,962,589 in 1999 and (ii) an increase
in the equipment sales and leasing segment of 7.6% or from
$531,661 in 1998 to $572,023 in 1999. Revenues in the recycling
segment increased $212,186 or 4.3% in the third quarter versus
the third quarter of 1998 due to increased tons and pounds
shipped which more than offset the average selling price
decreases.
The third quarter total cost of sales was $18,248,303 in
1999 increasing $2,303,869 or 14.4% compared to the third quarter
of 1998. Cost of sales in the management services segment
increased 15.9% in the third quarter, which is in direct
proportion to the percentage increase in revenue. Cost of sales
in the recycling segment increased 11.1% as a result of the 4.3%
revenue increase in this segment and the fluctuation in sales
prices.
11
Total gross margin for the third quarter at $1,448,145
represents 7.4% of revenue in 1999 while the gross margin at
$1,601,818 in 1998 represents 9.2% of revenue.
Selling, general and administrative expenses were lower in
1999 compared to 1998 by $279,733. Start up costs for ISA,
Indiana, Inc. were still being incurred during the third quarter
of last year which is part of the favorable variances while the
majority of the difference is continued emphasis on expense
control enhancements and efficiencies.
Financial Condition at September 30, 1999 Compared to
- -----------------------------------------------------
December 31, 1998
- -----------------
Accounts receivable-trade after allowances for bad debt
increased 4.0% or $296,599 during the first nine months of 1999.
This increase is due mainly to the higher sales levels in the
management services segment.
Accounts payable-trade increased $1,574,252 or 16.2% as a
result of additional expenses incurred with vendors in the
management services segment to generate higher revenue as noted
above.
From December 31, 1998 to September 30, 1999, the
Registrant's working capital increased by $137,454 to a deficit
of $522,543 from the deficit of $659,997. The Registrant's
management is focused on working capital during the remainder of
the fiscal year and as the financial plan for the year 2000 is
completed. Surplus inventories will be shipped to take advantage
of the stable commodity prices. The Registrant intends to
examine its purchases carefully to ensure a program of inventory
reduction by the end of the year and into the next year. Working
capital will be increased due to additional gross margin dollars.
The Registrant has also established a plan to identify and sell
any equipment identified as surplus or idle. The Registrant
continues to improve upon all expense controls to provide the
highest possible levels of operational efficiencies and customer
service.
Year 2000 Risk Factors
- ----------------------
The Registrant implemented its "Year 2000 Project" in
February 1997 to address the potential problem with which
substantially all users of automated data processing and
information systems must address.
The Registrant uses primarily "Microsoft" software, which is
already year 2000 compliant. The Registrant's financial
accounting system has already been upgraded and certified as
compliant. The Registrant's management services operations
utilize a DOS based system which was potentially identified as a
problem. In its endeavor to alleviate this DOS-based problem,
the Registrant has contracted with a programmer to write software
to prevent this potential problem. The software upgrade has been
completed and all testing will be completed by November 30, 1999.
The recycling operations utilize a database that will complete
all testing by November 30, 1999.
The Registrant currently has no reason to believe and does
not anticipate the cost of Year 2000 compliance to be a
significant expense or problem. Notwithstanding the foregoing,
the Registrant will bear some minimal risk due to customers who
fail to
12
address the issues appropriately. Presently, the Registrant has
no reason to believe that any of its customers are failing to
take appropriate action to effect Year 2000 compliance or that
its software will be unable to perform as before with the
upgrades. The Registrant believes that the "worst case" risk is
a loss of its power source due to local utility Year 2000
problems resulting in computer malfunctions. However, as a
matter of corporate policy, the Registrant nightly backs up all
information systems. Historical records are maintained in hard
copy and current and future transactions could be manually
undertaken until restoration of the information systems occurs.
13
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
- ---------------------------
During the second quarter of 1999, the Registrant
signed a Letter of Intent to acquire 100% of the
capital stock of two waste management services
companies. The combined annual revenues of the target
companies were approximately $48,000,000. The
Registrant anticipated financing the purchase using an
undisclosed amount of stock and cash. The Letter of
Intent was subject to the completion of due diligence,
signing of a definitive agreement, shareholder
approval, the receipt of all regulatory approvals and
the expiration of all statutory waiting periods. On
November 5, 1999 this Letter of Intent was nullified by
mutual consent of both parties.
Item 6. Exhibits and Reports on Form 8-K
- ------------------------------------------
None
14
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: November 12, 1999 /s/ Harry Kletter
------------------------------
Chairman and Chief Executive Officer
(Principal Executive and Financial
Officer)
15
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000004187
<NAME> INDUSTRIAL SERVICES OF AMERICA, INC.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,050,152
<SECURITIES> 0
<RECEIVABLES> 7,903,329
<ALLOWANCES> 86,522
<INVENTORY> 2,226,150
<CURRENT-ASSETS> 11,517,577
<PP&E> 8,777,144
<DEPRECIATION> 3,352,373
<TOTAL-ASSETS> 18,566,358
<CURRENT-LIABILITIES> 12,054,730
<BONDS> 0
0
0
<COMMON> 19,575
<OTHER-SE> 3,808,931
<TOTAL-LIABILITY-AND-EQUITY> 18,566,358
<SALES> 56,212,287
<TOTAL-REVENUES> 56,212,287
<CGS> 51,643,069
<TOTAL-COSTS> 51,643,069
<OTHER-EXPENSES> 3,688,454
<LOSS-PROVISION> 142,652
<INTEREST-EXPENSE> 163,451
<INCOME-PRETAX> 574,661
<INCOME-TAX> 229,864
<INCOME-CONTINUING> 344,797
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 344,797
<EPS-BASIC> .18
<EPS-DILUTED> .18
</TABLE>
