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FORM 10-Q |
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SECURITIES AND EXCHANGE COMMISSION |
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[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
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OR |
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[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE |
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Commission File Number 0-20979 |
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INDUSTRIAL SERVICES OF AMERICA, INC. |
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Florida |
59-0712746 |
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(State or other jurisdiction of |
(IRS Employer |
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Incorporation or Organization) |
Identification No.) |
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7100 Grade Lane, PO Box 32428 |
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(502) 368-1661 |
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Check whether the registrant (1) has filed all Reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ___ |
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Indicate by check mark whether the registrant is an accelerated filer (as defined in rule 12b-2 of the Act). Yes No X |
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Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of March 31, 2004: 3,475,468. |
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INDUSTRIAL SERVICES OF AMERICA, INC. AND SUBSIDIARIES |
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INDEX |
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Page No. |
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Part I |
Financial Information |
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Condensed Consolidated Balance Sheets |
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March 31, 2004 and December 31, 2003 (Unaudited) |
3 |
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Condensed Consolidated Statements of |
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Operations - Three Months Ended |
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March 31, 2004 and 2003 (Unaudited) |
5 |
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Condensed Consolidated Statements of Shareholders' Equity |
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March 31, 2004 and December 31, 2003 (Unaudited) |
6 |
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Condensed Consolidated Statements of |
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Cash Flows - Three Months Ended |
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March 31, 2004 and 2003 (Unaudited) |
7 |
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Notes to Condensed Consolidated |
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Financial Statements (Unaudited) |
8 |
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Management's Discussion and Analysis |
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of Financial Condition and Results |
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of Operations |
11 |
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Part II |
Other Information |
14 |
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PART I -- FINANCIAL INFORMATION |
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ITEM 1: Condensed CONSOLIDATED FINANCIAL STATEMENTS. |
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INDUSTRIAL SERVICES OF AMERICA, INC. AND SUBSIDIARIES |
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CONDENSED CONSOLIDATED BALANCE SHEETS |
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(UNAUDITED) |
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ASSETS |
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March 31, |
December 31, |
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Current assets |
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Cash and cash equivalents |
$ 500,734 |
$ 662,772 |
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Accounts receivable - trade (after allowance |
12,094,852 |
9,053,986 |
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Net investment in sales-type leases |
80,734 |
79,754 |
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Inventories |
2,948,404 |
1,532,138 |
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Deferred income taxes |
110,700 |
110,700 |
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Other |
136,626 |
185,768 |
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Total current assets |
15,872,050 |
11,625,118 |
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Net property and equipment |
7,075,267 |
7,487,901 |
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Other Assets |
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Goodwill |
560,005 |
560,005 |
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Net investment in sales-type leases |
187,683 |
208,238 |
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Notes receivable |
22,430 |
27,008 |
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Other assets |
104,132 |
79,941 |
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874,250 |
875,192 |
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$ 23,821,567 |
$19,988,211 |
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See accompanying notes to consolidated financial statements |
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3. |
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INDUSTRIAL SERVICES OF AMERICA, INC. AND SUBSIDIARIES |
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CONDENSED CONSOLIDATED BALANCE SHEETS |
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CONTINUED |
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(UNAUDITED) |
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LIABILITIES AND STOCKHOLDERS' EQUITY |
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March 31, |
December 31, |
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Current liabilities |
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Current maturities of long-term debt |
882,353 |
845,383 |
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Current maturities of capital lease obligation |
161,435 |
159,073 |
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Accounts payable |
14,062,943 |
10,502,503 |
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Income tax payable |
274,652 |
27,280 |
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Other current liabilities |
390,436 |
364,008 |
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Total current liabilities |
15,771,819 |
11,898,247 |
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Long-term liabilities |
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Long-term debt |
2,084,660 |
2,917,525 |
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Capital lease obligation |
789,617 |
830,873 |
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Deferred income taxes |
324,400 |
324,400 |
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3,198,677 |
4,072,798 |
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Stockholders' equity |
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Common stock, $.005 par value, 10,000,000 shares authorized, |
20,775 |
19,675 |
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Additional paid-in capital |
2,282,806 |
1,950,221 |
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Retained earnings |
3,250,451 |
2,801,167 |
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Treasury stock, 679,532 and 729,200 shares at average cost |
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in 2004 and 2003 |
(702,961) |
(753,897) |
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4,851,071 |
4,017,166 |
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$ 23,821,567 |
$ 19,988,211 |
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See accompanying notes to consolidated financial statements. |
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4. |
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INDUSTRIAL SERVICES OF AMERICA, INC. AND SUBSIDIARIES |
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS |
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THREE MONTHS ENDED MARCH 31, 2004 AND 2003 |
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(UNAUDITED) |
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2004 |
2003 |
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Revenue |
$ 34,764,205 |
$ 25,841,082 |
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Cost of goods sold |
32,540,837 |
24,701,260 |
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Selling, general and administrative |
1,420,068 |
1,380,314 |
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Income (loss) before other expenses |
803,300 |
(240,492) |
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Other expenses, net |
(54,493) |
(63,880) |
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Income (loss) before income taxes |
748,807 |
(304,372) |
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Provision (benefit) for income taxes |
299,523 |
(121,749) |
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Net income (loss) |
$ 449,284 |
$ (182,623) |
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Basic earnings (loss) per share |
$ 0.14 |
$ (0.05) |
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Diluted earnings (loss) per share |
$ 0.13 |
$ (0.05) |
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Weighted shares outstanding: |
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Basic |
3,304,494 |
3,229,600 |
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Diluted |
3,588,058 |
3,229,600 |
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See accompanying notes to consolidated financial statements. |
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5. |
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INDUSTRIAL SERVICES OF AMERICA, INC. |
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(UNAUDITED) |
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_________________________________________________________________________________________________________________________ |
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Additional |
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Common Stock |
Paid-in |
Retained |
Treasury Stock |
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Shares |
Amount |
Capital |
Earnings |
Shares |
Cost |
Total |
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Balance as of December 31, 2003 |
3,935,000 |
$19,675 |
$1,950,221 |
$2,801,167 |
729,200 |
$ (753,897) |
$4,017,166 |
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Exercise of common stock options |
220,000 |
1,100 |
273,900 |
- |
- |
- |
275,000 |
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Treasury stock distribution to employees |
- |
- |
58,685 |
- |
49,668 |
50,936 |
109,621 |
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Net income |
- |
- |
- |
449,284 |
- |
- |
449,284 |
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Balance as of March 31, 2004 |
4,155,000 |
$20,775 |
$2,282,806 |
$3,250,451 |
679,532 |
$ (702,961 ) |
$4,851,071 |
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See accompanying notes to consolidated financial statements. |
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6. |
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INDUSTRIAL SERVICES OF AMERICA, INC. AND SUBSIDIARIES |
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS |
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THREE MONTHS ENDED MARCH 31, 2004 AND 2003 |
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(UNAUDITED) |
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2004 |
2003 |
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Cash flows from operating activities |
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Net income (loss) |
$ 449,284 |
$ (182,623) |
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Adjustments to reconcile net income (loss) to |
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Depreciation and amortization |
383,838 |
446,569 |
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Treasury stock distribution to employees |
109,621 |
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- |
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Deferred income tax |
- |
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(121,188) |
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Loss on sale of property and equipment |
8,361 |
15,602 |
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Change in assets and liabilities |
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Receivables |
(3,036,288) |
(2,771,399) |
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Inventories |
(1,413,191) |
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181,616 |
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Other assets |
24,951 |
(143,657) |
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Accounts payable |
3,560,440 |
2,209,830 |
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Other current liabilities |
273,800 |
123,064 |
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Net cash from operating activities |
360,816 |
(242,186) |
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Cash flows from investing activities |
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Proceeds from equipment under sales-type leases |
194,532 |
37,852 |
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Proceeds from sale of property and equipment |
1,000 |
10,100 |
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Purchases of property and equipment |
(158,596) |
(162,741) |
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Net cash from investing activities |
36,936 |
(114,789) |
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Cash flows from financing activities |
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Net borrowings on note payable to bank |
- |
250,000 |
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Exercise of common stock options |
275,000 |
- |
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Payments on capital lease obligation |
(38,895) |
(24,658) |
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Payments on long-term debt |
(795,895) |
(182,394) |
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Net cash from financing activities |
(559,790) |
42,948 |
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Net decrease in cash |
(162,038) |
(314,027) |
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Cash at beginning of period |
662,772 |
1,630,028 |
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Cash at end of period |
$ 500,734 |
$ 1,316,001 |
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See accompanying notes to consolidated financial statements. |
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7. |
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INDUSTRIAL SERVICES OF AMERICA, INC. AND SUBSIDIARIES |
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
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(Unaudited) |
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NOTE 1 -- BASIS OF PRESENTATION |
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The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial reporting. They do not include all information and footnotes required by generally accepted accounting principles for complete consolidated financial statements. The information furnished includes all adjustments which are, in the opinion of management, necessary to present fairly the Registrant's financial position as of March 31, 2004 and the results of its operations and changes in its cash flow for the periods ended March 31, 2004 and 2003. Results of operations for the period ended March 31, 2004 are not necessarily indicative of the results that may be expected for the entire year. Additional information, including the audited December 31, 2003 consolidated financial statements and the Summary of Significant Accounting Policies, is included in the Registrant's Annual Report on Form 10-K for the year ended December 31, 2003 on file with the Securities and Exchange Commission. |
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NOTE 2 -- ESTIMATES |
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In preparing the condensed 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. |
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NOTE 3 -- LONG TERM DEBT AND NOTES PAYABLE TO BANK |
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The terms of the loan agreements with the Company's Bank place certain covenants on the Company, including maintenance of a specified tangible net worth, debt to net worth and EBITDA ratio. At March 31, 2004, the Company was in compliance with all covenants. There were no borrowings against this line of credit as of March 31, 2004 or December 31, 2003. |
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NOTE 4 -- STOCK SPLIT |
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On February 26, 2004, the Company approved a two for one stock split distributed on March 30, 2004 to shareholders of record on March 16, 2004. Earnings per share and all share data presented herein are retroactively adjusted to reflect this stock split. |
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NOTE 5 -- SEGMENT INFORMATION |
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The Company's operations include three primary segments: ISA Recycling, Computerized Waste Systems (CWS), and Waste Equipment Sales & Service (WESSCO). ISA recycling provides products and services to meet the needs of its customers related to ferrous, non-ferrous and fiber recycling at two locations in the Midwest. CWS provides waste disposal services including contract negotiations with vendors, centralized billing, invoice auditing, and centralized dispatching. WESSCO sells, leases, and services waste handling and recycling equipment. |
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8 |
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NOTE 5 -- SEGMENT INFORMATION (Continued) |
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The Company's three segments are determined by the products and services that each offers. The recycling segment generates its revenues based on buying and selling of ferrous, non-ferrous and fiber scrap; CWS's revenues consist of charges to customers for waste disposal services; and WESSCO sales and lease income comprise the primary source of revenue for this segment. |
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The Company evaluates segment performance based on gross profit or loss and the evaluation process for each segment includes only direct expenses and selling, general and administrative costs, omitting any other income and expense and income taxes. |
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ISA |
Computerized |
Waste |
Corporate |
Segment |
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Recycling revenues |
$ 11,164,149 |
$ - |
$ - |
$ - |
$11,164,149 |
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Equipment sales, service |
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and leasing revenues |
- |
- |
887,712 |
- |
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887,712 |
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Management fees |
- |
22,712,344 |
- |
- |
22,712,344 |
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Cost of goods sold |
(10,127,315) |
(21,946,651) |
(466,871) |
- |
(32,540,837) |
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Selling, general and |
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administrative expenses |
(184,132) |
(495,755) |
(135,218) |
(604,963) |
(1,420,068) |
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Segment profit (loss) |
$ 852,702 |
$ 269,938 |
$ 285,623 |
$ (604,963) |
$ 803,300 |
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Segment assets |
$12,726,463 |
$ 7,201,285 |
$ 1,853,526 |
$ 2,040,293 |
$23,821,567 |
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three months ended March 31, 2003 |
ISA |
Computerized |
Waste |
Corporate |
Segment |
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Recycling revenues |
$ 6,417,769 |
$ - |
$ - |
$ - |
$ 6,417,769 |
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Equipment sales, service |
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and leasing revenues |
- |
- |
550,446 |
- |
550,446 |
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Management fees |
- |
18,872,867 |
- |
- |
18,872,867 |
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Cost of goods sold |
(6,359,970) |
(18,062,570) |
(278,720) |
- |
(24,701,260) |
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Selling, general and |
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administrative expenses |
(288,454) |
(478,307) |
(175,029) |
(438,524) |
(1,380,314) |
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Segment profit (loss) |
$ (230,655) |
$ 331,990 |
$ 96,697 |
$ (438,524) |
$ (240,492) |
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Segment assets |
$ 9,888,831 |
$ 7,576,768 |
$ 1,921,661 |
$ 1,787,638 |
$21,174,898 |
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9 |
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NOTE 6 -- INVENTORIES |
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Inventories consist of the following: |
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March 31, |
December 31, |
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Equipment and parts |
$ 87,209 |
$ 91,485 |
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Ferrous materials |
2,195,719 |
1,098,771 |
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Non-ferrous materials |
665,476 |
341,882 |
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Total inventories |
$ 2,948,404 |
$ 1,532,138 |
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NOTE 7 -- STOCK OPTION INFORMATION |
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Pursuant to SFAS No. 123, "Accounting for Stock-Based Compensation," the Company has elected to account for its employee stock options using the intrinsic value method under ABP No. 25, "Accounting for Stock Issued to Employees." Accordingly, no compensation cost has been recognized for employee options. |
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No options were issued in 2004. Compensation cost for employee options based on the fair value method at the grant date consistent with SFAS No. 123 would have been $0 for the three months ended March 31, 2004. As of March 31, 2004 and 2003, all outstanding options were fully vested. Accordingly, there is no difference between reported and proforma net income, or the basic and diluted earnings per share and the proforma basic and diluted earnings per share for the periods ended March 31, 2004 and 2003. |
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NOTE 8 -- PER SHARE DATA |
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The computation for basic and diluted earnings per share is as follows: |
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2003 |
2002 |
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Basic earnings per share |
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Net income (loss) |
$ 449,284 |
$ (182,623) |
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Weighted average shares outstanding |
3,304,494 |
3,229,600 |
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Basic earnings (loss) per share |
$ .14 |
$ (.05) |
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Diluted earnings per share |
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Net income (loss) |
$ 449,284 |
$ (182,623) |
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Weighted average shares outstanding |
3,304,494 |
3,229,600 |
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Add dilutive effect of assumed exercising |
283,564 |
- |
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Diluted average shares outstanding |
3,588,058 |
3,229,600 |
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Diluted earnings (loss) per share |
$ .13 |
$ (.05) |
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10 |
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ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
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The following discussion and analysis should be read in conjunction with the information set forth under Item 5, "Segment Information" and the condensed financial statements of the Registrant and the accompanying notes thereto included elsewhere in this report. |
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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. Factors that could affect financial predictions, forecasts and projections include the fluctuations in the commodity price index and any conditions internal to the major customers of the Registrant, including loss of their accounts. |
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General |
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The Registrant continued to pursue a growth strategy in the waste management services arena servicing over 5,000 customer locations throughout the United States, Canada, and Puerto Rico and building a base of approximately 2,300 vendors. This strategy will allow for diversity of business opportunities so that the Registrant is not as dependent upon the operating results 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. Much of management's focus and attention now and in the future is directed towards the growth of the management services business segment through expansion in the existing markets and through an acquisition strategy. The Registrant is also focused on technology enhancements that can be provided to the new and existing customer base to further solidify customer relationships. Additionally, the Registrant is exploring strategic alliances and relationships that will enable it to effectively execute its growth and acquisition strategy. |
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It is management's plan to expand the management services segment in 2004. 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. |
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Management continues to maintain and grow the recycling business within its existing structure and is not actively seeking any further acquisitions or mergers in this segment. It is the plan of management to maximize profits through the reduction of surplus inventory and fixed assets. |
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Liquidity and Capital Resources |
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As of March 31, 2004 the Registrant held cash and cash equivalents of $500,734. |
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The Registrant derives its revenues from several sources, including management services, equipment sales and leasing and from its recycling operations. Management services comprised approximately 65.3% and 73.0% of the Registrant's total revenues for the quarters ended March 31, 2004 and 2003, respectively. |
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11 |
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The Registrant currently maintains a $3.8 million senior revolving credit facility with a bank. Outstanding principal under this credit facility bears interest at the Bank's prime rate and the line matures in June 2004. At March 31, 2004 there were no borrowings against this line of credit. |
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Results of Operations |
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The following table presents, for the periods indicated, the percentage relationship which certain captioned items in the Registrant's Statements of Operations bear to total revenues and other pertinent data: |
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Quarter ended March 31, |
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2004 |
2003 |
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Statements of Operations Data: |
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Total Revenue .................................................................................. |
100.0% |
100.0% |
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Cost of goods sold ............................................................................ |
93.6% |
95.6% |
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Selling, general and administrative expenses ........................................ |
4.1% |
5.3% |
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Income (loss) before other expenses ................................................. |
2.3% |
(0.9)% |
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Three months ended March 31, 2004 compared to three months ended March 31, 2003 |
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Total revenue increased $8,923,123 or 34.5% to $34,764,205 in 2004 compared to $25,841,082 in 2003. Recycling revenue increased $4,746,380 or 74.0% to $11,164,149 in 2004 compared to $6,417,769 in 2003. This is due to an increase of 15% in the volume of shipments as well as an increase of 60% in the average selling price of the commodities. Management services revenue increased $3,839,477 or 20.3% to $22,712,344 in 2004 compared to $18,872,867 in 2003. This is due to an increase in revenues per the customer locations while maintaining a consistent customer base. Equipment, service and leasing revenue increased $337,266 or 61.3% to $887,712 in 2004 compared to $550,446 in 2003. This increase is due to an increase in equipment sales. |
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Total cost of goods sold increased $7,839,577 or 31.7% to $32,540,837 in 2004 compared to $24,701,260 in 2003. Recycling cost of goods sold increased $3,767,345 or 59.2% to $10,127,315 in 2004 compared to $6,359,970 in 2003. This is due to higher commodity purchase prices in the recycling market. Management services cost of goods sold increased $3,884,081 or 21.5% to $21,946,651 in 2004 compared to $18,062,570 in 2003. This is due to increases in vendor service fees. Equipment, service and leasing cost of goods sold increased $188,151 or 67.5% to 466,871 in 2004 compared to $278,720 in 2003. This increase is due to an increase in equipment cost of goods sold. |
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Selling, general and administrative expenses increased $39,754 or 2.9% to $1,420,068 in 2004 compared to $1,380,314 in 2003. As a percentage of revenue, selling, general and administrative expenses were 4.1% in 2004 compared to 5.3% in 2003. This decrease as related to a percentage of revenue is due to a reduction of payroll expenses, consulting expenses, insurance expenses and marketing expenses. |
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12 |
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Financial condition at March 31, 2004 compared to December 31, 2003 |
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Accounts receivable trade increased $3,040,866 or 33.6% to $12,094,852 as of March 31, 2004 compared to $9,053,986 as of December 31, 2003. This is due to an increase in revenues per the customer locations while maintaining a consistent customer base in the Management Services segment as well as an increase in the volume of shipments and an increase in the selling prices in the Recycling segment. |
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Accounts payable trade increased $3,560,440 or 33.9% to $14,062,943 as of March 31, 2004 compared to $10,502,503 as of December 31, 2003. Accounts payable trade increased due to an increase in expenses per the customer locations while maintaining a consistent customer base in the Management Services segment as well as an increase in the volume of commodity purchases and an increase in the purchase prices in the Recycling segment. |
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Working capital increased $373,360 to $100,231 as of March 31, 2004 compared to a deficit of $273,129 as of December 31, 2003. |
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Contractual Obligations |
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Long-term debt decreased $795,895 or 21.2% to $2,967,013 as of March 31, 2004 compared to $3,762,908 as of December 31, 2003. Ordinary principal payments of long-term debt for the first quarter were $245,895. Additionally, proceeds from the exercise of stock options and the sale of leasing equipment were used to pay down long-term debt by $550,000 during the first quarter. |
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Item 3: Quantitative and Qualitative Disclosures About Market Risk. |
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There is market risk in our recycling segment, since it is driven by fluctuating commodity prices. Management mitigates this risk by selling our product on a monthly contract basis, insulating the Registrant from large fluctuations in the commodity prices. |
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ITEM 4: CONTROLS AND PROCEDURES |
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(a) Evaluation of disclosure controls and procedures. |
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Based on the evaluation of the Chief Executive Officer and the Chief Financial Officer of the Registrant of its internal controls and procedures as of March 31, 2004, it has been concluded that the disclosure controls and procedures are effective for the purposes contemplated by Rule 13a-15 (e) promulgated by the Securities and Exchange Commission. |
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(b) Changes in internal controls. |
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There have been no significant changes to the Registrant's internal controls or in other factors that could significantly affect these controls as of March 31, 2004. |
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13 |
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PART II -- OTHER INFORMATION |
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Item 1. |
Legal Proceedings |
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None |
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Item 2. |
Changes in Securities and Use of Proceeds |
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None |
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Item 3. |
Defaults upon Senior Securities |
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None |
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Item 4. |
Submission of Matters to a Vote of Security Holders |
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None |
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Item 5. |
Other Information |
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The Board of Directors of the Registrant accepted the resignation of Pat McGruder as Chief Operating Officer on April 16, 2004, effective April 12, 2004. The Registrant has not selected a successor and does not intend to do so in the near future. |
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Item 6. |
Exhibits and Reports on Form 8-K |
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(a) Exhibits |
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(b) Reports on Form 8-K. |
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1. |
Form 8-K was filed on February 9, 2004 related to Item 7. Financial Statements and Exhibits for press release for earnings results for period ended December 31, 2003. |
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2. |
Form 8-K was filed on March 4, 2004 related to Item 5. Other Events and Required FD Disclosure for press release for two-for-one stock split approved on February 25, 2004. |
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14 |
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SIGNATURES |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. |
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INDUSTRIAL SERVICES OF AMERICA, INC. |
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Date: May 5, 2004 |
/s/ Harry Kletter |
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Chairman and Chief Executive Officer |
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(Principal Executive Officer) |
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Date: May 5, 2004 |
/s/ Alan L. Schroering |
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Chief Financial Officer |
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(Principal Financial Officer) |
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15 |
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INDEX TO EXHIBITS |
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Exhibit |
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31.5 |
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Rule 13a-14(a) Certification of Harry Kletter for the Form 10-Q for the quarter ended March 31, 2004. |
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31.6 |
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Rule 13a-14(a) Certification of Alan Schroering for the Form 10-Q for the quarter ended March 31, 2004. |
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32.3 |
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Section 1350 Certification of Harry Kletter and Alan Schroering for the Form 10-Q for the quarter ended March 31, 2004 |