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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
[ x ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For Fiscal Year Ended December 31, 1998
[ ] 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 No.: 0-20979
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INDUSTRIAL SERVICES OF AMERICA, INC.
(Exact name of registrant as specified in its charter)
Florida 59-0172746
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7100 Grade Lane
P.O. Box 32428
Louisville, Kentucky 40232
(502) 368-1661
(Address, including zip code, and telephone number,
including area code, or registrant's principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of class)
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), and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by reference
in Part III of this Form 10-K or any amendment to this Form 10-K.
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Aggregate market value of the 939,796 shares of voting Common
Stock held by non-affiliates of the registrant at the closing sales
price on April 8, 1999: $2,466,965.
Number of shares of Common Stock outstanding as of the close of
business on March 8, 1999: 1,929,600.
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DOCUMENT INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement for the 1999
Annual Meeting of Shareholders are incorporated by reference into
Part III of this report.
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PART I
ITEM 1. BUSINESS.
GENERAL
Industrial Services of America, Inc. (the "Registrant") is a
management service company specializing in solid waste
management, as well as ferrous, non-ferrous and fiber recycling.
The management division of the Registrant is engaged in the
business of commercial, retail and industrial waste management
and waste handling equipment sales and service. The ferrous
division's major products include recycling of steel and iron
products, whereas the non-ferrous division recycles copper,
aluminum and brass. The fiber recycling consists mainly of high-
grade papers and corrugated cardboard. The Registrant is able to
offer a "total package" concept to commercial, retail and
industrial clients to cover their waste management needs.
Combining waste reduction, waste materials diversion and waste
equipment technology, the Registrant creates waste programs
tailored to each client's individual needs. The Registrant
believes that it offers a more complete line of products and
services than its competitors and is better able to coordinate
these services on a regional and nationwide basis. By offering
competitively priced waste handling equipment from a number of
different manufacturers, the Registrant is able to tailor
equipment packages for individual client needs. The waste
management services offered by the Registrant include locating
and contracting with a hauling company at a reasonable cost at
each participating location for the retail chain customers of the
Registrant that are a part of the management program offered by
the Registrant. Because the Registrant is not a "waste
transporter," it is able to maintain a neutral position vis-a-via
the customers and the hauling companies. The Registrant has
designed and developed proprietary computer software that
provides the Registrant's personnel with relevant information on
each of the client's locations, as well as pertinent information
on disposal rates and costs of equipment, installation and
shipping. The availability of this software has allowed the
Registrant to build a database for serving customers from coast
to coast. The Registrant is able to estimate cost savings to
potential customers by reviewing their current waste hauling
invoices either regionally or nationwide.
The Registrant plans to grow by expanding its marketing base
and by seeking future joint ventures and acquisitions of
companies in related businesses. The Registrant continues to
target retail and industrial customers throughout the United
States for the purpose of increasing its clientele in this
sector. Although the number of locations for each industrial
customer will generally be less than that of large retail chains,
solid waste output for each location of industrial clients is
generally greater than that of retail clients. The Registrant
believes that the corresponding greater need for appropriate
equipment results in the increased possibility of large equipment
orders. Further, the Registrant believes it can provide savings
for each industrial location.
The Registrant believes that opportunities for its continued
growth are enhanced by the increasingly stringent regulatory and
political constraints being placed on the waste hauling and
disposal industries. These more stringent federal, state and
local regulations drive prices higher throughout the industry.
With ever-increasing costs, solid waste disposal is becoming one
of the larger expense items for retail and industrial customers,
and perhaps one of the most difficult to contain. The Registrant
believes these increased costs will enhance the value of its
services. Through the retention of the Registrant's services,
customers will be able to "outsource" their in-house waste needs
to an experienced independent entity capable of lowering and
containing waste disposal costs. The Registrant is able to
provide customized reports detailing clients' recycling revenues
as well as waste disposal expense.
In January 1998, the Registrant entered into a Consulting
Agreement (the "K&R Consulting Agreement") with K&R Corporation,
a Kentucky corporation ("K&R"). The Registrant retains all
profits from the scrap and corrugated paper recycling facility
and pays only the consulting fee to K&R. The K&R Consulting
Agreement enables the Registrant to control the management and
day-to-day decisions regarding the recycling plant. See
"BUSINESS-K&R Lease; K&R Consulting Agreement" for details of the
K&R Consulting Agreement.
On July 1, 1997, the Registrant acquired the assets of a
complete non-ferrous scrap metal recycling facility in
Louisville, Kentucky, known as "The Metal Center" from TMG
Enterprises, Inc. thus expanding the Registrant's recycling
product lines and markets. The Metal Center is located at 7100
Grade Lane, Louisville, Kentucky 40213. The acquisition of
assets included purchase of equipment and a non-compete agreement
with the two selling principals for $1,600,000. The purchase
price was to be paid in two installments of $800,000 each,
payable on January 2, 1998 and July 1, 1998. Such payments were
made timely. The Registrant believes that this acquisition
enhances the Registrant's ability to provide turnkey services in
the recycling business. On an annualized basis this acquisition
increased revenues in 1998 by $7,100,000.
During August 1997, the Registrant issued options (the
"Bierman Options") to purchase 100,000 shares of its Common Stock
to its then acting Chief Executive Officer, Glenn Bierman. Mr.
Bierman's Letter Agreement of August 21, 1997 (the "Bierman
Agreement") set forth a monthly consulting fee. Bierman Options
provide for an exercise price of $5.00 per share and are
exercisable through October 1999. Because the exercise price of
these options was in excess of the market value of the
Registrant's Common Stock on the date of grant, there was no
compensation cost recorded in 1997 related to these options.
None of the Bierman Options have been exercised.
In October 1997, the Registrant issued options (the "Garber
Options") to purchase 25,000 shares and an additional option to
purchase 100,000 shares of Common Stock to its, then, Interim
President and Chief Operating Officer, Sean M. Garber, as a
component of a five-year employment agreement (the "Garber
Employment Agreement"). The exercise price related to the
options to purchase (i) the 25,000 shares is $1.00 per share and
(ii) the 100,000 shares is $5.00 per share. Compensation cost
charged to operations in 1998 and 1997 related to the option to
purchase 25,000 shares was $71,875 and $14,974, respectively. The
option to purchase 100,000 shares was at market value the day of
the grant, therefore no charges were associated with this option.
None of the Garber Options have been exercised.
OFFICER AND DIRECTOR CHANGES
On February 17, 1998,the Registrant announced the
appointment of Sean M. Garber to the position of President, which
was retroactive to February 5, 1998. The Board of Directors
elected Mr. Garber to this position at its meeting on February
16, 1998. Garber filled the role as interim President from
December 1, 1997 to February 5, 1998, when Harry Kletter, former
President, resigned. Harry Kletter retained his positions with
the Registrant as Chief Executive Officer and Chairman of the
Board.
On February 16, 1998, the Registrant received resignations
from the following Board Members: Matthew L. Kletter and Timothy
W. Myers. The Board of Directors of the Registrant accepted their
resignations effective February 16, 1998 and appointed Joseph H.
Cohen and R. Michael Devereaux to fill the vacancies.
Additionally, for purposes of having outside Members on the
Board, the Registrant, with Board approval, appointed Dr. Barry
Naft to the Board, thus providing the Registrant with three
outside members.
FITZPATRICK PURCHASE AGREEMENT; LEASE AGREEMENT
Effective June 1, 1998 but executed as of July 31, 1998, ISA
Indiana, Inc. (the "Subsidiary"), an Indiana corporation and
wholly-owned subsidiary of the Registrant,; R. J. Fitzpatrick
Smelters, Inc. (the "Seller"); and R. J. Fitzpatrick and Cheryl
Fitzpatrick (collectively the "Guarantors"); entered into an
Asset Purchase Agreement (the "Fitzpatrick Purchase Agreement")
whereby the Subsidiary acquired all of the business, property,
rights and assets of the Seller and assumed certain of the
liabilities of the Seller as set forth in the Fitzpatrick
Purchase Agreement. Under the Fitzpatrick Purchase Agreement,
the Subsidiary entered into a real property Lease Agreement (the
"Fitzpatrick Lease"), effective June 1, 1998, from the Guarantors
and the Seller for ten successive terms of ten years each at a
rental of $13,000 per month during the original term (as adjusted
in accordance with the Consumer Price Index for each renewal
term) with an option to purchase for $1,600,000 the real property
(including an adjoining 20 acre tract less 3 acres to be retained
by the Seller and Guarantors). In addition, the assets purchased
include furniture, fixtures and equipment, contracts, agreements,
commitments, understandings, trademarks, service marks, trade
names, books and records of the Seller and goodwill associated
with the business of the Seller. In addition, the Subsidiary
entered into a Commission Agreement and Covenant Not To Compete
for a five-year term with the Guarantors recognizing the Seller's
right to liquidate and sell the inventory of the Seller as of the
date of the Fitzpatrick Purchase Agreement and agreeing to pay
the Guarantors and the Seller $10,500 per month plus a percentage
commission of gross profit for any new sales generated from their
efforts.
The Subsidiary is an Indiana corporation newly formed for
the purpose of acquiring the assets of the Seller. The location
of the business is on an approximate 14-acre tract at U.S. 50 and
Jennings County Road 900 West, North Vernon, Jennings County,
Indiana, approximately 65 miles north of Louisville, Kentucky.
The business of the Seller is a metal salvage and metal handling
operation and is comprised of five buildings, the total square
footage of which is approximately 71,400 feet. The principal
improvement is a one-story concrete warehouse/foundry/office
approximating 25,500 square feet. The remaining buildings are
steel-framed buildings constituting warehouses, garages and
office space.
Under the Fitzpatrick Purchase Agreement, the Subsidiary has
not assumed any material liabilities of the Seller, and
specifically, the Subsidiary will not pay, perform, assume or
discharge any liability related to environmental, health or
safety matters or conditions. The Seller and the Guarantors
remain specifically responsible for all conditions with respect
to any hazardous material activity at the site of the business
prior to June 1, 1998; however, as between the Guarantors and the
Seller on the one hand and the Subsidiary on the other hand, the
Guarantors and the Seller shall be responsible to the Subsidiary
in an amount not in excess of $500,000. In that connection, the
Guarantors have entered into an Environmental Indemnity
Agreement, dated as of June 1, 1998, in favor of the Subsidiary
and the Registrant relating to the indemnity for all
environmental conditions affecting the real property (subject to
the monetary limitation referred to above). The aggregate
purchase price for the business was $900,000, $250,000 of which
was paid June 1, 1998, the balance of which was paid on July 31,
1998.
Funds from the operating line of credit of the Registrant
made available by Mid-America Bank of Louisville and Trust
Company were used as a source of funds for consummating this
acquisition.
The Fitzpatrick Lease provides for the right of the
Subsidiary to terminate at any time after May 31, 2003, for a
termination payment of $156,000. Defaults include (i) failure of
the Subsidiary to pay rent or any other payments due under the
Fitzpatrick Lease within 20 days after written demand, (ii)
failure by the Subsidiary to observe or perform any other
covenants, agreements or conditions of the Fitzpatrick Lease
after 20 days written notice unless the Subsidiary has within
that 20 day period commenced to cure the default, and (iii)
certain events of bankruptcy of the Subsidiary. Remedies for a
default include termination of the Fitzpatrick Lease and a suit
for damages. The Subsidiary has the option to terminate the
Fitzpatrick Lease if it is deprived of the use and benefit of the
real property under certain conditions described in the
Fitzpatrick Lease.
The Fitzpatrick Purchase Agreement provides for cross-
indemnifications. The Seller and the Guarantors are providing
indemnity in favor of the Subsidiary for any misrepresentation,
breach of warranty, or non-fulfillment of any covenant under the
Fitzpatrick Purchase Agreement in addition to any damage,
deficiency or cost resulting from claims regarding the business,
the assets, or the premises accruing prior to June 1, 1998, or
any claim, action, suit, proceeding, demand, judgment,
assessment, cost and expense incident to either of the above.
The Subsidiary may make a claim for indemnification for a period
ending no later than ten years after the date of the Fitzpatrick
Purchase Agreement so long as any single claim or aggregate of
claims equals $1,000. In turn, the Seller and the Guarantors
have a similar period within which to make claims against the
Subsidiary for similar violations of the Fitzpatrick Purchase
Agreement for damages, deficiencies or costs accruing after June
1, 1998 and related claims as set forth above. The threshold for
claims against the Subsidiary is also $1,000.
CONSULTING AGREEMENTS; LASSAK AGREEMENT AND JCA/LASSAK AGREEMENT
On June 2, 1998, the Registrant entered into an agreement
(the "Lassak Agreement") with Andrew M. Lassak ("Lassak") to
perform financial advisory services for the Registrant for a
period of up to five years. The Company grants to Lassak and/or
his designee for the financial advisory services rendered under
the Lassak Agreement options to purchase from 25,000 up to a
maximum of 250,000 shares of the Company's Common Stock (the
"Common Stock") on the basis of 25,000 shares for each
$10,000,000 in additional capitalization of the Company measured
from June 2, 1998 that vests upon maintenance for three (3)
consecutive months after achieving the increase in each
$10,000,000 in capitalization for which each 25,000 shares of
Common Stock subject to options are granted. The exercise price
for the shares subject to options earned on account of the
capitalization increase will equal the fair market value of the
Common Stock on the date the $10,000,000 in increased
capitalization for which each 25,000 shares of Common Stock
subject to options will be granted. From the date of vesting of
shares subject to options, Lassak has (i) five (5) years to
exercise with respect to shares subject to option vesting in
Years one (1) and two (2); (ii) four (4) years to exercise with
respect to shares subject to option in Year three (3); (iii)
three (3) years to exercise with respect to shares subject to
option vesting in Year four (4); and (iv) two (2) years to
exercise with respect to shares subject to option vesting in Year
five (5). "Years" for purposes of this Agreement shall mean the
365/366 day period from June 2, 1998 through June 1, 1999 and
each 365/366 day period thereafter. If as a result of any
merger, consolidation or other acquisition effected solely
through the efforts of the Registrant, and without the
participation of Lassak, an increase in the capitalization
occurs, Lassak is not entitled to any options.
The Lassak Agreement is terminable at the election of either
party upon written notice provided to the other party no later
than sixty (60) days before the end of the year. The Lassak
Agreement then terminates at the end of such year, otherwise the
Lassak Agreement continues through the following year. Although
the Lassak Agreement terminates, any Common Stock subject to
options that have vested will be exercisable according to the
terms of the Lassak Agreement.
On June 2, 1998, the Registrant entered into an agreement
(the "JCA/Lassak Agreement") with Joseph Charles & Associates,
Inc. ("JCA") and Lassak. The term of the JCA/Lassak Agreement is
for a period of up to five (5) years. The Registrant agrees to
grant to JCA and Lassak options to purchase the Registrant's
Common Stock on the basis of 65% of the shares of Common Stock
subject to options being granted to Lassak and 35% to JCA, at (a)
$6.00 per share for the first 150,000 shares that vest, and (b)
$8.00 per share for the remaining 35,000 shares that vest. The
number of shares of the Common Stock that vest is determined
based upon the following schedule:
REGISTRANT SHARES
SUBJECT TO OPTIONS VESTING
VESTING SCHEDULE DATE YEAR
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45,000 From June 2, 1998 to, but not 1
including, first anniversary date
of JCA/Lassak Agreement
("Anniversary Date")
35,000 From Anniversary Date to, but not 2
including, Second Anniversary Date
35,000 From Second Anniversary Date to, 3
but not including, Third Anniversary
Date
35,000 From Third Anniversary Date to, but 4
not including, Fourth Anniversary Date
35,000 From Fourth Anniversary Date to, but 5
not including, Fifth Anniversary Date
From the date of vesting of shares subject to option, JCA
and Lassak have (i) five (5) years to exercise with respect to
shares subject to options vesting in Vesting Years one (1) and
two (2); (ii) four (4) years to exercise with respect to shares
subject to options in Vesting Year three (3); (iii) three (3)
years to exercise with respect to shares subject to options
vesting in Vesting Year four (4); and (iv) two (2) years to
exercise with respect to shares subject to options vesting in
Vesting Year five (5).
The JCA/Lassak Agreement is terminable at the election of
either party upon written notice provided to the other party no
later than 60 days before the end of each Vesting Year. The
JCA/Lassak Agreement then terminates at the end of such Vesting
Year, otherwise the JCA/Lassak Agreement continues through the
following Vesting Year. Although the JCA/Lassak Agreement
terminates, any Common Stock subject to options that have vested
will be exercisable according to the terms of the JCA/Lassak
Agreement.
REGISTRANT BACKGROUND
The Registrant was incorporated in October 1953 in Florida
under the name Alson Manufacturing, Inc. ("Alson"). From the
date of incorporation through January 5, 1975, the Registrant was
involved in the design and manufacture of various forms of
electrical products. In 1979, the Board of Directors and the
shareholders of the Registrant commenced liquidation of all the
tangible assets of Alson. On October 27, 1983, Harry Kletter,
the Chairman of the Board and Chief Executive Officer of the
Registrant, acquired 419,500 shares of Common Stock of the
Registrant. The existing directors resigned and five new
directors were elected.
On July 1, 1984, the Registrant began a solid waste handling
and disposal equipment sales organization under the name Waste
Equipment Sales and Services Company ("WESSCO"). On January 1,
1985, the Registrant merged with Computerized Waste Systems, Inc.
("CWS"), a Massachusetts corporation. CWS was a corporation
specializing in offering solid waste management consultations for
large multi-location companies involved in the retail, restaurant
and industrial sectors. At the time of the merger, CWS was
concentrating on large retail chains, but has changed its
emphasis to include industrial clients. This strategy created an
additional target market for the Registrant. Subsequent to the
merger with CWS, the Registrant moved CWS headquarters from
Springfield, Massachusetts to Louisville, Kentucky. At the time
of the merger, much of the client base and marketing efforts were
concentrated in the Northeast. With the move to Louisville, the
Registrant began to expand its marketing efforts, which are now
nationwide and include most of Canada.
The Registrant's divisions operate closely with each other
in terms of present customer care and proposals for new
customers. WESSCO has expanded its product line and presently
offers a variety of equipment, which would be necessary for an
efficient waste handling and/or recycling system for an
individual user. The prices WESSCO can offer are competitive
with most dealers since it purchases equipment at dealer cost
without having to pay dealer overhead. The WESSCO program is
attractive to customers planning expansion programs. Some of
these customers have designated WESSCO as their exclusive waste
equipment supplier and consultant. By working with the customer
from the time the initial building plans are developed, WESSCO
has input into the design, development and implementation of the
waste handling system.
CWS has developed a network of over 2,500 vendors throughout
the United States, which include hauling companies, recycling
companies and equipment manufacturing and maintenance companies.
Through this network, the Registrant is able to provide pricing
estimates for potential customers in a timely fashion. CWS
customer representatives have access to this information through
the computer software designed and developed to accommodate the
daily needs of the Registrant. Through this information
retrieval system, customer representatives can review the
accuracy of customer concerns from recent billings to hauling
rates to the average monthly cost of service.
The Registrant also processes, sells and brokers a broad
range of materials for recycling. These materials include
ferrous and non-ferrous metals, corrugated containers, high-grade
paper and plastic. The Registrant offers document destruction
and transport of recyclable materials to the Registrant's
facility for regional clients. This division also brokers
recycled commodities for CWS customers.
The Registrant derives a significant portion of its revenues
from two primary customers (Home Depot and Office Depot)
accounting for approximately 44%, 57% and 58% of 1998, 1997 and
1996 total revenues, respectively. The Registrant is taking
affirmative action to counter its dependence on any one customer.
The potential negative effect of losing any single customer has
been reduced by the Registrant's expansion of its customer base.
However, there can be no assurance that if the Registrant was to
lose all or the substantial portion of the business with these
two customers that such losses would not have a material adverse
effect on the Registrant.
In addition to its other services, the Registrant provides
management services relating to recycling and waste stream
analysis. The main advantage to offering management services is
that the individual projects are priced on a substantial prepaid
individual basis. This method of pricing allows the Registrant
to collect an up-front fee with the opportunity to "sell" the
customer traditional services after the evaluation and/or any
subsequent implementation is complete. By offering management
and evaluation services, the Registrant is able to pursue
additional customers.
During 1998, the Registrant committed approximately
$1,240,168 towards capital improvements excluding the purchase of
fixed assets obtained in the Fitzpatrick Purchase Agreement. The
Registrant used a significant portion of such funds to purchase
two (2) balers, one (1) shear and rolling stock. The acquisition
of this new material processing equipment has enhanced operating
efficiencies and created additional capacity for new and expanded
equipment leasing business opportunities.
K&R LEASE; K&R CONSULTING AGREEMENT
On February 16, 1998 the Registrant's Board of Directors
ratified and formalized an existing relationship in connection
with (i) the leasing by the Registrant of its facilities from K&R
and (ii) the provision of consulting services from K&R to the
Registrant. K&R is an affiliate of the Registrant.
LEASE AGREEMENT. The Lease Agreement (the "K&R Lease"),
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effective as of January 1, 1998, between K&R, as landlord, and
the Registrant, as lessee, covers approximately 20.5 acres of
land and the improvements thereon, which are located at 7100
Grade Lane in Louisville, Kentucky (the "Leased Premises"). The
principal improvements consist of an approximately 22,750 square
foot building used as the Corporate Office, an approximately
8,286 square foot building used for CWS offices, an approximately
13,995 square foot used as the paper recycling plant, an
approximately 12,000 square foot building used for metals
recycling plant, and an approximately 51,760 square foot building
used as the recycling offices and warehouse space, with the
remaining 15,575 square feet of space contained in five (5)
buildings ranging in size from approximately 8,000 to 256 square
feet.
The initial term of the K&R Lease is for ten years with two
five-year option periods (the "Option Periods") available
thereafter. The base rent for the first five years is $450,000
per annum, payable at the beginning of each month in an amount
equal to $37,500 (the "Fixed Minimum Rent"). The Fixed Minimum
Rent adjusts each five years, including each of the Option
Periods, in accordance with the Consumer Price Index. The Fixed
Minimum Rent also increases to $750,000 per annum, in an amount
equal to $62,500 per month in the event of a "change in control"
of the Registrant. Under the K&R Lease, "change in control"
means a transaction or series of transactions as a result of
which (i) any person who does not currently own a majority of the
outstanding stock of the Registrant acquires a majority of the
outstanding stock of the Registrant, (ii) the Registrant sells or
otherwise disposes of all or substantially all of the assets or
business operations of the Registrant to any other person; or
(iii) the Registrant merges or consolidates with any other
person; unless, in any such case, shareholders owning the
outstanding voting stock of the Registrant immediately prior to
the consummation of such transaction or transactions will own,
upon consummation of such transaction or transactions, at least a
majority of the outstanding shares of the voting stock of the
person acquiring the shares or assets of the person acquiring the
Registrant or surviving the merger or consolidation of the
Registrant in the transaction(s).
The Registrant is also required to pay, as additional rent,
all real estate taxes, insurance, utilities, maintenance and
repairs, replacements (including replacement of roofs if
necessary) and other expenses. The Registrant provided a $50,000
security deposit to K&R for performance by the Registrant of the
terms, covenants and conditions of the K&R Lease applicable to
it.
The K&R Lease provides that the Leased Premises may be used
by the Registrant in its metal recycling and recycled paper
sorting and bailing businesses, and for its corporate offices.
Without the prior consent of K&R (and in the case of (ii) below
the prior consent of any mortgagee of K&R) the Registrant may not
(i) make any structural alterations, improvements or additions to
the K&R Leased Premises, or (ii) assign (including a change of
control) or sublet the Leased Premises. The K&R Lease provides
for indemnification of K&R by the Registrant for all damages
arising out of the Registrant's use or condition of the Leased
Premises excepting therefrom K&R's negligence. The K&R Lease
further provides that the Registrant will agree to subordinate
its leasehold interest to the mortgage interest of any mortgagee
of K&R.
The K&R Lease provides for termination by the Registrant
upon damage (the "Damage") by fire or other casualty that cannot
be reasonably repaired within, in most instances, 120 days of the
Damage. All rent ceases as of the "injury date" under these
circumstances. The K&R Lease also terminates upon condemnation
of the Leased Premises in whole, with a condemnation of a portion
of the Leased Premises resulting in an equitable adjustment of
the Fixed Minimum Rent.
Events of Default under the K&R Lease include (i) failure by
the Registrant to pay the Fixed Minimum Rent for 10 days after
written demand therefor, (ii) any other default in the observance
or performance by the Registrant of any of the other covenants,
agreements or conditions of the K&R Lease, which shall continue
for 30 days after written notice, unless the Registrant shall
have commenced and shall be diligently pursuing curing such
default, (iii) certain bankruptcy or related events affecting the
Registrant, (iv) vacation of the Leased Premises by the
Registrant, or (v) the transfer or devolution whether by
operation of law or otherwise of the K&R Lease or the
Registrant's estate or of any of the Registrant's interest to
anyone other than K&R. Upon the occurrence of an event of
default, K&R may, at its option, terminate the K&R Lease and
enter into and take possession of the Leased Premises with the
right to sue for and collect all amounts due, including damages.
All payments are current.
K&R CONSULTING AGREEMENT. The K&R Consulting Agreement
------------------------
remains in effect until December 31, 2007, with automatic annual
renewals thereafter unless one party provides written notice to
the other party of its intent not to renew at least six months in
advance of the next renewal date. K&R shall provide strategic
planning and development to the Registrant, including advice on
management activities, advertising, financial planning and
mergers and acquisitions (the "K&R Consulting Activities"). The
Registrant shall be responsible for all of K&R's expenses and pay
to K&R $240,000 in equal monthly installments of $20,000 in
connection with the K&R Consulting Activities.
The K&R Consulting Agreement terminates upon a non-
defaulting party providing written notice to the other party of
its intent to terminate. The recipient of the notice has 10 days
to cure monetary defaults and 30 days to cure non-monetary
defaults (which will be extended if a cure is being diligently
commenced and pursued during that 30 day period). The K&R
Consulting Agreement also terminates upon the condemnation or
destruction by fire or other casualty of all or substantially all
of the Leased Premises. Upon termination, K&R agrees not to
engage, directly or indirectly, in the business conducted by, or
hire employees from, the Registrant for a period of five years
and within 100 miles of any operation of the Registrant. The
Registrant's principal shareholder and Chief Executive Officer
is compensated through consulting fees pursuant to the K&R
Consulting Agreement.
The K&R Consulting Agreement provides for cross-
indemnification of each party by the other for acts other than
negligence or willful malfeasance. The K&R Consulting Agreement
further provides that K&R must maintain the confidentiality of
any information of the Registrant not otherwise in the public
domain or required to be disclosed by law.
EQUIPMENT LEASING/WESSCO
The Registrant leased approximately 154 pieces of solid
waste and recycling equipment to customers in 1998, with a
subsequent increase in monthly rental income to the Registrant of
14.7% as compared to the same period of 1997. The majority of
these contracts are for a minimum of 36 months. While the
resources required to purchase this equipment are generated
internally and the revenues returned are deferred over the term
of the contract, the Registrant's management believes this
investment in the rental fleet to be a proper use of capital and
will provide a long-term favorable return on its investment.
INDUSTRY BACKGROUND
The Registrant is involved in the management of non-
hazardous solid waste and recyclables for retail and industrial
customers. As such, the industry is actually driven by the multi-
billion dollar solid waste collection and disposal industry. The
size of this industry has increased for the past several years
and should continue to increase, as landfill space becomes more
scarce. Although society (and industry) have developed an
increased awareness of the environmental issues and recycling has
increased, waste production also continues to increase. Because
of environmental concerns, new regulations and cost factors, it
has become difficult to obtain the necessary permits to build any
new landfills. Management of the Registrant believes that with
the consolidation taking place in the waste industry, it will
become increasingly difficult for a customer to receive a fair
price. The Registrant should therefore be in a position to be
called upon to represent the best interest of that customer; this
fact can only enhance the Registrant's business.
The rising costs associated with solid waste disposal have
created additional opportunities for the Registrant. Because
waste disposal has begun to be an increasingly larger percentage
of the total monthly expenditures incurred by commercial
establishments, the Registrant believes that the services offered
by the Registrant will be in greater demand. Many commercial
establishments that have paid little attention to the costs
associated with waste disposal in the past are now looking for
ways to reduce expenses in this area. The Registrant offers
commercial establishments its expertise to lower waste disposal
bills and initiate recycling programs to generate additional
revenues and/or reduce costs and materials bound for ultimate
disposal.
In addition to increasing landfill costs, regulatory
measures and more stringent control of material bound for
disposal ("flow control") are making the management of solid
waste an increasingly difficult problem. The United States
Environmental Protection Agency (the "EPA") is expected to
continue the present trend of restricting the amount of
"potentially" recyclable material bound for landfills. Many
states have passed, or are contemplating measures, which would
require commercial establishments to recycle a minimum percentage
of their waste stream and would restrict the percentage of
recyclable materials in any commercial load of solid waste
material. Many states have already passed restrictive
regulations requiring a plan for the reduction of waste or the
segregation of recyclable materials from the waste stream at the
source. Management of the Registrant believes that these
restrictions may create additional marketing opportunities as
waste disposal needs within commercial establishments become more
specialized. Some large commercial establishments have hired in-
house staff to handle the solid waste management and recycling
responsibilities, but have found that without adequate resources
and staff support, in-house handling of these responsibilities
may not be an effective alternative. The Registrant offers these
establishments a possible solution to this increasing burden.
COMPETITION
On a commercial/industrial waste management level, the
Registrant has competition from a variety of sources. Much of it
is from companies that concentrate their efforts on a regional
level. Management of the Registrant believes that with the
proprietary database of regional and national pricing, the
Registrant will maintain its edge on a national basis.
There has been increased competition from national hauling
companies. The large national hauling companies often attempt to
handle an entire chain of locations for a "national chain"
client. This scenario poses a potential conflict of interest
since these hauling companies can attain greater profitability
from increases in hauling and disposal revenues. In addition to
having an interest in higher hauling and disposal rates, the
national hauling companies do not have operations in every
community and do not, to the knowledge of management, have some
of the billing and computer capabilities which the Registrant is
able to offer. Additionally, management has encountered evidence
of some reluctance from independent hauling companies to work
with national hauling companies.
There is also competition from some equipment manufacturers.
These companies have their primary interest in selling or leasing
equipment and offer management services in order to secure these
sales or leases. There is a cost involved in "using" the
equipment and the money saved must justify the amount spent on
this equipment.
The metals recycling business is highly competitive and is
subject to significant changes in economic and market conditions.
Certain of the Registrant's competitors have greater financial,
marketing and other resources. There can be no assurance that
the Registrant will be able to obtain its desired market share
based on the competitive nature of this industry.
An important difference between the Registrant and the
majority of its competition is the Registrant's management
"process". The systematic approach attempts to provide
consistent results for the customer. At the implementation
stage, the Registrant actively "bids out" every location that a
new customer requests. The Registrant repeats this bidding
process at any time that a client receives notice of an
undocumented price increase or at regular intervals as indicated
in the contractual relationship. At subsequent stages, the
Registrant will evaluate a customer's solid waste program and
give suggested alternatives for improvement.
The Registrant has developed a network of maintenance and
hauling companies throughout the country and due to the volume of
business awarded to them by the Registrant, often these companies
will offer discounted hauling and maintenance rates to the
Registrant. However, the Registrant is not "affiliated" with any
particular company or vendor in the hauling and/or maintenance
industries, but rather deals with those companies and vendors
that can supply quality service at a favorable price. In
addition to the volume of business handled by some of these
"vendors", the vendors understand that as long as the accounts
are well serviced, they will be invited to bid on future
accounts.
Few, if any, of the Registrant's competitors have a national
network of vendors similar to the one the Registrant has
developed over its years of operation. The major hauling
companies are limited in the scope of services which they can
provide to commercial/industrial accounts. Although the major
hauling companies have operating companies in most major and
intermediate-sized cities, they do not have nationwide geographic
coverage. Therefore, for large commercial/industrial clients,
they must obtain bids from local hauling companies that may
perceive them to be future competitors. The Registrant has
positioned itself to negotiate with the haulers, while servicing
its clients on a nationwide basis.
Most of the direct competition is from small regional
companies that bid on regional accounts or national accounts on a
regional basis. Few of the Registrant's competitors appear to be
equipped to handle large national accounts nor do they seem to
have the inclination to expand their geographic coverage. There
are numerous national companies in closely related businesses,
including national hauling companies that have substantially
greater financial resources than does the Registrant. Should any
of these companies decide to compete directly with the
Registrant, it could have a material adverse effect on the
business of the Registrant.
EMPLOYEES
The Registrant has approximately one hundred twenty-seven
(127) full-time employees.
EFFECT OF STATE AND FEDERAL ENVIRONMENTAL REGULATIONS
Any environmental regulatory liability relating to the
Registrant's operations is generally borne by the customers with
whom the Registrant contracts and the third party vendors in
their capacity as transporters. As a matter of Registrant's
policy, the Registrant uses its best efforts to secure
indemnification for environmental liability from its customers
and third party vendors. Although management of the Registrant
believes that for the most part its business does not subject it
to potential environmental liability, the Registrant continues to
use best efforts to be in compliance with federal, state and
local environmental laws, including but not limited to the
Comprehensive Environmental Response, Compensation and Liability
Act of 1980, as amended, the Hazardous Materials Transportation
Act, as amended, the Resource Conservation and Recovery Act, as
amended, the Clean Air Act, as amended, and the Clean Water Act.
Such compliance in 1997 did not constitute a material expense to
the Registrant.
The collection and disposal of solid waste and rendering of
related environmental services are subject to federal, state and
local requirements which regulate health, safety, the
environment, zoning and land-use. Federal, state and local
regulations vary, but generally govern disposal activities and
the location and use of facilities and also impose restrictions
to prohibit or minimize air and water pollution. In addition,
governmental authorities have the power to enforce compliance
with these regulations and to obtain injunctions or impose fines
in the case of violations, including criminal penalties. These
regulations are administered by the EPA and various other
federal, state and local environmental, health and safety
agencies and authorities, including the Occupational Safety and
Health Administration of the U.S. Department of Labor.
The Registrant strives to conduct its operations in
compliance with applicable laws and regulations. While such
amounts expended in the past or anticipated to be expended in the
future have not had and are not expected to have a material
adverse effect on the Registrant's financial condition or
operations, the possibility remains that technological,
regulatory or enforcement developments, the results of
environmental studies or other factors could materially alter
this expectation.
Each state in which the Registrant operates has its own laws
and regulations governing solid waste disposal, water and air
pollution and, in most cases, releases and cleanup of hazardous
substances and liability for such matters. Several states have
enacted laws that will require counties to adopt comprehensive
plans to reduce, through waste planning, composting, recycling,
or other programs, the volume of solid waste landfills. These
laws have recently been promulgated in several states.
Legislative and regulatory measures to mandate or encourage waste
reduction at the source and waste recycling, also are under
consideration by Congress and the EPA.
Finally, various states have enacted, or are considering
enacting, laws that restrict the disposal within the state of
solid or hazardous wastes generated outside the state. While
laws that overtly discriminate against out of state waste have
been found to be unconstitutional, some laws that are less
overtly discriminatory have been upheld in court. Challenges to
other such laws are pending. The outcome of pending litigation
and the likelihood that other such laws will be passed and will
survive constitutional challenge are uncertain. In addition,
Congress is currently considering legislation authorizing states
to adopt such restrictions.
SUBSEQUENT EVENTS
A. APPOINTMENT OF CHIEF FINANCIAL OFFICER.
The Board of Directors of the Registrant appointed John O.
Tietjen to the position of Chief Financial Officer/Senior Vice-
President effective March 1, 1999. Mr. Tietjen, 50, brings to
the Registrant nearly 30 years of experience in accounting, cash
and financial management and analysis. Most recently he was Vice-
President of Finance at Greater Louisville, Inc., the leading non-
profit, economic development agency in Louisville. Prior to that
time, he was Corporate Controller at OpenConnect Systems, Inc., a
worldwide distributor of hardware and software. Mr. Tietjen
began his career with the Glidden Paint Company, where he held
several executive positions during his 15-year tenure, including
Plant Controller and Corporate Manager of Budgeting and Financial
Analysis. Mr. Tietjen received a B.A. in Business
Administration/Economics from Muskingum College in New Concord,
Ohio and an M.B.A. from Baldwin-Wallace College in Berea, Ohio.
B. CHANGE IN TRANSFER AGENT
The Board also approved, authorized and ratified the hiring
of Reliance Trust Company ("Reliance") as the transfer agent for
the Common Stock effective March 18, 1999 upon the termination of
the Mid-America Bank of Louisville and Trust Company ("BOL").
C. AMENDMENT TO 1997 EMPLOYEE STOCK OPTION PLAN.
The Industrial Services of America, Inc. 1997 Employee Stock
Option Plan (the "Plan") as originally adopted reserved 100,000
shares for the granting of options to employees of the
Registrant. On February 11, 1998, the Board of Directors
authorized the Registrant to increase the shares reserved under
the Plan from 100,000 to 330,000. The Registrant never
implemented this increase. On March 22, 1999, the Board of
Directors approved, authorized and ratified an amendment (the
"Amendment") to the Plan, and, subject to shareholder approval,
the Amendment will become effective retroactively as of February
11, 1998. Upon effectiveness, the Amendment would (i) increase
the number of shares reserved under the Plan from 100,000 to
400,000, (ii) allow for the grant of non-qualified stock options
to non-employee directors of the Company under the Plan, (iii)
change the name of the Plan to the "Industrial Services of
America, Inc. 1997 Stock Option Plan," and (iv) effect certain
technical or administrative changes to the Plan. The Board will
recommend that the shareholders of the Registrant approve the
Amendment at the 1999 Annual Meeting of Shareholders.
On March 1, 1999, the Board granted to each of its three non-
employee directors (Messrs. Cohen, Devereaux and Naft) non-
qualified stock options under the Plan to purchase 20,000 shares
of Common Stock at $5.00 per share (the "Director Options"). The
Director Options vested on the grant date but the grantees may
not exercise the Director Options until the requisite percentage
of the Registrant's shareholders approves the Amendment. The
Director Options would become null and void and of no legal
effect in the event that shareholder approval is not obtained in
the required time period. The Director Options expire on March
1, 2009 unless terminated earlier pursuant to provisions in the
respective option certificates.
Additionally, on March 1, 1999, the Board granted to John O.
Tietjen, the Registrant's Chief Financial Officer, non-qualified
stock options under the Plan to purchase 15,000 shares of Common
Stock at $2.25 per share (the "Tietjen Option"). Subject to the
limitations contained in the next sentence, the Tietjen Option
vests as follows: 7,500 shares vest on January 1, 2000 and 7,500
shares vest on March 1, 2000. Mr. Tietjen may not exercise the
Tietjen Option until the requisite percentage of the Registrant's
shareholders approves the Amendment and the Tietjen Option would
become null and void and of no legal effect in the event that
shareholder approval is not obtained in the required time period.
The Tietjen Option expires on March 1, 2009 unless terminated
earlier pursuant to provisions in the option certificate.
ITEM 2. PROPERTIES.
The Registrant leases its corporate offices and processing
property and buildings for $37,500 per month from K&R pursuant to
the K&R Lease. See ITEM 1. BUSINESS. "K&R Lease; K&R Consulting
Agreement."
The Subsidiary has entered into the Fitzpatrick Lease
effective June 1, 1998, for ten successive terms of ten years
each at a rental of $13,000 per month during the original term
(as adjusted in accordance with the Consumer Price Index for each
renewal term) with an option to purchase for $1,600,000. See
ITEM 1. BUSINESS. "Fitzpatrick Purchase Agreement; Lease
Agreement."
ITEM 3. LEGAL PROCEEDINGS.
There are no material proceedings pending by, or against the
Registrant or affecting any of its properties.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
HOLDERS.
Not applicable.
ITEM 4A. EXECUTIVE OFFICERS OF THE REGISTRANT.
Served as an
Executive Position with the
Officer Registrant and Other
Name Since Age Principal Occupations
---- ----- --- ---------------------
Harry Kletter 1983 72 Chairman of the Board and Chief
Executive Officer of the Registrant
from July 31, 1992 to present,
President of the Registrant
from July 31, 1992 to December
1997, from January 1990 to
July 1991, and from October
1983 to January 1988; Mr.
Kletter is also Chairman and
sole shareholder of K&R.
Sean M. Garber 1996 32 President and Treasurer of the
Registrant since February 1998;
Interim President from December 1997
to February 1998; Chief Operating
Officer and Director of the
Registrant from November 1997 to
present; Vice President of Recycling
of the Registrant from November 1996
to December 1997. From 1989 to
November 1996, Mr. Garber was
an employee of and held
positions as general manager
and marketing director with
OmniSource, Inc., a Fort
Wayne, Indiana recycling
company; Mr. Garber holds a
degree in Business Management
from Indiana University.
John O. Tietjen 1999 50 Senior Vice President and Chief
Financial Officer of the Registrant
since March 1, 1999; from
September 1993 to February
1999, Vice President of
Finance at Greater Louisville,
Inc. (and its predecessor);
Mr. Tietjen served previously
Corporate Controller for
OpenConnect Systems, Inc. and
for 15 years prior to his
employment with OpenConnect
Systems, Inc., he served in
various positions with Glidden
Paint Company; Mr. Tietjen
holds a B.A. in Business
Administration/ Economics from
Muskingum College and an
M.B.A. from Baldwin-Wallace
College.
Timothy W. Myers 1998 47 Vice President of Operations of
the Registrant since July 1, 1998;
Senior Vice President and Chief
Operating Officer of the
Registrant from 1996 until
February 1998; President of
K&R from 1996 to July 1998;
Mr. Myers has served in
various operational capacities
with the Registrant and K&R
since 1973.
Charles J. Hulsman 1995 41 Manager of CWS, a division of the
Registrant, since December 1991, and
a sales representative of
WESSCO, a division of the
Registrant, prior to that
date.
Alan L. Schroering 1995 to 33 Director of Finance and
March 1998 Treasurer of the Registrant from
1995 to March 1998; Controller of
the Registrant from 1992 to
February 1998; Staff
Accountant of the Registrant
from 1984 to 1992. Mr.
Schroering is a graduate of
Indiana University.
Matthew L. Kletter 1994 to 39 Vice President of Legal
February 1998 Affairs and Secretary of the
Registrant from 1997 to February 1998;
Director of Legal Affairs from
1996 to 1997; Director of the
Registrant from 1995 to
February 1998 and from 1990 to
1991; Attorney, New York, New
York; Nephew of Harry Kletter.
Except as described under "Position with the Registrant and
Other Principal Occupations" in the above table, none of the
above officers is related to one another. With respect to
certain arrangements with certain officers of the Registrant
relating to executive compensation, see section entitled
"Executive Compensation - Certain Transactions" in the
Registrant's Proxy Statement for the 1999 Annual Meeting of
Shareholders as incorporated herein by reference at Item 11.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
Effective August 29, 1996, the $.01 par value common stock
of the Registrant became listed on the Small Cap Market (the
"Small Cap Market") of the Nasdaq Stock Market under the symbol
"IDSA". Prior to August 29, 1996, the Registrant's common stock
traded on the Over the Counter Bulletin Board ("OTCBB") operated
by the National Association of Securities Dealers, Inc.
("NASD").
QUARTER ENDED 1998 1997 1996
- ------------- ----------- ---------- -----------
HIGH LOW HIGH LOW HIGH LOW
March 31 6.63 4.13 13.25 7.25 8.50 5.50
June 30 7.00 4.75 9.50 5.50 18.00 7.25
September 30 4.88 3.63 9.50 7.13 15.75 8.25
December 31 4.00 1.75 7.38 4.50 12.50 8.38
There were approximately 418 shareholders of record as of
March 8, 1999.
The Registrant has never declared a cash dividend on its
Common Stock. The Board of Directors intends to retain all
earnings for investment into the Registrant's business and does
not anticipate any cash dividends in the foreseeable future. The
retention of these earnings will be used to help finance the
Registrant's expansion programs. Although there are no
restrictions on the Registrant's present or future ability to pay
dividends, the Board of Directors has the discretionary power to
make that determination.
The Nasdaq Stock Market, which began operation in 1971, is
the world's first electronic securities market and the fastest
growing stock market in the U.S. Nasdaq utilizes today's
information technologies-computers and telecommunications-to
unite its participants in a screen-based, floorless market. It
enables market participants to compete with each other for
investor orders in each Nasdaq security and, through the use of
Nasdaq Workstation II and other automated systems, facilitates
the trading and surveillance of thousands of securities. This
competitive marketplace, along with the many products and
services available to issuers and their shareholders, attracts
today's largest and fastest growing companies to Nasdaq. These
include industry leaders in computers, pharmaceuticals,
telecommunications, biotechnology, and financial services. More
domestic and foreign companies list on Nasdaq than on all other
U.S. stock markets combined.
ITEM 6. SELECTED FINANCIAL DATA.
SELECTED FINANCIAL DATA
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Amounts in Thousands,
Except Per Share Data)
Year ended December 31:
Total revenue $65,205 $45,212 $34,277 $30,545 $23,380
======= ======= ======= ======= =======
Income from operations (543) 215 742 1,162 489
======= ======= ======= ======= =======
Earnings
per common share:
Basic $ (0.26) $ 0.07 $ 0.25 $ 0.41 $ 0.28
======= ======= ======= ======= =======
Assuming dilution $ (0.26) $ 0.07 $ 0.24 $ 0.40 $ 0.28
======= ======= ======= ======= =======
Cash dividends declared
Per common share - - - - -
At year end:
Total assets $18,648 $13,893 $ 9,439 $ 6,209 $ 4,093
======= ======= ======= ======= =======
Long-term notes
Payable $ 2,613 $ 760 $ 5 $ 367 $ 13
======= ======= ======= ======= =======
RECLASSIFICATIONS
Earnings per share are computed under the provisions of
statement of financial accounting standards (FAS) No. 128,
"Earnings per Share" which was adopted retroactively at the
beginning of the fourth quarter of 1997. This resulted in
restatement of earnings per share as previously reported for
1996, 1995 and 1994.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATION.
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN
CONJUNCTION WITH THE INFORMATION SET FORTH UNDER ITEM 6,
"SELECTED FINANCIAL DATA" AND THE CONSOLIDATED FINANCIAL STATEMENTS
OF THE REGISTRANT AND THE ACCOMPANYING NOTES THERETO INCLUDED
ELSEWHERE IN THIS REPORT.
THE FOLLOWING DISCUSSION AND ANALYSIS CONTAINS CERTAIN FINANCIAL
PREDICTIONS, FORECASTS AND PROJECTIONS WHICH CONSTITUTE "FORWARD-
LOOKING STATEMENTS" WITHIN THE MEANING OF THE FEDERAL SECURITIES
LAWS. ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
FINANCIAL PREDICTIONS, FORECASTS AND PROJECTIONS AND THERE CAN BE
NO ASSURANCE THAT SUCH FINANCIAL PREDICTIONS, FORECASTS AND
PROJECTIONS WILL BE ACHIEVED.
GENERAL
The Registrant continued to pursue a growth strategy in the
waste management services arena servicing over 4,200 customer
locations throughout the country and building a base of
approximately 2,500 vendors. This strategy will allow for
diversity of business opportunities so that the Registrant is not
as dependent upon the profitability of the recycling division.
This diversity has helped to stabilize revenues and gross profit
during a period of time when commodity prices fluctuate and
affect the ferrous and non-ferrous markets. This strategy is
evidenced by the purchase of the management services accounts of
MGM Services, Inc. ("MGM") in September 1997. The impact of this
acquisition for the full year of 1998 added approximately
$3,200,000 in revenue. Much of management's focus and attention
now and in the future is directed towards the growth of this
business segment through an acquisition strategy.
It is management's plan to expand in the management services
segment in 1999. At the same time, the Registrant will be
seeking more operational cost control, increased efficiency in
the information technology area and emphasize sales and marketing
efforts.
Management continues to maintain and grow the recycling
business, although not actively seeking any further acquisitions
or mergers.
LIQUIDITY AND CAPITAL RESOURCES
As of December 31, 1998, the Registrant held cash and cash
equivalents of $1,014,068.
The Registrant currently maintains a working capital line of
credit with BOL in the amount of $2,000,000. Indebtedness under
this credit facility accrues interest at BOL's prime rate as
promulgated from time to time. The maturity date under this
agreement is July 1, 1999. The Credit Line is collateralized by
eligible accounts receivable, inventories, equipment and the
personal guarantees of the Chief Executive Officer of the
Registrant, Harry Kletter. As of December 31, 1998, $1,850,000
was outstanding under the credit facility as compared to
$1,800,000 as of December 31, 1997.
As consideration for the acquisition of The Metal Center,
the Registrant provided two (2) notes payable to the sellers in
the amount of $800,000 each, payable one half on January 2, 1998
and one half on or before July 1, 1998. The payments were made
timely.
RESULTS OF OPERATIONS
The following table presents, for the years indicated, the
percentage relationship which certain captioned items in the
Registrant's Consolidated Statements of Operations bear to total
revenues and other pertinent data:
YEAR ENDED DECEMBER 31, 1998 1997 1996
- ----------------------- ---- ---- ----
STATEMENTS OF OPERATIONS DATA:
Total Revenue .................... 100.0% 100.0% 100.0%
Cost of Goods Sold ............... 94.2% 91.4% 87.0%
Selling, General and
Administrative Expenses ......... 6.6% 8.1% 10.8%
Income (loss) from Operations .... (0.8%) 0.5% 2.2%
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31,
1997
The revenue in 1998 was $65,204,980 representing an increase
of $19,993,387 or 44.2% compared to 1997. The management
services business grew 36.7% to $44,106,218 by increasing the
same account and new account business serviced to over 2,500
accounts nationwide. Recycling revenues grew 66.5% to
$19,167,893 contributing to much of the remaining overall growth.
The major products include recycling of copper, aluminum and
brass, referred to herein as non-ferrous scrap. The ferrous
recycling business increased its revenues by 14.6% through an
increase in direct sales to mills and more aggressive purchasing
practices.
The 1998 total cost of goods sold was $61,457,890 increasing
$20,127,352 or 48.7% compared to 1997. The cost of goods sold in
management services increased by 38.5% versus an increase in
recycling cost of goods sold of 79.5%. The increase in
management services mirrored the sales increase within one (1)
percentage point, but the major cost of sales impact was realized
in the recycling business. Commodity prices of the ferrous and
non-ferrous markets began to decline during the third and fourth
quarters of 1998. The influx of foreign steel due to the
depressed Asian market caused domestic commodity pricing to
plummet. Due to the lack of domestic steel production, many of
the regional steel mills, which consume the Registrant's ferrous
product, had limited scrap purchasing during the fourth quarter.
The Registrant's inventory volume increased due to the local
dismantling of an automotive plant. Offsetting this quantity
increase in inventory is a decrease in inventory market value. The
Registrant estimates that these factors had a $370,000 adverse
impact on its 1998 operations.
The gross margin was $3,747,090 representing a decrease of
$133,965 or as a percentage to revenue a 2.9% decrease. A slight
decrease in gross margin as a percentage to revenue from 5.7% to
5.1% was realized in the management services segment due to some
fixed fee contracts which experienced store location growth
during the year. The recycling division experienced a decrease
in gross margin as a percentage to revenue of 6.9% due mainly to
the declining commodity price index. It is estimated that the
decline in commodity values had an adverse gross margin impact on
operations of approximately $370,000. The equipment
sales/leasing business incurred a decline in gross margins due to
the changing mix of higher sales relative to the rental and leasing
volume.
The selling, general and administrative expenses increased
$624,192 from 1997. The increase was primarily attributable to
Goodwill and Non-compete amortization related to two recent
acquisitions.
The loss from operations in 1998 resulted not only from the
$370,000 due to inventory devaluation, but also from the additional
$376,800 due to an aggregate of non-cash charges made in 1998.
FINANCIAL CONDITION AT DECEMBER 31, 1998 COMPARED TO DECEMBER 31,
1997
Trade accounts receivable increased $2,445,704 to $7,474,473
at December 31, 1998. This represents a 48.6% increase while
overall revenue increased 44.2%. Average days outstanding in
1998 were 41.8 days versus 40.6 days in 1997. Although there was
a slight increase in days outstanding due to the revenue mix, it
still reflects management focus on working capital through the
liquidation of accounts receivable.
Inventory increased $3,526 from $2,511,826 to $2,515,352
representing a .1% increase. The inventory of equipment and
parts increased from $752,099 to $761,780 or a 1.3% increase.
Non-ferrous materials inventory decreased 37.9% to $622,527 and
the inventory of ferrous materials increased 49.4% or $374,105.
The increase is due primarily to the purchase of a major ferrous
scrap plant rework which occurred at the end of 1998.
Accounts payable trade increased $3,570,103 from December
31, 1997 to $9,746,536 as of December 31, 1998. This increase
was due to higher volumes in operations.
As of December 31, 1998 the Registrant's working capital
deficit was $659,997, which represents a decrease of $164,447
from 1997. The total current assets increased $3,049,934 due to
the $2,445,704 in accounts receivable and the $518,234 increase
in cash. The total current liabilities increased $3,214,381
affected primarily by total accounts payable increase of
$3,570,103.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31,
1996
The revenue in 1997 was $45,211,593 representing an increase
of $10,934,377 or 32% compared to 1996. The revenue from the
newly acquired The Metal Center is included for six months and
represented 14% of the overall growth. The major products
include recycling of copper, aluminum and brass, referred to
herein as non-ferrous scrap. Except for equipment and corrugated
recycling, all other existing businesses had solid growth
contributing the remaining 18% of the total. One of the major
contributors to the remaining growth was the ferrous recycling
business, which includes iron and steel products. Recycling
revenues grew 126% to $11,513,600 through an increase in direct
sales to mills and more aggressive purchasing practices. The
management services business grew 17% to $32,064,237 by
increasing the same account and new account business serviced
from approximately 1,500 locations on December 31, 1996 to 2,000
locations on December 31, 1997. In addition, the management
services business absorbed approximately 550 additional locations
from MGM in the last quarter.
The 1997 total cost of goods was $41,330,538 increasing
$11,496,175 or 39% compared to 1996. The cost of goods sold in
management services increased by 22.2% versus an increase in
recycling cost of goods sold of 161.3%. This divergence was
caused by the addition of the non-ferrous business, which has
typically a lower gross profit percentage than the existing
business base. Secondly, the ferrous business spreads narrowed
due to competitive pressures. Finally, the corrugated recycling
business, while the most profitable product line in recycling and
which showed an improved percentage gross margin in 1997,
experienced a drop in revenue during 1997. The equipment
division had cost of goods sold of $953,463 or 22% less in 1997
versus 1996. This cost decrease compares with a revenue decrease
of 11%. The business experienced a 28% cost decrease in
equipment sales to approximately $803,500 while experiencing a
29% increase in rental/leasing. The Registrant has focused on
the growth of the rental/leasing portion of its business.
The gross margin was $3,881,055 representing a decrease of
$561,798 in 1997 or 12.6% from 1996. The gross margin was 8.6%
of revenue, which was 4.4% lower than 1996. A reduced gross
margin percentage of 4.0% was experienced in management services
due to some fixed fee contracts which experienced store location
growth during the year. Finally, the recycling division
experienced a 11.9% gross profit decrease due to the new mix of
non-ferrous products and narrowing spreads on the ferrous
products, and lower volume of corrugated scrap processing. The
equipment business had 8.6% higher gross margin percentage, due
to a favorable mix of higher rental and leasing business relative
to equipment sales.
The selling, general, and administrative expenses decreased
$35,070 as compared to 1996. As a percent of revenue, the
selling, general, and administrative expenses dropped from 10.8%
of revenue to 8.1%.
FINANCIAL CONDITION AT DECEMBER 31, 1997 COMPARED TO DECEMBER 31,
1996
Trade accounts receivable increased $1,728,041 to $5,028,769
at December 31, 1997. Last year the Registrant received a
December receivable payment of $1,264,920 at year end, and as a
result of this timing difference, trade receivables decreased
from $4,565,648 to $3,300,728. Therefore, the adjusted increase
as of December 31, 1997 was $463,121, which represented a 10%
increase in 1997. This increase is significantly less than the
32% increase in revenue, reflecting management focus on working
capital through the liquidation of accounts receivable.
Inventory increased $2,078,723 or 480% to $2,511,826. Of
the total increase, equipment increased $667,241 and the non-
ferrous scrap inventory increased $960,117 due primarily to the
new non-ferrous operation. The remaining increase was due to the
purchase of a major ferrous scrap plant rework, which occurred at
the end of the year, resulting in a temporary increase in ferrous
unprocessed scrap inventory.
Accounts payable trade increased $1,385,723 from December
31, 1996 to $6,176,433 as of December 31, 1997. This increase
was due to higher volumes in all areas of the Registrant's
operations except corrugated paper.
As of December 31, 1997, the Registrant's working capital
was a deficit of $495,550, which represents a $1,463,614 decrease
from 1996. The total current assets increased $1,875,835 due to
the $2,078,723 increase in inventory, and the increase in total
receivables of $623,185 offset by impact of the lower cash of
$875,601. The current liabilities increased $3,321,449 affected
primarily by total accounts payable increases of $1,228,945 and
additional short-term bank borrowings of $1,200,000.
INFLATION AND PREVAILING ECONOMIC CONDITIONS
To date, inflation has not and is not expected to have a
significant impact on the Registrant's operation in the near
term. The Registrant has no long-term fixed-price contracts and
the Registrant believes it will be able to pass through most cost
increases resulting from inflation to its customers. The global
economy, due to the devaluation of currency in various foreign
nations and the limited commodity export opportunities, has
created a weak domestic and international commodity market. The
Registrant is susceptible to the cyclical nature of the commodity
business. In response to these economic conditions, the
Registrant has focused on the management consulting area of the
business and is working to liquidate inventories while efforts
are made to enhance gross margins.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards No. 131 ("SFAS 131"),
"Disclosures about Segments of an Enterprise and Related
Information," in June 1997. The Registrant adopted SFAS 131
effective with the 1998 consolidated financial statements.
The FASB also issued Statement of Financial Accounting
Standards No. 132 ("SFAS 132"), "Employers' Disclosures about
Pensions and Other Postretirement Benefits," in February 1998.
The statement will not have an impact on the Registrant's
financial position or results of operations.
The FASB issued Statement of Financial Accounting Standards
No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and
Hedging Activities," in June 1998. SFAS 133 establishes
accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires recognition
of all derivatives as either assets or liabilities on the balance
sheet and measurement of those instruments at fair value. If
certain conditions are met, a derivative may be designed
specifically as (a) a hedge of the exposure to changes in the
fair value of a recognized asset or liability or an unrecognized
firm commitment referred to as a fair value hedge, (b) a hedge of
the exposure to variability in cash flows of a forecasted
transaction (a cash flow hedge), or (c) a hedge of the foreign
currency exposure of a net investment in a foreign operation, an
unrecognized firm commitment, an available-for-sale security, or
a forecasted transaction. The statement will not have an impact
on the Registrant's financial position or results of operations.
YEAR 2000 RISK FACTORS
In February 1997, the Registrant implemented its "Year 2000
Project" to address the potential problem with which
substantially all users of automated data processing and
information systems must deal. This problem is mainly with older
systems with only two digits to represent the year, rather than
the full four digits. Older computer systems may not operate
when the two digit year becomes "00" as will happen in the year
2000.
The Registrant uses primarily "Microsoft" software, which is
already year 2000 compliant. The Registrant's accounting system
is a DOS based system, which could create the problem with "00".
The Registrant in its endeavor to alleviate this DOS-based
problem has contracted with the programmer of the Registrant to
write software to prevent this potential problem. The software
upgrade was completed in February 1999 and the Registrant is
testing the program to verify all is in working order. By having
the upgrade this far in advance it will enable the Registrant to
run a test system to avert any future problem.
The only software that the Registrant uses that is beyond
its control is "EDI" or "Electronic Data Interchange". The
vendor of this software used by the Registrant and many Fortune
500 Companies, has promised a fix for this problem with its
Spring 1999 Release Software Upgrade. This area is the one over
which the Registrant has the least control. If EDI completes its
upgrade as promised the Registrant does not anticipate a Year
2000 problem with this software.
In summary, the Registrant's Year 2000 Project's goal and
expectation are that all necessary modifications and upgrades
will be in place, with the exception of EDI that is promised by
the vendor in spring 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 address the issues
appropriately; or should the one vendor fail to meet the spring
1999 deadline. 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
Not Applicable.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements of the Registrant required
to be included in this Item 8 are set forth in Item 14 of this report.
The quarterly results of operations are included in the Notes to
Consolidated Financial Statements under Item 14.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
(a)(1)(i) On July 15, 1997, the Registrant dismissed Mather,
Hamilton and Company ("Mather, Hamilton") as its
independent accountants.
(a)(1)(ii) Not applicable.
(a)(1)(iii) The decision to change accountants was approved by
the Board of Directors.
(a)(1)(iv) During the interim periods from December 31, 1996
through July 15, 1997 there were no disagreements
between Mather, Hamilton and the Registrant, on
any matter of accounting principles or practices,
financial statement disclosure, or auditing scope
or procedure, which, if not resolved to the former
accountant's satisfaction, would have caused it to
make reference to the subject matter of the
disagreement in connection with its reports.
(a)(1)(v)(A) Not applicable.
(a)(1)(v)(B) Not applicable.
(a)(1)(v)(C) Not applicable.
(a)(1)(v)(D) Not applicable.
(a)(2) The Registrant engaged Crowe, Chizek and Company,
LLP as the auditor for the year ending December
31, 1997, on July 29, 1997. Crowe, Chizek and
Company, LLP continues to serve as the auditor for
the Registrant.
(a)(3) Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. *
The information in Item 4a. in this report is incorporated
herein by reference.
ITEM 11. EXECUTIVE COMPENSATION *
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT. *
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. *
- ---------------
* The information required by Items 10, 11, 12 and 13 is or
will be set forth in the definitive proxy statement relating
to the 1999 Annual Meeting of Shareholders of the Registrant
which is to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A under the Securities
Exchange Act of 1934, as amended. Such definitive proxy
statement relates to an annual meeting of shareholders and
the portions therefrom required to be set forth in this Form
10-K by Items 10, 11, 12 and 13 are incorporated herein by
reference pursuant to General Instruction G(3) to Form 10-K.
PART IV
ITEM 14. EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K.
(a)(1) The following consolidated financial statements of
Industrial Services of America, Inc. are filed as a part of
this report:
Page
----
Report of Independent Auditors F-1(a)
Report of Independent Auditors F-1(b)
Consolidated Balance Sheets as of
December 31, 1998 and 1997 F-2
Consolidated Statements of Operations
for the years ended December 31, 1998,
1997 and 1996 F-3
Consolidated Statements of Shareholders'
Equity for the years ended December 31,
1998, 1997 and 1996 F-4
Consolidated Statements of Cash Flows
for the years ended December 31, 1998,
1997 and 1996 F-5
Notes to Consolidated Financial Statements F-6
(a)(2) Consolidated Financial Statement Schedules.
Schedule II - Valuation and Qualifying
Accounts for the Year ended
December 31, 1998 F-21
(a)(3) List of Exhibits.
Exhibits filed with, or incorporated by reference herein,
this report are identified in the Index to Exhibits appearing in
this report. The Management Agreement and the Consulting
Agreement required to be filed as exhibits to this Form 10-K
pursuant to Item 14(c) are noted by an asterisk (*) in the Index
to Exhibits.
(b) Reports on Form 8-K.
The Registrant filed two Reports on Form 8-K during the last
quarter of the fiscal year of the Registrant ended December 31,
1998. The Registrant's Form 8-K dated October 29, 1998 reported
the resignation of R. Michael Devereaux from the Board of
Directors and from his positions on all committees thereof. The
Registrant's Form 8-K dated November 18, 1998 reported the
reinstatement of Mr. Devereaux to the Board of Directors and to
his positions on the Compensation and Audit Committees of the
Board of Directors.
(c) Exhibits.
The exhibits listed on the Index to Exhibits are filed as a
part of this report.
(d) Consolidated Financial Statement Schedules.
Schedule II -Valuation and Qualifying Accounts for the year
ended December 31, 1998 is incorporated by reference at page F-21
of the Consolidated Financial Statements of the Registrant.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: April 14, 1999 By : /s/ Harry Kletter
---------------------------------
Harry Kletter, Chairman of the
Board and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act
of 1934, this report has been signed below by the following
persons on behalf of the Registrant and in the capacities and on
the dates indicated:
Signature Title Date
--------- ----- ----
/s/ Harry Kletter Chairman of the Board and Chief April 14, 1999
- ----------------------- Executive Officer (Principal
Harry Kletter Executive Officer)
/s/ Sean M. Garber Director, President, Chief April 14, 1999
- ----------------------- Operating Officer and
Sean M. Garber Treasurer
/s/ John O. Tietjen Chief Financial Officer April 14, 1999
- ----------------------- (Principal Financial Officer)
John O. Tietjen
/s/ Joseph H. Cohen Director April 14, 1999
- -----------------------
Joseph H. Cohen
/s/ R. Michael Devereaux Director April 14, 1999
- -----------------------
R. Michael Devereaux
/s/ Dr. Barry N. Naft Director April 14, 1999
- -----------------------
Dr. Barry N. Naft
INDEX TO EXHIBITS
Exhibit
Number Description of Exhibits
- ------- -----------------------
3.1 Certificate of Incorporation of the Registrant is
incorporated by reference to Exhibit 3.1 of the
Registrant's report of Form 10-KSB for the year ended
December 31, 1995.
3.2 Bylaws of the Registrant are incorporated by reference
to Exhibit 3.2 of the Registrant's report on Form 10-
KSB for the year ended December 31, 1995.
10.1 Independent Consulting Services Agreement - Maxwell,
dated as of March 31, 1995, and executed on June 25,
1996, by and between the Registrant and Douglas I.
Maxwell, III ("Maxwell"), is incorporated by reference
to Exhibit 4(a) of Registration Statement on Form S-8
of the Registrant, filed on June 26, 1996 (File No. 333-
06915).
10.2 Confidential Information and Non-Competition Agreement
Independent Contractor - Maxwell, dated as of March 31,
1995, and executed on June 26, 1996, by and between the
Registrant and Maxwell, is incorporated by reference to
Exhibit 10.1 of Registration Statement on Form S-8 of
the Registrant, filed on June 26, 1996 (File No. 333-
06915).
10.3 Stock Option Agreement - Maxwell, dated as of March 31,
1995, and executed on June 26, 1996, by and between the
Registrant and Maxwell, is incorporated by reference to
Exhibit 4(b) of Registration Statement on Form S-8 of
the Registrant, filed on June 26, 1996 (File No. 333-
06915).
10.4 Independent Consulting Services Agreement - Sullivan,
dated as of March 31, 1995, and executed on June 26,
1996, by and between the Registrant and Neil C.
Sullivan ("Sullivan"), is incorporated by reference to
Exhibit 4(a) of Registration Statement on Form S-8 of
the Registrant, filed on June 26, 1996 (File No. 333-
06909).
10.5 Confidential Information and Non-Competition Agreement
Independent Contractor - Sullivan, dated as of March
31, 1995, and executed on June 26, 1996, by and between
the Registrant and Sullivan, is incorporated by
reference to Exhibit 10.1 of Registration Statement on
Form S-8 of the Registrant, filed on June 26, 1996
(File No. 333-06909).
10.6 Stock Option Agreement - Sullivan dated as of March 31,
1995, and executed on June 26, 1996, by and between the
Registrant and Sullivan, is incorporated by reference
to Exhibit 4(b) of Registration Statement on Form S-8
of the Registrant, filed on June 26, 1996 (File No. 333-
06909).
10.7 Acquisition of Assets Agreement - TMG known as "The
Metal Center" dated as of July 1, 1997, by and between
the Registrant and The Metal Center set forth in an
Asset Purchase Agreement, is incorporated by reference,
as the sole Exhibit on Form 8-K of the Registrant,
filed July 15, 1997 (File No. 0-20979).
10.8 Assignment of Contracts - MGM Assignment dated
September 4, 1997, by and between the Registrant and
MGM Services, Inc. is incorporated by reference to
Exhibit 10.11 of the Registrant's report on Form 10-K
for the year ended December 31, 1997.
10.9 Employment Agreement - Garber dated as of October 15,
1997, by and between the Registrant and Garber is
incorporated by reference to Exhibit 10.12 of the
Registrant's report on Form 10-K for the year ended
December 31, 1997.
10.10 Lease Agreement - K&R Lease dated January 1, 1998, by
and between the Registrant and K&R, is incorporated by
reference herein, to Exhibit 10.10 on Form 8-K of the
Registrant, filed March 3, 1998 (File No. 0-20979).*
10.11 Consulting Agreement - K&R Consulting Agreement dated
as of January 2, 1998, by and between the Registrant
and K&R, is incorporated by reference herein, to
Exhibit 10.11 on Form 8-K of the Registrant, filed
March 3, 1998 (File No. 0-20979).*
10.12 Amendment to Employment Agreement - Garber dated as of
February 5, 1998, by and between the Registrant and
Garber, amending original agreement dated October 15,
1997 is incorporated by reference to Exhibit 10.15 of
the Registrant's report on Form 10-K for the year ended
December 31, 1997.
10.13 Stock Option Agreement, effective as of October 31,
1997, by and between the Registrant and Glenn Bierman
10.14 Stock Option Agreement, effective as of October 27,
1997, by and between the Registrant and Sean Garber.
10.15 Stock Option Agreement, effective as of October 31,
1997, by and between the Registrant and Sean Garber.
10.16 Amendment No. 1 to Option Agreement, effective as of
February 5, 1998, by and between the Registrant and
Sean Garber.
10.17 Stock Option Agreement, effective as of February 16,
1998, by and between the Registrant and Harry Kletter.
10.18 Consulting Agreement - Lassak, dated as of June 2,
1998, by and between the Registrant and Andrew M.
Lassak.
10.19 Consulting Agreement - JCA/AML, dated as of June 2,
1998, by and among the Registrant, Joseph Charles &
Associates, Inc. and Andrew M. Lassak.
10.20 Asset Purchase Agreement, effective as of June 1, 1998,
by and among the Registrant, ISA Indiana, Inc., R.J.
Fitzpatrick Smelters, Inc.; and R.K. Fitzpatrick and
Cheryl Fitzpatrick.
10.21 Lease Agreement, effective June 1, 1998, by and between
R.K. Fitzpatrick and Cheryl Fitzpatrick, R.J.
Fitzpatrick Smelters, Inc., and ISA Indiana, Inc.
10.22 Environmental Indemnity Agreement, effective as of June
1, 1998, by and between R.K. Fitzpatrick and Cheryl
Fitzpatrick, R.J. Fitzpatrick Smelters, Inc., and ISA
Indiana, Inc.
11 Statement of Computation of Earnings Per Share (See
Note 11 to Notes to Consolidated Financial Statements).
27 Financial Data Schedule (for SEC use only).
*Denotes a management contract of the Registrant required to be
filed as an exhibit pursuant to Item 601(10)(iii) of Regulation S-
K under the Securities Act of 1933, as amended.
INDUSTRIAL SERVICES OF AMERICA, INC. AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
INDUSTRIAL SERVICES OF AMERICA, INC. AND SUBSIDIARY
Louisville, Kentucky
CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
CONTENTS
REPORT OF INDEPENDENT AUDITORS 1
FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS 2
CONSOLIDATED STATEMENTS OF OPERATIONS 3
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY 4
CONSOLIDATED STATEMENTS OF CASH FLOWS 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6
SUPPLEMENTARY INFORMATION
VALUATION AND QUALIFYING ACCOUNTS 21
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
Industrial Services of America, Inc. and Subsidiary
Louisville, Kentucky
We have audited the accompanying consolidated balance sheets of
Industrial Services of America, Inc. and Subsidiary as of
December 31, 1998 and 1997, and the related consolidated
statements of operations, shareholders' equity and cash flows for
the years ended December 31, 1998 and 1997. These consolidated
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audit. The
consolidated statements of operations, shareholders' equity and
cash flows of Industrial Services of America, Inc. for the year
ended December 31, 1996 were audited by other auditors whose
report dated March 10, 1997, expressed an unqualified opinion on
those statements.
We conducted our audit in accordance with general accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, the 1998 and 1997 consolidated financial
statements referred to above present fairly, in all material
respects, the financial position of Industrial Services of
America, Inc. and Subsidiary at December 31, 1998 and 1997, and
the results of its operations and its cash flows for the years
then ended in conformity with generally accepted accounting
principles.
Our audit of the foregoing 1998 and 1997 consolidated financial
statements also included the schedule listed under item 14(a)(2).
In our opinion, such schedule presents fairly the information
required to be set forth therein.
/s/ Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
Indianapolis, Indiana
March 16, 1999, except for
note 3 as to which the date
is April 12, 1999.
1(a)
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Industrial Services of America, Inc. and Subsidiary
We have audited the accompanying consolidated statements of
operations, shareholders' equity, and cash flows of Industrial
Services of America, Inc. and Subsidiary for the year ended
December 31, 1996. These consolidated financial statements are
the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the consolidated financial statements are free of material
misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes
assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to
above present fairly, in all material respects, the results of
operations and cash flows of Industrial Services of America, Inc.
and Subsidiary for the year ended December 31, 1996, in
conformity with generally accepted accounting principles.
/s/ Mather, Hamilton, & Co.
MATHER, HAMILTON, & CO.
Louisville, Kentucky
March 10, 1997
1(b)
INDUSTRIAL SERVICES OF AMERICA, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
- -----------------------------------------------------------------
1998 1997
---- ----
ASSETS
Current assets
Cash $ 1,014,068 $ 495,834
Accounts receivable - trade (after
allowance for doubtful accounts
of $116,000 and $16,000 in 1998
and 1997, respectively) (Note 2) 7,474,473 5,028,769
Accounts receivable - related party
(Note 6) 26,259 34,667
Income tax refund receivable 113,000 164,737
Net investment in sales-type leases 35,270 40,154
Inventories (Notes 1 and 2) 2,515,352 2,511,826
Deferred income taxes (Note 4) 52,000 18,200
Other 309,692 195,993
---------- ----------
Total current assets 11,540,114 8,490,180
Net property and equipment
(Notes 1, 2 and 3) 5,063,576 3,642,712
Other assets
Non-compete agreements, net (Note 8) 810,604 450,000
Intangibles (net of accumulated
amortization of $80,000 and
$26,667 in 1998 and 1997,
respectively (Note 8) 720,000 773,333
Deferred income taxes (Note 4) 359,800 -
Other assets 153,439 344,645
---------- ----------
2,043,843 1,760,132
---------- ----------
$18,647,533 $13,893,024
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Notes payable to bank (Note 2) $ 1,850,000 $ 1,800,000
Notes payable (Note 8) - 800,000
Current maturities of long-term
debt (Note 3) 460,654 45,479
Accounts payable 9,746,536 6,176,433
Affiliated companies payable (Note 6) 22,000 23,000
Other current liabilities 120,921 140,818
---------- ----------
Total current liabilities 12,200,111 8,985,730
Long-term liabilities
Long-term debt (Note 3) 2,612,519 759,877
Deferred income taxes (Note 4) 411,800 257,700
---------- ----------
3,024,319 1,017,577
Shareholders' equity
Common stock, $.01 par value:
10,000,000 shares authorized and
1,957,500 shares issued and
1,929,600 shares outstanding 19,575 19,575
Additional paid-in capital 1,589,155 1,548,750
Retained earnings 1,822,373 2,329,392
Treasury stock, 27,900 shares at cost (8,000) (8,000)
---------- ----------
3,423,103 3,889,717
---------- ----------
$18,647,533 $13,893,024
========== ==========
See accompanying notes to consolidated financial statements.
2
INDUSTRIAL SERVICES OF AMERICA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1998, 1997 and 1996
- -----------------------------------------------------------------
1998 1997 1996
---- ---- ----
Revenue
Recycling $19,167,893 $11,513,600 $ 5,091,550
Equipment sales, service and leasing 1,930,869 1,633,756 1,830,273
Management services 44,106,218 32,064,237 27,355,393
---------- ---------- ----------
Total revenue 65,204,980 45,211,593 34,277,216
Cost of goods sold
Recycling 18,204,999 10,141,882 3,880,577
Equipment sales, service and leasing 1,380,946 953,463 1,226,739
Management services 41,871,945 30,235,253 24,727,047
---------- ---------- ----------
Total cost of goods sold 61,457,890 41,330,598 29,834,363
---------- ---------- ----------
GROSS MARGIN 3,747,090 3,880,995 4,442,853
Selling, general and administrative 4,290,368 3,666,176 3,701,246
---------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS (543,278) 214,819 741,607
Other income (expense)
Interest expense (215,144) (78,810) (53,268)
Interest income 67,993 64,549 43,339
Gain (loss) on sale of assets (367) 4,496 31,229
Other income (expense) (5,650) 17,372 (23,471)
---------- ---------- ----------
(153,168) 7,607 (2,171)
---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES (696,446) 222,426 739,436
Provision for income taxes (Note 4) 189,427 (85,290) (278,600)
---------- ---------- ----------
NET INCOME (LOSS) $ (507,019) $ 137,136 $ 460,836
========== ========== ==========
Earnings (loss) per share $ (.26) $ .07 $ .25
========== ========== ==========
Earnings (loss) per share,
assuming dilution $ (.26) $ .07 $ .24
========== ========== ==========
See accompanying notes to consolidated financial statements.
3
INDUSTRIAL SERVICES OF AMERICA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended December 31, 1998, 1997 and 1996
- ---------------------------------------------------------------------
Common Stock Additional Treasury Stock
------------ Paid-in Retained --------------
Shares Amount Capital Earnings Shares Cost Total
------ ------ ------- -------- ------ ---- -----
BALANCE AS OF JANUARY 1, 1996 1,757,500 $17,575 $ 27,000 $1,731,420 27,900 $8,000 $1,767,995
Fair value of stock options
issued for consulting services
provided to the Company (Note 9) - - 117,500 - - - 117,500
Common stock issued upon exercise
of non employee stock options
(Note 9) 200,000 2,000 248,000 - - - 250,000
Income tax benefit related to
exercise of non-employee
stock options (Note 9) - - 970,000 - - - 970,000
Stock transferred by Company's
principal shareholder for
services to be provided to
the Company (Note 6) - - 42,500 - - - 42,500
Net income - - - 460,836 - - 460,836
--------- ------- ---------- ---------- ------ ------ ----------
BALANCE AS OF DECEMBER 31, 1996 1,957,500 19,575 1,405,000 2,192,256 27,900 $8,000 3,608,831
Fair value of stock options
issued for employee stock
option plan (Note 9) - - 143,750 - - - 143,750
Net income - - - 137,136 - - 137,136
--------- ------- ---------- ---------- ------ ------ ----------
BALANCE AS OF DECEMBER 31, 1997 1,957,500 19,575 1,548,750 2,329,392 27,900 8,000 3,889,717
Fair value of stock options
issued for consulting services
provided to the Company (Note 9) - - 40,405 - - - 40,405
Net loss - - - (507,019) - - (507,019)
--------- ------- ---------- ---------- ------ ------ ----------
BALANCE AS OF DECEMBER 31, 1998 1,957,500 $19,575 $1,589,155 $1,822,373 27,900 $8,000 $3,423,103
========= ======= ========== ========== ====== ====== ==========
See accompanying notes to consolidated financial statements.
4
INDUSTRIAL SERVICES OF AMERICA, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1998, 1997 and 1996
- ---------------------------------------------------------------------------
1998 1997 1996
---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (507,019) $ 137,136 $ 460,836
Adjustments to reconcile net income
(loss) to net cash from operating
activities
(Gain) loss on equity investment - (29,142) 29,142
Stock options granted for services 112,270 14,974 100,625
Depreciation and amortization 1,173,448 730,227 465,838
Provision for doubtful accounts 100,580 37,983 2,255
Deferred income taxes (239,500) 123,900 55,400
Loss (gain) on sale of property
and equipment 367 (4,496) (31,229)
Change in assets and liabilities
Receivables (2,486,139) (661,168) (404,297)
Inventories (3,526) (2,078,723) (294,600)
Other current assets (108,815) (27,009) (52,715)
Accounts payable 3,569,103 1,228,945 1,193,376
Other current liabilities (19,897) 58,802 (28,407)
---------- ---------- ----------
Net cash from operating
activities 1,590,872 (468,571) 1,496,224
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of property
and equipment - 86,028 59,603
Proceeds from sale of joint venture - 44,826 -
Purchases of sales-type leases - (226,517) (2,369)
Proceeds from sales-type leases - 13,807 39,388
Investment in joint venture - - (44,826)
Purchases of property and equipment (2,140,168) (1,373,610) (1,156,839)
Other 283,699 (139,787) (7,537)
---------- ---------- ----------
Net cash from investing activities (1,856,469) (1,595,253) (1,112,580)
CASH FLOWS FROM FINANCING ACTIVITIES
Net borrowings from note payable
to bank 50,000 1,200,000 600,000
Proceeds from issuance of
long-term debt 900,000 - -
Payments on long-term debt (166,169) (11,777) (370,098)
Proceeds from exercise of
nonemployee stock options - - 250,000
---------- ---------- ----------
Net cash from financing activities 783,831 1,188,223 479,902
---------- ---------- ----------
Net change in cash 518,234 (875,601) 863,546
Cash at beginning of year 495,834 1,371,435 507,889
---------- ---------- ----------
CASH AT END OF YEAR $ 1,014,068 $ 495,834 $ 1,371,435
========== ========== ==========
Supplemental disclosure of
cash flow information
Cash paid for interest $ 215,144 $ 78,810 $ 48,748
Cash paid (refunded) for taxes $ (1,614) $(1,077,773) $ 641,226
See accompanying notes to consolidated financial statements.
5
INDUSTRIAL SERVICES OF AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business: Industrial Services of America, Inc. (the
- ------------------
Company) provides products and services to meet the waste
management needs of its customers related to ferrous, non-ferrous
and corrugated scrap recycling, management services and waste
equipment sales and rental. Management services represents
contracts with retail businesses to handle their waste disposal
needs, primarily by subcontracting with commercial waste hauling
and disposal companies. The Company's customers are located
throughout the United States and Canada. The Company's wholly-
owned subsidiary, ISA Indiana, Inc., provides services related to
ferrous and non-ferrous scrap recycling.
Principles of Consolidation: The consolidated financial
- ---------------------------
statements include the accounts of the Company and its wholly
owned subsidiary ISA Indiana, Inc. Upon consolidation, all
intercompany accounts, transactions and profits have been
eliminated.
Common Control: The Company conducts significant levels of
- --------------
business (see Note 6) with K & R Corporation, Inc. (K&R) which is
owned by the Company's principal shareholder. Because these
entities are under common control, operating results or financial
position of the Company may be materially different from those
that would have been obtained if the entities were autonomous.
Estimates: In preparing the consolidated financial statements in
- ---------
conformity with generally accepted accounting principles,
management must make estimates and assumptions. These estimates
and assumptions affect the amounts reported for assets,
liabilities, revenues and expenses, as well as affecting the
disclosures provided. Future results could differ from the
current estimates.
Inventories: Inventories consist principally of waste equipment
- -----------
machinery and parts and scrap materials held for resale and are
stated at the lower of cost (first-in, first-out method) or
market. Inventories as of December 31, 1998 and 1997 consist of
the following:
1998 1997
---- ----
Equipment and parts $ 761,780 $ 752,099
Ferrous materials 1,131,045 756,940
Non-ferrous materials 622,527 1,002,787
---------- ----------
$2,515,352 $2,511,826
========== ==========
Property and Equipment: Property and equipment are stated at
- ----------------------
cost and depreciated on a straight-line basis over the estimated
useful lives of the related property.
(Continued)
6
INDUSTRIAL SERVICES OF AMERICA, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December